The Valeant story just keeps getting weirder.
On Thursday night Evercore analyst Ummer Raffat released a report about all the unanswered questions surrounding pharmaceutical company, Valeant, and the “specialty pharmacies” it uses to distribute its product.
The background here is that Valeant is getting crushed under allegations of fraudulent accounting.
Right now we know that Valeant is the exclusive supplier of Pennsylvania-based Philidor Pharmacy, and that it also supplies California-based R&O Pharmacy.
Valeant has an option to buy Philidor, and Philidor has said it has an option to buy R&O.
It seems, though, that Raffat has found another name for Philidor: Isolani.
Isolani, which says that it exists for the sole purpose of acquiring R&O, purchased 10% of R&O in 2014 for $US350,000 and has the option to buy the rest. Like Valeant, however, it too has legal issues with R&O.
R&O’s pharmacist-in-charge, Russell Reitz, alleges in court documents that Isolani is a shell company for Philidor to “perpetrate a massive fraud not only against not only Mr. Reitz and R&O, but also the California State Board of Pharmacy, various payer networks and as yet unknown entities and individuals.”
The very existence of specialty pharmacies came to light on Monday during Valeant’s third quarter earnings call. It said that Philidor is part of a “network” of pharmacies that it works with.
It said it had not disclosed the relationship before then as specialty pharmacies have been considered an industry advantage and secret until now. These specialty pharmacies are a fairly new innovation in the pharmaceutical space, but they’re not uncommon.
But, as BMO pointed out in a recent note, Valeant’s relationship with these pharmacies seems out of the ordinary because of their ownership and accounting organisation. Other pharmaceutical companies work with independent specialty pharmacies.
Everyone’s suing everyone
The ownership structure is also what makes it so strange that Valeant, Philidor and R&O are suing each other in two separate cases.
One of the cases was uncovered on Wednesday, when short-selling firm Citron Research released a damning report accusing Valeant of accounting fraud. Citron alleged that Valeant creates “phantom” specialty pharmacies in order to bill them for products and book the revenue. Since then, Valeant’s stock has fallen 30%.
As proof, Citron offered up a suit between R&O and Valeant. Valeant billed R&O for $US69 million worth of product it claims was sent to R&O and sold. R&O said it had never heard of Valeant before, and sued the company in California court.
It makes sense that R&O has never heard of Valeant. R&O had been doing business with Isolani, which did not disclose any relationship with Philidor or Valeant.
Isolani is also suing R&O for $US15 million, or $US19 million (according to documents) or $US25 million (according to Valeant) worth of product sales. It claims R&O’s pharmacist-in-charge, Russell Reitz, is witholding the money. This, it says, means Isolani is unable to pay outstanding invoices.
Reitz admits that he’s withholding too. But he says it’s because he uncovered that Philidor and Isolani are the same company.
And that’s a problem, because as Pro Publica reported, Philidor was blocked from doing business in California, where R&O is based, in May 2014. California denied Philidor’s application, in part, because it lied about its relationship with Valeant. It didn’t admit that it had a special relationship at all.
Evercore, for its part, thinks that Philidor and Isolani are the same company too. That’s because the same man who signed Isidor’s court documents is also a Philidor’s Senior Director, according to Linkedin.
Reitz also claims that Isolani/Philidor asked him to sign off on payments for sales that were filled by other pharmacies, or were filled before Isolani purchased R&O. In July of this year, Reitz straight up asked Isolani if it was the same company as Philidor.
And there’s at least one instance where Philidor admitted to using R&O’s credentials to process product after Reitz started asking questions.
Raffat writes that it is now unclear if specialty pharmacies only generate 10% of Valeant’s sales, as Valeant claims. We just don’t know how many specialty pharmacies their are, what their relationship is to Valeant, or if they even know very clearly what their relationship to Valeant is.
Valeant will hold an emergency conference call on Monday to address questions surrounding this controversy. The thing is, will anyone even know enough to ask the right questions.
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