Valeant's big pharmacy deal with Walgreens includes quirky drug-buyback plan

Valeant Pharmaceuticals' much-ballyhooed agreement with Walgreens includes an unusual inventory provision that helps explain why the pharmacy chain might have been eager to strike a deal.

As The Wall Street Journal reports, Valeant ($VRX) is buying back its drugs from Walgreens ($WBA) and selling them on consignment to the pharmacy, a provision that triggers an upfront financial hit. Walgreens won't physically return the drugs, just the title to them, a source close to the deal told the newspaper.

It's just one out-of-the-ordinary feature of an out-of-the-ordinary pharmacy deal. Valeant announced last week that it had teamed up with Walgreens to distribute its drugs, discounting key skin and eye brands by 10% and another slate of meds by an average of 50%. Walgreens is taking the Valeant drugs on consignment and collects fees for filling prescriptions, the newspaper says.

Valeant CEO J. Michael Pearson

In fact, one analyst told the Journal, the drugstore chain may earn more from those fees than it would via the usual method of buying at wholesale and filing for insurance reimbursements.

Valeant said the Walgreens deal would cut revenue by $150 million, which includes the cost of shifting its drugs to consignment status, expected delays in recognizing revenue from the partnership and reduced sales to wholesalers that had been selling Valeant meds to Walgreens, the WSJ reports.

The Walgreens partnership replaces Valeant's relationship with Philidor, a specialty pharmacy that was closely tied to the drugmaker until questions arose about its operations. Philidor had been filling Valeant scripts and collecting insurance reimbursements as a way to ease patients' access to the company's meds. But reports of questionable tactics arose--including allegations that Philidor employees changed doctors' prescriptions to benefit Valeant brands--and Valeant cut Philidor loose.

The drugmaker is expecting a sales hit from the pharmacy shift, partly because of the mechanics of the Walgreens deal and partly because of lower demand for its drugs in the wake of the Philidor allegations. Last week, the company cut its Q4 revenue outlook to $2.7 billion to $2.8 billion from $3.25 billion to $3.45 billion.

Valeant's image is suffering, too, as increased scrutiny on drug prices has put an unwelcome spotlight on some of its outsized price increases and R&D-light business model. CEO Michael Pearson is due to appear at a Congressional hearing early next year, and the company is dealing with several government investigations into its pricing practices and pharmacy relationships.

- read the WSJ piece (sub. req.)

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