Valeant Pharmaceuticals has been in the news for several months for a variety of reasons, including investigations by the United States Congress and accusations by Citron Research, run by Andrew Left, that the company was committing fraud.
Citron published a damning report in October suggesting that the Canadian-based pharmaceutical company was orchestrating an Enron-like fraud scheme. Citron released the report in October 2015, claiming that the company was engaging in several sham transactions that inflated its drug sales. Since the report, Valeant’s stock has plummeted and, most recently, its soon-to-depart CEO was called to testify in front of the Senate Committee on Aging.
Citron, a short seller, called the report a “smoking gun,” comparing the pharmaceutical company to Enron, notes Forbes. The former American energy, commodities and services company that went bankrupt in 2001 after unethical practices and misrepresented earnings resulted in several employees being convicted of illegal activity.
The short seller’s accusations against Valeant centered around pharmaceutical distributor Philidor RX, which it claimed was owned at least in part owned by Valeant. Citron’s report claimed that Valeant was using a network of mail-order pharmacies that the company controlled to over inflate sales of its high-priced drugs.
Valeant shares tumbled by over 39% before they recovered after a press release from Valeant denied the report. The stock eventually closed down by 19%. The market drop left the pharmaceutical company’s stock down more than 60% from a record high in August 2015.
Valeant asked US securities regulators to investigate Citron’s allegations, calling them “completely untrue.” CEO Mike Pearson added in a call with investors and analysts the next week, “[Andrew Left’s] motivation is the same as one who runs into a crowded theater and falsely yells fire. He wanted people to run.”
Left disputed the CEO’s statement, claiming, “Yelling fire in a crowded theater is a lot different than walking into a theater, smelling smoke and yelling, ‘Hey everyone, there could be a fire.’ ” The Citron Research head added, “Now the information is out, people have an opportunity to inspect the theater and they have chosen to leave … maybe there is a fire.”
In its rebuttal, Valeant noted that a board review found the company was in compliance with the U.S. laws on revenue recognition from drugs that were sold through Philidor RX. Pearson added that the pharmaceutical company would set up an ad-hoc committee to look into allegations related to its relationship with the Pennsylvania-based Philidor.
While Citron’s report was the most damning, other outlets also reported on the possible drug pricing scandal. BNN notes that the New York Times suggested the same week that Valeant and other drugmakers were using companies like Philidor and B&O to get around barriers that kept them from raising prices. Specialty pharmacies like Philidor work with complex medications that have unique requirements for storage or administration.
Specialty pharmacies like Philidor work with complex medications that have unique requirements for storage or administration. However, Valeant used these pharmacies to sell more conventional medications and work out reimbursement from insurers after the fact. This practice allowed the company to get past limits that insurers or a retail pharmacy would otherwise have. Philidor was accused by B&O of improper billing practices.
At the time, Valeant noted that it would consider options that ranged from buying Philidor to severing ties with it and other specialty pharmacies. Eventually, the pharmaceutical company cut its ties with Philidor.
Amid the scandal with Philidor, Valeant Pharmaceuticals found itself in the crosshairs of US prosecutors when the company was subpoenaed over its pricing, drug distribution, and patient assistance programs. The company reported that it would cooperate with investigations.
Pearson at the same time said that the company hired a consultant to review the pricing of Nitropress and Isuprel and noted that “there was considerable room to increase the price of both drugs without unduly depleting the funds available to the hospitals from payers.”
Nitropress saw a six times increase from February through October while Isuprel’s price tripled. Pricing concerns were raised after Turing Pharmaceuticals acquired Daraprim and raised the treatment from $13.50 per tablet to $750 a tablet.
While the investigation was ongoing by the US Senate Committee, Valeant continued to research Philidor and eventually cut ties with the mail-order pharmacy. It transitioned instead toward using Walgreens, admitting later on that this transition was difficult. In a conference call with analysts in early March, Valeant said that the business “was not operating on all cylinders” in recent months.
Valeant’s stock lost 47% of its value on March 15 when the company warned investors of a possible default. Valeant explained that it may not meet a deadline to file its annual report by April 29. The violation would allow lenders to declare the pharmaceutical company in default and demand their money back before they originally planned.
In its statement about the potential default, Valeant explained that was working to complete the report and asked to get the deadline pushed back. That evening the company’s stock had dropped to $35 a share. That announcement quickly led to the resignation of CEO Michael Pearson, who announced the next week that he would step down while activist investor William Ackman, who owns a large portion of Valeant stock, was appointed to the company’s board.
In a statement announcing his departure, Pearson stated, “While I regret the controversies that have adversely impacted our business over the past several months, I know that Valeant is a strong and resilient company.” Pearson added, “I am committed to doing everything I can to ensure a smooth transition to new leadership.”
Valeant’s stock took another hit Monday when Pearson was subpoenaed to testified at the Senate Committee on Aging, which is examining sudden price spikes in decades-old drugs. The committee announced that Michael Pearson was one of several witnesses scheduled for the hearing on April 27th.
Specifically, the aging committee is looking into price increases on recently acquired off-patent medications, mergers and acquisitions that led to increases in these drug prices, and the FDA’s role in the drug-approval process for generic drugs, according to USA Today. The committee is also looking at the FDA’s off-label regulatory regime and distribution protocols.
Democratic Senator Claire McCaskill (Missouri) is leading the effort along with Republican Senator Susan Collins of Maine. In announcing the list of witnesses, McCaskill commented, “Some of the recent actions we’ve seen in the pharmaceutical industry … have looked like little more than price gouging.”
For its part, Valeant looks to be cooperating with the investigation by the Senate committee. Company spokeswoman Laurie Little noted, “Valeant has been cooperating with the committee’s investigation and Mr. Pearson looks forward to testifying at the hearing.”
Still, the announcement of Pearson’s subpoena led to yet another stock sell-off. Trading ended down again at $28.87 per share.
Valeant is also under investigation by a House oversight committee, as well as the Securities Exchange Commission. The company’s woes in the past year point to the idea that acquisitions and price increases will not be tolerated among the pharmaceutical industry. The results of the SEC, House and Senate committee hearings will likely set a standard on pricing raising limits for Valeant and its fellow pharmaceutical companies.