Valeant Plunges After Bearish Report Likens it to Enron

Valeant plunges after bearish report likens it to Enron
October 21, 2015
By Mark Terry, BioSpace.com Breaking News Staff

Laval, Quebec-based Valeant Pharmaceuticals International, Inc. ’s took a major plunge and trading was temporarily halted after a negative research note published by Citron Research compared the company to Enron and accused it of “channel stuffing.” Channel stuffing, in this case, refers to using specialty mail-order pharmacies that Valeant controls to make it, according to CNBC, “prop up sales of its high-priced drugs and to keep patients and their insurance companies from switching to less costly generics.”

Valeant responded to the report with a press release addressing the accusations.

Citron Research, formerly StockLemon.com, is led by Andrew Left, who is described as an activist short seller. The Citron report raises questions regarding Valeant’s relationship with Philador RX and R&O Pharmacy, which Citron claims are the same company with the same management. This does not appear to be an accurate statement.

The story is quite complicated, but R&O Pharmacy is a specialty pharmacy co-owned by compounding pharmacists Russell Reitz and Robert Osbakken. The company is located in Camarillo, Calif. In a lawsuit filed by R&O, the company received a letter from Robert Chai-Onn, Valeant’s general counsel and director of business development, demanding repayment of $69.8 million for “invoiced amounts.” Reitz was not aware of any business R&O had conducted with Valeant and hadn’t received any invoices from Valeant or its subsidiaries.

R&O’s attorney contacted Valeant, wondering if both companies were being defrauded by someone. When the communication went nowhere, R&O’s attorney, Gary Kaufman, filed a suit to prove that R&O did not owe Valeant anything.

Which is where things grow even more complicated. Apparently Reitz and R&O did do business with a company called Philidor Rx Services and its chief executive officer, Andrew Davenport. Philidor calls itself a pharmacy administrator. Furthermore, Philidor appears to have only a single client — Valeant. It is headquartered in Hatboro, Penn.

Writing for the Southern Investigative Reporting Foundation, Roddy Boyd says, “A better description is a ‘specialty pharmacy,’ filling, shipping and getting insurance approval for prescriptions of the more complex drugs Valeant makes. In its third quarter conference call last year, the only instance where Philidor has been publicly mentioned by an analyst, Valeant chief executive Mike Pearson said that perhaps 40 percent of its business flows through specialty pharmacies. In July, he reiterated the company’s guidance for up to $11.1 billion in 2015 revenue, implying that as much as $4.4 billion in product could move through this channel.”

The Citron report says, “It appears … that Valeant/Philidor have created an entire network of phantom captive pharmacies to store and invoice products.”

Citron’s argument appears to be that Philidor RX and R&O Pharmacy are the same company. It seems more likely that Philidor is essentially a part of Valeant, but seems to create an indirect connection to R&O. In a Valeant earnings conference call on Monday, Pearson said that Valeant has a “contractual relationship” with Philidor and an option to acquire the company if it chose to do so.

In today’s press release, Valeant claims the Citron report is “erroneous” and that, “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.”

Valeant’s statement also attempts to clarify the relationship between Philidor and R&O, saying, “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 is undoubtedly not good news for Valeant, which is currently under fire — and had a 20 percent stock drop in late September — regarding drug pricing. The company recently acquired rights to two cardiac drugs, Nitropress and Isuprel, which it then increased the prices by 212 percent and 525 percent, respectively. This occurred in April, before the public furor over Turing Pharmaceuticals AG, which had acquired the rights to the parasite drug Daraprim and then escalated the price by 5,000 percent.

Valeant has also recently received subpoenas from federal prosecutors in Manhattan and Massachusetts regarding its patient financial assistance programs, various pricing decisions and distribution practices. It’s unknown to date whether there is any connection to its relationship with Philidor.

Meanwhile, the company’s shares, which traded for a yearly high of $262.52 on Aug.5, is currently trading for $116.15.

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