(Bloomberg) Valeant Pharmaceuticals International Inc. shares slumped as Chief Executive Officer J. Michael Pearson’s defense of the drugmaker’s accounting and ethics failed to resonate with investors fretting about its relationship with a mail-order pharmacy.

The stock continued its slide even as Pearson, four other executives and six board members used a conference call Monday morning to discuss the company’s arrangement to sell medications through Philidor RX Services, a pharmacy it has an option to buy. The shares dropped 6.4 percent to $108.75 at 9:35 a.m. in New York. That wiped out gains on Friday, when the company announced the conference call and pledged to fully address questions about its accounting.

Pearson’s remarks were his first since a short seller accused his company of fraud and threw its stock into a tailspin. After spending seven years building Valeant through serial acquisitions, the CEO found himself responding to questions about the company’s accounting, pricing and business practices that have sent shivers through the industry and the stock market.

"We operate our business based on the highest standards of ethics and are committed to transparency," Pearson said on the call. "The company I’ve heard described in the press in the past week is not one that I recognize."

Short seller Citron Research has said Valeant is using Philidor to store inventory and record those transactions as sales. Valeant has said those allegations are “erroneous,” adding that sales are recorded only when drugs are sent to patients. The company is asking the U.S. Securities and Exchange Commission to look into Citron’s actions, Pearson said on Monday’s call.

Andrew Left, who runs Citron, didn’t address Valeant’s comment on the SEC in an e-mail, though he did respond to Pearson’s comment that his report was alarmist and unnecessarily frightening to investors.
"Yelling, ‘Fire!’ in a crowded theater is a lot different than walking into a theater smelling smoke and yelling, ‘Hey everyone, there could be a fire,’" Left said. "One is irresponsible, another one is a duty."

The Philidor pharmacy network accounted for about 6 percent of Valeant’s revenue for the nine months ended Sept. 30, Valeant said in a filing. The drugmaker hadn’t previously disclosed its relationship with Philidor because it fell below the 10 percent threshold that would make the arrangement material, Chief Financial Officer Rob Rosiello said on the call.

Morfit Returns
The company said earlier Monday it brought back G. Mason Morfit, president of ValueAct Capital, to its board, appointing him to an ad hoc committee that will look into the company’s relationship with Philidor.
Morfit had previously served as a director at Valeant from May 2007 to May 2014, the Canadian company said in a statement. His appointment will be effective immediately. While the board has conducted a review and determined that the revenue recognition and accounting treatment for Philidor was appropriate, the special committee will review the company’s arrangements with the pharmacy, Valeant said in a separate statement.

Bringing back Morfit “indicates the company is trying to win back the trust of the board and the trust of investors,” said Elizabeth Krutoholow, an analyst with Bloomberg Intelligence in New York. “That’s going to be a hard to thing to achieve. The more you poke at Valeant, the more you keep finding.”

The appointment increases the oversight of Valeant by ValueAct, one of the drugmaker’s biggest shareholders. D. Robert Hale, a ValueAct partner, has been on the board since August, when he replaced ValueAct CEO Jeffrey Ubben. Morfit had resigned last year to allow ValueAct to sell shares at its discretion.

Valeant’s lead director Bob Ingram will be chairman of the ad hoc committee, which will also include Norma Provencio, chairman of the audit and risk committee, and Colleen Goggins, former chairman of Johnson & Johnson’s consumer group.

Complete Faith
Ingram said on the conference call Monday that he has "complete and total faith" in Pearson.
The "distractions" of the attention placed on Philidor have led Valeant to put a plan to sell or spin off a business unit "on the backburner," Pearson said. The drugmaker announced a week ago that it would explore whether to divest the division, which focuses on neurology drugs and some other products, because the unit was more dependent on price increases than other parts of the business.

In a presentation posted online Monday, Valeant said Philidor is independent and that the drugmaker’s accounting leaves no way for it to stuff inventory into the pharmacy. Valeant can’t remove the CEO or management of Philidor, and the drugmaker’s executives and board members don’t own any stake in the pharmacy, according to the document.

Valeant will consider whether to exercise its option to acquire Philidor or sever ties and move to different pharmacies, it said in the presentation.

"While we work with a number of specialty pharmacies, we believed that a strategic relationship with a specialty pharmacy would allow us to provide high service levels to physicians and affordable access to drugs for patients," Howard Schiller, a Valeant board member and the drugmaker’s former chief financial officer, said on the call. "If Philidor rapidly expanded with additional partners, we might have lost the high service levels to patients and doctors that had driven success."

Separately, Valeant said in a filing that its Bausch & Lomb unit got a subpoena in September from the U.S. Justice Department related to two surgical products. The subpoena was related to a criminal investigation into possible violations of federal health-care laws, Valeant said, without providing further details. Bausch & Lomb is cooperating with the probe, the drugmaker said.

—With assistance from Makiko Kitamura in London and Anna Edney in Washington.

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