Valeant Pharmaceuticals shares plunge after accusation of faked sales

"These similarities are too close to ignore".

Valeant Pharmaceutical shares hit their lowest level in more than a year Wednesday following a report accusing the company of creating a network of "phantom" pharmacies to deceive auditors and book revenue - an allegation it firmly denied.

The report from short-selling research firm Citron Research raised questions about Valeant's relationship with specialty pharmacies known as Philidor Rx Services LLC and R&O Pharmacy Inc., which help patients fill their prescriptions for Valeant medicines and pay for out-of-pocket costs.

Valeant Pharmaceuticals worldwide Inc. shares tumbled as much as 40%, cutting about $20 billion off market capitalization, after a short seller alleged revenue-recognition improprieties.

Citron claims that Philador and the downstream customer are one and the same, meaning Valeant is shipping product to its own subsidiary and then falsely claiming the revenue. "There is no sales benefit from any inventory held at these specialty pharmacies", the company said, adding that, "Sales are recorded only when the product is dispensed to the patient". "Our analysis of Valeant's cash flows does not support Citron's Enron-like thesis; in fact it supports the opposite conclusion".

Investor Bill Ackman has swooped on Valeant Pharmaceuticals Intl Inc (NYSE:VRX), grabbing 2 million shares as their price crashed 32% this week.

Valeant has built its business model on buying smaller drug companies and putting up the price of their products.

A spokesman for the British Columbia Securities Commission declined to comment on whether the provincial securities regulator is probing either the company or Citron.

The report, from research firm Citron Research, fanned concerns about Valeant's accounting, raising questions about its use of certain pharmacies to supply its drugs and its accounting for the dispensing. "While other companies also use specialty pharmacies, the structure of Valeant's network seems different", wrote BMO.

Wall Street fluctuated as biotech stocks declined amid accusations of fraud at Valeant Pharmaceuticals, while the latest U.S. earnings offered disappointments such as Yahoo and Chipotle Mexican Grill and stellar surprises such as General Motors.

Equities have struggled this week to extend a rally that has added more than $4 trillion to the value of global stocks since the end of September. It had never received a previous invoice from Valeant for any amount.

A spokeswoman for Philidor didn't immediately respond to comment. Valeant had never disclosed the existence of Philador until recent scrutiny of the company's pricing and distribution forced it to do so on its last earnings call, which was held on Monday.

Valeant Chief Executive Michael Pearson isn't going down without a fight.

"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", the statement said.

At Ackman's average purchase price of $177 (the average price of the stock in the first quarter, when he purchased), he has a 32% loss on the holding based on its closing price of $118.32.