Valeant shares tumble as report questions company finances

Citron Research, which often highlights the short case for a stock, published a note Wednesday that said Valeant and Philidor, a specialty pharmacy, "have created an entire network of phantom captive pharmacies" to record "phantom sales or stuff the channel, and avoid scrutiny from the auditors".

Citron said in a report that it appears that Valeant and the specialty pharmacy Philidor have created the network, and that Philidor appears to own R&O Pharmacy, a company Valeant has accused of improperly withholding payments.

Valeant, in response to the report, defended its relationship with the specialty pharmacies that distribute its drugs and called the comparison to Enron Corp. unwarranted, saying sales are only recorded when drugs are sent to patients.

"While Mallinckrodt does not publicly quantify contributors to revenue growth, since becoming independent the majority of our growth has been through increased volume", the company said in a statement.

Citron is an activist short seller with a team of investigators led by Andrew Left.

The statement by Philidor, a Pennsylvania-based Valeant unit, said the subsidiary provides administrative services to a network of pharmacies, including R&O.

In its note, Citron cited an alleged court filing made by a regional chemist called R&O Pharmacy against a demand for payment from Valeant worth US$69mln. Herbalife has vehemently denied Ackman's allegations that it is running a pyramid scheme. Chief Executive Michael Pearson also said that the company did not see any compelling acquisition targets at the moment. "We are confident in our full compliance with all applicable accounting rules, regulations and laws", it said. In a lawsuit filed in federal court in California, R&O said it had gotten a letter from Valeant's general counsel on September 4 indicating that it owed Valeant more than $US69 million. Valeant acquired as many as 100 companies in the last seven years, including Bausch & Lomb and Salix Pharmaceuticals. Shkreli said he has bought shares of Valeant. They also use the current weakness as a buying opportunity. Congress has started to investigate how it and other companies buy and then ramp up the price of drugs. Valeant Pharmaceuticals' significant decline distracted investors amid one of the busiest days for corporate earnings.

"Relations between Valeant and Philidor are not only aggressive, they also raise questions", he argued.

Valeant's five-year credit default swaps have blown out 44 percent, or 195 basis points, to 637.5 basis points, according to Markit data.

Canadian stocks slid on Wednesday as Valeant Pharmaceuticals worldwide Inc. lost more than a quarter of its market value after Citron Research published a report examining the drugmaker's pricing practices.

Valeant has since plummeted 60 per cent from an August 5 all- time high, amid increasing scrutiny from USA lawmakers over the industry's pricing models for prescription drugs.

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. But with Valeant Pharmaceuticals' accounting practice, that can never happen because sales matches demand exactly with a slight delay in booking sales until the pharmacy tells them the product is sold.

It's the latest controversy swirling around Valeant, a $50 billion pharmaceutical giant that's backed by hedge fund billionaire Bill Ackman. The ratio fall, as 59 funds sold all Valeant Pharmaceuticals Intl Inc shares owned while 216 reduced positions.