It’s been a terrible month for investors in Valeant (and Pershing Square) and it is about to get even worse following news that the outgoing CEO of the troubled company, which is under scrutiny for dramatically hiking the price of older drugs, has been summoned to testify at a U.S. congressional hearing on April 27, the panel said on Monday.
According to Reuters, the Senate Special Committee on Aging hearing comes as the Canadian-based company is coping with a variety of federal investigations into its accounting practices that led to a restatement and delays in the filing of its annual report.
Valeant said last week CEO Michael Pearson would step down, after a board committee probing the company’s ties to specialty pharmacy Philidor Rx Services had found accounting problems dating back to December 2014. Billionaire William Ackman, whose Pershing Square Capital Management owns a 9 percent stake in Valeant, has joined the company’s board.
Pearson’s testimony under oath will take places as prosecutors in Massachusetts and Manhattan are probing Valeant’s pricing and distribution channels, while the Securities and Exchange Commission is investigating its accounting and disclosure issues.
The Senate committee is one of two congressional bodies that are looking into aggressive prescription drug pricing.
Both committees are particularly focused on Valeant and Turing Pharmaceuticals, a private company founded by Martin Shkreli, a 32-year-old entrepreneur who has come under fire for raising the price of the drug Daraprim by more than 5,000 percent to $750 a pill.
In February, the U.S. House Committee on Oversight and Government Reform held a long and contentious hearing on drug pricing. At that hearing, Shkreli, who is facing unrelated securities fraud charges, asserted his Fifth Amendment right against self-incrimination.
Pearson did not testify at the hearing in the U.S. House of Representatives because he was on medical leave. Howard Schiller, Valeant’s then-interim CEO and former chief financial officer, testified in Pearson’s place. This is the same Schiller who since then has been publicly accused of “improper conduct” which helped contribute to a misstatement of its financial results. Schiller, through his attorneys, has denied any wrongdoing.
In short, bring out the popcorn, this will be one epic spectacle, one which sooner or later culminate with one or more people in prison as Valeant revealed to be the pharma industry’s Enron we predicted months ago it would ultimate devolve into.
But wait, that’s not all.
Over the weekend, Bloomberg reported that investors in Sprout, the female libido pill maker bought by Valeant Pharmaceuticals International Inc. for $1 billion last year, said Valeant has failed to successfully commercialize the treatment by setting the price too high and neglecting to market it, putting the drugmaker at risk of violating the merger agreement.
So add corporate lawsuits to civil and criminal: the board will be very busy (assuming there is one in a few weeks).
The group, representing all Sprout shareholders at the time of the acquisition, sent Valeant a letter on March 14 requesting materials showing that the drugmaker can fulfill its obligations under the deal going forward. Among the documents, the investors are seeking evidence that Valeant plans to spend $200 million for marketing and research and development for 2016 and half of 2017, as part of the agreement. They also ask for assurance that Valeant will keep a sales force of 150 to distribute the drug, called Addyi, which has posted disappointing sales since its introduction five months ago.
“Valeant predatorily priced Addyi at $800 a month even though Sprout had established a price point of approximately $400 a month for the drug based on market research,” the investor group said in the letter. “As a result of this predatory pricing, insurance companies refused to cover the drug, which has led to the drug not being affordable for millions of women.”
Oh the irony: a drug which has been a speculatcular flop (and which the “investors” would have loved to see Valeant sell at $800 per month) is now said that it would sell better if only the price was cut in half.
Valeant has received the letter and will respond in due course, spokeswoman Laurie Little said in an e-mail. “While confidentiality obligations under the merger agreement prohibit us from commenting on specific contractual terms, Valeant intends to comply with all of its obligations under our agreement with the former shareholders of Sprout, including as they relate to marketing spend, number of sales reps, and post-marketing studies.”
The investor group, represented by Boies Schiller & Flexner LLP managing partner Jonathan Schiller, received cash in the acquisition, but they stand to collect royalty payments if the drug is successful. They are requesting that Valeant provide all “books, contracts, documents and records” related to the development and commercialization of Addyi by April 13, according to the letter.
“The Sprout shareholders have a contractual right to obtain the information that we have requested of Valeant,” Schiller said by e-mail.
“They also have legal remedies under the merger agreement to pursue claims against Valeant for its failure to perform its obligations.”
Sprout is one of four business lines that have performed poorly and need fixing, Pearson told senior managers this month. The struggling unit has started to cut jobs and eliminated the positions of its two national sales directors, according to people familiar with the matter, who asked not to be identified because the moves aren’t public. In addition, about 12 regional sales directors have been asked to interview for their jobs, the people said.
At the time of the merger agreement in August — within days of its approval by the U.S. Food and Drug Administration — both parties expected Addyi to hit $1 billion in net sales in the first full seven quarters following its introduction, the investors said in their letter.
Now, not so much, as suddenly Valeant’s entire rollup enterprise is under threat of imminent collapse.
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