Valeant Pharmaceuticals International Inc. is in full-on crisis mode amidst accusations of fraudulent accounting practices. Citron Research, a provider of short-focused market commentary, has reported that the Canadian pharmaceutical company is storing excess inventory in subsidiaries and then reporting that inventory as sales revenue. These types of unethical accounting practices are very similar to those used by the infamous energy company Enron in the late 1990s and early 2000s.

 

The multibillion dollar company’s stock price has plummeted from a high of over $260 per share in August to just $110 per share as of yesterday’s market close.

 

 

Philidor Rx Services and R&O pharmacy are the two entities Citron believes are being manipulated to create phantom revenues for Valeant. The financial and legal relationships between the three companies are strange. The Bank of Montreal stated, “While we do not have all the pieces to this puzzle yet, we find Valeant’s apparent control over Philodor, and Philodor’s alleged activities with other pharmacies such as R&O as aggressive, unusual and questionable.” Valeant has received a subpoena from U.S. prosecutors for details on its patience assistance programs, drug pricing, and distribution practices.

 

Valeant’s now embattled Chief Executive Officer J. Michael Pearson defended his company during a conference call with other executives and board members on Monday. The company is creating a board to look into its relationship with Philidor, but investors and the media alike are questioning why an independent third party is not being brought in to conduct the investigation.

 

In an attempt to regain credibility with investors, Valeant has requested that the Securities and Exchange Commission probe Citron Research. Andrew Left, the Executive Editor of Citron Research, told Bloomberg news:

“Yelling ‘Fire’ in a crowded theater is a lot different than walking into a theater smelling smoke and yelling, ‘Hey everyone, there could be a fire.’ One is irresponsible, another one is a duty.”

 

It will take time for investigators to make a definitive decision on the matter, but innocent or guilty, significant damage has been done to Valeant’s bottom line and its reputation.

 

What kind of regulations should be implemented to prevent financial fraud? If Citron’s claims are inaccurate what penalties should it face? Feel free to leave a comment or find me on Twitter @Andrew_Morse4