(Recasts, adds short seller and analyst comments, updates share price move)
By Euan Rocha and Rod Nickel
TORONTO/WINNIPEG, Nov 10 (Reuters) - Valeant Pharmaceuticals International Inc said on Tuesday its dermatology business would be hurt in the short term as it moves rapidly to sever ties with a controversial specialty pharmacy.
As of last week, Philidor Rx Services has stopped handling insurance claims for drugs and it will cease operations by the end of January, Valeant Chief Executive Officer Mike Pearson told investors and analysts on a conference call on Tuesday.
The call, however, failed to allay concerns about the one-time stock market darling. Valeant's volatile shares, which fell as much as 7.5 percent in morning trading, turned higher in the afternoon after one of Valeant's main critics stated he had trimmed his short positions in the stock.
"My short on Valeant has been significantly scaled down from where it was earlier," said Andrew Left of Citron Research in an interview on CNBC on Tuesday.
The influential short-seller had precipitated a steep slide in the stock in October after his firm claimed Valeant was using an undisclosed relationship with Philidor to inflate revenues. Valeant, which is also being probed for aggressive drug pricing practices in the United States, has since cut ties with Philidor and said it was investigating its practices.
"We believe management's openness and transparency on the call was a good first step in rebuilding investor confidence," said Canaccord analyst Neil Maruoka in a note, adding that persistent uncertainty around the impact of Philidor and U.S. drug pricing continues to weigh on the stock.
Pearson said short-term disruption would be significant in the company's dermatology business, and to a lesser extent in neurology, affecting both average prices and sales volume for drugs in the fourth quarter as Philidor winds down.
Valeant will give details when it updates financial guidance in December, said Pearson, whose tone during the call ranged from apologetic to defiant. The company has previously said that Philidor accounted for about 7 percent of its total revenue and EBITDA in the third quarter.
Len Yaffe, portfolio manager of StockDoc Partners healthcare fund, said he expects that forecast to disappoint, and bets that the stock will continue to fall.
"The first reduction may not be the last," said Yaffe. "I remain short the stock, and I believe that the issues go well beyond Philidor."
Valeant said it aims to put a new program in place within 90 days for selling its dermatology products. Valeant's toenail fungus treatment Jublia is one of the dermatology products most dependent on Philidor.
Valeant's priority for the near term will be paying down debt, said Pearson, who stressed that he remains committed to the company and is optimistic about its organic growth prospects in 2016.
Pearson took over at Valeant back in 2008 after working as a pharmaceutical industry consultant at McKinsey & Co. He drove up Valeant's revenue sevenfold via a quick succession of takeovers, including those of Salix Pharmaceuticals and Bausch + Lomb.
The run of acquisitions, however, has left the company with a long-term debt load of more than $30 billion.
Valeant said it has no significant debts maturing until 2018 and has significant cash flow, most of which will go next year to reducing debt. Valeant's deleveraging focus is positive, said credit rating service Moody's.
Pearson has come under pressure as Valeant's stock price has fallen from over $260 in early August to near $85 on Tuesday, on scrutiny over its price mark-ups and allegations about Philidor.
Valeant has denied the allegations, but has not completely allayed investor concerns as new reports surface of questionable billing practices at Philidor.
"The past few weeks have been a painful learning experience for me personally," said Pearson, who sounded tired and at times stumbled over prepared remarks about the company's missteps.
"One of the consequences of rapid growth is you don't always take the time to listen to what the broader world outside your company is saying."
Additional reporting by Ankur Banerjee in Bangalore and Bill Berkrot in New York; Editing by Nick Zieminski