Valeant blames Schiller, but ex-CFO holds ground
Investors who were calling for Valeant Pharmaceuticals International Inc. CEO Michael Pearson to step down got their wish Monday morning, though the fact that he passed on the blame for the company’s specialty pharmacy scandal to just two individuals doesn’t cut it for analysts who say the entire management is at fault.
Valeant issued a statement accusing its former chief financial officer Howard Schiller and corporate controller Tanya Carro of “improper conduct,” asking the once-interim CEO Schiller to step down from his position on the company’s board, a request he has refused.
“As a result of the fact that I did not engage in any improper conduct regarding this proposed restatement, I have respectfully declined the request from the company’s board to resign from the board,” said a statement issued on behalf of Schiller from law firm Winston & Strawn.
Its stock gained more than eight per cent, or $2.97, to $37.90. At its peak last August, the share price was $346.32 on the Toronto Stock Exchange.
At the centre of the accusations is the now-defunct Philidor Rx Services, a specialty pharmacy that Valeant now says it may have used to count sales not yet purchased by patients, resulting in the “misstatement” of approximately US$58 million in financial documents since the end of 2014.
Valeant management says it has concluded that financial reporting, disclosure controls and procedures had “material weaknesses” in the company beginning at the end of 2014, resulting in a year of alleged improper conduct.
“The improper conduct of the company’s former chief financial officer and former corporate controller, which resulted in the provision of incorrect information to the committee and the company’s auditors, contributed to the misstatement of results,” said a news release issued by Valeant on Monday.
But some analysts say it’s the entire management that is to blame for these troubles with the company.
“I think there’s plenty of blame to go around and frankly I think it’s just comical (Valeant) focused on the CFO and the controller while at the same time calling out a management culture that, by their own admission, fostered bad behaviour,” David Amsellem, an analyst with Piper Jaffray, told the Financial Post.
Valeant cut ties with Philidor in October after it was revealed the specialty pharmacy used aggressive tactics to try to increase insurer reimbursement to help the drugmaker inflate revenue.
Valeant says it has never had an ownership interest or control over Philidor, although it purchased the option to acquire ownership in August 2013. The drugmaker also says that although Philidor operated independently and did not report to Valeant, the drugmaker did have the right to access Philidor’s books, records and facilities.
Valeant says it will restate its financial results for 2014 and 2015 after identifying some sales to Philidor that should have been recognized when products were dispensed to patients.
“The company has determined that the tone at the top of the organization and the performancebased environment at the company, where challenging targets were set and achieving those targets was a key performance expectation, may have been contributing factors resulting in the company’s improper revenue recognition,” said the Valeant news release.
Schiller says that although he did sign off on the Philidor sales transaction accounting, it was Carro, as corporate controller, who presented the information, telling him it had been reviewed by outside auditors.
Carro was recently put on administrative leave in the wake of an internal review that found the firm had booked some revenues from Philidor too early in 2014.
She has not issued a statement regarding the latest accusations.
In October 2015, Carro said there was “no way” the company used Philidor to inflate its sales figures by forcing more products through the distribution channel since all inventory remains on the company’s consolidated balance sheet until dispensed to patients.
In response to questions about why Valeant’s relationship with Philidor was only reported last October, Carro said it was because it was not considered material to the company’s business.
Schiller resigned as CFO at Valeant in June 2015, a job he had held since December 2011.
“It was an incredibly tough decision but sometimes you have to make tough decisions,” Schiller told the Financial Post in May 2015 when he announced his intention to step down once the company found a replacement.
Schiller continued to serve on Valeant’s board, and was brought back as interim-CEO of the Laval, Que.-based pharmaceutical giant when its Pearson was hospitalized with severe pneumonia late December 2015.
In fact, it was Schiller who represented Valeant in front of U.S. Congress in early February, answering to lawmakers about the company’s drug price hikes.
According to Bloomberg News, Schiller may be forced to pay back some of the US$26.1 million in incentive compensation he received as CFO in 2014.
On Monday Pearson also announced plans to eventually step down, though the company did not give a reason for his leaving the CEO post.
Valeant said it had started a search to replace Pearson, who will serve as CEO until a successor is found. Bill Ackman, the billionaire investor whose Pershing Square Capital Management LP is one of the drugmaker’s biggest investors, will join the board.
The stock fell by more than half last week after the drugmaker cut its 2016 forecast, reported weak fourth-quarter results and said it was at risk of breaching some of its debt agreements.
“This is the company in utter disarray; there’s no management right now,” said Amsellem.
Valeant also says it plans to delay filing its annual report until April 29, which puts it in danger of a default on its US$30 billion in debt.