Valeant tries corporate housecleaning
Embattled drugmaker Valeant Pharmaceuticals International (VRX) moved to clean house Friday, reporting more investigations of its business practices, overhauling its board of directors and averting a potential technical default by filing its overdue 2015 annual report.
After initially moving higher after the news, the Canada-based company's stock resumed a months-long plunge, closing down 5.36% at $33.36. Valeant shares have lost nearly 87% of their value since early August.
Morningstar financial analyst Michael Waterhouse said Valeant's leadership changes were "likely a step in the right direction to restore investor credibility." But he cautioned that the drugmaker's first-quarter earnings "will likely be ugly," with some impairments and depressed earnings" as the company moves further into its prescription distribution deal with pharmacy giant Walgreens.
Valeant's annual report said the North Carolina Department of Justice in March issued a legal demand for production, marketing, distribution, sale, pricing and patient assistance records for three decades-old medications whose prices spiked after the drugmaker acquired them by buying other health care firms.
The request focused on heart medications Nitropress and Isuprel, along with Cuprimine, a drug used to treat Wilson disease, a rare ailment that if left untreated can cause a fatal buildup of copper. The company's decision to hike prices on the three drugs drew sharp criticism — and statements of regret from departing Valeant CEO J. Michael Pearson — during a Wednesday hearing by the Senate Special Committee on Aging.
Senate told Valeant drug price hikes hurt patients
Additionally, Valeant said it received an April 12 request letter from the Autorité des marchés financiers, the regulator for Québec's financial markets, for records regarding the company's previous business relationship with Philidor Rx Services, a Pennsylvania-based specialty pharmacy.
The New Jersey State Bureau of Securities similarly served Valeant with a subpoena for Philidor-related records on April 20, the drugmaker's annual report disclosed.
Valeant's stock plunge resulted in part from contentions in an October report by short-seller Andrew Left's's Citron Research that the drugmaker partnered with Philidor to create "a network of phantom pharmacies" that would steer pharmacy benefit managers to the company's more expensive medications.
Valeant loses more than half its value on lower forecasts, default risk
Valeant denied the allegations, but dropped Philidor and appointed a special board committee to review the relationship. The panel's findings prompted restatement of $58 million in 2014 fiscal year revenue, reduced that year's net income by $33 million and cut earnings per share by 9 cents a share, the company's annual report confirmed.
The drugmaker also disclosed that Texas investigators in May 2014 served a civil investigative demand for records related to the amounts the state's Medicaid program paid in reimbursements for Valeant's Bausch & Lomb eye care division dating back to 1995.
Valeant said it was cooperating with the investigations and requests, but could not predict their outcome or potential financial impact.
The newly disclosed reviews multiply the legal scrutiny focused on Valeant. The company previously reported investigations by two congressional committees, including the Senate panel, as well as the Securities and Exchange Commission and federal prosecutors in Massachusetts and New York.
Friday's annual report provided more details on those investigations, disclosing that they focus on Valeant's drug pricing and distribution policies, the scrapped Philidor relationship, financial assistance the company offered to patients and data the drugmaker submitted to the Centers for Medicare and Medicaid Services.
Separately, Valeant said the imminent arrival of new CEO Joseph Papa, the former chief executive of health care firm Perrigo, will be accompanied by a board shake up. Howard Schiller, the former chief financial offer who previously refused the company's request that he give up his board seat, won't seek re-election, the company said.
Five current independent directors also will leave. Five other independent directors who were named to the board in the last year, including billionaire hedge fund manager William Ackman, have been nominated for election, Valeant said.
Three additional independent directors, all with health care experience, have been recommended for the board, Valeant said. They include Argeris Karabelas, a pharmaceutical industry veteran who's now a partner at life sciences venture firm Care Capital LLC; Russel Robertson, a vice president at financial services company BMO Financial Group; and Amy Wechsler, a board-certified dermatologist in New York City.
Valeant said Friday's filing of its annual report, known as a 10-K, staved off the threat that it could face technical default on portions of the company's roughly $30 billion in bonds.
"The default under our senior note indentures arising from the failure to timely file the form 10-K was cured in all respects," Valeant said in a statement issued with the announcement. "In addition, the company remains in full compliance with its credit agreement."
The annual report also said Valeant identified misstatements for the first quarter or 2015 that reduced revenue by roughly $21 million, increased net income by approximately $24 million and boosted diluted earnings per share by 7 cents.
Additionally, the filing said Valeant's internal board review of the Philidor relationship blamed the misstatements on "material weaknesses in the company's internal control over financial reporting." The weaknesses "relate to the tone at the top of the organization and the accounting and disclosure for non-standard revenue transactions particularly at or near quarter ends," the annual report said.