Valeant, tone at the top and compliance

August 15, 2016

One has to wonder about Valeant Pharmaceuticals International. It had a corporate strategy of simply purchasing other drug companies and then jacking up the prices sky high, no matter what the social cost, to drive explosive growth. Now, it seems as if the company might have engaged in criminal behaviour to garner its once high-flying stock price. An article in The Wall Street Journal has noted that the Justice Department (DOJ) is investigating whether the company defrauded its insurers by hiding its true relationship with a third party sales agent.

Valeant sold drugs through an alleged arms-length third party, Philidor Rx Services. It turned out that Valeant had an option to purchase the company, and it used the alleged third party as something more akin to an in-house sales arm. The problem was that Philidor claimed to be ‘agnostic’ about the prescription of drugs when it may well have been run by Valeant. The issue originally arose in an accounting kerfuffle but has now moved to a much more serious arena. Prosecutors are reportedly “investigating not only the level of control Valeant exerted over Philidor’s business, but the extent of the ties, including Valeant’s role in Philidor’s growth”.

The continued scrutiny of Valeant and its practices demonstrates once again how the tone set by management is one of the key indicators of whether a company will do business ethically and in compliance with relevant laws. In the Foreign Corrupt Practices Act (FCPA) world, the Valeant case points to the more troubling issue – advocated by some commentators – that it is somehow unfair for corporations to be penalised under laws such as the FCPA for the actions of a few bad apples. What these commentators fail to recognise is that corporate culture is set from the top of an organisation. Valeant provides a prime example of an organisation that clearly valued its stock price more than anything else. Such a culture helps to explain why some companies continue to violate the FCPA more than 35 years after its enactment.

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