Valeant shares plunge on negative research report
Shares of Valeant Pharmaceuticals International (VRX) nosedived Wednesday following a negative research report that raised questions about the Canada-based drugmaker's relationship with a specialty pharmacy.
The stock at one point plunged below $90 per share, a more than 30% intra-day drop. The sell-off followed allegations in the report by short-seller Citron Research that Valeant might have created "phantom accounts" as part of a purported "fraud to create invoices to deceive the auditors and book revenue."
Trading in Valeant shares was halted on pending news around 1:30 p.m. EST Wednesday before resuming trading and recovering some of the lost value and closing down nearly 19.2% at $118.61.
Valeant issued a response that attempted to rebut the Citron Research report by calling it "false and misleading." The company said the allegations "appear to be an attempt to manipulate the market in an effort to drive down Valeant’s stock price."
The high-stakes financial debate focuses on the Valeant's links to Pennsylvania-based pharmacy Philidor RX Services. Valeant said Philidor also provides claims adjudication, logistics and additional support to other pharmacies, including R&O Pharmacy, located in Camarillo, Ca.
Valeant on Monday disclosed that it had bought Philidor, a company it uses to distribute some of its medications. Valeant also said it had consolidated Philidor's financial results into its own publicly-disclosed filings.
Questioning the relationship between the firms, Citron Research cited a Monday report by the Southern Investigative Reporting Foundation that said Valeant was Philidor's only client. Why would a major pharmaceutical firm acquire a small company "to which you are the only customer?" the Citron Research report asked.
Additionally the report said Philidor shares the same management with R&O Pharmacy.
R&O on Oct. 6 filed a federal court complaint arguing it had received an improper Valeant payment demand in September for $69 million. The court complaint denied that R&O owed Valeant "any amount of money," and said the Canada drugmaker "has failed to provide a single shred of evidence to support its claims."
Gary Kaufman, an attorney representing R&O, sent Valeant General Counsel Robert Chai-Onn a Sept. 8 letter that theorized the pharmacy and drugmaker could be "victims of a massive fraud perpetuated by third parties." Alternatively, the letter speculated that Valeant was "conspiring with other persons or entities to perpetuate a massive fraud" against R&O and others.
Despite R&O's disavowal of any connection with Valeant, the Citron Research report said the small pharmacy and Philidor "are the same company and share management."
"The two companies have the same patient privacy disclosure, in fact formatted identically, on both companies' websites," the report said, also noting that the firms have the same toll-free number to reach their privacy officer.
"It is apparent to Citron that Valeant has created a network of 'pharmacies' as clones of Philidor," the Citron Research report said. "Why do these exist? Citron believes it is merely for the purpose of phantom sales or stuff the channel, and avoid scrutiny from the auditors."
Valeant, however, responded that Philidor's back-end support of other pharmacies, including R&O, "includes a common call center phone number."
"All shipments to Philidor and other pharmacies in the Philidor pharmacy network, including R&O, are not recorded in Valeant's consolidated net revenue," Valeant said. "All sales to Philidor and Philidor network pharmacies are accounted for as intercompany sales and are eliminated in consolidation."
Valeant also appeared to indicate the $69 million payment request it sent to R&O involved product costs that "were not recorded as revenue to Valeant" when the shipment took place.
It was not immediately clear whether the drugmaker's statement would calm investors.
"The recent allegations by the Southern Investigative Reporting Foundation and Citron Research of Valeant’s potentially questionable relationships with their specialty pharmacies puts not only their business model but their reported revenues into question," Maxim Jacobs, a healthcare analyst at Edison Investment Research wrote Wednesday.
The new allegations followed Valeant's disclosure last week that federal prosecutors in Massachusetts and New York have subpoenaed the company seeking information about its drug pricing and distribution policies, as well has how it helps patients pay for medications.
Valeant subpoenaed over drug pricing
The subpoenas also seek information Valeant submitted to the Centers for Medicare and Medicaid Services, Valeant said in a statement.
Valeant also said CEO J. Michael Pearson had responded to questions by Sen. Claire McCaskill, D-Mo., about the history and pricing of Nitropress, a medication used to treat high blood pressure, and Isuprel, a drug used to treat cardiac arrest. McCaskill raised the questions after Valeant's February 2015 decisions to hike the price per vial of Isuprel from $215 to $1,346, and raise the similar dosage of Nitropress from $257.80 to $805.61.
Valeant said last week it was "reviewing the subpoenas and intends to cooperate with the investigations." McCaskill characterized the company's response to her inquiries as inadequate.