Valeant vs. Citron

This week, Valeant Pharmaceuticals has suffered from a major sell-off after Andrew Left, short-seller and founder of Citron Research, compared Valeant to a pharmaceutical Enron, an energy firm that collapsed in 2001 due to an accounting scandal. Citron Research consists of a group of investors who publish free reports on firms that are usually considered over-valued or are possibly engaged in fraud. Valeant has denied these fraudulent claims, by calling the report “false and misleading” and “an attempt to manipulate the market.” The Quebec-based specialty pharma company, was one of the best performing stocks, growing at 5% CAGR per year, has lost 42% in it’s equity value in the past week—resulting in a $20 billion loss in market value. Valeant was up 8% at $118.70 last Friday, however still at a 33% overall loss.

Citron Research has also alleged that Valeant was inflating sales by wrongfully benefited from engaging in business with Philidor RX Services, a specialty pharmacy. Companies like Philidor distribute drugs to patients and receive reimbursements from insurers. Generally, drug makers like Valeant encouraged doctors to send their patients to pharmacies because a higher number of prescriptions are filled. When Valeant made an announcement this week, that they had an option to buy Philidor, it raised many questions in the media, considering this is uncommon for firms in the industry. Valeant responded to Citron stating that all sales to Philidor and other pharmacies are “accounting for as intercompany sales and are eliminated in consolidation.” The Canadian-based company has never mentioned its financial ownership of Philidor, until this past week when they were under scrutiny.

While the company has been facing scrutiny in the press, Valeant Chief Executive J. Michael Pearson has been responding to questions raised regarding revenue and their recent acquisition of Salix Pharmaceuticals. In a call, Pearson stated that Valeant is aware of the amounts of inventory at its big three distributors—McKesson, AmerisourceBergen Corporation and Cardinal Health, because Valeant has data-sharing agreements with each. However, in last year’s annual report, Valeant released a statement saying they used third-party data to estimate its level of inventory and product demand. Similarly, in another report, a court filing was made by R&O Pharmacy to block a demand of $69 million of Valeant’s products because R&O had never received it. The major problem here is that if Philidor is actually the parent company to R&O, then Valeant also owns R&O, which does not constitute them as a third-party company.

Before Valeant acquired Salix Pharmaceuticals back in April, Salix had a major accounting restatement. On June 30th, in a quarterly filing, Valeant said the SEC was conducting an investigation the relating accounting issues and the violations of disclosing inventory amounts. These accounting issues from Salix can become another lingering problem for the Valeant.

The Canadian company definitely has a lot of explaining to do and if the report is found true, the company may not be able to fully recover. However, analysts at BMO, J.P. Morgan, and other banks have stated that the report from Citron Research has not yet been shown to be true. There is much ambiguity coming from the firm and it seems Valeant has been concealing many of their tactics. Despite the company’s web of allegations from Left and the media, activist investors and firms have still bought more shares of the company.

By: Samantha Eng


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