October 26, 2015 / 9:20 PM / 3 years ago

UPDATE 1-Valeant bonds steady after analyst call

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By Natalie Harrison and Davide Scigliuzzo

NEW YORK, Oct 26 (IFR) - Valeant bonds were volatile on Monday morning but steadied after the drugmaker’s management sought to alleviate investor fears of potential fraud at the company.

One high-yield investor said Valeant’s 5.5% 2023s traded as low as 83.5 before steadying to around 86 after the company said a board review had found the company was in compliance with the law on revenue recognition from drugs sold through the specialty pharmacy Philidor.

Its Board of Directors has set up an ad hoc committee to review allegations by short seller Citron Research related to the company’s business relationship with Philidor and related matters.

Citron Research accused the drugmaker of using Philidor to create “phantom sales” of its products or push more product through distribution channels than sales would warrant, an allegation that Valeant has denied outright.

“My overall take is that management did a reasonable job conveying that their accounting is above board. The call removed fears that there was a legal or accounting fraud issue,” said one of the investors who owns the 2023 bonds.

But he said there was still a feeling that the company was acting “at the edge of the letter of the law” and that further weakness in Valeant’s bonds was likely.

“The biggest issue was allegations about revenue inflation,” said the investor. The company appeared to pour cold water on those concerns.

Valeant said on its call with analysts that it only recognizes revenue when products are dispensed to patients and records this at net realized price.

Blasting Citron’s claims as “completely untrue,” Valeant chief executive Michael Pearson said the company has asked the SEC to investigate the research firm and his founder Andrew Left.

In an email to IFR, however, Left stood by the contents of his firm’s report.

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

He accused Valeant of not disclosing a payment of US$100m for an “option” to purchase Philidor, the posting of Valeant senior staff onsite at Philidor, and the consolidation of Philidor’s revenue in Valeant’s balance sheet.

Valeant revealed new information earlier this month about its dealings with specialty pharmacies, including Philidor and R&O Pharmacy Inc, which are designed to handle medicines that require complex storage or administration and distribute specialty drugs to patients, and that it had purchased an option to acquire the pharmacy Philidor and was already consolidating its results.

It has also been subpoenaed by U.S. prosecutors seeking details on its patient assistance programs, drug pricing and distribution practices.

“Now they’ve got to work through the various regulatory issues, including multiple subpoenas which will take 6-12 months,” said the investor.

“I can’t see the bonds trading back to where they were until the muddy waters are cleared.” (Reporting by Natalie Harrison and Davide Scigliuzzo; editing by Jack Doran and Shankar Ramakrishnan)

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