New regulations have dramatically altered the rules by which the biotech industry plays, leaving industry stalwart Valeant Pharmaceuticals International, Inc. (NYSE:VRX) struggling to catch up. Does this spell the end for the rally in VRX stock? Let’s take a look.
Has Valeant Stock Finally Bottomed? Not Likely
These are extremely challenging times for biotech stocks, especially after Democrat Presidential hopeful Hillary Clinton recently commented she would review the pricing of drugs if she was to become the next President.
The malaise in the biotech sector is reflected in the chart of the widely followed iShares Nasdaq Biotechnology (NASDAQ:IBB) which is down 25% from its peak. Note the downward channel and the emergence of a bearish Death Cross after the 50-day moving average moved below the 200-day moving average.
Chart courtesy of www.StockCharts.com
In last Wednesday’s session, the biotechnology sector was given a severe whipping after momentum biotech stock Valeant Pharmaceuticals was the target of well-known short seller Andrew Left of Citron Research.
At the core of the short thesis is the role of specialty pharmacy company Philidor, which acts as a distributor and biller of drugs sold directly to clients rather than going through the normal pharmacy and claims process. The problem with Valeant stock is that the company is the sole client of Philidor. It also invoiced affiliate R&O Pharmacy for some $69.0 million for drugs that apparently were never received or sold. The report essentially suggests that Valeant owns both companies, which implies it is both billing itself and collecting funds. This is a major conflict of interest and non-arms length transaction if it’s true, which is troublesome.
The price chart showed the volatile selloff that saw Valeant cratered by as much as $56.00 on Wednesday before a bounce that narrowed the decline to $28.00. The selling continued on Thursday morning in which Valeant fell another $18.00.
Chart courtesy of www.StockCharts.com
Famed hedge fund Pershing Square Capital Management and its enigmatic owner Bill Ackman—the largest owner in Valeant stock with a position of close to six percent—is now facing a paper loss in excess of $2.0 billion in less than 24 hours.
Ackman has close ties with Valeant and may have let his emotion cloud his vision after refusing to even consider that the company may indeed be scamming the stock market. He added another two million shares on Wednesday and must now be hemorrhaging at the thought that he might have been played.
The company is denying that it’s cheating the market by fake transactions per questionable revenue recognition methods purposed by Citron. Whether Valeant is telling the truth is a big unknown. But the old saying, “where there’s smoke, there’s fire,” may be the case here.
I wouldn’t be jumping in unless you have the propensity to assume massive risk and the willingness to take more losses if the company is misleading the public. If you are an active trader, playing via long Call Options or writing Put Options may be an alternative if you really want to play the stock.
The reality is that lawsuits are emerging and the company is seeing dwindling support by Wall Street.
The point is; until regulators and independent forensic auditors actually look deeper into the company, Valeant is a purely speculative gamble. You can make a boatload of money on VRX stock if the company is found to be truthful.
Here’s the Bottom Line on Valeant Stock
So while Bill Ackman, the hedge fund community, and instructions are major holders of Valeant (491 institutions), and have been buying in the recent months, it doesn’t mean the company is clean. (Source: “Valeant Pharmaceuticals International, Inc. Major Holders,” Yahoo! Finance, last accessed October 22, 2015.)
What is happening to Valeant is not an isolated event. The fact is numerous drug sellers in the biotechnology space use specialty pharmacy companies to speed up the drug delivery to patients. It is not illegal but there would be an issue if Valeant indeed controls both Philidor and R&O Pharmacy.