Valeant shares plunge after 'fraud' accusation from short-seller

Trading in shares of Laval, Que.-based drug company Valeant Pharmaceuticals International was halted twice Wednesday on the Toronto and New York exchanges after a damning report from Citron Research sent the stock plunging by 39per cent.

Citron Research, a short-seller of stocks that profits when shares decline, said Valeant, Canada's largest listed company, is using pharmacies related to Philidor, a company it said it has an option to buy, to store inventory and had recorded the transactions as drugssales.

The shares resumed trading within a few minutes of the first halt. Regulators said the halt was a response to the rapid drop in price. By mid-afternoon, the stock was down 39.5 per cent in New York and 36 per cent in Toronto. It ended the day off by 19 per cent in Toronto, trading at $154.21.

At 1:33 p.m., stock trading was halted a second time as Valeant issued a release denying the allegations.

Citron's allegationscomeafter Valeant said in an earnings conference earlier this week that its revenue has been boosted by sales volume of some drugs. It also said it helps patients afford its drugs by cutting distribution fees to companies like Philidor, a regional pharmacy based in Pennsylvania.

'Phantom accounts'

Comparing the company to Enron and using the word "fraud,"Citron accused Valeant of using "phantom accounts" to escape the scrutiny of auditors. This isa serious accusation that has not been proven.

It wasn't immediately clear whether Citron was short-sellingValeantstock.

It also alleged the full scope of Valeant's relationship with Philidor has not been properly disclosed.

The company'sstock had previously fallenby 30 per cent this month and lastafterU.S.Attorney's offices in New York and Massachusetts subpoenaed Valeant company documents regardingprice hikes on heart drugs Nitropress and Isuprel.

The company has built its business model on buying smaller drug companies and raising the price of their products. Several takeover targets have accused Valeant of predatory practices and of putting no effort into research.

But in the earnings conference Monday, CEO Mike Pearson said he expected to change that strategy and put more money into research in future.

Valeantdenies allegations

Valeant issued a release Wednesday afternoon denying Citron's allegations and explaining in detail how drug sales from these pharmacies are recorded.

It said sales to Philidor and Philidor's network pharmacies are only reported as revenue when the drugs are dispensed to patients, not when they are sold to the pharmacy. Shipments to pharmacies aren't recorded in Valeant's net revenue, the company said.

In addition, inventory at Philidor network pharmacies are included in Valeant's inventory balances, it said in its statement.

Beyond drug pricing

Citron Research says the trouble at Valeant goes well beyond the pricing of its drugs.

"Citron Research has delivered the proof that something really stinks at Valeant and itgoes beyond their egregious price hikes," it said in the conclusion of its report.

It said Valeant has created a network of "phantom captive pharmacies," including one called R&O, all related to Philidor.

"Citron believes the whole thing is a fraud to create invoices to deceive the auditors and book revenue," it said,

In response to Citron's allegation thatPhilidorand R&O share a phone number,Valeantagreed there is a relationship betweenPhilidorand other pharmacies such as R&O. It says these companies share back-end services, including a call centre and logistics support.

Nomura says buy

AnalystNomurasaid its own research intoValeantshowed it only booked revenue when drugs were actually dispensed and recommended buying the Quebec drugfirm since its stock has taken such a hit.

That's what hedge fund investor BillAckmandid today, buying two million shares.

ButVeritasInvestment Research is highlighting multiple risks to the pharmaceutical giant in a report issued today, recommending investors sell.

VeritasCEOAnthonyScilipotisaid his company, which does stock research, has had concerns about the transparency ofValeantaccounts since 2012.

He says there were no Securities Exchange Commission filings related toPhilidor, a companyValeantfirst mentioned last year.

"There was no disclosure last year regarding a purchase order or option forPhilidorlast year, the fact that they own or control or have some type of interest or relationship withPhilidor," he said in an interview withCBC'sThe Exchange.

The Citron report comes as Valeant faces increasing scrutiny over the prices it charges for drugs. Valeant's business model has historically involved acquiring drugs that it considers undervalued, or mispriced, and then raising the price to what it determines is a proper value.

The Laval, Que., company drew the interest of the U.S.Congressfollowing its purchase of the life-saving heart drugs Nitropress and Isuprel. The company jacked up prices on both drugs shortly after buying them from Marathon Pharmaceuticals in February, tripling one and raising the other sixfold.

Valeant revealed last week that federal prosecutors have subpoenaed documents tied to its drug pricing and other policies.