Citron Research slams Valeant Pharma; shares down 20%, trading halted

|By:, SA News Editor

Valeant Pharmaceuticals (VRX -19.7%) is getting pummeled in early trading after perennial bear Citron Research issued a new report today titled, "Valeant, Could this be the Pharmaceutical Enron?"

The report accuses the company of routing some of its business through phantom specialty pharmacies in order to avoid scrutiny from auditors. The pharmacy network, according to Citron, is home to various shadowy characters with dubious histories.

The genesis of this latest dust-up appears to be a lawsuit filed in California federal court by a small compounding operation named R&O Pharmacy owned by Russell Reitz and Robert Osbakken. Mr. Reitz received a letter from Valeant general counsel Robert Chai-Onn requesting payment of $69.8M for "invoiced amounts," despite the absence of any business between the two firms. Public interest financial investigative reporter The Southern Investigative Reporting Foundation (SIRF) found out that Mr. Reitz was doing business as with Valeant through a firm called Philidor Rx Services, a "pharmacy administrator" with only one customer: Valeant. It appears to be a key component of Valeant's "patient access" program in which patients referred to Philidor receive reduced or waived co-payments given to the prescribers from Valeant sales reps. According to SIRF, this makes its price increases less visible since most patients never see them.

Philidor appears to have gone out of its way to conceal its ownership. There is a fairly complex web of relationships that no one feels inclined to explain.

During Valeant's earnings call yesterday, CEO J. Micheal Pearson said that his company had purchased an option to acquire Philidor late last year and that Philidor's results are consolidated in Valeant's financial reports.

Whatever the outcome, Mr. Pearson appears to have some explaining to do.

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