Valeant Pharmaceuticals informed that it was cutting ties with mail-order pharmacy Philidor RX, which will shut down operations as soon as possible. A key investor in the embattled drug company meanwhile said, "Valeant would survive despite a widening scandal over its relations with Philidor and its accounting practices."
Valeant had nurtured Philidor in its infancy when it sold only two Valeant acne drugs by mail order. The two signed a deal in 2014 that effectively gave Valeant limited control over Philidor as a distribution channel for its drugs, and an option to buy the pharmacy. The partnership saw Philidor aggressively market Valeant's more expensive drugs over cheaper generics preferred by insurers. This caught the attention of US lawmakers and investigators now looking into its pricing.
The scandal has sent Valeant's share price tumbling 60% in three months. J. Michael Pearson, chairman and chief executive of the Canadian drugmaker said, "We have lost confidence in Philidor's ability to continue to operate in a manner that is acceptable to Valeant and the patients and doctors we serve. The newest allegations about activities at Philidor raise additional questions about the company's business practices."
The announcement came after Citron Research, an influential short-seller, accused Valeant of creating a network of mail-order pharmacies to 'stuff the channel', a deceptive business practice involving inflating sales figures by sending retailers in its distribution channel more products than they are able to sell. It said, "Valeant was using two firms it purportedly controlled - Philidor and R&O Pharmacy. The latter is also embroiled in litigation with Valeant over non-payments for drug shipments. R&O insists it owes no arrears."
Valeant has refuted the accusations and asked the US Securities and Exchange Commission to investigate Citron. In a bid to boost the company's image, former US deputy attorney general Mark Filip was hired to advise Valeant's board. In a conference call Friday, October 30, 2015, Bill Ackman, the influential Wall Street activist investor whose Pershing Capital owns about 6% of Valeant, said, "The drug maker had done a poor job of countering attacks and explaining its operations and accounting. It would survive these recent setbacks. Life will go on for Valeant. While this has been a very damaging reputational moment we think that Valeant's business is very robust. We expect more negative press. In the meantime, we expect the business to perform well."
Pershing Square doubled down last week on its investment in the company, even as the shares kept tumbling. Despite Ackman's comments and the cutoff of Philidor, Valeant shares sank more than 10% on Friday to 99.34, a two-year low.
The Wall Street Journal reported that at Sequoia Fund, Valeant's largest institutional shareholder, two board members quit their positions earlier this week saying Sequoia held too large a position in the pharmaceutical firm. In a letter to shareholders on Thursday, October 29, 2015, Sequoia Fund criticized Valeant's handling of the situation and said, "We had caused an extraordinary level of (investor) pain, but are sticking by its investment. In our view, Valeant is an aggressively-managed business that may push boundaries, but operates within the law. We would stress the importance of taking a more systemic approach to managing business practices with an eye on the company's long-term corporate reputation."