Valeant Pharmaceuticals (VRX) has its work cut out for itself this week in its hopes of ironing out its partnership with Walgreens (WBA), a deal launched in January that the struggling drugmaker points to for much of its first-quarter earnings problems.
Joseph Papa, who stepped in as Valeant's CEO last month after departing the helm of Irish drugmaker Perrigo (PRGO), said on Valeant's earnings call with analysts he plans to meet with Walgreens CEO Stefano Pessano this week to address "speed bumps" in the partnership. (Walgreens is an investment held in Jim Cramer's Action Alerts PLUS charitable trust.)
"We continue to strongly believe in the program, and both Walgreens and Valeant are working diligently to correct the issues," Papa said in last week's call, in which he also slashed 2016 earnings guidance, quickly prompting a 20% drop in the price of Valeant shares.
The drugmaker missed analyst earnings estimates on the quarter by about 7% and cut 2016 guidance to a range of $6.60 to $7 per share, down from previous guidance of $8.50 to $9.50,
And Valeant's partnership with Walgreens, which was launched in January in part help replace the loss of Valeant's partnership with mail-order pharmacy Philidor, was largely to blame, as Papa cited low sales prices for substantial revenue shortfalls in Valeant's dermatology businesses.
The partnership with Walgreens was launched last December to help boost the distribution of Valeant's dermatology products through discount offerings, which Valeant now says has begun to cut into profits.
Papa says prescription authorization issues and low sale prices need to be revised, as the terms of the deal have so far pressured Valeant's average returns into negative territory.
"What that means is every time a prescription goes out the door, we're taping dollar bills to that prescription," Papa said, noting that he intends to negotiate with Walgreens this week in how to reduce the "speed bumps" Valeant has run into so far this year.
"Overall volume challenges were exacerbated by the loss of refills following the shutdown at the end of January of our previous specialy pharmacy relationship as well as the negative external narratives and some internal disruptions," Valeant CFO Robert Rosiello also said on the call with analysts.
Valeant shares are down about 90% over the past 12 months, largely due to accounting improprieties tied to Valeant's former partnership with specialty pharmacy Philidor, in which it has so far admitted to $58 million of improperly booked sales.
Papa has said his plan to restore profitability with Walgreens includes the implementation of a new reimbursement program and help with a third party to insure a fair prior authorization for prescriptions.
Meanwhile, Walgreens is well poised to benefit from the general decline of drug prices, especially as it finds new means to boost margins, Jim Cramer and Action Alerts PLUS co-manager Jack Mohr said in a Friday report, noting the stock will remain an attractive investment regardless of whether Walgreens' $17 billion bid for Rite Aid ultimately nets regulatory approval.
"From a secular standpoint, we think that the drug store will continue to benefit from price deflation in the generic drug space. Generic drugs are the largest input cost for Walgreens (as they buy wholesale and sell to consumers), so any price relief boosts margins," Cramer and Mohr wrote, estimating that Walgreens is on track to book roughly 15% annual earnings growth over the long term.