Dive Brief:

• Bausch Health, formerly Quebec, Canada-based Valeant Pharmaceuticals, has agreed to pay $45 million to settle charges of improper revenue recognition and misleading disclosures, the Securities and Exchange Commission announced this week.
• Separately, three former executives – CEO J. Michael Pearson, CFO Howard Schiller and Controller Tanya Carro – agreed to pay penalties to settle charges against them.
• "Valeant’s former top executives chose to present GAAP and non-GAAP financial measures to indicate strong financial results, which misstated ... sales and included erroneous revenue allocations,” said Michele Layne, director of the SEC’s Los Angeles regional office.

Dive Insight:

When announcing certain GAAP and non-GAAP financial measures, Valeant misstated revenue transactions and included erroneous revenue allocations, the SEC said in its order.

For five consecutive quarters, Valeant and the three former executives touted double-digit same store organic growth, a non-GAAP financial measure that represented growth rates for businesses owned for one year or more. Much of that growth came from sales to Philidor, a mail order pharmacy Valeant helped establish, fund and subsidize.

The orders found Valeant improperly recognized revenue relating to Philidor sales, and did not disclose its unique relationship with, or risks related to, Philidor in SEC filings or earnings and investor presentations. Valeant severed ties to Philidor in October 2015 and restated its 2014 financial statements in April 2016, reducing the revenue that was improperly recognized.

Valeant also failed to disclose the material impact of certain revenue it received from drug wholesalers following a 500% price increase of a single drug Valeant acquired in April 2015. The company erroneously attributed the resulting revenue to more than 100 unrelated products and did not record any as attributable to that drug.

Additionally, in its SEC filings and earnings presentations for the second and third quarters of 2015 and its 2015 annual report, Valeant failed to disclose the impact of that allocation on its GAAP and non-GAAP financial measures.

“When public companies and their senior executives tout strong financial measures, they must provide investors with all of the information needed to make fully informed investment decisions,” Layne said.

Without admitting or denying the SEC’s findings, the company and three former executives consented to orders finding they violated anti-fraud provisions of the Securities Act of 1933, among other things.

In addition to the penalty against the company, Pearson and Schiller agreed to pay civil penalties of $250,000 and $100,000, respectively, and to reimburse Valeant $450,000 and $110,000, respectively, representing a portion of their incentive compensation, pursuant to the Sarbanes-Oxley Act. 

Carro agreed to pay a $75,000 penalty and be suspended from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. The SEC’s order permits Carro to apply for reinstatement after one year.