Drugmaker Valeant Pharmaceuticals International Inc (VRX.TO)(VRX.N) said on Monday its chief executive officer is leaving and billionaire investor William Ackman would join the board as it tries to clean up accounting problems and save its business. The Canadian company, whose operations include prescription drugs, consumer products, and Bausch & Lomb eye care, has lost nearly 90 percent of its value as it came under public scrutiny for its pricing and distribution practices, including investigations by Congress and various government agencies.
Valeant blamed accounting issues on "improper conduct" by top finance executives.
On Monday, shares rose as much as 17 percent in New York trading.
Just three weeks after CEO Michael Pearson returned from a two-month medical leave, the company said he will leave. Also, Ackman of Pershing Square Capital Management will join the board, the second seat given to the activist investment firm in as many weeks. The firm held a 6.3 percent stake as of March 8.
In addition, a board committee said its five-month investigation into Valeant's dealings with pharmacy Philidor Rx Services found broad accounting problems dating back to December 2014. The committee's work is ongoing and more restatements may be needed, Valeant said.
The committee traced the issues in part to the former chief financial officer, Howard Schiller, who had been interim CEO while Pearson was on leave, and is still on the board.
The company said Schiller's and the corporate controller's "improper conduct" contributed to a misstatement of financial results because they provided incorrect information related to revenue recognition to auditors and the board committee.
Valeant pledged on Monday to file its annual report on or before April 29 after missing a deadline last week, which opened the door to a default on part of its $30 billion debt load.
Last week, the company's stock, hovering around $60, lost one-half of its value as investors wondered if it could manage the debt, built up from a stream of acquisitions. Since August, it has lost $80 billion in market value.
BTIG analyst Timothy Chiang said the moves announced on Monday looked to be the start of a clean-up process that will take time, but the sooner the company can submit its 10K filing, the better. “There's not much visibility,” Chiang said.
ACCOUNTING "CAREFUL AND REASONED"
Valeant's prescription drug sales began to unravel last year as its history of large price increases drew sharp criticism and the attention of lawmakers as well as New York and Massachusetts attorneys general, which opened investigations.
On Monday, Elijah Cummings, a U.S. representative from Maryland who has investigated Valeant, said “It is clear that there are more than just ‘accounting problems’ at Valeant, and company executives need more than new faces to fix them.”
The company's profitable dermatology franchise faltered as it stopped distribution through pharmacy Philidor due to investor and media scrutiny.
In January, while Pearson was still on leave, the company said it would need to restate earnings from 2014 and 2015 due to revenue recognition issues.
Valeant said on Monday it has started a search for a successor to Pearson, who joined the company in 2008 and built it on acquisitions and drug price increases. His first big stumble came when its hostile takeover attempt of Allergan Inc, done with Ackman, failed.
Investors had debated the merits of Pearson's return to the top job in recent weeks, but Valeant Chairman Robert Ingram said in the company statement that he would be missed and thanked him for staying until a new CEO is found.
After the Philidor problems surfaced, Valeant's board began an investigation, which has identified revenue recognition and other accounting problems, the company said. The probe and the dismissal of its corporate controller led to the delay of the regulatory filing, Valeant said.
The company said Schiller had been asked to leave the board and refused to do so, requiring another board member to step down to make room for Ackman.
Schiller said in a statement he had not engaged in improper conduct, adding that accounting decisions were "careful and reasoned."
Valeant had already begun making changes before Monday. It added a Pershing Square representative in a reshuffling two weeks ago that named three new members to the board.
The company said last week it would not hit its 2016 earnings targets and would need to negotiate with lenders because of the delay in filing its annual report with the Securities and Exchange Commission.
At the time, shares fell sharply, leading Ackman to lose more than $700 million in one day.
Institutional investors, including TIAA-CREF and CalPERS, filed securities fraud lawsuits against the company in New Jersey last year, accusing Valeant of inflating its share price by not disclosing the use of specialty pharmacies to prop up sales of high-priced drugs.
John Hempton of Bronte Capital, who has been shorting shares of Valeant, said on Monday he still believes Valeant shares will be worthless.
Hempton said Valeant is currently forecasting $6 billion in earnings before interest, taxes, depreciation and amortization from just over $10 billion in revenue for 2016. "If you believe a bunch of non-patent protected drugs can do this in the face of a payer revolt against rigged prices, I will sell you some stock and the Brooklyn Bridge," Hempton said.
Shares rose 6.2 percent to $28.65 in New York trading after rising as high as $31.59.
(Reporting by Caroline Humer in New York, additional reporting by Jennifer Ablan and Dena Aubin in New York and Sara Lynch in Washington D.C.; Editing by Jeffrey Benkoe)