The allegations were made by Citron Research, a short-selling firm, in a report entitled, “Could this be the Pharmaceutical Enron?”.
Advertisement
Valeant has categorically denied the allegations made in the Citron report.
Valeant released a statement calling the Citron report “erroneous”.
“It was one of the scariest declines I have seen in my 35 years of investing”, Cramer said.
The Laval, Quebec, company drew Congress’ interest following its purchase of the life-saving heart drugs Nitropress and Isuprel.
Valeant fell 38 per cent to $US91.45 at 1:19 pm in New York, headed for its biggest one-day drop since at least 1994. The shares are down 55% from an early-August peak of $262.52.
The drug company denied the allegations.
Before the recent slide, Valeant was among the stock market’s best performers. It also cut costs, including on research.
By the end of June, Goldman Sachs estimated that hedge funds owned 22 percent of Valeant’s stock.
Citron claimed in a research note that Valeant was using mail-order chemists that it controls to underpin sales of high-priced drugs. He said the notion that Valeant would need to resort to phantom sales to juice revenues heightens existing widespread concerns about the company’s ability to produce growth in an increasingly hostile pricing environment. Allergan was eventually bought by Actavis PLC.
Investors weren’t satisfied. Markets have grown suspicious over Valeant’s reliance on specialty pharmacies like Philidor, which maintain exclusive relationships with drug manufacturers hoping to sidestep retail pharmacies and ship directly to customers.
The company on Monday said it would change its approach, spending more on R&D and focusing more on reducing its debt than on dealmaking. Shares fell almost 8% that day. Nearly all small drugmakers use this more conservative method initially when the drug is launched because they don’t know how much drug is going to get returned. Valeant also said it sought to recover about $69 million from R&O pharmacy for medicines it provided.
The Citron report names several pharmacies, including R&O Pharmacy, that share a phone number with Philidor and have similar text on their websites.
On Monday, however, Valeant said that past year it exercised an option to acquire Philidor, which had done business with R&O.
Any inventory at pharmacies in the Philidor pharmacy network are included in Valeant’s consolidated inventory balances – there is no sales benefit from any inventory held at these specialty pharmacies and inventory held at the Philidor network pharmacies is reflected in Valeant’s reported inventory levels. Unfortunately for Valeant Pharmaceuticals, investors simply weren’t impressed with the new plans.
“It is apparent to Citron that Valeant has created a network of “pharmacies” as clones of Philidor”, the report says.
“Hedge fund managers with great track records have stood by their conviction that Valeant is a great company despite a growing list of questions about its business model, its pricing policies, its pile of debt and the determination of potential acquisition targets to stay out of Valeant’s clutches”, said Erik Gordon, a professor at the University of Michigan’s law and business schools.
Advertisement
A few investors sought to profit from the stock fall.
