MONTREAL — Explosive, unproven allegations against Valeant Pharmaceuticals have caught the eye of a Canadian regulator and raised serious questions about its business structure — even from the company's long-time supporters.
The market value of Canada's biggest publicly traded pharmaceutical company has been cut by more than $30 billion this week as Valeant's stock plunged Tuesday, Wednesday and again Thursday amid intense scrutiny of its business practices.
Citron Research, a U.S. firm that says it examines fraudulent and over-hyped stocks, alleged Wednesday that Valeant created a network of pharmacies to distribute its products and avoid the scrutiny of auditors.
Quebec's securities regulator says it hasn't launched a formal investigation into Valeant, which has its headquarters in Laval near Montreal, but is watching the situation "very seriously.''
"These allegations are worrying and our goal is to make sure that there was no negligence regarding our regulations,'' said Sylvain Theberge, spokesman for l'Autorite des marches financiers.
Valeant (TSX:VRX) responded on Wednesday to what it called an "erroneous report'' by issuing a detailed explanation of how it accounts for transactions with Philidor Rx Service and R&O Pharmacy, which were the focus of investigations by the New York Times and the Southern Investigative Reporting Foundation.
It had said previously that it's co-operating with U.S. government investigations into its drug pricing activities.
There have been no charges or formal allegations laid against Valeant by U.S. or Canadian authorities.
Analyst Alex Arfaei of BMO Capital Markets said that while Valeant's actions may not be illegal, the allegations raise concerns about the entire company that may not be fully eased until there is an investigation.
Arfaei, who claims to be a "strong, vocal Valeant bull,'' said his analysis of the company's cash flows can't totally refute Citron's allegations of "phantom sales'' or channel stuffing.
"We find Valeant's arrangements with the specialty pharmacy Philidor as not just aggressive but questionable,'' he wrote in a report. "We believe that the questionable nature of this specific business practice casts uncertainty over the rest of the business.''
Valeant critic Vicki Bryan of Gimme Credit said the company's disclosure about its ties and potential ownership in mail-order pharmacies like Philidor shed light on U.S. investigations into its drug distribution, patient assistance program and aggressive pricing strategies.
"We also doubt this will be the last of bad news for Valeant, and apparently investors feel the same,'' she said, pointing to the 60 per cent drop in its share price since its August peak.
Activist investor Bill Ackman of Pershing Square Capital — a business partner with Valeant in its failed bid for Allergan — took advantage of Wednesday's share price meltdown to purchase more than two million Valeant shares, making it the company's second-largest shareholder.
Controversial hedge fund manager Martin Shkreli, who was roundly criticized by U.S. politicians for dramatically hiking the price of Daraprim after buying the drugmaker, tweeted he took a long position in Valeant and shorted Allergan.
Valeant has been under a considerable degree of political and legal scrutiny in the United States over hefty price increases for two heart drugs and its patient assistance program. A week ago, the company said that U.S. Attorney's offices in Massachusetts and New York had court orders for it to produce documents.
The drugmaker is one of Canada's top companies and accounts for about four per cent of the S&P/TSX composite index.
Meanwhile, Toronto law firm Koskie Minsky LLP and New York investor rights specialist Rosen Law Firm said they are each preparing potential class-action lawsuits to recover losses suffered by Valeant investors over alleged misrepresentations by Valeant.
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