Valeant asks U.S. Securities and Exchange Commission to investigate Citron

MONTREAL – Embattled drugmaker Valeant Pharmaceuticals is asking U.S. securities regulators to investigate Citron Research, whose explosive report about the Quebec-based company’s business practices caused its stock to crater.

Chief executive Michael Pearson told analysts on a conference call Monday that the main reason for Valeant’s recent problems is that it’s the victim of false allegations by outsiders who want to manipulate the market to their own profit.

Pearson says he has called on the Securities and Exchange Commission to investigate Citron Research and Andrew Left, its executive editor, after the U.S. short seller compared Valeant to Enron, the U.S. energy firm that collapsed after widespread deception and fraud at the highest levels of management.

“His motivation is the same as someone who runs into a crowded theatre to falsely yell, ‘Fire.’ He wanted people to run,” Pearson said.

“He intentionally designed the report to frighten our shareholders to drive down the price of our stock so he could make money for his short selling.”

Left said it’s Pearson who owes people an explanation.

“Before accusing me of market manipulation, Pearson should ask himself why Philidor was undisclosed to Valeant shareholders,” Left said in an email.

The SEC declined to comment.

Citron is a short seller’s research firm that publishes reports online about companies. Short sellers earn money when a stock declines. Citron says on its website that it does not guarantee that it is providing all available information, and its principals “most always” hold a position in securities profiled on its site.

In a report last week, Citron alleged that Valeant set up a network of phantom pharmacies to fool auditors — allegations that Pearson said are “completely untrue.”

Valeant’s (TSX:VRX) stock has been on a slide since the report was released, resulting in billions of dollars of losses for its shareholders. Its shares fell another $7.35 or 4.81 per cent to close at $145.34 on Monday.

Pearson said Valeant follows the law as well as accounting and disclosure rules, adding he would not hesitate to take action if he finds violations.

Valeant’s board will conduct its own review of allegations into the drugmaker’s business relationship with Philidor, a specialty pharma company based in Hatboro, Pa. The committee review will determine whether Valeant will maintain its relationship with Philidor or turn to several other specialty pharmaceutical companies, the company said.

Philidor issued a statement saying it values its relationship with Valeant and will provide any information required for the review.

Valeant lead director Robert Ingram, who has been on the company’s board for five years, said the directors have complete confidence in Pearson, the company’s accounting practices and the use of specialty pharmaceutical companies.

“With that said, there are other allegations that have been raised publicly with respect to Philidor and we as a board felt it was important to review those issues and any related ones that might arise,” Ingram said.

Among them are allegations in a Wall Street Journal report that Valeant employees placed at Philidor used separate email accounts with fictitious names, including Spider-Man’s alter ego, Peter Parker.

Philidor said in an email those workers set up separate Philidor email accounts to keep their internal Philidor communications separate from Valeant communications, mainly to reduce the risk of accidentally sharing either company’s propriety information.

“To further reduce this risk, clearly distinguishable names were used for the email accounts,” Philidor said. “However, their real identities were well-known to the other Philidor employees as they were on site at the only location Philidor had at that time and Philidor was still a startup company with a small number of employees.”

During Valeant’s conference call, Seena Carson, the company’s chief compliance officer, said the use of fictitious names by employees is one of the issues that would be examined by the committee review.

In a session lasting more than an hour and accompanied by an 88-page presentation, several top Valeant officials and members of the board detailed the company’s relationship with specialty pharmaceutical companies like Philidor and R&O.

Pearson insisted Valeant’s business model using specialty pharmacies is “sound” and gives patients access to drugs at an affordable price. Critics say it encourages the use of expensive drugs that insurance companies often won’t cover.

Valeant said the use of these pharmacies is common in dermatology and employed by many companies including Allergan, Galderma and Novartis.

Valeant’s relationship with Philidor began in early 2013. About a year ago, it paid about US$100 million up front and agreed to pay up to another US$133 million in milestone payments over time to deter Philidor from pursuing other drug partners and ensure most of its volume is Valeant product.

Philidor accounted for about seven per cent of Valeant’s total revenue and pre-tax operating income (EBITDA) in the third quarter. It remains an independent company licensed to dispense prescriptions in 46 states plus the District of Columbia. In other states like California, it has agreements with affiliated pharmacies to dispense products.

Analyst Alex Arfaei of BMO Capital Markets called Valeant’s additional information “incrementally positive” but more needs to be done to rebuild investor confidence.

Valeant also announced Monday that it is putting on the back burner its plans disclosed just a week ago to possibly sell or spin off its neurology and other portfolio.

Follow @RossMarowits on Twitter.