Valeant Pharmaceuticals Seeks To Calm Investors, But New Questions Emerge

Executives at Valeant Pharmaceuticals International Inc. defended the Canadian company over allegations of accounting fraud and impropriety, on a conference call held for investors Monday. The presentation featuring CEO J. Michael Pearson came a week after a series of bruising reports into the company, which produces Wellbutrin and Bausch & Lomb eye products, left its stock down nearly 30 percent.

“The company stands by its accounting completely,” said Robert Ingram, director of the board, expressing his support for Pearson.

A raft of reports last week, including an explosive charge of fraud from a short-seller, put Valeant on the defensive over its murky relationships with specialty pharmacies, which contract exclusively with drug manufacturers like Valeant to distribute prescriptions directly to customers. That model has come under increasing scrutiny after the New York Times suggested that these arrangements provide a way of circumventing limits on drug price hikes.

The reports last week hinged on a lawsuit filed by a California pharmacy called R&O, which denied owing the $69 million that Valeant sought in an invoice. The news puzzled investors and brought to light a relationship between Valeant and Philidor RX, a specialty pharmacy that the company says accounts for roughly 7 percent of Valeant revenue.

After being denied a license to operate in California in 2013, Philidor created partnerships with R&O and other California pharmacies to distribute drugs in the state and elsewhere. A lawsuit filed by R&O describes a Philidor partner company misusing R&O’s license. R&O's lawsuit sought a judgment declaring that no contractual relationship exists between the pharmacy and Valeant, and that Valeant's claims are without merit.

Last week was the first time investors had heard of Philidor. On the call Monday, Valeant executives defended their decision not to publicize their pursuing an option to acquire Philidor. The Canadian drugmaker paid $100 million in December 2014 for the right to acquire the company, which has seen rapid growth since its 2013 founding.

Valeant said earlier this month that federal prosecutors were investigating the company's drug pricing, distribution and customer incentive programs.

Valeant also took on a more aggressive posture toward Citron Research, a short-seller that last week released a bombshell report raising questions of whether the pharmaceutical giant improperly booked revenues at specialty pharmacies like Philidor. Pearson said that after the report was issued, “all hell broke loose.”

Though Valeant's stock surged over the last year compared to rivals like Teva and Allergan, shares hit a low of $88 last week, after hitting highs of more than $260 in August. By midday Monday, Valeant was trading at $115.

Valeant said it would request that the Securities and Exchange Commission investigate Citron and its founder, Andrew Left, who made the explosive suggestion that Valeant was the “pharmaceutical Enron.”

Even as Valeant tried to clarify the independence and accounting practices of its specialty-pharmacy partners -- executives said Philidor was “independent and therefore does not report to anyone at Valeant” -- reports in the Wall Street Journal and Southern Investigative Reporting Foundation (SIRF) raised further questions about the tangle of business interests surrounding Valeant’s specialty pharmacies.

The Wall Street Journal report described a Valeant employee named Bijal Patel, who worked in Philidor’s Phoenix offices, sending company emails from the pseudonym Peter Parker, otherwise known as Spider-Man. A report in SIRF, meanwhile, described a close working relationship between Valeant and Philidor, despite the two companies being independent in their operation.

The reports complicate Valeant executives’ attempt to cast Philidor as an independent partner company. Valeant consolidates Philidor’s financials and treats inventory at Philidor as unsold, booking revenue only when prescriptions are shipped to clients.

Valeant set up an ad hoc committee to review further questions surrounding R&O and Philidor. The drugmaker is eager to assure investors that its organic growth is robust enough to justify its heavy debt burden, the result of an aggressive corporate strategy defined by big-dollar mergers and acquisitions over the last decade.