Valeant shares sink again despite new denials in Philidor crisis

Valeant Pharmaceuticals laid out a comprehensive refutation of fraud allegations that have been raised against it by a short-seller, but the denials failed to halt the slide in the company's shares on Monday.

Valeant's shares sank again on Monday despite a detailed denial — during a morning conference call with investors — of allegations that the drug company's bookkeeping is not all it seems.

Valeant said it had assigned one of its company directors to take the lead on investigating the company's business dealings with Philidor, the specialty pharmacy at the centre of the crisis that knocked billions of dollars of value off the company last week.

The Montreal-based drug company named Robert Ingram, who has been on Valeant's board for five years, to head up an internal probe into the affair. Ingram is also a partner of Hatteras Venture Partners, which specializes in pharmaceuticals and medical devices.

• Valeant shares plunge after fraud allegation from short-seller Citron
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Last week, Valeant was rocked by a report from a short-seller that alleged, among other things, that the company's accounting practices were obtuse and misleading, partly because of Valeant's relationship with Philidor, which is a sales channel for Valeant's drugs.

The company's critics allege that Philidor and other companies are solely designed to alter the company's revenues by inflating sales. Valeant, meanwhile, staunchly defended its bookkeeping and noted that revenue from specialty pharmacies like Philidor only makes up between six and seven per cent of the business anyway.

Valeant chairman and chief executive Michael Pearson repeated his company has complied with the law but welcomed the board's review and said it would free management to run the business.

"We operate our business based on the highest standard of ethics, and we are committed to transparency," Pearson said in a statement ahead of Monday's conference call with analysts.

"However, other issues have been raised publicly about Philidor's business practices, and it is appropriate that they be fully reviewed. This decision to create an ad hoc committee of the board, which I fully support, will help free management to focus on continuing to serve doctors and patients and run our business."

Shares slide again

That was not enough to set a floor under the stock, however, as shares fell as low as 136.98 in trading on Monday. Valeant closed down 6.4 per cent or $9.97 at $145.34 on the TSX.  In premarket trading while the call was happening, Valeant was at one point down by as much as 14 per cent.

Valeant shares lost more than a third of their value last week after the allegations came out. Prior to that, it had been Canada's most valuable company.

• U.S. lawmakers want to speak to Valeant with regards to drug pricing policies
• Drug price increases will be 'modest' in 2016, Valeant says

Valeant said it will request that the short-seller behind the allegations, Citron Research, be investigated by the Securities and Exchange Commission.

"His motivation is the same as one who runs into a crowded theatre and falsely yells fire. He wanted people to run," Valeant CEO Mike Pearson said of Andrew Left, the main behind Citron. "He intentionally designed the report to frighten our shareholders to drive down the price of our stock so he could make money for his short-selling."

Left, for his part, disputed Valeant's interpretation.

"Yelling fire in a crowded theater is a lot different than walking into a theatre, smelling smoke and yelling, 'Hey everyone, there could be a fire," he said in a statement following Valeant's conference call.

"Now the information is out, people have had an opportunity to inspect the theatre and they have chosen to leave … maybe there is fire."

Analyst reaction

The investment community was similarly underwhelmed. Nomura analysts Shibani Malhotra and Austin Nelson said while they believe Valeant's interpretation with regards to its relationship with Philidor, the company needs to do a better job of convincing the general public that there's nothing untoward going on.

Whether or not Citron's claims are unfounded, "the bigger issue here is that investors were willing to believe the report and Valeant lost nearly $24 billion in market value last week alone," Nomura said.

The analysts also noted that even beyond the recent Philidor allegations, Valeant now has three government investigations ongoing, of which one is criminal.

"We had hoped that management recognized that regaining investor credibility is the single most important thing for the company at present," Nomura said.

Despite that, the investment bank maintained its "buy" rating on Valeant shares, with a target price of $290 — 2.5 times where the shares are currently valued.