A board shows the name of Valeant Pharmaceuticals above the floor of the New York Stock Exchange shortly after the opening of the markets in New York Oct. 22.Lucas Jackson/Reuters
Citron Research is backing away from its direct attack against Valeant Pharmaceuticals International Inc., saying it does not want to deal with any potential legal action by the Canadian drug maker. But reports by the U.S. stock comment website have already sparked more intensive scrutiny of Valeant's business practices that appears set to continue.
In a note on Monday, Citron said that while it has been at the nexus of information on the Valeant story, it will not release new allegations against the company.
Valeant shares rose 7 per cent to $100.47 in New York trading in response.
Philidor Rx Services LLC, a specialty pharmacy that distributed Valeant skin-care products, is at the centre of allegations it acted improperly in several ways, including tweaking doctors' orders to squeeze more reimbursements from U.S. health insurers. Valeant said on Friday it would sever all ties with Philidor, which will shut down operations.
"We believe that it is not our responsibility to be the judge, jury and executioner of the company's deeds," Citron said in its note.
"We have reviewed numerous data points strongly suggesting that Valeant's operation is far 'dirtier' than just Philidor; we are passing all new information on to the mainstream media investigative reporters, whose legal teams are far deeper than those at Citron."
The comments represent a retreat by Citron, which sent out a tweet on Friday promising it would update the "full story" on Valeant on Monday. "Dirtier than anyone has reported!!," the tweet said. In fact, Citron's note on Monday was a summary and further discussion of its previous claims as well as a list of reasons it believes Valeant stock is "toxic" until several issues are resolved.
Among the immediate concerns Citron cited: Valeant's potential civil and criminal responsibility for Philidor's actions, the consequences to its sales of the damage to its reputation, heightened scrutiny from auditors and the potential for earnings restatements.
Said Citron: "The only investment thesis is now this: In the face of all these headwinds, will Valeant actually be able to generate sufficient cash to service its debt load? It's a tough call. And since the cost of insuring against default has skyrocketed, as its debt ratings sag and [credit default swap] spreads have widened, it's no longer possible to hedge the risk at reasonable cost."
Interest in Laval, Que.-based Valeant began three years ago, when media in Canada began probing its claims to be a Canadian company while its senior management works from an office in New Jersey.
The allegation has always been that Valeant registered itself as Canadian simply to make use of international fiscal treaties and pay low taxes.
But the drug maker has come under heavy scrutiny in recent weeks after a report by Citron alleged accounting irregularities involving a system of specialty pharmacies, including Philidor, that Valeant never disclosed to investors.
Citron compared the situation at Valeant to the one that sunk Enron, and said on Monday it stood by that comparison, alleging Valeant "engaged in manipulation of the insurance reimbursement system, and very possibly the law, to alter their financial results."
Valeant says Citron's allegations are false.
"Citron admits in its latest report that it has no substantiation for further allegations against Valeant," Laurie Little, a spokesperson for Valeant, said in a statement on Monday.
"Given that its last report was filled with demonstrably false statements about our business, we are not surprised, even as Citron continues to mislead investors in an attempt to profit by driving down our stock. We will continue to focus on running our business in an honest and transparent manner."
In a phone interview, Andrew Left, the short-seller who runs Citron, said he is personally exhausted from all the attention he has received for his work on Valeant and that the mainstream media are better equipped than Citron to pursue further inquiries and analysis into Valeant's business.
"I want to go back and be a father and a husband, not a mouthpiece against Valeant," he said, adding he does not want to deal with any legal fallout from pushing the story further. "Valeant could sue me for speaking to an employee. Tortious business interference, they could say.
"They're not going to sue the Wall Street Journal."
Mr. Left said he has not been contacted by Valeant's lawyers nor anyone at the U.S. Securities and Exchange Commission since first publishing his research. Valeant said it has asked the SEC to look into the activities of Citron and Mr. Left.
As a short-seller, Mr. Left benefits when the price of stocks he trades in fall. He has not disclosed whether he has a position in Valeant.
The Citron developments came as Goldman Sachs lowered its recommendation on Valeant shares to "neutral" from "buy" and cut its price target to $122 (U.S.) from $180.
"We move to the sidelines until there is further visibility on how management will repair the reputational damage to the company, as well as grow its business effectively in this increasingly challenging environment," Goldman analyst Gary Nachman said.