Valeant Pharmaceuticals International, Inc. (NYSE:VRX) is in hot water following a scathing report from short-seller Citron Research. The publication questioned the company’s sales practices, comparing the pharmaceutical giant to Enron. After the dust settled, shares of Valeant stock finished the trading session down more than 20% on Wednesday.
In its report, Citron blamed the company for using a specialty pharmacy, Philidor RX Services, of which Valeant is the only client, to store its drug inventory, and recording sales before making them. Citron claims that Valeant has been using “phantom” accounts to report bogus revenue figures in order to paint a rosy picture of the business. (Source: “Valeant: Could this be the Pharmaceutical Enron?” Citron Research, October 21, 2015.)
Within a few hours, though, Valeant responded back by saying any inventory kept at Philidor was consolidated with Valeant’s inventory and the company recorded sales only after the drugs were sent out to patients.
This Should Terrify Valeant Stockholders
Of course, we’re not accusing Valeant of any wrong-doing; we are waiting for an investigation to be completed. However, investors are apparently not satisfied, given that shares of VRX stock continue to plummet. The reason being that other pharmaceutical companies have not been found to have the kind of arrangement Valeant has with Philidor. Some don’t deal with specialty pharmacies. Others that do don’t have an ownership interest in them.
There are some questions regarding Valeant’s business model. The company chooses to grow on debt-backed acquisitions instead of internal research and development. The result is mounting debt which is an ongoing expense that’s multiplying interest on the balance sheet, as opposed to periodic research and development (R&D) expenses that return something tangible. But apparently, CEO Michael Pearson finds R&D to be too risky to invest in.
One may question Citron’s objectivity in its research since the activist was short the VRX stock prior to releasing this report, which creates an evident conflict of interest. At the same time, however, the matter needs to be investigated.
In all this mayhem, billionaire hedge fund manager Bill Ackman, having lost over a billion dollars on his bet, remains bullish on VRX stock and further upped his stake by two million shares yesterday. Even if Valeant is completely innocent of all of the “price gouging” accusations against it, government probes will put a limit on stock price gains for the foreseeable future. It boggles one’s mind why Ackman can’t see the inevitable. It appears, though, that Ackman didn’t learn his lesson from his J. C. Penney bet, which he adamantly stuck on to until it was too late.
Ackman’s famous short bet on Herbalife Ltd. (NYSE:HLF) is already losing him money as the HLF stock continues its northward journey. Ackman blamed Herbalife for having a “pyramid scheme” similar to what Valeant is being blamed of. According to him, Herbalife sold its products through distributors and recorded sales even though the products sat with distributors who didn’t actually realize sales.
Here’s the Bottom Line on VRX Stock
I may not agree with Citron’s outrageous valuation of $50.00 for VRX stock, but I did believe the stock was wildly overvalued over $140.00 where it was trading until Tuesday. Until the smoke clears, I would not be bullish on VRX stock. It remains to be seen whether Ackman will come to his senses before it’s too late for him.