Valeant Pharmaceuticals has been crushed by investors after short-selling research-firm Citron called it the “pharmaceutical Enron.”
The stock fell 39% before Valeant called Citron’s claims “erroneous.” That stopped the bleeding, but the stock is still down 25% to around $US110. Just two months ago, it was trading above $US250.
Citron alleged Valeant improperly benefited from a business relationship with Philidor, a pharmacy that distributes drugs for specialty pharmacies. Citron says Valeant filed fake invoices with Philidor to make its revenue appear greater than it is. Valeant is Philidor’s only customer, Citron points out.
In a release Wednesday, Valeant said that Philidor is a legitimate distribution network through which Valeant sells some of its products.
Sort of like how a soda company might deliver syrup to an in-house bottler but not recognise this as revenue until the finished product is sold a customer, Valeant says it doesn’t recognise in-network sales by Philidor network pharmacies until they are sold to an end user.
Here’s the full release from Valeant:
Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (TSX: VRX) today responded to recent accusations made regarding its financial reporting and operations.
- Philidor Rx Services is a pharmacy licensed in Pennsylvania and also provides back-end services, including call center, claims adjudication, IT and logistics support, as well as compliance/HIPPA regulation guidance, to other pharmacies, including R&O Pharmacy. This includes a common call center phone number serviced by Philidor for the Philidor network pharmacies.
- All shipments to Philidor and other pharmacies in the Philidor pharmacy network, including R&O, are not recorded in Valeant’s consolidated net revenue. Sales are recorded only when the product is dispensed to the patient. All sales to Philidor and Philidor network pharmacies are accounted for as intercompany sales and are eliminated in consolidation. They are not included in the consolidated financial results that Valeant reports externally.
- 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.
- The $US69 million at wholesaler acquisition cost of products shipped by Valeant to R&O were not recorded as revenue to Valeant when shipped to R&O. When R&O dispensed those products Valeant recognised the net realised amount due from patients and payors (approximately $US25 million) and reduced the associated inventory from Valeant’s balance sheet. In this case, we estimate the net amount of revenue for the $US69 million at WAC would be approximately $US25 million.
- The timing of our revenue recognition by selling through the Philidor pharmacy network is actually delayed when compared to selling through the traditional wholesaler channel.
A Valeant spokesperson added that, “We categorically deny the allegations made in the Citron Report. Citron’s false and misleading statements about Valeant appear to be an attempt to manipulate the market in an effort to drive down Valeant’s stock price. As disclosed in our third quarter earnings presentation and further today, Valeant has a contractual relationship with Philidor and properly accounts for sales to, and inventory at, Philidor and Philidor’s network pharmacies. We are confident in our full compliance with all applicable accounting rules, regulations and laws.”
On Wednesday, Citron Research’s report asked: “Could this be the Pharmaceutical Enron?” This sent shares of the company sharply lower, and the stock was briefly halted earlier this morning because of volatility as a result. Year-to-date the stock is off around 24%.
Citron’s report continues a rough week of news for Valeant, which got hammered after reporting earnings Monday morning that were poorly received by investors, largely because of commentary from CEO Mike Pearson about the company’s shift in strategy.
Pearson told analysts on the call that the company would increase spending on research and development or potentially spin off entities, a decided change from the company’s strategy of acquiring smaller competitors and increase the price of their drugs.
On Monday, a separate report from the Southern Investigative Reporting Foundation took a look at Valeant’s relationship with the specialty-pharmacy-company Philidor.
As SIRF lays out, Valeant sued a company named R&O Pharmacy for $US70 million, though these companies had never done business together. On Monday, however, Valeant said that last year it exercised an option to acquire Philidor, which had done business with R&O.
In a slide in its earnings presentation Monday, Valeant says this about the R&O letter:
The leap Citron then makes in its report is that R&O and Philidor are the same company, meaning Valeant owns both, which means the company is billing and paying itself.
Citron, which again is making comparisons between Valeant and Enron, compares commentary from Pearson and former Enron executives.
Citron even goes so far as to imply that Pearson’s 23-year tenure at McKinsey before he joined Valeant was “too much of an eerie coincidence” that is shared with former Enron CEO Jeff Skilling, who worked at McKinsey for 11 years before joining Enron.
But aside from the most recent headlines regarding the company, Valeant has, along with the rest of the pharmaceutical industry, been under the microscope from politicians and regulators who want to take a closer look at the industry’s pricing practices.
Valeant is hedge fund manager Bill Ackman’s largest holding.