October 26, 2015 / 1:00 PM / 2 years ago

UPDATE 5-Drugmaker Valeant raises detailed defense but doubts remain

(Adds Philidor comment, analyst and investor comment, links to Breaking Views and graphics, updates shares)

By Caroline Humer and Euan Rocha

Oct 26 (Reuters) - Drugmaker Valeant Pharmaceuticals International Inc laid out a detailed defense on Monday of its relationship with a little-known specialty pharmacy, but its arguments failed to calm all investor concerns.

Valeant shares have lost more than half their value in recent weeks as the company came under attack on several fronts.

U.S. prosecutors are investigating Valeant over drug pricing, an issue emerging in the U.S. presidential campaign. The falling stock price, in turn, complicates Valeant’s acquisition-driven strategy. And those stock losses accelerated last week when short-seller Citron Research, run by Andrew Left, published a sharply critical report on the company.

The stock dropped another 2 percent in volatile afternoon trading in New York and Toronto.

Laval, Quebec-based Valeant said it has asked U.S. securities regulators to investigate Citron’s “completely untrue” allegation that the company used its ties with a specialty pharmacy to inflate revenue, and said it would conduct a review of its pharmacy network.

About a dozen executives, directors, and a former chief financial officer - some of whom Chief Executive Mike Pearson said were operating on little sleep - made up Valeant’s defense team on a conference call with investors and analysts. The call included an unequivocal endorsement of Pearson by lead director Robert Ingram.

“(Left‘s) motivation is the same as one who runs into a crowded theater and falsely yells fire. He wanted people to run,” Pearson said. “He intentionally designed the report to frighten our shareholders to drive down the price of our stock so he could make money for his short-selling.”

Left disputed Pearson’s comment in a statement.

”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.’

“Now the information is out, people have had an opportunity to inspect the theater and they have chosen to leave ... maybe there is fire.”

Left said on Bloomberg TV that he had not been contacted by the U.S. Securities and Exchange Commission. He refused to discuss his trading of Valeant.

Valeant said it would set up an ad-hoc committee to look into allegations related to the company’s association with specialty pharmacy Philidor. The committee includes Mason Morfit, president of one of Valeant’s largest shareholders ValueAct Capital, who is rejoining the board.

Philidor said it welcomed formation of the committee and would cooperate with it.

Peter Andersen, chief investment officer at Boston-based Congress Wealth Management, a long-time Valeant investor, said he was impressed with the directors and senior management, but sold his stake Monday because of uncertainty facing the company.

“They are an excellent example of modern corporate governance in terms of being open and available. I feel they discredited the short-seller’s allegations,” he said, but added,

“The stock is going to be stuck in limbo.”

REBUILDING CONFIDENCE

Valeant cleared the air somewhat, but not enough, said BMO analyst Alex Arfaei, in a note.

“There is still much more that needs to be done to rebuild investor confidence, which we argue has been significantly weakened.”

Arfaei said he wondered what other undisclosed business practices Valeant might be involved in that could undermine the stock.

Valeant said in a filing Monday it received a subpoena in a U.S. government probe of payments between its Bausch & Lomb division and medical professionals.

Valeant should sever its relationship with Philidor so it can focus on its core business, said BTIG analyst Tim Chiang.

But J.P. Morgan analyst Chris Schott said in a note that concerns about Valeant’s connection with Philidor were “overblown.”

Valeant said it paid $100 million in December 2014 for its option to buy Pennsylvania-based Philidor Rx Services Llc, which also included contractual rights, such as influence over certain personnel hirings and a place on a joint steering committee.

Philidor accounted for about 7 percent of its total revenue and EBITDA in the third quarter, and 44 percent of sales of Jublia, Valeant’s toenail fungus treatment, Valeant said, but added it is not material for reporting purposes.

Valeant described Philidor as independent, and said Valeant does not have legal liability for it.

The company said a board review had found the company in compliance with the law on revenue recognition from drugs sold through Philidor.

Valeant’s link to Philidor came under scrutiny after a New York Times report said that Valeant and other drugmakers were using specialty drug distributors to circumvent barriers to raising prices.

Valeant has said it properly accounts for sales through its pharmacy partners and only books revenue once one of its medicines reaches a patient.

FOCUS ON SPECIALTY PHARMACIES

Specialty pharmacies are designed to handle complex medications that have unique requirements for storage or administration. But Valeant has also used such pharmacies to sell more conventional medicines directly to patients, and work out reimbursement from insurers afterward.

That may allow them to get past limits on a drug’s use imposed by insurers or a retail pharmacy. In Valeant’s case, the company has been under scrutiny for its ties to Philidor, which has been accused by one of its affiliates of improper billing practices.

The Wall Street Journal reported that Valeant and Philidor are more interconnected than previously disclosed, and highlighted business practices that included a few Valeant workers who used alternative names, sometimes fictional ones, while working in Philidor’s office.

Valeant chief compliance officer Seana Carson said the company’s ad-hoc committee will also review that report.

Pearson said Valeant will consider all options, including buying Philidor or severing ties with it, as well as using other specialty pharmacies.

The acquisitive company has been considering a sale or other options for its neurological business, but such a move is now on the back-burner, Pearson said.

Reporting by Caroline Humer in New York, Euan Rocha in Toronto and Rod Nickel in Winnipeg, Manitoba; additional reporting by Michael Flaherty in New York and Svea Herbst-Bayliss in Boston; Editing by Nick Zieminski

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