MONTREAL -- Valeant Pharmaceuticals faces years of legal challenges despite cutting ties with a U.S. mail-order pharmacy at the centre of a controversy about how Canada's largest publicly traded drug firm conducts its business, say industry observers and the company's second-largest shareholder.

Quebec-based Valeant said it was ending its relationship with Philidor Rx Services after several major U.S. drug-benefit providers announced they were walking away from the specialty pharmacy.

Valeant (TSX:VRX) said it had lost confidence in the Hatboro, Pa.,-based company and was exploring relationships with other pharmacies to fill prescriptions for its drugs.

"We understand that patients, doctors and business partners have been disturbed by the reports of improper behaviour at Philidor, just as we have been," CEO Michael Pearson said in a news release Friday.

"We know the allegations have also led them to question Valeant and our integrity, and for that I take complete responsibility. Operating honestly and ethically is our first priority, and you have my absolute commitment that we will make it right."

On the Toronto Stock Exchange, Valeant's shares closed down nearly 18 per cent to $122.04.

Valeant did not specify the allegations it was referring to in its statement and declined to clarify or provide additional comment.

However, the company's announcement came after a Bloomberg story reported that former workers it did not identify said they were instructed to change codes on prescriptions so that it would appear that doctors required, or patients wanted, Valeant's more expensive brand-name drugs -- and not their cheaper generic versions.

Philidor declined repeated requests for comment on the allegations and would not confirm Valeant's assertion that it will cease operations.

On Monday, when the committee was announced, Philidor issued a statement saying it welcomed the creation of the committee and it was "proud of the company we have built and value our working relationship with Valeant."

Valeant also announced Friday the appointment of former U.S. deputy attorney general Mark Filip to advise a committee it has struck to investigate allegations in a report from Citron Research. The short-selling firm has alleged Valeant set up a network of "phantom pharmacies" as clones of Philidor to trick auditors. Pearson has said the allegations are "completely untrue."

Citron tweeted that it would update its report on Monday. "Dirtier than anyone has reported."

Philidor represented 6.8 per cent of Valeant's revenue in the third quarter, including large quantities of its toenail fungus medication Jublia. The company only distributed medications in the United States.

Activist investor Bill Ackman of Pershing Square Capital -- a business partner with Valeant in its failed bid last year for Allergan -- offered a spirited defence of the company in a conference call Friday that lasted nearly four hours.

Ackman, Valeant's second-largest shareholder, said he believes it is an undervalued company that will eventually overcome this scandal after two to four years of legal scrutiny.

"Life will go on for Valeant," he said from New York City. "And while this has been a very damaging reputational moment for the company -- the dramatic decline in the stock price, the front-page stories, all kinds of negative press about the business and various assertions and attacks -- we think the Valeant business is quite robust."

The pharmaceutical industry has a long history of companies, including big-name multinationals that have thrived after paying large fines for repeated and serious violations, he said.

He said he expects Valeant's shares will recover in the coming years as its core business continues to prosper.

While he continues to have faith in Pearson and recently met with company employees at a town hall meeting, Ackman said Valeant and its CEO have done a poor job communicating, being transparent and quickly responding to damaging accusations.

"Anything less than complete transparency makes the company vulnerable to attack," he said. "We view it as a compact with shareholders. In exchange for high returns investors are willing to accept complexity so long as there is transparency."

Vicki Bryan, senior analyst of independent research for bond-rating company Gimme Credit, said Valeant's problems aren't over with the termination of its relationship with Philidor.

"The legal tsunami Valeant has created could loom for years to come considering the number of serious federal probes investigating virtually all of Valeant's business practices, not to mention civil lawsuits quickly piling up," she wrote in a report.

And without Philidor, she said, Valeant could face a big hole in its revenue generation that can't be filled immediately by quick acquisition or further drug price hikes.