Why Did Valeant Stock Drop 46% This Week (NYSE: VRX)

Valeant stock dropThe Valeant stock drop has now reached nearly 46% this week. Today (Thursday), Valeant Pharmaceuticals Intl. Inc. (NYSE: VRX) stock is down another 20% as shares trade near $95.

The worst Valeant stock drop happened Wednesday when shares fell 40% intraday amid a scathing report from Citron Research. VRX stock ended Wednesday's session down 19%.

In a report entitled "Could this be the Pharmaceutical Enron?" the short seller alleged Valeant engaged in a series of sham transactions to inflate its drug sales.

Citron discussed Valeant's recently reported relationship with Philidor RX. Citron also noted a court filing made by a company called R&O Pharmacy. Filed in September with the California District Court, this small regional pharmacy claims it received an improper payment demand from Valeant for a whopping $69 million.

Valeant CEO J. Michael Pearson revealed Monday in the company's quarterly earnings call that Valeant had purchased an option to acquire Philidor in late 2014. Pearson also said that Valeant consolidated Philidor's results in its own financial reports.

As the Citron report states:

"Why would Valeant, a major big cap pharma, a darling of the hedge fund crowd, a suitor of Allergan and an aggressive acquirer of pharmas like Salix, Bausch & Lomb, etc., etc., be secretly maneuvering to buy a little known pharmacy with a dubious ownership structure? And then consolidate its financials? Why was this entity NEVER disclosed in any prior company disclosure?"

According to Citron, Philidor owns R&O Pharmacy, and that's the "smoking gun" in this case.

The report says it's clear that Valeant has created a network of "pharmacies" as clones of Philidor. Citron analysts believe they exist "merely for the purpose of phantom sales or stuff the channel, and avoid scrutiny from the auditors."

Money Morning Global Credit Strategist Michael Lewitt saw the Valeant stock drop coming and even said it was a "deeply troubled company" back on Oct. 4. And according to Lewitt, the troubles are far from over for Valeant stock...

How We Saw the Valeant Stock Drop Coming

Before the Valeant stock drop, VRX was one the stock market's best performers.

At its high of $263.81 in August, shares were up more than 300% over the last five years.

Valeant grew by leaps and bounds as a serial acquirer of smaller companies. It domiciled in Canada for a lower tax rate and continued to cut research costs.

The company would also hike the prices of newly acquired drugs - a move which has recently irked regulators.

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Valeant is now being asked to explain its decision to raise the prices for two cardiac care drugs it acquired in February. Valeant boosted the prices of Nitropress and Isuprel by 525% and 212%, respectively.

Additionally, U.S. attorney offices in Manhattan and Massachusetts just issued subpoenas to the company related to its patient assistance programs. Valeant offers financial assistance to offset the cost of the treatment for patients who are unable to afford its drugs.

Under federal law, companies are not permitted to provide assistance to patients insured by Medicare or other government insurance programs because it's considered an illegal kickback. Instead, Valeant Pharmaceuticals and other companies give funding to private foundations that independently help Medicare patients.

"Valeant's predatory business model places it at a disadvantage with investors because it depends on inflicting harm on people to make money," Lewitt said today.

When Lewitt first warned readers about a possible Valeant stock drop on Oct. 4, he said the company is "emblematic of just about everything that's corrupt and toxic in today's market."

He cited Valeant's practice of bankrolling acquisitions with junk bond financing, firing most their employees, and hiking the prices of the drugs which they'd just purchased the rights to.

"The bottom line is that Valeant is getting what it deserves," Lewitt said today. "This predatory business model has enriched management and a bunch of hedge funds but has left everyone else with whom the company has come into contact severely damaged."

The Bottom Line: The Valeant stock drop has now topped 46%, and there is no end in sight for this pharmaceutical giant. As the analysts and regulators continue to expose the nefarious behavior of Valeant officials, you can expect VRX stock to continue lower.

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