Valeant Denies Citron's 'Erroneous' Report; Analysts Also Cast Doubt

Shares of Valeant Pharmaceuticals Intl Inc VRX plummeted 40 percent on Wednesday after noted short-seller Citron Research referred to the company as the "pharmaceutical Enron." Citron's report said it has published a "smoking gun" detailing what it calls a "cover up" concerning Valeant's relationship with specialty pharma company Philidor RX. Shares were halted for a second time Wednesday at 1:32 p.m. ET priced at $88.58, down 39.6 percent or $58 per share. Shares resumed trading at 1:54 p.m. ET, recently priced at $102.01, down a little over 30 percent for the day. Around 1:41 p.m. ET, Valeant denied Citron's "erroneous" report and suggested short-sellers are confused about its business practices. See Also: Citron Calls Valeant The 'Pharmaceutical Enron,' Sees 60% Downside In Stock In a release, Valeant said, "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." The release went on to say, "The $69 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 recognized the net realized amount due from patients and payors (approximately $25 million) and reduced the associated inventory from Valeant's balance sheet. In this case, we estimate the net amount of revenue for the $69 million at WAC would be approximately $25 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."

Analysts Weigh In

In a late morning note, JP Morgan said Valeant's $15 million inventory in the U.S. specialty pharma channel, which in their view "limits the ability of Valeant to 'stuff the channel' by shipping excess inventory to its specialty pharmacies as this would be not be recognized as revenues." JP Morgan said specialty pharmacies are used selectively in certain therapeutic markets as an alternative to distributors at a lower fee. They continued, "through this channel, products are distributed immediately and Valeant takes on reimbursement risk in the case that the product is not covered by insurance as well as collection risk from these smaller pharmacies." JP Morgan sees no impact to other pharma companies in its coverage, as those companies generally don't have the specialty pharma arrangement that Valeant has for its dermatology franchise. The firm maintained its Overweight rating and $146.74 price target on Valent. Nomura, for its part, reiterated a Buy rating and $290 price target on Valeant and considered the Philidor news "likely misinformation." The firms believes that "R&O was created to allow Philidor access to the California market. We believe that R&O is supposed to pay Philidor for product dispensed by R&O and that Philidor is supposed to then pay its manufacturer clients." On the issue of Valeant booking profit revenues for product it hasn't sold, Nomura has been "unable to share our analysis with or speak with Valeant, [but] our own diligence suggests that this is not accurate."