Embattled drugmaker Valeant Pharmaceuticals International (VRX) said Monday that CEO J. Michael Pearson will step down and billionaire hedge fund manager William Ackman will join the company's board of directors.
The company also said it would restate some of its financial results, a move Valeant said was based in part on "improper conduct" of Howard Schiller, the drugmaker's former chief financial officer, and a second executive. Schiller, who denied the allegations, has not agreed to a request that he leave the company's board, Valeant said.
The drugmaker's shares, halted on the Nasdaq exchange in pre-market trading pending the news, were down 4.52% at $25.76 at the time, continuing a months-long plunge that has seen the stock lose roughly 87% of its value. Turning positive during the regular session, the stock was up 8.27% at $29.21 a share in afternoon trading.
The Canada-based company said Pearson, who recently returned following treatment for pneumonia, would stay on as chief executive and a member of the firm's board of directors until a successor is appointed.
Pearson had been hailed for Valeant's rapid expansion in recent years through acquisition of other pharmaceutical firms and their medications. But his tenure has been marred by questions and criticism of the company's since-cancelled business dealings with Philidor Rx Services, a specialty pharmacy that had helped distribute some of Valeant medications.
An October report by Citron Research and its executive editor, activist short-seller Andrew Left, contended that arrangement was designed to create "phantom accounts" as part of a purported "fraud to create invoices to deceive the auditors and book revenue." Valeant denied the allegations and characterized them as an effort to drive down the price of the company's shares.
However, the company appointed a special committee to examine the issue. Preliminary results from the review showed that approximately $58 million in net revenue from sales to Philidor in the second half of 2014 should not have been recognized and recorded at the time the medications were delivered to the specialty pharmacy.
The committee's review is continuing. The examination prevented Valeant from filing its annual report before a March 15 deadline, a financial slip that raised risk of potential default on the company's bonds, the drugmaker warned last week. The disclosure caused Valeant shares to lose half their value in a single day.
Additionally, Valeant has acknowledged that its drug pricing and distribution policies are under investigation by federal prosecutors in New York and Massachusetts, the Securities and Exchange Commission and two congressional committees.
"While I regret the controversies that have adversely impacted our business over the past several months, I know that Valeant is a strong and resilient company, and I am committed to doing everything I can to ensure a smooth transition to new leadership," Pearson said in a statement issued with the shakeup news.
Board Chairman Robert Ingram thanked Pearson and voiced confidence that Valeant "will be able to rebuild its reputation and thrive under new leadership."
Ackman, whose fund Pershing Square Capital Management hedge fund holds a 9% Valeant stake, will join the board of directors immediately, the company said.
While Schiller did not agree to step down, Katherine Stevenson voluntarily resigned from Valeant's board because the panel's current maximum size is fixed at 14 members, the company said.
"The improper conduct of the company's former Chief Financial Officer and former Corporate Controller, which resulted in the provision of incorrect information to the committee and the company's auditors, contributed to the misstatement of results," Valeant said.
The company added that it 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."
In response, Schiller issued a statement through his attorneys that said "at no time did I engage in any improper conduct that relates to any restatement of revenue that the company is considering." The statement also said Schiller did not provide any incorrect information to the Valeant's Audit and Risk Committee or outside auditors.
"As a result of the fact that I did not engage in any improper conduct ... I have respectfully declined the request from the company's board to resign," said Schiller.
Despite the continued conflict, Ackman who had already gained a Valeant board seat for one of his associates earlier this month, predicted the company would rebound from a "challenging time."
"The company's large scale and dominant franchises in eye care, dermatology, GI (gastrointestinal) and other therapeutic areas coupled with its extraordinarily low valuation present a spectacular opportunity for a world-class health care executive," Ackman said.
