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«Statement of Howard B. Schiller Interim Chief Executive Officer and Director, Valeant Pharmaceuticals International, Inc. before the Committee on ...»

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Statement of

Howard B. Schiller

Interim Chief Executive Officer and Director,

Valeant Pharmaceuticals International, Inc.

before the

Committee on Oversight and Government Reform

U.S. House of Representatives

February 4, 2016

Chairman Chaffetz, Congressman Cummings, and Members of the Committee, thank you

for the opportunity to testify on behalf of Valeant and address your questions about the company,

our products, the prices of our prescription drugs, and our approach to pharmaceutical research and development.

I have worked for Valeant since 2011, first as the company’s chief financial officer, then as a member of the Board of Directors, and now as interim CEO during the medical leave of Michael Pearson. Over this time, I have watched Valeant grow quickly and substantially.

Today, we are a robust and innovative specialty pharmaceutical and medical device company that employs about 22,000 people around the world, including 6,000 in the United States, and generates more than $10 billion in annual revenue. We have a collection of world-class franchises that we use to meet our mission of delivering life-changing drugs to doctors and patients who depend on them. In the United States, we are a leading dermatology, gastrointestinal, ophthalmology, and consumer healthcare company, with growing dental, oncology, and women’s heath businesses, among others. Valeant makes and markets approximately 1,800 products, including more than 200 prescription drug products in the United States. Our flagship products and brands – such as Bausch + Lomb, Jublia, and CeraVe – are familiar to many Americans, and I am sure to many of you as well.

I hope that today’s hearing will permit me to address some of these broader aspects of Valeant’s business, although I recognize that I am here today primarily because of the Committee’s interest in two issues: The pricing of our drugs and our investment in research and development. I would like to address each of these issues directly.

First, we understand, and have heard very clearly, Congress’s and the public’s concerns about drug prices in the pharmaceutical industry and Valeant’s increases to the list prices of certain drugs, including two cardiac medicines used in hospital procedures, Nitropress and Isuprel. We are responding to these concerns and have already taken steps to address them. We have, for example, created a volume-based price rebate program providing up to a 30% discount for Nitropress and Isuprel through arrangements with the leading hospital group purchasing organizations in the United States. For prescription products purchased by consumers at retail, we have just launched a 20-year program with Walgreens, one of the most well-known and wellrespected pharmacies in the nation, that will provide substantial savings for patients purchasing both branded and generic prescription drugs – averaging a 10% reduction for a majority of our branded dermatology, ophthalmology, and women’s health products and up to a 95% reduction 2 on certain branded products for which there is a generic alternative. These actions together offer new and innovative ways to deliver prescription medicines to patients, doctors, and hospitals at lower costs. Valeant takes pride in its innovation, which extends both to the development of new medicines and treatments, and to the development of innovative business approaches that increase patient access to medicines. These new innovations are in addition to our existing patient assistance programs that help ensure that out-of-pocket expenses do not prevent eligible patients from receiving the medicines they need. Valeant offers patient assistance programs for more than 55 products, and we expect to spend more than $1 billion on patient assistance in 2016.

Second, Valeant’s history of innovation is also evident in our approach to research and development. We have consciously avoided building a large, fixed-cost research infrastructure focused on open-ended research, which often proves inefficient. We believe innovation should be judged not by how much a company spends on R&D, but by the new products and innovation that a company is actually able to bring to market.

Valeant’s R&D outputs make us a leader in the industry:

 Over the past five years, our productivity – measured by drugs approved per dollar spent – is seven times higher than the average of the fifteen pharmaceutical companies with the most new drug approvals. In the dermatological sector, where we are a market leader, our clinical research success rates exceed the industry in each of the three research phases, and our phase II and phase III success rates are significantly better than industry averages.

–  –  –

 Our U.S. R&D pipeline contains more than 200 active programs, more than 100 of which we consider significant, including programs for 32 surgical products, 26 consumer products, and 15 dermatology products.

Although, as I noted, we do not believe that dollars spent on R&D alone are the most useful measure of effectiveness, our R&D spending is significant. Valeant’s U.S.

pharmaceutical R&D spending is about 8% of our U.S. branded pharmaceutical revenue, and we estimate that total U.S. R&D spending will exceed $400 million in 2016. We have 43 R&D facilities and employ more than 1,000 R&D employees worldwide.

In addition to our internal development, we have looked outside the company to bolster our R&D pipeline, and we have made a strategic choice to pursue valuable R&D through corporate acquisitions, in-licensing, and partnerships. From an economic standpoint, a dollar spent to buy the output from another company’s R&D is the same as a dollar spent on in-house R&D. The economic effects may even be greater when acquisitions have the effect of providing capital to small startups that are uniquely positioned to engage in further research and innovation in particular therapeutic spaces. This transformation in the pharmaceutical industry – from large 3 internal R&D expenditures to entrepreneurial acquisitions – is similar to the transformation that occurred in the technology sector. The large internal R&D operations at traditional technology companies have been supplemented by an ecosystem of incubators, startups, and entrepreneurial specialization. The larger technology companies in Silicon Valley and elsewhere now frequently pursue R&D through the acquisition of start-up companies and their products. Following such an acquisition, the large companies can bring innovations to the market more quickly. At the same time, the companies’ acquisition expenditures provide capital to the innovators, spurring further research and new product development. The pharmaceutical sector is following this same trend.

A few weeks ago, the Deloitte Center for Health Solutions, which is the research division of Deloitte’s life sciences and healthcare practice, released its sixth annual report examining the pharmaceutical industry’s return on R&D investment. The conclusions were dramatic, and very consistent with Valeant’s experience and strategy. Deloitte found that, in the past two years, “smaller companies are delivering higher R&D returns” than 12 of the largest research-based life science companies. These smaller companies reported a 25% lower average cost to develop a new product and a 340% higher internal rate of return on their R&D spending. In contrast, the R&D internal rates of return for the 12 large research-based life science companies declined from 10.1% in 2010 to 4.2% in 2015.

Deloitte concluded that smaller companies “may be better at integrating the most innovative science due to their smaller and more nimble R&D organizations.” This is certainly true at Valeant. We have purposely created a streamlined, nimble in-house R&D operation that efficiently brings promising products to market, both from our internal R&D and from our acquisition of external R&D assets. This model is helping to serve patients, as Valeant brings new and better products to market. As the Deloitte study highlights, the pharmaceutical industry is moving in this direction as well.

Finally, the Deloitte study noted that given the weakening performance of their internal R&D operations, large life science companies “are now more likely to return cash generated to shareholders via a combination of dividends and share buybacks than they are to invest in company acquisitions, product licenses and internal R&D.” In contrast, Valeant has not paid a dividend to shareholders in more than five years. We have chosen instead to reinvest our profits in R&D, manufacturing expansion, and acquisitions of new products.

For example, Valeant is investing substantially in manufacturing in the United States.

Valeant has 16 manufacturing sites throughout the United States, with our largest facilities in Rochester, New York; Greenville, South Carolina; St. Louis, Missouri; Tampa, Florida; and Clearwater, Florida. We are currently expanding our investments in Rochester, Greenville, and St. Louis.

Before its acquisition by Valeant, it is our understanding that Bausch + Lomb intended, over time, to move its contact lens manufacturing facilities from Rochester to Ireland. Valeant took a different approach. Given its talented workforce and strong contact lens R&D group, we decided to retain our contact lens manufacturing facility in Rochester and also to expand our investment. Since that decision, we have invested more than $250 million in capital and expanded our manufacturing work force by nearly 200 employees in Rochester. To provide 4 additional support for four new product lines for Bausch + Lomb’s popular Ultra contact lenses and other contact lens projects, over the next five years we expect to invest almost $500 million more and add approximately 630 jobs in Rochester, including many highly skilled engineering and manufacturing jobs.

Last fall, our Greenville plant celebrated the production of its four billionth bottle of eye care solution. In Greenville, we expect to spend approximately $150 million over the next five years, creating between 150 and 200 jobs. The jobs that Valeant is creating are the result of our growing sales, both within and outside of the United States. In St. Louis, since acquiring Bausch + Lomb, we have made significant capital investments, and we expect to develop the next generation of our cataract and retina surgery equipment at the facility.

From the United States, Valeant exports to more than 100 countries, including countries like China that are traditionally viewed as lower-cost manufacturing centers rather than export markets. As a percentage of revenue, the products we manufacture in the United States and Canada represent more than twice the revenue generated by products we manufacture in the rest of the world, and this share is increasing. We are proud to be reinvesting our earnings to strengthen American exports while expanding skilled manufacturing and R&D jobs in the United States.

Nitropress and Isuprel

I would like to address the Committee’s specific concerns regarding Nitropress and Isuprel, which are two of the approximately 1,800 products sold by Valeant (comprising about 4% of our 2015 revenue). Although broad conclusions about Valeant cannot be drawn from the pricing history of any one drug or set of drugs, I understand your concerns, and I therefore want to provide the Committee with detailed information concerning these two drugs. In addition to this written testimony, we have produced thousands of pages of supporting data to the Committee concerning the two drugs.

Nitropress and Isuprel are used in cardiac care. Nitropress is an antihypertensive (it lowers blood pressure) that immediately addresses blood pressure for patients in hypertensive crisis or acute congestive heart failure. Sodium nitroprusside, the active ingredient in Nitropress, was first introduced during the nineteenth century, and the product is therefore not on patent.

Isuprel is indicated for mild or transient episodes of heart block that do not require shock or pacemaker therapy and for certain serious episodes of heart block and Adams-Stokes attacks, among other uses specified in its label. Isoproterenol, the active ingredient in Isuprel, was patented in 1943, and therefore has been off patent for several decades.

It is important to note that Nitropress and Isuprel are administered by healthcare professionals in clinical settings, primarily hospitals. They are not sold to patients at a traditional consumer pharmacy. Moreover, Nitropress and Isuprel are mostly used as part of a larger hospital procedure. They normally are not administered as stand-alone treatments.

Valeant acquired Nitropress and Isuprel from Marathon Pharmaceuticals in February

2015. Prior to that acquisition, Marathon had engaged an outside pricing consultant to study the market for these two drugs. We understand that the pricing consultant examined the uses of the 5 drugs, interviewed healthcare professionals, studied the then-current pricing and reimbursement rates for hospital procedures in which these drugs may be used, and reviewed the drugs’ price history. In a report to Marathon in 2013, the consultant concluded that the prices of Nitropress and Isuprel, even after prior price increases, were still substantially below their true value to hospitals and patients. The “bundled” rates at which hospitals were being reimbursed by health insurance payers for the procedures in which they were used were substantially higher than the price of either drug. The consultant recommended a 250% increase in the list price of Nitropress and a 350% increase in the list price of Isuprel. Marathon took overall price increases totaling 350% for each of Nitropress and Isuprel in 2013.

In the case of a hospital-administered drug like Nitropress and Isuprel, a pharmaceutical manufacturer typically will sell to a wholesaler and the wholesaler will sell to a hospital pharmacy (or other buyer, such as a hospital group purchasing organization, which typically negotiates a discount on behalf of the hospitals). Following a medical procedure, the hospital typically will seek reimbursement from the patient’s health insurance provider, such as a commercial payer or a federal healthcare program. In many cases, there are separate limitations on the amount that the payer, whether an insurance company or federal program, pays for a drug.

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