Defensive Valeant sets up board committee to probe fraud allegations


Valeant CEO J. Michael Pearson

Add Valeant ($VRX) itself to the list of entities investigating the Canadian drugmaker.

On Monday, the company said it would set up an ad hoc committee--composed of its board members--to look into allegations that it used its relationship with specialty pharmacy Philidor to inflate its top line.

The announcement comes as Valeant is scrambling to defend itself against not only those fraud allegations but also intense criticism of its pricing policies and M&A-focused business model. The company is also under investigation by the Justice Department and the New York Attorney General's office.

During an investor call on Monday, Valeant maintained that its revenue reporting follows the rules. The board's audit committee and its full slate of directors reviewed the records and "confirmed the appropriateness of the company's related revenue recognition and accounting treatment."

"As we have said previously, our accounting with respect to the Company's Philidor arrangements is fully compliant with the law," CEO J. Michael Pearson said in a statement. "However, other issues have been raised publicly about Philidor's business practices, and it is appropriate that they be fully reviewed," he said, noting that formation of the committee would free up management to run the company.


Philidor first came into the spotlight last Wednesday, when short seller Citron Research published a report likening the Quebec-based pharma to Enron. Shares of the company, already down on price-hike probing from lawmakers and federal prosecutors, took another beating, despite Valeant's attempts to combat the accusations. The company promised that it hadn't been improperly handling inventory or using Philidor to bump up its revenue tally.

Still, details surrounding the relationship between Valeant and Philidor were sparse until Monday. Pearson's company, which says it has kept quiet because it considered its specialty pharmacy relationships a competitive advantage, said in a presentation that Philidor accounts for 5.9% of Valeant's revenue, with specialty pharmacies on the whole accounting for 7.2%.

For some products, the specialty pharmacy business generates a large chunk of sales. Take Valeant growth engine Jublia, for example: 44% of its revenue flowed through Philidor in this year's Q3, the company said.

Valeant contends that the use of specialty pharmacies--which help ensure access to pricey products by covering copays imposed by restrictive insurers, thwarting their efforts to use formulary placement to discourage use of expensive meds--is a "sound" strategy. But while the company has "found no evidence of illegal activity at Philidor," it's considering both severing ties with the company and exercising its option to buy it.

Meanwhile, The Wall Street Journal reported on Monday that Valeant employees--placed at Philidor in the pharmacy's early days--used fake names in email communications during their time there.

"This is an issue that the ad hoc committee of the board plans to review," Valeant said in its presentation.

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