Valeant (VRX) Plunges as CVS Health Terminates Philidor

The CVS announcement came after mutual fund manager Ruane, Cunniff & Goldfarb Inc., sent a letter to its own investors about the Valeant saga. As an academic case study, Valeant would be fascinating.

A lot of funds have gotten hit by Valeant’s share price decline.

Philidor contributed less than 7 percent to Valeant’s .8 billion in third-quarter revenues, although it’s a fast-growing business area. For a long time, the stock had been a huge victor for them.

Separately, two of the five independent directors of the Sequioa Fund resigned over the weekend, the Wall Street Journal reported on Thursday, citing the board’s chairman. Instead, Valeant’s accounts receivable growth has been in line with overall sales growth for the first nine months of the year, both up about 30%.

In Valeant’s detailed presentation on Monday that spelled out its dealings with Philidor, the company said that the pharmacy accounted for about 5.9 percent of its total sales so far this year. The company said earlier this week it would set up a committee to review its relationship with Philidor. Philidor is a pharmacy that was recently associated with Valeant Pharmaceuticals global (VRX) in a report from Citron Research that was peppered with allegations against Valeant.

Valeant has categorically denied all of Citron’s allegations. In the letter Sequoia Fund managers discuss in detail what happen to Valeant. At least one other large drug company owns its own pharmacy. There is no point in trying to hide the relationship.

Goldfarb and Poppe, whose fund’s investment objective is long-term growth of capital, nonetheless reaffirmed their confidence in Valeant CEO J. Michael Pearson. We believe the company will learn from the current crisis the importance of reputation and transparency to all stakeholders, especially the shareholders. Until last week, when Valeant held its Q3 earnings call, shareholders were unaware that it and its “network” of smaller pharmacies even existed. Our belief has always been that Pearson is honest and extremely driven.

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A bigger question is whether Valeant can avoid liability for any possible future illegalities discovered at Philidor, which has been helping Valeant get insurers to pay for its costly drugs.