Pharma firm's business practices damage large investor

Leading investment fund rocked by allegations of dubious business practices

By James Middleton

Valeant Pharmaceuticals International, until recently one of the largest companies by capitalization on the Toronto stock exchange, faces an uncertain future. Fallout from criticism levelled at the company's business practices has caused the company to lose half its value and dealt a great deal of pain to main investor Sequoia Fund.
Valeant was taken to task last week after revelations that the company had set up a specialist pharmacy, Philador, and was shipping product to this subsidiary then booking the revenue. The three largest pharmacy-benefit managers in the US immediately dropped Philador and Valeant said it would shut down the operation.
The news has been compounded by rumours that the drug manufacturer is also under federal investigation over its pricing practices. In February, Valeant purchased a portfolio of older branded drugs that it claimed had been underpriced by the former owner. Once acquired, it dramatically increased prices on the entire portfolio. In this case, two of the drugs were important cardiac medicines used by hospitals during heart surgery, prompting a harsh reaction from politicians, health care payers, hospitals and the general public. Valeant is noted for its growth by acquisition strategy, rather than through research and development.
The company's shares have plummeted from a high of US$263 in August, to a low of US$88.50 in the wake of the news. This puts Sequoia, as a key investor, in a difficult position.
Indeed, the Wall Street Journal reports that Vinod Ahooja and Sharon Osberg have stepped down from Sequoia Fund’s independent board of directors and that the two “had raised concerns” about the investment.  
In a note published last week, Sequoia said:  “In 2016, we believe Valeant should grow earnings by at least 30%, generate free cash flow in excess of $4 billion and have the liquidity to pay down some of its bonds before their scheduled maturities.”
Valeant said Friday that the ad hoc committee appointed by its board of directors has appointed former Deputy Attorney General of the United States Mark Filip of Kirkland & Ellis LLP to advise in its review of allegations.