Valeant's ‘Circular Firing Squad’ Claims CEO Pearsonby
Directors ask ex-CFO Schiller to resign the board; he refuses
Shares rise most since Dec. 15 after major losses last week
Open warfare has broken out at Valeant Pharmaceuticals International Inc.
After a series of conference calls over the weekend, the drugmaker’s directors came out swinging.
They blamed former Chief Financial Officer Howard Schiller for “improper conduct” that contributed to financial misstatements and asked him to resign his seat on the board. He refused, saying he did nothing wrong. Chief Executive Officer Mike Pearson will step down and Bill Ackman, the billionaire investor whose hedge fund has lost hundreds of millions betting on Valeant, will join the board.
“Circular firing squad emerges,” was how Piper Jaffray & Co. analysts led by David Amsellem put it Monday. “It appears to us that there is some scapegoating at play here, and yet it is also clear to us that there is ample blame to go around,” they said in a note to investors.
The latest developments add more craziness to the chaos since Pearson’s return to work three weeks ago following a three-month medical leave. Since the end of February, Valeant has delayed filing its annual report pending an internal investigation by an ad hoc committee, disclosed an Securities and Exchange Commission probe and said it would restate several quarters worth of results. The company, which has been under scrutiny for months for its business practices, said Monday it has discovered “one or more material weaknesses” in internal controls.
“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 in the statement.
Schiller fired back Monday.
“At no time did I engage in any improper conduct that relates to any restatement of revenue the Company is considering,” Schiller said in a statement. “As a result of the fact that I did not engage in any improper conduct regarding this proposed restatement, I have respectfully declined the request from the company’s board to resign from the board.”
Under the company’s clawback policy, Schiller, whom the board chose to be interim CEO while Pearson was on medical leave, may be forced to pay back some of the $26.1 million in incentive compensation he received as chief financial officer in 2014.
The policy allows Valeant to seek reimbursement of certain bonus, incentive or equity-based compensation from executives if “the company materially restates or adjusts its financial statements.” It also applies if the restatement was caused by fraudulent or illegal misconduct and whether or not the the executive is still an employee.
The shares had their biggest intraday gain since Dec. 15 and were up 7.6 percent to $28.97 at 4 p.m. in New York. Last week, the stock fell by more than half after the drugmaker cut its 2016 forecast, reported weak fourth-quarter results and said it was at risk of breaching some of its debt agreements.
Valeant’s $3.25 billion of 6.125 percent bonds rose 1.1 cents to 76.5 cents on the dollar at 12:35 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
“This is a positive first step,” said Jack Flaherty, a money manager in New York at GAM Holdings AG., which oversees $127 billion, including Valeant debt. “They have a long way to go.” When Valeant releases its earnings reports, “that will be a real positive,” he said.
The board decided Pearson’s fate during a number of conference calls over the weekend, according to a person familiar with the matter. One of the board’s main concerns was the pressure on employees to meet high targets in order to achieve performance expectations, a culture Pearson contributed to, the person said. The board said Pearson will stay on until a replacement is found.
“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 the statement.
Ackman on Board
Ackman’s addition to the board will give his hedge fund, Pershing Square Capital Management LP, two director spots after Pershing Vice Chairman Stephen Fraidin joined earlier this month. To make room for Ackman, director Kate Stevenson voluntarily resigned, the company said.
Pershing Square’s paper losses topped $750 million just on March 15, the day Valeant released weak fourth-quarter earnings, cut its forecast and said it risked breaching some of its debt agreements if it can’t file its annual report in time.
The board is close to completing the ad hoc investigation of business practices, Valeant also said Monday. The probe was started last year after the drugmaker revealed its relationship with a mail-order pharmacy that critics said was used to inflate sales.
“While the ad hoc Committee is still reviewing certain accounting-related items, and has identified certain concerns related to those items with respect to the tone of the organization, it has not identified any additional items affecting the financial statements to date,” Valeant Chairman Robert Ingram said in the statement.
Valeant said its former corporate controller, whom it didn’t identified, has been placed on administrative leave.
In his statement Monday, Schiller said transactions with the mail-order pharmacy, Philidor Rx Services, in the fourth-quarter of 2014, and subsequent accounting treatment, was the result of “a careful and reasoned accounting decision made by the company’s corporate controller based on what she considered to be complete and accurate facts.”
“The accounting decision was not my decision, but I was advised of the decision and the rationale behind the decision by the Corporate Controller, and I agreed with the decision,” Schiller said.
Fall From Grace
Pearson, 56, built the drugmaker into what was once a Wall Street darling with a series of debt-funded acquisitions and a low-cost research and development model. That strategy drew criticism from Congress when Valeant bought up existing drugs, including treatments for serious heart conditions, and then raised their prices aggressively.
Pearson this month said Valeant would refrain from such price increases, yet that hasn’t been enough to soothe investors’ nerves. In a one-day rout, Valeant plunged 51 percent on March 15 in reaction to Pearson’s first conference call with investors after he returned to his job from a two-month leave of absence for pneumonia.
Among the surprises that day: a $600 million typo in the company’s preliminary fourth-quarter earnings release, overstating its forecast for the next four quarters of adjusted profit before interest, tax, depreciation and amortization. Pearson acknowledged the mistake and said he had to earn back credibility and deliver on results.
“The company overreached itself and became far too reliant on the aggressive tactics that fueled its first growth spurt,” said Ram Selvaraju, an analyst for Rodman & Renshaw LLC in New York.