attorneys for defendant howard b. schiller united states ... · 9/13/2016 · james s. richter...

WINSTON & STRAWN LLP The Legal Center One Riverfront Plaza, Suite 730 Newark, New Jersey 07102 (973) 848-7676 James S. Richter Melissa Steedle Bogad Attorneys for Defendant Howard B. Schiller

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

––––––––––––––––––––––––––––––––––––––– x IN RE VALEANT PHARMACEUTICALS INTERNATIONAL, INC. SECURITIES LITIGATION This Document Relates To: All Actions

: : : : : : : : : : : : : : : :

Honorable Michael A. Shipp, U.S.D.J. Master File No.: 15-7658 (MAS) (LHG) DEFENDANT HOWARD B. SCHILLER’S MOTION TO DISMISS THE CONSOLIDATED COMPLAINT Electronically Filed Oral Argument Requested Return date: To be set by the Court

––––––––––––––––––––––––––––––––––––––– x TO:

Ted. E. Trief Shelly J. Friedland TRIEF & OLK 9 Kansas Street Hackensack, NJ 07601 Telephone: 201/343-5770 [email protected] [email protected]

Darren J. Robbins ROBBINS GELLER RUDMAN & DOWD LLP 655 West Broadway, Suite 1900 San Diego, CA 92101 Telephone: 619/231-1058 619/231-7423 (fax)

Case 3:15-cv-07658-MAS-LHG Document 168 Filed 09/13/16 of 4 PageID: 3672

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Samuel H. Rudman ROBBINS GELLER RUDMAN & DOWD LLP 58 South Service Road, Suite 200 Melville, NY 11747 Telephone: 631/367-7100 631/367-1173 (fax) [email protected]

James E. Barz ROBBINS GELLER RUDMAN & DOWD LLP 200 South Wacker Drive, 31st Floor Chicago, IL 60606 Telephone: 312/674-4674 312/674-4676 (fax) [email protected]

Jack Reise Robert J. Robbins ROBBINS GELLER RUDMAN & DOWD LLP 120 East Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 561/750-3364 (fax) [email protected] [email protected]

Attorneys for Plaintiffs PLEASE TAKE NOTICE that, on a date and at a time to be set by the Court, the

undersigned attorneys for Defendant Howard B. Schiller shall move before the Honorable

Michael A. Shipp, U.S.D.J., at the United States District Court, Clarkson S. Fisher Building and

U.S. Courthouse, 420 East State Street, Trenton, New Jersey 08608, for entry of an Order

granting his Motion to Dismiss the Consolidated Complaint.

PLEASE TAKE FURTHER NOTICE that in support of said Motion, Defendant

Howard B. Schiller relies upon the brief and Declaration of Melissa Steedle Bogad submitted

herewith.

PLEASE TAKE FURTHER NOTICE that Defendant Howard B. Schiller respectfully

requests oral argument.


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WINSTON & STRAWN LLP Attorneys for Defendant Howard B. Schiller By: s/ Melissa Steedle Bogad James S. Richter [email protected] Melissa Steedle Bogad [email protected]

Dated: September 13, 2016 OF COUNSEL Robert Y. Sperling Joseph L. Motto WINSTON & STRAWN LLP 35 West Wacker Drive Chicago, Illinois 60601 (312) 558-5600 Elizabeth P. Papez WINSTON & STRAWN LLP 1700 K Street, N.W. Washington, D.C. 20006-3817 (202) 282-5000


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CERTIFICATION OF SERVICE

I certify that on this 13th day of September, 2016, the foregoing Notice of Motion and

supporting documents were electronically filed and served upon counsel for Plaintiffs by notice

of electronic filing.

I certify that the foregoing statements made by me are true. I am aware that if any of the

foregoing statements made by me are willfully false, I am subject to punishment.

s/ Melissa Steedle Bogad

Melissa Steedle Bogad [email protected]

Dated: September 13, 2016

CHI:3026963.3



–––––––––––––––––––––––––––––––––––––– IN RE VALEANT PHARMACEUTICALS INTERNATIONAL, INC. SECURITIES LITIGATION This Document Relates To: All Actions –––––––––––––––––––––––––––––––––––––

)))))))))

Honorable Michael A. Shipp, U.S.D.J.

Master File No. 15 CV 7658 (MAS) (LHG)

Electronically Filed Oral Argument Requested Return date: To be set by the Court

BRIEF IN SUPPORT OF DEFENDANT HOWARD B. SCHILLER’S MOTION TO DISMISS PLAINTIFFS’ CONSOLIDATED COMPLAINT

OF COUNSEL Robert Y. Sperling Joseph L. Motto WINSTON & STRAWN LLP 35 West Wacker Drive Chicago, Illinois 60601 (312) 558-5600 Elizabeth P. Papez WINSTON & STRAWN LLP 1700 K Street, N.W. Washington, D.C. 20006-3817 (202) 282-5000

WINSTON & STRAWN LLP The Legal Center One Riverfront Plaza, Suite 730 Newark, New Jersey 07102 (973) 848-7676 James S. Richter Melissa Steedle Bogad

Counsel for Defendant Howard B. Schiller

Case 3:15-cv-07658-MAS-LHG Document 168-1 Filed 09/13/16 Page 1 of 38 PageID: 3676

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TABLE OF CONTENTS

Page

PRELIMINARY STATEMENT .................................................................................................... 1

RELEVANT FACTUAL ALLEGATIONS ................................................................................... 7

ARGUMENT ................................................................................................................................ 10

I. PLAINTIFFS DO NOT ADEQUATELY PLEAD THAT SCHILLER MADE ANY MATERIALLY FALSE STATEMENTS OR OMISSIONS ................................. 12

A. Plaintiffs Do Not Allege That Schiller’s Congressional Testimony Was Materially False or Misleading ..................................................................................... 12

B. Plaintiffs Do Not Adequately Allege That Schiller’s Earnings Call and Conference Quotes Were Materially False or Misleading ............................................ 13

C. Plaintiffs Do Not Adequately Allege That Schiller Made Any Other Statements That Were Materially False or Misleading ................................................................... 15

II. PLAINTIFFS DO NOT ADEQUATELY PLEAD SCHILLER’S SCIENTER............... 20

A. Many of Plaintiffs’ Allegations as to Schiller’s Scienter Are Conclusory, Nonspecific, or Made Through Impermissible Group Pleading ................................... 20

B. Plaintiffs’ Allegations Regarding Schiller’s “Motives” to Engage in Fraud Also Do Not Adequately Plead Scienter ............................................................................... 22

C. Plaintiffs Do Not Plead Facts Demonstrating Schiller’s Knowledge or Reckless Disregard of Allegedly False Statements on Pricing Practices ..................................... 23

D. Plaintiffs Do Not Plead Facts Showing Schiller’s Knowledge or Reckless Disregard of Factual Misrepresentations Regarding Philidor ....................................... 26

E. Plaintiffs Do Not Plead Particular Facts Showing Schiller’s Knowledge or Reckless Disregard of False Statements Regarding Internal Controls ......................... 27

III. COUNTS III, IV, V, VI, VII, AND VIII: PLAINTIFFS HAVE NOT SUFFICIENTLY ALLEGED THAT SCHILLER VIOLATED SECTIONS 11 OR 12(A)(2) OF THE SECURITIES ACT ............................................................................. 29

IV. COUNTS II AND IX: PLAINTIFFS HAVE NOT SUFFICIENTLY ALLEGED CONTROL PERSON CLAIMS AGAINST SCHILLER ................................................. 30

CONCLUSION ............................................................................................................................. 30


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TABLE OF AUTHORITIES

Page(s)

Cases

Acito v. IMCERA Grp., Inc., 47 F.3d 47 (2d Cir. 1995) ........................................................................................................23

In re Advanta Corp. Sec. Litig., 180 F.3d 525 (3d Cir. 1999)............................................................................................. passim

In re Aetna Sec. Litig., 617 F.3d 272 (3d Cir. 2010).................................................................................................2, 11

In re Amarin Corp. PLC Sec. Litig., 2016 WL 1644623 (D.N.J. Apr. 26, 2016) ..............................................................................14

Ashcroft v. Iqbal, 556 U.S. 662 (2009) ...........................................................................................................10, 11

Backman v. Polaroid Corp., 910 F.2d 10 (1st Cir. 1990) (en banc) ......................................................................................19

Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) .................................................................................................................10

Belmont v. MB Inv. Partners, Inc., 708 F.3d 470 (3d Cir. 2013).............................................................................................3, 6, 30

In re Bristol-Myers Squibb Sec. Litig., 312 F. Supp. 2d 549 (S.D.N.Y. 2004) ......................................................................................28

In re Burlington Coat Factory Sec. Litig., 114 F.3d 1414 (3d Cir. 1997)........................................................................................... passim

Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp., 2002 WL 33934282 (D.N.J. June 26, 2002) ............................................................5, 13, 15, 16

Chen v. Valeant Pharms. Int’l, Inc., No. 15-cv-7679 (Oct. 23, 2015) .................................................................................................8

City of Edinburgh Council v. Pfizer, Inc., 754 F.3d 159 (3d Cir. 2014).................................................................................................4, 11

City of Roseville Emps. Ret. Sys. v. Horizon Lines, Inc., 713 F. Supp. 2d 378 (D. Del. 2010) aff’d, 442 F. App’x 672 (3d Cir. 2011) ..........................26


TABLE OF AUTHORITIES (continued)

Page(s)

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In re Cybershop.com Sec. Litig., 189 F. Supp. 2d 214 (D.N.J. 2002) ..........................................................................................30

Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) .................................................................................................................11

ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009).....................................................................................................26

Fein v. Valeant Pharms. Int’l Inc., No. 15-cv-7809 (Oct. 30, 2015) .................................................................................................8

In re Gentiva Sec. Litig., 932 F.Supp.2d 352 (E.D.N.Y. 2013) .......................................................................................17

Goldstein v. MCI WorldCom, 340 F.3d 238 (5th Cir. 2003) ...................................................................................................21

GSC Partners CDO Fund v. Washington, 368 F.3d 228 (3d Cir. 2004).................................................................................................5, 23

In re Hertz Glob. Holdings, Inc. Sec. Litig., 2015 WL 4469143 (D.N.J. July 22, 2015) .......................................................................3, 5, 28

Higginbotham v. Baxter Int’l, Inc., 495 F.3d 753 (7th Cir. 2007) .......................................................................................23, 26, 27

Horizon Asset Mgmt. Inc. v. H & R Block, Inc., 580 F.3d 755 (8th Cir. 2009) ...................................................................................................27

IBEW Local Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383 (2d Cir. 2015).....................................................................................................16

In re IKON Office Solutions, Inc., 277 F.3d 658 (3d Cir. 2002).....................................................................................................28

Institutional Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242 (3d Cir. 2009)............................................................................................. passim

In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262 (D.N.J. 2007) ..........................................................................................27

Janbay v. Canadian Solar, Inc., 2012 WL 1080306 (S.D.N.Y. Mar. 30, 2012) .........................................................................17



Page(s)

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Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) .............................................................................................................3, 15

Jones v. ABN Amro Mortgage Grp., Inc., 606 F.3d 119 (3d Cir. 2010).......................................................................................................8

Klein v. Autek Corp., 147 F. App’x 270 (3d Cir. 2005) .............................................................................................21

Leder v. Shinfeld, 2008 WL 2165097 (E.D. Pa. May 22, 2008) ...........................................................................28

Luminent Mortg. Capital, Inc. v. Merrill Lynch & Co., 652 F. Supp. 2d 576 (E.D. Pa. 2009) .......................................................................................29

Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011) .............................................................................................................15, 19

In re Merck & Co., Inc. Sec., Derivative & ERISA Litig., 2011 WL 3444199 (D.N.J. Aug. 8, 2011) ...........................................................................5, 16

Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049 (9th Cir. 2008) ...........................................................................................24, 26

Nat’l Junior Baseball League v. Pharmanet Dev. Grp. Inc., 720 F. Supp. 2d 517 (D.N.J. 2010) ......................................................................................6, 23

Novak v. Kasaks, 216 F.3d 300 (2d Cir. 2000).....................................................................................................22

OFI Asset Mgmt. v. Cooper Tire & Rubber, 2016 WL 4434404 (3d Cir. Aug. 22, 2016) .............................................................................18

Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318 (2015) .............................................................................................................13

P. Schoenfeld Asset Mgmt. LLC v. Cendant Corp., 142 F. Supp. 2d 589 (D.N.J. 2001) ..........................................................................................22

In re Par Pharm. Sec. Litig., 2008 WL 2559362 (D.N.J. June 24, 2008) ..........................................................................4, 20

In re PetroChina Co. Ltd. Sec. Litig., 120 F. Supp. 3d 340 (S.D.N.Y. 2015), aff’d (2d Cir. Mar. 21, 2016) ......................................17



Page(s)

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Potter v. Valeant Pharms. Int’l Inc., No. 15-cv-7658 (Oct. 22, 2015) .................................................................................................8

Rahman v. Kid Brands, Inc., 736 F.3d 237 (3d Cir. 2013).......................................................................................................7

In re Refco Inc. Sec. Litig., 503 F. Supp. 2d 611 (S.D.N.Y. 2007) ......................................................................................29

Ret. Sys. v. Chubb Corp., 394 F.3d 126 (3d Cir. 2004).................................................................................................3, 25

In re Rockefeller Ctr. Props. Sec. Litig., 311 F.3d 198 (3d Cir. 2002).....................................................................................................11

S.E.C. v. Lucent Techs., Inc., 610 F. Supp. 2d 342 (D.N.J. 2009) ..........................................................................................27

Sapir v. Averback, 2016 WL 554581 (D.N.J. Feb. 10, 2016) ................................................................................22

Se. Pa. Transp. Auth. v. Orrstown Fin. Servs., Inc., 2015 WL 3833849 (M.D. Pa. June 22, 2015) ....................................................................17, 29

In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256 (3d Cir. 2006).................................................................................................6, 20

In re Synchronoss Sec. Litig., 705 F. Supp. 2d 367 (D.N.J. 2010) ....................................................................................25, 26

Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) .................................................................................................3, 11, 20, 28

In re Tellium Inc. Sec. Litig., 2005 WL 1677467 (D.N.J. June 30, 2005) ........................................................................12, 30

U.S. v. Gray, 780 F.3d 458 (1st Cir. 2015) ....................................................................................................28

In re Westinghouse Sec. Litig., 90 F.3d 696 (3d Cir. 1996).........................................................................................................4

In re Wilmington Tr. Sec. Litig., 852 F. Supp. 2d 477 (D. Del. 2012) .........................................................................................11



Page(s)

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Wilson v. Bernstock, 195 F. Supp. 2d 619 (D.N.J. 2002) ..........................................................................................22

Winer Family Tr. v. Queen, 503 F.3d 319 (3d Cir. 2007).....................................................................................3, 15, 19, 21

Witriol v. Conexant Sys., Inc., 2006 WL 3511155 (D.N.J. Dec. 4, 2006) ................................................................................21

Yang v. Valeant Pharms. Int’l, Inc., No. 15-cv-7746 (Oct. 27, 2015) .................................................................................................8

Statutes

15 U.S.C. § 78u–4(b)(2)(A) ...........................................................................................................20

15 U.S.C. § 78u–5(c)(1)(B) ...........................................................................................................18

15 U.S.C. § 78u-4(b)(1) .................................................................................................................11

Other Authorities

Black’s Law Dictionary (10th ed. 2014) ........................................................................................28

Oxford English Dictionary, available at http://www.oed.com/ .....................................................28


Defendant Howard B. Schiller respectfully submits this Brief in Support of his Motion to

Dismiss Plaintiffs’ Consolidated Complaint.

PRELIMINARY STATEMENT

In late 2015, a confluence of events and negative publicity surrounding Valeant

Pharmaceuticals International, Inc. (“Valeant” or the “Company”) preceded a dramatic decline in

the Company’s stock price. (Compl. ¶¶ 18-26.)1 The stock drop triggered shareholder suits

against Valeant and a number of its present and former officers, executives, and directors,

including Schiller, who served as Valeant’s CFO and Executive Vice President from December

2011 until June 30, 2015, was a member of Valeant’s Board of Directors from September 2012

until June 2016, and served as the Company’s interim CEO from January to February 2016 while

then-CEO J. Michael Pearson was on medical leave. (Compl. ¶ 37.) These suits culminated in

Lead Plaintiff TIAA-Cref and Plaintiff City of Tucson’s (“Plaintiffs”) Complaint, which casts

the negative news surrounding Valeant’s stock drop as evidence of a multi-year fraud in

violation of Section 10(b) of the Securities Exchange Act of 1934 and Securities and Exchange

Commission Rule 10b-5 (“Exchange Act Claims”), and Sections 11 and 12(a)(2) of the

Securities Act of 1933 (“Securities Act Claims”). (E.g., Compl. ¶¶ 3-6.)

Plaintiffs’ allegations against Schiller exemplify the pleading defects the Company and

other Defendants detail in their Rule 12 motions,2 and that support dismissal of the Complaint

1 Plaintiffs’ Consolidated Complaint for Violations of the Federal Securities Laws, Dkt. Entry No. 80 (June 24, 2016), is referenced herein as “Complaint” and cited as “Compl.” 2 Schiller hereby incorporates by reference the arguments made in the briefs in support of the motions to dismiss filed by Valeant, J. Michael Pearson, Robert L. Rosiello, Ari S. Kellen, Robert A. Ingram, Ronald H. Farmer, Colleen Goggins, Anders Lönner, Theo Melas-Kyriazi, Robert N. Power, Norma Provencio, Katherine B. Stevenson, and Jeffrey W. Ubben (“Valeant’s brief”), by Barclays Capital, Inc., BMO Capital Markets Corp., CIBC World Markets Corp.,


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under controlling federal rules and the Private Securities Litigation Reform Act (“PSLRA”). The

factual allegations and documents they cite chronicle the realization of appropriately disclosed

business risks, public criticism of Valeant’s business model and affiliation with certain third

parties, and accounting errors concerning the proper time for reporting a trivial amount of

Company revenue. None of these allegations supports a private claim for securities fraud, and

Plaintiffs’ addition of legal conclusions and inflammatory rhetoric cannot cure their failure to

plead their claims against Schiller with the particularity Rule 9(b) and the PSLRA require.

The alleged misstatements Plaintiffs quote as directly attributable to Schiller consist of

just three statements cited in three of the Complaint’s 734 paragraphs. (Compl. ¶¶ 16, 138, 183.)

To the extent these statements go beyond protected forward-looking projections, opinions, or

puffery, see, e.g., In re Aetna Sec. Litig., 617 F.3d 272, 278-79 (3d Cir. 2010) (citing 15 U.S.C.

§ 78u–5(i)(1)), Plaintiffs do not plead how they were materially false or misleading, much less

that Schiller knew or should have known they were false when made. The statements the

Complaint cherry-picks from Schiller’s February 2016 congressional testimony (Compl. ¶¶ 422-

25) likewise fail to provide a basis for Plaintiffs’ claims. These statements are not even alleged

to be false or misleading. As discussed below, Plaintiffs blatantly mischaracterize Schiller’s

testimony as “admitting” alleged legal violations in an improper attempt to excuse their failure

adequately to plead them. (See id.; Part II(C) infra.) As the attached record of Schiller’s

testimony makes clear, Schiller merely candidly observed that in hindsight, some of Valeant’s

Citigroup Global Markets Inc., DBS Bank Ltd., Deutsche Bank Securities Inc., DNB Markets Inc.; Goldman, Sachs & Co., HSBC Securities (USA) Inc., J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Mitsubishi UFJ Securities (USA), Inc. (which, as of July 1, 2016, changed its legal name to MUFG Securities America Inc.), Morgan Stanley & Co. LLC, RBC Capital Markets LLC, SMBC Nikko Securities America, Inc., SunTrust Robinson Humphrey, Inc., and TD Securities (USA) LLC (“Bank Offering Defendants’ brief”), and by the other individual defendants.


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“aggressive” price increases and acquisitions were “mistakes.” (Schiller Ex. A (Feb. 4, 2016

Hearing Transcript) at 9, 21; Schiller Ex. B (Feb. 4, 2016 Written Testimony) at 10-11.) Such

observations “are insufficient to establish even recklessness.” In re Hertz Glob. Holdings, Inc.

Sec. Litig., 2015 WL 4469143, at *17 (D.N.J. July 22, 2015); Cal. Pub. Emps.’ Ret. Sys. v.

Chubb Corp., 394 F.3d 126, 158 (3d Cir. 2004).

Plaintiffs’ remaining allegations against Schiller derive from purported misstatements by

Valeant or other Defendants about the Company’s drug pricing practices and relationship with

third-party pharmacy Philidor. (Compl. ¶¶ 132-230.) Plaintiffs attribute these statements to

Schiller based on his position with the Company and mandatory certification of certain financial

reports. (Compl. ¶¶ 392, 400-05.) But Plaintiffs cannot satisfy their pleading burden by lumping

Schiller in with other Defendants who allegedly made material misstatements because this

Circuit does not permit group pleading of fraud claims. See, e.g., Winer Family Tr. v. Queen,

503 F.3d 319, 337 & n.6 (3d Cir. 2007). Plaintiffs fail to cure this defect by pleading facts

showing that Schiller controlled other Defendants’ statements to the degree required for liability.

See, e.g., Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135, 142 (2011). And

their claims even with respect to statements Schiller could be deemed to have “made” for 10b-5

purposes, id., fail for at least two reasons. First, they fail adequately to plead that any of the

alleged statements was materially false or misleading. Second, they fail adequately to allege that

Schiller made any, much less all, of the alleged misstatements with the requisite scienter; i.e.,

Plaintiffs fail to “state with particularity” facts showing that Schiller made specific statements

with the “intention to deceive, manipulate, or defraud,” Tellabs, Inc. v. Makor Issues & Rights,

Ltd., 551 U.S. 308, 313 (2007) (quotation omitted), or as a result of “conscious misbehavior or

recklessness,” Institutional Inv’rs Grp. v. Avaya, Inc., 564 F.3d 242, 267 (3d Cir. 2009), that

goes beyond “simple, or even inexcusable negligence, [to] an extreme departure from the

standards of ordinary care,” Belmont v. MB Inv. Partners, Inc., 708 F.3d 470, 493 (3d Cir. 2013).


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No Material Misstatements or Omissions. Plaintiffs’ colorful narrative of the events

surrounding Valeant’s stock drop does not identify any material misstatements or omissions by

Schiller. The only inaccurate information the Complaint identifies in statements Schiller signed

or certified during the putative class period is an overstatement of financial results based on

mistimed revenue recognition in late 2014. (E.g., Compl. ¶ 378.) Plaintiffs’ assertion that this

overstatement was “material” under accounting rules (id.) is a red herring. It is undisputed that

the amount of the overstatement was trivial (approximately 0.7% of reported revenue for 2014),

and thus immaterial and not actionable as the basis for a securities fraud claim. See, e.g., In re

Westinghouse Sec. Litig., 90 F.3d 696, 713-15 (3d Cir. 1996). The remaining statements

Plaintiffs attribute to Schiller are protected by the PSLRA’s safe harbor for forward-looking

statements or opinions, factually accurate in context, or concern details regarding Valeant’s

pricing practices and affiliate relationships that Schiller had no duty to disclose in order to render

any of his alleged statements truthful or accurate. See, e.g., City of Edinburgh Council v. Pfizer,

Inc., 754 F.3d 159, 174 (3d Cir. 2014). The Plaintiff funds are managed by sophisticated

investors who were advised of the risks associated with Valeant’s non-traditional business model

in the very statements they cite in the Complaint, (see, e.g., Valeant MTD Ex. 3 (VRX 10-K FY

2013), at 17, 19), and who could have discovered Valeant’s reported list price increases and

relationship with Philidor through simple diligence. And to the extent their claims go beyond

such information, Plaintiffs do not adequately plead that Schiller knew or should have known of

any facts warranting disclosure.

No Scienter. Although the defects above alone preclude Plaintiffs’ claims against

Schiller, they independently fail because Schiller’s “individual” participation in the alleged fraud

is not “pled separately and with particularity.” In re Par Pharm. Sec. Litig., 2008 WL 2559362,

at *10 (D.N.J. June 24, 2008). The generic claims that “the Defendants” knew or should have

known facts that rendered certain statements false or misleading, (e.g., Compl. ¶¶ 386, 397-99),


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do not satisfy this burden. And Plaintiffs’ assertion that Schiller was motivated by compensation

and performance metrics to defraud investors (e.g., Compl. ¶ 467) likewise fails to plead that he

was “individually associated with the alleged fraud, other than by virtue of [his] position within”

the company, e.g., In re Merck & Co., Inc. Sec., Derivative & ERISA Litig., 2011 WL 3444199,

at *25-26 (D.N.J. Aug. 8, 2011), or for reasons beyond those applicable to any officer or director

of a public company, e.g., GSC Partners CDO Fund v. Washington, 368 F.3d 228, 237-38, 245

(3d Cir. 2004). Indeed, the Complaint’s elaboration of Schiller’s alleged scienter undermines

Plaintiffs’ claims.

The Complaint does not allege that Schiller sold stock or otherwise capitalized on

allegedly material non-public information to the detriment of other investors. (Compl. ¶¶ 37,

470-72.) It concedes that Schiller was not subject to clawback or other extraordinary requests

when he left the Company. (Id. ¶ 414.) And Plaintiffs’ assertion that “Valeant has specifically

attributed its fictitious accounting to the ‘improper conduct’ of Defendant Schiller,” among

others (Compl. ¶¶ 14, 411) provides no support for this suit. Even accepting this statement

concerning supposed “improper conduct” (which Schiller contests) as true for pleading purposes,

it is unaccompanied by any factual allegations that it relates to specific, much less fraudulent,

misstatements Schiller should have recognized as such based on specific “reports or statements”

revealing the “contrary facts.” See, e.g., Cal. Pub. Emps.’ Ret. Sys. v. Chubb Corp., 2002 WL

33934282, at *23 (D.N.J. June 26, 2002). That is not surprising, because Valeant denies any

admissions of fraud in its papers, and the accounting issue associated with the accusation of

“improper conduct” is not material under the securities laws in any event. See supra. Further,

even unencumbered by all of these fatal defects, the Complaint’s references to allegations of

unspecified “improper conduct” against Schiller do not support fraud claims under settled

precedents holding that allegations of “corporate mismanagement are insufficient to establish

even recklessness.” Hertz, 2015 WL 4469143, at *17.


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For all of the foregoing reasons, Plaintiffs’ Exchange Act Claims against Schiller are

inadequately pled and warrant dismissal. Their Securities Act Claims likewise fail because they

depend on the same alleged Valeant misrepresentations as the Exchange Act Claims, but

Plaintiffs have not alleged any facts showing that these supposed misrepresentations are

actionable as referenced in the underlying debt and stock offerings documents they cite. Both

the Exchange Act Claims and Securities Act Claims also fail adequately to plead loss causation

between their claimed damages and any actionable misrepresentations by Schiller. See, e.g.,

Nat’l Junior Baseball League v. Pharmanet Dev. Grp. Inc., 720 F. Supp. 2d 517, 558-59 (D.N.J.

2010) (“plaintiff is required to plead that the decline in the stock price was caused by the

market’s discovery of defendant’s fraud.”) (citation omitted). And their “control person” claims

against Schiller similarly fail because the Complaint does not adequately allege any primary

violations of the Exchange or Securities Acts, much less that Schiller was a “culpable

participant” in any such violations. In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 284

& n.16 (3d Cir. 2006).

* * * * *

At bottom, the facts Plaintiffs allege, like the documents they cite, refer to corporate

decision-making that proved regrettable in hindsight, notably: (i) aggressively raising certain

drug prices to a point that drew public ire; (ii) transacting business with a third party (Philidor)

whose alleged misconduct had nothing to do with Schiller; and (iii) prematurely recognizing

certain revenue immaterial to the company’s earnings. Plaintiffs’ efforts to impugn or

mischaracterize Schiller’s distinguished career as an investment banker (Compl. ¶ 37), the

circumstances surrounding his departure from Valeant (id. ¶¶ 23, 37, 391), and his voluntary

cooperation with congressional inquiries (id. ¶¶ 422-25), are unseemly and incapable of

transforming their legally insufficient allegations into actionable securities fraud claims.

Accordingly, the Court should dismiss the claims against Schiller with prejudice. See, e.g.,


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Belmont, 708 F.3d at 493 (affirming dismissal of a complaint against an individual defendant

when “[i]nvestors provided no evidence of scienter” against that individual defendant); Rahman

v. Kid Brands, Inc., 736 F.3d 237, 243 (3d Cir. 2013) (similar).

RELEVANT FACTUAL ALLEGATIONS

Schiller’s Tenure With Valeant. Valeant is an international pharmaceutical and medical

device company. (Compl. ¶¶ 2, 35.) Schiller served as Valeant’s CFO from December 2011 to

June 30, 2015. (Id. ¶ 37.) He was also a member of Valeant’s Board of Directors from 2012

through June 14, 2016 (id.), and served as the Company’s interim CEO in January and February

of 2016 when then-CEO Pearson was on medical leave. (Id.) Plaintiffs do not attribute any

alleged material misrepresentations in Company filings to Schiller after he stepped down as

Valeant’s CFO in June 2015.

Primary Events Precipitating This Suit Against Schiller and Other Defendants.

Valeant’s stock first came under pressure in approximately September 2015, when members of

Congress and the press began vocalizing disapproval of price hikes in the prescription drug

industry. (Compl. ¶¶ 232-36.) These critiques were accompanied by regulatory inquiries into

Valeant’s drug pricing (see id.) and patient assistance programs (id. ¶ 237), which gained

momentum when a blogger with an apparent short interest in Valeant stock began publishing

fantastic accusations comparing Valeant to Enron, based on inflammatory allegations concerning

the operations and reimbursement practices of a third-party pharmacy—Philidor Rx Services,

LLC—with which Valeant had a business relationship. (Id. ¶ 213.) In response to these

accusations, Valeant announced that its Board of Directors had formed an ad hoc committee to

review the Company’s relationship with Philidor (id. ¶ 252), severed ties with the pharmacy (id.

¶¶ 252, 259), and in the process identified a small amount of Philidor sales revenue Valeant

prematurely recognized in the second half of 2014. (Id. ¶¶ 289-90, 302-05, 308.)

These and other incidents alleged in the Complaint preceded significant downward


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movement in Valeant’s stock price (Compl. ¶ 26), which in turn provoked a proverbial rush to

the courthouse, with Plaintiffs’ counsel and others filing four separate lawsuits between October

22 and 30, 2015, which were eventually consolidated into this action.3 On March 21, 2016,

Valeant filed with the SEC a Form 8-K describing that it was initiating a search for a CEO to

replace Pearson; that Pershing Square, a major Valeant investor, would be taking two positions

on the Valeant board; and that certain of the Company’s historical financial statements would

need to be restated due to premature revenue recognition on certain sales to Philidor during the

third and fourth quarters of 2014. (Compl. ¶¶ 36, 302; Valeant MTD Ex. 37 (VRX 8-K (Mar.

21, 2016)) at 2.)4 The Company determined that this premature revenue recognition caused

Valeant’s financial statements for 2014 to overstate revenue by approximately $58 million—or

0.7% of the $8.264 billion in reported revenue for the year, the adjustment of which would also

impact reported results for the first quarter of 2015. (Id.)

The 8-K further stated, with respect to the untimely revenue recognition for 2014: “The

improper conduct of the Company’s former Chief Financial Officer [i.e., Schiller] and former

Corporate Controller, which resulted in the provision of incorrect information to the Committee

and the Company’s auditors, contributed to the misstatement of results described above.”

3 See Potter v. Valeant Pharms. Int’l Inc., No. 15-cv-7658 (Oct. 22, 2015); Chen v. Valeant Pharms. Int’l, Inc., No. 15-cv-7679 (Oct. 23, 2015); Yang v. Valeant Pharms. Int’l, Inc., No. 15-cv-7746 (Oct. 27, 2015); Fein v. Valeant Pharms. Int’l Inc., No. 15-cv-7809 (Oct. 30, 2015). 4 Occasional reference is made in this brief to certain of public disclosures, statements, or SEC filings that are cited, quoted, or relied upon in the Complaint. See Jones v. ABN Amro Mortgage Grp., Inc., 606 F.3d 119, 125 n.2 (3d Cir. 2010). For the sake of clarity and to avoid redundant filing of identical materials, this brief cites two exhibits accompanying Valeant’s motion to dismiss—specifically, Exhibits 3 and 37 contained in the September 13, 2016 Declaration of Robert J. Giuffra, Jr. Those two exhibits are cited herein as “Valeant MTD Ex.” The two exhibits attached to the Declaration of Melissa Steedle Bogad in Support of Defendant Howard B. Schiller’s Motion to Dismiss, which accompanies this brief, are cited as “Schiller Ex.”


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(Valeant MTD Ex. 37 (VRX 8-K (Mar. 21, 2016)) at 3.) The 8-K also reported that “one or

more material weaknesses exist in the Company’s internal control over financial reporting and

that, as a result, internal control over financial reporting and disclosure controls and procedures

were not effective” as of December 31, 2014, and March 31, 2015, and would not be effective as

of December 31, 2015. (Compl. ¶ 304-05; Valeant MTD Ex. 37 (VRX 8-K (Mar. 21, 2016)) at

3.) In addition, the Company “determined that the tone at the top of the organization and the

performance-based environment at the Company, where challenging targets were set and

achieving those targets was a key performance expectation, may have been contributing factors

resulting in the Company’s improper revenue recognition and the conduct described above.”

(Id.) On April 29, 2016, Valeant filed a 10-K that included restated financial results for 2014

and 2015, due to the premature revenue recognition described in the earlier 8-K. (Compl. ¶ 308.)

Claims Against Schiller in Plaintiffs’ Consolidated Complaint. On May 31, 2016, the

Court consolidated the complaints that had been filed in late October 2015, and appointed

Plaintiff TIAA as lead plaintiff. On June 24, 2016, TIAA, together with Plaintiff City of Tucson,

filed the operative Complaint (Dkt. No. 80), alleging hundreds of material misstatements and

omissions that supposedly caused Valeant’s stock drop and Plaintiffs’ associated losses. (Compl.

¶¶ 3-6.) According to Plaintiffs, Valeant’s stock price was inflated over a three-year period

(from January 4, 2013, through March 15, 2016), by alleged misrepresentations or omissions

regarding the Company’s: (i) reliance on allegedly unsustainable prescription drug price hikes

(e.g., Compl. ¶¶ 12, 139(c), 148(b), 148(e), 190(f), 202(e), 228(b), 230, 375); (ii) undisclosed

ties to the Philidor pharmacy accused of improper practices such as altering prescriptions to

ensure they were filled with Valeant’s excessively priced prescription drugs rather than available

generics (e.g., id. ¶¶ 139(a), 202(a), 228(a), 228(b)); and (iii) alleged control failures (id. ¶¶

139(g), 181(h), 228(n)), that resulted in the premature recognition of a small amount of Philidor

sale revenue that cause the Company to restate its financial results, (e.g., id. ¶¶ 181(j)-(k),


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202(o)-(p), 228(i)).

These allegations serve as the basis for: (i) Plaintiffs’ claims against Schiller and various

other Defendants5 for primary violations of Section 10(b) of the Exchange Act and Rule 10b-5,

(Compl. ¶¶ 538-43 (Count I)); (ii) claims against Pearson, Schiller, and Schiller’s successor as

CFO, Robert Rosiello for alleged violations of Section 10(b) and Rule 10b-5 under a “control

person” theory pursuant to Section 20(a) of the Exchange Act (id. ¶¶ 544-50 (Count II)); and (iii)

claims against Schiller and various Defendants for alleged violations of Section 12(a)(2) of the

Securities Act (Counts III-VI, and VIII), Section 11 of the Securities Act (Count VII), and

Section 15 of the Securities Act (Count IX), on direct and control person theories. (See id. ¶¶

581-85, 603-08, 625-34, 651-61, 674-85, 716.) In support of these sweeping claims, (id. ¶¶ 133-

230), Plaintiffs allege only two categories of alleged misstatements against Schiller: (i) three

discrete statements identified in three paragraphs of the Complaint (id. ¶¶ 16, 138, 183); and (ii)

statements by the Company or other Defendants that the Complaint attributes to Schiller by

virtue of his position with the Company or his approval of certain mandatory certifications.

ARGUMENT

To survive a motion to dismiss, a complaint must contain sufficient allegations of fact,

accepted as true, to state a claim to relief that is “plausible on its face.” Ashcroft v. Iqbal, 556

U.S. 662, 678 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). To satisfy

this standard, a complaint must contain factual allegations that are sufficient “to raise a right to

5 Other individual defendants include Pearson, former CFO Robert Rosiello, former Vice President and Company Group Chairman Deborah Jorn, former Corporate Controller Tanya Carro, current Executive Vice President and Company Group Chairman Dr. Ari S. Kellen, current directors Robert Ingram and Robert Power, and former directors Ronald Farmer, Theo Melas-Kyriazi, Norma Provencio, Katherine Stevenson, Colleen Goggins, Anders Lönner, and Jeffrey Ubben. Compl. ¶¶ 36-51.


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relief above the speculative level.” Twombly, 550 U.S. at 555. It is not enough to allege a mere

“possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678.

In addition, securities fraud claims are subject to the heightened requirements of Rule

9(b) and the PSLRA, which Congress designed to curb abusive securities litigation that might

otherwise “impose substantial costs on companies and individuals whose conduct conforms to

the law.” Tellabs, 551 U.S. at 313. To state a claim under Section 10(b) and Rule 10b–5,

Plaintiffs must allege, inter alia, (1) a materially false statement or omission, (2) that was made

with scienter; and (3) a causal link between the alleged fraud and Plaintiffs’ alleged loss. Dura

Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42, (2005). Because such claims sound in fraud, they

must be pled with factual “particularity” in satisfaction of Rule 9(b). FED. R. CIV. P. 9(b); In re

Rockefeller Ctr. Props. Sec. Litig., 311 F.3d 198, 216 (3d Cir. 2002). Also, the PSLRA imposes

distinct, heightened requirements for pleading both falsity and scienter in private securities fraud

actions. Avaya, 564 F.3d at 252.

To satisfy Rule 9(b) and the PSLRA, Plaintiffs must “specify each statement alleged to

have been misleading,” and plead particularized facts describing “the reason or reasons why” the

maker of the statement knew or should have known the statement was false or misleading at the

time it was made. 15 U.S.C. § 78u-4(b)(1); City of Edinburgh Council, 754 F.3d at 166. The

alleged misleading statement must also be material, meaning it “significantly altered the ‘total

mix’ of information made available” to the market. In re Aetna, Inc. Sec. Litig., 617 F.3d 272,

283 (3d Cir. 2010) (citations omitted). To meet these requirements, the Complaint must identify

specific alleged misrepresentations attributable to Schiller, and then plead particularized facts

demonstrating that the statements were both false and material when made, and that Schiller


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made them with knowledge or reckless disregard of their falsity. See In re Wilmington Tr. Sec.

Litig., 852 F. Supp. 2d 477, 490 (D. Del. 2012).6 Plaintiffs’ claims against Schiller do not satisfy

these standards and should therefore be dismissed.

I. PLAINTIFFS DO NOT ADEQUATELY PLEAD THAT SCHILLER MADE ANY MATERIALLY FALSE STATEMENTS OR OMISSIONS

Many of the alleged misstatements asserted in the Complaint are specifically attributed to

Defendants other than Schiller. The statements the Complaint alleges Schiller “made” for

securities law purposes fall into two categories: (i) a handful of direct quotes from an earnings

call and analyst conference (Compl. ¶¶ 16, 138, 183), and cherry-picked excerpts of his February

2016 congressional testimony (id. ¶¶ 422-26); and (ii) a host of statements by the Company and

other Defendants that the Complaint attempts to attribute to Schiller through group pleading or

references to his position with the Company, including his execution of various legal

certifications. (See, e.g., Compl. ¶¶ 133-38 (citing dozens of alleged misstatements concerning a

variety of different subjects).) Plaintiffs’ claims against Schiller warrant dismissal, first and

foremost, because the Complaint does not adequately plead facts that would establish any of

these statements as materially false and misleading under the federal securities laws.

A. Plaintiffs Do Not Allege That Schiller’s Congressional Testimony Was Materially False or Misleading

As noted, Plaintiffs do not even allege that the cherry-picked quotes they cite from

Schiller’s February 2016 testimony before the House Oversight Committee were materially false

or misleading under the securities laws. (Compl. ¶¶ 422-26.) Plaintiffs cite the testimony solely

6 See also In re Tellium Inc. Sec. Litig., 2005 WL 1677467, at *15 n.19 (D.N.J. June 30, 2005) (lamenting plaintiffs’ “puzzle pleading,” whereby the complaint “place[d] the burden on the reader to sort out the [alleged false] statements and match them with the corresponding adverse facts to solve the ‘puzzle’ of interpreting Plaintiffs’ claims”).


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to argue that Schiller “admitted” certain legal violations they fail adequately to plead. (See id.)

As the attached records of the improperly excerpted testimony makes clear, Schiller made no

such admissions. (Schiller Ex. A (Feb. 4, 2016 Hearing Transcript); Schiller Ex. B (Feb. 4, 2016

Written Testimony); infra at Part II(C).)

B. Plaintiffs Do Not Adequately Allege That Schiller’s Earnings Call and Conference Quotes Were Materially False or Misleading

The statements Schiller made during a June 11, 2013 Healthcare Conference regarding

Alternative Fulfillment (“AF”) strategies (Compl. ¶ 138) do not contain any representations the

Complaint adequately pleads were materially false or misleading when made. (Id. ¶¶ 138-39.)

In response to a question from an analyst about AF strategies, Schiller responded, as quoted in

part by the Complaint:

Alternative fulfillment, I think a couple things. One is, to me, the alternative fulfillments was an example of what the whole pharmaceutical industry – certainly what Mike and I believe is the trend, and that is the focus on the profitable scripts. There was a day when you could call on anybody, and almost any script was profitable. Those days are gone. So segmenting your customer base and really focusing on profitability has got to be the future. And that’s – alternative fulfillment was the beginning of that journey, but not the endpoint. So I probably think under Medicis, alternative fulfillment was held out a little bit too much as the holy grail. I really think it’s – it’s actually the starting points, and in some ways, it was quite a clumsy starting point. It wasn’t that different, but it’s a process where we have generation two and generation three. But it’s all trying to focus on profitable scripts, and stay away from those scripts that are unprofitable, and more judicious use of co-pay cards and the rest, and making sure when a customer, a patient is covered, you get reimbursed for it. . . . Yes, I think – I’m hoping – we’ve got generation two and generation three, which I’m hoping sort of turn it into a pure defense, into more of an offensive tool to allow us to grow profits. And that’s really the focus, is growing profits.

(Id. ¶ 138.)

Plaintiffs’ effort to paint these statements as actionable securities fraud fails for several

reasons. First, the statements were properly qualified (“I think,” “I believe,” “So I probably

think,” “I’m hoping”) as inactionable forward looking statements or opinions. See Omnicare,


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Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct. 1318, 1327 (2015).

Second, even if these statements could be viewed as factual, the Complaint does not identify any

“contrary facts” that would have rendered them false or misleading when made. Chubb Corp.,

2002 WL 33934282, at *23; In re Amarin Corp. PLC Sec. Litig., 2016 WL 1644623, at *15

(D.N.J. Apr. 26, 2016) (dismissing claims as to opinion statement and rejecting plaintiffs’

argument that positive statements on a subject necessarily implied a denial of risks or negative

information). Plaintiffs’ laundry list of alleged points that supposedly render the statements

“misleading” (Compl. ¶ 139) do not identify any facts “contrary” to Schiller’s descriptions and

opinions at the conference, but instead assert legal conclusions and details regarding Valeant’s

relationship with Philidor (i) that do not themselves contradict the points in Schiller’s statements;

(ii) that Plaintiffs do not tie to any duty to disclose; and (iii) that Plaintiffs do not, and as

discussed below cannot, plead were known to Schiller when he made the statements in 2013.

The statements Schiller allegedly made during a February 23, 2015 earnings call are

likewise unaccompanied by sufficient factual allegations that the statements were false or

misleading when made. In the statements in question, Schiller observed that: (i) “[r]evenues for

our dermatology business were very strong and increased 70% year-over-year”; (ii) “[t]he

outstanding work of our sales teams, implementation of innovative marketing approaches, great

leadership, a portfolio of great products, and our four new launch products have contributed to

the turnaround and the outstanding results in our dermatology business in Q4 and 2014; and (iii)

“[c]ore products such as Zyclara, Elidel, and the RAM franchise continued their strong growth;

Solodyn grew in Q4 and grew 5% for all of 2014, after a tough year in 2013; [and] Jublia

continues its rapid growth trajectory and reported more than 20,000 weekly scripts for the last

reported weekly sales report.” (Compl. ¶ 183.) The Complaint does not plead facts establishing

that any of these statements was false when made or even proved inaccurate in hindsight.


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Several of the statements amount to “vague and general statements of optimism” and thus

“constitute no more than puffery” and cannot form the basis of a federal securities claim. In re

Advanta Corp. Sec. Litig., 180 F.3d 525, 538 (3d Cir. 1999). With respect to the financial

metrics mentioned by Schiller, Plaintiffs do not plead any specific facts, with citations to specific

“reports or documents,” demonstrating any “contrary facts” regarding those stated aspects of

Valeant’s results or growth. E.g., Chubb Corp., 2002 WL 33934282, at *23. And Plaintiffs’

suggestion that the statements were misleading because they did not disclose additional details

about the pricing practices or third-party relationships underlying the described growth (Compl.

¶ 190(b)) run aground on cases holding that a company does not have an unqualified duty to

reveal all information allegedly in its possession, but rather only such information as “necessary

‘to make . . . statements made, in the light of the circumstances under which they were made, not

misleading.’” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011) (quoting 17 C.F.R.

§ 240.10b–5(b)); In re Burlington Coat Factory Sec. Litig., 114 F.3d 1414, 1432 (3d Cir. 1997)

(“[P]ossession of material nonpublic information alone does not create a duty to disclose it.”);

Winer Family Tr., 503 F.3d at 330 (liability may exist for misleading or untrue statements, but

not for statements that are simply allegedly incomplete) (citation omitted). Plaintiffs do not

allege particularized facts describing why any of the foregoing statements were misleading under

these settled precedents.

C. Plaintiffs Do Not Adequately Allege That Schiller Made Any Other Statements That Were Materially False or Misleading

Impermissible Group Pleading and Lack of Particularity on Falsity and Materiality.

Plaintiffs’ claim that Schiller made other alleged misrepresentations through Company filings

fails for several independent reasons. First, the PSLRA and circuit law do not permit “group

pleading” of fraud, e.g., Winer Family Tr., 503 F.3d at 337, and only the “maker” of an alleged

misrepresentation—i.e., the person or entity who exercised “ultimate control” over the content of


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the statement—can be held liable. Janus, 564 U.S. at 144. For these reasons alone, Plaintiffs

cannot base their claims against Schiller on statements the Complaint generically attributes to

“the Defendants” as an undifferentiated group, or to Pearson or other Defendants it does not

allege Schiller controlled within the meaning of the Exchange Act. See id.; In re Merck, 2011

WL 3444199, at *25-26. Second, Plaintiffs cannot base their claims on statements that the

Complaint does not specifically tie to “contrary facts” known to Schiller at the time he made the

challenged statements. Chubb Corp., 2002 WL 33934282, at *23; Compl. ¶ 139 (alleging seven

reasons Schiller’s statements at a conference were “false,” but failing to tie any of the supposed

“contrary facts” to factual representations in the challenged statements).

Statements Regarding Valeant’s Financial Controls and Restatements. Plaintiffs cite

as misleading several Company filings Schiller signed through March 15, 2015, that reported

revenue and related figures based on Valeant’s premature recognition of approximately $58

million in Philidor sales revenue. (Compl. ¶¶ 177, 184, 187.)7 As described more fully in

Valeant’s brief, however, the restated amounts at issue were fractional (e.g., the 2014

overstatement amounted only to 0.7% of Valeant’s reported revenues for the year) and strictly

temporal, and thus immaterial under the controlling legal standards here. See In re Burlington,

114 F.3d at 1427; IBEW Local Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of

Scotland Grp., PLC, 783 F.3d 383, 390 (2d Cir. 2015).

Plaintiffs also claim that the Company’s March 21, 2016 8-K statement that the Company

7 Plaintiffs also contend that the Company misstated its “revenues, earnings per share . . ., and profitability as well as its future business prospects” for the earlier periods in the putative class period, prior to the second half of 2014. (Compl. ¶¶ 139(f), 148(d), 165(f), 181(d).) But Plaintiffs have not cited any particular figures or projections reported in the May, August, or November 2013 10-Qs, February 2014 10-K, or May or August 2014 10-Qs that were untrue at the time or that even turned out to be inaccurate in hindsight.


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had an “improper tone at the top” and lacked effective internal controls in 2014 and 2015

(Compl. ¶¶ 181(h), 190(i)) is proof that Schiller committed fraud when he signed 2014 and 2015

Company statements and certifications that Company management had “evaluated the

effectiveness of our disclosure controls and procedures” and “concluded that our disclosure

controls and procedures were effective as of” the certified dates. (Compl. ¶¶ 179, 184(f), 187(c);

see also id. ¶¶ 179, 184(h), 187(c) (citing Schiller’s Sarbanes-Oxley (“SOX”) certifications that,

“[b]ased on my knowledge, the report does not contain an untrue statement of material fact or

o[mission]”)).

However, Valeant’s post-hoc reflections on its internal controls do not establish that

Schiller falsely represented his impression of those controls “based on [his] knowledge” at the

time the statements were made. See In re PetroChina Co. Ltd. Sec. Litig., 120 F. Supp. 3d 340,

358-60 (S.D.N.Y. 2015) (dismissing claim alleging false certification of effective internal

controls because complaint “d[id] not claim that PetroChina failed to evaluate its internal

controls” as indicated in the certification), aff’d (2d Cir. Mar. 21, 2016); Se. Pa. Transp. Auth. v.

Orrstown Fin. Servs., Inc., 2015 WL 3833849, at *46 (M.D. Pa. June 22, 2015) (subsequent

recognition of ineffective internal controls did not establish that control certifications were false

when made).8

Statements Regarding Valeant’s Drug Pricing Policies and Relationship with Philidor.

Plaintiffs take issue with the statement in Valeant’s various 10-Qs and 10-Ks that “pricing and

8 Plaintiffs also claim the Company’s 10-Qs from May, August, and November 2013, 10-K filed in February 2014, and 10-Qs filed in May and August 2014 falsely asserted the same internal controls and SOX certifications. (Compl. ¶¶ 135-36, 143, 145, 151(c), 157(b), 170.) But Plaintiffs cite no evidence that those statements were misleading at the time they were made or even proved inaccurate after the fact. Janbay v. Canadian Solar, Inc., 2012 WL 1080306, at *9 (S.D.N.Y. Mar. 30, 2012); In re Gentiva Sec. Litig., 932 F. Supp. 2d 352, 370 (E.D.N.Y. 2013).


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sales volume of certain of our products . . . are distributed by third parties, over which we have

no or limited control.” (E.g., Compl. ¶¶ 137, 143.) Plaintiffs suggest this statement was

misleading because it allegedly “conceal[ed] that Valeant controlled and had significant

influence over Philidor.” (See id.) Plaintiffs take this statement out of context and omit

preceding language. The statement reads, in its entirety, as follows: “Important factors that

could cause actual results to differ materially from these [i.e., the Company’s projected]

expectations include, among other things, the following: . . . declines in the pricing and sales

volume of certain of our products that are distributed by third parties, over which we have no or

limited control.” (See, e.g., Valeant MTD Ex. 3 (VRX 10-K FY 2013) at iv.) Thus, the

statement Plaintiffs allege as false is actually a forward-looking risk disclosure that

acknowledges Valeant’s limited control over third-party distributors of “certain” products, and

thus is not false or misleading on its face or in light of subsequent revelations regarding the

Company’s relationship with Philidor. Moreover, the statement is forward-looking and immune

from liability under the PSLRA’s “safe harbor” because Plaintiffs do not—and cannot—

demonstrate that it was made with the requisite scienter. 15 U.S.C. § 78u–5(c)(1)(B); OFI Asset

Mgmt. v. Cooper Tire & Rubber, 2016 WL 4434404, at *5 (3d Cir. Aug. 22, 2016).

Plaintiffs similarly assert falsity as to other statements made in SEC filings Schiller

signed that have nothing to do with Philidor or the Company’s drug price increases, such as a

statement that “[t]o successfully compete for business with managed care and pharmacy benefits

management organizations, we must often demonstrate that our products offer not only medical

benefits but also cost advantages as compared with other forms of care.” (Compl. ¶¶ 151(a),

184(c)). Likewise, Plaintiffs claim it was false for Valeant filings to state that: “The growth of

our business is further augmented through our lower risk research and development model. This

model allows us to advance certain development programs to drive future commercial growth,

while minimizing our research and development expense.” (E.g., id. ¶¶ 152, 157(a), 170, 177.)


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Plaintiffs apparently claim these statements were misleading, despite being true on their face—

indeed, for example, Plaintiffs concede that Valeant made use of a lower-risk R&D model,

(Compl. ¶¶ 8, 56)—because the Company did not provide additional detail it had no obligation to

disclose.

A company’s duty to not make misleading statements “does not mean that by revealing

one fact about a product, one must reveal all others that, too, would be interesting, market-wise,

but means only such others, if any, that are needed so that what was revealed would not be so

‘incomplete as to mislead.’” Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990) (en

banc). “Disclosure is required . . . only when necessary ‘to make . . . statements made, in the

light of the circumstances under which they were made, not misleading.’” Matrixx Initiatives,

563 U.S. at 44 (quoting 17 C.F.R. § 240.10b–5(b)); In re Burlington, 114 F.3d at 1432

(“[P]ossession of material nonpublic information alone does not create a duty to disclose it.”);

Winer Family Tr., 503 F.3d at 330 (liability may exist for misleading or untrue statements, but

not for statements that are simply allegedly incomplete). Plaintiffs do not allege particularized

facts describing why any of the foregoing statements were misleading in context, and in the

absence of an unmitigated duty to disclose all allegedly negative information.

Plaintiffs similarly assert—again with insufficient factual corroboration—that Schiller

knowingly endorsed false or misleading company financial statements because the statements

did not specifically identify Philidor as a “Variable Interest Entity” before October 2015 (Compl.

¶¶ 323-31) or detail the impact of Philidor’s prescription practices on Valeant’s drug-related

sales revenues. (Id. ¶¶ 346-75.) As described more fully in Valeant’s brief, the Company had no

duty to identify Philidor any earlier than October 2015 because, inter alia, sales to Philidor were

immaterial prior to (and even as of) that point in time; Valeant specifically advised investors that

the Company would not identify by name third-party contractors or distributors whose activities

accounted for less than 10% of Company revenues, which was always true of Philidor; and


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Valeant regularly disclosed information concerning the contribution of price increases to its

revenue growth and otherwise had no duty to provide further pricing details (Compl. ¶ 346);

Winer Family Tr., 503 F.3d at 329-30, which were discoverable by diligent investors in any

event. For the foregoing reasons alone, dismissal is warranted.

II. PLAINTIFFS DO NOT ADEQUATELY PLEAD SCHILLER’S SCIENTER

Plaintiffs’ claims against Schiller also and independently merit dismissal because to state

a claim for securities fraud, “[e]ach individual’s participation and scienter must be pled

separately and with particularity.” In re Par Pharm. Sec. Litig., 2008 WL 2559362, at *10

(D.N.J. June 24, 2008). The Complaint fails to do so. Specifically, it fails to “state with

particularity” the facts “evidencing scienter”; here, Schiller’s “intention to deceive, manipulate,

or defraud,” Tellabs, 551 U.S. at 313 (quotation omitted), or involvement in “conscious

misbehavior or recklessness.” Avaya, 564 F.3d at 267. Recklessness here refers to an “extreme

departure from the standard of ordinary care . . . which presents a danger of misleading buyers or

sellers that is either known to the defendant or is so obvious that the actor must have been aware

of it.” In re Suprema, 438 F.3d at 276 (quotation and citations omitted). It is not sufficient “to

allege facts from which an inference of scienter could be drawn.” Tellabs, 551 U.S. at 329

(emphasis in original). Rather, under the PSLRA, the allegations must give rise to an inference

of scienter that is “strong,” 15 U.S.C. § 78u–4(b)(2)(A), and at least as “cogent and compelling”

as any non-culpable inference. Tellabs, 551 U.S. at 324. Plaintiffs do not plead allegations as to

Schiller that satisfy these standards. Plaintiffs instead plead precisely the kind of allegations this

Court and others have routinely rejected as insufficient to plead an actionable securities fraud

claim.

A. Many of Plaintiffs’ Allegations as to Schiller’s Scienter Are Conclusory, Nonspecific, or Made Through Impermissible Group Pleading

At paragraphs 386 to 472 of the Complaint, Plaintiffs purport to set forth various


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allegations as to the Defendants’ scienter, certain of which allegedly apply to Schiller. These

allegations fail sufficiently to plead Schiller’s scienter, as an initial matter, because many of the

allegations impermissibly group all of the individual Defendants together. (See, e.g., Compl. ¶

386) (“The Individual Defendants were personally aware of, designed, and implemented the

deceptive practices detailed herein.”).9 Such group pleading is inconsistent with the particularity

requirements of the PSLRA, Winer Family Tr., 503 F.3d at 337, and cannot be used to establish a

strong inference of scienter with respect to any particular individual defendant. Witriol v.

Conexant Sys., Inc., 2006 WL 3511155, at *3 (D.N.J. Dec. 4, 2006) (dismissing § 10(b) claim

where complaint “d[id] not speak to what a particular Defendant knew, or when”).

The same allegations are deficient for the related reason that they are conclusory and

devoid of particularized factual content and, thus, legally insufficient. See Klein v. Autek Corp.,

147 F. App’x 270, 277 (3d Cir. 2005) (allegations insufficient to raise an inference of scienter

where complaint “ma[de] no more than blanket assertions” that defendants “‘knew’ that the

representations were untrue, without any corroborating factual support explaining how and why

the [d]efendants knew the statements to be false”).

Relatedly, a number of Plaintiffs’ allegations broadly claim that Schiller and the other

Defendants possessed information contradicting Valeant’s public statements by virtue of their

positions with the Company or active or involved leadership style. (See, e.g., Compl. ¶¶ 386,

395, 398-400.) But “[g]eneralized imputations of knowledge do not suffice” to give rise to an

inference of scienter, “regardless of the defendants’ positions within the company.” Advanta,

9 Other purported scienter allegations that are made impermissibly through group pleading are at Complaint paragraphs 397-99, 401, 404, 408, and 470-71.


-22-

180 F.3d at 539; see also Goldstein v. MCI WorldCom, 340 F.3d 238, 251 (5th Cir. 2003)

(allegations that defendant was a “hands-on” CEO not sufficient to establish he must have been

aware of particular accounting situation).

Rather, to satisfy the PSLRA by pleading Schiller’s supposed possession of contradictory

information, Plaintiffs must identify and describe that alleged information with particularity.

Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000); see also P. Schoenfeld Asset Mgmt. LLC v.

Cendant Corp., 142 F. Supp. 2d 589, 617-18 (D.N.J. 2001) (contrasting general allegations of

position within company and access to internal information with allegations describing specific

documents evidencing fraud). That Plaintiffs are unable to marshal such allegations and fail to

cite a single alleged contradictory fact is especially noteworthy here, where Plaintiffs have had

the unusual benefit of access to a trove of Valeant documents that were collected and made

public by Congress. Such an omission “count[s] against inferring scienter under the PSLRA’s

particularity requirements.” Avaya, 564 F.3d at 263 (quoting Tellabs, 551 U.S. at 326); see also

Sapir v. Averback, 2016 WL 554581, at *10 (D.N.J. Feb. 10, 2016) (dismissing § 10(b) claim

where plaintiff failed to “cite a single document or witness that corroborate[d] allegations of

scienter”).

B. Plaintiffs’ Allegations Regarding Schiller’s “Motives” to Engage in Fraud Also Do Not Adequately Plead Scienter

Third Circuit courts have traditionally viewed scienter allegations as taking two forms:

(1) those relating to motive and opportunity to commit fraud; and (2) those pleading

circumstantial evidence of “recklessness or conscious misbehavior.” Advanta, 180 F.3d at 534-

35; In re Burlington, 114 F.3d at 1418. Motive and opportunity alone, however, are not

sufficient to establish scienter with respect to any particular alleged misrepresentation, but rather

must be paired with additional circumstantial allegations of scienter. Avaya, 564 F.3d at 277.

Legitimate allegations of motive are those that show “that the individual corporate defendant[]


-23-

stood to gain in a concrete and personal way” from the alleged fraud. Wilson v. Bernstock, 195

F. Supp. 2d 619, 633 (D.N.J. 2002). It is not legitimate for a plaintiff to allege motive merely by

citing motivations “generally possessed by most corporate directors and officers.” Avaya, 564

F.3d at 278. Yet, that is precisely what Plaintiffs attempt to do.

Plaintiffs allege that “Schiller . . . had millions of dollars of his executive compensation

tied to meeting challenging share price increases” (Compl. ¶ 467), and that “the Individual

Defendants were motivated to conceal the negative facts described herein in order to artificially

inflate Valeant’s stock price to more cheaply acquire other companies and further its acquisition

strategy.” (Id. ¶ 470.) But these are precisely the type of incentives that apply almost

universally to corporate management, irrespective of any particular alleged fraud, and are thus

not legitimate allegations of motive against individual defendants. See Avaya, 564 F.3d at 279;

GSC, 368 F.3d at 237-38; Acito v. IMCERA Grp., Inc., 47 F.3d 47, 54 (2d Cir. 1995).

Plaintiffs’ reference to Schiller’s stock awards from Valeant (see Compl. ¶ 37) actually

undermines, rather than supports, an inference of scienter, as Plaintiffs have not alleged that

Schiller sold any stock before the negative news came to light. See Advanta, 180 F.3d at 540

(stating that allegations of motive to inflate stock are doubtful if defendant did not sell); Nat’l

Junior Baseball League v. Pharmanet Dev. Grp. Inc., 720 F. Supp. 2d 517, 550 (D.N.J. 2010)

(“[T]he Court finds that because the Individual Defendants did not sell their stock during the

Class Period, there is no strong inference of scienter.”); Higginbotham v. Baxter Int’l, Inc., 495

F.3d 753, 759 (7th Cir. 2007) (lack of stock sales by those “who would have been in the know . .

. implies that nothing was thought to be out of the ordinary”).

C. Plaintiffs Do Not Plead Facts Demonstrating Schiller’s Knowledge or Reckless Disregard of Allegedly False Statements on Pricing Practices

The Complaint likewise does not contain a single particularized allegation describing

Schiller’s awareness of facts contradicting any statements he made regarding Valeant’s pricing


-24-

practices. Plaintiffs merely allege that Schiller was knowledgeable as to Valeant’s drug pricing

practices generally. (See Compl. ¶ 392) (alleging Schiller participated in a meeting during which

Valeant management discussed pricing for Nitropress and Isuprel). That is not enough to state a

fraud claim. Knowing what Valeant charged for certain drugs does not establish Schiller’s

awareness that the Company’s pricing risked the public backlash and other negative

consequences that allegedly caused the decline in stock price underlying Plaintiffs’ claims. See

Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1068 (9th Cir. 2008) (general

awareness of the day-to-day workings of the company’s business does not establish scienter,

absent some additional allegation of “specific information conveyed to management and related

to the fraud”). Rather, these allegations are simply additional impermissible attempts toward

“[g]eneralized imputations of knowledge” based on Schiller’s position as a senior-level

executive who was naturally exposed to the Company’s business activities. Advanta, 180 F.3d at

539.

Unable to allege any facts corroborating their accusation that Schiller had

contemporaneous knowledge of allegedly concealed risks associated with pricing, Plaintiffs

resort to distorting Schiller’s Congressional testimony. Plaintiffs remarkably claim that Schiller

“admitted” during “live testimony” on February 2016, before the House Oversight Committee

that “the previously concealed risks of the Company’s price-gouging practices included:

‘increased pressure for rebates from the payers, decreased sales volumes from hospitals,

increased substitution of alternative products, and heightened competition from new generic or

branded drugs.’” (Compl. ¶ 423.) As noted, the attached transcript of Schiller’s testimony

reveals that Schiller did not give the quoted “admission” or anything like it. (See Schiller Ex. A

(Feb. 4, 2016 Hearing Transcript).) Schiller’s prepared remarks submitted in advance of the

hearing referenced “increased pressure for rebates from the payers, decreased sales volumes


-25-

from hospitals, increased substitution of alternative products, and heightened competition from

new generic or branded drugs,” but within the context of listing “market-based responses,” a

company would see if it “were to price a drug above its true value to healthcare providers and

patients.” (See Schiller Ex. B (Feb. 4, 2016 Written Testimony) at 7.) Accordingly, far from

conceding that the Company had concealed known risks associated with price increases, Schiller

explained why those increases should not be viewed as improper. Indeed, in the very next

sentence, Schiller reiterated that Valeant did not foresee the fallout from the price increases on

Nitropress and Isuprel, and noted that their “sales volumes have fallen by a greater degree—

about 30% for each drug—than was anticipated at the time of the price increase.” (Id.)

Plaintiffs additionally fabricate the allegation that “Schiller admitted that ‘patient

assistance’ Valeant provided to lower co-pays for patients with private insurance was not

permitted by federal anti-kickback laws.” (Compl. ¶ 422.) Schiller “admitted” no such thing.

His testimony simply observed that the law prohibits “co-pay assistance to individuals on

government programs.” (Schiller Ex. B (Feb. 4, 2016 Written Testimony) at 8-9.)

Plaintiffs contend “Schiller also effectively acknowledged . . . that Valeant’s business

strategy was neither sustainable nor more profitable,” simply by stating that “we made a lot of

mistakes” and would not pursue such “aggressive” price increases in the future. (Compl. ¶ 424;

see Schiller Ex. A (Feb. 4, 2016 Hearing Transcript) at 90.) The quoted statements do not

“admit” that Valeant’s business strategy was unsustainable in contravention of any public

statements. Schiller simply acknowledged that the Company had determined to change course in

light of negative experiences in the months preceding the hearing. (See Schiller Ex. A (Feb. 4,

2016 Hearing Transcript) at 90) (“We made a lot of mistakes. In the past, we have looked for

situations where the older drugs, where there wasn’t generic competition, where we can increase

revenue by increasing price. You should not expect that those are opportunities that we would


-26-

be looking for in the future. We’ve taken aggressive steps in terms of our partnership with

Walgreens where we’re reducing our prices by 10 percent on average in two of our largest

franchises, dermatology and ophthalmology prescription drugs.”). The “failure to predict”

criticism or failure of a particular business strategy is not actionable fraud under Section 10(b),

In re Synchronoss Sec. Litig., 705 F. Supp. 2d 367, 407 (D.N.J. 2010), and Plaintiffs cannot

plead scienter by hindsight. Chubb Corp., 394 F.3d at 156 (rejecting fraud claim because

defendants’ public statements “d[id] not, in fact, contradict the purportedly false and misleading

statements made throughout the Class Period”).

D. Plaintiffs Do Not Plead Facts Showing Schiller’s Knowledge or Reckless Disregard of Factual Misrepresentations Regarding Philidor

Plaintiffs also fail adequately to allege Schiller’s scienter with respect to alleged

misstatements concerning Valeant’s relationship with Philidor. Plaintiffs contend that Schiller

was familiar with Valeant’s relationship with Philidor (Compl. ¶ 401), executed agreements with

Philidor (id. ¶ 403), and engaged in “due diligence” of Philidor relating to an option agreement.

(Id. ¶ 405.) But none of these allegations supports an inference, much less a conclusion, that

Schiller was aware of facts “related to the [alleged] fraud,” Corinthian Colls., 540 F.3d at

1068—i.e., facts that Philidor was indeed engaged in the misconduct alleged by a short-seller

and some media. Cf. Higginbotham, 495 F.3d at 758 (“business executives are not charged with

‘knowing’ the truth of whatever” anyone may publicly assert). Plaintiffs cannot simply “hint”

that Schiller must have known something was wrong by vaguely connecting him to Philidor.

Synchronoss, 705 F. Supp. 2d at 423 (citations omitted); City of Roseville Emps. Ret. Sys. v.

Horizon Lines, Inc., 713 F. Supp. 2d 378, 401 (D. Del. 2010) (plaintiffs’ allegations merely

suggesting “possible ways in which . . . defendants could have discovered” the improper conduct

did not establish actual awareness or recklessness) aff’d, 442 F. App’x 672 (3d Cir. 2011).

Further, and with respect to the Company’s decision not to identify Philidor by name


-27-

prior to October 2015 or disclose Philidor as a VIE, Plaintiffs fail to allege any facts showing

Schiller’s fraudulent intent with respect to that accounting judgment. For example, they allege

no facts suggesting that he knew Philidor was contributing materially to Valeant’s financial

results (which it clearly was not), or that Valeant had a duty to identify Philidor in Valeant’s SEC

filings. See ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553

F.3d 187, 200 (2d Cir. 2009) (alleged accounting violation is insufficient to establish scienter

absent sufficient allegations establishing fraudulent intent). Indeed, Plaintiffs acknowledge that

Valeant’s outside auditor, PwC, certified Valeant’s SEC filings during the putative class period

(Compl. ¶ 563), and Valeant’s board of directors approved of the Company’s accounting

treatment of Philidor. (Id. ¶ 405.) These concessions alone “seriously undermine the suggestion

that” Schiller “knowingly aided and abetted a scheme to misstate [the company’s] financials.”

S.E.C. v. Lucent Techs., Inc., 610 F. Supp. 2d 342, 367 (D.N.J. 2009).

Finally, Valeant’s decision to conduct an internal review of the Company’s relationship

with Philidor in response to the negative allegations that were being made about Philidor’s

reimbursement practices (Compl. ¶ 252) “demonstrate[ed] a pursuit of truth rather than reckless

indifference to the truth” that thus further undercuts any inference of scienter. Higginbotham,

495 F.3d at 758.

E. Plaintiffs Do Not Plead Particular Facts Showing Schiller’s Knowledge or Reckless Disregard of False Statements Regarding Internal Controls

Concerning the Company’s premature recognition of revenue on a small amount of sales

to Philidor in the second half of 2014 and the Company’s controls over financial reports for 2014

and 2015, Plaintiffs assert that Schiller (and Pearson and Rosiello) executed SOX certifications

that accompanied the Company’s SEC filings stating that, inter alia: “Based on my knowledge,

the report does not contain any untrue statement of material fact or omit to state a material fact

necessary to make the statements made, in light of the circumstances under which such


-28-

statements were made, not misleading with respect to the period covered by this report.” (E.g.,

Compl. ¶¶ 136, 143, 400.) But a SOX certification is probative of scienter only if accompanied

by “facts indicating that, at the time of certification, defendants knew or consciously avoided any

meaningful exposure to the information that was rendering their SOX certification erroneous.”

In re Intelligroup Sec. Litig., 527 F. Supp. 2d 262, 289-90 (D.N.J. 2007); Horizon Asset Mgmt.

Inc. v. H & R Block, Inc., 580 F.3d 755, 765–66 (8th Cir. 2009) (allowing courts to infer scienter

from mandatory SOX certifications would allow Plaintiffs to plead scienter in every case

involving an accounting mistake by public company, “thereby eviscerating the pleading

requirements for scienter”) (quotation omitted). Plaintiffs assert no such facts.

That the Company recognized its accounting errors is likewise irrelevant absent

particularized allegations of Schiller’s fraudulent intent to misstate revenue in 2014, which are

lacking from the Complaint. In re Bristol-Myers Squibb Sec. Litig., 312 F. Supp. 2d 549, 565

(S.D.N.Y. 2004). Plaintiffs “must show that [Schiller’s] judgment—at the moment exercised—

was sufficiently egregious such that a reasonable [person] reviewing the facts and figures should

have concluded that [these facts or figures] were misstated and that . . . the public was likely to

be misled.” In re IKON Office Solutions, Inc., 277 F.3d 658, 673 (3d Cir. 2002).

Plaintiffs cite the Company’s assertion in March 2016 that Schiller and the Company’s

former corporate controller Tanya Carro engaged in unspecified “improper conduct” relating to

the mistimed revenue recognition (Compl. ¶ 411), but the term “improper” is merely an

adjective, not a particularized description of fact, that can mean as little as “incorrect.” See

“Improper,” Black’s Law Dictionary (10th ed. 2014); “Improper,” Oxford English Dictionary,

available at http://www.oed.com/view/Entry/92817; U.S. v. Gray, 780 F.3d 458, 468 n.12 (1st

Cir. 2015). The Company did not and has never accused Schiller of engaging in fraudulent or

intentional misconduct. “[A]llegations that merely suggest corporate mismanagement are


-29-

insufficient to establish even recklessness.” Hertz, 2015 WL 4469143, at *17. Because

Plaintiffs make no cognizable allegations as to why Schiller would deliberately overstate a trivial

amount of revenue, see Leder v. Shinfeld, 2008 WL 2165097, at *6 (E.D. Pa. May 22, 2008)

(“fraud without motive makes little economic sense”), the stand-alone reference to Schiller’s

alleged “improper conduct” does not support an inference of his scienter that is at least as

“cogent and compelling,” Tellabs, 551 U.S. at 324, as the non-culpable inference that Schiller

and Carro simply failed to perceive a particular accounting issue in 2014.10

III. COUNTS III-VIII: PLAINTIFFS HAVE NOT SUFFICIENTLY ALLEGED THAT SCHILLER VIOLATED SECTIONS 11 OR 12(A)(2) OF THE SECURITIES ACT

As stated more fully in the Bank Offering Defendants’ brief, Valeant’s debt offerings are

not actionable under Section 12(a)(2) of the Securities Act, as alleged against Schiller, because

they were non-public private placements made under Rule 144A. See In re Refco Inc. Sec. Litig.,

503 F. Supp. 2d 611, 625 (S.D.N.Y. 2007); Luminent Mortg. Capital, Inc. v. Merrill Lynch &

Co., 652 F. Supp. 2d 576, 598 (E.D. Pa. 2009). In addition, Plaintiff City of Tucson is the only

named Plaintiff to assert claims arising from Valeant’s stock offering, but the Complaint does

not plausibly plead that City of Tucson purchased shares directly in or traceable to that offering,

and thus, City of Tucson does not have standing to assert claims under Sections 11 or 12(a)(2) of

the Securities Act.

In addition, because Plaintiffs’ Securities Act claims are predicated on the same alleged

10 See also In re Burlington, 114 F.3d at 1418 (“Large volumes of disclosure make for a high likelihood of at least a few negligent errors. To allow plaintiffs and their attorneys to subject companies to wasteful litigation based on the detection of a few negligently made errors found subsequent to a drop in stock price would be contrary to the goals of Rule 9(b), which include the deterrence of frivolous litigation based on accusations that could hurt the reputations of those being attacked.”).


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misrepresentations as their Exchange Act claims, and because Plaintiffs fail to plead sufficient

facts showing a material misrepresentation in support of their Exchange Act claims, Plaintiffs’

Securities Act claims are also insufficiently pled. Se. Pa. Transp. Auth., 2015 WL 3833849, at

*32.

IV. COUNTS II AND IX: PLAINTIFFS HAVE NOT SUFFICIENTLY ALLEGED CONTROL PERSON CLAIMS AGAINST SCHILLER

Plaintiffs’ control person claims against Schiller under Section 20(a) of the Exchange Act

and Section 15 of the Securities Act necessarily fail because they derive from Plaintiffs’

underlying claims under Section 10(b) of the Exchange Act and Sections 11 and 12(a)(2) of the

Securities Act, respectively, which are inadequately pled. Thus, Plaintiffs’ control person

liability claims must also be dismissed. See Avaya, 564 F.3d at 252; Advanta, 180 F.3d at 541;

In re Cybershop.com Sec. Litig., 189 F. Supp. 2d 214, 233 (D.N.J. 2002).

Furthermore, control person liability requires “culpable participa[tion] in the act or acts

constituting the violation or cause of action,” meaning Plaintiffs must demonstrate that Schiller

had “knowledge” of the underlying fraud or material misrepresentation Belmont, 708 F.3d at

485; In re Tellium Inc., 2005 WL 1677467, at *23. For the reasons stated supra, Plaintiffs have

not pled that Schiller knew of any material misrepresentations. Consequently, they have not

adequately alleged the “culpable participation” necessary to hold him liable as a control person.

CONCLUSION

For all of the foregoing reasons, Plaintiffs’ claims against Schiller should be dismissed in

their entirety.


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WINSTON & STRAWN LLP Counsel for Defendant Howard B. Schiller By: s/ Melissa Steedle Bogad James S. Richter [email protected] Melissa Steedle Bogad [email protected]

Dated: September 13, 2016 OF COUNSEL: Robert Y. Sperling Joseph L. Motto WINSTON & STRAWN LLP 35 West Wacker Drive Chicago, Illinois 60601 (312) 558-5600 Elizabeth P. Papez WINSTON & STRAWN LLP 1700 K Street, N.W. Washington, D.C. 20006-3817 (202) 282-5000





: : : : : : : : : : : : : : : : : :

Honorable Michael A. Shipp, U.S.D.J. Master File No.: 15-7658 (MAS) (LHG) DECLARATION OF MELISSA STEEDLE BOGAD IN SUPPORT OF DEFENDANT HOWARD B. SCHILLER’S MOTION TO DISMISS THE CONSOLIDATED COMPLAINT Electronically Filed Oral Argument Requested Return date: To be set by the Court

––––––––––––––––––––––––––––––––––––––– x

MELISSA STEEDLE BOGAD, of full age, hereby declares as follows:

1. I am an attorney at law of the State of New Jersey and an associate with

Winston & Strawn LLP, attorneys for Defendant Howard B. Schiller (“Schiller”) in the above-

captioned action. As such, I have personal knowledge of the facts set forth herein.

2. This Declaration is submitted in support of Schiller’s Motion to Dismiss the

Consolidated Complaint.


2

3. Attached hereto as Exhibit A is a true and correct copy of a transcript of a

February 4, 2016 hearing before the House Committee on Oversight and Government Reform.

4. Attached hereto as Exhibit B is a true and correct copy of Schiller’s prepared

remarks submitted in advance of the February 4, 2016 hearing held before the House Committee

on Oversight and Government Reform.

I hereby declare under penalty of perjury that the foregoing statements made by me are

true and correct.

_______s/ Melissa Steedle Bogad_____________ Melissa Steedle Bogad [email protected] Dated: September 13, 2016


EXHIBIT A


CQ.com - House Oversight and Government Reform Committee Holds Hearing on Prescription Drug Market Oversight

http://www.cq.com/doc/congressionaltranscripts-4830468?3&print=true[2/8/2016 4:59:46 PM]

CQ CONGRESSIONAL TRANSCRIPTSCongressional HearingsFeb. 4, 2016 - Final

House Oversight and Government Reform Committee Holds Hearingon Prescription Drug Market Oversight

LIST OF PANEL MEMBERS AND WITNESSESChaffetz: We Could All Take A Sit. We're -- Welcome Everybody. The committee on oversight and government reform willcome to order. That objection, the chair is authorized to declare a recess at any time.

Chairman is responsible under the rules of the House, the rules of the committee. Maintain order and preserve decorum onthe committee room and I will do that.

We have an important hearing today. We've got an important week. We've had a number of hearings that have been veryimportant.

Today, we're talking about the cost of health care in our country and it's -- because it's growing at unsustainable rate.

Congressional Budget Office reported the federal government will spend $1 trillion, trillion, on Medicare, Medicaid, and otherhealth care programs. CBO also reported that in 10 years time, that cost will double, roughly $2 trillion. The cost forprescription drugs are a substantial portion of the federal health care expenditures.

2014, the federal government paid out just over $77 billion in Medicare Part D prescription drug benefits and clearly it's verydifficult to sustain this.

One way that affects the cost of prescription drugs is the increase access to generic drugs and drugs that have been on themarket for sometime.

Now, our committee is very fortunate to have one pharmacist. I think there's one pharmacist in the United States Congress.We have to sit in our panel, so I'd like to yield a minute to Mr. Buddy Carter from Georgia

CARTER:Thank you, Mr. Chairman.

I'm disgusted that we're here today to talk about drug price increases. As a pharmacist for over 30 years, I've owed andoperated numerous pharmacies in the Southeast Georgia, that the only pharmacist in Congress I know free market principlesare the best way to provide quality affordable health care to the American people.




But what was done here is different. Reverse business practices were employed to exploit a patient group trying to donothing more to extend their lives. None of the witnesses here today have had to look into the eyes of someone who's tryingto make a decision between buying groceries and buying medication. No one here today has seemed to look on a mother'sface when she realizes that she can't afford to buy her child's medication. I have.

But as a health care professional, I've worked with these people in order to make sure that they can get their medicationsand to make sure that my business and my employees stay afloat. So some here today may had behind their shareholdersor the corporate boards and say that this is just free market principles but I, for one, don't agree with that.

I'll tell you that you can meet your shareholder's needs, that you can meet your board's needs and still take care of theAmerican public. But then again, I'm not sure that those who are hiding behind their shareholders and their boards reallycare about that.

Mr. Chairman, I yield back.

CHAFFETZ:Thank you, gentleman.

The FDA, the Federal Drug Administration, is responsible for approving applications to manufacture generic drugs. But thisdrowning in backlog of applications and has attempt to deal with the backlog Congress passed unanimously out of the Houseby voice vote and with only one dissenting vote in the Senate as I recall. The Generic Drug User Fee Act in 2012.

The act premise shorter wait times for required applicant to pay $1.5 billion and user fees over a five year period. Despitethese fees and their premises, the FDA still has the backlog of more than 3,700 generic drug applications.

The basic premise here, I think is one of basic economics. If you have somebody who rapidly increases or dramaticallyincreases the price of a prescription drug, that's going to invite more competition but if that competition can't get the approvalfrom the FDA, then there is that -- there is no competition and the price will be inelastic and it will continue to rise.

So most of my questions today are actually for the FDA and what they're doing to accelerate that process. I believe that theFDA has failed to meet its statutory responsibility that's dramatically behind in its processing.

A good example of how valuable a shortened FDA review process has become is the program that offers priority reviewvouchers. Because the FDA review process can be so time consuming, drug companies have been paying outrageous sumsfor these vouchers.

Last year, one of these vouchers sold for $350 million, that these vouches only speed up the process by roughly four months.That means, at least one applicant was willing to pay $2 million a day just for an additional 120 days.

Given these facts is pretty obvious, our current review process for generic drug applications is too slow. Along with the FDA,we have representatives from two drug manufacturers here today, Turing Pharmaceuticals, purchase the prescription drugDaraprim and raise the price per bill from $13.50 to more than $750.

Valeant Pharmaceutical's CEO is also here to explain how his company bought heart drugs, Nitropress and Isuprel and raisetheir prices 525 and 212 percent, respectively. All three of these drugs lack any generic competition even though the patent(ph) has expired and their available for generic versions.




I look forward that the hearing from all witnesses today. I also want to thank Ranking Member Cummings who's been verypassionate on this issue and very insistent that we have this hearing and I think I'm glad that we did this together.

And now I yield the time and recognize Mr. Cummings for five minutes.

CUMMINGS:Thank you very much, Mr. Chairman. And from the depths of my heart, I thank you again and again for holding this hearing.

The issue has been my number one, number one investigative priority for several years. And I'm so grateful that we'reholding this hearing today and the drug companies, the FDA and other stakeholders have been called here.

Thank you for also sending joint document request to these companies, Turing and Valeant. They both refused my previousrequest and obstructed our abilities to investigate their actions. The fact is, we would not have the documents we have todaywithout your action. And I thank you again for that.

We have now obtained more than 3,000 pages of internal documents from these companies after they still on hold. Theyinclude e-mails, analysis on the revenues and profits, communications with hospital and other providers and public relationsstrategy documents.

And earlier this week, I circulated two memos, some arising these documents. I now ask unanimous consent that they bemade part of the official herring record.

CHAFFETZ:No objections. So order.

CUMMINGS:These new documents provide an insiders view into how drug company executives are lining their pockets at the expense ofsome of the most vulnerable families in our nation. Their basic strategy has been to buy drugs that are already on the marketand then raise the prices astronomically what temporary period of time before other competitors enter the market.

These companies did not invest funds to research or developed these drugs. They bought them, jacked up the prices, took asmuch money as they could out of the pockets of patients, hospital and others and put those funds into their own coffers. I'vecall this money blood money.

How much money are we talking about? Valeant reported gross revenues of more than $547 million on Nitropress andIsuprel, just two drugs. That's more than a billion dollars in one year, coming out of the pockets of hard working Americans.

The company reported profits of 351 million on just these two drugs in 2015 alone.

These stunning returns by Valeant CEO, J. Michael Pierson, one of Forbes listed billionaires.

According to the press reports, these massive profits allowed Mr. Shkreli, was here today on behalf of Valeant, to elect asalary of $400,000 per month, per month out of the pockets of our constituents.

For Turing, the company reported $98 million in revenues for Daraprim in 2015 with manufacturing course of only $1 million.Yet, Turing actually tried to claim that it took $44 million loss last year, the company reported that they spend $22 million on




research and development.

This money apparently went to donations, to unnamed entities, "Contributions to foundations", and they quote, "Otherresearch and development cost". But the documents we have attained indicate that these expenditures would just as muchabout PR as R&D.

Like upon this of this scheme, it appears that Turing maybe using revenues from Daraprim to research and identify the nextdrug it will acquire and then impose similarly massive price increases on future victims.

It's not funny, Mr. Shkreli. People are dying and they're getting sicker and sicker.

Based on the documents obtained by the committee, we know exactly what these companies will say as part of their publicrelation strategy. They will try to distract from their massive price increases by talking about their R&D. They will downplaytheir massive profits by claiming that they help patients who can afford their exorbitant prices.

The testimony from the drug companies today will be the same, but the difference now is that we've been behind their smokescreen. These tactics are not limited to a few bad apples. They are prominent throughout the entire industry. Valeant (ph),Pfizer, Horizon, Teva, Abott's, Algorithm, Endo, all of these companies have taken significant price increases on their drugs.

The reason that I care so much about these issue is because it directly, directly affects my constituents and the constituentsof every member of this committee, every member of this Congress.

The people in my district are not on the Forbes billionaire list. They don't buy Wu-Tang Clan albums for $2 million. They can'tliquidate assets to free up millions of dollars. They work hard. They get the early bus and many take home decent salaries.But like many Americans, they struggle every single month to support their families and to pay for the increasing cost ofhousing, education, and health care. They live from paycheck to paycheck. And sometimes from no check to no check.

Hardworking American families should not be forced to pay increases of 10 percent, 100 percent or 1,000 percent just tosubsidize the leverage lifestyles of hedge fund managers and corporate executives.

As I conclude, I hope we can also talk about solutions today. For example, Secretary of State Hillary Clinton had send lettersto the FDA and the FDC proposing stronger regulatory action to correct down on companies that engaged in price gauging. Ithink there's an interesting approach that could be significant bipartisan support.

On the legislative side, I've introduce to Prescription Drug Affordability Act with Senator Bernie Sanders. One provision in thisbill would allow HHS to negotiate drug prices for Medicare. This is something is that even Donald Trump supports.

There's significant bipartisan agreement on the need to address this crisis. According to the nonpartisan Kyzer familyfoundation rising for 15 prices (ph) are the top health care concern for all Americans, including Democrats, Republicans andIndependents.

I hope today's hearing is the beginning of a sustained effort to address this issue in a bipartisan way. It should be address in abipartisan way that brings much needed relief to American families.

And again, Mr. Chairman, I truly and sincerely thank you for this hearing and just -- Mr. Chairman, may I ask your unanimousconsent to take care of some business before we continue.




CHAFFETZ:Yes.

CUMMINGS:Mr. Chairman, since I started this investigation, several years ago, I've literally been inundated with letters from families,hospitals and patient groups begging begging, not asking, begging for relief from these astronomical price increases.

I have 12 letters here that I would like to include in the official record of today's hearing, and they have been signed by morethan 100 different organizations. Obviously, I won't go through all of them, but some of them include the AmericanAssociation of Poison Control Center, the American Federation of Teachers, the California Poison Control System,Consumer's Union, Fair Pricing Coalition, HIV, Medicine Association and Infectious Diseases Society, Infectious DiseasesSociety of American, Human Rights Campaign, national Alliance of State and Territorial AIDS Directors, National MultipleSclerosis Society.

Finally, Mr. Chairman, there is one more letter I'd like to submit. And it is one of the first letters I received on this issue wayback in 2011 and started this journey. This is a heartfelt letter I received from Brenda Frese, the coach of the women'sbasketball team at the University of Maryland. Coach Frese's son was diagnosed with leukemia and treated with a drug calledCytarabine.

Now, the interesting thing is that coach -- this is what the coach wrote. "My son, Tyler, would not be alive today if we did nothave access to the drugs that rid his body of cancer. Every family who have access to these drugs and it's the same thatthey are either not available, only available to the highest dealer in the world."

I kept that letter with me for the past five years and this has motivated me everyday on his journey. And so, I ask unanimousconsent that all of these letters be included in the record.

CHAFFETZ:Without objection, so order.

CUMMINGS:And with that, I yield back.

CHAFFETZ:Thank the gentlemen. I will hold the record open for five legislative days for any members who'd like to submit a writtenstatement. We'll now recognize our witnesses.

We're now pleased to welcome our panel, Mr. Mark Merritt, is the President, Chief Executive Officer of the PharmaceuticalCare Management Association. Dr. Janet Woodcock is the Director of the Center for Drug Evaluation and Research at theUnited States Food and Drug Administration. Ms. Woodcock is accompanied by Mr. Keith Flanagan, Director of the Office ofGeneric Drug Policy at the United States Food and Drug Administration, whose expertise might be needed duringquestioning.

By prior arrangement, we are going to release an excuse, Dr. Woodcock at roughly 10:30 a.m., as she is testifying in anothercommittee. And in order to accommodate this, we're squeezing in and we appreciate your participation of both hearings, but




you will be excuse at 10:30 as we had previously agreed upon. She will be replaced by Mr. Keith Flanagan and we will swearhim in at the same time.

Mr. Howard Schiller is the interim Chief Executive Officer of Valeant Pharmaceuticals International, appreciate you beinghere. Ms. Nancy Retzlaff, the Chief Commercial Officer of Turing Pharmaceuticals. And we have Mr. Martin Shkreli, formerChief Executive Officer of Turing Pharmaceuticals. We appreciate you being here pursuant to committee rules, all witnessesare to be sworn before they testify. We will also be swearing in Mr. Flanagan.

If you would please all rise and raise your right hand.

Do you solemnly swear firm that the testimony you're about to give will give the truth, the whole truth and nothing but thetruth. Thank you. Please be sited.

Let the record reflect the witnesses, all answered in the affirmative. In order to allow time for discussion, we would appreciateyou're limiting your oral statements to five minutes. Mr. Merritt, you are now recognized for five minutes.

MERRITT:Thank you, Mr. Chairman, ranking member Cummings and other members of the committee.

I'm Mark Merritt, President and CEO at the Pharmaceutical Care Management Association, the group representing America'sPharmacy Benefit Managers or PBMs. PBMs administer drug benefits for more than 260 million Americans with healthcoverage to employers, unions, Medicare, FRD, FAHBP, state government plans and other sources.

Over the next decade, PBMs have rejected the same 654 billion or up to 30 percent on drug cost while still offeringconsumer's brand choice and access. PBMs reduce drug cost in several ways. They negotiate price concessions from drugmanufactures, negotiate discounts from drug stores. They offer more affordable pharmacy options including home delivery.They encourage the use of generics and more affordable brand medications. They manage high cost specially medicationsand they improve accountability up and down the pharmacy supply chain.

PBMs are perhaps most known for their role in administering Medicare Part D plans. Since it's launched, Part D has come inand under CBO projections year after year, literally, countless choices to patients and then perhaps the most popular healthprogram in America. As the GAO reports, one way Medicare Part D plans reduce cost is through their ability to negotiateprices with drug manufacturers and pharmacies. PBMs do that by competing drugs and drug stores against one another andusing differential copays and other tools to encourage patients to choose the more affordable options.

Competition is the key as you can see from a recent high profile example of high priced drugs that treat hepatitis C.According to news reports, the price of these drugs has been cut nearly in half over the past year, this new brand ofcompetitors have entered the marketplace. PBMs will demand even greater discounts as other competitors out of the space.

The pricing tactics we're here to discuss today are just one piece of a much large puzzle and that's important to know. Theyhighlight how you can't separate drug company pricing strategies from marketing strategies that promote those drugs.

Many drug companies used marketing strategies to reduce awareness and resistance to higher prices, the higher prices thatultimately increase the cost of care. One of the most prevalent of these tactics is the use of bait-and-switch copay assistanceprograms to encourage patients to more generics and start on the most expensive brand instead.

Unlike programs for the poor and uninsured, copay assistance programs specifically target patients with drug benefits and




encourage them to bypass those expensive drugs for higher cost branded drugs. Copay coupons are different than normalcoupons for groceries and other products where consumers pay 100 percent of the cost, can get 100 percent of the benefit.Because copay coupons pay only the cost of the copay, say, $25 or $50 in order to make the third party payers that offercoverage, the employer's unions and others to pay hundreds of thousands more for the most expensive brands on theformulary.

Such practices are considered illegal kickbacks in federal programs and have long been under scrutiny by the HHS Office ofthe Inspector General.

However, copay marketing programs are wide spread in the commercial marketplace and they play a key role on increasingcost there. Now, they've outlined the problem, what can policy makers do about it? Well, there are few solutions.

First, we do need to accelerate FDA approvals of meet two brands against competitors that face no competition.

Second, we need to accelerate FDA approvals of generics that compete with off patent brands that face no competition, andof course, I differ to Dr. Woodcock on how to do this. She is certainly the expert on this and I know it's not an easy task.

Third, Congress should create a government watch list, of all the off patent brands that don't face competition so potentialinquirers are aware that policy makers are monitoring these situations.

Finally, copay coupons should be considered legal kickbacks in any federal program or program that receives federalsubsidies. Thank you very much. I will forward any questions you might have.

CHAFFETZ:Thank you. Dr. Woodcock, you're now recognized for five minutes.

WOODCOCK:Thank you. Good morning, Mr. Chairman, ranking member and members of the committee. I'm Janet Woodcock, I'm thehead of the Drug Center at the FDA. We regulate generic drugs as well as brand drugs.

The Hatch-Waxman legislation that established generic drug program has been extraordinarily successful. Today, about 88percent of prescriptions that are given out for dispense in the United States are generic drugs, saving the public it's estimatedalmost $1.7 trillion recently.

In the last decade, the generic drug industry grew very rapidly and globalized its operations. FDA's generic drug reviewprogram did not grow significantly and fell behind both in our review and our inspectional capacity, and a large backlogaccrued.

To resolve this, in 2012, Congress enacted the Generic Drug User Fee Act reflecting to negotiate agreement between genericdrug industry and the FDA. This was a five year program during which industry would pay $300 million per year in fees andFDA would attempt to meet a progressively more difficulty series of performance measures over that time.

In the three years since that was enacted, FDA's network exceeded all to do for performance goals. This has been aformidable task. In these three years, we've been managing over 6,000 generic applications, 2,500 that were piled up at thestart of the program and almost 3,000 that have been submitted in the three years since the program started.




But the good news is, over 90 percent of these applications had received review at the FDA or review communications, andover 1,700 have been approved or tentatively approved. Tentative approval means they're waiting for their patent exclusivityto expire.

Over a thousand have been sent back to industry because they had deficiencies. This means there are only about 600applications out of the 6,200 that are awaiting review and many of these have been submitted recently.

The generic drug backlog was a big problem. It was caused by rapid growth in industry submissions not matched bycorresponding investment in the FDA generic review program. This was ultimately fixed by the User Fee Act that was passedby Congress, that takes some time for us to dig out of this hole and it will take a bit more time before we are fully caught up.

Nevertheless, applications that have been submitted in the last two years, 2014 and fiscal year '15 have a 15-month reviewclock that we expect to make. And by this October, we will have a 10-month review clock. So an application submitted thisOctober or beyond, we would expect to completely finish the review and get back to sponsor in 10 months.

It is the older applications that we need to clean up and we are working very hard and very successfully of doing that.

The purpose of Hatch-Waxman was to introduce high quality FDA approved competition into the market to improve access forpatients. 65 percent of drugs have generic competition right now and another 24 percent are still protected by patents orexclusivity so they are not yet eligible for generic competition.

10 percent have no protection either patent or exclusivity but lack generic competition and lack applications submitted to theFDA. 2 percent have -- and has applications with the FDA awaiting approval. Those were all expedited. We expedite all firstgeneric and those who are all moving through the process and getting review and so forth.

Under the GDUFA system that between -- the potential to get on the market very fast because these first generics areprioritized and all applications will have a 10-month review clock.

Now, I am as you said, scheduled to testify the second hearing this morning beginning at 10:30 and I may need to departbefore all committee questions have been answered. So Mr. Keith Flanagan, who is Director of the Office of Generic Policy,will be able to answer any technical questions about the generic program after I leave.

So, I thank you very much for your attention. I look forward to answering your questions.

CHAFFETZ:Thank you. Mr. Schiller, you are now recognized for five minutes.

SCHILLER:Chairman Chaffetz, Congressman Cummings, members of the committee, thank you for the opportunity to testify. I've beenwith Valeant since 2011 first as CFO then on the board and now as interim CEO.

Over this time, Valeant has grown substantially. Today, we're a large innovative pharmaceutical company that employees22,000 people around the world including 6,000 in the United States. We have about 1,800 products including 200prescription drugs in the US. We're leading dermatology, gastroenterology, ophthalmology and consumer healthcarecompany.




Our flexure brands like Bausch & Lomb, Jublia and CeraVe are known to many Americans. We have a large U.S. presenceincluding 16 manufacturing sites and we're making significant investments in United States.

In Rochester, New York alone, we've invested more than a quarter of a billion dollars to upgrade the plant and added nearly200 jobs, and we expect to invest $500 million more over the coming years and had 630 jobs. We have shared very clearlyCongresses and the public's concerns about drug prices in the industry generally and Valeant's increases in prices includingfor two of our drugs, Nitropress and Isuprel, and we're responding to those concerns.

We've created a volume-based rebate program providing up the 30 percent discount for Nitropress and Isuprel, and we justlaunched a 20 year partnership with Walgreens that will provide a 10 percent average price reduction for brandeddermatology and ophthalmology products and a price reduction for up to 95 percent insured branded drugs where there isgeneric.

These steps are in addition to the existing patient assistance programs which help insure that out of pocket expenses don'tprevent eligible patients from receiving medicines they need. We expect to spend more than a billion dollars in 2016 onpatient assistance.

I'd like to specifically address the pricing of Nitropress and Isuprel which are cardiac drugs use in a hospital procedure inhospital procedures, which there's a fixed rate of reimbursement by payers.

These are not drugs purchased by patients in a pharmacy. When we acquire them, we commissioned in outside pricingconsultants to review the market. They conclude that Nitropress and Isuprel were clinically very valuable from the hospitaland patients and that the fixed reimbursements rates allowed for significant price increases without eliminating the hospital'sprofits.

Based on these findings, we implemented significant price increases. Since then we have experienced about a 30 percentreduction in volume, then hospitals moved to alternative drugs. The volume discounts we've implemented would help addressthe needs in those hospitals that are large users of these drugs.

Now, let me say a word about commitment to research and development. Valeant's R&D results make us a leader in theindustry. Our productivity drugs approved for R&D dollar spent is seven times higher than the average of the 15 companieswith the most new drug approvals.

In just the last two years, Valeant has launched 76 new prescription drugs, generic drugs, medical devices and other productsin the United States. And there is more to come from our robust U.S. pipeline which has more to 200 active productsprograms.

We expect approvals this year of the significant noble treatment for glaucoma in a biologic for the treatment of moderates,severe plaque psoriasis. We believed that R&D should focus on outputs and should not be judged by spending alone.Nonetheless, our R&D spending is significant, expected to exceed $400 million in 2016.

We have 43 R&D facilities with a thousand R&D employees worldwide. In addition to internal development, we have followedthe successful model of the technology industry by inquiring valuable R&D assets.

Mr. Chairman, where we've made mistakes, we're listening and we're changing. Our (inaudible) partnership is a key stepforward but we have more to do.

Through internal development in acquisitions, we developed the portfolio of world class franchises. Like other pharmaceutical




companies, we will sometimes adjust our prices and our price increase is in the future will be well within industry norms andmuch more modest in the ones who drew your legitimate concerns.

Mr. Chairman, thank you for the opportunity for today and I look forward to answering your questions.

CHAFFETZ:Thank you. Ms Retzlaff, you're now recognized for five minutes.

RETZLAFF:Thank you, Chairman Chaffetz, ranking number Cummings and distinguished members of the committee. I appreciate theopportunity to provide Turing's perspective on the issues before this committee today.

Turing is a small research focused pharmaceutical company founded just one year ago. We invest in developing andcommercializing important drug treatment for patients who suffer from serious and often neglected diseases.

Daraprim is our principle current product. It's a prescription drug used to treat a serious parasitic infection calledtoxoplasmosis which most often affects patients with compromised immune systems.

Daraprim was on the market for more than 60 years before Turing acquired it last August in the proceeding five decades therewas no significant pharmaceutical innovation in the treatment of toxoplasmosis and Daraprim remains the only FDA approvedtreatment for this disease.

Perhaps that's not surprising since only about 3,000 patients are prescribed Daraprim each year. Daraprim presented ininvestment opportunity for Turing because it was priced far below its market value, in comparison to other similar drugtreatments for rare and serious diseases.

After considering the pricing of comparable drugs, the value Daraprim provide in the treatment of a potentially life-threateningdisease, the small patient population for Daraprim and the mandatory discounts and rebates that applied to many whoreceived the drug. Turing made the decision to raise the wholesale list price or WLP for Daraprim to $750 per pill.

As Turing's chief commercial officer, I was comfortable with that decision, first, because of our company's commitment toinsure access to Daraprim for every single patient who needs the drug, regardless of ability to pay. And second, because ofour commitment to invest a large portion of net revenues generated from Daraprim in R&D for new and improved drugtreatment.

Let me address patient access. Most fundamentally in terms of cost, it's important to realized that the wholesale list price of adrug is not the same as the price paid by patients, hospital, health plan or government programs. To our knowledge, nopatient needs to pay $750 per pill for Daraprim.

In fact, about two-thirds of patients get the drug through government programs that receive a discounted price of one pennyper pill. Beyond the discounts available through a government programs, Turing has taken several additional steps to ensureaffordable access to Daraprim.

We fund a patient assistant program that offers Daraprim free of charged to qualified uninsured patients with income at orbelow 500 percent of the federal poverty level, well above industry standard for patient assistance eligibility. We providecopay's support to help ensure patients meet their copay obligations, and we fund a bridge program.




So again, those with commercial insurance, a supply of Daraprim at no charged if there are delays in coverage.

In response to concerns about cost and after consulting with key stakeholders, Turing announced in November that we woulddiscount the price of Daraprim to hospitals by up to 50 percent that's especially important because hospitals are the first totreat 80 percent of patients with the most common form of toxoplasmosis.

We've also begun offering Daraprim to hospitals in a smaller 30 pill bottle which can help to ensure availability and lower thecost burden for hospitals.

There have been challenges with the patient access particularly in the first week after Turing acquired the drug. To the best ofour knowledge, most of those challenges involved deficiencies in distribution that were unrelated to our pricing of Daraprim.Since then, we have worked hard to improved and expand the distribution system including through the engagement of a newspecialty distributor providing streamline access to more than 90 percent of hospitals.

Of course, Turing expect to generate profits from Daraprim, but our net income is not simply passed on to shareholders.Turing is committed to bring an innovation to the treatment and neglected diseases. We invest nearly 60 percent of netrevenue in to R&D, a percentage far higher than most other companies. 36 of our 139 employees are dedicated to R&D andour pipeline of research includes candidates for innovation.

We're proud of our investment and innovation just as we are as proud of our commitment to patient access. I believe thedecisions made by the company have been appropriate and strike the right balanced between patient access innovation andshareholder value. Thank you.

CHAFFETZ:Mr. Shkreli, you did not provide the committee any written testimony, do you wish to make an opening statement?

SHKRELI:On the advice of council I will not be giving an opening statement.

CHAFFETZ:Do -- I want to ask you a few questions? What do you say to that single pregnant woman who might have AIDS, no income,and she needs Daraprim in order to survived, what do you say to her when she has to make that choice? What would yousay to her?

SHKRELI:On the advice of council, I invoke my Fifth Ammendment, privilege against self-incrimination and respectfully declining toanswer your question.

CHAFFETZ:You are quoted in saying on FOX 5 in New York, you are quoted to saying, "If you raise prices and you don't take that cashand put it back in the research, I think it's despicable. I think you should not be in the drug business. We take all of our cash,all of our extra profit and spend it on research for these patients, for other patients who have terrible life-threatening, life-




ending diseases". Did you say that?

SHKRELI:On the advice of council, I invoke my Fifth Amendment privilege against self-incrimination and respectfully decline to answeryour question.

CHAFFETZ:Do you think you've done anything wrong?

SHKRELI:On the advice of council, I invoke my Fifth Amendment privileged against self-incrimination and respectfully decline to answeryour question.

CHAFFETZ:I like to yield to the time to Congressman Gowdy in South Carolina.

GOWDY:And thank you Mr. Chairman. Is it pronounced Shkreli?

SHKRELI:Yes, sir.

GOWDY:See there, you can answer some questions, no, I didn't incriminate you. I just want to make sure you understand, you arewelcome to answer questions and not all of your answers are going to subject you to incrimination, do you understand thatdon't you?

SHKRELI:I intend to the follow the advice of my council, not yours.

GOWDY:I just want to make sure you get in the right advice, that you do know that not every disclosure can be subject to the FifthAmendment assertion. Only those that you recently believed could be used in the criminal prosecution or could lead to otherevidence.

SHKRELI:I intend to use the advice of my council not yours.




GOWDY:Do you also understand that you can wave (ph) your Fifth Amendment right. You gave an interviews to a television station inNew York where, if I understood, you correctly -- you couldn't wait to come and educate the members of Congress on drugpricing. And this would be a great opportunity to do it, so do you understand you can wave (ph) your Fifth Amendment right?

SHKRELI:On the advice of council, I invoked my Fifth Amendment privilege against self-incrimination and respectfully decline to answeryour question.

GOWDY:Well, Mr. Chairman, I'm vexed. He's not willing to answer at least one question this morning, and that one didn't subject himto incrimination. I don't think he's under indictment for the subject matter of this hearing.

So the Fifth Amendment actually didn't apply to answers that are not recently calculated to expose you to incrimination. Andeven it didn't apply, he's welcome to wave it. And I listen to his interview and it didn't have to be prodded to talk to in thatinterview. It didn't have to be prodded to tweet a whole loud or the show us life on that little webcam he's got, so this is agreat opportunity.

If you want to educate the members of Congress about drug pricing or what do you call the fictitious case against you or wecan even talk about the purchase of a -- is it Wu-Tang Clan? Is that the name of the album? Name of the group?

SHKRELI:On the advice of council, I invoke my Fifth Amendment privilege in self-incrimination and respectfully decline to answer yourquestion.

GOWDY:Mr. Chairman, I am stunned that a conversation about an album he purchased could possibly subject him to incrimination.

CHAFFETZ:Well, the gentleman is correct. I understand that Mr. Shkreli is under indictment but it is not the intention to ask him questionsabout that topic.

GOWDY:So if I understand it correctly, he -- we're not going to ask him questions that are going to be in the subject matter of hiscurrent pending criminal charges. And if we were to get close to wonder in the gray area, he's welcome to assert his FifthAmendment privilege there. And if we stay away from the subject matter of his indictment, he is -- some could argue as alegal obligation to answer under CASCAR versus United States. But certainly has the right to do so as he did in the televisioninterview and as he does quite frequently on social media.

CHAFFETZ:




Correct.

(Crosstalk)

(UNKNOWN)Mr. Chairman, may I be recognize for a moment?

CHAFFETZ:No. No, you will not. No, you're not allowed to -- under the house rules, you have not been sworn in.

(UNKNOWN)I understand but he's making out this large...

CHAFFETZ:No. Mr., you are not recognized and you will be sited.

The gentleman from South Carolina is correct, we were trying to provide an opportunity to have a candid discussion aboutissues related to drug pricing.

We now recognize Mr. Cummings for any questions you might have.

CUMMINGS:Thank you very much, Mr. Chairman.

Let me say for the record that I completely support your decision to bring Mr. Shkreli to make sure that he asserted his FifthAmendment right before this committee. Normally, Democrats on our committee have accepted the assertions of witnesses'attorney that his or her client is going to take this in.

But in this case, Ms. Shkreli made a number of public comments himself raising legitimate questions about his intentions.Honestly, I did not know whether he was even going to show up today, so it's nice to see you.

But now that he has invoked his constitutional rights, of course, we'll respect his decision. To Mr. Shkreli, since I have you infront of me after trying to get you in front of this committee for so long, let me say this. I want to ask you to -- no, I want pleadwith you. To use any remaining influence you have over your former company to press them to lower the price of thesedrugs.

You can look away if you like but I wish you could see the faces of people no matter what Ms. Retzlaff says, who cannot getthe drugs that they need. And by the way, it's a taxpayer, somebody is paying for these drugs. Somebody is paying this as ataxpayers that end up in for some of them.

And so, in those are all constituents, people lives a stake because of the price increases you impose in the access, theaccess problems that have been created. You are in a unique position. You really are, sir. Rightly or wrongly, you've beenviewed as a so- called bad boy of pharma. You have a spotlight and you have a platform.




You could use that attention to come clean, to write your wrongs and to become one of the most effective facing advocates inthe country. And one that could make a big difference in so many people lives. I know your smiling but I'm very serious, sir.

The way I see it you can go down in history as opposed to boy for greedy drug company executives or you can change thesystem. Yeah. You detailed knowledge about drug companies and the system we have today. And I truly believe, I trulybelieve -- are you listening?

SHKRELI:Yes.

CUMMINGS:Thank you. I truly believe you could become a force of tremendous good. Of course, you can ignore this if you like, but all Iask is that you reflect on it.

No. I don't ask, Mr. Shkreli, I beg that you reflect on it. There are so many people that abuse, you help. May God bless you,thank you. I yield back.

CHAFFETZ:Gentleman yields back.

Mr. Shkreli, it is your intention to decline all answers to the questions and invoke your Fifth Amendment right.

SHKRELI:Yes.

CHAFFETZ:Given that the witness is indicated that he is not intend to answer any question and out of respect for this constitutionalrights, I ask now that the committee excuse the witness from the table. Without objection, so order.

We'll pause from a moment as Mr. Shkreli is escorted out.

We will continue. Now recognize the gentleman from Florida, Mr. Mica for five minutes.

MICA:Thank you, Mr. Chairman. And, now, Mr. Chairman, Mr. Cummings, we've been around this committee for along time. I don'tthink I've ever seen the committee treated with such contempt. In fact, Mr. Chairman, I would like to know if base on hisresponse today and his actions if he could be held in contempt.

CHAFFETZ:It's not my intention to hold them in contempt. We had heard a multiple statement from Mr. Schiller prior to this hearingeverything from "I can't wait to school Congress to" "I will evoke my Fifth Amendment rights". It's important for us to have




person like that come and explain that and answer those question in person.

I wish he would have answered those questions. We had no intention of asking things about for what she was underindictment. But, I'll entertain any suggestions that their might be but at this point no.

MICA:Oh, at some appropriate time, may move to hold the gentleman in contempt.

That's very sad, you know, and Mr. Cummings said he maybe the poster child for greed and unfair pricing. It's a very seriousmatter. And while he is the focus of attention and he is the villain, we have a lot of blame to go around the pricing for drug isfrom all of these companies as skyrocketed. Some of the information I have is prices of more than double for 60 drugs in thepast year. And, then a survey about 3,000 brand names for prescription drugs found the prices of more than double for 60and at -- least quadrupled for 20 since 2014. Is that correct Dr. Woodcock?

WOODCOCK:Excuse me. Congress is not really vested any authority for FDA of...

MICA:On pricing, right. We know that.

WOODCOCK:We do not follow that.

MICA:And you said about 88 percent of the drugs that are consumed out there are generic today?

WOODCOCK:That are just spent, say, by pharmacist or generics, that was correct.

MICA:And the situation with their pricing is that increase to decrease, what did you testify to?

WOODCOCK:The HHS recently release lace a report that showed for Medicare about two-thirds of the drugs over the last several years,the generic drugs decrease. The prices had decrease, but there is a few where prices have increase. So there is this -- agroup that has increase and this may have to with the amount of competition in the -- for those drugs.

MICA:One of the problems is the approval process and you spoke of getting drugs out there and you have competition the price




can come down. Now, you've made some progress as you say that today. Ms. Retzlaff, is the company you work for own byMr. Shkreli?

WOODCOCK:He is a shareholder, yes, a shareholder.

MICA:Does he own what share, do, you know?

WOODCOCK:I'm not sure what share he owns in the company but I can check that out.

MICA:Well, you describe a little bit difference scenario on what's been publicize different cost. It's pretty sad that your shareholderwould take attitude at least you did explain to the committee some of the pricing. But again, there are other companies anddrugs of Alkor 10A with 1,860 percent increase, is that correct? Anyone know?

But -- and that's not your drug, is it? So it's another manufacture who just as guilty, maybe not as arrogant but just as guiltyto millions of American depend on medication. I brought mine, and I'm pretty fortune that I've got coverage. But a lot ofpeoples live depend on it and mine is not that situation.

But what we seen in here is unprecedented arrogance, and what we see is a situation where people who need these drugsare denied these drugs because of pricing and lack of competition. And I think we're going to see more of this becausepeople take advantage of the system. I yield back.

CHAFFETZ:Thank you, gentleman. Now recognize the gentlewoman from New York, Ms. Maloney, for five minutes.

MALONEY:When you read the e-mails between Valeant and Turing. After you finished, you would not described your business as abusiness but as an exploitation machine. Your basic business model was to buy a company, by our people to save moneyand then jack up prices to reach revenue goals. You set a revenue goal and then you jack up the price.

Now, Ms. Retzlaff, when you talk about discounts is really just ingenious when you raise the prices 5,000 percent. So my firstquestion to Mr. Schiller, when you -- were jacking this prices and sending your e-mail -- your mails back and forth, did youever think about the impact on patience, on hospitals, on public health payers?

And, did you ever think about it? And how can you justify raising prices by thousands of percent on lifesaving orphan drugsfor which there are no competing manufactures? No generic. No manufactures. People are going to die if they can't get thedrug. Did you ever think of about how hiking the price on Daraprim which is important in treating life-threatening infectionsand AIDS? Did you ever think about people that would not be able to afford it? Did you ever think about it? Or the impact onthe hospitals and the payers? Or you memo you just showed, the internal memo as you just said, "This is the price we need




to make. This is the goal of the profits we need to make".

SCHILLER:I can't comment Daraprim, it's not our drug. But I will...

MALONEY:Will then, let me ask you another question since you know mentioned that it's from someone else. How is Valeant conductany different than the conduct of Shkreli's Company? Is the conduct of your company and your business model any different?

SCHILLER:Well, I'm not that familiar with their company other than reading newspaper articles. But as far as Valeant's concern, Valeantis a global company we operate in a hundred countries. We have over 1,800 products.

MALONEY:We're not looking at the company. We're looking at your strategy which from you own memos that I would like to place intothe record show the business model was to set a goal. A revenue goal, the profit you would make, and that was all you did.

Now, yesterday, in response to questions that were put forward by this committee and memos about Valeant's priceincreases. Your company said, "Mr. Peterson made an inaccurate statement during Valeant's first quarter, of 2015 earningconference call. Where they were clearly study the goal and that's raise to price to that goal". In light of this, why should thiscommittee have confidence in the accuracy of your testimony today?

SCHILLER:Will the statement you're referring to, I think related to an e-mail that I send to Mr. Peterson which was 100 percent correct.Our SEC filings were 100 percent correct. I can't tell you what Mr. Peterson's intent was, what question I thought he wasanswering. But as the company yesterday, we shows to clarify and make sure it was clear and we put out that press release.

MALONEY:Will he talk about, you know, increasing prices on Spasril in July of 2015 to meet the goals of revenue. Will did you increasethe price of Spasril on July 2015?

SCHILLER:I believe yes.

MALONEY:You did increase the price. So on May 21, 2015, you wrote an e-mail to him stating and I, "Peterson, last night one theinvestors asked about price versus volume for Q1 excluding Marathon. Price represented about 60 percent of our growth. Ifyou include Marathon price represents about 80 percent".

So, Mr. Schiller, price increases represented 80 percent of your company's growth for the first quarter of 2015. Is that




correct?

SCHILLER:That is correct.

MALONEY:And most of growth is attributed to one strategy and that is increasing the price of your drugs. And all of your memos, theonly strategy I saw was, "Lets increase the price of the drugs, we'll increase revenue". That was you strategy, correct?

SCHILLER:No. There was -- in the past, there were examples where we bought older drugs.

MALONEY:OK. I would like you to replace that in the record any strategy that was different from just increasing prices?

CHAFFETZ:I thank the gentlewoman for the time. Your time is now expired.

MALONEY:I just would like to say, Mr. Chairman, increasing revenue and price profit was their strategy regardless of cost and impact. Itis a terrible example of American business. And I would say the American people are tired of paying the price for it.

CHAFFETZ:Thank you, gentlewoman.

MALONEY:Thank you for this hearing. Mr. Chairman.

CHAFFETZ:Thank you. We'll now recognize, gentleman from Tennessee, Mr. Duncan, for five minutes.

DUNCAN:Well, thank you. Mr. Chairman, Dr. Woodcock I have a report here that from top from Top's University (ph). Their center forthe study drug development and stated November 2014 is says that -- is says, "Cost to develop and win marketing approvalfor a new drug is 2.6 billion. And average out of pocket cost is 1.395 million, what do you say -- about that 2.6 billion?

And it takes -- it says, it takes an average of 10 years to get a drug to market. What do you have to say about that? Is thatany place close to being accurate?




WOODCOCK:Well, the economics community has various estimate of this cost. So those are in dispute. But it is agreed that it cost a greatdeal of money, and it takes a long time to get innovative drug to the market.

Some of the recent advances in science are shortening this timeframe for targeted therapies and breakthrough therapies.However, in general, that timeframe is accurate and it does take a large investment to first find and then develop a new drug.

DUNCAN:Don't you see that if a small company or an individual comes up with some miraculous drug that they would be force to sellout to some big drug giant to get a drug to market with those kinds of cost, that's -- and that's what many people think hasled to this over consolidation of the drug business outs into that, in that hands of few big giants.

WOODCOCK:Well, the industry is changing rapidly because of the new science. Last year, we approved a large proportion of our newdrugs were orphans and a number of them came from small companies, so it is doable. And the drug development paradigmis influx because of the new scientific finding.

DUNCAN:Mr. Merritt, what do you see about that?

MERRITT:Well, as Dr. Woodcock says, the market has been changing toward more specialized drugs that are all developed differentlyin market and different way than drug traditionally, have been, I know from our perspective, you know, the best way to getcost down is to competitions to the more products when get into the market, the faster get them on the market whether theyare competing lead two brands or generic competitors, the better it is for consumers, and the employers unions, andgovernment program that we serve.

DUNCAN:We all believed that there should be some testing to make sure the drugs are safe that you can go, ridiculously over boardon anything. And in seems to me that when it is taking 10 or 12 years to get a drug to market and it's costing 2.6 billion asthe Topp's (ph) studies say that that's going a little bit over board.

Mr. Schiller, I have a great detail letter from one of my constituents that I would like to place in the record. But she sent tome, her cost of the drug that your company put out, that was in her cost with -- for 30 pills on that on the -- in December of2014, a total cost, annual cost of $13,566, cost per pill is $37.

Less than two years later, the cost for the same pills had gone to $106.74, a 224 percent increase in two years time. Andalso have a letter from another individual, a state representative of Tennessee that says, that the average of pharmaceuticalcompany average spending over 20 percent, research and development. But did your company average is less than 3percent. What do you say about this 224 percent increase in less than two years time and the 3 percent on research anddevelopment?




SCHILLER:Sure. When we price our drugs, we try in take into account, the critical value, the alternative therapies, patient access amongother factors, it is not exact science. The number of cases, we have been too aggressive. We're also trying to manage abottom line to be able to invest in our research and development pipeline, and making investments and expending ourmanufacturing.

I mentioned Rochester, New York we're going to put another $0.5 billion to increase the capacity in that facility as well aspatient access...

(UNKNOWN)Let me -- and my time is running out. Let me just add that I think we need -- you need to do much more the hold down thiscost. But I would like also to say that in all my time in Congress, I've serve on four committees in her 28 years, I've seen 100of witnesses and some very heated confrontations.

I have never seen an individual act with such arrogant as Mr. Shkreli a while ago, in such childish -- smirks, even turningaway from Ranking Member Cummings to post for pictures while the ranking number was speaking. And I think it just wastotally ridiculous.

I can tell you this, as his lawyer that are advising a little bit because the jury would love to convicts somebody if he acts thatsame way while he his on trial.

Thank you, Mr. Chairman.

CHAFFETZ:Thank you, gentleman. We'll now recognize Ms. Norton for five minutes.

NORTON:Thank you very much, Mr. Chairman. And may have been Mrs. Shkreli's ethics that drew the kind of attention that...

CHAFFETZ:Yeah.

NORTON:... gets us this very important hearing today. And I understand your testimony, Mr. Merritt, about competition and encouragingpatients to go to less expensive drugs. I also appreciate what you said about a more specialize drug.

And let me say this, about pharmaceuticals. I think pharmaceuticals and the work of our companies is most extraordinary, isnot only saves, keep people out of the hospitalization.

So I want you to know that I think this great appreciation for the industry here, even for what is often given as reason for theprice of drugs. We do understand RND. We do understand that more of the RND is done here than done abroad. And then,of course, it cost less abroad, all of that. And I think Dr. Woodcock's last testimony and response to question made clear that




the government understands it.

That understood -- let us go to a kind of paradigm here, Daraprim. This is a life saving drug that is used for parasitic or,indeed, what could be fatal parasitic infection is known as -- Ms. Retzlaff who took over from Mr. Shkreli. It's known astoxoplasmosis. It is used by cancer patients, by patients with HIV. It has a relatively small patient market.

Now, Ms. Retzlaff, during purchase of this drug, I've just said that I give all credit to the industry for RND. But it is true, Ms.Retzlaff, if it isn't -- is it not? That you did not do the RND for Daraprim? You purchased Daraprim.

RETZLAFF:It is true, yes, we purchase Daraprim. Now, Daraprim was on the market for 60 years, and even after 60 years, still the onlyFDA approved treatment for toxoplasmosis.

NORTON:Now, isn't it interesting that for 60 years somehow, a company had been able to manufacture this drug for $13.50 per tablet,but when you purchase it, the tablet overnight went to $750 per tablet. To do the math, Ms. Retzlaff, that's a 5,000 percentincrease.

Is there any conceivable justification for companies that had nothing to do with the RND taking over a company and then,overnight, raising the price so that is left to be fair, out of reach for patients and even some hospitals. What is youjustification for that?

RETZLAFF:My justification is that, there has been no new innovation, no new treatments which we believe are critically needed. And weare reinvesting much of the revenue...

NORTON:How much have you...

RETZLAFF:... 80 percent.

NORTON:So you wrote it, you immediately begun to reinvest in the -- reinvestment was so large that you had to increase for those whoare now using that. I'm not talking about future users, who are now using the drug, you needed to increase it 5,000 percent.

RETZLAFF:And we're also investing in other serious and neglected diseases.

NORTON:




Now, in spite, excuse me -- yes, we should -- we putting all on this one, you putting it all on this one life saving drug.

RETZLAFF:It's not uncustomary for pharmaceutical companies to use revenues from one product to fund multiple program.

NORTON:All right, certainly isn't. But why isn't that when the committee, I drew that some of the testimony from the committee that thedocuments obtain by the committee indicated that. In response to this very wide spread concern about this huge increase,Turing implode a public relation strategy to try to divert the change with -- so patient assistance programs, and research anddevelopment efforts.

In other words, instead of keeping the price so that it could be purchased by patients and hospitals, you went to what I thinkeven some of your testimony was about, and that is the patient assistance programs to try to obscure the price. Is that yourstrategy for raising prices and then essentially trying to obscure those raises by asking -- telling people, "That's all right. We'llgive you a 50 percent increase, well -- sorry, discount." But for the rest of you, we're using assistance money our sales orR&D. Is that your strategy?

RETZLAFF:No, it is not. Our intent behind our public relations strategy was to correct any miscommunication. Again, as I said in mytestimony, two-thirds of patients, the most vulnerable toxoplasmosis patients can access our product for a penny a pill. Thatis two- thirds. 23 percent are covered by commercial insurance. For those patients, we kept their copays at $10. We areabsolutely committed and always have been to ensuring every single patient who needs Daraprim gets it.

CHAFFETZ:That ain't true, but we'll talk some more about that.

We'll now recognize the gentleman from Michigan, Mr. Walberg for five minutes.

WALBERG:Thank you, Mr. Chairman, and thank you for having this hearing. I think we can all agree on the importance to pursue lifesaving treatments and cures to the illnesses like cancer, et cetera that affect our communities, our neighbors, our families,our friends. We can also agree that we want individuals to have access to these treatments at an affordable price.

The question, of course, today is how do we do that?

Unfortunately, under the president's health care law, we've seen drug cost spike. We've all heard that back in our districts.Congress needs to push back, needs to create an environment that promotes innovation and increases competition, whichwill bring down cost and increase access to prescription drugs. We have our fault in the process.

But so far, we've acted to approve more than $2 billion in additional funding for NIH, good thing, the first big raise in over 12years to boost medical research. Additionally, the House, we the House, have acted responsibly and passed 21st CenturyCures Act which reforms the FDA approval process would accelerate the discovery and development of treatments andcures. The Senate has not allowed that to go through yet or the president pushed for it.




And so Dr. Woodcock, it's my understanding, and I guess I just want to delve a little deep, more deeply into your responsesso far. It's my understanding that the FDA currently has a backlog of over 4,000 new drug applications and a medium processrate of 42 months. Can you explain to our committee why your agency is so far behind?

WOODCOCK:We were far behind when we started the Generic Drug User Fee Program. At this point, the number of applications thathaven't -- where the manufacture hasn't heard from us or we haven't picked them up is 600. We have approved and...

WALBERG:Let me understand it clearly. They haven't heard from you? But I guess we're taking approvals.

WOODCOCK:Well, in the past generic program, before we reformed it, generic drugs went through four cycles of review and back to thecompany and review. This is a very inefficient process. We are trying to streamline that process so we can get it right firsttime the company sent in an application, it is an approvable application. Under that scenario, as I said, this year, 15 months,starting in October, 10 months.

We'd still have to deal with the backlog which we are cranking out approvals of the backlog, but they were -- they started in2012 when the program starts, they're already 40 months old. They're not going to get any younger. So, for the backlogapplications, when we approved them, their time to approval will be more than 40 months. But these newer ones, we'veapproved drugs in 10 months under the new program, generic drugs.

WALBERG:Well, I wish you well on that and that's the direction we want to see going, because we very clearly have seen here, haveseen the efforts in the pharmaceuticals as well to try to get away from that perception. But we've also seen that they've usedthis backlog to, really, to capitalize on a system that allows them to pillage the market.

WOODCOCK:The drugs under the discussion have been on the market for decades, times where there were no backlogs and there werestill no generic competition to them. There are other reasons that for a very small segment of the generic drugs, the 88percent, you know, is out there. But for small segment of generic drugs, there is no generic competition.

When we, at the end of the first GDUFA program, we'll have eliminated this backlog and being a steady state type of activity.There will still be problems with drugs that don't have generic competition because there are other reasons for that.

WALBERG:I'm probably expediting that. We'll ultimately help to have more competition as well. Let me ask you about biosimilars. Do youthink that biosimilars can play a part in addressing affordability in a patient's access to the drugs they need?

WOODCOCK:




Absolutely and that is what they are intended to do, and we're very vigorously enacting that program, we've had a veryvigorous response to the legislation that Congress passed.

WALBERG:So swamping up there, you believe that patient in health care professional confidence and biosimilars is essential for savingsfrom biosimilars to occur?

WOODCOCK:I believe that's the number one issue. We just recently completed with generics, some studies of seizure drugs. Because afterall these years, the neurologists still didn't believe that the generics were equivalent. Those studies showed no differencebetween the generics and the brand name seizure drugs.

WALBERG:Well, your efforts in moving that forward, we'll assist that, I'm sure. So, thank you and I yield back.

WOODCOCK:Thanks.

CHAFFETZ:I thank the gentleman. Now, I recognize the gentleman from Massachusetts, Mr. Lynch, for five minutes.

LYNCH:Thank you Mr. Chairman. I do want to follow up on the gentleman from Tennessee's -- one of his (ph) questions. I thought itwas very good. The costs are prohibitive in terms of trying to develop some of these drugs. We've had -- you know,Massachusetts and in the Boston area, we've been blessed. We've had 29 IPOs, small pharmaceutical companies are cometo market in the last two years.

So, we do have some growth in the industry. And so, those few big players are not dominating like they were before, sothat's good for change. But in the case of Turing here, they just bought the drug, didn't do a lot of research, bought the drug.And as the gentlelady from District of Columbia pointed out, the next day went from $13.50 a pill to $750 a pill overnight. Andthat is disgraceful. There's not a lot of shame at the table today. But this is disgraceful. And it was well-known that the impactwould be great harm on the public.

So, Ms. Retzlaff, after you, in August, increased the price of the drug by 5,000 percent, where people who had no alternative,on August 18th, Tina Goldman (ph), a Turing employee sent an e-mail that you were seat (ph) on regarding the increase inthe price. And she said that, well, and I quote, "There are patients now waiting for products who have $6,000 copay."

Now, you just said that -- and you're under oath, you're under oath, you're subject to perjury charges if you don't answercorrectly. She's saying that these patients, well, had a $6,000 copay, and you're saying, they never had to pay more than apenny for a pill.




RETZLAFF:So, allow me to provide some context. Yes, she did say there was $6,000 copay, however, we paid the majority of the copay.The patient did not pay...

LYNCH:Everything but a penny?

RETZLAFF:We paid the copay up to $10.

LYNCH:OK. Glad to get you on the record on that. Just so you know...

(CROSSTALK)

LYNCH:So, it goes that you were aware that you had Daraprim price increase was resulting incredibly high copays, isn't that correct?

RETZLAFF:It's correct, which is why we introduced a very generous copay program to ensure the price increase did not hurt patients.

(CROSSTALK)

LYNCH:Well, this is another e-mail from Ms. Goldman (ph). She sent another e-mail to you and the director of special pharmacydevelopment at Walgreens, asking where the Turing would, and I quote, "Grant an exemption for those patients with copayover the approved amount of 10,000, $10,000."

RETZLAFF:And our policy was to ensure that the price increase did not impair access for patients. And so yes, we subsidized that copay.

LYNCH:You didn't want to impair access so you raised the price to $750 a pill?

RETZLAFF:The access issue with Daraprim had nothing to do with the price. To our knowledge, they were based on gaps in thedistribution network which, by the way, we inherited in the previous manufacture...

LYNCH:




Look, I reclaim my time. She asked the question because there was a patient in North Carolina had a copay of $16,830.

RETZLAFF:Yes.

LYNCH:That's what the patient was being asked for.

RETZLAFF:Yes, and we paid that down for the patient.

LYNCH:Four days later, on August 24th, the same outrageous copay was reflected in an internal Turing presentation on patientaccess, and this is your presentation. Patients with commercial private insurance experience increased copays and delays inclaims approval and rejections. One has a 50 percent co-insurance resulting in a copay of $16,830. That's your own companyand your own presentation, what the patient is being charged.

RETZLAFF:Yes. Again, we put that in the presentation to inform leaderships that that was...

LYNCH:OK, so...

RETZLAFF:... that those were the subsidies that we were offering patients.

LYNCH:So, I think we got a solution here. I think we got a solution. You know, Congress has the power. I would suggest that in our,right, pharmaceutical regulatory procedure, our regulations, that we adapt a poison pill amendment. That when anybody actslike Turing is acting and increasing the price from $13.50 to $750 per pill, Congress can suspend the exclusivity period foryou to produce that drug. We can eliminate it the next day. And contract with DARPA, our research, our government researchlabs, to produce your drugs at no cost of the consumer. That's what we can do. The problem is that it'll impact the goodcompanies that are actually doing research. Not the hedge funds that come in and buy a company and punch a...

RETZLAFF:If I may?

LYNCH:




... and pump up the prices.

RETZLAFF:We're...

LYNCH:So, I didn't ask you a question. I didn't ask you a question. I'm telling you what we can do. If Congress has the willpower, wecan do that. Unfortunately, it will hurt a lot of good companies and you're trashing, you're trashing the pharmaceutical industrythat's doing a great job on a lot of different drugs from organs transplants, to cystic fibrosis. Good researches that are outthere doing great work, you're trashing that industry.

And you're going to cause us to have to put heavy, heavy regulations on good companies and you're probably going to chokeoff other drugs that will come into the pipeline. So, look at the impacts you're having, you know.

CHAFFETZ:I thank the gentleman. I thank the gentleman.

LYNCH:Thank you.

(OFF-MIC)

CHAFFETZ:Thank you. We're going to excuse Dr. Woodcock per our previous arrangement. We'll allow her to hopefully make her nexthearing without any hesitation as we change this name place. We'll now have Mr. Flanagan join us, also from the FDA's, waspreviously introduced and was also sworn in. So he is too -- he too is under oath.

We have Dr. Desjarlais who is now recognized for five minutes.

DESJARLAIS:Thank you Mr. Chairman. Good morning panel. Mr. Schiller, could you explain to us a little further how you determined thenew price for Isuprel and Nitropress?

SCHILLER:Sure. After we signed the contract to purchase the assets, we reengaged a pricing consultant that was in -- have engagedpreviously by the prior owners. They made a presentation to our head of our neurology division where this product was goingto sit.

The conclusion was that given the reimbursements for the procedures where Isuprel was used, which were as high as$12,000 or $14,000 in some cases, that there were significant opportunity to increase the price of Isuprel without impacting orwithout making it unprofitable for the hospital.




DESJARLAIS:Excuse me. So, a lot of cardiology drugs put with neurology?

SCHILLER:It's a -- I apologize. It's called, it's our neurology and other division, and so it's our neurology, and we have a number of othersmaller therapeutic categories that are underneath.

DESJARLAIS:Both these drugs are generic, right? They've lost their patents?

SCHILLER:They've lost their patents but there are -- there's not generic competition.

DESJARLAIS:OK. So, this isn't a drug that a patient can go to their doctor and say, "Hey doc, I need some Nitropress. I need someIsuprel." If you're -- is that correct?

SCHILLER:It's -- in a hospital setting, part of the procedure or in a clinic.

DESJARLAIS:Right. So, it's not the patient that's getting out their wallet and paying for this drug. They're actually in a hospital. And eithertheir blood pressure is going through the roof and the doctor has really no other choice but to use your drug, in severalcases, this comes in a vial, right? And you raised the price of the Nitropress, 252 percent, is that right? $257 for 2 millilitervials to 805?

SCHILLER:Correct.

DESJARLAIS:So, if you're laying there in the ICU and your blood pressure is going sky high, the doctor doesn't ask you if you want to payfor this drug. You just passed to use it. And whatever you charge the hospital for, they have to pay it, right?

SCHILLER:That is correct. It is used in emergency situations.

DESJARLAIS:




And Isuprel, same way. It's not pill, this is a vial and you raised the price, so that 525 percent, from $215 to $1,346 a vial?


DESJARLAIS:And that you don't ask the doctor, "Hey, I need some Isuprel." That you got a rhythm in your heart, things are going -- circle inthe drain, in a hurry, and the doctor doesn't have a choice. He's gotten over a barrel because there's no other competitionhere, so he has to get that drug. He doesn't -- they don't have another choice?

SCHILLER:Well, there are substitutes and the volumes have gone down over 30 percent since we acquired those drugs.

DESJARLAIS:So, you're saying that you raised one 212 percent and one 525 percent, that you've been so gracious to drop the price 30percent?

SCHILLER:Well, we have gone to the hospitals that have the largest users, that have large cardiac departments, who would be the mostimpacted to make sure that they're -- got a significant discount. I think also when you look at our overall portfolio, we tried toaddress the issue of price by reducing the prices in our dermatology and ophthalmology products by 10 percent, and bydramatically increasing the amount of patient...

DESJARLAIS:Well, that's probably from (inaudible) years. I did pick up something in your opening statement where you said the patientdoesn't really pay this so they don't really feel the sting. But I think anyone who's been a patient comes home from thehospital, I know they get a really big bill. And some were not billed as Isuprel and/or Nitropress if it was used. And so, thepatient does end up paying for that drug in the end, correct?

SCHILLER:It is paid as part of the procedure. So, when somebody at the end pays it, I would add that these types of transactions,Isuprel and Nitropress, in the past, we have purchased some drugs like this where there was no generic competition. Weraised the price as you mentioned. We were too across (ph) and we are not...

DESJARLAIS:May be way to aggressive and...

SCHILLER:We are not going to be looking for those kinds of acquisitions going forward.




DESJARLAIS:Yes. Ms. Retzlaff, you also kind of did the same thing with your drug. It's a unique drug and people don't have much of achoice. But, you know, in your opening statements, sounded like maybe you're doing people a favor. You're giving it to themfor a penny or they're getting it free. You're making a lot of money.

I mean, Mr. Shkreli wouldn't even answer a question. He was so ashamed of himself. And you're basically saying that, youknow, you're doing these people a favor. You're knocking off their $10 copays and all that. But bottom line is your companymade a heck of a lot of money on this drug, and there's only a handful of patients that needed that don't you think that maybeyou can do a little better?

RETZLAFF:We didn't make a lot of money on the drug actually. I believe the committee has our financial statements. I don't want toshare that information because it's confidential. But you will see that, you know, Turing is off running at a loss.

DESJARLAIS:And I'll just, you know, say people really hurt. Now they're seeing increased premiums. They're seeing increased deductibles.And you know, this type of thing doesn't help. It's like if one gas station has gas and all the other ones run out, that gasstation would jack the price and people have to pay it, but they're not going to think much of that gas station. I think you guysare basically the same thing. I yield back.

RETZLAFF:Yes.

CHAFFETZ:I thank the gentleman. We'll now recognize the gentleman from Vermont, Mr. Welch, for five minutes.

WELCH:Thank you. Thank you, Mr. Chairman. Thanks for calling this hearing.

To go over this astonishing and unsustainable situation with the price with prescription drugs, a couple of things, one, Ms.Retzlaff, if Springfield Hospital in Vermont wanted to buy Daraprim, what would they have to pay you?

RETZLAFF:So, we have introduced a hospital discount program.

WELCH:Yes, give me the number. What would they have to pay?




RETZLAFF:So, for 100 count bottle, it would be roughly $35,000. For a 30 count bottle, that's roughly $11,000.

WELCH:So, how much does that come to a pill, so $1,100 a pill?

RETZLAFF:So, $750 is the least price. We're offering discounts up to 50 percent for hospitals.

WELCH:$1,100 is the discount.

RETZLAFF:No, no, no, $1,100 is not the discount. It's 50 percent off of 750.

WELCH:OK. So, if Springfield Hospital...

RETZLAFF:It's 375.

WELCH:If Springfield Hospital wanted to buy a pill, it would be $350?

RETZLAFF:Correct.

WELCH:All right, what about if I have Blue Cross Blue Shield and it was covered, what would they -- what would Blue Cross BlueShield pay?

RETZLAFF:So, that would depend on what the copayment and coinsurance was. About 25 percent of patients on Daraprim havecommercial insurance. So in the examples that were mentioned above, you know, the patient would be asked to pay a copayof, say, $5,000. In which case, we would pay down that copay, so they didn't have to pay any more than $10 out of pocket.

WELCH:So, in your financial statement, you're saying if I had to buy that -- I had $5,000 copay, you would pay all of that except the




penny?

RETZLAFF:Except $10.

WELCH:Except $10. And we can confirm that?

RETZLAFF:Yes, you can.

WELCH:All right, what if they had the -- what if they are on ObamaCare, what would be the cause of for that pill?

RETZLAFF:On ObamaCare, so, well, if there -- if they are on a Medicaid patient for instance.

WELCH:Well Medicaid, tell me Medicaid and tell me Medicare.

RETZLAFF:Medicaid patient, so for Medicaid patients, as well as patient that are treated through 340 programs, they can get themedicine for one penny per pill and that actually represents two- thirds of their premise business.

WELCH:And so, who pays the rest of that? If the patient gets it for one penny?

RETZLAFF:That's the price, nobody pays.

WELCH:All right. Why isn't possible to just have a price where anybody who wants to know what that price is can go to a website andsee? Do you do that? Do you provide that?

RETZLAFF:We provide as you know a list price, the list price is not reflect the price that patients pay hospitals, pay that othergovernment programs pay.




WELCH:I mean.

RETZLAFF:From a government program perspective they are often mandatory, statutory retail...

WELCH:So the list...

RETZLAFF:... which is why...

WELCH:I'm reclaiming my time. The list, the list price is, you know, as the starting point.

RETZLAFF:That's correct.

WELCH:So most people have no idea what the actual price will be if you go through the gymnastics that you just described?

RETZLAFF:That's correct, that's the way a pharmaceutical pricing works in the industry.

WELCH:Oh, you know, and that a mess in the industry. We've had a lot of outrage at the outrageous conduct here and none is -- wecan't under do it, but the bottom line here is we've got a broken market and it's a real challenge for us as members whorepresent the public that are getting hammered with this to deal with that broken market.

I think Mr. Duncan's got a really good idea and I think we can do to help but the FDA, the streamline, we should do that. Buton the other hand there's, you've got market power without competition and it is resulting in ripped off's, most -- glaringlyrepresented by Mr. Shkreli.

And I hope Mr. Chairman and Mr. Ranking Member, we can't have an action plan to include what Mr. Duncan is talkingabout. It would streamline, getting the drugs to the market, it would deal with this ripped off approaches where the companiesare oftentimes -- extending the life of the patent to prevent generic competition, do we need to ever grinning, to imitate a drugthat's on the market with slight changes that don't really increase yet efficacy but increase the cost, work on Mr. Stivers' bill toget generics to market faster.




And actually, let's have some transparency in pricing, there's always talk about how much cost goes into research and that'sa legitimate cost we all support it incidentally taxpayers $30 billion to NIH, we mutually support, that's our contribution.

But the bottom line here is that, we know prescription drugs are life extending and pain relieving, they're good. But we'regetting killed with the price.

CUMMINGS:Gentleman, you have five seconds. Hospitals are getting killed too, big time.

WELCH:And employers, trying to do the right thing. So I guess my time is up, but I think we've got a lot more work to do and thankthe Ranking Member and the Chairman of the committee for setting up this hearing.

CHAFFETZ:Thank the gentleman. Now I recognized...

WELCH:I just have one item to submit for the record if I can, Mr. Chairman.

CHAFFETZ:Without objection. I'm not sure what it is, it would.

WELCH:With concerns regarding the pharmacy benefit management industry of paper by applied policy, thank you.

CHAFFETZ:Without objection, so ordered. We'll recognized the gentlemen from Florida, Mr. Desantis, for five minutes.

DESANTIS:I yield back my time.

CHAFFETZ:Mr. Walker, let's recognize Mr. Walker for five minutes.

WALKER:Thank you, Mr. Chairman. I appreciate the time today. Thank you folks for being here and testifying on this panel. I want togo back a little bit Ms. Retzlaff and talk a little bit about what you said about shareholders.




RETZLAFF:Yeah.

WALKER:Before as Mr. Shkreli's, you've said that he is a shareholder but you are unaware as for as how much he owned in theshares?

RETZLAFF:Yeah. I can't remember of the top of the head, that's correct.

WALKER:OK. According to our information, he is your largest shareholder of Turing, would you dispute that? That you --you're notaware of that, you don't know.

RETZLAFF:I knew he was a major shareholder, I wasn't aware that he was the largest shareholder.

WALKER:OK. As far as code of conduct, you know, most organizations, I recent remember the L.A. Clippers Donald Sterling get satdown because of the way he behaved. I was administer for 20 years there's codes of conducts that we have to follow, is thata part of discussion as far as the outrageous conduct that he's representing your country, do you have anything in yourbylaws or constitution if you will that would prevent somebody for amount being so outlandish in his behavior?

RETZLAFF:Yeah, thank you for the question. So, first, as you know, Mr. Shkreli is no longer the CEO of the company and subsequentlyour chief commercial or chief compliance officer just published a code of conduct for the organization which again iscustomarily for pharmaceutical companies.

WALKER:But you just said it just published that one when was the date that he just published it?

RETZLAFF:She published it a few weeks ago. I can't remember exact date.

WALKER:Was that code of conduct published to push back a little bit on Mr. Shkreli's behavior?

RETZLAFF:




Again, Mr. Shrkeli is no longer part of this organization, that code of conduct was put in place to ensure that, you know, ourcurrent employees behave in a manner that reflected our values.

WALKER:Would you find that -- I mean, I don't know me I just find it odd that all of a sudden you have a code of conduct, so but yousay there's stories, you know, there's no link with her institution of this code of conduct with the behavior of Mr. Shkreli.

RETZLAFF:So Turing is a very young company, we're just a year old. We brought on our chief compliance officer not long ago. We'restill in the process of putting together all of our policies and procedures and we just happen to get the code of conduct out afew weeks ago.

WALKER:I mean, your five days after acquiring Daraprim, Mr, Shkreli was sending e-mails about the timing of the price increase, in e-mail stated August of 12th, Mr. Shkreli ask when the price of Daraprim will be updated in red book which is so compendiumof drug pricing is by healthcare as we all know...

RETZLAFF:Yes.

WALKER:He said, I need an answer ASAP, took three days to long last time I did what he is referring to. When he says, "The last timeI did this, was he referring to the 2,000 percent price hike of the Thiola, that he implemented in his former companyRetrophin.

RETZLAFF:I'm not sure but I'd be happy to check out, check that out.

WALKER:Is -- so when you could get that information back...

RETZLAFF:Yeah, I get that information back to you.

WALKER:Maybe the end of the week, next week.

RETZLAFF:




Sure, absolutely.

WALKER:OK. I appreciate that. I do want to comeback make sure that I'm clear with the something with the FDA, Mr. Flanagan, I meanif I could.

Earlier, so there was Ms. -- Dr. Woodcock said there was 600 manufacturers waiting to hear back from the FDA are approval,my question is that 600 manufacturers part of the backlog, are those all new, there's 40 months backlog that you're waiting toget to and you're trying to reduce it from 15 months to 10 months. For that can you explain what number what column, who'sthe new manufacturers versus the old ones? Can you use the microphone too please make sure it's turn on. Thank you.

FLANAGAN:So, Representative, there's -- let me see if this answers most of the question. There's basically two big buckets of work, andincoming submission some that may comes in right now, thus going to give a 15 month goal date, beginning in October we'llhave a 10 month goal. Then there's a big pot of much older submissions, a lot of those had been an FDA before the user freeagreement started.

WALKER:Sir, when we say big pot, can you give me a number of value where the big pot is?

FLANAGAN:Yes, sir. It was 2,866 abbreviated new drug applications in October 2012.

WALKER:And those rank back as for as 40 months or nearly three and half years?

FLANAGAN:So, those are were like 40 months after October 2012, and many of those have been very long pending in FDA before theuser free agreement ever started like 2011, 2010, 2009.

So now, when we clear out the backlog, the way that everyone wants, anytime we approved one of those old ones, it's beensitting around, the approval time is very high.

WALKER:Sure. And what makes you think you're going to go from 15 months to 10 months you go my time is expired but you cananswer that, now I yield back, thank you.

FLANAGAN:We made very substantial improvements to the program like rebuild the factory and then describe and Dr. Woodcock'swritten testimony.




CHAFFETZ:I thank the gentleman. Now recognize gentleman from Virginia, Mr. Connolly, for five minutes.

CONNOLLY:Thank you, Mr. Chairman. Well, Lord Almighty. Mr. Flanagan, just to try to understand, how pharmacological pharmaceuticalresearch works? Basic research, a lot of its number of government isn't it?

FLANAGAN:Yes. Representative, I'm here...

CONNOLLY:I understand. I mean your understanding of where research has done as a precursor to the development of approved drugs, ifusing in the government isn't not...

FLANAGAN:I'm really a technical expert just concerning the Generic Drug User Fee Act -- I'm sorry, I'm just not the right person toanswer that kind of question.

CONNOLLY:Ms. Retzlaff, you -- I've got that name, right?

RETZLAFF:Yeah, you have.

CONNOLLY:Thank you. You in testimony, in response to Ms. Norton's question, about how could you go from, you know, $13.73 whateverit was per pill, the $750 in your new company? You've got a hell of a first year as a company just model for everyone.

You said, well, we need to use it that revenue to help finance research on other life-threatening conditions, drugs thataddress other kind of diseases and life-threatening conditions, that was your testimony.

RETZLAFF:Other conditions as well as toxoplasmosis, yes.

CONNOLLY:Is it your testimony that the company you bought this drug from was not doing that?




RETZLAFF:The company we brought the drug from was not doing any research, pharmaceutical innovation research for toxoplasmosis.

CONNOLLY:Are you doing basic research?

RETZLAFF:Yeah. Our -- we're doing early research right now in toxoplasmosis.

CONNOLLY:Well, but you said other conditions as well?

RETZLAFF:Yes, we have a...

CONNOLLY:So, can you provide the committee with a list of the use basic research efforts that this revenue was financing?

RETZLAFF:I believed we can, I'm not involved in a day-to-day operations of research and development but I can certainly check...

CONNOLLY:No, but it's your testimony on behalf of your company that that's what you're doing with this revenue and that was...

RETZLAFF:That's right.

CONNOLLY:... the rationale or part of the rationale for jumping to price of 5,000 percent?

RETZLAFF:Yes, I believed we provided the committee with our research and development spend, is that correct?

CONNOLLY:Well, I'm being a little more specific.

RETZLAFF:




OK.

CONNOLLY:In answer to Ms. Norton's question, I would like to see that correlation. I'd like to see where that revenue was in fact going interm -- if from this increase.

RETZLAFF:Yeah.

CONNOLLY:Because, that was your testimony that's funding other good things and the only way presumably we can do that is this is$5,000 price increase. Let me ask you a question, a corny question, in your company, at Turing, did the public interest evercome up in terms of by jacking up the price.

We really could affect the access. We could have unintended consequence of people's health especially sense the sacredtrust we got as a drug no one else produces. It's the only drug for this condition that exists on the planet. And we just boughtit, we control it and we've just increase the price 5,000 percent.

Was there any discussion at the corporate level about the morality, the ethics of that in terms of impact on people's healthand lives?

RETZLAFF:So, as I said in my testimony, I was comfortable with that price increase, first, because of the companies commitment toinvest generously in patient access programs, those are important. We didn't want the price increase to go -- disadvantagepatients in anyway. And, second, the companies commitment to reinvest into research and development, and I will just saythat there -- we believed that there is a need for a new and better and treatment for toxoplasmosis.

CONNOLLY:Would you agree whatever your motivation and your altruistic instincts that from a public relations point of view didn't work outso well?

RETZLAFF:We had challenges from a public relations point of view and I believed it's because there was a lot of misinformation and therecontinues to be a lot of misinformation out there.

CONNOLLY:Well, I would suggest you and I know he's no longer your CEO but when you have as an individual behavior when Mr. Shkrelidid when he was CEO, end in a public appearance today and then his tweets. He has put a pretty ugly face in front of thepublic in terms of the industry, it's motivation, it's profit motivation, it's concern for patients any sense of ethical responsibility.

And I would echo what Mr. Lynch said, it has unfairly damage the whole industry because of the practice of one CEO at one




company. And I just think, I would hope, it would cause of very profound reexamination about the practice of jacking up pricesthe way Turing did with this one.

I yield back.

CHAFFETZ:Thank you, gentleman. Well, now, I recognized the gentlemen from Georgia, Mr. Carter, for five minutes.

CARTER:Thank you, Mr. Chairman. Mr. Merritt, isn't it true that your organization PBM, Pharmacy Benefit Manager, isn't it true thatthree of your member companies control over 75 percent of the PBM market?

MERRITT:I don't have the exact numbers, but there are...

CARTER:I have it is 78 percent to be exact...

MERRITT:Exactly.

CARTER:... 78 percent of control by three different companies.

MERRITT:Yeah.

CARTER:Three orders.

MERRITT:So get make a discounts for their customers too.

CARTER:Mr. Merritt, are you aware of the term MAC, Maximum Allowable Cost?

MERRITT:Yes.




CARTER:You're aware of that? And you understand that that's a PBM generated list of drugs that determines the maximum amount,that into your sponsor will pay for a medication, in other words they tell the pharmacy what you're going to pay?

MERRITT:Yes, that's...

CARTER:That's where the MAC is.

MERRITT:It's created by Medicaid right now PBM.

CARTER:And there are no two MAC lists that are the same. Each PBM generates their own separate list, correct?

MERRITT:Right, kind of like...

CARTER:That.

MERRITT:... they say it was they're on list for how much...

CARTER:They choose the products they will own it. They are the ones who dictate that. So, on the other side, PBM's also have MAClist on how much they will charge the insurance company. And that's a different MAC list, is that correct?

MERRITT:Sometimes, all the different companies are different.

CARTER:Yeah, all the different companies are different. But they have one list here that they're going to reimburse the dispenser theyhad. They have another list here that they're going to charge the insurance company, that they're representing, so you gottwo different lists here. Don't you find that somewhat are accord and don't you find that to be a situation where a PBM coulddistort the market greatly?




MERRITT:No, because that's a decision and negotiator and a contract between a client and PBM and they're million different kinds ofcontracts including those and if the client thinks that's in their interest...

CARTER:But the point is, Mr. Merritt, is that you're deciding what you're going to reimburse in dispenser forward in your deciding whatyou're going to charge the insurance company forward?

And there in lies the difference. Are you familiar with the term spread pricing?

MERRITT:Yes.

CARTER:You are familiar with that. And you understand what spread pricing is?

MERRITT:Yes.

CARTER:That's when the price of the drug goes up, it cost the pharmacy more to buy it but yet your still reimbursing at the lower rate.For instance in Turing, when Daraprim was $13.50 a pill, if you had it on the MAC at $13.50. If you didn't increase at MACand you went up to $750 a pill, you'd still be reimbursing, that dispense her $13.50 yet you would be charging the insurancecompany $750.

MERRITT:No.

CARTER:That spread pricing, that's what's happening, because you're not increasing -- you're not updating the PBMs are not updatingtheir right, their MAC list.

MERRITT:That's inaccurate. MAC list are...

CARTER:That is accurate. If that's inaccurate, then let me ask you, Mr. Merritt. Why is it that just recently -- and let me quote here, "At




a recent hearing of the judiciary committee, one of your largest member companies", who I notice aren't here today and I'mvery disappointed by that, I'm sorry that you have to represent them, we invited them I believed Mr. Chairman, they decidednot to come.

Anyway, if the judiciary committee, one of your largest member company has testified in December that they have tens ofpeople who constantly update MAC list, is that correct?

MERRITT:I don't know but that was just a specific company but industry wide PBM is update MAC list regularly.

CARTER:They update them regularly and that was the test -- that was the testimony in the judiciary committee. If that's true, don't youfind that somewhat odd that CMS found it necessary to mandate, to require that this MAC list be updated every seven daysand that 26 dates have pass laws, requiring PBMs to increase their -- to update their MAC list, don't you find that somewhatodd if you got tens (ph) of companies doing this?

MERRITT:I (ph) don't know why that happened, drug stores want higher payments and they lobby for those changes and got them.

CARTER:Drug stores just want to get paid what they're paying for, when companies go up from $13.50 to $750 that's a problem. Whenwe were only getting reimburse, when they're only getting reimburse $13.50 and that's where the spread pricing comes in.

I notice that the profits of the PBM have increasing enormously over the past few years, in fact almost double. And I find thatvery disturbing particularly when you're talking about spread pricing.

Let me ask you some, Mr. Merritt, I want to switch gear to a real quick OK. Just let me ask you something, as you know, Iformerly own three independent retail pharmacies. I had a family member who got a prescription field at my pharmacy. Shegot her pill at my pharmacy.

Later on that night, she got a call at home from the insurance company encouraging her to use mail order pharmacy -- a mailorder pharmacy that is owned by the PBM.

Now, don't you find that a conflict of interest when a PBM not only owns the pharmacy but they're reimbursing here. They'resetting the reimbursement. It's that not a conflict of interest? How can it not be a conflict of interest?

MERRITT:Federal Trade Commission looked into that and said they are no conflicts in these benefit patients.

CARTER:Mr. Merritt, that is a conflict of interest. I've actually have experienced this where I've adjudicated a claims for this. If you don'tknow, adjudicate means my computer calls his computer, it tells me what they're going to pay me. I've adjudicated claim and




it told me, they're not going to pay for it. They weren't cover it.

While this patient was still in my lobby they got a call from the PBM saying, "Hey, you can use our mail order pharmacy."That's a conflict of interest. Thank you, Mr. Chairman.

CHAFFETZ:I thank the gentleman. We'll now recognize the gentleman from Pennsylvania, Mr. Cartwright for five minutes.

CARTWRIGHT:Thank you, Mr. Chairman and thank you for calling this hearing. I'm obviously concerned about these price increases on anumber of levels but one of the levels is as a former hospital director myself. And Mr. Schiller, because Isuprel and Nitropressare hospital administered drugs, hospitals -- it is hospitals that are bearing the biggest burden of your price increases. Am Icorrect in that?


CARTWRIGHT:Last year, Cleveland Clinic reported that price increases for Isuprel and Nitropress added $8.6 million to its budget. AndIsuprel and Nitropress are both heart medications, am I correct in that?

SCHILLER:Correct.

CARTWRIGHT:Given the choice between paying higher prices and risking the lives of their patients, most hospitals choose to knuckle underand pay the price. Am I correct in that?

SCHILLER:I'd assume that is correct. Yes.

CARTWRIGHT:So by raising the price of these medications exponentially, you are forcing hospitals to make that decision between theirbudgets and essentially their patients' lives and well-being almost like holding the hospitals own patients as hostages againstthem.

Of course, Valeant was not the first company to raise prices. Valeant actually bought Isuprel and Nitropress from a companycalled Marathon Pharmaceuticals, correct?




SCHILLER:Correct.

CARTWRIGHT:And Marathon Pharmaceuticals acquired the drugs in 2013 from another manufacturer. Marathon also raised prices in the twoyears it owned Isuprel and Nitropress by about 400 percent each. Marathon's price -- it's increase had a net impact to theCleveland Clinic at that time of $2.8 million. And the Cleveland Clinic is not alone in bearing the burden of rising prescriptiondrug prices at Johns Hopkins Hospital up at Baltimore, sustained an impact of $20 million last year of which $4 million wasattributed to price increases for injectable drugs like Isuprel and Nitropress.

These price increases hurt hospitals in ways that reach far beyond the immediate care of patients. They also divert muchneeded funding from research and other programs and technologies that improve care.

Look, the truth is, hospitals are struggling in this country. We have to keep hospitals alive. There's no greater impact to yourhealth care than when you're local community hospital has to close.

I've seen this. They trim their budgets. They trim their budgets. They absorb these price increases. They absorb the cost ofuninsured care and they absorb it and they absorb it and they absorb it until they can't absorb it anymore and they can't cutback nursing and staff anymore and patients' lives become endangered and they have to close.

And there is no greater impact to you than when your local hospital closed so that when you're having a heart attack, it's nota 10 or 15 minute drive to the hospital, it's a 40 or 50 minute drive to the hospital and that can be the difference between lifeand death.

So Mr. Schiller I understand from information your company has provided to this committee that Valeant has spent a quote,"nominal" amount of money on research and development for Isuprel and Nitropress. Am I correct in that?


CARTWRIGHT:Well, that's the usual vindication of these exponential drug price increases that we need to do this because it's fundingresearch but you've admitted there's a nominal amount of money on research and development for Isuprel and Nitropress,the very drugs that are experiencing this exponential price increase.

Let me ask you this Mr. Schiller, isn't it also true that one of the quote, "key elements" of your company's operatingphilosophy is and I quote, "Do not bet on science, bet on management." Have a I quoted that correctly?

SCHILLER:That is a quote from Mike Pearson. I don't know what date is on that. But I would say that this company is changed quite abit.

CARTWRIGHT:




Mike Pearson at your company?

SCHILLER:Yes, he is.

CARTWRIGHT:And you've turned over a new leave since him, is that it?

SCHILLER:No, i think if Mike were here, if you look at his quotes over the last year to -- he's changed the way he's described thecompany and our focus and emphasis on research and development. I'd also add in the pharmaceutical industry, it's very rare$1 of revenue to a $1 of R&D. It's almost...

CARTWRIGHT:Mr. Schiller, I understand that shareholder return is your primary concern and objective. But I say, it's unconscionable todeprive hospitals of the resources they need to fulfill their primary objectives caring for patients and developing new andbetter treatments for the future.

And again, Mr. Chairman, I appreciate you bringing this hearing and calling all of this information to life. Now, I yield back.

CHAFFETZ:Thank you, gentleman. We'll now recognize the gentleman from Texas, Mr. Farenthold for five minutes.

FARENTHOLD:Thank you, Mr. Chairman. Ms. Retzlaff, you testified that your $750 drug nobody pays that. Some people get it for a penny,some people get it for $20. So I want to know how much am I paying for that because the rest of that is either coming fromthe federal government in Medicare, Medicaid, state governments, or it's coming from an insurance company that is beingfunded by the premiums that I pay and hopefully, we'll never need that drug.

So I mean, you make it sound like, nobody's getting hurt by this but everybody in this room is actually getting hurt by thisprices, are they not?

RETZLAFF:So there are only 3000 patients in the United States that are cured with Daraprim. 25 percent of them are covered bycommercial insurance.

FARENTHOLD:Right. So that's my insurance rates which have...




RETZLAFF:Right. So...

FARENTHOLD:... greatly up under ObamaCare...

RETZLAFF:... so the overall impact in terms of the budget for any health care plan is very, very small. It doesn't obtain...

FARENTHOLD:All right. But you guys are potentially setting another trend in the industry by these orphaned drugs and jack up the price orgo and buy a generic manufacturer that's the only manufacturer of a generic drug which brings me to the FDA.

You know, you're saying you're getting down to 10 and 15 months but you've basically agreed that a 10 and 15 monthsmonopoly or anybody who's the single source of a generic drug to do that price increase and name their, you know, price forthat drug. Is that not correct, Mr. Flanagan?

FLANAGAN:Can you ask the question in a different way? Can you clarify please?

FARENTHOLD:All right. So the amount of time it takes the FDA to approve a generic drug manufacturer -- that -- if there's only onemanufacturer in the generic market, they've basically got the 15 months it takes. And I'm going to argue that number with you.They've got an exclusive ability to sell that drug for 15 months at $1 million a pill if they choose to do that.

FLANAGAN:Right.

FARENTHOLD:So, what takes so long to do this? I'm not an expert in what's involved in approving a place to manufacture drugs. I assume ifyou can manufacture XYZ drug in a place, you got a clean facility, either no roaches in the assembly line. If you want to addanother product, why should it take 15 months to get that approved?

I assume you can test whatever drug they make and see if it is what they say. What else is involved there? And why -- and ifthey do screw up making it, 1-800 bad drug is going to bankrupt the company.

FLANAGAN:So basically, through review a generic drug, there is a scientific and technical review bioequivalent chemistry andmanufacturer controls stuff like that...




FARENTHOLD:So how much is this is really necessary and how much of it is regulations that are what color is the toilet paper?

FLANAGAN:So the reason we have 88 percent prescription penetration ion the United States is because when you or your family go tothe pharmacy to get a generic drug that you can be confident that it is the same as the brand. A review...

FARENTHOLD:But why does it have to take 15 months? How difficult is it to get their output, analyze it and see what it is? I can't believe thattakes 15 months. The TSA can in a matter of seconds show whether or not , I've got an explosive in my bag by just swipe insomething on it. I mean, didn't their technology there that it'll make it faster and better. Why are we using it?

Everyday you delay getting a competitor on the market is a day companies can just screw the consumer, right. So, let me askyou one other question on your numbers before I was at a time when Dr. Woodcock was testifying, "My BS detector went offwhen"-- she said, now, we've got our number of applications way down. But she also mentioned that a great many of themwhere in I think her words were return due to technical defect.

So, are you artificially decreasing your numbers and wait time as a result to somebody turning something in without a T-dotted or T- crossed or I-dotted (ph)?

FLANAGAN:No.

FARENTHOLD:All right. So, what are those -- give me an example, one of those technical defects with me. I see it with the V.A. all the timein the case work I do, well, you don't have this piece of paper, you don't have that. You go to the back of the line. My fear iswe've got a bureaucracy at work here that is causing the taxpayer's money and the amount we have to reimburse Medicareand Medicaid for. And it's costing the insured money based on higher rates, they have to pay for their premiums and thetaxpayers are having to pay in premium supplements under ObamaCare.

FLANAGAN:Mr. Chairman, can I talk to my...

FARENTHOLD:Yes. You have decided to answer, I don't have to answer this question.

CHAFFETZ:Please, answer our question.




FLANAGAN:You ask for two examples. One example would be if the application doesn't show that the generic drug would bebioequivalent to the brand. So, we want to make it sure it's going to work the same as the brand. Another example would bethat if the facility its manufacture and the substandard and what can't produce a safe quality drug.

FARENTHOLD:Again, at the amount of time, just take is I think criminal and add to that, we've got a court system with plenty of attorneyswilling to go after any company that screws up even the slightest -- this got to be fixed. Thank you, I yield back.

CHAFFETZ:Gentleman makes a good point. I'd find out some further questions on this. But will now recognize the Ranking member, Mr.Cummings for five minutes.

CUMMINGS:Ms. Retzlaff, when Turing -- and I'm going to remind you that you're under ought, by the way. When Turing increased theprice of Daraprim by more than 5,000 percent on August 11, 2015, you are hoping to avoid the attracting attention from themedia and the public. Is that right?

RETZLAFF:Yes, of course.

CUMMINGS:Yes, you were. Despite your best efforts, the price increase soon became a major new story on October 8. An outsideconsultant, send an e-mail to a member of Turing's Board of Directors laying out a P.R. strategy. I'm sure you'd paid a lot forP.R. here for Turing to respond to this unwanted attention. The consultant suggested that the board remove Mr. Shkreli asCEO, and I quote "As early as next week". The consultant also suggested that Turing reduce the price of Daraprim. Is thatcorrect? Come on, talk to me.

RETZLAFF:I believe that's correct, yes.

CUMMINGS:You don't know? You got -- you're getting these memos with regard -- did you have any answer for me?

RETZLAFF:Yes, that's correct.

CUMMINGS:Right. So, OK. So, he wrote, and I quote, "The price drop has to be significant and tied to something. This cannot be seen as




something that a PSV as arbitrary as a price hike in the first place. Do you remember that?"

RETZLAFF:Yes, I do.

CUMMINGS:All right. The consultant recommended the Turing issue, a press release announcing a, quote "Package of patient assistantprograms for patients." Do you remember that?

RETZLAFF:Yes, I do.

CUMMINGS:Did you follow over the instructions?

RETZLAFF:Not all of them.

CUMMINGS:All right. We're going to talk about that. The consultant also recommended the Turing, quote, "Specifically tie profits fromDaraprim to the research and development of a new and more effective treatment for Daraprim patients, do you rememberthat?"

RETZLAFF:Yes, I do.

CUMMINGS:And that's exactly what you're doing today and the consultant also suggested a long-term strategy of and I quote, "Forcing afocus on Turing as a research and development company not a pharma hedge fund hybrid." Do you remember that?

RETZLAFF:Yes, I do.

CUMMINGS:Now, Ms. Retzlaff, this e-mail offered to you by the board, by board member. Do you recall receiving it?

RETZLAFF:




I believe, I did. Yes.

CUMMINGS:OK. It seems that Turing followed most of the consultant's advice with one glaring exception. You never lowered the price ofDaraprim. Let me read another e-mail you receive from Turing marketing executive order October 2nd, 2015, says you are soconcern about patients in discounts. She wrote and I quote "The course of the impatient hospital is pretty clear now, it'sprice".

So as you can see at the quote and this is what she said, "We all realize that we need a solution as soon as possible. But wedon't want to commit to something beyond the small impact that would potentially debilitate the business and risk futurerevenues" remember that?

RETZLAFF:Yes I do.

CUMMINGS:Now Ms. Retzlaff, this e-mail indicates that Turing was aware that its price increase had created issues for inpatient hospitalsMr. Cartwright was just saying.

It also indicates that Turing was unwilling to do anything to risk future revenues including actually lowering the price foreveryone. Is that fair -- is that a fair reading?

RETZLAFF:No it's a fair reading.

CUMMINGS:Well, give me what is the fair reading.

RETZLAFF:Yes, we did learn that price seemed to be an issue with hospitals, so then in November, we actually announced a discountingprogram for hospital is up to 50 percent and then based on feedback from hospitals, we also introduced the smaller accountbottle to alleviate there final percent

CUMMINGS:I'm glad you said that. Now let's move on. Let me read an excerpt from an e-mail that Ed Painter Turing's head of investorrelations said to Patrick Klucher (ph), the director of business development on September 26, 2015.

Mr. Painter if there was a lower price Turing could announce that would discourage the generics from entering the market andgenerate positive P.R. Mr. Klucher (ph) replied and I quote "It's best we don't be P.R. something like vet unless it's somethingwe are willing to commit the doing" he added quote "only thing to P.R. is the patient assistance program and the R&D."




Mr. Painter replied jokingly and this is what -- this is the quote and maybe you could interpret this for me, maybe somemillennial talk, I don't know but it says, "My hours begging to D and my pet, cat and rat". Ms Retzlaff, do you know what thatmeant? What he was saying.

RETZLAFF:I'm sorry I do not

CUMMINGS:But this was sent to you. I mean, you didn't read it, you didn't ask?

RETZLAFF:I've read it but I don't know what that sentence...

CUMMINGS:OK. They are very real issues for people with compromised immune systems. And this e-mail indicates that despite thepromises of lowering the price internally, Turing has no desire to actually fix what has broken. And the thing that really getsme, Mr. Shkreli, who just sat there, your former CEO is that right?

RETZLAFF:That's right.

CUMMINGS:Walk out of this hearing a few minutes ago and before he probably got out of the door, he says a tweet calling everybody onthis committee "imbeciles". Did you know that?

RETZLAFF:I was not aware of that.

CUMMINGS:So instead, you all spent all of your time strategizing about how to hide your price increase behind positive P.R. and comingout with stupid jokes. While other -- not, while other people were sick and they try to figure how they were going to survive.

RETZLAFF:No that is not true.

CUMMINGS:And as I said before, this is about a -- a lot of this is about blood money. And Mr. Schiller, one question for you. You said andI quote, a few minutes ago, you said, "In some cases, we have been too aggressive in increasing prices". Do remember




saying that?

SCHILLER:Yes, I did.

CUMMINGS:Now, just -- so that we can be effective and efficient in what we do, are you all going to be reducing prices?

SCHILLER:We have looked across our portfolio and we have reduced prices.

CUMMINGS:Are you going to continue to reduce prices. You said that you've learn your lesson. You said that PSN is now going to --apparently he has a new attitude. I want people watching this to know that they are not being ripped off.

SCHILLER:We looked across our portfolio, we took a 10 percent reduction in two of our largest business units, our dermatology divisionand our ophthalmology division. We reduced by -- up to 30 percent Nitropress and Isuprel. We increased to our patientassistance programs.

We're going to continue to look at where it is to improve access at affordable prices. At the same time manage our businessso we can invest in R&D manufacturing and place like Rochester and Greenville South Carolina.

We have made mistakes and grew very quickly. We're acknowledging those mistakes, we're going to change. We're going tobe, you know, a responsible corporate system and a part of the health care community and we had -- and we've madechanges.

CUMMINGS:Right. So you're going to continue to make those changes? Continue to make changes?

SCHILLER:We're always going to look to do the right thing, but we have made significant changes.

CUMMINGS:Thank you very much, Mr. Chairman.

CHAFFETZ:Thank you. And I recognize myself. Ms. Retzlaff.




RETZLAFF:Yeah.

CHAFFETZ:The proper role of Congress is not to micromanage a private company. It's not my role but -- and I do believe in the right toprofit. I think profit is a motivator that does a lot of good. But I also do believe that it's imperative that people tell the truth thatthey're ethical, that they not mislead the public, that they properly represent the truth. Would you disagree with that or agreewith that?

RETZLAFF:I agree with that.

CHAFFETZ:All right. Let me show you a video. This is a couple of weeks ago. This is, I believe, on Channel 5. This is Mr. Shkreli. Allright.

(BEGIN VIDEO CLIP)

SHKRELI:It's up to the company. If you raise prices and you don't take that cash and put it back into research, I think it's despicable. Ithink you should not be in the drug business. We take all of our cash, all of our extra profit and spend it on research forthese patients and other patients who have terrible life-threatening, life-ending illnesses.

(END VIDEO CLIP)

CHAFFETZ:Is that true?

RETZLAFF:We invest 60 percent of our net revenues into research and development.

CHAFFETZ:But that's not all of it, is it?

RETZLAFF:He may have meant profits. He may have quoted. So we...

CHAFFETZ:No, he said, "We take all of our cash. All of our extra profit." What's "extra profit"?




RETZLAFF:I'm not sure what he meant by "extra profit." What he could meant -- what he could have meant as once we deal withexpenses, you know, just operational administrative expenses and we take that money and bring to R&D.

CHAFFETZ:Are you really testifying that you're losing money?

RETZLAFF:Yes. I think you have seen our financial statement.

CHAFFETZ:Yeah, you're not losing money. You're picking it in hand or just as fast as you can. Let me ask you about some of that.

RETZLAFF:Sure.

CHAFFETZ:And first let me ask you, are you planning another price increase?

RETZLAFF:No, I am not.

CHAFFETZ:That's not what the documents here. We'll release into the media and you can fight that one in the public. But based on this,who's -- do we know who Adam Stone is?

RETZLAFF:He's an investor.

CHAFFETZ:Yeah. And he wrote to Mr. Martin Shkreli and he wanted the public relations to calm down, one of the politicians to slowdowna little bit and Mr. Shkreli said, "We could wait a few months for sure." It sounds like a plan of price increase for me.

RETZLAFF:What was the timing of that? Do you know?




CHAFFETZ:December.

RETZLAFF:December. Well, that was -- subsequent to that, Mr. Shkreli is no longer the CEO. So I will have final call on those businessdecisions.

CHAFFETZ:Well, and we'll see what happens with that.

RETZLAFF:Yeah.

CHAFFETZ:The company has been a business for how long?

RETZLAFF:We started operations in February of last year.

CHAFFETZ:So about a year?

RETZLAFF:Yeah, close to a year.

CHAFFETZ:And within the first year, you've given out raises?

RETZLAFF:Yes, we have.

CHAFFETZ:Giving out bonuses?

RETZLAFF:I don't believe we've given out bonuses as of yet.




CHAFFETZ:Well, your spreadsheet said, "30 percent across the board, everybody gets a bonus."

RETZLAFF:But we haven't paid out any bonuses.

CHAFFETZ:We have this document from the agenda of October 14, 2015, one person had a pay increase of $250,000 to $600,000,correct?

RETZLAFF:Correct.

CHAFFETZ:Another person had a pay increase of $275,000 to $600,000, correct?

RETZLAFF:Correct.

CHAFFETZ:Another person had a pay increase of $160,000 to an annual salary of $800,000, correct?

RETZLAFF:I'm sorry. What was that one?

CHAFFETZ:From -- and additional $160,000 to $800,000.

RETZLAFF:I'm not aware of that one.

CHAFFETZ:We'll release it. You could look at it. It's from your agenda in October.

Now, again, people can make a profit, they could pay exorbitant salaries, but they'll come before the American people andsay and cry it and shed a tear and say, "Well, we're not making any money." And don't have the person who's the majorinvestor into the company come and say, "We invest all of our cash into research and development."

We have e-mails that show here they're not even sure if they're going to invest in research and development. The person




wanted to check out and make sure that was even part of the plan. And it sounds like it can drive P.R. plan in order to dothat.

Do you know who Metro Yacht Charters is?

RETZLAFF:Yes, I do.

CHAFFETZ:Why would you know them?

RETZLAFF:I believe we rented Metro Yacht Charters for a sales force meeting.

CHAFFETZ:Yeah, for a party, $23,000. Did you spend money on fireworks?

RETZLAFF:Yes.

CHAFFETZ:Did you spend money a cigar roller for the yacht night, 800 bucks?

RETZLAFF:Yes, we did.

CHAFFETZ:OK. So don't tell me that you're losing money. Don't try to pretend and tell us that this -- the $750 is justified when you've gota woman who's got AIDS, and what is she supposed to do? She's supposed to tweet Martin and try to get that for a penny?Is that how that works?

RETZLAFF:No, that doesn't work. That's not how it works.

CHAFFETZ:It doesn't work, I get it.

RETZLAFF:




That's not how it works.

CHAFFETZ:So who pays the $750?

RETZLAFF:You know, $750 is paid primarily by commercial insurers...

CHAFFETZ:Who...

RETZLAFF:... that represents the minority of patients about 25 percent. Again, that's a very small number of patients. For only...

CHAFFETZ:But it generates a lot of revenue, doesn't it. And who pays those insurers? Are they just the big bad insurance companies thatare raking on all these profits? Who are these insurers? Who pays their money who then you -- have to pay you?

RETZLAFF:I supposed its big companies that are insuring their employees, for the most part.

CHAFFETZ:No, it's people.

RETZLAFF:And again, because there are so few patients treated with Daraprim, the impact on their budgets -- the budget impact is very,very small.

CHAFFETZ:What's your first year? What is your first year revenue?

RETZLAFF:This year's revenue. Our gross sales were 98, our net sales were 20.

CHAFFETZ:The what? Twenty million right?




RETZLAFF:Twenty million, yes.

CHAFFETZ:Yes. That comes -- and this is one drug that just services about 3,000 people.

RETZLAFF:Yeah.

CHAFFETZ:And then you wonder why the average person who's trying to scrape for buying and they see their insurance rates go up,double digits, screaming high, it's because of people like you. That's why they're going up. It's one of the key reasons.

RETZLAFF:I will add, and I think I need to be clear here is that, Turing is a specialty pharmaceutical company. We are 139 employees,36 of which are dedicated to R&D. We are absolutely committed to taking that revenue that we generate from Daraprim andinvesting it in next generation treatments as well as other neglected diseases. That's a fact.

CHAFFETZ:I think that is legitimately part of what you're doing, but what Mr. Shkreli is saying publicly, which you're putting to the public,to say that you're losing money, it's not true.

And if you're going to continue to lie to the American people, the Congress is going to continue to probe. I can investigateunder this, under the House Rules. The House of Representatives, the oversight committee can investigate anything at anytime.

RETZLAFF:Right. I am being truthful. I'm looking at our income statement right now and our operating profit for 2015.

CHAFFETZ:I have additional questions. I've gone far past my time. Let's recognize the gentlewoman from Michigan, Ms. Lawrence for fiveminutes.

LAWRENCE:Thank you, Mr. Chairman. I just wanted to -- before I start with my questions, just state that heart disease and stroke kills onein three women, more than all the cancers combined. Personally, I experienced the miracle of medicine and the need for myhusband who had a heart attack.

So I really want to talk about R&D. In the 2014 proxy statement filed with the SEC, Valeant reported that one of the keyelements of a company's operating philosophy is, and I quote, "Do not bet on science, bet on management." And it's been




reported, financial reports that Valeant R&D was equal to only 3 percent of sales between 2014 and 2015. Mr. Schiller, is thiscorrect, 3 percent of sales is R&D?

SCHILLER:This past year, it would have been about 4 percent of total sales, but a big chunk of our portfolio are consumer products orgenerics, which don't require R&D. If you look at our branded pharmaceuticals, the number is 8 percent and then last year, ifyou look at what we spend to acquire late stage projects, which we later commercialized, it was over a billion dollars.

So we have a significant commitment, we have over 200 active programs in R&D. We expect this year to get approval for asignificant new glaucoma drug and a new biologic for the treatment of moderate to severe plaque psoriasis and we haveprojects in Phase 1, 2 and 3 which we hope would bring -- and new products in the future. There's tons of risk associated withit, but that comes with the territory and we will continue to invest in that portfolio.

LAWRENCE:Three percent for R&D, you said it was a billion dollars of our -- of that. What is 3 percent?

SCHILLER:If you look at our total revenue, we spent around 4 percent of revenue. But again, we have a very significant percentage ofour revenue which is consumer products or generics where there's no R&D required. So it's about 8 percent on our brandedpharmaceutical business, which does require R&D. Then in addition, we spent a billion dollars on inquiring late stage productslast year, over a billion dollars.

LAWRENCE:Committee staff received an e-mail from Dr. Benjamin Levine who is conducting an NIH funded research on exerciseintolerant in heart failure. And Isuprel, am I saying that correct?

SCHILLER:Isuprel.

LAWRENCE:Isuprel, is a drug that stimulates the beta receptors of the heart, natural pacemakers and causes the heart rate to go up usingthe same biological pathway. Now, Dr. Levine uses this drug to conduct his research and has been impeded and meeting hiscommitments to NRH because of the increase of cost of this drug. He has attempted to reach out directly to your company tono avail.

Here we have a doctors focused on doing real research for people's lives. Mr. Schiller, what should Dr. Levine do so that hecan use this drug in his research to fulfill the requirements and perhaps extend the lives of individuals? What do yourecommend?

SCHILLER:Well, I'm not aware of that. But now that you'd made me aware of it, if you would give me his number, I would call him




tomorrow and make sure that we help him wherever we can, make sure it's in a compliant fashion.

LAWRENCE:Because sir, you have to know the connection your research that you're funding, but also if you are increasing the drugs thatare being used in research, you must recognize the impact you're having.

SCHILLER:Well, of course we do. And if there's ever a situation where we had, we need to do something about access, that issomething we're going to do. So I am happy to talk to him tomorrow and see if we can rectify that situation. I am assumingit's all compliant, I'm assuming we can take care of that tomorrow.

LAWRENCE:I just want to say this before my time runs out. In America, well, while we are a leader in the world of R&D and medicalresearch in some areas, we have turned the focus from medicine being a part of healing of people to a profit-making industry.Every business should make a profit, but it is turning from profit to greed. And this is why this is so important to me.

I know there are senior citizens who are making decision between food and drugs, the medicine that they need to live andthen there is someone in your industry that's buying a yacht. And I want you to be able to be part of the American economyand pay salaries that are will allow a basic and even on advance based on education, quality of life. But we are at the pointwhere greed is not acceptable in America. And I'm very concerned about that.

CHAFFETZ:Thank you. The gentlewoman's time has expired. Now, we recognize the gentleman from North Carolina, Mr. Meadows forfive minutes.

MEADOWS:Thank you, Mr. Chairman. Thank you for holding this hearing and further thanking the staff for bringing this to the attentionbecause the American people, it was obviously the work of this committee, both majority and the minority where we'vehighlighted this issue. But it's truly an issue that must be addressed.

And the best way to address it is to put companies that do the kind of -- to use a tweeted out word, imbecile pricing strategy.It used to put you out of business. So the barrier to putting you out of the business, obviously, Mr. Flanagan, the FDA plays arole in that. And let me tell you why I'm concerned, because I hear from a number of stakeholders that they're afraid to evengive me the details for fear of retribution from FDA in terms of the potential of approval process that we go through.

And the reason why companies like this can complete is because there's no one to compete against them, you know, they'resmall little drugs, orphan drugs, there are things that for average company don't pay for the big pharmaceutical company, itdidn't pay. But there are thousand -- I mean, to have, you know, $20 million sales, $90 something million sales that was justtestified, there are lots of companies that would be willing to take that on, smaller companies.

So Dr. Woodcock gave her testimony. Did you agree with all of her testimony, Mr. Flanagan? Turn on your mic.




FLANAGAN:Yes, sir.

MEADOWS:OK. So you agree with her. She testified also in the senate just a few days ago. So are you familiar with her testimony there?

FLANAGAN:Yes, sir.

MEADOWS:So I guess the question would with that senate testimony, we're talking about all of the progress we're making and how we're90 percent and we've made great progress, but I look at her testimony and it looks like you've only approved 25 percent ofthe applications over a three-year period. Do you call that a winning percentage?

FLANAGAN:So right now, it usually...

MEADOWS:Yes or no, winning percentage, 25 percent over three years. Is that a good track record?

FLANAGAN:I can't answer the question yes or no. It usually takes on average four review cycles to approve a generic drug submission.So it's not that way for the brand side. On the brand side, there's about 90 percent...

MEADOWS:I'm talking about generics. And so, let's look at this, if you had put up the first slide for me, one of the concerns I have is withthe ambiguity and we have this particular letter which actually is a letter from Dr. Woodcock that says that in terms of theapplication process that with certain types that they will go ahead and allow that application to be filled out with less than 12months of stability data going to -- it says, "Generally, we will allow it to happen with six months," and on -- and the drugs, wewill actually allow that application process to be started with three months of stability. Would you agree with that?

FLANAGAN:Actually, I'm not the expert on stability. That's the office of pharmaceutical...

MEADOWS:So you're expert...




FLANAGAN:It's a different office than me.

MEADOWS:All right. I thought you were the technical expert is what you just said a few minutes.

FLANAGAN:I'm halfway just in my...

MEADOWS:OK, OK. So would you agree that this is typically the way the FDA does business? That they get faster approval for genericsin the application process?

FLANAGAN:I don't think that our approval...

MEADOWS:OK. Let me cut to the chase. I've got one minute left. Put up the other slide which actually is on -- going to case 2 slide, ifyou would. Here is my concern, I've got a number of stakeholders throughout North Carolina and across the country who arewilling to compete with these two country -- companies and they are willing to provide the drug to compete with them andthey have been told by the FDA, "Well, we got to get a little bit more information. We got to wait for 12 months of stabilitydata," instead of going with their own internal data, if you look it says, "A company initially submitted three-month long-termaccelerated process for three badges." Can you do that consistently for all of these that want to compete with this kind ofcompanies?

FLANAGAN:So I understand your question, it's the same issues. It's the stability issues are out of the Office of Pharmaceutical Quality,which is just a different office.

MEADOWS:All right. So let me close with this, is there anything the FDA can do to make sure that we can speed up the process so wecan compete with companies who are willing to price gauge on a regular basis. Can you speed up your process, Mr.Flanagan?

FLANAGAN:Your -- Mr. Chairman, can I answer? I don't know how the rules work.

CHAFFETZ:Please, yes.




FLANAGAN:So two things, first is if a submission comes in the door and it's for a product for which there isn't generic competition or forwhich there is a drug shortage, we consider those to be priorities and we expedite their review like a...

MEADOWS:So that's interesting because I have a letter that basically from Dr. Woodcock that would suggest that shortage is not part ofyour decision making process. So you're saying her letter is wrong?

FLANAGAN:I need to see the letter. We, for sure, consider drug...

MEADOWS:We'll follow up on up on a number of other questions. I'm way beyond my time.

CHAFFETZ:Gentlemen, it's time to expire. We do expect votes on the floor soon. So we'll now recognize the gentlewoman from NewMexico, Ms. Lujan Grisham, for five minutes.

LUJAN GRISHAM:Thank you, Mr. Chairman, and I really appreciate you holding this hearing. And quite frankly, I share my colleague's outrage.

Now, I think outrage is actually too soft a word given what we've heard today, what we knew before today, what we still don'tknow after today, about what's really going on to make sure that there is fair pricing, protected access from the patient'sperspective to life saving drugs and treatments. And I want to talk a little bit in my statement to get to my question about FDAapproval and making sure that we do everything we can here to give the right opportunity so that we're focused on the rightthing here, which is patient. That's the right thing to focus on here.

But in all of the e-mails that you've had members read you and I have the e-mail of my own. If I've got time, them I'm goingto read it to make very clear, particularly from Turing, that FDA approval and that R&D, that none of those issues were issuesthat cause the price gauging that we're talking about today.

So as we sort of figure out what we can do better, I'm really interested in what ought to be doing to make sure that there'sreal accountability into an entire industry that has made it their practice to put profits and not small profits, outrageous profitsto the patient.

Actually, Ms. Retzlaff, you certainly indicated that really it's not patients you pay, you know, its hospitals and insurancecompanies. You know, there's a lot of people that don't love insurance companies and hospitals. So we'll shift and try to shiftthe focus. Where do you suppose the majority of their reimbursements come from, Ms. Retzlaff?

RETZLAFF:




Again, as I've said, there are so few patients treated with Daraprim and only about -- and very few that are covered bycommercial insurance.

LUJAN GRISHAM:You know, in your...

RETZLAFF:The overall impact...

LUJAN GRISHAM:When you're dying...

RETZLAFF:The overall impact is very, very small. And to our knowledge, no...

LUJAN GRISHAM:So when they cost ship that -- I'm going to interrupt you. So when 3,000 people have their HIV/AIDS drug shifted someplaceelse and my copays go up and my out of pocket cost up, my hospital access goes up and this country is under bedded in thehospitals, and do you know who is paying them? Medicare, Medicaid and Veterans and TRICARE. And guess who pays forthose, I do, every member in this audience does, every member of this committee does.

I cannot believe that you're indication here is, that the cost really, in terms of the number of people who are impacted is sosmall that that's not really the issue. It is the issue. And let's talk about a couple of other drugs. Let's talk about anothercompany, let's talk about Gilead, let's talk about the hepatitis C drugs, Sovaldi and Harvoni, which retail at 84,000 and 94,000respectively for 12 recourse. So we can treat this drug, we can cure hepatitis C but because of profit we're not going to cureit, instead we're going to create an environment where people are going to have to have liver transplants.

So I see a pattern here that is incredibly frightening for the overall aspect of getting a handle on health care costs and clearlyis a shift for moving from protecting patients in this design and it isn't a result of R&D, I mean, we've got many e-mails fromyour company that would indicate the directly, we just passed 21st century cures, which is another indication that Congress isvery interested in making sure that innovation and research and development and that the FDA approval without minimizingpatient safety is as streamlined as we can. And yet, that isn't an indication, at least not as a result of this hearing that that'sreally an issue about how we determine drug costs are, greed is how we determine what costs are.

So here's my question, given what you have stated today and given the questions and the e-mails that we have providedduring this hearing about Turing, would you say that the practices at Turing are the same practices for all pharmaceuticalcompanies or is this just really an issue for your company?

RETZLAFF:Turing Pharmaceuticals is a research-based pharmaceutical company that invests. It's committed to developing andcommercializing treatments for rate and neglected diseases. As I've said in my testimony, I...




LUJAN GRISHAM:So this is the practice of everyone else, this is just your practice?

RETZLAFF:I can't speak on behalf of other companies. But what I can tell you is that we are an ethical pharmaceutical company. As I'vesaid in my testimony, I was comfortable with the price increase of Daraprim provided the company was willing, and it was, toinvest generously in...

LUJAN GRISHAM:I'm going to reclaim my five...

(CROSSTALK)

LUJAN GRISHAM:This is how this works in this hearing, I get to reclaim my time. The issue is I think it's clear today that that's your intent oryour motive. We've provided plenty of information here that would not just suggest but clearly identify the opposite of that.

Mr. Chairman, thank you for...

RETZLAFF:I disagree with you...

LUJAN GRISHAM:... exposing these issues.

RETZLAFF:... respectfully.

CHAFFETZ:I recognize the gentleman for Georgia, Mr. Hice, for five minutes.

HICE:Thank you, Mr. Chairman. I want to go real quickly to you, Mr. Flanagan, regarding the generic backlog and for Mr. Meadowswho was talking about. Can you provide a little bit more clarity as to how the FDA is prioritizing applications to expedite thereview process?

FLANAGAN:Yes, sir. So there's a policy that's available online, like you can find it on the website. And basically, certain categories of




submissions, like first generics, that could potentially open the market to competition, drugs that could mitigate shortage,PEPFAR or HIV drugs and a couple of other specific categories who submit...

HICE:So it's based on the disease, the prioritizing. Is that what you're saying?

FLANAGAN:The PEPFAR ones you based on the disease, the shortages are just based on whether -- kind of whether there's a shortageout there in providers. And first generics, it depends on whether the market has already been, you know, opened to generics.

HICE:So there's no real standard policy?

FLANAGAN:Oh, there's a standard policy.

HICE:All right. How long is four review cycles?

FLANAGAN:It's hard to answer that question because it depends on how long it takes the applicant to respond back to us.

HICE:OK. The targeted action dates, they're assigned and you have their aspirational noncommittal, what's the point of having atargeted action date if it's basically means nothing?

FLANAGAN:Well, industry very strongly requested them for the following reason. So we have this new user fee program, beginning inyear three of it, you get a goal date that tells you when we're act in your submission. But for everything prior to year three,there are goal dates. Industry needed some kind of information so they could plant -- plan product launches and conductother types of business planning and they strongly requested that we disclose to them what our aspirational...

HICE:But is it true that these dates really are virtually meaningless because there's no commitment there?

FLANAGAN:No.




HICE:All right. So well, according to what you said, they're aspirational, they're noncommittal and it appears we're got months andmonths and months, 15 months plus before we ever get these prioritized and get something going. So the targeted actiondates basically are meaningless.

FLANAGAN:Well, again, Congressman, industry strongly requested that we do this...

HICE:We're all requesting something to be done, and that's the problem. You have these targeted dates but nothing -- the backlogis not getting any better, it's getting worse.

FLANAGAN:No, the target action dates say when we're going to take action on each of the submissions in the backlog. It's a way oforganizing the backlog and disclosing to all the companies who have submissions in there, "Here's when we think when we'regoing to move your submission."

HICE:OK. Mr. Chairman, I would like -- I mean, I have other questions, but I'd like to yield the remainder of my time to my colleaguefrom Georgia, Mr. Carter.

CARTER:Thank you, gentleman from Georgia. Ms. Retzlaff, when Turing bought Daraprim, was it especially to (inaudible) educationthen? No, it was not?

RETZLAFF:It depends on how you define the specialty...

CARTER:No, it has -- I define the specialty medication as one that's available only through specialty pharmacies. You said yourself thataccess to Daraprim was a problem when the price went up. And the only way...

RETZLAFF:When we...

CARTER:I reclaim my time. When the price went up, it became distributed only through specialty pharmacies. I cannot -- in mypharmacy, I cannot buy.




RETZLAFF:That's not...

CARTER:It did. You created a specialty medication and you did it intentionally because you had a limited market of only 3,000 patientsand you knew you weren't going to be able to make a profit unless you went up on that drug and it became a specialtymedication. You abused the system is what you did. A PBM owns is a specialty pharmacy and now you're using it onlythrough specialty pharmacies. You know...

RETZLAFF:May I...

CARTER:... Mr. Retzlaff -- Mr. Schiller, let me tell you, I've been practicing pharmacy for many years. I've spent my adult life dispensingmedications to help people get well. I find at reports of what you done.

I've seen advances in medicine have been amazing to me. Since I started practicing, we've had advances that are justamazing and I've always been amazed at the pharmaceutical companies and when you come in and you rate the public andyou make, I give this a black eye, I find it repulsive.

Mr. Chairman, I want to thank you and your staff for bringing this hearing here and for all those involve. You've been mostcooperative and I thank you for this.

RETZLAFF:May I correct the statement?

CHAFFETZ:Sure, go ahead.

RETZLAFF:So, when we purchase Daraprim it was already in a close distribution model. So, we inherited that model from the previousmanufacture. And subsequent...

CARTER:Then why did you say that access that Daraprim was a problem when the price went up? You said that to yourself.

RETZLAFF:Access to Daraprim was a problem because of the distribution model that we inherited from the previous manufacturer. That's




what I said. And subsequent to that, we have made -- we have taken action. We have...

CARTER:You said, when the price went up it became a problem.

RETZLAFF:I don't believe that price was the driver of the access to problem.

CARTER:That's not what you said earlier. Mr. Chairman, earlier...

CHAFFETZ:Thank you, gentleman. We will now recognize the gentleman from New Jersey, Ms. Watson Coleman.

COLEMAN:Thank you, Mr. Chairman. I think I want to follow on Mr. Carter's line of questioning because I think I quite understand now.Before you acquire the drug, was there a problem with access to it?

RETZLAFF:Yes, there was.

COLEMAN:So, you're desire to acquire this drug for which there was supposedly a problem with accesses. That mean that those peoplewho were suffering from -- what is that effect, infections associated with HIV and AIDS did not have access do it the way inneeded it.

RETZLAFF:So, in June, that was three months before we acquire the asset, the previous manufacture did what they went to specialtydistribution model, they close distribution.

COLEMAN:That was three months before you -- then you purchase it.

RETZLAFF:Three months before we purchase that after...

COLEMAN:What was going on before those three months? Was there still that close distributions?




RETZLAFF:No, it wasn't. It was broader distribution.

COLEMAN:So with that, as a result or perhaps conversations with your company and anticipation of your company...

RETZLAFF:Absolutely not. Absolutely not.

COLEMAN:How would you believe that?

RETZLAFF:Absolutely not. There's plenty of proof that arrangement with the specialty pharmacy originated. In fact, it's not with theprevious manufacturer but the manufacturer before that.

COLEMAN:Yeah, Walgreens which is the close distribution, right?

RETZLAFF:Yes.

COLEMAN:Walgreens said, informed you all their concern about access -- this drug access to other patients, to other pharmacy is and etcetera, et cetera. What did you all do in response to that?

RETZLAFF:So, we've added a specialty distributor that addresses -- that eliminates a lot of the red tape and distributes the product toroughly 90 percent of hospitals. We're going to process of adding additional specialty pharmacies to the network. We haveworked with the different state ADAPs to make sure that all the processes are in place so that they can access Daraprimseamlessly and these are most vulnerable patients by the way with -- who are cover by ADAP.

COLEMAN:So, as you -- once you acquire this drug and you increase the cost associate with this drug which I still elude me why thiswas done other than to make somebody very, very, very, very wealthy. You all anticipated that there were -- there was goingto be push back from Human Rights Organizations, from Advocacy Organizations.




And so from where I have read and I believe some of this is obviously from internal memos. It didn't seem that your companywas that all concern about ensuring that people who needed this drug could have access to it. It was about managing themessage for your company.

RETZLAFF:No, that is not true. In fact, the actions we took reflect differently. We put in place multiple patient access programs to ensurethat they go on access.

COLEMAN:Thank you very much. It seems to me that you all respond to a whole bunch of pressure and you have your serious issuesthat you have to contend with now your company as a very bad physical public image right now. It's like, if you care to knowthat.

I come from a state of New Jersey. We have large pharmaceutical companies, we have large universities, we do a lot of R&Dand the people that engage in research and development, they are not trying to make somebody a billionaire just trying tocure people. And that is -- and even the issue here, because you all aren't trying to do R&D, you were manipulating access toa medicine that already show the benefits of treating a very dangerous disease.

And with that, I yield my time back to you sir.

CHAFFETZ:Thank you. I now recognize the gentleman from Illinois, Miss Duckworth for five minutes.

DUCKWORTH:Thank you, Mr. Chairman. I want to thank both of you and the ranking member for your collaborative efforts to raise this issuetoday. I want to start off by talking about a couple in my district.

They are 73 and 74 years old, respectively and they are stretch every single month to cover their expenses. The wife isdiabetic and she has a number of medical conditions and for 2016 we're probably lead to an out of pocket prescription pricetag of around $46,000. Her husband's out of pocket expenses for prescriptions are going to be about $19,000 a year.

Now, since they are retired they are seriously anxious about their finances, how they are going to continue to afford to pay fortheir health care. And get this. The wife feels endlessly guilty because her medications are the most expensive and even withsome coverage, they together face overwhelming pressure of having to manage their family's budget which after medicalexpenses is only about $20,000 a year.

This is to pay their home loan, property taxes, as well as food and utilities. This is a crisis that is far too common across thecountry. And when I hear about raise like from my constituent and a congressional district, and then I hear about $200,000bonuses for executives in a pharmaceutical company that purposefully shutdown distribution of a life saving drugs so that theycould make that money, it disgust me. It is absolutely disgusting, you know.

And the Valeant and Turing witnesses have testified today have used many different tactics to downplay the harmful effectsof their price increases. They want to shift the blame and they want to shift the attention and say that, "Oh, the patientpopulations are so small that the price increases, doesn't affect the larger health care system and individuals that they are




paying on the more mainstream drugs, you're not being affected. It's just those 3,000 people because there's only a few ofthem."

And then there's actually the large insurance companies and not individual patients that they are disburden. But let me tellyou, every one of us pay those insurance company. My entire office is in ObamaCare. We pay those insurance companies.

So, this hearing has really show that this is hardly the case. And, Ms. Retzlaff, isn't it true that Turing price increase led toastronomically higher copays for many of your privately insured patients?

RETZLAFF:Yes, it did but through our copay program we CAP them at $10.

DUCKWORTH:Really?

RETZLAFF:Yes, that's true.

DUCKWORTH:Well, you know, your own -- your internal memo identify that, you know, one patient had any insurance copay raise up to 50percent increase to $16,000 and others I have copays ranging from $1,000 to $6,000.

Miss Retzlaff, is it true that some doctors treating patients in hospital settings were force to switch to secondary alternativetherapies because they could not access Daraprim?

RETZLAFF:I'm supposed that's true but in response to that we have discounted Daraprim by 50 percent and introduce the smaller bottleto better meet their needs and that seems to have resolved the issue.

DUCKWORTH:Well, you know, doctors are saying that the -- they have to switch and it was not their preference for whether they would treattheir patients.

RETZLAFF:And being in the hospital setting, we have off -- we are offering discounts now, so Daraprim can be available for thosepatients.

DUCKWORTH:Can you confirm that before Turing owned Daraprim it was widely available covered by most insurance and affordable, beforeyou owned it?




RETZLAFF:Yes. It was covered by most insurance. I don't know what you mean widely available.

DUCKWORTH:OK. Mr. Schiller, is it true that your price increases on Isuprel and Nitropress have cut into hospital budgets?

SCHILLER:Yes, it certainly would have cut into their budgets. There were -- the price increases were meant to stay underneath thereimbursements for the bungled rates but it was certainly hit their budgets.

DUCKWORTH:Yes, it absolutely did. In fact, the Johns Hopkins Hospital, their chief pharmacy officer in Baltimore said, "These expensesdeplete importing savings and result in less funding for research programs and technologies that are improve care." This isDaniel Ashby and he further says that the high cost threatens patient's access to critical treatments and create financialburdens to low and middle income patients.

Mr. Schiller, these are only two of the many drugs your company owns and has increase the price off, is that correct?


DUCKWORTH:How many other drugs have you increase their price up?

SCHILLER:I don't know off hand but...

DUCKWORTH:So, you have so many that you don't even know how many other drugs you've jack up the prices on everyday hardworkingAmericans who are suffering from diseases. I mean, that (volume) was -- you're coming to testified before Congress, youdon't even know how badly you suck it to the American public.

SCHILLER:We have 18,000 products around the world.

DUCKWORTH:OK.




SCHILLER:We have certainly raise the price on some in a number that you all have mentioned. We have acknowledged mistakes. We'vealso acknowledged that going forward it would no longer be looking for those opportunities to purchase these older drugs.When I got -- when I took over beginning of this year, we froze all price increases.

DUCKWORTH:Have you return the price increases back to where they were before you raise them? Is that's the important question? I yieldback Mr. Chairman.

CHAFFETZ:The time is expired. There's a (boat) on the floor that committee is going to go into recess. So, if you have intention ofcoming back, you know, sooner than 12:15, committee stands and recess until that time.

Committee will come to order. We'll resume now. Thank you for your patience and understanding both happened in them. Iappreciate your understanding in that way.

Dr. Woodcock has rejoined us. We appreciate you being here. I know you've -- we're testifying with us, testified anothercommittee and now you're back and so, I appreciate you toggling back and forth.

In consultation with the minority, we're going to go ahead and start. We're now going to recognize the gentleman from Texas,Mr. William Hurd for five minutes.

HURD:Thank you Mr. Chairman. My first question, Ms. Retzlaff, when you all made the decision to go from $13.50 to $750 a pill,who made that decision?

RETZLAFF:The final decision was made by the former CEO.

HURD:All by himself?

RETZLAFF:Yes, he made the final call.

HURD:There was no conversation? You didn't know in advance? You all found out after the fact he made the decision and told you?

RETZLAFF:




No, there were certainly conversations about it.

HURD:Who was involved in those conversations?

RETZLAFF:The senior leadership team.

HURD:Which would be?

RETZLAFF:Myself, our president of R&D.

HURD:And that person's name?

RETZLAFF:Dr. (inaudible).

HURD:OK.

RETZLAFF:Our chief people officer which would have been Peter Mile (ph) -- let see. I'm do not recalling all of the...

HURD:Can you (furnish) us a list of all...

RETZLAFF:Yeah, yeah, sure.

HURD:... the people that were involved in that conversation because to be frank, I don't think you should be the only one enjoyingthe fund of up here having -- answering these conversations.

Did anybody raise their hand and say, "You know, this may not be a good idea?"




RETZLAFF:So, I think what the conversations we had were around ensuring that if the price went up that we would have the appropriateprograms in place to ensure no patients were left behind.

HURD:So, nobody thought an increase of 5,000 percent was a bad idea?

RETZLAFF:We have provided that we have the mechanisms in place to ensure patients did not suffer from the price increase. Andsecond, that we were absolutely committed to investing in R&D for our next generation talks of toxoplasmosis treatmentwhich we are doing currently.

HURD:So, help other people on the box of those folks that have a 5,000 percent increase, interesting. Mr. Schiller, my question foryou, when you all made the decision that go from $215 to $1,356, 525 percent increase on the drug Isuprel, who made thedecision?

SCHILLER:The -- our neurology and other division where these products sat initially did the review and then...

HURD:The review of the price?

SCHILLER:The review of the pricing, the market for that drug.

HURD:And who are those people? Can you say names?

SCHILLER:Steve Sembler (ph) is the gentlemen who run that division that...

HURD:So, he made the decision by himself?

SCHILLER:No. He brought -- he organized the meeting with senior management, which I was -- my peers and then myself were included




in that meeting where it was discuss and the price was decided.

HURD:Did anybody raise their hand and say, "You know, increase in 525 percent, huh, may not be a good idea?'

SCHILLER:There's always discussions indecent, but the bottom line is the decision was made and decides...

HURD:So, it was the decision made on an actual meeting? Was there, you know, everybody vote all those in favor and say "aye",oppose "nay"?

SCHILLER:Definitely was not a meeting where there is a vote. I can't recall how the final decision was made but, as I have mentioned weacknowledge that it was too aggressive and...

HURD:So, can you send us a list by next week of all the people that were involved making decision?

SCHILLER:I can try if that list exists, I can get at you.

HURD:Best effort. And Ms. Retzlaff, again, next -- in the next week, it would be great to have a list of people involved in that.

Also Mr. Schiller, for Nitropress going from $257 to $800, 212 percent increased but the same in individuals involved inmaking that decision.

SCHILLER:It was the same meeting.

HURD:Excellent. I yield the balance of my time to the Chairman.

CHAFFETZ:Thank you. I've actually like now to recognize gentleman from Alabama, Mr. Palmer, for five minutes.

PALMER:




Mr. Schiller, how large is Valeant workforce?

SCHILLER:22,000 people, plus or minus.

PALMER:How many do you have engaged in R&D?

SCHILLER:There are roughly 1,000 people.

PALMER:How much to you spend on your own in-house R&D?

SCHILLER:This year we will spend an access to $400 million.

PALMER:How many products are in the Valeant's development pipeline?

SCHILLER:We have over 200 active programs, 100 of which we would consider significant and we expect and hope they get an approvalfor a novel glaucoma drug and a biologic for the treatment of moderate to severe psoriasis.

PALMER:I don't need a list. I just -- I want to get an idea of how much you're investing in R&D versus what you're doing in terms ofbuying other branded drugs. There are some suggestions that you operate your model from no longer alliance of the hedgefund and that regard, how would you respond to that.

SCHILLER:I would disagree with that characterization that we have because I mentioned, 22,000 people. We operate in 100 countries.We have 18,000 products. We've got vibrant R&D effort. We have 16 manufacturing facilities in United States that wereinvesting heavily in. And we've won 76 products from last two years and investing heavily in patient assistance programs. So,I think we are just like any other pharmaceutical company.

PALMER:I want to talk, raise some questions to Dr. Woodcock. Where there is no competition prices or high I think we all understandthat. Do you agree that you get all this generic drugs in the pipeline depending that if we can get this 4,000 generic drugs end




to the mark place that have an impact on pricing?

WOODCOCK:Yes.

PALMER:Or should we -- let me ask you this. Does the FDA prioritize reviews for first generic drugs? There's an issue about that theFDA blames swap the applications for the current backlog? And have you considered compiling a preferred provider's list ofgenerics to try to move some of these drugs up and get up -- in getting approve quicker?

WOODCOCK:We fast track all first generics, so we give them special attention. We move them through. We recognized the consequences.In the last several years, a first generic there might be 14 applicants who can be the potential first generic. We don't knowwho's going to get over the finish line first. So, we expedite that class of filings that set of application.

PALMER:10 years ago, the median approval time for a generic drug was about 16 months and now its 42 months. That's almost fourtimes as long. Can you explain why that it takes so long? I mean, if these are generic drugs are coming from a branded drugthat's already been approved.

WOODCOCK:Yes. As I said in my oral testimony, the -- we were victim of our own success. There are 88 percent of dispense prescriptionsare generics or thousands of generics in the market and they have been very successful. But, the industry grew as aresponse to that just like a factory that had a great product and we got many, many more applications but our resourcesagainst that workload did not grow and we build up a backlog.

And as a result, we were able to negotiate the User Fee Program with the industry to provide the resources to get it done.But, we had that backlog. In that 42 months is the reaction to that because we have 25,000 applications waiting when westarted the User Fee Program and that was 40 months ago. They are not going to get any younger when we approved them.They are at least 40 months. The new ones have a much shorter clock and...

PALMER:You're talking about the first generic drugs or the new applications?

WOODCOCK:The new applications. The first generics in the 25,000 are very few and we are expediting this.

PALMER:OK. Of the current backlog, can you tell me how much or what percentages of those are first generics.




WOODCOCK:I'm very, very, very -- it depends on how you define the backlog. If you're talking about the 25,000 that were there when westarted that User Fee Program, it's a very small percentage.

PALMER:When you had 14,000 submissions in fiscal year 2014 that only approved 409 of those, so you're adding to that.

WOODCOCK:Under the agreement that has a 15 months clock for getting back to the sponsor. So, we are planning to meet those goalsand get back to the sponsor and complete the review in 15 months.

Now, because generics typically have multiple cycles of review the time to approval maybe longer. In my testimony, I thinkyou see that in the prescription drug world, the new drug world were up to 95 percent last year, first cycle approval. But, thattook a lot of work and effort to get it right the first time. That's what we need. We need to (arrive) at the first time applicationthen starting in October when we get those, we'll approve them in 10 months.

PALMER:And you expect to do that in what timeframe when you expect to be at the 10 months approval?

WOODCOCK:The applications submitted October 1 of 2016 and beyond, if they are right first time they will get approved in 10 months. Ifthey are deficient, they will get an answer in 10 months and tell them what they have to do. We get some where we go outand we find that the bioequivalence data has been falsified or some of the manufacturing has been falsified.

So, we have to have time to make sure that this meet the standards for the US people are going to be force to take this, OK,if we approved them. They have to be right.

PALMER:My time has expired, hurry up. One last quick question, is the FDA catching up for following further behind?

WOODCOCK:We're definitely catching up. We're doing great job.

PALMER:My time has expired. Thank you Mr. Chairman.

CHAFFETZ:Thank you. I have some unanimous consent request. The first one is the statement from Congressman Doug Collins ofGeorgia without objection (under) it that's into the record, so ordered. We also have Congressman Duncan who has a letter




of December 15th, 2015 that he had received from a Joy McCallum (ph). I ask (inaudible) consent to enter that into the recordwithout objection, so ordered.

Congressman Blum has also have one statement for the record. Without objection, we will enter his as well, so ordered onthat.

I have a few questions as we start the second round here. And Woodcock, again, thank you for joining us. Since, the passageof the Generic Drug User Fee Act 2012 has passed the intention here was to generate roughly $1.5 billion. This is money --user fee money coming out. In the office of generics, that people working on this. So, tell me what's happen to the stuffinglevels since 2012?

WOODCOCK:Well, across the program we've hired over 1000 people.

CHAFFETZ:In the working specifically on the approval process for generics?

WOODCOCK:That's correct.

CHAFFETZ:OK. Can you give us the very specific number? I really like to see that one, not really in this hearing is a follow up. I just reallywant as we all to see that that one.

WOODCOCK:I need to understand your question. I didn't understand your question.

CHAFFETZ:I want to see which offices they are actually working in, what they are doing, and if you could break that down. I don't expectyou to do it verbally up to the top of your head. What I'm suggesting is, as a follow up to this hearing, can you provide thecommittee that information?

WOODCOCK:Yes.

CHAFFETZ:OK, perfect. I want to get into this priority review vouchers. These were intended to incentivized treatment for rare pediatricand tropical diseases. The vouchers were supposed to shorten the FDA review time for a roughly four months, but companieshave figured out how valuable these are. I think it could demonstrate their frustration to -- with the FDA in the timing.




Recently, there have been -- there is one voucher in August that was sold for $350 million, that means roughly they werewilling to pay, they thought that was a good business transaction to pay roughly $2 million a day just to get in line a little bitquicker. And I'm concerned that, you know, not everybody can buy their way to the top of the -- in the front of the line, butthese those demonstrate how back logged and how problematic the demand is at the FDA.

Does the FDA have a necessary authority to prevent the alleged abuse of the PRV system? Do you think there is any abuseof the PRV system? Should they be sold the way they're being sold?

WOODCOCK:Again, this is economic issue is intended to incentivize development. These recent vouchers applied to products that werealready being in development because it' early and...

CHAFFETZ:But they don't have to actually sell those drugs, they don't have to actually market those drugs, correct?

WOODCOCK:Correct. That they need to be approved.

CHAFFETZ:Again, so they can be used for a variety of different things. They don't necessarily -- because if you develop one, you're goingto get this priority review voucher but you can use the priority review voucher for something other than that category, correct?

WOODCOCK:Yes, and that is what has been done. And I do have to comment on what you said, the priority review vouchers are appliedto novel drugs, they have nothing to do with the generic drug review process that program is completely on time and thereason they -- people use priority review vouchers is to move in front of competitors and could reach the market faster than acompetitor who maybe developing a drug in the same space. Because for a new drug, a novel drug, being first on the market,and I know nothing about this, but apparently must have a great deal of value. So it does not apply to generic drugs orgeneric drug process.

CHAFFETZ:But you can see how this can be manipulated. Do you see any evidence of any manipulation here?

WOODCOCK:I don't know what -- it depends on how you define manipulation.

CHAFFETZ:Well, are they eating this up in order to get the voucher with no real intention of actually marketing, producing or investing inthe smaller drug?




WOODCOCK:The companies that we have awarded vouchers to have fulfilled the requirements of the statue for being eligibly to beawarded a priority review voucher.

CHAFFETZ:And the worry is that the statue is inadequate, it's provided a market way that people can get in line sooner. They're willing topay hundreds of millions of dollars in order to do so, and we're concerned about spurring innovation in actual drugdevelopment.

WOODCOCK:It was supposed to -- the existence of the PRV was supposed to spur those developers of tropical diseases or rare pediatricdiseases to enter that space because they would get this reward at the end for...

CHAFFETZ:And I think that's one of our questions is to -- are they actually spurring innovations? Should there be a limitation on the resellof those vouchers?

Again, when you have a difficult disease that affects such a small population, it's difficult. We -- not everybody can just actaltruistically, they -- there has to be some degree of profit motivation but then this rise has gone from tens of millions ofdollars to hundreds of millions of dollars just to get that four-month edge.

And when I see $350 million transactions for four-month edge, that catches a lot of people's attention. I'm just asking the FDAif they see, is it fulfilling its original mission and are using any abuse?

WOODCOCK:All right. Well, there are two sides to this. Is it stimulating development in rare pediatric diseases or tropical diseases? I thinkit's too early to say because it takes a long time to develop one of these products.

CHAFFETZ:So let me read a quote here real quick. I'm sorry to catch up. I've gone passed my time. John Jenkins, the director of FDAsOffice of New Drugs has publicly criticized the PRV program.

He said, "The program has --" as diverting, "Time and resources away from other important public health works such asreviewing other applications for potentially much more serious conditions or drafting of guidance documents on issues relatedto drug development."

You see in your opinion, right or...

WOODCOCK:Yes.




CHAFFETZ:... or wrong?

WOODCOCK:Yes, that is true. But we have to implement -- this program is established by congress and we will implement it.

CHAFFETZ:OK. I appreciate it. We're going to continue to have this discussion because I do think it -- it's not going to solve all problemsbut it is an interesting thing. The basic concern here is Turing or Valeant or any other company has the right, I believe, tocome in and enter the marketplace.

But when you have a rapid rise in pricing, a dramatic rise in pricing, natural economics would suggest that that would createopportunity for others to come in and create more of a balance to the true market pricing if there was competition. But if theycan't get through the process with the FDA in order to enter the marketplace and compete with somebody who's rapidlyraising the price of goods, then the market factors are out of balance.

And I think it is incumbent upon us to accelerate the process so that if somebody is taking the advantage of price elasticitythe only way you can make it more elastic is to provide some competition. What I don't want to do is have governmentcontrols or government -- you know, price controlling but it's difficult when you see patients that are suffering and they don'thave access and they don't know how to go through the convoluted process, they look at that equation and say, you know,"Do I buy food for my kids or do I just take in stuff for myself." And so, that's why it's so pertinent.

I've gone well beyond my time. We'll now recognize Mr. Desjarlais for five minutes.

DESAULNIER:First, thank you...

CHAFFETZ:Mr. DeSaulnier. Sorry I was thinking Desjarlais over here and...

DESAULNIER:That's OK. That's all right.

CHAFFETZ:We got a Desjarlais and a DeSaulnier. So...

DESAULNIER:As long as you said from California, I'm fine.




CHAFFETZ:The gentlemen from California.

DESAULNIER:Well, thank you both to the chair and other ranking member for having this hearing. And I just want to say, you know, just asan observer and somebody who is not young, the history of this industry, I think, is fascinating and certainly the gentleman inmy left, given his professional experience, Mr. Carter understands this better than I do. But as an observer, 30, 40 years ago,people invested in pharmaceutical companies because it was a relatively low rated return but it was a different culture.

I certainly don't think that the addition of more capital into this industry is necessarily a bad thing and meeting with people inthe public sector, in my district in the bay area and in the private sector, particularly UCSF and hearing all of the amazingthings we're on the verge of doing, whether it's cancer or cardiovascular disease because of some of these investments butalso because of the public investment. But the concern I have is that although you're companies and A, individual are gettinga lot of price, an extreme example, that in the transition of the pharmaceutical industry although there's been benefit toincrease capital into the marketplace that this is more a symptom of an overall cultural problem.

And if I was a free marketeer, which to some degree I can be, you would be a symbol of what's wrong with my philosophybecause as Madison once said, "If people were angels, there'd be no need for government," and this is an example ofcertainly less than angelic behavior.

So Mr. Retzlaff, I've -- just to ask you to sort of comment on we've got examples of quotes that -- for instance writers (ph),headline fights or hikes, U.S. prices over 100 drugs, the Washington post prescription drug prices jumped more than 10percent in 2015 from Bloomberg. Everyone is hiking drug prices as a quote from your former CEO.

So you have heard (ph) that the ranking members talked about that you have e-mails on, there are e-mails from your formerCEO who refuse to speak on the record here. It's my impression that you're doing what companies do in terms of thecontrolling what was a bad episode in your company. But it seems like you're on a track to maybe repeating the samemistake because of market pressures, but that's also indicative to the whole industry.

So tell me that you have learned your lesson and that there's a place where your shareholders can be satisfied but theconsumers can be fairly full of confidence that isn't going to repeat itself because it certainly seems like, following some of thecomments by the ranking member that you may retire but we're set up for failure again here, that this is just a symptom of alarger problem.

RETZLAFF:Right. So -- you weren't here but Turing is a research-based pharmaceutical company. We have a 139 employees, 36 arededicated to research and development. The increase revenues from Daraprim much -- 60 percent of them actually arereinvested into research and development, which is critical for a pharma company and I believe essential, and then we alsoinvest very aggressively and generously inpatient access programs. So our goal with the patients is to ensure that they don'tincur any incremental out of pocket cost because of our price increase.

Another thing I'll note is that two, almost two-thirds of patients who are in Daraprim benefit from government program pricingwhich is one penny per pill. Those are your most vulnerable patient populations. And what I will say is I'm proud of the workthat we're doing for toxoplasmosis. It's the second leading cause of death in the United States due to foodborne illness. 750patients still die each die. Not all patients respond to Daraprim. Some of them don't tolerate it. Daraprim's not active on the --




or it doesn't behave on the parasite when it's in its dormant phase. You know, many people go blind.

DESAULNIER:Can I ask you to wrap up because I don't want to use all my time.

RETZLAFF:Yes.

DESAULNIER:OK.

RETZLAFF:So, you know, I don't believe my company has done anything wrong. I believe that the decisions we made struck the rightbalance between the need to ensure patient access, innovation, as well as shareholder value.

DESAULNIER:So, I don't think you answered my question partially. So Mr. Schiller, I'll try with you.

There are a lot of people with you in your industry that do practice what I would describe as responsible consumer practices.Historically, yours, I would not include in that group. But they have market pressures, that if you have a higher return ofinvestment, because of your -- these practices that would scoured what I think is in the best interest for the consumers,they're forced to come down to a level in the marketplace.

So, tell me how your company is never going to be in that situation again? Absent from -- and as best as you can from publicrelations response. Personally, how are you going to look back and tell your grand kids that your were part of a solution?

SCHILLER:So, we grew very, very quickly. We did a lot of good things. We made a lot of mistakes. In the past, we have looked forsituations where the older drugs, where there wasn't generic competition, where we can increase revenue by increasing price.

You should not expect that those are opportunities that we would be looking for in the future. We've taken aggressive steps interms of our partnership with Walgreens where we're reducing our prices by 10 percent on average in two of our largestfranchises, dermatology and ophthalmology prescription drugs.

We went to a 30 percent volume-based discount structure on Isuprel and Nitropress and we significantly increased ourpatient assistance programs. Going forward, as it's been in the past, our focus is on, again, developing our franchises arounddermatology, gastrointestinal diseases, ophthalmology, women's health, and some of our other smaller franchises. We'llcontinue to invest in R&D and bring innovative products to the market, and continue to invest, and expanding ourmanufacturing.

DESAULNIER:




Thank you, Mr. Chairman. I appreciate those responses. I would say that although I understand why you respond that way, itdoes suggest to me that the cultural changes, I think, we need in your companies or within your industry, I hesitate to haveconfidence that you've actually learned necessary lessons that I think you need to learn for the Chairman's question aboutavoiding more government regulations.

So, with that, I'll return to you.

CHAFFETZ:Thank you. Thank you. Now, I recognize the gentleman again from Georgia, Mr. Carter for five minutes.

CARTER:Thank you Mr. Chairman. I'd like to follow up on a couple of questions from our colleagues earlier. Dr. Woodcock, you weren'there, but we -- one of my colleagues representing Meadows from North Carolina was asking about the process of drugapproval in the FDA. And I'd like to ask you something or like for you to clarify some of these.

My understanding that FDA can expedite a new drug application to the -- abbreviated to the new drug application to help withthe drug shortage problem, if there is such a thing. But I understand right now that you're putting more emphasis on theapproval and the quality of standards which we all applaud. But you can, in fact, approve a drug if indeed there is a drugshortage there and that has been number four, there has been precedent with that.

Now, let me ask you, you could address an issue of drug shortage with compounding, could you not? Yes or no?

WOODCOCK:We wouldn't overtly do that, but the compounders could potentially...

CARTER:But you could...

WOODCOCK:... may offer.

CARTER:Dr. Woodcock.

WOODCOCK:Yes?

CARTER:You control the list of ingredients that they are allowed to compound, correct?




WOODCOCK:Yes.

CARTER:So, you could add one to that if there was a drug shortage. And in fact, you have done that before in the past. You've setprecedent with that, correct?

WOODCOCK:No, I don't know about that. We haven't...

CARTER:Well in 2000 -- if you will, in 2012, the FDA waved its authority of an enforcement action against the compounded version of ahormone cream. Yes, I see your staff nodding here. That's prescribed to lower the risk of women from premature birth whenthe approved version became too expensive. This could have helped us in this situation. This could have helped theAmerican public in this situation.

WOODCOCK:The situation you referred to was enforcement discretion. Usually, when a new drug is approved, then other versions are notsupposed to be marketed and, you know.

CARTER:But through compounding, we could have addressed this issue of the drug shortage because of a significant price increase.And that has been done before. There is precedent there.

Dr. Woodcock, just one other thing. Through the Omnibus that was recently passed Congress, we instituted a rule on -- weinstituted a rule on office use compounding. And I know that there was a language in the bill that directed the FDA to issueguidance on that. Can you give me an idea? Are you still working on that? Any idea when that will be?

WOODCOCK:We are working on a set of guidances to implement the recent statutory changes, and I would hope that would -- they wouldcome out within this year in draft.

CARTER:OK. Thank you for that. Another question that was asked by one of my colleagues from New Mexico, Ms. Retzlaff, and infact, you just repeated it again. She asked you a question and you stated that Turing is a research pharmaceutical company.How many drugs has Turing taken from research to development? How many drugs have you -- microphone, microphone.

RETZLAFF:We have 13 products in development right now. We are a new company. We're just...




CARTER:You're a new company, so you have had none, but you're calling yourself a research pharmaceutical company. I think it's astretch to even call you a pharmaceutical company because I think it's a shell of a company. And I would tell you that when acompany that calls himself a research pharmaceutical company only puts in 5 percent of their profits back in research anddevelopment, I think that that proves the point that they are indeed not one. And I know what you've said, that now 60percent. Yes, when things went south, you increased it to 60 percent to increase your public relations. But before that, it wasonly 5 percent. So, I beg to differ with you on that.

Now, you said that your drug, Daraprim, was being distributed to specialty pharmacies. Any of those specialty pharmaciesowned by PBMs? The answer is yes.

RETZLAFF:I guess Walgreens, yes.

CARTER:Yes, they are. Which brings us to the PBM problem which is another problem -- which is a great problem that we have in ourcountry, and then particularly in the medical field.

Mr. Merritt, I want to ask you. Over the past week or so, there's been much in the press about a problem between one of thelargest health insurers and one of the largest PBMs in our country, that they cannot reach a negotiation. They were trying anegation. They cannot reach a deal in a $3 billion settlement.

They're trying to -- if that's the case with one of the largest PBMs and one of largest insurance companies, how do youexpect a small pharmacy, a small independent pharmacy to stand a chance against the giant PBM when one of the largestinsurance companies in the world can't even negotiate with you?

MERRITT:Well, on that particular issue, that's a dispute, a contract dispute between the two companies. But I do know that pharmacies,independent pharmacies...

(CROSSTALK)

CARTER:Can you image a contract dispute between a company and then one of the smallest in the United States and one of thegiants, the PBMs?

MERRITT:True. But drug stores, independent drug stores typically where the PSIOs (ph) that are parts of giant companies, and theynegotiate with PBMs on behalf of independent drug stores.

CARTER:




Mr. Merritt, I'm really concerned about the current marketplace, because I believe it creates, of course, incentives for PBMs toshut out independent pharmacies at the expense of the American public. And I say that because as competition decreases,prices going to increase. That's what we're finding now. It's one of the worst things about the Affordable Care Act.

Look, how many health insurance companies we have left? Only three or four. That's what's going to lead us to destroy whatI believe is greatest health care system in the world.

Now, Mr. Merritt, I know that you're not specifically the problem. I know that you represent an association. But I can tell you,we have to have transparency in the PBM world. You know, Representative Collins just introduced the letter, for the record.And I can tell you, he's got a bill that deals with transparency.

Mr. Chairman, I hope this is something that we will continue to deal with in this committee. It's vitally important that we do.And again, Mr. Chairman, I want to thank you, the Ranking Member, and all your staff are here in this hearing today.

CHAFFETZ:I thank the gentleman. I'll now recognize the ranking member.

CUMMINGS:I just want to -- thank you Mr. Chairman. I want the witnesses to know that I fully support Mr. Carter and his efforts, becauseI've got a lot of people in my district that are very, very concerned about that issue. And I, Mr. Carter, I plan to join you in yourefforts because you're absolutely right.

Now, going on, Mr. Schiller, I have been interested in Isuprel and Nitropress since the Marathon Pharmaceuticals, thecompany that owned these drugs before you dramatically increased their prices by roughly 400 percent each. The JohnsHopkins Hospital, by the way, which is smacked down (ph) in the middle of my district, five minutes from where I live, andtheir hospital -- their hospital budget was significantly impacted by Marathon's price increases. That's why I wrote a letter toMarathon asking about the drugs in October 2014.

Then in February 2015, your company came along and jacked up the prices of these clinical medicines even more, 525percent and 212 percent. Your price increase stretched the Hopkins Pharmacy budget even further. You have testified todaythat Valeant is offering a 30 percent discount to some hospitals that use these products.

From what we've heard, it's unclear where the hospitals are actually able to access this discount. But even if they are, a 30percent discount on a 500 percent price increase hardly makes a dent. You're a businessman Mr. Schiller, does that soundlike a good deal to you?

SCHILLER:What we try to do is address the issue from a portfolio point of view.

CUMMINGS:Do you know? Do you realize how much that hurts Hopkins? And I don't know whether you heard the testimony of -- thequestions of Mr. Carter, right, a little bit earlier. These hospitals are suffering big time. And that means they -- some of them,they're not like Johns Hopkins is one of the best in the world, but they are suffering big.




And my father who only had a third grade education, former Senator Roberts (ph) used to say, and I didn't understand it nowbut I understand it -- I didn't understand it then but I understand it now. He says when -- somebody's going to pay.Somebody's got to pay. And the hospitals are paying big time.

Now, going back to you Ms. Retzlaff, I'm very concerned about the documents the committee has obtained, showing thatyour company was more concerned about managing the P.R. backlash of your price increase than ensuring the patients hadaccess to Daraprim. An internal Turing presentation, and again, these are not my documents, these are your documents from2015 stated and I quote, listen to this. This is incredible to me. "HIV patient advocacy may react to a price increase. HIVcommunity is highly organized, sensitive and action oriented. Significant price increases that disproportionately affect thiscommunity could result in a backlash from patient advocacy groups, particularly if payers increase card (ph) sharing withpatients."

I'm concerned about this because in the district that I live in, the zip code has one of the worst HIV situations in the world, inthe world. And so, that's why you're going to hear me talk about this. It would be legislative malpractice for me not too. Itappears Turing was aware this price increase was going to adversely affect the HIV/AIDS community, yet the company stillchose to increase the price by 5,000 percent.

And you can sit (ph) here now until forever and tell me about all your little discounts, $1 and all those. You're raising theprice, all right? So Ms. Retzlaff, did anyone at Turing's stopped and think about the effect of this price increase would haveon such a vulnerable population, beyond the anticipated bad P.R.?

RETZLAFF:Yes, we did. And we took action on it. So, that is why, again, and it's important that we participate in Medicaid 340B. Weoffered Daraprim to the most vulnerable patients at 1 penny per pill.

CUMMINGS:But you were worried about the AIDS community, weren't you?

RETZLAFF:Absolutely.

CUMMINGS:Oh yeah, you were really worried. You worried about the P.R. Not so worried the patients, the P.R.

RETZLAFF:No, we worried that there would be misinformation in the public domain and that's exactly what happened. So, we, our effortsfrom a P.R. perspective were intended to correct the misinformation and make sure that patients understood that we havethese programs in place, that we -- that they could access Daraprim at a very affordable price.

CUMMINGS:Well one thing that there was another -- there was a memo from October 12, 2015. And this said, the advocacy groups like




the Human Rights Campaign, I'm sure this is going to invigorate them to continue to fight for the people that they represent.But this is a quote. It says, "The Human Rights Campaign have been vocal in the media about pricing issues, and ispotentially the most vocal organization able to garner media coverage. While their motivation is primarily political, given theiraccess, we feel it would be important to get a meeting with CEO Chad Griffin in an attempt to slow their aggressive stanceand work with them to better understand the company."

So, you thought it was political that they were trying to make sure that people suffering from AIDS get the proper medicationthat they need, that they need. Is that what you just thought sort of political problem?

RETZLAFF:No. We thought we needed to engage all important stakeholders to make sure they were aware that the most vulnerablepatients suffering from toxoplasmosis, over two-thirds of Daraprim use can access that product at a penny per fill.

CUMMINGS:Now, Mr. Schiller, I just have a -- just have few more questions Mr. Chairman. I know, well, you're trying to close this down. Ithas been reported that in 2014, Valeant led the industry in price hikes, raising prices on 62. So yeah, so like just a few drugsyou raised prices on, 62 of its drugs by an average of 50 percent.

In 2015, Valeant continued that pattern with the highest average increase in the industry, 65 percent a across 50 drugs.According to CMS data complied by the C.Q. roll call, five of the 10 brand name drugs that had the largest price increasesbetween April 2013 and July 2015 are Valeant drugs. Of those five drugs, two increased by more than 500 percent, oneincreased by over 600 percent, and one by 800 percent, and one skyrocketed over 1000 percent in just 15 months. One drugin particular, Glumetza, a drug used to treat patients with Type 2 diabetes increased by a whopping 800 percent over a meresix-week period. Is that true Mr. Schiller?

SCHILLER:I'm not familiar with all those numbers. But directionally, that is true.

CUMMINGS:The massive price jump was so preposterous that it caused Pharmacy Benefit Manager Express Scripts to announce onJanuary 29,2016, that is intended to remove, well, Glumetza from its formulary. And this is what they said, they said, "Toprotect clients and patients from ways or unnecessary drugs spend, Express Scripts will exclude well Glumetza from our2016 National Preferred Formulary and the FDA approval of the generic equivalence."

I asked you a little bit earlier, and you danced around it very nicely. You did a great dance. What were you going to do to --you said, you admitted under oath that you all had gone too far. I'm asking you, are you going to tell the public which iswatching this by the way, what are you all going to do further? You talked about what you've done. What are you going todo? Because as far as I'm concerned, we still got problems.

SCHILLER:First of all, you're right, we've made some mistakes.




CUMMINGS:You said that before. I got that.

SCHILLER:I acknowledge that. We have frozen all price increases other than for our gastrointestinal drugs this year. It's...

CUMMINGS:Wait. Well, how long will that price freeze last, until what, the end of that year?

SCHILLER:I can't commit. I mean, I -- we raised it at the board, board level, and at the board level, we decided to freeze any priceincreases that have been proposed for 2016. We also rolled out our Walgreens program where we took a 10 percent averageprice discount of ophthalmology and dermatology drugs. The 30 percent volume discount on Isuprel and Nitropress has beenrolled out. So, any of the significant users of that will be availing themselves of the 30 percent price increase per pricedecrease.

Going forward, we're not going to be looking for those opportunities such as Isuprel and Nitropress. Our focus is going to bein our core franchises as it always has been around dermatology, ophthalmology, gastro, women's health, consumer healthcare. And that's where our focus is going to be on our pipeline, on our manufacturing and delivering innovative drugs.

We have to do a better job of getting the balance right between being shareholder friendly, in good corporates (ph), and thena good partner in the health care system, and we will work very hard to get that balance right.

CUMMINGS:Thank you very much, Mr. Chairman. I really appreciate. Mr. Chairman, I got to say this. I really -- I cannot tell you how muchI appreciate this hearing.

CHAFFETZ:Thank you.

CUMMINGS:Thank you.

CHAFFETZ:Now, I recognize the gentlewoman from New York, Ms. Maloney.

MALONEY:Thank you. I join the Ranking Member in thanking you for this hearing. This is an important one. Mr. Schiller, how muchcompensation have you received since joining Valeant including salary, bonuses, stock based compensation? Is it more than




20 million including your current stock holdings?

SCHILLER:It is.

MALONEY:So basically, how much is it?

SCHILLER:I have not added up. In 2014, it was $27 million. I am incredibly fortunate and well compensated.

MALONEY:Well, if you could get it back to us in writing, we'd appreciate it.

(OFF-MIKE)

MALONEY:Now, throughout this hearing, everyone is citing consultants as the cover, I would say, of increasing prices. Would you pleaseidentify those consultants, Mr. Schiller?

SCHILLER:First of all, while we mentioned consultants, we do not want to cast blame on anyone. We accept responsibility for our ownactions. The consultants we referred to for Nitropress and Isuprel I believe was a firm called MME.

MALONEY:Could you get back to us in writing the consultants that you used in all of these price hikes in your business?

Also, Ms. Retzlaff, what consultants did you use for these price hikes?

RETZLAFF:We didn't use any consultants.

MALONEY:OK. I was stunned by the internal documents that the actually the majority secured. In particular, in exchange with Mr.Pearson where he shows in three different graphs that the increase in earnings for your company, Mr. Schiller, was almostcompletely and totally price increases. And I referred to the Q 15, he sights everything except the U.S. grew a total of 26million. So, these other firms overseas didn't grow year growth according to his graphs.

And the remaining 305 million in growth came totally from the United States. And he goes on further. He says, out of this, hesays, 61 million of that growth came from volume, whereas the remaining 244 million of growth came from price increases.




My question is, how do you justify these price increases particularly on drugs that are the sole source of treatment, there's noother manufacturer? How do you justify these price increases? And did you ever think about the impact on patients, onhospitals, on other providers, on the government, on the taxpayers? You say very blithely that this is going to be covered byhealth care, or Medicaid, or a Medicare, or whatever. That comes from the American taxpayer. That comes out of -- and thecopayments, many people tell me, their copayments have gone to thousands of dollars which they can't afford. How do youjustify that? How does your company justify that?

SCHILLER:When we decided on prices for drugs in the past, we've taken in a number of factors including clinical value, alternativetherapies and patient access, which is obviously critical. We have...

MALONEY:And may I add that in our memos that we got from you, that patient access was decreased after these price increases. Thatmajor hospitals like Mass General in Boston, a major hospital couldn't even get access to these drugs. They weren't coveredby any other form. And people could not get treatment.

SCHILLER:I'm not aware of -- that people weren't able to get access, Isuprel and Nitropress if that's what you're referring.

MALONEY:I'll send you the memos that we read. I started reading last night, I couldn't go to sleep. I tell you, I don't even think this is ahearing. This is a scandal. An absolute abuse of power, abuse of a pharmaceutical industry, and I -- it's a scandal. And Iwould like the permission to put into the record additional questions in writing for you to answer for us, both of you. And I yieldback to balancing my time.

CHAFFETZ:Thank you. As we wrap up here, Mr. Schiller, tell me again the factors that you take into consideration when pricing a drug.

SCHILLER:We -- it's a number of factors including clinical value, alternative therapies, patient access, and obviously it's quite subjective.And in some of these situations that we've talked about, we had clearly gotten it wrong.

CHAFFETZ:Anything else? Anything? I'm just trying to make a little checklist. Anything else on that list?

What about Ms. Retzlaff? Sorry, if I not pronounced your name properly. But what considerations does Turing take in placewhen considering the pricing of the drug?

RETZLAFF:




So that first, you take into account the value of the medicine or clinical value of the medicine. We took into -- we take intoaccount the size of the patient population, other products in the category, the need to invest in innovation, the assessments ofwhether or not there are mandatory rebates and things like that associated with the product, and then I think I mentioned theinnovation and the need to fund patient access programs.

CHAFFETZ:I'll just tell you candidly. Again, I'm a conservative guy.

RETZLAFF:Yes.

CHAFFETZ:I want people to make a profit. But you know why I feel like you're both lying to us? You didn't write in there, you didn't sayprofit. And if you don't include that as a factor, you know, how you price a drug, you're lying. You're not telling the full andcomplete truth.

You can tell me about access and all that other thing, but profit is a motivator. I happen to not think that it's an evil think, but Ithink you're purposely avoiding it. I don't think you're telling the full and complete truth. We want people to make money. Youcan't be in business and not make money.

RETZLAFF:May I -- can I comment?

CHAFFETZ:Sure.

RETZLAFF:Of course, we expect to make a profit.

CHAFFETZ:And when you priced the drug, is that part of the consideration?

RETZLAFF:It is part of the consideration.

CHAFFETZ:Then why didn't you list it out?




RETZLAFF:Again, we expect to make a profit. I think what's critical and I did mention it in the form of the need for innovation. Because ina research based pharmaceutical company...

(CROSSTALK)

CHAFFETZ:And I don't believe you.

RETZLAFF:... that into research.

CHAFFETZ:That is not the history of Turing. You have...

(CROSSTALK)

RETZLAFF:Turing is a brand new company.

CHAFFETZ:Exactly, and it is a better model to understand because Valeant has literally over a thousand different items. They've got longhistory here.

RETZLAFF:Right.

CHAFFETZ:And we could be fairly critical to certain things, but when you have a drug that is acquired, that's been on the market since Ibelieve 1953 or so.

RETZLAFF:Something like that.

CHAFFETZ:Then you start to understand what happened here. And again, when it gets abused and it goes too far and you're takingadvantage of and you lie to the public, you go on television, and I'm saying you personally. But I'm saying, when the personwho owns the plurality of the company here lies, it appears that it's cheating the American people. And I think you're bothbeing disingenuous and incomplete in your answer, and I want you to reconsider on the future profit is of course a motivator.




It's of course part of your calculation. You don't have to see a pose (ph) and sit in there and don't calculate out the profit line.

You don't go out and rent yachts and fireworks and all that kind of stuff unless you're able to jack up the price. And what I'mworried about is you're out there marketing a drug that sit now $750, and you're telling that "Oh well, the majority of thepeople, they just discount that down to $1." Who's paying the 750 bucks? Suckers. And you know who those suckers are?The American public, because we all pay our insurance premiums, we do that right things, we go to the hospitals, we pay ourbills, and your, your extravagance is something we all have to pay for.

RETZLAFF:Pennies.

CHAFFETZ:Pennies.

RETZLAFF:Pennies.

CHAFFETZ:Pennies.

RETZLAFF:It's pennies and I actually...

(CROSSTALK)

CHAFFETZ:And that's why it makes us sick. It makes us -- and don't tell me that it's pennies. Because you're right, you've got a drug thataffects less than 3,000 out of 330 million people. But you multiply what you're doing out over the long course of everybodyelse and you're taking advantage of the system. And that's why, again, the pressure comes back to the government and theFDA to increase the competition so that there is a proper balance here.

You can find the right amount of profit, not have Congress dictate or set up price controls, and that's why we will continue todo this. This has been a very fruitful and enlightening hearing. I appreciate it.

Did the Ranking Member wanted to say? Yes?

CUMMINGS:Questions. Ms. Retzlaff, you got a research department?

RETZLAFF:A research department?




CUMMINGS:Yes, you said you're spending all the money on research.

RETZLAFF:Yes, yes, we have an R&D department.

CUMMINGS:All right. No, no, no, research.

RETZLAFF:Research.

CUMMINGS:OK. I'm going to get to development in a minute.

RETZLAFF:Yes.

CUMMINGS:Research. How many people, how many scientists do you have in a research department?

RETZLAFF:We have 36 people in our research department of 839 employees.

CUMMINGS:You have...

(CROSSTALK)

CUMMINGS:Whoa, whoa, whoa, whoa. You have 36 scientists, hike (ph)?

RETZLAFF:Thirty six people in research and development. And generally, having a science background is a requirement to work in R&D.

CUMMINGS:




And so you've got 36 science hike (ph) folk in doing research.

RETZLAFF:Yes.

CUMMINGS:And so, of that -- the money that you are spending on R&D, how much of that -- what percentage of that is development?And I'm not -- again, we've separated. I'm putting development to this side and putting research over here.

RETZLAFF:Yes. I don't know. I don't know if I have that exact number, but I think I can go back to our president of R&D and get your thatinformation.

CUMMINGS:Now, go and -- so you -- how soon you're going to get that?

RETZLAFF:As soon as possible. I can call him when we're finished here.

CUMMINGS:All right, we're get it by -- OK. Now, Mr. Schiller, just one question for you. Do you ever -- do you all want ever meet with thehospital associations? Because there a lot of hospitals, probably almost every hospital in this country that need those drugs,that we were talking about that you've gone up going (ph) so much are suffering.

Do you all meet with hospitals? And it probably affects everybody. I know they affect Hopkins. So, you know if they affectJohns Hopkins, they're affecting a lot of hospitals. Do you meet with them? Do you all?

SCHILLER:We -- I have not personally. We have the head of the division where those drugs said has reached out to all the major usersof Nitropress and Isuprel and had discussions. We've also reached agreement with the large group purchasing organizationsthat buy for the hospitals to make sure that those who need the discount are getting the discount.

CUMMINGS:So, and so how does -- so how do you all, we say those that need the discount, you mean to tell me there's some peoplethat would come up to say, "Hey, we can spend those millions extra, no big problem. We don't need a discount." Is that whatyou're trying to tell me?

SCHILLER:No, those poor choice awards.




CUMMINGS:Well, why don't you tell me what you mean?

SCHILLER:We wanted to make sure that the heavy users of Isuprel and Nitropress did not have a big burden from the price increase, sothat's why we geared it towards heavy volume users. So, the largest users will get a 30 percent discount, lighter users wouldget a smaller discount.

CUMMINGS:Well, if you've got a hospital that's a hospital but need those drugs desperately, then they don't get as much of a discount.Maybe, you know, in some small town in South Carolina, wherever, as opposed to a Hopkins, right?

SCHILLER:There -- they -- we...

CUMMINGS:So they -- in other words, that might hurt them even more. Hopkins is a big international hospital and they are complainingbig time. So, they may -- they would qualify, I guess, for the big hospital discount, right? Come on man.

SCHILLER:I don't know. I assume so but I can't tell you specifically.

CUMMINGS:So, my point is that, you know, Mr. Carter and then I'm finished with this Mr. Chairman.

But Mr. Carter, right, I think made some good points about these hospitals. Our community hospitals, hospitals doing thebest they can with what they got, and this is all cutting into their bottom line. But the Chairman is absolutely right. You know, Iabsolutely have no problem with folk making money. But when it gets to a point where you basically is about greed so thatyou all can -- you can make -- what did you make, $26 million? What was it, 26, Mr. Schiller?

SCHILLER:It was 27.

CUMMINGS:And what about you Ms. Retzlaff?

RETZLAFF:I'm sorry.




CUMMINGS:How much money did you make? That's what I asked you.

RETZLAFF:I'm with a private company. I don't know that I have to disclose...

CUMMINGS:OK. All right. Well, I'm sure you're making a nice sum.

RETZLAFF:Not as much as Mr. Schiller.

CUMMINGS:Yeah, I'm sure. Well guess what? The people in my district are making like $30,000 a year, $40,000 a year. Probably themoney that you spend in a day or a week, they make in a year. And again, still they have to get drugs to stay alive. And so,you know, I hope that you -- are you in contact with Mr. Shkreli?

RETZLAFF:On occasion, yes.

CUMMINGS:OK. Again, I want to thank you all for being here. Bye-bye.

CHAFFETZ:Thank you. It's been very illuminating. The committee stands adjourned. Thank you.

CQ Transcriptions, Feb. 4, 2016

List of Panel Members and Witnesses

PANEL MEMBERS:REP. JASON CHAFFETZ, R-UTAH. CHAIRMAN

REP. JOHN L. MICA, R-FLA.

REP. MICHAEL R. TURNER, R-OHIO

REP. JOHN J. DUNCAN JR., R-TENN.

REP. KEN BUCK, R-COL.




REP. JIM JORDAN, R-OHIO

REP. JODY B. HICE, R-GA.

REP. TIM WALBERG, R-MICH.

REP. GLENN GROTHMAN, R-WISC.

REP. JUSTIN AMASH, R-MICH.

REP. PAUL GOSAR, R-ARIZ.

REP. BUDDY CARTER, R-GA.

REP. SCOTT DESJARLAIS, R-TENN.

REP. TREY GOWDY, R-S.C.

REP. STEVE RUSSELL, R-OK.

REP. WILLIAM HURD, R-TEXAS

REP. BLAKE FARENTHOLD, R-TEXAS

REP. GARY PALMER, R-AL.

REP. CYNTHIA M. LUMMIS, R-WYO.

REP. MARK WALKER, R-N.C.

REP. THOMAS MASSIE, R-KY.

REP. MICK MULVANEY, R-S.C.

REP. ROD BLUM, R-IND.

REP. RON DESANTIS, R-FLA.

REP. MARK MEADOWS, R-N.C.

REP. ELIJAH E. CUMMINGS, D-MD. RANKING MEMBER

REP. CAROLYN B. MALONEY, D-N.Y.

DEL. ELEANOR HOLMES NORTON, D-D.C.

REP. WILLIAM LACY CLAY, D-MO.

REP. STEPHEN F. LYNCH, D-MASS.

REP. JIM COOPER, D-TENN.




REP. GERALD E. CONNOLLY, D-VA.

REP. MATT CARTWRIGHT, D-PA.

REP. TAMMY DUCKWORTH, D-ILL.

REP. MICHELLE LUJAN GRISHAM, D-N.M.

REP. PETER WELCH, D-VT.

REP. ROBIN KELLY, D-ILL.

REP. BRENDA L. LAWRENCE, D-MICH.

REP. BRENDAN F. BOYLE, D-PA.

REP. MARK DESAULNIER, D-CALIF.

REP. TED LIEU, D-CALIF.

DEL. STACEY PLASKETT, D-VIRGIN IS.

REP. BONNIE WATSON COLEMAN, D-N.J.

WITNESSES:JANET WOODCOCK, DIRECTOR, CENTER FOR DRUG EVALUATION AND RESEARCH, FDA

HOWARD SCHILLER, INTERIM CEO, VALEANT PHARMACEUTICALS INTERNATIONAL, INC.

MARTIN SHKRELI, FORMER CEO, TURING PHARMACEUTICALS LLC

NANCY RETZLAFF, CHIEF COMMERCIAL OFFICER, TURING PHARMACEUTICALS LLC

MARK MERRITT, PRESIDENT AND CEO, PHARMACEUTICAL CARE MANAGEMENT ASSOCIATION

KEITH FLANAGAN, DIRECTOR, THE OFFICE OF GENERIC DRUG POLICY, THE UNITED STATES FOOD AND DRUGADMINISTRATION

Source: CQ Transcriptions© 2016 CQ Roll Call All Rights Reserved.


EXHIBIT B


Statement of Howard B. Schiller

Interim Chief Executive Officer and Director, Valeant Pharmaceuticals International, Inc.

before the Committee on Oversight and Government Reform

U.S. House of Representatives

February 4, 2016

Chairman Chaffetz, Congressman Cummings, and Members of the Committee, thank you for the opportunity to testify on behalf of Valeant and address your questions about the company, our products, the prices of our prescription drugs, and our approach to pharmaceutical research and development.

I have worked for Valeant since 2011, first as the company’s chief financial officer, then as a member of the Board of Directors, and now as interim CEO during the medical leave of Michael Pearson. Over this time, I have watched Valeant grow quickly and substantially. Today, we are a robust and innovative specialty pharmaceutical and medical device company that employs about 22,000 people around the world, including 6,000 in the United States, and generates more than $10 billion in annual revenue. We have a collection of world-class franchises that we use to meet our mission of delivering life-changing drugs to doctors and patients who depend on them. In the United States, we are a leading dermatology, gastrointestinal, ophthalmology, and consumer healthcare company, with growing dental, oncology, and women’s health businesses, among others. Valeant makes and markets approximately 1,800 products, including more than 200 prescription drug products in the United States. Our flagship products and brands – such as Bausch + Lomb, Jublia, and CeraVe – are familiar to many Americans, and I am sure to many of you as well.

I hope that today’s hearing will permit me to address some of these broader aspects of Valeant’s business, although I recognize that I am here today primarily because of the Committee’s interest in two issues: The pricing of our drugs and our investment in research and development. I would like to address each of these issues directly.

First, we understand, and have heard very clearly, Congress’s and the public’s concerns about drug prices in the pharmaceutical industry and Valeant’s increases to the list prices of certain drugs, including two cardiac medicines used in hospital procedures, Nitropress and Isuprel. We are responding to these concerns and have already taken steps to address them. We have, for example, created a volume-based price rebate program providing up to a 30% discount for Nitropress and Isuprel through arrangements with the leading hospital group purchasing organizations in the United States. For prescription products purchased by consumers at retail, we have just launched a 20-year program with Walgreens, one of the most well-known and well-respected pharmacies in the nation, that will provide substantial savings for patients purchasing both branded and generic prescription drugs – averaging a 10% reduction for a majority of our branded dermatology, ophthalmology, and women’s health products and up to a 95% reduction


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on certain branded products for which there is a generic alternative. These actions together offer new and innovative ways to deliver prescription medicines to patients, doctors, and hospitals at lower costs. Valeant takes pride in its innovation, which extends both to the development of new medicines and treatments, and to the development of innovative business approaches that increase patient access to medicines. These new innovations are in addition to our existing patient assistance programs that help ensure that out-of-pocket expenses do not prevent eligible patients from receiving the medicines they need. Valeant offers patient assistance programs for more than 55 products, and we expect to spend more than $1 billion on patient assistance in 2016.

Second, Valeant’s history of innovation is also evident in our approach to research and development. We have consciously avoided building a large, fixed-cost research infrastructure focused on open-ended research, which often proves inefficient. We believe innovation should be judged not by how much a company spends on R&D, but by the new products and innovation that a company is actually able to bring to market.

Valeant’s R&D outputs make us a leader in the industry:

Over the past five years, our productivity – measured by drugs approved per dollar spent – is seven times higher than the average of the fifteen pharmaceutical companies with the most new drug approvals. In the dermatological sector, where we are a market leader, our clinical research success rates exceed the industry in each of the three research phases, and our phase II and phase III success rates are significantly better than industry averages.

In the last three years, the FDA has approved 6 new drug applications and issued 13 device approvals to Valeant. In the past two years, Valeant has launched 76 new prescription drugs, generic drugs, medical devices, and other products in the United States.

Our U.S. R&D pipeline contains more than 200 active programs, more than 100 of which we consider significant, including programs for 32 surgical products, 26 consumer products, and 15 dermatology products.

Although, as I noted, we do not believe that dollars spent on R&D alone are the most useful measure of effectiveness, our R&D spending is significant. Valeant’s U.S. pharmaceutical R&D spending is about 8% of our U.S. branded pharmaceutical revenue, and we estimate that total U.S. R&D spending will exceed $400 million in 2016. We have 43 R&D facilities and employ more than 1,000 R&D employees worldwide.

In addition to our internal development, we have looked outside the company to bolster our R&D pipeline, and we have made a strategic choice to pursue valuable R&D through corporate acquisitions, in-licensing, and partnerships. From an economic standpoint, a dollar spent to buy the output from another company’s R&D is the same as a dollar spent on in-house R&D. The economic effects may even be greater when acquisitions have the effect of providing capital to small startups that are uniquely positioned to engage in further research and innovation in particular therapeutic spaces. This transformation in the pharmaceutical industry – from large


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internal R&D expenditures to entrepreneurial acquisitions – is similar to the transformation that occurred in the technology sector. The large internal R&D operations at traditional technology companies have been supplemented by an ecosystem of incubators, startups, and entrepreneurial specialization. The larger technology companies in Silicon Valley and elsewhere now frequently pursue R&D through the acquisition of start-up companies and their products. Following such an acquisition, the large companies can bring innovations to the market more quickly. At the same time, the companies’ acquisition expenditures provide capital to the innovators, spurring further research and new product development. The pharmaceutical sector is following this same trend.

A few weeks ago, the Deloitte Center for Health Solutions, which is the research division of Deloitte’s life sciences and healthcare practice, released its sixth annual report examining the pharmaceutical industry’s return on R&D investment. The conclusions were dramatic, and very consistent with Valeant’s experience and strategy. Deloitte found that, in the past two years, “smaller companies are delivering higher R&D returns” than 12 of the largest research-based life science companies. These smaller companies reported a 25% lower average cost to develop a new product and a 340% higher internal rate of return on their R&D spending. In contrast, the R&D internal rates of return for the 12 large research-based life science companies declined from 10.1% in 2010 to 4.2% in 2015.

Deloitte concluded that smaller companies “may be better at integrating the most innovative science due to their smaller and more nimble R&D organizations.” This is certainly true at Valeant. We have purposely created a streamlined, nimble in-house R&D operation that efficiently brings promising products to market, both from our internal R&D and from our acquisition of external R&D assets. This model is helping to serve patients, as Valeant brings new and better products to market. As the Deloitte study highlights, the pharmaceutical industry is moving in this direction as well.

Finally, the Deloitte study noted that given the weakening performance of their internal R&D operations, large life science companies “are now more likely to return cash generated to shareholders via a combination of dividends and share buybacks than they are to invest in company acquisitions, product licenses and internal R&D.” In contrast, Valeant has not paid a dividend to shareholders in more than five years. We have chosen instead to reinvest our profits in R&D, manufacturing expansion, and acquisitions of new products.

For example, Valeant is investing substantially in manufacturing in the United States. Valeant has 16 manufacturing sites throughout the United States, with our largest facilities in Rochester, New York; Greenville, South Carolina; St. Louis, Missouri; Tampa, Florida; and Clearwater, Florida. We are currently expanding our investments in Rochester, Greenville, and St. Louis.

Before its acquisition by Valeant, it is our understanding that Bausch + Lomb intended, over time, to move its contact lens manufacturing facilities from Rochester to Ireland. Valeant took a different approach. Given its talented workforce and strong contact lens R&D group, we decided to retain our contact lens manufacturing facility in Rochester and also to expand our investment. Since that decision, we have invested more than $250 million in capital and expanded our manufacturing work force by nearly 200 employees in Rochester. To provide


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additional support for four new product lines for Bausch + Lomb’s popular Ultra contact lenses and other contact lens projects, over the next five years we expect to invest almost $500 million more and add approximately 630 jobs in Rochester, including many highly skilled engineering and manufacturing jobs.

Last fall, our Greenville plant celebrated the production of its four billionth bottle of eye care solution. In Greenville, we expect to spend approximately $150 million over the next five years, creating between 150 and 200 jobs. The jobs that Valeant is creating are the result of our growing sales, both within and outside of the United States. In St. Louis, since acquiring Bausch + Lomb, we have made significant capital investments, and we expect to develop the next generation of our cataract and retina surgery equipment at the facility.

From the United States, Valeant exports to more than 100 countries, including countries like China that are traditionally viewed as lower-cost manufacturing centers rather than export markets. As a percentage of revenue, the products we manufacture in the United States and Canada represent more than twice the revenue generated by products we manufacture in the rest of the world, and this share is increasing. We are proud to be reinvesting our earnings to strengthen American exports while expanding skilled manufacturing and R&D jobs in the United States.

Nitropress and Isuprel

I would like to address the Committee’s specific concerns regarding Nitropress and Isuprel, which are two of the approximately 1,800 products sold by Valeant (comprising about 4% of our 2015 revenue). Although broad conclusions about Valeant cannot be drawn from the pricing history of any one drug or set of drugs, I understand your concerns, and I therefore want to provide the Committee with detailed information concerning these two drugs. In addition to this written testimony, we have produced thousands of pages of supporting data to the Committee concerning the two drugs.

Nitropress and Isuprel are used in cardiac care. Nitropress is an antihypertensive (it lowers blood pressure) that immediately addresses blood pressure for patients in hypertensive crisis or acute congestive heart failure. Sodium nitroprusside, the active ingredient in Nitropress, was first introduced during the nineteenth century, and the product is therefore not on patent.

Isuprel is indicated for mild or transient episodes of heart block that do not require shock or pacemaker therapy and for certain serious episodes of heart block and Adams-Stokes attacks, among other uses specified in its label. Isoproterenol, the active ingredient in Isuprel, was patented in 1943, and therefore has been off patent for several decades.

It is important to note that Nitropress and Isuprel are administered by healthcare professionals in clinical settings, primarily hospitals. They are not sold to patients at a traditional consumer pharmacy. Moreover, Nitropress and Isuprel are mostly used as part of a larger hospital procedure. They normally are not administered as stand-alone treatments.

Valeant acquired Nitropress and Isuprel from Marathon Pharmaceuticals in February 2015. Prior to that acquisition, Marathon had engaged an outside pricing consultant to study the market for these two drugs. We understand that the pricing consultant examined the uses of the


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drugs, interviewed healthcare professionals, studied the then-current pricing and reimbursement rates for hospital procedures in which these drugs may be used, and reviewed the drugs’ price history. In a report to Marathon in 2013, the consultant concluded that the prices of Nitropress and Isuprel, even after prior price increases, were still substantially below their true value to hospitals and patients. The “bundled” rates at which hospitals were being reimbursed by health insurance payers for the procedures in which they were used were substantially higher than the price of either drug. The consultant recommended a 250% increase in the list price of Nitropress and a 350% increase in the list price of Isuprel. Marathon took overall price increases totaling 350% for each of Nitropress and Isuprel in 2013.

In the case of a hospital-administered drug like Nitropress and Isuprel, a pharmaceutical manufacturer typically will sell to a wholesaler and the wholesaler will sell to a hospital pharmacy (or other buyer, such as a hospital group purchasing organization, which typically negotiates a discount on behalf of the hospitals). Following a medical procedure, the hospital typically will seek reimbursement from the patient’s health insurance provider, such as a commercial payer or a federal healthcare program. In many cases, there are separate limitations on the amount that the payer, whether an insurance company or federal program, pays for a drug. For example, an insurance company may have a contract with the pharmaceutical manufacturer that limits the amount that the pharmaceutical company can charge for its product. If the reimbursed price is greater than this contracted amount, the pharmaceutical company will “rebate” the difference to the insurance company, with the effect of lowering the net cost of the drug.

Certain federal programs are likewise subject to a variety of limitations that restrain the price that a pharmaceutical company can actually charge for a drug, regardless of the list price. The short-term changes in the price of any input for the procedure – whether it is a drug, the hospital’s overhead, or the cost of doctors and technicians – often does not immediately change the reimbursement amount, although the amount may be adjusted over time.

In the specific case of Nitropress and Isuprel, we understand that the drugs most often are used by hospitals and other care providers as part of procedures that are subject to their own overall pricing caps. The specific price that a hospital is reimbursed for the procedure – often referred to as a “bundled” rate – is derived from an approximation of the wide variety of costs associated with the products and services, including the costs of various drugs, personnel, equipment, and overhead typically incurred in the average procedure. Those bundled reimbursement rates may vary by patient condition, procedure, and payer. Importantly, however, the amount that a hospital is reimbursed for a procedure that includes Nitropress or Isuprel generally will be the same regardless of short-term changes to the prices of the individual drugs. Of course, the reimbursement amount to hospitals may change over time as commercial insurance companies and federal programs adjust their formulas, including the Centers for Medicare & Medicaid Services’ (“CMS”) “Ambulatory Payment Classification” rates for outpatient services and “Diagnosis-Related Group” rates for inpatient treatments. Even then, however, the reimbursement rates continue to be adjusted based on the average cost of the procedure as a whole, not the price of any particular drug.

A price increase or decrease for a drug that is a component in a larger procedure therefore may have an attenuated impact, if any, on the reimbursement rates approved by CMS and other


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payers for that procedure. Those rates are adjusted gradually over time based on many factors. In the case of Nitropress and Isuprel, which face likely near-term competition from generic versions of both drugs that will place downward pressure on average prices, it is far from clear that the increase in the price of the branded versions of those drugs ultimately would increase hospital reimbursement rates for the procedures in which they are used.

During the acquisition of Nitropress and Isuprel from Marathon, Valeant commissioned an update of the pricing consultant’s earlier review of the market, which was nearly two years old at that point, along with other assessments of the market and hospital practices. These analyses showed that Nitropress and Isuprel continued to be very valuable to hospitals and patients, including following the price increases instituted by Marathon. The pricing consultant found, for example, that the volume of Nitropress and Isuprel used by hospitals had been relatively constant over one year of data, indicating that the hospitals continued to value the products highly at the new list prices.

The consultant also confirmed that, under the existing CMS-established hospital reimbursement rates for the procedures in which Nitropress and Isuprel are used, there was considerable room to increase the price of both drugs. In other words, the consultant found that hospitals were receiving from federal payers, and likely commercial payers, payment amounts for the typical procedures in question that were significantly higher than the cost of the drugs used, and they had been doing so for some time. Because these drugs are hospital-administered, and not purchased by patients directly, increasing the cost of the drugs to hospitals would affect the hospital’s profits on these procedures, but it should not reduce patient access.

Because most institutions use only a limited number of Nitropress and Isuprel doses, Valeant’s increases in the list prices would have had a limited impact on most hospitals. A few institutions that specialize in cardiac care, however, use a larger share of the volume. For this reason, and in response to the concerns that Congress and others raised, Valeant has created a volume-based price rebate program for Nitropress and Isuprel through arrangements with the leading hospital group purchasing organizations in the United States. We recently concluded agreements with two major national group purchasing organizations – one representing approximately 3,600 U.S. hospitals, the other representing about 4,500 U.S. hospitals. These agreements provide volume rebates for Nitropress and Isuprel up to 30% (for 500 units or more of Nitropress and 20 units or more of Isuprel). Our goal is to provide tiered rebates on half of the volume of Nitropress and Isuprel that we sell. This means that hospitals that have an atypical need for Nitropress and Isuprel because of the size of their cardiac practices will have access to significant volume discounts.

Drug Pricing in the United States

In the U.S. healthcare system, the list price of a drug is not the same price that a drug manufacturer receives from selling the drug, or even that the hospital, pharmacy, or consumer pays for the drug. The list price operates much like the manufacturer’s suggested retail price of a new car. It is a useful reference, but it reflects neither the price that is actually paid by any given car buyer nor the amount that is ultimately received by the car manufacturer for the sale. Like MSRP, the list price of drugs is typically much higher than the amount that a buyer pays.


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In the pharmaceutical industry, this difference can be substantial – far more than the difference between a car’s MSRP and its sales price. For Valeant’s overall U.S. prescription products, the difference between our gross and net sales is approximately 50%. That is, for each dollar of sales, about half is given back in discounts, rebates, chargebacks, and the like to wholesalers, managed care organizations, pharmacy benefit managers, federal and state healthcare programs, and others. In dermatology, one of the company’s most significant market segments, the overall effective discount is even higher – about 60% and some individual drugs have discounts up to 90%.

In certain federal healthcare programs, Congress has established requirements that restrict the prices that drug companies can charge. These restrictions lower drug company margins and sometimes result in drugs being sold at a loss. For example, as of September 2015, Valeant’s gross sales of Isuprel in the VA’s Federal Supply Schedule were $10.8 million, but the discounts totaled $9.9 million. After accounting for applicable distribution costs, Valeant’s total net revenue was only about $300,000. In the same period, gross sales of Isuprel to the Public Health Service were $48.7 million, with discounts of $47.7 million. After distribution costs, Valeant realized negative net revenue of approximately $2.2 million on these sales. Similarly, Valeant had negative net revenue of $3.5 million on the sales of Wellbutrin XL to the Public Health Service, and negative net revenue of $4.5 million on sales of Glumetza to Medicaid.

Although the pharmaceutical pricing and reimbursement system in the United States is complex, the pharmaceutical companies, health insurance providers, hospitals, pharmacy benefit managers, group purchasing organizations, and federal administrators are all sophisticated participants in the healthcare market. If a pharmaceutical company, for example, were to price a drug above its true value to healthcare providers and patients, the company would see market-based responses, including increased pressure for rebates from the payers, decreased sales volumes from hospitals, increased substitution of alternative products, and heightened competition from new generic or branded drugs.

Indeed, Nitropress and Isuprel sales volumes have fallen by a greater degree – about 30% for each drug – than was anticipated at the time of the price increase. The available data suggests that hospitals are in some cases substituting other drugs. In response to these changes and the public’s and Congress’s concerns, we are calibrating our pricing through volume rebates, which should help address budgetary concerns at hospitals that frequently use these drugs. Even with the volume rebates, some hospitals may choose to substitute other drugs to protect their profit margins on cardiac procedures or for other reasons.

Off-patent drugs like Nitropress and Isuprel also face market pressure from generic drugs, and Valeant expects that both drugs will likely be subject to generic competition in the not-too-distant future. It appears that this generic competition was spurred by the price increases taken by Marathon Pharmaceuticals on Nitropress and Isuprel, which highlighted the value of these drugs to hospitals even before their acquisition by Valeant. As Congress has recognized, there is a degree of inefficiency in the generic drug market, and competition from generics is not always immediate. These inefficiencies sometimes cause instances, such as currently exists with Nitropress and Isuprel, where clinically valuable drugs are subject to little price competition despite being off-patent. This is probably most true in the case of drugs for which the market is relatively small, as is true of Nitropress and Isuprel. Because Valeant itself files applications for


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new branded drugs as well as generic drugs, we too would benefit from faster FDA drug approvals. We also recognize that the benefits of faster drug approvals must be balanced with the exceedingly important process that the FDA undertakes to ensure the safety and efficacy of drugs in the U.S. market, and we support ensuring that the FDA has sufficient resources for this important work.

While there is widespread criticism in the media and in Congress of price increases for older, off-patent drugs – and we understand why – it is important to recognize that patients, doctors, and the entire U.S. healthcare system are best served by a system that permits drugs to be priced based on their clinical value. Older drugs sometimes languish for long periods at prices that do not reflect their value to doctors and patients. When these drugs are priced to reflect more closely their true clinical value, the more accurate price signals incentivize generic competition and innovation. Higher prices draw generic competitors into the market, which in turn tends to put significant downward pressure on prices.

This is exactly what we have seen happening in the case of Nitropress and Isuprel. The rising prices of these drugs over the past decade, including by Marathon before Valeant acquired the products, have stimulated market competition and innovation. We expect that multiple generic alternatives could be approved within the next year or two. These generic alternatives can be expected to put significant downward pressure on the cost of hospital procedures in which Nitropress and Isuprel are currently used.

Patients’ Access to Medicines and Valeant’s Partnership with Walgreens

Nitropress and Isuprel are hospital drugs, typically administered in a clinical setting, as part of a procedure with a set, bundled reimbursement rate. Patients’ out-of-pocket expenses, therefore, generally are not affected directly by price changes. Valeant, however, recognizes that many of its products are purchased directly by patients at a retail or mail-order pharmacy. We have therefore implemented a number of strategies that are designed to ensure that patients’ out-of-pocket expenses are not an impediment to getting access to the medicines that they need.

First, Valeant offers patient assistance programs for more than 55 different products in the United States. One of our larger programs, Valeant Coverage Plus, provides extensive aid to patients needing financial assistance to purchase Syprine or Cuprimine, medications that treat the genetic disorder Wilson’s Disease. Valeant Coverage Plus provides a capped co-pay for patients with commercial insurance ($25 co-pay), subsidized prescriptions for patients without insurance or with low incomes (maximum patient cost of $200 per month above 400% of poverty line; $0 co-pay below 400% of poverty line), and referrals to a foundation that provides prescription support for patients in federal health programs. The foundation, which is supported in part by a Valeant grant, independently determines a patient’s eligibility for support, pursuant to its own criteria. Valeant also provides hardship exceptions in certain cases. With fewer than 1,000 patients in the United States taking these drugs, we seek to ensure that out-of-pocket costs are not a barrier to a patient’s access to these needed medicines.

It is an unfortunate reality of U.S. healthcare laws that pharmaceutical companies cannot provide co-pay assistance to individuals on government programs – some of the patients with the


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most acute need for assistance. We encourage Congress to re-examine this policy and consider whether changes are warranted.

In 2014, Valeant spent approximately $544,000,000 on patient assistance programs. As of September 2015, the company had spent approximately $476,000,000 on patient assistance, and we estimate that our total expenditure for patient assistance for 2015 will be more than $630,000,000. In the years ahead, we expect our spending on patient assistance programs to continue increasing at double-digit annual percentage rates. With our expected continued growth and launches of brodalumab, Addyi (flibanserin), and latanoprostene bunod, we expect to spend more than $1 billion on patient assistance in 2016 in the United States.

Second, almost a month ago, we launched a major new program with Walgreens, one of the largest, best known, and most well-respected pharmacy chains in the nation. The Valeant Access Program with Walgreens will provide substantial savings for eligible patients purchasing both branded and generic prescription drugs at pharmacies throughout the United States. The program with Walgreens is a 20-year partnership designed to increase affordable access to Valeant products that doctors choose to prescribe to eligible patients. This innovative program will improve patients’ access to medicines and reduce costs to the healthcare system. Independently, Walgreens has retained Leavitt Partners, headed by former Health and Human Services Secretary, and former Utah Governor, Michael Leavitt, to assess the model and evaluate its benefits to patients and markets to ensure it is delivering value.

Our partnership with Walgreens has two distinct components:

The U.S. Branded Access Program, which became active last month, will enable consumers to access a majority of Valeant’s dermatology, ophthalmology, and women’s health products at a lower out-of-pocket cost from more than 8,000 Walgreens retail pharmacy locations in the United States. The program will also be open to independent retail pharmacies, in addition to Walgreens. The program will initially cover a majority of Valeant’s branded dermatology, ophthalmology, and women’s health products, including popular medicines such as Jublia, Solodyn, Retin-A Micro 0.08, Besivance, Lotemax, and Alrex, along with Addyi.

This program is designed to lower patients’ costs and ensure that patients have access to the products their doctors prescribe. Patients with commercial insurance can benefit from lower out-of-pocket costs, such as reduced co-pays, and the program will provide access for patients who lack coverage for these products. The program will provide a price reduction of approximately 10% from the list price, on a weighted average basis, over the next six to nine months. Like our other patient assistance programs, the program will not be available to patients with government insurance because of government restrictions relating to federal healthcare programs.

The U.S. Brand for Generic Program is a separate initiative with Walgreens, in which Valeant will make certain branded products available at generic prices. A number of branded products in the dermatology, ophthalmology, gastrointestinal, neurological, and other therapeutic areas will potentially be included in the program, which we expect to launch in the second half of this year. We expect that the discount off of list price for these products will be up to 95%, with


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a weighted average discount of approximately 50%. I’m pleased that we can make this program available to all patients, including those in federal healthcare programs, under current law.

When fully implemented, Valeant expects that the price decreases across both programs will result in significant savings to the U.S. healthcare system. Our agreement with Walgreens is another example of Valeant’s efforts to innovate in ways that benefit patients and doctors.

Finally, Mr. Chairman, I would like to address some of Valeant’s critics who have suggested that the company should be subject to a different set of standards because it does not always operate like a traditional pharmaceutical company. I noted recently that a pharmaceutical trade group proposed five criteria by which it suggested pharmaceutical companies should be judged: 1. Whether the company is developing life-changing medicines for patients. 2. Whether the company has a commitment to discovering new treatments and cures. 3. Whether the company is fueling economic growth and job creation. 4. Whether the company maintains a robust pipeline of new medicines. 5. Whether the company helps patients access needed medicines.

As demonstrated in the many examples cited in my testimony today, Valeant passes each of these five tests easily. Let me summarize my testimony with reference to these five tests:

1. In the last three years, the FDA has approved 6 new drug applications for Valeant and issued 13 new device approvals. In the past two years, Valeant has launched 76 new prescription drugs, generic drugs, medical devices, and other products in the United States.

2. We have 43 R&D facilities and employ more than 1,000 R&D employees.

3. We are investing hundreds of millions of dollars in manufacturing facilities in New York, South Carolina, and Missouri. These investments are generating hundreds of new jobs in the United States.

4. Our development pipeline in the United States contains more than 200 active programs, more than 100 of which are significant, including programs for 32 surgical products, 26 consumer products, and 15 dermatology products.

5. We offer patient assistance programs for more than 55 different products in the United States, and we expect to spend more than $1 billion on patient assistance in 2016 in the United States. We are currently launching an innovative distribution model with Walgreens.

Valeant is helping to improve access to drugs at affordable prices and seeking better outcomes for our R&D investments. My Valeant colleagues and I are proud of these innovations, as we believe strongly that they will define the future for innovative, research-based companies in the pharmaceutical industry. As Deloitte’s recent R&D study shows, the industry is moving in this same direction.

At the same time, we recognize that being an innovator also means that some of our assumptions and choices will not always prove to be correct. Where we have made mistakes, we


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have listened to the criticism and are taking steps to change. We have more to do. We continue to listen and adapt. Our Walgreens partnership is evidence of that. I also expect that after years of rapid growth, which included significant price increases, we will no longer rely on such significant increases in price. Through internal development and acquisitions, we have developed a portfolio of world class franchises. While, like most other pharmaceutical companies, we will from time to time raise prices, I expect those price increases to be within industry norms and much more modest than the ones that drew this Committee’s legitimate concern.

Thank you again for the opportunity to testify today. I would be happy to answer any questions that you may have.





: : : : : : : : : : : : : :

Honorable Michael A. Shipp, U.S.D.J. Master File No.: 15-7658 (MAS) (LHG) ORDER GRANTING DEFENDANT HOWARD B. SCHILLER’S MOTION TO DISMISS THE CONSOLIDATED COMPLAINT

––––––––––––––––––––––––––––––––––––––– x

THIS MATTER having been brought before the Court by Winston & Strawn LLP,

attorneys for Defendant Howard B. Schiller, by way of Defendant Howard B. Schiller’s Motion

to Dismiss the Consolidated Complaint; and the Court having considered the papers submitted in

support thereof and in opposition thereto; and for good cause shown,

IT IS on this __________ day of ___________________, 2016,

ORDERED as follows:

1. Defendant Howard B. Schiller’s Motion to Dismiss the Consolidated Complaint

be and is hereby GRANTED.


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2. Plaintiffs’ Consolidated Complaint be and is hereby DISMISSED with prejudice

as to Defendant Schiller.

________________________________ Honorable Michael A. Shipp, U.S.D.J.


attorneys for defendant howard b. schiller united states ... · 9/13/2016 · james s. richter...

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