Valeant says Philidor shutting down as it cuts ties

By Caroline Humer and Svea Herbst-Bayliss

(Reuters) – Valeant Pharmaceuticals International said on Friday that it is cutting ties with pharmacy Philidor Rx Services and that the pharmacy was shutting down.

The move was part of a defense to allay concerns about the downside of its dealings with that pharmacy the morning after big pharmacy chains said they would cut it from their networks.

Valeant also said it would bolster its internal investigation into the matter by adding to the team an outside lawyer who once worked in the U.S. Department of Justice.

The drugmaker’s move comes amid growing pressure from investors after Valeant disclosed two weeks ago that it was under investigation by the U.S. government over its patients’ assistance program and drug pricing and distribution.

Influential short-seller Citron Research was one of the first critics to call the company out on Philidor in an Oct 20 report, saying Valeant was using the pharmacy set-up to inflate revenue. Valeant has denied any wrongdoing.

Valeant disclosed this week that it had paid $100 million for an option to buy the business. Bloomberg on Thursday detailed wrongdoing in its processing of medical claims, building on earlier reports about business practices.

Later Thursday, three top U.S. drug benefit managers, who administer prescription medicine benefits for health plans, said they would no longer work with the pharmacy. Express Scripts , CVS Health and OptumRx, part of UnitedHealth Group Inc , said they made the decision after conducting audits of the pharmacy.

Philidor will be shutting down operations as soon as possible, Valeant said.

Bill Ackman, whose Pershing Square Capital Management has a 6.3 percent stake in Valeant, told investors on Friday that “life will go on” for the company as it continues to sell high-demand products like Bausch Lomb contact lenses.

“We think the Valeant business is quite robust,” Ackman said on a widely attended conference call. He said shares are undervalued.

“One criticism of (Valeant Chief Executive Mike Pearson) has been that he is so disciplined on costs that he could be seen as being a little cheap on hiring on the PR side,” Ackman said.

The hedge fund swept up 2.1 million additional Valeant shares last week as the stock plummeted, making Pershing Square the company’s second-largest shareholder, leapfrogging asset manager T. Rowe Price.

Valeant shares fell 9.1 percent Friday and remained off during Ackman’s conference call, trading at $101.31. They have given up more than a third of their value since the company disclosed that Philidor pharmacy distributed drugs making up 6-percent of Valeant revenue this year, and are well off from their peak on Aug. 5 of $263.70.

Bloomberg reported on Thursday that Philidor has altered doctors’ orders to wring more payment out of insurers, according to former employees and an internal document, which details how to proceed with a prescription for certain Valeant drugs after they have been rejected.

‘LOST CONFIDENCE IN PHILIDOR’

Valeant first disclosed less than two weeks ago that it was using a pharmacy called Philidor, which works with a network of pharmacies including one called RO Pharmacy that is also involved in lawsuits with Valeant over nonpayment and other issues.

“We have lost confidence in Philidor’s ability to continue to operate in a manner that is acceptable to Valeant,” Chief Executive Michael Pearson said in a statement. “Operating honestly and ethically is our first priority, and you have my absolute commitment that we will make it right.”

Valeant said that former U.S. Deputy Attorney General Mark Filip had been appointed to advise a committee that it formed earlier this week to look into the allegations related to the company’s association with Philidor. Filip works for Kirkland Ellis.

Philidor accounted for 6.8 percent of Valeant’s total revenue in the third quarter and 5.9 percent so far this year. The drugmaker said it intended to develop a plan to ensure minimal disruption to patients’ access to drugs.

Valeant shares have lost more than half their value since September as the company has come under attack on several fronts. U.S. prosecutors are also investigating the company over drug pricing, a hot issue in the U.S. presidential campaign.

Valeant was until recently one of the most popular healthcare stocks among investors, with its model of rapid acquisition-driven growth. Its abrupt slide from market darling to a company under fire has weighed heavily on ValueAct Partners and Pershing Square, two well known U.S. activist funds.

Short-seller Citron Research tweeted Friday that the shares of Valeant have a better chance of going to zero than Herbalife Ltd .

Citron said: “$VRX has a better chance of going to 0 than $HLF EVER will. Citron to update full story on Monday. Dirtier than anyone has reported!!”

(Corrects spelling of “patients” in paragraph 4, makes clear in paragraph 16 disclosure came from Valeant, not Philidor)

(Additional reporting by Ben Hirschler in London and Shivam Srivastava in Bengaluru; Editing by David Goodman and Nick Zieminski)

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