Thursday, 22 October 2015

Valeant's shareholders bitter pill to swallow

Drug manufacturer Valeant plunged yesterday after research house Citron sent out a report accusing the pharmaceutical company of fraud by inflating sales numbers it recorded saying the company had created phony companies for the purpose of misleading shareholders by falsely recording the sale of products to speciality pharmacies who in turn were owned by Valeant and recorded such transactions as inventory.  One such company that came up was Philidor RX services.

The discovery was made after another speciality pharmacy R&O Pharmacy had filed a lawsuit in a California district court asking for relief after an "improper demand of payment" was made by Valeant seeking $69 million in debt owed. R&O Pharmacy said it owned Valeant nothing as there were no invoices to account for the money it said it owned.
To add further to the matter Citron reveals that upon investigation of the two pharmacies, Philidor RX services and R&O Pharmacy it would appear that they share the same patient privacy disclosure as well as the same contact details of the privacy officer. If you look closely at the design of the logos they contain similar features as well as colour of the text.

But it doesn't end there, they also found three other separate websites, again with the exact same contact details of the privacy officer. It has been found that each of these websites were created on the same day. Mere coincidence?

Investors had no knowledge of Philidor until Monday this week when the CEO J. Michael Pearson announced it has purchased an option to buyout the company. This was after alarm bells were raised to the relationship between the two companies without proper disclosure.

Some cite the reason for Valeant buying up Philidor is to cover management's tracks in the dubious dealings they been participating in after being caught red handed in an attempt to shift the focus from it.

It would seem that the bad press the company received yesterday isn't the only concerning sentiment that has been hanging around investors lately with accusations that the company buys up smaller pharma companies and then increases the prices of the drugs sold by these companies by astronomical levels, so much so there has been calls for an investigation into these allegations.

I found this article published on Bloomberg where it states that the Research and Development costs for Valeant is the lowest throughout the entire pharmaceutical sector. They also say that the company has been on an aggressive drive to buyout drug companies who have already researched and developed drugs that they need to add to their product line instead of investing in it themselves.

However they say that this has caused an increase in the debt burden on the balance sheet of the company escalating the finance costs needed to service these debts. They also say that the increased in the R&D being proposed by the CEO is not enough to continue creating revenue streams to fund these debt costs placing the company in a very difficult position whether to increase its buyout strategy which is becoming more or more difficult due to costs or increase the amount allocated to R&D which would be hard to do with the existing debt expenses.  
One of the big losers on the day was hedge fund manager Bill Ackman who holds a significant stake in the company who lost a substantial amount of value after the stock dropped as low as 40%. There was mixed feelings around this with some saying Ackman had it coming after he had recently accused Herbalife of employing the same tactics with others highlighting the fact that Citron, who was heavily short in the stock, has been known to release damning reports that accelerates the stock price.

Ackman responded to these claims made by Citron by buying a further 2 million shares at lower levels in the hope to allay investors fears and make his own confidence in management known to the market. But will this stop the rout?
There's just an awful amount of consequential evidence stack up against management that points to devious measures that can't be thought away without some explanation. Allegations such as these do not simply go away without rousing up authorities to investigate further in which the company will be required to cooperate, but they also owe it to their shareholders who have been left shell shock and uncertain of the next move they need to make.

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