VRX artical bloomberg today Valeant Pharmaceuticals International Inc. said a short seller’s allegation that it recorded fake sales to phony customers was “erroneous," mounting a defense of its relationship with specialty pharmacies that failed to assuage investors.
The drugmaker responded after a report by Citron Research that sent its shares down as much as 40 percent on Wednesday. The shares recovered some ground after the company’s statement, and closed at $118.61 in New York. That still represented a 19 percent drop, the company’s biggest one-day decline since 2011.
The stock-commentary site
said Valeant is using a specialty pharmacy called Philidor RX Services to store inventory and record those transactions as sales. “Is this Enron part deux?” the report said. “These similarities are too close to ignore.”
“There is no sales benefit from any inventory held at these specialty pharmacies,” Valeant said in a statement Wednesday afternoon. The company said that sales are recorded only when drugs are sent to patients.
Citron, founded by Andrew Left, has been a dogged critic of Valeant’s business model,
denouncing its reliance on acquiring drugmakers and then jacking up the prices of their products, which have been on the market for years.
Intensifying Debate
Valeant has been at the forefront of an intensifying debate over price increases for older drugs in the U.S. Last week it said it had received subpoenas from the U.S. Attorney’s Office in Massachusetts and the Manhattan U.S. Attorney’s Office seeking information on its patient assistance programs, drug distribution and pricing decisions. Valeant has also been scrutinized by lawmakers for pushing up the prices of heart drugs Isuprel and Nitropress -- and Citron has said those price hikes have
disguised a lack of growth. Valeant has
disputed Citron’s figures.
It’s all taken a heavy toll on Valeant shares, which were up 83 percent for the year in August and have fallen 55 percent since that high point. That’s hurt top shareholders including Ruane Cunniff & Goldfarb Inc., which manages the Sequoia Fund, along with T. Rowe Price Group Inc. and Bill Ackman’s Pershing Square Capital Management.
Ackman said in an e-mail he acquired 2 million shares of Valeant Wednesday during the stock’s rout. He defended Valeant at the Bloomberg Markets Most Influential Summit on Oct. 6, saying drug companies put their profits into research and acquisitions, rewarding investors and producing more innovative products.
The Citron report published Wednesday names several pharmacies, including
R&O Pharmacy, that share a phone number with Philidor and have similar
text on their websites. Valeant said that’s because Philidor provides logistics and compliance support to other pharmacies, including R&O.
R&O Lawsuit
The twist in Citron’s allegation is that R&O Pharmacy has sued Valeant. In a lawsuit filed in federal court in California, R&O said it had gotten a letter from Valeant’s general counsel on Sept. 4 indicating that it owed Valeant more than $69 million. It had never received a previous invoice from Valeant for any amount.
The lawsuit says that R&O believes that either Valeant and R&O are "victims of a massive fraud perpetuated by third parties" or that "Valeant is conspiring with other persons or entities to perpetuate a massive fraud against R&O and others."
Citron said that lawsuit is evidence that Valeant is creating invoices "to deceive the auditors and book revenue."
“Valeant/Philidor have created an entire network of phantom captive pharmacies” to create fake sales of drugs or to avoid scrutiny from auditors, Citron said.
Valeant said the inventory held by R&O remained on Valeant’s balance sheet and wasn’t recorded as revenue until the products were distributed to patients, the drugmaker said.
A spokeswoman for Philidor didn’t respond to comment. The R&0 answering services offered up a customer service number that is the answering service for Philidor.
Inventory Comments
On a conference call Monday, Valeant said inventory held by Philidor is on Valeant’s books, and the company doesn’t recognize revenue until prescriptions are filled. The drugmaker’s general counsel sent a letter to R&O because the pharmacy "is currently improperly holding significant amounts it receives from payers," or insurers, Valeant Chief Executive Officer Michael Pearson said on the call. Inventory held by R&O is on Valeant’s books, he said.
Valeant owns an option to acquire Philidor, the company said.
Valeant said Monday it may
spin off one line of drugs that has benefited from price increases. The company said it will focus less on acquisitions that depend on buying old treatments and raising their prices.
The company’s bonds erased more than a billion dollars in market value after the Citron report was published.
The junk-rated securities, which mostly come due within 10 years, lost $1.5 billion in value at 1 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The price of Valeant’s $3.25 billion of 6.125 percent maturing in 2025 fell 11.25 cents to 83.5 cents on the dollar, the biggest drop since they were sold in March, Trace data show.
Valeant has almost $20 billion of bonds outstanding, according to data compiled by Bloomberg.