Valeant CEO defends ties with mail-order pharmacy
Responding to concerns about its relationship with a little-known specialty pharmacy that have hammered its stock, Valeant Pharmaceuticals International (VRX) blasted what the company's CEO called "false attacks and misleading statements" by an investor.
"The company I've heard described in the press the past few days is not one that I recognize," Michael Pearson, Valeant's chief executive, said in a conference call on Monday. "We follow the law, and we comply with accounting and disclosure rules."
Pearson was among the Valeant executives and board members who spoke for nearly an hour Monday before taking questions from analysts. Several had a sleepless weekend, Pearson said.
While the company reaffirmed its fourth quarter and 2016 guidance, the projection excluded one-time expenses associated with recent events, noted Deutsche Bank analysts Gregg Gilbert and Greg Fraser. "The magnitude of these expenses is hard to estimate, and it is not clear to us whether the expenses will be one-time in nature." The analysts also said they were disappointed that Valeant management ended the call before they -- and possibly others -- were able to ask questions.
Valeant has asked the U.S. Securities and Exchange Commission to look into the actions of Citron Research, which last week accused Valeant of fraud. The investment firm, led by prominent short-seller Andrew Left, said the drugmaker used Philidor RX Services to inflate its revenue by relying on the mail-order pharmacy to store inventory while counting the transactions as sales.
While dismissing Citron's allegations as "completely untrue," Valeant said it would review its pharmacy network. Robert Ingram, the Canadian company's lead outside director, will chair a committee that will look into Valeant's relationship with Philidor.
"Before accusing me of market manipulation, Pearson should ask himself why Philidor was undisclosed to Valeant shareholders, including having paid $100 million for an 'option' to purchase it," responded Left in an email. The investor also questioned "posting Valeant senior staff onsite at Philidor every day, operating it as a (Variable Interest Entity), consolidating Philidor revenue without disclosure, and the legal jeopardies of operating a network of pharmacies, all without disclosure."
Valeant shares fell 35 percent after Citron on Wednesday released its report, which compared the company to disgraced energy company Enron. The drug company's stock price on Monday slid 5.3 percent to $110.04.
The ad-hoc company committee's review would include looking into issues raised by the Wall Street Journal, which on Monday reported that Valeant employees working in Philidor's offices used fictional names in emails.
Valeant disclosed during an earnings call last week that it had purchased an option to acquire Philidor in late 2014. The company paid $100 million for its option to buy the Pennsylvania-based company, which accounted for about 6 percent of its net revenue in the the third quarter, the company said.
Still, Valeant executives said the company does not have legal liability for Philidor, which they content is an independent entity. In the call, Valeant board member Howard Bradley Schiller said no senior executive or board members at Valeant owns shares in Philidor. Valeant also has not invested in the pharmacy or lent it money.
By contrast, Valeant is authorized to approve certain employees at Philidor and to audit the pharmacy, among other rights, clouding the legal and commercial relationship between the firms.
The company's relationship with Philidor, and its lack of full disclosure, could be legal, but still raises questions, Alex Arfaei, an analyst at BMO Nesbitt Burns, wrote in a note: "Given that Valeant consolidates financials of its affiliated specialty pharmacies, many shareholders may remain uncertain about the company's legal liabilities for Philidor's actions."
Philidor, denied a license to operate in California last year, reportedly purchased a 10 percent stake in a licensed pharmacy in Los Angeles a few months later. A lawsuit filed in September in Los Angeles alleges Philidor officials also purchased a stake in a second pharmacy, R&O Pharmacy, to get around the state pharmacy board's denial and then shipped drugs to patients using R&O's billing information without its approval.
"It is possible, in our view, that Philidor inappropriately distributed Valeant's products in California via its affiliated pharmacies," noted Irina Koffler, an analyst at Mizuho Securities USA, in a research note. "But once the smoke clears, this issue may become less significant."
The Quebec company's troubles come amid congressional scrutiny over the pricing of its drugs. Valeant in February purchased two life-saving heart drugs from Marathon Pharmaceuticals, hiking the cost of one six times, and tripling the other.
Lawmakers began probing Valeant and other drug companies after the New York Times reported they were using specialty drug distributors to bypass rules intended to stop such price hikes.
The company also faces probes on other fronts. In a regulatory filing on Monday, Valeant said it was subpoenaed by the Department of Justice regarding payments between Bausch & Lomb and medial professionals.
And, Valeant said it received a request earlier this month from the Federal Trade Commission for more information about its recent acquisition of Paragon.