A company involved in Valeant's alleged fraud put out a fascinating statement as the market slept

Around 7:10 pm EST Wednesday night, Philidor — a specialty pharmacy company which distributes and bills clients for embattled drug company Valeant Pharmaceuticals — put out a press release relevant to fraud allegations a short selling firm levied against Valeant on Wednesday.

And we now have a better understanding of the opaque specialty pharmacy industry.

Philidor said that it had the option to buy R&O pharmacy, the other specialty pharmacy at the heart of short seller Citron Research’s allegations against Valeant.

R&O operates as part of Philidor’s “network” but operates in much the same capacity.

“Philidor has contractual relationships with the affiliated pharmacies, such as R&O Pharmacy, under which we provide those services,” said the release.

“Philidor does not currently have a direct equity ownership in R&O Pharmacy or the affiliated pharmacies, but does have a contractual right to acquire the pharmacies now or in the future subject to regulatory approval.”

Specialty pharmaceutical companies are used by big drug companies to act as distribution channels and bill their products, often bypassing insurance companies whose partial mandate is to ensure that patients purchase the drugs that will do the job at the lowest cost.

Specialty pharmacies do this by expediting the drug purchasing process for patients and doctors. Instead of going through insurers, patients call specialty pharmacies directly. Then the specialty pharmacies try to recover from the insurers. If they take a loss, they and, the drug companies they serve, recover for that in volume.

The drug companies, for their part, say they do not book revenue from specialty pharmacies until a sale is made to the patient.

It all evens out, as long as the price is right.

So it’s not hard to see the benefit of a drug company having a relationship with one of these pharmacies. It’s a new, but not unheard of, way for big drug companies to make money.

You can also see how beneficial it would be for a drug company to own one of these distribution channels outright.

Philidor’s only client

All three companies in question here — Valeant, Philidor, and R&O — are at the center of allegations fraud levied by Citron Research on Wednesday.

In a report, Citron said that Valeant — Philidor’s only client — was invoicing Philidor’s affiliate, R&O, for drugs R&O never sold or received.

That’s because R&O filed a court document saying that it had no idea why Valeant had invoiced it for $US69 million worth of product it had never received or sold.

Citron’s report also highlighted the connection between Philidor and R&O, pointing out that they shared boards and infrastructure. And that put the spotlight on the entire specialty pharmacy industry.

After the report was released Valeant’s stock cratered, ending the trading day down 19% even after the company’s third largest shareholder, billionaire investor Bill Ackman, threw $US2 billion on top of his stake.

In fact, the entire drug industry suffered during Wednesday’s trading session, and drug companies like Allergan — once a Valeant acquisition target — and Endo, both released statements saying that they didn’t use specialty pharmacies.

Suddenly no one wants to touch that space.

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