What’s Next For Valeant Pharmaceuticals? by Probes Reporter
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Valeant Pharmaceuticals $VRX
Expect an array of protracted, distracting, and expensive investigations.
As of 30-Sep-2015, we received information from the SEC to suggest the absence of recent SEC investigative activity at Valeant. Given recent developments, including Valeant receiving subpoenas from federal prosecutors (link is external) seeking information related to how it prices and distributes drugs; and, a recent and well-circulated Citron report we expect this will change. (See, Citron Research: Valeant — Could this be the pharmaceutical Enron? (link is external)
If they haven’t already, we fully expect SEC and Canadian enforcement officials to contact the company sometime in the next 10 days or so. We base this on the timing we’ve seen in documents from our database on closed SEC probes of other public companies.
There’s just too much going on at Valeant for these regulators to ignore. They are going to have to open inquiries, if only to sort out the conflicting arguments and claims currently circulating about the company. New FDA investigations could also begin.
Of the many items that we know can trigger an SEC investigation, Valeant has high risk from these four –
- Significant, negative media and/or analyst reports, especially if they move the stock price. The Citron report fits this profile.
- An accounting or disclosure controversy.
- Significant stock price volatility (usually more than 10%), unusual options activity, etc.
- Referrals from other government agencies, including criminal investigations.
Given the complexity of the issues, paired with the company’s very vocal proclamations of innocence, you should expect these investigations will be protracted, time-consuming, distracting, and expensive. None of that is good for investors.
On 22-Oct-2015, a Canadian regulator was already reported to have said no formal investigation of Valeant had started (link is external) (quoted below). The SEC doesn’t usually comment. In fact, it’s highly unusual for any regulator to comment in this fashion. This is not good for Valeant.
“Quebec’s securities regulator says it hasn’t launched a formal investigation into Valeant, which has its headquarters in Laval near Montreal, but is watching the situation ‘very seriously.’ [Emphasis added]
This statement should not give investors comfort as it does not rule out informal inquiries. In the US, SEC investigations usually start out informally. Both formal and informal probes can be very serious. The guys from Tyco went to jail though its SEC probe was informal.
The key questions regarding any possible new SEC and/or Canadian investigation of Valeant –
Will the company tell you? Compared to other companies in our research database, Valeant has been about average when it comes to disclosing its regulatory exposures in the past. As such, yes, we expect they will tell you.
But they may not give it prominence. The recent receipt of subpoenas was only announced in a conference call with no accompanying formal SEC filing.
For those who can’t wait, the company’s given investors a golden opportunity to ask outright if the SEC or any other entity has started a new inquiry. Valeant management plans to hold a conference call on Monday, 26-Oct-2015 (link is external).
Assuming they don’t beat you to the punch, here’s three great questions to ask –
- What communications, if any, has Valeant had with the SEC’s Division of Enforcement, the US Attorney/DOJ, or Canadian regulators, regarding any matter, in the past 30 days?
- If such communications exist, what was the purpose and date of those communications?
- Last week the company said it received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts and a subpoena from the U.S. Attorney’s Office for the Southern District of New York.
We recommend asking when they were received, who they were sent to, and what information they seek?
When will the company tell you? Again, we expect Valeant will be contacted very soon by Canadian and SEC enforcement officials, if they have not already. Again, given its history, we do expect Valeant will eventually disclose this new SEC or Canadian probe.
Given the market sensitivity to these shares right now, we won’t be surprised if Valeant announces an SEC probe either ahead of or in the opening to its conference call on Monday. Brace yourself.
What will the company tell you? Assuming disclosure of an SEC, or any other new probes are made, you should expect an array of denials paired with promises of full cooperation with investigators.
Blah, blah. We see it all the time. Details on who is investigating, when they started, and details on the issues being examined are what really matters.
If disclosure comes ahead of or during the conference call, especially if they see this report, you should also prepare for the company to, perhaps, do a preemptive move by claiming it can’t discuss its investigations as “they are confidential”. This is fluff.
In general, a company under investigation by the SEC can tell you whatever they want. If the SEC’s already contacted them, they will already have a good idea what the SEC is investigating.
We strongly recommend investors take Valeant management to task if they try to dodge or even refuse to answer questions regarding possible or existing investigations.
What will the SEC make of the Citron report? We know from experience the SEC routinely receives tips from hedge funds and other sources with “dirt” on public companies. Like any arms-length investigator, they consider the source, its agenda, and the overall quality of the data/research presented.
Like us, Citron is not new at what it does. Also like us, Citron is well-known to the SEC. Finally, and like routinely happens to us, Citron is being accused of trying to manipulate the market. No such accusation has ever stuck to us. We expect Mr. Left of Citron has his ducks lined up in this regard as well.
According to an article from the Wall Street Journal, dated 22-Oct-2015, “A Wall Street Journal analysis of 111 Citron short-sale reports published from 2001 to 2014 shows an average share-price decline of 42% in the year after a Citron report was released.”
Valeant shares would not have reacted as negatively as they did to the Citron report if investors viewed the source as anything less-than-credible. The SEC knows this as well.
Is there any tie-in between what SEC/DOJ investigators are learning at Valeant’s Salix unit? Some of the language in the Salix and Salix-related disclosures sound somewhat similar to allegations circulating in the market today regarding Valeant.
Regardless of overlap, the mere fact Valeant felt compelled to disclose the ongoing DOJ/SEC probes of Salix means Valeant management judges the exposure potentially material to the entire company. This is despite the fact that probe is supposedly confined to an acquired unit.
What did SEC investigators learn about Valeant and its management the many times they’ve investigated the company in the past? Below we include excerpts from earlier disclosures of investigative activity at Valeant. They show a wide array of lengthy civil and criminal investigations.
Back in Apr-2013, the SEC informed us 54 boxes (roughly 162,000 pages) of records were potentially available regarding an earlier SEC investigation of Valeant. Though no