[1]pic thx to mike mozart on flickr creative commons
In a fact-filled conference call this morning, executives at Valeant Pharmaceuticals tried to clarify [2] the company’s convoluted ties to a mail-order pharmacy known as Philidor Rx Services. A bevy of murky details surrounding the relationship has called into question whether Valeant properly disclosed its business practices and fueled further skepticism about its growth prospects.
But whether the hour-long effort today had the intended affect is uncertain, at best.
Valeant insisted its accounting practices are legal and reviewed arrangements between the companies. And to reassure Wall Street, Valeant formed an ad hoc board committee to review the relationship. But Valeant stock fell slightly today, suggesting investors are unconvinced the drug maker has fully explained the extent to which Philidor is important to its operations.
It’s not hard to understand why. Valeant tried to address some of the issues raised over the past week – such as using the pharmacy to inflate revenue and hiding its relationship with Philidor. The Wall Street Journal [3], for instance, wrote that some Valeant employees worked out of Philidor offices and used aliases, such as Peter Parker, the Spiderman character, to distinguish accounts.
But the drug maker otherwise failed to deliver, according to one company watcher. “We were somewhat disappointed the call was so narrowly focused,” wrote Nomura Securities analyst Shibani Maholtra in an investor note. “We believe the onus is on management to do whatever it takes to answer open questions to regain investor confidence.”
Valeant stock has lost more than half its value since early August.
The conference call came after an extraordinary chain of events surrounding the controversial drug maker. In recent weeks, Presidential candidate and Vermont Senator Bernie Sanders began probing [4] Valeant over its drug pricing. Then, Valeant reported that federal prosecutors started investigating [5] patient assistance programs.
Hoping to soothe anxious investors, Valeant last week disclosed, for the first time, its relationship with Philidor and its role in filling prescriptions. But a series of reports – notably, one from an influential short seller, Citron Research [6], exposed some holes in the Valeant narrative. And over the past few days, still more questions emerged about the company’s ties, prompting speculation about probes by state and federal regulators, as well.
A key point of confusion is how Philidor fits into the Valeant game plan. As a mail-order pharmacy, Philidor directs patients to Valeant drugs and helps negotiate reimbursement with insurers. Philidor does this with a network of pharmacies that ship medicines quickly, while Valeant subsidizes patient co-payments with assistance programs.
Even if insurers failed to cover a drug, Valeant was essentially buying loyalty from patients. In its report, Citron alleged Valeant was running a scheme to inflate revenue. Valeant execs denied the allegations during the conference call, displaying numerous slides detailing how they believe accounting practices are controlled properly.
Still, some questions remain outstanding. One big one: Why did people affiliated with Valeant use another company, which lists Valeant employees as officers, to buy a stake in a California pharmacy known as West Wilshire? This happened last year, after Philidor was denied a permit to operate in the state, according to ProPublica [7]. Was this a back door approach to circumvent regulators? Valeant did not address this.
And given that Valeant stock has plummeted in recent weeks, perhaps the US Securities and Exchange Commission is curious to know more about Valeant’s dealings. We asked the drug maker if it has been contacted by the agency and will let you know what, if any, reply we receive. We do know Valeant asked the SEC to investigate Citron for its report.
These developments have only intensified skepticism about Valeant’s strategy, which relies on buying medicines and then jacking up prices, while eschewing R&D. But whether the board committee will provide sufficient answers remains to be seen.
The ad hoc committee [8] will be chaired by Valeant board member Robert Ingram, who last week told Bloomberg News [9] that Valeant chief executive Michael Pearson has the “unanimous and strong support” of the board. Another committee member is G. Mason Morfit [10] of ValueAct Capital, a hedge fund that owns about 5 percent of Valeant stock, according to a spokeswoman for Valeant. He was appointed today [11] to the Valeant board as an independent director.
Perhaps if Valeant really wanted to satisfy investors, a committee comprised of people with more disinterested views would be appropriate.