Valeant tumbles on report of fraud investigation
- Valeant Pharmaceuticals stock dropped by nearly 8% in early trading Thursday after a new report from the Wall Street Journal said federal prosecutors are examining whether the company defrauded insurers. The stock drop reversed gains from earlier in the week, prompted by Valeant reaffirming its sales guidance for the year.
- The U.S. Attorney's Office for the Southern District of New York is reportedly looking into whether Valeant improperly disguised its close relationship with the mail-order pharmacy Philidor, according to The Wall Street Journal.
- Valeant had previously disclosed investigations by both the U.S. Attorney's Office for the District of Massachusetts and Southern District of New York in quarterly filings with federal regulators. But the Journal's report gave greater detail on the probe and indicated Valeant could face criminal charges.
Valeant can't catch a break. Just two days after its stock climbed by over 20% on a relatively calm earnings report, investors were spooked by The Wall Street Journal's report federal prosecutors may be considering criminal charges against the company and former Philidor executives.
Prosectors are "pursuing an unusual legal theory" that Valeant's close relationship with the now-defunct Philidor could fall afoul of mail and wire-fraud statutes, the Journal said.
Valeant stock opened down about 8% on Thursday morning.
"We have been fully cooperating with the authorities throughout the investigation, and we are in frequent contact and continue to cooperate with the U.S. Attorney's Office for the Southern District of New York," Valeant said in a statement.
The investigations by federal prosecutors in New York and Massachusetts were first disclosed by Valeant in October 2015, although the company made no mention of Philidor until a critical report by Citron Research's Andrew Left blasted the company's ties with the specialty pharmacy.
In filings with the Securities and Exchange Commission, Valeant has indicated it has received subpoenas for a wide range of information including: patient assistance programs, the company's former relationship with Philidor, its account practices, pricing decisions, distribution and compliance.
In addition to the investigations by the U.S. Attorney Offices in New York and Massachusetts, Valeant's former ties to Philidor are also under investigation by the Securities and Exchange Commission, the Autorité des marchés financiers (a Canadian financial regulator) and the State of New Jersey Department of Labor.
Some backstory: Valeant first began working with Philidor in 2013 and relied on the mail-order pharmacy to distribute its drugs, sometimes in significant quantities. Mail-order pharmacies, sometimes known as specialty pharmacies, allow patients to order drugs to their door and usually help patients get a discount on their commercial insurance co-pay.
The pharmacies are fairly typical in the industry, but usually have contracts with a number of different pharmaceutical companies. Philidor exclusively worked with Valeant.
And in December of 2014, a subsidiary of Valeant entered a “purchase option agreement,” giving it rights to acquire 100% of equity interest in Philidor at a future date. Philidor was subsequently consolidated with Valeant for accounting purposes.
Before the consolidation, Valeant reported revenues when it delivered product to Philidor, rather than when Philidor dispensed the product to actual patients. After the consolidation, Valeant switched to counting revenue at the time drugs were dispensed.
However, some of inventory sold to Philidor before the consolidation was still on the Philidor’s books when the pharmacy was subsumed into Valeant. Valeant then redundantly recognized revenue as this previously sold inventory was dispensed to patients. This artificially inflated fiscal year 2014 revenue and led to inaccurately reported amounts in quarterly reports during 2015.
In February, the company disclosed preliminary findings by a special internal committee showing approximately $58 million in revenue which should not have been recognized on its 2014 year-end earnings report.
The special committee recently completed its investigation but the repercussions of the months-long accounting scandal have continued to haunt Valeant, even as it tries to turn over a new leaf under recently appointed CEO Joseph Papa.
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