Valeant Pharmaceuticals International Inc. Chief Executive Officer Mike Pearson will step down in a board and management shakeup after a series of controversies that culminated in a 61 percent drop in the shares last week.

The drugmaker has started a search to replace Pearson, who will stay CEO until a successor is found, according to a statement Monday. Bill Ackman, the billionaire investor whose Pershing Square Capital Management LP is one of the drugmaker’s biggest investors, will join the board. Valeant said it asked former Chief Financial Officer Howard Schiller, who took over for Pearson during a two-month medical leave, to resign from the board following “improper conduct.” Schiller, in a statement via his law firm, said he never engaged in any improper conduct and refused to step down as director.

The latest developments cap three chaotic weeks since Pearson’s return from his leave, raising even more questions about Valeant’s accounting practices. Since the end of February, Valeant has delayed filing of its annual report pending an internal investigation by an ad hoc committee, disclosed an Securities and Exchange Commission probe and said it would restate several quarters worth of results. The company, which has been under scrutiny for months for its business practices, said Monday it has discovered “one or more material weaknesses” in internal controls.

“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 said in the statement.

The shares had their biggest intraday gain since Dec. 15, and were up 12 percent to $30.10 at 10:06 a.m. in New York. Last week, the stock had fallen by more than half after the drugmaker cut its 2016 forecast, reported weak fourth-quarter results and said it was at risk of breaching some of its debt agreements.

Valeant’s $3.25 billion of 6.125 percent bonds rose 2.4 cents to 77.75 cents on the dollar at 9:40 a.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

“This is a positive first step,” said Jack Flaherty, a money manager in New York at GAM Holdings AG., which oversees $127 billion, including Valeant debt. “They have a long way to go.” When Valeant releases its earnings reports, “that will be a real positive,” he said.

Ackman on board

Ackman’s addition to the board will give Pershing Square two director spots, after Pershing Vice Chairman Stephen Fraidin joined earlier this month. To make room for Ackman, director Katharine Stevenson voluntarily resigned, the company said.

Ackman, who has said he would become more active at the company, is getting on the board after a nightmarish week, during which his Pershing Square Holdings hedge fund suffered hundreds of millions of dollars in paper losses.

The board is close to completing the ad hoc investigation of business practices, Valeant also said Monday. The probe was started last year after the drugmaker revealed its relationship with a mail-order pharmacy that critics said was used to inflate sales.

“While the ad hoc Committee is still reviewing certain accounting-related items, and has identified certain concerns related to those items with respect to the tone of the organization, it has not identified any additional items affecting the financial statements to date,” Valeant Chairman Robert Ingram said in the statement.

Valeant said its former corporate controller, whom it didn’t identified, has been placed on administrative leave.

In his statement Monday, Schiller said transactions with the mail-order pharmacy, Philidor Rx Services, in the fourth-quarter of 2014, and subsequent accounting treatment, was the result of “a careful and reasoned accounting decision made by the company’s corporate controller based on what she considered to be complete and accurate facts.”

“The accounting decision was not my decision, but I was advised of the decision and the rationale behind the decision by the Corporate Controller, and I agreed with the decision,” Schiller said.

Fall from grace

Pearson, 56, built the drugmaker into what was once a Wall Street darling with a series of debt-funded acquisitions and a low-cost research and development model. That strategy drew criticism from Congress when Valeant bought up existing drugs, including treatments for serious heart conditions, and then raised their prices aggressively.

Pearson later said Valeant would refrain from such price increases, yet that hasn’t been enough to soothe investors’ nerves. In a one-day rout, Valeant plunged 51 percent on March 15 in reaction to Pearson’s first conference call with investors after he returned to his job from a two-month leave of absence for pneumonia.

Among the surprises that day: a $600 million typo in the company’s preliminary fourth-quarter earnings release, overstating its forecast for the next four quarters of adjusted profit before interest, tax, depreciation and amortization. Pearson acknowledged the mistake and said he had to earn back credibility and deliver on results.

“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,” Pearson said in the statement.

Instant Insights /

Valeant CEO Pearson will step down, Ackman added to board

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