Does new scrutiny threaten pharma's specialty-pharmacy strategy?

Yesterday's Valeant Pharmaceuticals rout put specialty pharmacies under an unwelcome spotlight. But though Valeant's own close relationship with Philidor RX may be an unusual one--a host of Big Pharma and Big Biotech companies have now denied similar arrangements--tight links between drug marketing and specialty pharmacies are increasingly common industrywide.

As Bernstein analyst Ronny Gal detailed in an investor note over the weekend, Valeant ($VRX) is hardly alone in depending on a specialty pharmacy for sales success. What began as a technique for getting "complex, costly drugs"--often orphan meds for rare diseases--to the appropriate patients has become a broadly used marketing technique.

For instance, Gal says, generics giant Teva Pharmaceutical Industries ($TEVA) credits its internal specialty pharmacy with success in switching patients to a new, patented version of Copaxone in the face of generic copies of the older formula.

But smaller drugmakers have used specialty pharmacies to goose sales of some products well known for high prices, either through repeated price hikes or upfront price-setting, namely Jazz Pharmaceuticals ($JAZZ) with Xyrem and Horizon Pharma ($HZNP) with Vimovo and Duexis. And as Gal notes, Medicis--the dermatology specialist now owned by Valeant--was a pioneer in using specialty pharmacy services to administer the copay programs that ensure access to pricey products. According to Gal, Medicis covered copays imposed by restrictive insurers to make sure patients had access to its products, and then raised prices for insurers that were more permissive.

That practice has spread, the analyst notes. Drugmakers hire a specialty pharmacy to make sure all patients get a particular drug. Copay discounts "essentially negate" insurers' efforts to use formulary placement to discourage use of expensive meds; as long as at least half of payers aren't completely blocking a drug, the company can raise prices enough to cover patient copays and keep booking profits.

Of course, copay discounts have been a bone of contention among payers for years now. One of the reasons CVS Health ($CVS) and Express Scripts ($ESRX) initially introduced exclusionary formularies was to kick off me-too and aging meds that depended heavily on copay programs. But payers' power to combat such programs is limited, partly because patients do want access to these drugs, and, as Gal points out, partly because drugmakers are secretive about their workings.

"Most drug companies still need to negotiate coverage with insurers," Gal wrote in a follow-up note Monday. "Insurers are generally aware of the practice, but don't have all the details. Drug companies prefer it would remain that way--why tell your clients you are getting around their utilization management tools?"

In light of the Valeant subpoenas related to copay programs, and a New York Times article that highlighted some drugmakers' practices for collecting on high-priced meds, some investors and other market-watchers are calling the approach "immoral," if not illegal. Gal emphasizes that in general, the specialty pharmacy operation is not illegal at all. Immoral? Some companies might step over the line by offering copay assistance to Medicare patients, for instance, which is illegal; delivering drugs that aren't ordered, for another, as some posters in online forums have alleged about Philidor RX.

But drugmakers will want to take care, particularly those using in-house pharmacies to deliver their services rather than hiring third-party companies. Payers might use the furor over Valeant and drug pricing to block more drugs from their formularies and otherwise combat copay programs. Gal figures change on both sides will be gradual. One thing is for certain: Pharma's pricing and marketing moves are going to stay on center stage for some time. -- Tracy Staton (email | Twitter)

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