(Adds after hours stock move, CVS, Express details, Valeant's Philidor revenue, Bloomberg Philidor story, Valeant comment)
By Michael Flaherty and Caroline Humer
Oct 29 (Reuters) - Valeant Pharmaceuticals Inc. sustained hits on several fronts on Thursday after CVS Health Corp and Express Scripts dropped Philidor from their networks in a sign the fallout from the drugmaker's connection with the specialty pharmacy is spreading.
The moves by the nation's two largest pharmacy benefit managers whacked Valeant shares before the market close, and pushed them 10 percent lower to $99 after hours.
After coming under pressure this summer, Valeant's stock plunged last week after short-seller Citron Research said that the company was using its drug distributor, Philidor Rx, to inflate revenue numbers.
About a dozen Valeant officials held a conference call on Monday to address the accusations, which helped ease pressure on the company's stock. Valeant said it properly accounts for sales through its pharmacy partners and only books revenue once one of its medicines reaches a patient.
Valeant's stock recovered throughout the week than sank on the CVS and Express Scripts news. CVS, late on Thursday, said its Caremark program was dropping Philidor. CVS took the step following an audit of Philidor, citing "noncompliance" with its provider agreement, the company said.
Shortly after the market close, Express Scripts said it too was ending its ties to Philidor.
CVS did not explain the "noncompliance" further when contacted by Reuters. Bloomberg on Thursday said Philidor has altered doctors' orders to wring more payment out of insurers, according to former employees and an internal document, which details how to proceed with a prescription for certain Valeant drugs after they have been rejected.
"Valeant's drugs are provided to patients through many channels, including traditional retail pharmacies, specialty pharmacies, and directly from health care providers," said Valeant Spokeswoman Laurie Little in an emailed statement.
Philidor declined to comment on Thursday.
CVS and Express Scripts Holdings manage most of the prescriptions filled under health plans run by the nation's largest insurers. Express Scripts manages prescription benefits for 85 million people.
The move by CVS and Express Scripts will have a direct impact on Valeant, though Philidor accounts for a small portion of the Canadian company's revenues.
In Valeant's detailed presentation on Monday that spelled out its dealings with Philidor, the company said that the pharmacy accounted for about 5.9 percent of its total sales so far this year.
The stock was trading as high as $260 per share in August. The next month, U.S. Democratic politicians singled out Valeant for hiking drug prices on consumers, and a federal subpoena followed. With the stock under pressure, the Citron report last Wednesday sent it into a tailspin.
The CVS announcement came after mutual fund manager Ruane, Cunniff & Goldfarb Inc., sent a letter to its own investors about the Valeant saga. The Sequoia Fund, which the mutual fund manages, owns 9.93 percent of Valeant and is the company's largest shareholder.
While the letter is largely a defense of Valeant's practices, it says that the company needs to move faster with paying down its debt. It also points out that Valeant's aggressive business practices have "pushed boundaries," and that the company needs to better manage its image.
"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," said the letter dated Oct. 28 and signed by Ruane, Cunniff & Goldfarb President Robert Goldfarb and Executive Vice President David Poppe.
Separately, two of the five independent directors of the Sequoia Fund resigned over the weekend, the Wall Street Journal reported on Thursday, citing the board's chairman. A person who answered the phone at Ruane, Cunniff & Goldfarb said the chairman, Roger Lowenstein, could not be reached.
Valeant's abrupt slide from a hedge fund darling to a drug company under fire has weighed heavily on two of the best known U.S. activist funds: ValueAct Partners and Pershing Square.
ValueAct has been an investor in Valeant since 2006, and played a significant role in instituting the company's strategy and its current CEO, Michael Pearson. Pearson took over in 2008 and built Valeant into a more than $40 billion company with over 100 transactions. ValueAct, with $19 billion under management, now has two directors on the company's board, and was the fourth largest shareholder as of June 30.
William Ackman's Pershing Square, Valeant's third-largest shareholder, has scheduled a call on Friday at 9 am EDT to address the drug company's issues. Pershing owned 5.7 percent of Valeant as of June 30, and faced a paper loss of more than $800 million at one point last week.
Additional reporting by Vidya L Nathan; Editing by Cynthia Osterman, Nick Zieminski and Andrew Hay