Valeant and Philidor Revenue Disclosures: The Pharmacy Behind the Growth Story

Bausch Health, formerly Valeant Pharmaceuticals, agreed to pay a $45 million civil penalty to settle the Securities and Exchange Commission’s case over improper revenue recognition and misleading disclosures involving Philidor and drug-price increases. The commission also settled separate charges against the former chief executive, chief financial officer and controller. Its order said a pharmacy Valeant helped establish, fund and subsidize supplied much of its touted growth. For a revenue analyst or channel-account employee, the story runs through familiar decisions: who approved the credit, when the goods arrived and which business got credit for the revenue.

Valeant was headquartered in Quebec, Canada, with principal administrative offices in New Jersey, United States, and shares listed in New York and Toronto. According to the commission’s order, Philidor was a mail-order pharmacy based in Pennsylvania that dispensed overwhelmingly Valeant products.

This case follows the pharmacy relationship and a separate drug-price allocation that changed the growth story investors heard. Our page on revenue recognition and premature sales explains the wider pattern of channel activity outrunning the public explanation.

Philidor’s Sales Carried Valeant’s Organic Growth

The Securities and Exchange Commission’s settled order concerning Valeant said the company touted double-digit U.S. same-store organic growth for five consecutive quarters, ending in the third quarter of 2015. The measure described growth in businesses owned for at least a year, fitting a company that expanded through acquisitions. According to the order, Valeant would have missed double-digit U.S. organic growth in that final quarter without Philidor.

The relationship went well beyond supplying a pharmacy. The commission said Valeant helped establish Philidor’s infrastructure, hire key employees and expand into other states. Valeant maintained a sales force promoting access to its products through Philidor and agreed to reimburse the pharmacy for Valeant drugs that insurers and other payers did not cover. Internally, Valeant deducted that subsidy from gross revenue.

According to the order, Valeant used Philidor to sell dermatology drugs facing declining market share or reimbursement blocks, as well as newly launched products. Philidor accounted for over 13% of dermatology revenue in the third quarter of 2014 and over 16% in the fourth. Yet Valeant’s earnings calls praised the dermatology business without explaining the pharmacy’s material contribution, and the management discussion in its annual and quarterly reports omitted the relationship.

That omission also reached the risks inside the channel. The commission said Valeant learned that pharmacy benefit managers had told Philidor it was violating terms of its network agreements, but its management discussion did not address those risks. A person handling those agreements could know something important about the growth story that never reached the investor presentation.

The Credit Limit Moved to Fit the Order

According to the Securities and Exchange Commission, a $75 million Philidor order near the end of the third quarter of 2014 exceeded the pharmacy’s credit limit. Valeant approved a $70 million increase without the justification its own procedure required, even though part of Philidor’s existing balance was already overdue. The order cleared the limit because management moved the limit.

The commission described another $130 million order in early December, followed by another credit increase and extended payment terms without proper justification. This order included one-time pricing at 4% above wholesale cost. Because no other customer paid above wholesale cost, Valeant had to enter the price changes manually.

The commission’s account shows how closely the shipment followed the desired revenue amount:

The order places those changes just before Valeant acquired its option to buy Philidor for $100 million on December 15, 2014. At that point, Valeant began combining Philidor’s accounts with its own and knew it would have to wait until the pharmacy sold the drugs to patients before recognizing revenue. The commission said the earlier delivery enabled Valeant to conclude at the time that it could recognize the order’s revenue on delivery to Philidor. That revenue later required correction.

The Disclosure Threshold Moved Too

The Securities and Exchange Commission said Valeant’s internal disclosure thresholds initially required the company to identify the Philidor transaction by name in its annual report. Shortly before the option purchase, Valeant raised those thresholds above the anticipated purchase price and told its audit and risk committee what that meant for disclosing Philidor. The company later told investors that the option fell below its pre-established threshold.

If you worked on the disclosure review, the earlier threshold, the revision and the committee communication would explain a decision the commission said the annual report left out. In the commission’s account, we see Philidor become too small to name when Valeant enlarged the threshold.

One Drug’s Price Increase Became Other Products’ Revenue

The Securities and Exchange Commission also found that Valeant allocated revenue from a 500% Glumetza price increase to 106 other products, leaving none of that revenue with the drug that generated it. Glumetza was a diabetes drug Valeant acquired through its purchase of Salix Pharmaceuticals. The allocation affected both its GAAP financial reporting and non-GAAP measures presented to investors.

The wholesaler contracts explain how a price increase could produce revenue from drugs already sold. According to the order, under Valeant’s distribution service agreements, the company paid wholesalers for distribution and inventory management. Price-appreciation provisions gave Valeant credits when it increased the price of drugs still sitting in those wholesalers’ inventories. The credits offset distribution fees and increased Valeant’s net revenue.

According to the order, most of the relevant Glumetza inventory had come from Salix, which had accrued no distribution fees to offset the credit. Valeant departed from its usual practice of assigning the credit to the drug whose price rose. It assigned the entire $110.4 million Glumetza credit to other products instead.

The commission supplied the consequence for the growth claim: Valeant reported 19% same-store organic growth for the second quarter of 2015, while the figure would have been 14% without the allocation. Revenue generated by a recently acquired drug appeared in businesses old enough to count as organic growth. According to the order, the credit also allowed Cash EPS, Valeant’s adjusted earnings-per-share measure, to exceed guidance and analysts’ expectations.

The distortion reached individual product rankings. The order said Glumetza appeared as Valeant’s eighteenth-largest product by revenue when, with its own credit assigned to it, it would have ranked second. The drug generated the credit. Other products got the growth.

What Is an Accounting Restatement?

An accounting restatement corrects previously reported financial statements. In Valeant’s case, the Securities and Exchange Commission said the restatement reduced previously reported 2014 revenue by approximately $58 million and net income attributable to Valeant by approximately $33 million. The company also acknowledged weaknesses in its financial reporting and disclosure controls.

The commission’s finding about the Philidor sales was specific: Valeant knew or should have known that collecting payment was not reasonably assured when it approved the credit increases. The company had ended the Philidor relationship in October 2015. Its restatement and the decisions behind it connect the corrected financial statements to the orders, credit approvals and accounting judgments that produced them.

The correction did not complete the disclosure story. According to the commission, Valeant’s annual report disclosed that price-appreciation credits existed, but still omitted the impact of the Glumetza allocations on important financial measures. Correcting when revenue belonged and explaining where it came from were separate jobs.

What Evidence Is Needed for Whistleblowing?

For a pharmacy-channel revenue concern, useful evidence connects the commercial agreement, the accounting entry and the explanation investors received. We work through those connections with the person who knows the account, using the records behind the revenue and disclosure.

We compare the order and payment terms with the credit approval, the pharmacy agreement with the subsidy, and the wholesaler’s inventory with the price-credit allocation. Those comparisons cross departments: the channel employee knows the payment extension, accounting knows the entry, and the disclosure team knows which explanation survived review. The commission specifically found insufficient controls over nonstandard journal entries, manual price changes and documented approval of exceptions, allowing management to override controls on Philidor’s credit increases.

Under Armour supplies a useful parallel. In its revenue-disclosure order, the Securities and Exchange Commission found that pulling customer orders forward supported a misleading growth explanation and left uncertainty about future revenue undisclosed. In Valeant’s order, the pharmacy relationship, credit changes and allocation decisions likewise explain what a headline growth figure left out. The person who understands why an order or entry changed can connect the number to the decision behind it.

What Can a Channel Insider Add?

A channel insider can explain how a sale worked before it became a financial result. That perspective matters when different employees see the contract, the credit approval and the investor presentation separately. A 2018 study in the Journal of Forensic & Investigative Accounting, The Significance of Whistleblowing as an Anti-Fraud Measure, examined fraud-examiner survey data and found whistleblowers detected 1,774 of 4,943 frauds with complete data, compared with 1,057 detected through internal controls. Its findings also associated more participants in a scheme with a greater likelihood of whistleblower detection.

For information crossing Canada and the United States, we examine the company, the transactions and the market disclosures together. Our work with people reporting securities fraud from outside the United States starts with those connections and their knowledge of the business. We assess reporting the conduct to the SEC with you and SEC whistleblower counsel.

Eligible SEC whistleblowers can receive a combined award of 10% to 30% of qualifying sanctions collected when the SEC action results in sanctions over $1 million. We assess how your information could support an award alongside the revenue and disclosure evidence. Where your information also concerns false claims for government money, we examine that conduct separately with you. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What the Growth Figure Left Out

If you know why a pharmacy’s credit limit changed, where a price credit went or what disappeared from a disclosure draft, speak to our whistleblower experts about what the growth figure left out. We build your case around the commercial decisions you understand and bring in SEC whistleblower lawyers experienced in revenue and accounting matters. We remain your partners as those decisions become evidence investigators can test.