Valeant has built its business model on buying smaller drug companies and putting up the price of their products.
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The stock ended the day off 19% at $118.61 after trading was halted a few times on the New York Stock Exchange and on the Toronto Stock Exchange. But Chief Executive Michael Pearson surprised investors earlier in the week by disclosing the company had an option to acquire specialty pharmacy Philidor, which features prominently in the Citron allegations as the center of a network of pharmacies used to artificially boost sales. “Why do these exist?”
Shares bounced back a bit on a response from the Canadian pharma, which stated that it was not improperly handling inventory or using Philidor to bump up revenue numbers.
Maruoka commented: “Based on its disclosures, Valeant has clearly indicated that it only books revenue when the product is dispensed to the patient”.
A long list of prominent investors, including hedge fund star Bill Ackman and the managers of the Sequoia Fund, made billions of dollars in paper gains as stock of Valeant Pharmaceuticals global soared over the past five years.
And Nomura analyst Shibani Malhotra dismissed the claims on Wednesday, too. Drug companies use specialty pharmacies as a workaround to deal with insurance companies, whose partial mandate is to ensure that patients purchase the drugs that will do the job at the lowest cost. “We are confident in our full compliance with all applicable accounting rules, regulations and laws”, it said.
The comments came as Valeant lifted its 2015 revenue forecast to $11.0-$11.2 billion from the prior $10.7- $11.1 billion.
Over the years, Valeant Pharmaceuticals has been under scrutiny for extreme drug price hikes it has acquired, which included several probes carried out by New York and Massachusetts federal prosecutors.
In a note to clients, Nomura analyst Shibani Malhotra said the weakness in Valeant’s stock offers a buying opportunity, as the brokerage firm believes the concern raised by Citron is likely “misinformation”.
With the stock’s dramatic swings, Ackman’s portfolio lost as much as US$820 million during the day but the loss lessened to roughly US$650 million as the price inched up again in mid-afternoon.
Pearson also described how Valeant’s relationship with another specialty pharmacy, R&O Pharmacy LLC of Camarillo, California, turned sour.
The report by Citron Research, a short-selling firm run by Andrew Left, said Wednesday that Valeant’s previously undisclosed relationship is a sign of a cover-up.
About 6.8 billion shares changed hands on U.S. exchanges, compared with the 7.3 billion daily average for the past 20 trading days, according to Thomson Reuters data. “This alone, negatively affects Valeant’s expected rate of growth”, he says.
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It added: “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”.
