How much of that option premium will Pearson ever see again?
Photograph by Christinne Muschi — Reuters
By Geoffrey Smith
October 30, 2015

Under-fire pharma group Valeant (VRX) said Friday it’s severing all ties with the controversial pharmacy chain at the heart of concerns about its accounting practices.

In a statement, the Canadian-based company said Philidor Rx Services LLC “has informed Valeant that it will shut down operations as soon as possible, consistent with applicable laws.”

“The newest allegations about activities at Philidor raise additional questions about the company’s business practices,” Valeant chairman and CEO J. Michael Pearson said. “We have lost confidence in Philidor’s ability to continue to operate in a manner that is acceptable to Valeant and the patients and doctors we serve.”

We understand that patients, doctors and business partners have been disturbed by the reports of improper behavior at Philidor, just as we have been,” Pearson said. “We know the allegations have also led them to question Valeant and our integrity, and for that I take complete responsibility. Operating honestly and ethically is our first priority, and you have my absolute commitment that we will make it right.”

At the start of the week, the company had claimed there was nothing wrong in its relationship with Philidor, although it subsequently admitted to the unusual step of having paid its owners $100 million for the option to buy it for free at any time in the future. It had done this without saying anything to shareholders. There is no clawback provision for that money, a spokeswoman told Fortune Friday.

The company had also confirmed that after the deal, it had started consolidating Philidor’s sales into its own financials, even though it didn’t formally own the company.

Pearson repeated Friday what he had told investors on a conference call Tuesday, namely, that Philidor accounted for only 6.8% of Valeant’s revenue in the third quarter.

Valeant, hailed only five months ago as ‘the next Berkshire Hathaway’ by activist investor (and key shareholder) Bill Ackman, has seen its share price fall by more than half in six weeks. In addition to the Philidor revelations, it’s under federal investigation for its aggressive drug pricing. Critics of the company say that both issues reveal a fundamentally flawed business model that depends too much on financial engineering and gaming the healthcare system.

This article has been updated to include more detail about the option payment to Philidor’s owners.

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