Valeant Falls Deeper; Citron Says Stock has Better Chance Going Zero

The shares of Valeant Pharmaceuticals are trading lower again after Citron Research tweeted that it will release another bombshell against the company today.

The short-selling research firm added that the stock price of Valeant “has the better chance of going 0” than Herbalife. Citron Research accused Valeant of using pharmacies including Philidor RX Services to create fraudulent sales and inflate its growth rate.

The stock price of Herbalife was down 12% to $98.15 per share at the time of this writing around 1:22 in the afternoon in New York.

Valeant cuts ties with Philidor

Today, Valeant announced its decision to terminate its relationship with Philidor. The pharmaceutical company said it will develop a plan to make sure that the disruption to patients’ access to drugs will be minimal.

Philidor also informed Valeant that it will shut down its operations as soon as possible and consistent with applicable laws.

In a statement, Valeant CEO Michael Pearson said, “The newest allegations about activities at Philidor raise additional questions about the company’s business practices. We have lost confidence in Philidor’s ability to continue to operate in a manner that is acceptable to Valeant and the patients and doctors we serve.”

Mr. Pearson emphasized that Valeant’s priority is “operating honestly and ethically.” He said, “We are committed to doing everything we can to provide important medicines to the patients and doctors who depend on them, and will continue to explore relationships with the full range of pharmacies to ensure patients have access to the drugs they need.”

CVS, Express Scripts remove Philidor from pharmacy network

Valeant’s decision came after CVS Health removed Philidor from its network of pharmacies. CVS said Philidor failed to comply with the terms of its provider agreement.

Express Scripts Holdings also issued a statement indicating that it is in the process of terminating Philidor from its network. It is also evaluating four other pharmacies that have similar relationships with Valeant.

On the other hand, OptumRx, the pharmacy-benefits business of UnitedHealth Group started terminating Philidor from all of its networks after evaluating the specialty pharmacy last year.

Bill Ackman defends investment in Valeant

Bill Ackman of Pershing Square Capital Management defended his investment in Valeant during an investor call today. The activist investor expressed confidence with his bet on Valeant, but he said blamed the company for its weak response to the accusations of Citron Research.

Mr. Ackman said Valeant made a “meaningful mistake” for underinvesting in public relations since the company only answered the short seller’s allegation with a blunt denial.

He criticized the short-selling strategy of Andrew Left from Citron Research. He said Mr. Left disclosed his short position in Valeant, but he made it look like a research report. Mr. Ackman added that short-sellers like Mr. Left were bad for capital markets.

Additionally, the activist investor noted that investors and ratings agencies are looking at Valeant’s debt load and leverage too simplistically. He said they should not view the Canadian pharmaceutical company as an industrial company with a simplistic debt to EBITDA analysis.

Mr. Ackman said they should focus on the company’s ability to service its debt. He said Valeant is “comfortably leveraged.”Last week, he said the shares of Valeant were significantly undervalued and some of the criticisms against the company were baseless.

Yesterday, Ruane, Cunniff & Goldfarb, the manager of Sequoia Fund, released a letter to shareholders indicating that its investment in Valeant “caused an extraordinary level of pain.” Sequoia Fund is the largest shareholder of Valeant. It owns 33.9 million shares or approximately 10% of the Canadian pharmaceutical company. The two independent directors of the Fund resigned amid the controversies confronting Valeant.