How Valeant tried to defend itself on Monday morning's investor call
Valeant Pharmaceuticals on Monday held a 75-minute, 90-slide investor relations call and webcast in which a bevy of executives addressed serious allegations made by Citron Research, run by short-seller Andrew Left, against the pharma giant.
As BioPharma Dive reported in our initial explainer on the Valeant affair last week, Citron has made bombshell claims regarding Valeant's relationship with a network of specialty pharmacies, including Philidor Rx. The group alleges that Valeant actually maintains (undisclosed) control over Philidor and another pharmacy in its network, R&O Pharmacy, and uses these distribution channels as a shell network to shuttle inventory and then log those moves as sales (in essence, billing and paying itself). You can read our guide to the major issues behind the controversy here.
Valeant announced that it would be holding an investor relations call to address the allegations on Monday after its stock got absolutely pummeled, shedding 35% of its value over the course of the week (note: at first blush, it appears Valeant may have partially succeeded in defusing shareholder concerns - while its shares were down anywhere from 5% to 9% in initial morning trading Monday, they were up about 1% as of press time). BioPharma Dive listened in to the webcast and slide presentation. Here's how the company defended itself.
Swiping at the accuser
Valeant CEO Michael Pearson immediately attacked the credibility and motivations of Citron Research and Left, who is a persistent Valeant critic and known short-seller.
"The sensational claims made by the short-seller Andrew Left... are completely false," said Pearson. "His motivation is the same as one who runs into a crowded theater and falsely yells fire. He wanted people to run. 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."
Pearson went on to call for an Securities and Exchange Commission probe of Left and Citron's recent actions and said that it had already asked the agency to investigate Left.
For his part, Left responded that rather that his actions were more akin to "walking into a theater, smelling smoke and yelling, 'Hey everyone, there could be a fire.' "
Justifying a complex relationship with specialty pharmacies
Pearson showed no signs of giving up on Valeant's use of specialty pharmacies, calling it a "sound" business practice that is convenient and cost-effective for patients, and a normal distribution vessel for dermatological products.
Valeant also tried to explain its relationship with Philidor, which it insisted on several occasions was independent from the firm. One of the biggest questions facing Valeant has been why its relationship with the specialty pharmacy, from which Valeant purchased an acquisition option with $100 million, had been relatively unknown until recently.
The firm responded that because the amount of revenues logged through Philidor was less than 1% of total firm assets, the relationship was not required to be specifically mentioned. In its slide deck, Valeant said that specialty pharmacies account for 7.2% of net revenues YTD and that Philidor accounts for 5.9% of net revenues YTD. Valeant adamantly repeated its assertion that any inventory distributed through the channel is not logged as a sale until it actually gets to patients.
The company also provided this slide explaining the options chain between itself, Philidor, another entity called Isolani, and R&O Pharmacy:
This chain of possible acquisition stakes has raised some eyebrows. But Valeant insists that it is all above board, despite the "unusual" tactic of paying $100 million for an option to later buy Philidor for $0. "I think it's legal," said Pearson of that arrangement. Again, the company maintained that it has limited rights when it comes to influencing Philidor (such as spurring the hiring of an advisor to the CEO) and that Valeant executives and board members do not personally own any stakes in the pharmacy.
Board members also repeatedly brought up a new ad hoc board that will be led by independent director Robert Ingram and tasked with reviewing Valeant's relationship with Philidor. It appears that the main function of this board will be to evaluate whether or not Valeant should ultimately exercise its option for acquire the specialty pharmacy (whose only client is Valeant) or to sever ties with it altogether.
Not so fast on that neurology unit sale
One of the biggest tidbits to emerge from the conference call was Valeant chief Pearson's admission that the firm would likely not be pursuing a sale of its neurology unit, reversing a position announced last week during the company's Q3 earnings call.
"We won’t do anything with neuro or other businesses for the foreseeable future," said Pearson, citing the "distractions" of the last week. Valeant, under pressure for its drug price hike model, had been considering the neuro sale as part of an effort to shift its strategy and invest more in R&D.
About those email addresses...
Another major issue raised during the conference call stemmed from a Wall Street Journal article published Sunday night scrutinizing the relationship between Valeant employees and Philidor. According to the Journal, several workers listed as Valeant employees were placed at Philidor early on in order to help the pharmacy with its "structures and processes," but that they went by one name in person and different names on their Philidor email addresses.
For instance, one listed Valeant employee, Bijal Patel, went by "Peter Parker" on Philidor's email server, the Journal reported. A Philidor spokesperson told the publication that this was simply meant to keep workers' Philidor communcations separate from Valeant communications.
Pearson responded to the email issue by saying that it was probably not a legal matter, but rather a compliance issue on Philidor's end. "This is an issue that the ad hoc committee of the board plans to review," the company said during the call.