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Valeant sued over bungling marketing of female libido drug

Valeant's new CFO will be Paul Herendeen, former finance chief at veterinary drugmaker Zoetis.

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Valeant Pharmaceuticals International Inc. was sued by former investors of Sprout Pharmaceuticals Inc. over claims the company bungled the marketing of a female libido pill it acquired from Sprout in a $1-billion buyout of the drugmaker last year.

The lawsuit filed Wednesday claims Valeant violated terms of the deal by overcharging for Addyi and failed to make promised investments to market the drug, designed to bolster women's sex drives. As a result, former Sprout shareholders being shortchanged on millions of dollars in royalty payments, according to the complaint.

The suit comes amid a federal investigation into whether J. Michael Pearson, Valeant's former chief executive officer, engaged in fraud by hiding the company's ties to Philidor Rx Services LLC, a now-shuttered mail-order pharmacy. Philidor was intended to be one of Addyi's main sales outlets, according to the Sprout investors' suit filed in Delaware Chancery Court.

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The former shareholders contend that as part of the buyout, Valeant vowed to make future royalty payments as soon as January if sales of the drug hit $1-billion in 2016. Yet, Valeant fired Sprout executives and sales representatives who were familiar with Addyi and reneged on promises to spend millions on marketing, according to the suit.

'Operational Ineptitude' "Simply put, Addyi is languishing because of Valeant's operational ineptitude and breach of its obligations under the merger agreement," according to the complaint.

Scott Hirsch, a Valeant spokesman, didn't immediately comment on the lawsuit or the company's handling of the drug. Valeant's stock fell 12 per cent to $21.10 at 1:46 p.m. in New York.

At the time of the August 2015 merger – within days of the pill's approval by the U.S. Food and Drug Administration – Valeant and Sprout executives predicted Addyi might hit $1-billion in net sales in its first two years on the market. Demand for the libido drug has lagged, however, and sales are expected to be less than $10-million this year, investors said in the suit.

A group of disgruntled ex-Sprout shareholders investors sent Valeant executives a letter in March complaining that the drugmaker, based in Laval, Quebec, wasn't living up to the buyout's terms. They demanded proof that Valeant planned to spend a promised $200-million on marketing, along with research and development, in 2016 and 2017.

Ousted Executives They also urged the company to retain 140 Sprout sales reps familiar with the libido pill. Valeant officials later fired those salespeople after ousting former Sprout executives such as ex-CEO Cindy Whitehead as part of a "re-launch of the brand," the investors said. Whitehead co-founded Sprout in 2011 with her husband, Robert Whitehead.

Addyi has been struggling because insurers and pharmaceuticals benefit managers have denied or limited coverage for the daily pill. Philidor, the pharmacy slated to help sell Addyi, shut down last year after being accused of falsifying prescriptions so orders could be filled with Valeant drugs. Prosecutors are investigating whether Philidor and Valeant officials misled investors about ties between the companies, according to the people familiar with the matter.

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"With the largest distributor for Addyi out of business, Valeant faced a distribution disaster as a consequence of its fraudulent conduct," the Sprout investors alleged in their suit. Pearson and former Valeant Chief Financial Officer Howard Schiller face questions from federal prosecutors about the drugmaker's accounting practices in connection with its relationship with Philidor.

The ex-Sprout shareholders want a judge to find that Valeant officials failed to "use diligent efforts" to market Addyi as required by the terms of the buyout and duped Sprout investors into backing the sale based on promises to aggressively tout the drug.

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