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Report of Criminal Probe Leads to Fall on Stocks of Valeant and Adds to its Woes

Report of Criminal Probe Leads to Fall on Stocks of Valeant and Adds to its Woes
Investor concerns about Valeant Pharmaceuticals International Inc’s past business relationship with a mail-order pharmacy that sold its products emerged in new details about a criminal investigation into the drugmaker led to the shares of the company falling about 11 percent on Thursday.
With some in the market concerned it could face penalties and may have to pay more to borrow as it renegotiates debt, the Canadian company had been trying to clean up its image and the news of the investigation, reported by the Wall Street Journal on Wednesday, was a setback to the efforts.
Valeant said that it continued to cooperate with that probe and it had disclosed it was being investigated by the U.S. Attorney's Office in October, the company said in a statement after the article was published.
The share price of the company had been cut already by about 90 percent in one year due to concerns about the investigations that were aimed at the drug pricing and accounting practices of the company.
A plan to sell assets, pay down debt and focus on dermatology, consumer and Bausch & Lomb eyecare had been outlined by Chief Executive Officer Joseph Papa, who joined in May, resulting in a 25 percent gain in stock prices.

Citing sources, the Journal reported that whether Valeant’s relationship with a specialty pharmacy, Philidor Rx, that helped inflate its drug sales were kept obscured from insurers is the aspect that lawyers at the U.S. Attorney's Manhattan office are probing into.
The report added that criminal charges against former Philidor executives and Valeant as a company could be placed following the investigation.
David Neuhauser, managing director of Livermore Partners, who added his firm covered its profitable short position in Valeant this quarter said that the investigation reflects lingering issues facing Valeant and shows that it is "nowhere close to out of the woods."
Including the aggressive tactics Philidor used to receive payment from insurers, Valeant's relationship with Philidor was revealed last fall.
Several investigations into pricing and its patient assistance programs, including one by the U.S. Attorney's Office in New York were initiated by that news as well as investor and political scrutiny of its sharp drug price increases.
Given that Valeant may not be able to raise prices as it did before and has moved away from its strategy of growth through serial mergers and acquisitions, some investors have been worried that is too much as the company has more than $30 billion in long-term debt.

Bringing on its top investor, activist Bill Ackman, Valeant overhauled its board of directors and cut ties with Philidor last year. Wall Street began expecting that there could be fines issued against the company after the investigations were disclosed last year.
"It is not possible for us to know how this investigation will turn or if charges will be pursued. We believe that with Valeant having such high debt, the impact of financial or commercial penalties is high," Wells Fargo analyst David Maris said in a client note.

Christopher J. Mitchell

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