Walgreens and Valeant Devise a New Twist on Preferred Pharmacy Networks

Walgreens Boots Alliance (WBA) and Valeant Pharmaceuticals just announced a very intriguing preferred pharmacy network for Valeant’s branded products. Patients and payers will pay lower prices for Valeant products that are filled at Walgreens or other to-be-named-later independent pharmacies. Read the press release. (I presume we’ll learn a lot more about the deal at Valeant’s investor meeting today.)

Read on for my observations on this novel arrangement. The deal offers clear business benefits for both companies—while helping them overcome their respective PR deficits. With this preferred network arrangement, both Valeant and WBA get to do a partial end-run around payers. What’s more, it suggests that a new marketing model for generic prescriptions could emerge.

I’m not so sure, however, that payers and pharmacy benefit managers (PBMs) will be so enthusiastic about these channel innovations.

THE DEAL

Here are the deal’s highlights:

• Valeant's dermatology and ophthalmology products will be available at lower (but as yet unspecified) out-of-pocket costs from more than 8,000 Walgreens U.S. retail pharmacy locations, as well as from unnamed “participating independent retailers.” The new relationship will begin in the first quarter of 2016 and last an astounding 20 years.

• Prescriptions will be dispensed with copay offsets from Valeant, which means that the program will be unavailable to patients with government insurance.

• For prescriptions dispensed at Walgreens and the participating independents, Valeant will reduce the prices of its branded prescription-based dermatological and ophthalmological products by 10 percent.

• Beginning in the second half of 2016, Valeant will distribute more than 30 branded products with generic equivalents through Walgreens at generic prices. The products are in the dermatology, ophthalmology, gastrointestinal and neurology/other therapeutic areas

• Valeant will be selling its product on consignment to Walgreens, which will be paid distribution and dispensing fees but earn no spreads. This is a variation of the arrangement that Valeant had with Philidor. See the video below.

OBSERVATIONS

1) Valeant gets to play the good guy.

Valeant has become the poster child for bad pharma behavior. The price cut story provides a counterpoint to the shellacking the company took at last week’s congressional hearing. Watch the video below, where CEO J. Michael Pearson says that the products will be “sold directly to payers without all of the middlemen” and allow them to “offer cheaper prices in Walgreens.”

The deal also boosts Valeant’s credibility, since Walgreens has little in common with the troubled Philidor business. The press release claims savings “up to $600 million,” but that figure seems inflated to me.

2. Valeant can partially solve its growth problem.

As I note in Valeant, Philidor RX, and the Uninformed Attack on Specialty Pharmacy, Philidor was crucial to Valeant’s strategy of selling branded generic products. If you are still confused, check out Valeant: O Tidings of Comfort and Joy, Bronte Capital’s latest sarcastic takedown of the Valeant-Philidor economics.

I presume that Walgreens will be providing the prior authorization and related services that Philidor had previously provided for Valeant’s relatively undifferentiated products.

3. Walgreens can drive store traffic without owning a PBM and with no reimbursement hit.

For payer-defined preferred pharmacy networks, the reduction in pharmacy profits is the biggest source of cost savings. Here, it appears that Walgreens is willing to trade some gross profit for a fixed dispensing fee and increased store traffic from Valeant. In fact, the fee could even be more profitable than the dispensing spread in a typical preferred network arrangement, because there will be no maximum allowable cost (MAC) limits, DIR fees, or inventory investment.

Patients and physicians will be directed to Walgreens, instead of using the tainted (and soon to be closed) Philidor pharmacy. I hear that the Walgreens Community Theater Players are already rehearsing their next skit!

Some people were surprised when WBA opted to acquire Rite Aid, instead of buying Express Scripts or aligning more closely with a payer. Since WBA doesn’t own a major PBM, it doesn’t have to worry about aligning with Valeant, which has acted against the interests of third-party payers. That’s also why CVS Health can’t readily respond with a comparable deal.

As a bonus, Valeant’s dermatology products align with Walgreens' new focus on beauty revenues and profits. Clever.

4. Walgreens can divert attention from its own image issues.

Consider the developments that could be on the minds of WBA management:

• Thanks to The New York Times, we all know the oh-so-charming Martin Shkreli of Turing Pharmaceuticals. Last September, he became notorious for having raised the price of Daraprim from $13.50 per tablet to $750. What’s less well known is that he also shifted the product from open distribution to a single pharmacy—Walgreens Specialty Pharmacy.

• Last year, WBA had to abandon its tax inversions plans and accelerate its merger. Tax inversions remain controversial. Rather than enact fundamental reform of our broken tax system, politicians would rather rant about traitor companies and impose “exit taxes.”

• The Federal Trade Commission (FTC) is reviewing the Walgreens-Rite Aid combination. Consider this statement of principle from the FTC website: “Competition in America is about price, selection, and service. It benefits consumers by keeping prices low and the quality and choice of goods and services high.” Could the Valeant arrangement allow WBA to argue that it uses scale to promote competition and lower prices?

5. This deal could signal a new prescription branding model for generic manufacturers.

When a branded product loses exclusivity and faces generic competition, formulary control shifts from the PBM to the channel. That’s why generic manufacturers are so afraid of the big generic purchasing consortia—Walgreens Boots Alliance Development (with AmerisourceBergen), the Red Oak joint venture between Cardinal Health and CVS Health, and McKesson’s OneStop program.

Many Valeant products have generic equivalents. By offering 30 of its products at generic prices, Valeant is trying to create prescription brand loyalty for multisource products. Put another way, the OTC brand model for aspirin and other product could be moving behind the counter. It could be an interesting variation on WBA’s Almus Generic prescription products, which are branded to the consumer in Europe.

LISTEN TO CEO PEARSON

Valeant CEO J. Michael Pearson appeared on CNBC to explain the deal. Worth watching. Click here if you can’t see the video.