Valeant Pharmaceuticals Intl Inc (VRX) Tanks Further as Analyst Downgrades Stock

Valeant Pharmaceuticals

Valeant Pharmaceuticals suffered another significant decline after an analyst, who has been bullish on the stock for more than two years downgraded his rating.

The shares of Valeant Pharmaceuticals are trading $98.95 per share, down by more than 16% at the time of this writing around 10:59 AM in New York. Yesterday, the stock dropped more than 19%.

Valeant’s arrangement with Philidor is questionable

BMO Capital Markets analyst Alex Arafaei downgraded his rating for Valeant Pharmaceuticals to Market Perform after Citron Research accused the company of inflating sales using pharmacies such as Philidor, which dispenses drugs to patients. The pharmacies also handle many aspects of reimbursements to insurers.

Citron Research called Valeant Pharmaceuticals as the “Enron of pharmaceutical,” which prompted investors to sell their stakes in the drug maker.

In a report on Thursday, Arfaei wrote, “We cannot defend the specialty pharmacy structure. We’ve been strong, vocal Valeant bulls. However, we find Valeant’s arrangements with the specialty pharmacy Philidor as not just aggressive, but questionable.”

Arfaei and other analysts from several equity research firms noted that Citron Research hadn’t supported its allegations of fraud against Valeant Pharmaceuticals, but they emphasized that the company’s distribution arrangement is unusual and complex.

Valeant Pharmaceuticals recently disclosed that it has an option to acquire Philidor RX Services. Evercore ISI analyst Mark Schoenebaum noted that such arrangement with pharmacies does not exist in other drug companies including Amgen (NASDAQ:AMGN), Gilead Sciences (NASDAQ:GILD), and Pfizer (NYSE:PFE) and seven others of similar size.

Arfaei said, “The downside from here is not limited to the specialty pharmacy business in question (we estimate that is priced in); it is dependent on the impact of the residual uncertainty on the rest of the business. We believe most VRX investors didn’t know about Philidor; what else is out there that we don’t know?”

Valeant denied the allegations

Valeant Pharmaceuticals denied the allegations of Citron Research and called the report “erroneous.”  In a statement yesterday, the company said, “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.”

The company also stated, “Sales are recorded only when the product is dispensed to the patient.  All sales to Philidor and Philidor network pharmacies are accounted for as intercompany sales and are eliminated in consolidation.   They are not included in the consolidated financial results that Valeant reports externally.”