Valeant Pharmaceuticals said Friday it was cutting ties with mail-order pharmacy Philidor RX, which will shut down operations as soon as possible, following a furor over their relationship.
A key investor in the embattled drug company meanwhile said it would survive despite a widening scandal over its relations with Philidor and its accounting practices.
Valeant had nurtured Philidor in its infancy when it sold only two Valeant acne drugs by mail order. The two signed a deal last year that effectively gave Valeant limited control over Philidor as a distribution channel for its drugs, and an option to buy the pharmacy.
The partnership saw Philidor aggressively market Valeant's more expensive drugs over cheaper generics preferred by insurers, which caught the attention of US lawmakers and investigators now looking into its pricing.
Standard and Poor's on Friday lowered its rating of Valeant from B+ to BB- in the wake of the scandal, which has sent Valeant's share price tumbling 60 percent in just three months.
"We have lost confidence in Philidor's ability to continue to operate in a manner that is acceptable to Valeant and the patients and doctors we serve," said J. Michael Pearson, chairman and chief executive of the Canadian drugmaker.
"The newest allegations about activities at Philidor raise additional questions about the company's business practices," he said.
The announcement came after Citron Research, an influential short-seller, accused Valeant of creating a network of mail-order pharmacies to "stuff the channel" -- a deceptive business practice involving inflating sales figures by sending retailers in its distribution channel more products than they are able to sell.
It said Valeant was using two firms it purportedly controlled -- Philidor and R&O Pharmacy. The latter is also embroiled in litigation with Valeant over non-payments for drug shipments. R&O insists it owes no arrears.
Valeant has refuted the accusations and asked the US Securities and Exchange Commission to investigate Citron.
In a bid to boost the company's image, former US deputy attorney general Mark Filip was hired to advise Valeant's board.
In a conference call Friday, Bill Ackman, the influential Wall Street activist investor whose Pershing Capital owns about six percent of Valeant, said the drug maker had done a poor job of countering attacks and explaining its operations and accounting.
But, he added, it would survive these recent setbacks.
"Life will go on for Valeant," he said. "While this has been a very damaging reputational moment ... we think that Valeant's business is very robust."
"We expect more negative press," said Ackman. "In the meantime, we expect the business to perform well."
Pershing Square doubled down last week on its investment in the company, even as the shares kept tumbling. Despite Ackman's comments and the cutoff of Philidor, Valeant shares sank more than 10 percent on Friday to 99.34, a two-year low.
But at Sequoia Fund, Valeant's largest institutional shareholder, two board members quit their positions earlier this week saying Sequoia held too large a position in the pharmaceutical firm, the Wall Street Journal reported.
In a letter to shareholders on Thursday, Sequoia Fund criticized Valeant's handling of the situation and said it had "caused an extraordinary level of (investor) pain," but said it was sticking by its investment.
"In our view, Valeant is an aggressively-managed business that may push boundaries, but operates within the law," the letter said.
"We would stress the importance of taking a more systemic approach to managing business practices with an eye on the company's long-term corporate reputation."