"Female Viagra" Backers Give Valeant the Cold Shoulder

By Markets Fool.com

IMAGE SOURCE: SPROUT PHARMACEUTICALS.

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Disgruntled former investors in the drugmaker Sprout have sent a letter toValeant Pharmaceuticals questioning its commitment to Sprout's one and only commercial drug, Addyi, a pill that can increase sexual desire in women. Last year, these Sprout investors sold their company to Valeant for $1 billion, plus future royalties. However, their letter highlights concerns regarding Addyi's commercial rollout and suggests they may regret their decision to cozy up to the now-troubled company.

Failure to launch
Former Sprout investors probably aren't too mad about pocketing a billion dollars in up-front money from Valeant as part of their deal, but they do appear to be upset about Addyi's tepid sales and the resulting lack of royalty revenue that they're receiving.

Despite pre-launch peak sales projections of $1 billion and a sales forecast of between $100 million and $150 million this year, Valeant acknowledged earlier this month that Addyi's sales are struggling and that it's unlikely that the drug will attain its 2016 sales target.

Former Sprout investors lay that blame squarely at the feet of Valeant.

Specifically, they argue that Valeant's decision to price a month's supply of Addyi at $800 is a bust. According to their own pre-launch market research, a price of roughly $400 per month would have allowed widespread insurance coverage and led to far greater demand.

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Instead, Valeant's $800 price tag has left insurance companies with no option but to exclude Addyi from their drug formularies and to institute barriers to Addyi's use, such as requiring patients visit a psychiatrist before being prescribed Addyi. In cases where Addyi has been included in an insurer's drug formulary, it's often been placed in high tiers that require large patient copays that further restrict demand.

Valeant's pricing decision seems even less prudent when we consider that Addyi's efficacy in clinical trials was modest and its use poses some safety risks. Importantly, combining Addyi with alcohol increases the chance of unconsciousness, and as a result, the Food and Drug Administration included a black box warning on Addyi's label and required that a risk management program be established to educate doctors and patients on this risk.

Ongoing struggles
Disgruntled Sprout investors, however, may be the least of Valeant's problems.

A history of acquiring drugs only to hike their price has led to scrutiny of Valeant's business, which has in turn revealed accounting mishaps and an all-too-cozy relationship with a specialty pharmacy used by Valeant to boost its sales.

The fallout from these revelations includes Valeant abandoning its specialty pharmacy distribution model, tumbling sales, and potential pressure from creditors because of delays in filing its audited financials. If Valeant can't get its financials to regulators soon, it could become in technical default on $30.9 billion in debt.

Looking ahead
Valeant's business model is on the ropes and changes, including cost-cutting, are necessary. Given Addyi's poor performance thus far, it wouldn't be shocking if its budget is on the chopping block. Valeant assures investors it will live up to its end of the bargain on Addyi, which includes $200 million in spending in 2016 and 2017 and a 150-person sales force. However, if Sprout's investors remain unconvinced that Valeant is following through on those pledges, a lawsuit could be on the horizon.

The article "Female Viagra" Backers Give Valeant the Cold Shoulder originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.