Activist investor William Ackman joins drug maker's board

LAVAL, Quebec — J. Michael Pearson is slated to step down as chief executive officer of Valeant Pharmaceuticals International Inc., which has begun a search for a new CEO.

The embattled drug maker said Monday that its board has initiated a search to identify a candidate to take over for Pearson, who will continue to serve as CEO and as a director until a replacement named.

J. Michael Pearson

Valeant also announced that William Ackman, CEO of hedge fund Pershing Square Capital Management, is joining its board of directors, effective immediately. Pershing holds a 9% stake in Valeant. Ackman will join Pershing vice chairman Stephen Fraidin on Valeant’s board.

With the membership of Valeant’s board set at 14 directors, Katharine Stevenson has voluntarily resigned from the board to enable Ackman’s appointment, according to Valeant. The company said the board also has asked former chief financial officer Howard Schiller to resign as a director, but Schiller has declined to do so.

“While the past few months have been difficult, Valeant has a collection of leading brands, valuable franchises and great people, and I am confident that the company will be able to rebuild its reputation and thrive under new leadership,” Valeant chairman Robert Ingram said in a statement. “We thank Mike for his dedicated service to Valeant and for agreeing to stay on until we conclude our search.”

Pearson has served as Valeant’s CEO and as a board member since September 2010. He served as chairman from March 2011 to February 2016.

“It’s been a privilege to lead Valeant for the past eight years,” Pearson stated. “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.”

In January, Valeant named Schiller as interim CEO as Pearson was on medical leave, hospitalized with severe pneumonia. In announcing Pearson’s leave of absence, the company created an interim Office of the CEO.

Ackman commented on Monday that he’s “looking forward to working with the board to identify new leadership for Valeant” and pointed to the pharmaceutical firm’s leading businesses.

“The company’s large-scale and dominant franchises in eye care, dermatology, GI and other therapeutic areas, coupled with its extraordinarily low valuation, present a spectacular opportunity for a world-class health care executive,” Ackman stated. “On behalf of all shareholders, we are extremely appreciative of Valeant employees’ hard work and commitment during this challenging time for the company.”

Since last year, Valeant has been in the headlines after becoming enmeshed in a number of controversies, notably its relationship with now defunct mail-order pharmacy Philidor Rx Services. The company’s shares jumped last year as it drove growth by acquiring older drugs and boosting their prices. However, Valeant’s shares have since dropped in the wake of news about its dealings with Philidor as well as a heavy debt burden, investigations of its accounting and pricing practices, and shareholder lawsuits.

Philidor was accused of bolstering sales of products made by Valeant. The drug maker’s relationship with Philidor came under scrutiny, in part, because of the reportedly aggressive tactics that Philidor used to ensure that pharmacy benefit managers (PBMs) paid for Valeant drugs, instead of the lower-cost alternatives preferred by insurers. Philidor had almost exclusively dispensed Valeant’s high-priced dermatology drugs.

In September, Valeant announced that it would cut ties with Philidor. The move came after PBMs CVS Caremark, Express Scripts and OptumRx said they were terminating Philidor from their networks.

On Monday, Valeant said it has determined that about $58 million in net revenue relating to sales to Philidor in the second half of 2014 shouldn’t have been recognized upon delivery of product to Philidor. Because of that and other misstatements, the company said financial reports for certain periods “should no longer be relied upon.”

“Over the past five months, the ad hoc committee has worked closely with our independent advisers to conduct a comprehensive review of Philidor and related matters,” Ingram stated.

Valeant reported that on Monday it filed a Form 8-K with the Securities and Exchange Commission that identified the misstatements and said it’s now in the process of restating the affected financial statements, which will be included in its 10-K annual report for the year ended Dec. 31, 2015, slated to be filed on or before April 29, 2016.

In addition, Valeant said its management is continuing to assess disclosure controls and procedures and internal control 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 stated. “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 and the performance-based environment at the company — where challenging targets were set and achieving those targets was a key performance expectation — may have been contributing factors resulting in the company’s improper revenue recognition.”

In a research note on Monday, Wells Fargo Securities analyst David Maris said Valeant’s announcements increase the uncertainty surrounding the company.

“Overall, there is little to opine on the state of Valeant beyond today’s press release and 8-K filing, which to us are significantly negative and underscore the risks and changing situation with Valeant,” Maris wrote. “We believe many investors who held management up as new business model leaders will have to reconcile themselves that the team and the model are being dismantled.”