Before Pearson took control of Valeant, it spent 14 percent of its revenue developing new drugs. Last year, that number was under 3 percent. Meanwhile, Pearson has been ruthless about price hikes; in February, according to The Wall Street Journal, the company raised the price of one heart drug by 525 and another by 212 percent — on the very day it acquired the rights to the drugs. Complaints from patients, doctors and insurance companies have prompted investigations by federal prosecutors in Massachusetts and New York.
In the seven years Pearson has run the company, Valeant has done more than 100 deals. Its growth has been supercharged, and so has its stock price. Pearson has become a billionaire.
Fast forward to Oct. 19. During a conference call with investors, Valeant disclosed a relationship with a specialty pharmacy called Philidor RX Services, a relationship in which Philidor seemingly does business with no one besides Valeant, and that is so close that Valeant consolidates Philidor’s financials while holding Philidor’s inventory on its books. During the call, Valeant also disclosed that it had paid for an option to buy Philidor, though it had not actually made the purchase — a very strange deal indeed.
It made these disclosures because Roddy Boyd, a former New York Post reporter who now runs the Southern Investigative Reporting Foundation, had found out about the Philidor relationship and begun asking questions. So had several Wall Street critics of the company, including John Hempton of Bronte Capital.
Valeant’s disclosures last week — along with subsequent allegations by Citron Research that Valeant was cooking the books — as well as stories by Boyd and several others have caused the stock to tank.
On Monday, Pearson and his executive team held a lengthy conference call with investors in which they insisted Valeant had complied with “applicable law.” But Valeant also announced that a committee of the board would investigate the ties with Philidor. And it urged the S.E.C. to investigate Citron. This was also a tactic Biovail once used to silence its critics; it backfired spectacularly when the S.E.C. concluded that the critics were the ones who had it right.
It is difficult, if not impossible, to understand all the implications of the Philidor-Valeant relationship, or whether anything genuinely illegal has taken place. But the whole thing looks pretty, well, sleazy.
As The Times’s Andrew Pollack pointed out last week, Valeant uses Philidor to keep patients from getting generics instead of its high-priced drugs. Philidor negotiates directly with the insurance companies, saving patients from feeling the sticker shock their price hikes would otherwise cause. The co-pay is often waived, which only adds to the allure of using Philidor.
The evidence strongly suggests that Philidor is controlled by Valeant, even though it is supposed to be an independent company. The Wall Street Journal reported that certain Valeant employees work at Philidor using fake names.
But why? And why did Valeant fail to disclose the relationship for so long? If there was really nothing wrong, why did Valeant keep it a secret? Why, even now, are there more questions than answers?
Maybe it will all turn out to be innocent. But I remember another company that Wall Street once swooned over, a company that had eye-popping growth, but also had secrets, which eventually destroyed it.
You probably remember that company, too. Its name was Enron.