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Valeant vows to refute 'phantom sales' allegations

The company logo of Valeant Pharmaceuticals International Inc is seen at its headquarters in Laval, Quebec May 19, 2015. REUTERS/Christinne Muschi

By Euan Rocha and Ransdell Pierson

TORONTO/NEW YORK (Reuters) - Valeant Pharmaceuticals 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, 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 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, 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.

(Additional reporting by Ransdell Pierson, Carmel Crimmins and Bill Berkrot in New York; Editing by Michele Gershberg, Nick Zimienski and Bernard Orr)