Valeant Pharmaceuticals said Monday that it initiated a search for a successor to CEO Michael Pearson and also appointed investor William Ackman to its board of directors. Board chairman Robert Ingram remarked "while the past few months have been difficult...I am confident that the company will be able to rebuild its reputation and thrive under new leadership." Shares in the drugmaker rose nearly 16 percent on the news.
Pearson, who recently returned from a medical absence, said "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." The drugmaker indicated that Pearson will continue to serve as CEO until a replacement is appointed.
Commenting on the news, Jack Flaherty of New York at GAM Holdings said "this is a positive first step," although the company has "a long way to go." Flaherty added that when Valeant releases its earnings reports, "that will be a real positive."
Most recently, Valeant announced revised sales and earnings guidance for this year, causing the company's shares to fall more than 50 percent. The new forecast came after the drugmaker disclosed that it would likely restate earnings for 2014 and 2015 due to a review by a board committee formed in response to allegations surrounding its relationship with the specialty pharmacy Philidor. Valeant has also delayed filing its annual report pending an internal investigation, with the hold-up possibly meaning the company will default on loan agreements (for related analysis, see ViewPoints: Valeant looks to press reset button – but misses, badly).
Valeant said Monday that it has discovered "one or more material weaknesses" in internal controls. "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 organisation, it has not identified any additional items affecting the financial statements to date," Ingram noted.
Meanwhile, Valeant indicated that Ackman, whose company Pershing Square Capital Management has a 9-percent stake in the drugmaker, will replace Katharine Stevenson on the board. Valeant noted that due to the maximum size of its board currently standing at 14 directors, Stevenson voluntarily resigned in order to create a vacancy for Ackman. Ingram remarked "we look forward to Bill Ackman's perspective and contributions as a new member of our board and one of Valeant's largest shareholders." Earlier this month, Valeant appointed three new independent directors, including Stephen Fraidin, vice chairman at Pershing Square Capital.
Valeant added that it also asked former chief financial officer Howard Schiller, who served as interim CEO in Pearson's absence, to resign after uncovering the issues with internal controls over financial reporting. "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.
However, Schiller issued a statement denying the allegations, saying "at no time did I engage in any improper conduct that relates to any restatement of revenue the company is considering." The former executive added that "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."
Schiller suggested that transactions with Philidor 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." Schiller added "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." Valeant said the former corporate controller, whom it did not publicly identify, has been placed on administrative leave.
Rodman & Renshaw analyst Ram Selvaraju remarked that "there's bound to be a lot of scapegoating going on inside Valeant." Additionally, analyst Dimitry Khmelnitsky of Veritas Investment Research said "they seem to be identifying Schiller as the culprit," but he suggested "it is really the company's culture of loose corporate controls that has created this situation." However, Steven Caruso, a partner with Maddox Hargett & Caruso, pointed out that as Schiller and Pearson had signed statements vouching for the accuracy of the financial reports in question, both are ultimately responsible for their content.
Meanwhile, both Pearson and Schiller could be forced under the drugmaker's clawback policy to repay compensation received from Valeant. The policy permits Valeant to reclaim certain compensation from executives if "the company materially restates or adjusts its financial statements." Specifically, Valeant could request repayment of part of the $26.1 million in incentive compensation Schiller received as CFO in 2014, and could also attempt to recover an $8-million bonus paid to Pearson during that year.
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