(Adds context on Valeant's business, paragraphs 6-8)
By Euan Rocha and Ransdell Pierson
TORONTO/NEW YORK, Oct 22 (Reuters) - Valeant Pharmaceuticals (N:VRX)
International Inc VRX.TO moved to reassure investors on
Thursday after being accused of using specialty pharmacies to
inflate revenue, and said it would refute them in detail on a
conference call with investors.
Valeant shares have lost more than 25 percent of their value
since influential short-seller Citron Research made the
allegations on Wednesday. The company had already issued
statements denying the claims.
Valeant said at least 10 of its executives and board members
would participate in a call on Monday, including Chief Executive
Michael Pearson (L:PSON), its current and former chief financial
officers, and board member Robert Hale, who represents key
shareholder ValueAct Capital.
"We look forward to our call on Monday where we will address
and refute recent allegations," Pearson said.
Citron's allegations have heaped pressure on Valeant, which
is already under scrutiny for extreme price hikes on drugs that
it has acquired over the years, including investigations
launched by federal prosecutors in New York and Massachusetts.
Valeant has built a reputation for rapidly acquiring
drugmakers and scaling up sales of their medicines, in some
cases through steep price increases.
The company has said a growing amount of its revenue comes
through its specialty pharmacy partners, which will fill patient
prescriptions even before they have secured reimbursement from
their health insurers. Citron alleged that the pharmacies allow
Valeant to create phantom accounts that boost its revenue.
Valeant maintains it only books revenue once a drug is
received by a patient.
On Thursday, some of the company's greatest champions on
Wall Street began to express doubt about its prospects, and a
securities regulator in Quebec said it was keeping a close eye
on developments regarding its pharmacy ties.
Alex Arfaei, an analyst with BMO Capital Markets who had
long held a "buy" rating on Valeant, downgraded the company on
Thursday to "market perform." He questioned disclosures that
suggest Valeant had operational control of one of its specialty
pharmacies, whereas other drugmakers consider their affiliated
specialty pharmacies fully independent.
"Valeant's structure may not be illegal, but we find it
aggressive and questionable," Arfaei said in a research note. He
added that concerns over Valeant's handling of the business
would linger unless resolved by an investigation.
Valeant's swoon this week has hurt major shareholders,
including billionaire William Ackman whose Pershing Square
Capital Management hedge fund lost about $500 million alone in
Wednesday's rout. Rival specialty drugmakers including Horizon
Pharma Plc HZNP.O and Endo International ENDP.O also fell
sharply.
Valeant's secondary loan price fell for a second day on
Thursday in volatile trading, pulling down trading levels for a
range of other drugmaker loans, according to Thomson Reuters
Loan Pricing Corp.
Valeant's five-year credit default swaps have blown out 44
percent, or 195 basis points, to 637.5 basis points, according
to Markit data. That means the cost of insuring $10 million of
Valeant bonds against default has become $195,000 more
expensive. The company's swaps are relatively new, however, and
therefore not very liquid.
But the company has also seen signs of support. Ackman
bought additional Valeant shares during Wednesday's rout.
Standard & Poor's also said it is sticking by its ratings on
Valeant, saying speculation about potential fraud was unfounded.
SPECIALTY PHARMACY CHANNEL
Specialty pharmacies typically are used to deliver drugs
that require special handling, or for patients with complex
medical conditions like multiple sclerosis or rheumatoid
arthritis. A New York Times story early this week said Valeant
was using its ties with a pharmacy called Philidor to sell more
conventional medications to get past health insurer barriers to
reimbursement.
Citron wrote that Valeant was also using Philidor accounts
to inflate its revenue. Valeant has categorically denied the
allegations, saying it only books revenue once its drugs reach
patients. But Pearson surprised investors earlier in the week by
disclosing the company had an option to acquire Philidor.
On Thursday, the Autorité Des Marchés Financiers (AMF),
which regulates companies based in Quebec including Valeant,
said it does not have an active probe into the drugmaker.
The regulator is "watching very seriously the evolution of
the situation," said Sylvain Théberge a spokesman for the AMF in
an email, adding that the AMF is in communication with the U.S.
Securities and Exchange Commission about the matter.
"Regardless of the accuracy of allegations, we don't see a
quick end to unquantifiable headline risk," Susquehanna analyst
Andrew Finkelstein said in a note.
The brokerage firm suspended its ratings and estimates on
the company, noting that a battle with short sellers means
Valeant's shares are not likely to trade on fundamentals in the
near-term.
Yet Pearson also had some social media backing from Martin
Shkreli, the CEO of Turing Pharmaceuticals, a start-up drug
firm, which sparked outrage by raising the price on a decades
old drug by 5,000 percent.
Valeant "is not overreporting revenue. Give me a break,"
Shkreli posted on Twitter (N:TWTR), noting that the company's sales are
in line with prescription drug data from independent research
firm IMS Health. Shkreli said he has bought shares of Valeant.