Shares of Valeant took quite the beating yesterday after Citron Research accused the company of an Enron-like accounting strategy. The reason, the Times reported, is that these specialty pharmacies (which were originally meant to distribute specialty medications) lower pricing pressure on patients, since pharma companies often pay out the co-pays on consumers’ behalf while the specialty pharmacy gets the medicine to a patient directly, and quickly, via mail or direct delivery.
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On Monday, during a conference call with investors, Valeant defended its pricing and declined to comment on the federal investigations, saying it was cooperating with authorities.
Every allegation has a source, and this case, the accuser is one that has an obvious vested interest in tarnishing Valeant’s reputation (although that’s not to say their claims should automatically be dismissed).
Now Citron, a short-selling firm that publishes free research used to bet against companies, is making allegations that Valeant could be the “pharmaceutical Enron”. This company is the largest Canadian public company, the largest pharmaceutical in Canada.
Valeant said the Citron report allegations were erroneous. It said Philidor’s pharmacy network includes R&O, and Valeant only records sales involving that network when a product is dispensed to a patient. He couldn’t own Valeant shares while they were working on the takeover together.
“[Pricing power] had contributed to their increased profitability, which in turn contributed to a higher stock price and more accretive acquisitions”, said Leonard Yaffe, who runs a healthcare hedge fund Stoc*Doc Partners.
“We believe innovation should not be judged by how much you spend, but by the new products that a company is able to bring to market, and our goal has been to bring multiple, high-quality, innovative products to the market year after year”, Valeant spokeswoman Laurie Little said. The drugmaker’s general counsel sent a letter to R&O because the pharmacy “is now improperly holding significant amounts it receives from payers”, or insurers, Valeant Chief Executive Officer Michael Pearson said on the call.
Valeant has disclosed that it recognizes nearly all of its revenues generated through the specialty pharmacy channel when the prescription is actually filled, and that the specialty pharmacies operate on a consignment model.
Valeant’s swoon this week has hurt major shareholders, including billionaire William Ackman whose Pershing Square Capital Management hedge fund lost about $500 million alone in Wednesday’s rout.
“We’ve been strong, vocal Valeant bulls”, Arfaei said. The VRX market cap is at 40.66B with an EPS of $2.41 per share.
The drugmaker didn’t immediately respond to a call for comment.
Valeant has declined 55 percent from an intraday peak of $263.81 on August 6, according to data compiled by Bloomberg.
Citron is an activist short seller with a team of investigators led by Andrew Left. Stocks have mostly gained this month following a sharp selloff in the third quarter. The short seller noted in its Valeant report that in 2008 it exposed a relationship between medical device maker Arthrocare and Discocare. That position was a huge victor in the first half of 2015, but started to falter in recent weeks, and was pummeled after the report from Citron. The stock later pared losses after investor Bill Ackman said he increased his Valeant stake on Wednesday by about 2 million shares.
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A simple promise turned Valeant Pharmaceutical global Inc and a few of its rivals into stock market darlings: we will buy more companies and make more money selling drugs.
