A Week Late, Valeant Finally Cuts Ties With Philidor

Nearly two weeks after serious allegations emerged about Philidor and Valeant’s(VRX) relationship with it, and five days after a conference call in which Valeant defended the indefensible, Valeant has finally cut ties with Philidor and Philidor will cease its operations.  We had urged this as the only rational action for Valeant, and were surprised when Valeant instead spent 90 slides detailing the legality of the relationship with Philidor and Philidor’s actions.  Valeant CEO J. Michael Pearson called it “unusual”, but legal.

The final straw, it seems came when additional reports emerged of Philidor modifying prescriptions to gain insurers’ approval, and companies including CVS Health(CVS) and Express Scripts(ESRX) announced they would no longer work with Philidor. Others, such as Anthem, were said to be preparing similar moves. So, only once Philidor was already dead, did Valeant move to sever ties. Is it too late?

Valeant Pharmaceuticals International, Inc. announced today that it is severing all ties with Philidor Rx Services, LLC, and that Philidor has informed Valeant that it will shut down operations as soon as possible, consistent with applicable laws.

“The newest allegations about activities at Philidor raise additional questions about the company’s business practices,” said J. Michael Pearson, Valeant’s chairman and chief executive officer. “We have lost confidence in Philidor’s ability to continue to operate in a manner that is acceptable to Valeant and the patients and doctors we serve.”

“We understand that patients, doctors and business partners have been disturbed by the reports of improper behavior at Philidor, just as we have been,” Pearson said. “We know the allegations have also led them to question Valeant and our integrity, and for that I take complete responsibility. Operating honestly and ethically is our first priority, and you have my absolute commitment that we will make it right.”

Valeant intends to develop a plan to ensure patients’ access to drugs is minimally disrupted. Valeant has informed Philidor that to the extent that managed care plans will no longer reimburse prescriptions in process, Valeant will fill them at the company’s expense.

“We are committed to doing everything we can to provide important medicines to the patients and doctors who depend on them, and will continue to explore relationships with the full range of pharmacies to ensure patients have access to the drugs they need,” Pearson said.

In the Third Quarter 2015, Philidor represented 6.8% of total Valeant revenue.

Philidor accounted for $190 million in revenue in the third quarter. Given higher projected revenue and a higher percentage from Philidor, Valeant may have projected $220-$300 million in revenue from Philidor in the fourth quarter. Not only might much of this revenue disappear, but, with Valeant agreeing to fill prescriptions at the company’s expense when managed care plans refuse to reimburse them, earning may take a significant hit.  For a company with only $49.5 million in net income in the third quarter, this might well result in a loss for the quarter.

There also remains risk that despite the company’s strategy to avoid liability and responsibility for Philidor by buying the company and consolidating financials without technically owning it, it may be a target of lawsuits and regulatory action and may ultimately be found responsible.  In addition, companies like CVS may not view a distinction and may refuse to carry the drugs most promoted by Philidor in their formularies.

Severing ties does not end Valeant’s crisis. The company’s high debt load leaves little margin for error. Major holder Bill Ackman of Pershing Square Capital plans to give a presentation on the his position in the company this morning at 9AM.  Valeant needs to be proactive in dealing with this crisis- so far it has only been reactive.  Today’s announcement makes no mention of the much-vaunted ad hoc committee that the company announced on Monday to investigate the situation. We need to hear from the committee, hear what further steps Valeant will be taking, and how they will impact the company going forward.

Disclosure: The author holds a small short-dated, short position in Valeant