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Valeant Tanked Billions in Shareholder Value, Investors Say

(CN) - Shareholders sued Canadian pharmaceutical giant Valeant after the company's value plummeted on news it was manipulating drug-distribution channels to inflate its revenue.

The State Board of Administration of Florida filed a 187-page federal complaint against Valeant Pharmaceuticals and its former CEO Michael Pearson in New Jersey, chronicling the company's stock crash after the allegations of malfeasance came to light in late 2015.

Unbeknownst to shareholders, the Dec. 7 complaint alleges, Valeant's financial performance had been driven in part by its use of online pharmacy Philidor and other "captive pharmacies" to improperly peddle Valeant-branded medication and stave off competition from generic drug makers. Valeant-controlled pharmacies sent insurers altered prescription claim codes that "falsely represented the prescribing doctor had ordered that only Valeant drugs be dispensed," the complaint says. In other instances, the pharmacies allegedly did not follow statutory mandates and insurance-contract directives to substitute generic alternatives for branded drugs.

Valeant and its captive pharmacies also executed automated refills without patients' permission, and distributed deceptive drug-benefit "coupons" which consumers were misled to believe could be used to acquire prescriptions at no cost.

Meanwhile Valeant was drastically increasing its prescription drug prices. Over a two-and-a-half year period ending in 2015, the company jacked up the price of the antidepressant Wellbutrin by more than 380 percent, Tretinoin (a common acne gel) by more than 320 percent, and the precancerous skin lesion cream Carac by more than 550 percent, according to the lawsuit.

The lawsuit says the Florida retirement fund and other shareholders incurred massive losses as a result of Valeant managers' failure to control the company's practices. The defendants in the case are Valeant, Pearson, former Chief Financial Officer Howard Schiller, successor CFO Robert Rosiello, along with former Valeant executives Tanya Carro, Ari Kellen and Deborah Jorn.

Seeking damages for securities law violations, the board wants to hold Pearson liable for falsely assuring shareholders that the company's profit model was sustainable, and was propelled by sales volume, not the company's drug price increases.

"Pearson was the architect of the Company’s business strategy and orchestrated the dramatic price increases and deceptive business practices along with the other Executive Defendants," the complaint states.

Despite his role at the helm of Valeant during the debacle, and his alleged knowledge of the company's improper distribution practices, Pearson received a $9 million severance after being replaced as CEO in 2016.

Valeant's stock price ultimately tumbled from a high of more than $260-a-share in the summer of 2015, to a low of $8.31 in the spring of 2017. Valeant shares are trading at $19.68-a-share as of Dec. 14 market close.

Valeant's decision to drastically increase the price of the cardiac drugs Nitropress and Isuprel became the subject of inquiries by the U.S. House of Representatives Committee on Oversight and Government Reform in Sept. 2015. A month later, the company revealed it received subpoenas from federal prosecutors seeking information about Valeant's drug pricing and distribution practices.

During a subsequent conference call, the company disclosed its close relationship to Philidor, noting that it had previously acquired an option to purchase the pharmacy. Then-CEO Pearson said Valeant had not revealed the relationship with Philidor because it was seen as "a competitive advantage that we did not want to disclose to our competitors."

Though Pearson tried to maintain that Philidor was not controlled by Valeant, three of the largest pharmacy-benefit managers in the U.S. - CVS Health, Express Scripts and OptumRx - dropped Philidor from their networks.

When Valeant restated its financials, the company admitted it had incorrectly recognized revenue from a subset of drug sales to Philidor, a snafu it blamed on Schiller.

"As part of this assessment of internal control over financial reporting, the company has determined that the tone at the top of the organization and the performance-based 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," the company said in a media release.

An outwardly rueful Pearson testified before the U.S. Senate Aging Committee in April 2016, conceding that the company had "relied too heavily on the industry practice of increasing the price of brand name drugs in the months before generic entry."

The company went on to announce that it had formed a patient access and drug-pricing committee in light of the company's "mistakes" in drug pricing, according to a press release.

In Nov. 2016, non-parties Andrew Davenport (Philidor's former CEO) and one-time Valeant executive Gary Tanner were hit with criminal fraud charges for allegedly engaging in a kickback scheme involving funds from Valeant's  purchase option for Philidor. According to the Justice Department, Davenport allegedly misappropriated millions of dollars from payments Valeant sent to Philidor in connection with the purchase option, and "kicked back" large sums to Tanner in return for his role in furthering Philidor's relationship with Valeant.

Both men have pleaded not guilty.

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