The U.S. Attorney for the Southern District of New York, which often prosecutes Wall Street cases, has opened an investigation into Valeant Pharmaceuticals Intl Inc (NYSE:VRX). The topic: Valeant’s relationship with Philidor Rx Services, a specialty pharmacy. The unsurprising result: a 6% haircut to VRX stock in Thursday’s morning trade.
The “Philidor Scandal” first came to public light last fall, with short-seller Citron Research publishing a piece describing Valeant Pharmaceuticals as “the pharmaceutical Enron.”
Reporters immediately jumped on the story. The Los Angeles Times found a pharmacist, Russell Reitz, who had sold his R&O Pharmacy to Philidor for $350,000, calling it “a massive fraud.” VRX stock already had begun what would eventually become a 90%-plus decline, but this triggered the next massive down-leg.
A specialty pharmacy often is used to sell expensive drugs to assure compliance, and may even send people to a patient’s home to monitor their administration. But Philidor was accused of being something else: a prescription mill that existed solely to push insurers into paying for name-brand drugs. That includes drugs such as Valeant’s Jublia, used against toenail fungus, for which there was generic competition.
The accusation was that Philidor bought many pharmacies, like R&O, which would submit bills until insurers approved payments, then fulfill the orders by mail nationwide. Invoices at one point saw R&O was on pace to sell $230 million in Valeant drugs over one year.
Now, an investigation by U.S. prosecutors could lead to criminal charges against both VRX and Philidor executives.
Wall Street Clipped by VRX
The revelations weighed down many of Wall Street’s top firms, including Bill Ackman’s Pershing Square. The value of VRX stock has fallen by 90% over the past year. Valeant CEO Michael Pearson resigned in March, and was replaced in April by former Perrigo Company plc Ordinary Shares (NYSE:PRGO) CEO Joseph Papa.
There are issues issue here beyond specialty pharmaceuticals.
Valeant made a practice of buying drug companies, cutting research budgets, and then hiking prices. Both VRX and PRGO also grew by moving their headquarters to other countries, then acquiring other U.S.-based drug firms to reduce corporate taxes — a politically controversial process called a “tax inversion.” The U.S. Department of the Treasury actually issued new rules in April that prevented the merger of Pfizer Inc. (NYSE:PFE) with Allergan plc Ordinary Shares (NYSE:AGN), which is run out of New Jersey but had moved its headquarters to Ireland for tax purposes.
What Happens Now?
The news of an investigation sent VRX stock — which had just shot up on news of $8 billion in asset sales — plunging again. Shares that traded at $24 on Monday were at $28 by late Tuesday, but were off 8% Thursday morning to dip back to around $25.
Investors who had been calling for a “victory lap” early in the week and said the stock was woefully undervalued may now know some of Pershing Square’s pain.
Dana Blankenhorn is a financial journalist and amateur futurist who dabbles in fiction, his latest being The Reluctant Detective Travels in Time. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.