On the heels of a dramatic post-second quarter earnings run-up in shares, reports of a federal criminal investigation into its past business dealings has Valeant Pharmaceuticals (NYSE:BHC) investors back on the defense again. The reports of investigations into the company's use of Philidor (a specialty pharmacy it was closely tied to) aren't new, but the number of investigations does appear to be increasing, and that adds uncertainty to a story that was already pretty uncertain.
Smoke and fire?
Valeant Pharmaceuticals isn't hiding the various investigations into it from investors. In fact, the company's recently filed quarterly 10-Q with the Securities and Exchange Commission discloses an unfortunately long list of investigations into its past, including these low-lights:
- September 2015: The U.S. Department of Justice Civil Division's investigation into violations of the False Claims Act arising from how Valeant unit Biovail Pharmaceuticals calculated and reported average manufacturer prices.
- September 2015: The Department of Justice's investigation into Bausch & Lomb agreements and payments with and to medical professionals related to two surgical products. Valeant reports, "The government has indicated that the subpoena was issued in connection with a criminal investigation into possible violations of Federal healthcare laws."
- October 2015: Investigations by the U.S. Attorney's Office for the District of Massachusetts and the U.S. Attorney's Office for the Southern District of New York involving patient assistance programs, including financial support provided to patients; its former relationship with Philidor and other pharmacies; accounting treatment for sales by specialty pharmacies; information provided to the Centers for Medicare and Medicaid Services; pricing (including discounts and rebates), marketing and distribution of products; Valeant's compliance program; and employee compensation.
- November 2015: A subpoena from the staff of the Los Angeles Regional Office of the SEC related to its investigation of Valeant, including requests for documents concerning the company's former relationship with Philidor, its accounting practices and policies, its public disclosures, and other matters.
- March 2016: An investigative demand from the State of North Carolina Department of Justice relating to Nitropress, Isuprel, and Cuprimine, including information regarding production, marketing, distribution, sale and pricing of, and patient assistance programs covering such products, as well as issues relating to the company's pricing decisions for certain of its other products.
- April 2016: A Request for Information from the Autorite des marches financiers (AMF) for documents concerning the work of Valeant's ad hoc committee, which reviewed allegations regarding Valeant's former relationship with Philidor, accounting practices and policies, and other matters.
- April 2016: An investigation by the State of New Jersey Department of Law and Public Safety, Division of Consumer Affairs, Bureau of Securities regarding Valeant's former relationship with Philidor, its accounting treatment for sales to Philidor, its financial reporting and public disclosures, and other matters.
- May 2016: An investigation by the State of Texas of Bausch & Lomb's various price reporting matters relating to the state's Medicaid program and the amounts the state paid in reimbursement for B&L products for the period from 1995 to the date of the civil investigative demand. In April 2016, the state sent B&L Inc. a demand letter claiming damages in the amount of $20 million.
- May 2016: The California Department of Insurance investigation into Bausch & Lomb's consulting agreements and financial arrangements between B&L and healthcare professionals in California.
That's quite a list, and it shouldn't go unnoticed by investors that four of the investigations disclosed in the 10-Q appear to have begun last quarter -- or that many of these investigations relate to Philidor.
Valeant Pharmaceuticals stopped using Philidor to fill patient prescriptions last year amid scrutiny of the unique nature of their relationship. Philidor appeared on the surface to be an independent company from Valeant, but Valeant possessed an option to buy Philidor, and it paid sales milestones to Philidor, which makes Philidor's actual independence -- at a minimum -- questionable.
Some healthcare insurers appear to agree. According to Valeant, two virtually identical RICO class action lawsuits were filed in the second quarter against the company and Philidor alleging claims under the federal racketeering act. According to the suit, third-party payers of claims submitted by Philidor for certain Valeant-branded drugs between January 2, 2013, and November 9, 2015, allege that Valeant and Philidor
[...] committed predicate acts of mail and wire fraud by submitting or causing to be submitted prescription reimbursement requests that misstated or omitted facts regarding (1) the identity and licensing status of the dispensing pharmacy; (2) the resubmission of previously denied claims; (3) patient co-pay waivers; (4) the availability of generic alternatives; and (5) the insured's consent to renew the prescription.
Valeant says the claims are meritless, and it plans to defend itself "vigorously," but no one knows how these allegations will pan out.
Investigations aren't that uncommon, and no one should attempt to guess how these particular ones will end. The company explains in each case that it has provided information, and that it's engaged with and/or cooperating with various agencies. Cooperation aside, investors can't ignore the risk that -- at a minimum -- these investigations could result in settlements or fines that could dent new CEO Joseph Papa's plans to turn Valeant around.
Clearly, the company's got a lot of work to do to restore confidence among payers, investors, and regulators, and Papa's plan to do that includes a new prescription fulfillment relationship with Walgreens Boots Alliance, new and expanded drug launches, and the repayment of billions of dollars of its $31 billion in debt.
While Papa's plan is encouraging, there's no telling how long his turn-around will take -- or when the company will be firmly back on track. Add that uncertainty to the potential for additional litigation and regulatory investigations "that may result from the recent public scrutiny of our distribution, marketing, pricing, disclosure and accounting practices and from our former relationship with Philidor, including any claims, proceedings, investigations and liabilities we may face as a result of any alleged wrongdoing by Philidor, and/or the completed review by the Ad Hoc Committee" -- and you get a risky recipe.
Although the company isn't hiding the fact that it's got a lot of legal balls in the air, investors shouldn't dismiss the obstacles that remain for Valeant. After all, Valeant also reminds investors in its 10-Q that "an adverse outcome in certain of these proceedings could have a material adverse effect on the Company's business, financial condition and results of operations, and could cause the market value of its common shares and/or debt securities to decline."