More Scandal Clouds Valeant as Committee is Formed to Review Accounting Practices; Conference Call to be Held Today

Published: Oct 26, 2015

More Scandal Clouds Valeant as Committee is Formed to Review Accounting Practices
October 26, 2015
By Alex Keown, Breaking News Staff

LAVAL, Quebec -- Embattled Valeant Pharmaceuticals is standing firm in its defense of its relationship with specialty pharmacy company Philidor, but announced this morning that it formed a committee to review allegations of the business practices after a Citron Research report harshly criticized its alleged accounting practices and dubbed Valeant as the “pharmaceutical Enron.”

J. Michael Pearson, Valeant’s chief executive officer, said in a statement this morning that all accounting practices between Valeant and Philidor are “fully compliant with the law.” However, because of some of the issues surrounding Philidor’s business practices raised in the Citron report, Pearson said it was important for the company to investigate

"We operate our business based on the highest standard of ethics, and we are committed to transparency. These values are at the core of our business model, and if we find violations we will take appropriate action," Pearson said.

During an investor call this morning, Pearson said if the committee turns up any violations, he will not hesitate to take direct action, which could include terminations.

"Our company's mission is to make drugs available that will improve people's lives, and to do it more efficiently and with greater speed than traditional pharmaceutical companies have been able to. Our commitment is to the patients who use our drugs, the doctors who prescribe them, our partners who make them available across the country, and to our shareholders,” Pearson said this morning.

Last week in a release, Citron decried Valeant for its “unsavory business practices of massive price raises on pharmaceuticals acquired in a rapid succession of acquisitions, while slashing research and development.”

Additionally, the Citron report criticized Valeant’s relationship with Pennsylvania-based Philidor Rx Services, a specialty pharmacy acquired by Valeant last year. Philidor engages in the “prescriptions made easy” practice. Under this practice, a pharmaceutical company encourages physicians to submit prescriptions for the high-priced medication to a mail-order pharmaceutical company associated with the parent pharmaceutical company. That pharmacy sends the medication to the patient and then directly deals with the insurance company. Some who are critical of the “prescriptions made easy” practice prevents patients and insurance companies from switching to cheaper alternative prescriptions and serves to pad the bottom lines of companies such as Valeant.

Additionally, Citron highlighted a Wall Street Journal report of another specialty pharmacy, R&O Pharmacy, which “claims it had received an improper demand for payment from Valeant to the tune of $69 million.” In its report, Citron said R&O is owned by Philidor and accused Valeant of creating phantom invoices to “deceive auditors and book revenue.”

Valeant fired back, calling the report erroneous. The company claimed in a statement on its website that Philidor is a legitimate distribution network for Valeant and any sales are “accounted for as intercompany sales and are eliminated in consolidation.” This morning, Pearson reaffirmed its stance that Citron’s comments are unfounded. Pearson said Citron wanted to release a negative report in order to frighten investors and drive down stock value so he could make money by short selling.

Since Citron released its report last week, Valeant’s has dropped about 13 percent of its value. But, Valeant’s stock has lost more than 50 percent of its value in the past few months, falling from a high of $259.98 per share to a low of $113.19 per share.

Robert Ingram, lead outside director of Valeant’s board and chairman of the ad hoc committee, praised Pearson’s leadership of the company and said the board has “complete confidence” in his performance as CEO and has “fully supported the company's specialty pharmacy strategy.”

“Mike operates with the highest degree of ethics, and we believe it is important that he and the management team be allowed to focus their efforts on continuing to serve patients and doctors and create long term value for our thousands of individual and institutional shareholders," Ingram said in a statement.

Under Pearson’s leadership, Valeant has seen massive growth, although there has been some criticism of its practices. Recently company stock dropped 20 percent, prompting Pearson to pen a note to employees explaining company strategy.

In addition to criticism of the relationship with Philidor, Valeant is also facing scrutiny from U.S. lawmakers and two U.S. attorney’s offices over pricing of drugs acquired through acquisitions. Valeant is under fire for a price increase of two recently-acquired cardiac drugs, Nitropress and Isuprel, after the company acquired Salix Pharmaceuticals, Ltd. . Valeant then increased the prices for those drugs by 212 percent and 525 percent, respectively. Valeant acquired the two drugs in April.

In addition to the two cardiac drugs, Valeant has also been criticized for quadrupling the price of the 55-year-old drug Cuprimine, used in the treatment of Wilson disease. A New York Times article excoriated Valeant for its practice of increasing the price of drugs following an acquisition. According to a Deutsche Bank report, Valeant increased prices on its brand-name drugs an average of 66 percent, about five times more than its other competitors, the Times said. Valeant, the article says, spends only about three percent of sales generated revenue on research and development, “which it views as risky and inefficient compared with buying existing drugs.” That amount was about $246 million in 2014.

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