Valeant shares plunge for second straight day as questions linger

Shares in Montreal-based drug company Valeant plunged for a second consecutive day on Thursday as investors continue to be rattled by an explosive report that raised numerous questions about the company's books.

Shares were off another 16 per cent to just over $130 on Thursday nearing midday on the TSX. That fall comes on the heels of an even larger drop of 19 per cent the day before following a report by research firm — and short seller — Citron Research, which suggested the company created a network of specialty pharmacies to distribute its products and avoid the scrutiny of auditors.

At one point on Wednesday, the shares were off almost 40 per cent in Toronto before recovering somewhat after the company came out and strongly disputed the report, calling its claims "erroneous."

"Citron's false and misleading statements about Valeant appear to be an attempt to manipulate the market in an effort to drive down Valeant's stock price," spokeswoman Laurie Little said in an emailed statement.

"We are confident in our full compliance with all applicable accounting rules, regulations and laws."

But that denial didn't seem to be enough to convince everyone that everything is OK at what was as recently as July Canada's most valuable company.

Stock downgrade

Bank of Montreal analyst Alex Arfaei on Thursday downgraded his rating for the company slightly from "outperform" to "market perform" and gave it a target price of $141, not much above where it currently is. As recently as last month, Arfaei thought the company should be worth as much as $390 per share.

While he still likes the stock, the overhang is getting hard to ignore.

"While other companies also use specialty pharmacies, the structure of Valeant's network seems different," he said in a research note on Thursday. "Valeant's structure may not be illegal, but we find it aggressive and questionable."

He was quick to note, however, that he thinks there's no evidence of any financial wrongdoing at the company. 

"Our analysis of Valeant's cash flows does not support Citron's Enron-like thesis," he said, "but we cannot refute Citron's allegation either."

He's not alone in that view. "It seems like there's … some sort of web of sales transactions with related and unrelated parties that's going to need to be disclosed and cleared up," Veritas analyst Anthony Scilipoti said on Wednesday's episode of The Exchange on CBC.

Scilipoti has had a sell rating on the stock even before this week's news, citing numerous other concerns with their business and the underlying numbers. But he, too, wants to know more about the latest issue.

"If it's ever found [guilty] of wrongdoing, it's kind of like being pregnant," he said. "You can't be a little bit pregnant, and you can't [have] a little bit wrongdoing."

Others are buyers

Some investors are still believers in the company, however. Hedge fund manager Bill Ackman was already one of Valeant's biggest backers, and he bought another 2.1 million shares on Wednesday as the stock was plunging. His company, ​Pershing Square Capital Management, is now the company's second-largest shareholder, leapfrogging asset manager T.Rowe Price in the process. 

The recent sell-off comes on the heels of pre-existing weakness in the stock tied to some of its drug pricing policies. 

The Laval, Que., company attracted scrutiny from the U.S. Congress following its purchase of the life-saving heart drugs Nitropress and Isuprel. The company jacked up prices on both drugs shortly after buying them from Marathon Pharmaceuticals in February, tripling one and raising the other six-fold.

Regulator weighs in

Valeant revealed last week that federal prosecutors have subpoenaed documents tied to its drug pricing and other policies.

Quebec's Autorité des marchés financiers is in charge of regulating all companies in the province, so Valeant falls under its purview. For its part, the AMF said "we are watching very seriously the evolution of the situation."

"At this stage, we won't make any comment on the allegations regarding Valeant." spokesman Sylvain Theberge said. "These allegations are, however, worrying, and our goal is to make sure that there was no negligence regarding our securities regulation."