Pharmaceutical Distribution

Pharmaceutical Distribution

Summer Albondante

Southern New Hampshire University

The emergence of the pharmaceutical industry started in 1870. It can be traced back to two sources, apothecaries and chemical companies. “Merck, for example, began as a small apothecary shop in Darmstadt, Germany, in 1668, only beginning wholesale production of drugs in the 1840s” (American Chemical Society, 2005, p. 1). Merck is a company that is still around today. They are a major manufacture for vaccines and other medications. There are several other companies that started at small apothecaries. Such as Abbott, Smith Kline and Upjohn in the United States, these started as small drug suppliers and apothecaries in the early 1830’s to the late 1890’s. “A merging of these two types of firms into an identifiable pharmaceutical industry took place in conjunction with the emergence of pharmaceutical chemistry and pharmacology as scientific fields at the end of the 19th century. Oriented to identifying and preparing synthetic drugs and studying their impacts on pathological conditions, both disciplines were intimately linked with the rise of the industry” (American Chemical Society, 2005, p. 2). The growth of the pharmaceutical industry since the early 1900’s has been tremendous. The ever-expanding technologies of modern medicine has allowed the industry to reach heights that many other industries would struggle to reach. But aggressive growth has also gotten some once very powerful companies into trouble.

Valeant Pharmaceuticals was one an industry leader. Over the years from 2008 to 2015 the company began to growth exponentially, the company acquired over 100 companies in that short period of time. Their business strategy was to buy smaller firms, which would cut down on their operating expenses by cutting research and development. During this time, they also raised the prices of their drugs pretty drastically, a lot of the company’s growth came from these price increases rather than the volume gains and this simply wasn’t sustainable (Dabney, 2016, p. 2).  This was the beginning of the end. Besides the public scrutiny, the company faced for the raise in the cost of their drugs, there were so other not so ethical things going on.

        Philidor was a specialty pharmacy company that was owned by Valeant. It soon came out that the pharmacy was altering the prescriptions written by doctors so that it could see more of the Valeant’s drugs. When in a doctor writes a prescription, the pharmacist is required to sell the generic version, the generic version until the prescription specifically states to sell the name brand. Well the pharmacy was doing just that. After the malpractice investigation, the negative impact it had on Valeant’s investors, they ended their relationship with the Philidor. When this happened the dermatology, sales declined drastically (Dabney, 2016, p. 3). If this controversy wasn’t bad enough, Valeant was also involved with price gouging.

While their business strategy was to acquire smaller firms, with hopes of saving on research and development, they still had to find a way to pay for the enormous amount of debt they were also accruing. “Valeant Pharmaceuticals International (VRX) significantly raised the prices of two of its heart drugs—Nitropress and Isuprel—which caused an outrage and a controversy.” (Dabney, 2016, p. 8). Valeant bought Nitropree and Isuprel from Marathon Pharmaceuticals in February 2015, after doing so, they raised the price of the drugs. They raised the price of Nitropress by 212% and Isuprel by 525% (Dabney, 2016, p. 8). The idea behind this was, to make up for the money they spent, buying these drugs. But this only brought Valeant into the spotlight and once they were accused of pricing gouging its share prices began to fall. Not only did it affect the price of their stock, but it influenced the entire specialty pharmaceuticals industry, and everyone’s stock began to fall.

The falling stock price was not the only thing they had to worry about. “Valeant’s (VRX) inorganic growth was supported by a high leverage. The increase in total debt in fiscal 2015 followed the Salix Pharmaceuticals acquisition for a consideration of $14.5 billion. Along with rising debt, the company’s interest expense rose to $1.6 billion in fiscal 2015” (Dabney, 2016, p. 9). After stock prices plummeted, public scrutiny for price gauging, controversy over their relationship with Philidor Pharmacy and the massive amount of debt they acquired over the years, the company had to make changes. One of the changes they made was letting go over their CEO, Michael Pearson, it was under him, and the company adopted this very aggressive business strategy (Dabney, 2016, p.5). This is the kind of business strategy that you would want to avoid, especially when starting a new business. Debt can be the death of your company. I have seen it many times in the industry. They are so concerned when having market share and will have just about anything to make sure they have the biggest piece. But in the end their debt consumes them and they have no choice but to sell or file bankruptcy. Also, sometimes the competition is so fierce that, selling is the best option.

A perfect example of a company not being able to compete or stand their ground in an industry is a company called Kythera. In June2015 Allergen announced it was acquiring Kythera Biopharmaceuticals. Kythera had earlier that year received FDA approval for a ground breaking to drug, which would launch as a first in the cosmetic/plastic pharmaceutical world. The drug was Kybella. “Kybella is the first and only approved non-surgical treatment for contouring moderate to severe submental fullness, commonly referred to as double chin” (DeFrancesco, 2016, p.1). Kythera originally signed a distribution agreement with Besse Medical, who was to be the sole distributor of the product. They then broke that contract when Allergan gave them an offer they couldn’t refuse. Allergan is the leading manufacturer and distributor for cosmetic drugs. So, it made sense why they would want to acquire Kythera. This is a good business stragety, they bought out their competition. But while doing so, they didn’t take on a massive amount of debt in the process. “Allergan has agreed to acquire KYTHERA in a cash and equity transaction valued at $75 per KYTHERA share, or approximately $2.1 billion, subject to the fulfillment of certain customary conditions summarized below.  The fixed-value transaction consideration will be payable 80 percent in cash and 20 percent in new AGN shares issued to KYTHERA shareholders.  Allergan's 2015 earnings-per-share forecast provided on May 11, 2015 is unchanged because of the acquisition.  The acquisition is expected to be breakeven in 2016 and accretive thereafter.  The Company remains committed to de-levering to below 3.5x debt to Adjusted EBITDA by the end of the first quarter of 2016” (DeFrancesco, 2016, p.1). So, unlike Valeant, acquiring Kythera didn’t leave Allergan consumed with debt. They could make this purchase and it didn’t have a negative effect on their stock prices. There are other issues that can plague the pharmaceutical industry and distributors besides price gauging, bad press and debt.