WILMINGTON, Del. (CN) — Former shareholders claim in a class action that Valeant Pharmaceuticals botched the launch of its female libido drug after projecting it would bring in billions of dollars.
Valeant paid $1 billion for Sprout Pharmaceuticals last year, with agreements to pay royalties on Addyi, a daily pill approved by the FDA for treatment of low sexual desire for pre-menopausal women.
The deal required Valeant to pay Sprout shareholders "40 percent of the future global product margin for Addyi," if sales top $1 billion, according to the Wednesday complaint in Delaware Chancery Court.
But the shareholders say that Valeant "abdicated its duty to use diligent efforts to develop and commercialize Addyi," and that projected sales this year top out at $10 million.
"Simply put, Addyi is languishing because of Valeant's operational ineptitude and breach of its obligations under the merger agreement," the complaint states.
Lead plaintiff Shareholder Representative Services also claims that Valeant executives failed to disclose possible fraudulent conduct related to its business with Philidor Rx Services, its former mail-order pharmacy distributor.
the shareholders say Valeant failed to disclose during merger discussions that it had an option to buy Philidor or that Philidor was engaging in illegal billing practices by hiking drug prices for Valeant drugs.
According to the complaint, independent investigations by the Southern Investigative Reporting Foundation and Citron Research revealed a "massive fraud" perpetrated by Valeant and Philidor, which included manipulating the insurance reimbursement system and a scheme to deceive auditors by creating false invoices that booked revenue for unsold Valeant products.
Valeant then terminated its relationship with Philidor, which closed down. More reporting by The Wall Street Journal and Bloomberg found that Valeant paid Philidor $100 million for an option to acquire the company and paid the drug distributor millions of dollars in bonuses when it met Valeant's sales goals, according to the complaint.
It claims the investigations showed that "Valeant's employees worked in Philidor's offices using fictitious names to hide their identities," and that "Philidor steered customers towards high-priced, Valeant-owned drugs, and then attempted to negotiate reimbursement with insurers."
Bloomberg news service reported that both companies are being investigated by the U.S. Attorney's Office for the Southern District of New York.
"Valeant's criminal conduct with Philidor prevented it from meeting its obligations under the merger agreement," the shareholders say in the complaint.
They also complain that Valeant violated the terms of the buyout by failing to fully invest in marketing Addyi and by overcharging for the pill.
Market researchers for Sprout found that a $400 price for a month's supply of Addyi was optimal because it was "a price point similar to that at which male erectile dysfunction drugs were covered by most insurance companies," complaint states.
But Valeant decided to increase the price to $800 per month without doing any market research, merely asking participants at a meeting to "write on a sticky pad the price at which they thought Addyi should be priced," according to the complaint.
It claims that former Sprout CEO Cindy Whitehead said at the meeting that "the $800 price was going to 'kill' Addyi," to which a Sprout executive responded that Sprout was "lucky we didn't triple the price."
At $800, "managed care plans and their pharmacy benefit managers refused to cover Addyi, although they would have done so at $400 per month," the complaint states.
Just before the projected launch of Addyi, Pearson told Sprout executives, including Whitehead, that "Valeant would not be following Sprout's painstakingly prepared commercial launch plan." And though Valeant had no launch plan of its own, it "jettisoned all of Sprouts' preparatory work, and soon ended its relationship with Sprout's CEO, Cindy Whitehead, and the entire Sprout leadership team," the complaint states.
Then "Valeant terminated the entire 140-person Addyi sales force that Sprout had put together," as "part of a 're-launch' of the brand," according to the complaint.
Neither the relaunch nor the promise to spend at least $200 million to promote Addyi has materialized, the shareholders say.
They ask the court to order Valeant to use the "diligent efforts" required under the merger agreement to develop and commercialize Addyi.
They are represented by Rudolf Koch with Richards Layton in Wilmington, and by Jonathan Schiller with Boies Schiller in New York City.
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