After months of delays, a Senate hearing, and a precipitous stock fall, Valeant Pharmaceuticals finally filed its annual 10-K report to the Securities and Exchange Commission on Friday morning.
The document has been delayed multiple times as the company reviewed financial documents related to a specialty pharmacy, Philidor, associated with the company.
In its report, the company disclosed risk factors related to its accounting practices and new sales arrangements as well as to a previously undisclosed investigation conducted by the state of North Carolina and a document subpoena from the New Jersey State Bureau of Securities relating to the company’s former relationship with Philidor.
Once a Wall Street darling, Valeant has seen its stock price fall almost 70% since October following the revelation of the existence of Philidor, accusations of malfeasance from a short seller, and government scrutiny over the company’s drug-pricing practices.
Prominent hedge funds, including Bill Ackman’s Pershing Square, were all pulled down by the tailspin. After a ton of drama, Ackman now sits on Valeant’s board, and CEO Michael Pearson, with whom Ackman once had a close relationship, is on the way out.
If the company had not filed its annual report by Friday, it would be in violation of its covenants with bondholders, risking default on its debt pile of over $30 billion.
In addition to drawing the ire of the US Senate, the filing disclosed, the company is undergoing investigations in four states. Those investigations are:
North Carolina: The state’s Department of Justice has opened an investigation into the company related to the company’s pricing practices and patient-assistant programs covering numerous drugs that Valeant offers. New Jersey: According to the filing, Valeant received a document subpoena from the state’s Bureau of Securities on April 20 asking about the company’s accounting services and relationship with Philidor. Massachusetts: The US attorney’s office in the state is investigating the Philidor relationship, relationships with other specialty pharmacies, and patient-assistance programs. New York: The US attorney’s office in the Southern District is also investigating the Philidor relationship, relationships with other specialty pharmacies, and patient-assistance programs.
According to the 10-K, the relationship with Philidor caused Valeant to add $58 million in revenues and $33 million in profit during fiscal year 2014 that did not exist. Additionally, the company misstated financials in the first quarter of 2015, which reduces revenue by $21 million but actually increases profits by $24 million.
Additionally, Valeant’s ad hoc committee found “material weaknesses” in the financial reporting of the company, citing the culture created by executives. From the 10-K:
These material weaknesses relate to the tone at the top of the organization and the accounting and disclosure for non-standard revenue transactions particularly at or near quarter ends. 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 ARC and the Company’s independent registered public accounting firm, contributed to the misstatement of financial results. In addition, as part of this assessment of internal control over financial reporting, the Company has determined that the tone at the top of the organization, with its performance-based environment, in which challenging targets were set and achieving those targets was a key performance expectation, may have been a contributing factor resulting in the Company’s improper revenue recognition and the conduct described above.
The company had already said the CFO, Howard Schiller, was to blame for the misstatements. Schiller was later asked to step down from the board.
Valeant originally created the ad hoc committee in October after the Philidor scandal came to light. The committee delayed the filing on March 21, saying there was substantial misreporting in the company’s financials.
The committee announced it had completed its review on April 5.