Drug maker Valeant plunges as report alleges Enron-like fraud

A long list of prominent investors, including hedge fund star Bill Ackman and the managers of the Sequoia Fund, made billions of dollars in paper gains as stock of Valeant Pharmaceuticals worldwide soared over the past five years. The shares cut their losses and were last down 16 percent at $123.05, representing about a roughly $500 million loss for Ackman's Pershing Square Capital Management, which holds a 5.7-percent stake in Valeant.

The company's stock tanked by almost 40% on Wednesday on a report from short seller Citron Research, which likened Valeant ($VRX) to Enron and claimed it used its relationship with specialty pharmacies-Pennsylvania's Philidor Rx and those connected to it-to inflate its top line.

That fall comes on the heels of an even larger drop of 19 per cent the day before following a report by research firm - and short seller - Citron Research suggested the company is making its sales appear to be larger than they are in reality by moving money between specialty pharmacy subsidiaries. Inventory held by R&O is on Valeant's books, he said.

Valeant is the only customer of Philidor and it also has an option to buy the company.

"In the case of Philidor, Valeant consolidates their financials and seems to have a controlling financial interest, while other companies say their affiliated specialty pharmacies are 'fully independent.' Valeant's structure may not be illegal, but we find it aggressive and questionable". Cleveland Clinic and other hospitals have been hit financially by Valeant price increases on heart drugs Isuprel and Nitropress.

"We look forward to our call on Monday where we will address and refute recent allegations", Pearson said, as per Reuters.

The media attention took its toll on Valeant's share price, which closed down nearly 20% after falling as much as 39% during the course of the trading day.

Valeant said in response that it does not record sales of drugs that are stocked as inventory at such pharmacies in its consolidated financial reports.

Stocks have mostly gained this month following a sharp selloff in the third quarter.

"Valeant/Philidor have created an entire network of phantom captive pharmacies" to create fake sales of drugs or to avoid scrutiny from auditors, Citron said.

Valeant disclosed last Wednesday that the USA government requested information on pricing and on programs that help patients cover their out-of-pocket expenses for Valeant's drugs.

The declines have chopped $16 billion from the company's market capitalization in the past two days.

Earlier this week, the New York Times reported that Valeant and other drug companies were using mail-order specialty firms to circumvent efforts by insurance companies to switch patients to cheaper, generic versions of their drugs. Representatives of R&O declined to comment. Also in the healthcare sector, insurers Aetna, Humana, Anthem and Cigna all fell at least 3 per cent after Democratic presidential candidate Hillary Clinton said she had "serious concerns" about the mergers the companies were proposing.

"It was an $800-million-in-revenue company that was operating in over 100 countries", Pearson said in a 2014 interview with Institutional Investor magazine.