Say goodbye to another Valeant price-hike boon: 'Pricing credits' that boosted cash flow by 20%-plus, NYT says

Take note, market watchers. Valeant Pharmaceuticals may have more pricing-related problems. According to a New York Times analysis of financial documents, the Canadian drugmaker has been generating a good chunk of its cash flow with “price appreciation credits”--and if the company holds off on hiking prices as promised, that cash is likely to dwindle.

The company disclosed its use of the credits for the first time in its 2015 10-K, filed late after Valeant announced it would need to restate its financials. They cropped up again when the company filed first-quarter earnings, the NYT says.

The credits work this way: When Valeant raises prices, it receives a credit from wholesalers that have inventory on hand already. Those credits then offset the fees wholesalers charge to distribute its products.

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It’s not uncommon for drugmakers to use such credits, the newspaper reports. But they usually don’t add up to much; for most companies, they’re never itemized because the amounts are immaterial, one consultant told the Times.

For Valeant, that’s not the case. For the fourth quarter of 2015, $138 million of its operating cash flow--almost 25% of the $562 million total--came in the form of a payment related to the price appreciation credits.

Valeant’s first-quarter results brought another round: $110 million, or about 20% of the $558 million total, the NYT notes.

On an annual basis, 2015’s credits delivered revenue of $171 million, up from $53 million in 2014 and $44 million the prior year. Valeant spokeswoman Laurie Little told the NYT that the number in 2015 was so high because of the company’s price increases taken that year.

Don’t expect any more increases, however. Little said that the company doesn’t anticipate any more payments this year, and the company warned in its 2015 10-K that, by limiting or eliminating price increases on certain products, “this will result in fewer or lower price appreciation credits from certain of our wholesalers.” We’ll see next week whether that applies to the company’s Q2 results.

Indeed, Valeant expects a lot of numbers to be lower for 2016. In June, the company slashed its guidance for the year, to $9.9 billion to $10.1 billion, down from $11 billion to $11.2 billion. And that $110 million in pricing credits didn’t go far enough during the first quarter to fully offset the company’s losses: Valeant reports a loss of $373 million for the period, a big slide from $97 million in profits for the same period last year.

- see the NYT story

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