Valeant Plummets on Criminal Probe of Philidor Unit

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Valeant Pharmaceuticals International Inc. (Laval Quebec) did an about-face and fell 11% on Thursday as new details about a criminal investigation into the drugmaker reignited investor concerns about the company’s past business relationship with a mail-order pharmacy that sold its products.

News of the investigation, reported by the Wall Street Journal, was a setback to the Canadian company’s efforts to clean up its image, with some in the market concerned it could face penalties and may have to pay more to borrow as it renegotiates debt.

After the article was published, Valeant said in a statement it had disclosed it was being investigated by the U.S. Attorney’s Office in October and that it continued to cooperate with that probe.

Concern about other investigations, which focused on its drug pricing and accounting practices, had already cut its share price by about 90% the past 12 months. The stock had gained 25% on Tuesday after new CEO Joseph Papa, who joined in May, outlined a plan to sell assets, pay down debt and focus on dermatology, consumer and Bausch & Lomb eyecare.

Lawyers at the U.S. Attorney’s Manhattan office are probing whether Valeant hid from insurers its relationship with a specialty pharmacy, Philidor Rx (Hatboro PA) that helped inflate its drug sales, the Journal reported, citing sources.The federal investigation could lead to criminal charges against former Philidor executives and Valeant as a company, the report added.

The investigation reflects lingering issues facing Valeant and shows that it is “nowhere close to out of the woods,” said David Neuhauser, managing director of Livermore Partners LLC (Northbrook IL), who added his firm covered its profitable short position in Valeant this quarter. Valeant’s relationship with Philidor was revealed last fall, including the aggressive tactics Philidor used to receive payment from insurers.

That news as well as investor and political scrutiny of its sharp drug price increases led to several investigations into pricing and its patient assistance programs, including one by the U.S. Attorney’s Office in New York.

Valeant has more than $30 billion in long-term debt and some investors have voiced concern such amount is too much, given that it may not be able to raise its drug prices as in the past and has moved away from its strategy of growth through serial mergers and acquisitions.

Valeant cut ties with Philidor last year and overhauled its board of directors, bringing on its top investor, activist Bill Ackman. After the investigations were disclosed last year, Wall Street started predicting fines against the company.

“It is not possible for us to know how this investigation will turn or if charges will be pursued,” Wells Fargo analyst David Maris said in a client note.

Steve’s Take: It may have taken a while, but the Feds have finally gotten around to bringing criminal charges against much flogged Valeant Pharma, the most recent and well-earned poster child for healthcare companies brazenly ripping off insurers and, well, us citizens too.

The Feds have finally brought criminal charges against much flogged Valeant Pharma. Click To Tweet

Valeant’s stock peaked at $263.81 just a year ago when profits were off the charts. Since then it’s been a steady, sickening-for-shareholders slog downward, wiping out 90% of the company’s market cap, forcing former CEO Michael Pearson to resign, and prompting Congressional hearings, civil lawsuits and a notice of its default from bondholders.

As mentioned above, the WSJ reports that the U.S. Attorney for the Southern District of New York (Manhattan) is investigating whether Valeant also defrauded insurers by obscuring its ties to the shadowy mail-order-pharmacy, Philidor, whose sudden explosion into the news set the stage for one of the most spectacular crashes among the darlings of pharma players in recent memory.

The WSJ said the federal attorneys, “are pursuing an unusual legal theory, previously unreported, that Valeant and a closely linked mail-order pharmacy, Philidor Rx Services LLC, allegedly defrauded insurers by hiding their close relationship.”

The U.S. attorney’s office in Manhattan, headed by Preet Bharara, is investigating possible mail and wire fraud violations, one of the people familiar with the matter said. The wide-ranging mail and wire-fraud statutes make it illegal to use interstate communications as part of a scheme to defraud another out of money.

Just what does “closely linked” mean, referring above to the Feds’ characterization of the relationship of Valeant with Philidor? Donning my cap as a former IRS lawyer, I learned from sources at Bloomberg that Valeant had a legal option to acquire Philidor, essentially for free. If that doesn’t constitute control, I don’t know what does.

It was through this de facto control that patients’ prescriptions were changed from the generic version of their medicines to Valeant’s much higher-priced, branded treatments. Now, that’s plainly illegal.

Ultimately, though, the federal criminal issue is price, and whether Valeant’s management defrauded clients by not disclosing its Philidor relationship.

Prosecutors are investigating whether now-extinct Philidor knowingly made false statements to insurers about its ties to Valeant, something the company has been widely accused of in the media before.

Philidor helped patients get insurance coverage for higher-priced Valeant drugs, for example for toenail fungus or acne treatment, instead of cheaper alternatives. At the heart of the matter is whether insurers thought Philidor was neutral rather than in the service of Valeant, the person said.

Government lawyers are also examining some of Philidor’s business practices, including rebates and other compensation provided by the pharmacy to customers who used Valeant products, as well as Philidor’s efforts to seek reimbursement from insurers, the person said.

As such, Valeant likely will be made another example to “explain away” soaring drug prices; one where Michael Pearson may well end up in a cell.

Ironically, he may not be the biggest loser. As pointed out by Tyler Durden in Zero Hedge, a far worse fate could befall Valeant’s biggest “lifetime” investor, Bill Ackman, who appears to have made one of the worst trades in recent memory:

  1. short Herbalife, where he has a $1 billion short on the expectations it was a criminal ponzi scheme (and which has soared recently after being cleared by the FTC), and
  2. long Valeant, which may end up defunct following potentially huge regulatory fines, civil judgments and the necessary asset sales to cover the entire mess.


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