Canadian pharmaceutical giant Valeant was accused of operating an Enron-like fraud.
On Wednesday, short-seller Citron Research pointed its spotlight on Philidor RX, an entity that distributes drugs for specialty pharmacies. Citron says Valeant filed fake invoices with Philidor to make its own revenue appear greater than it was. Valeant is Philidor’s only customer, Citron points out.
Valeant responded, arguing that Citron analysis was “erroneous.” They clarified that shipments to Philidor were not recorded as revenue for Valeant until the product was dispensed to the patient.
Still, Valeant’s response did not prevent shares from closing down 19% for the day. And importantly, it did not prevent skeptics from questioning how companies like Valeant conduct business.
So what do Wall Street’s investment pros think?
Some say it’s a buying opportunity. Some say to wait and see how management handles the aftermath. At least one firm admits they don’t know what’s going on.
“We do not know if Valeant was the victim of or involved in any fraud,” Morgan Stanley’s David Risinger writes. “But if allegations of fraud are wrong, depressed VRX shares appear to present a buying opportunity.”
Unfortunately, that’s not helpful.
Here’s what the other pros are saying.
Concerns are “likely” based on misinformation, Nomura says.
Price Target: $290
Comment: “… While we have been unable to share our analysis with or speak with Valeant, our own diligence suggests that this is not accurate. Key reason: Valeant has stated numerous times and publicly that it only books revenues on products sold through specialty pharmacies when they have been dispensed; we would use the current weakness as a buying opportunity …”
It will be important to see how management deals with this, Deutsche Bank says.
Price Target: $204
Comment: “… The bull case in the past had been tied in large part to the thematic appeal of the story and some investors’ strong desire to invest with CEO Mike Pearson. We suspect that new investors will focus not only on valuation but will want to take a very detailed approach in understanding the company on a bottoms-up basis, which could take some time. It will be important to see how the company and management team deal with a period of adversity after a long period of significant success …”
Regardless of what you think of the business model, Valeant has limited ability to “stuff the channel,” JPMorgan says.
Price Target: N/A
Comment: “… It is our understanding that Valeant books revenue upon shipment to end customer, limiting the ability to “stuff the channel” using these specialty pharmacies. Valeant has disclosed that it recognizes almost all of its revenues generated through the specialty pharmacy channel when the prescription is actually filled, and that the specialty pharmacies operate on a consignment model. For reference, Valeant currently has only $15mm of inventory at gross price in the U.S. specialty pharmacy channel. In our view, this limits the ability of Valeant to “stuff the channel” by shipping excess inventory to its specialty pharmacies as this would be not be recognized as revenues …”
It’s volatile, but it also looks like a buying opportunity, Bank of America Merrill Lynch says.
Price Target: $290
Comment: “… In our view, VRX will remain volatile and will require even clearer articulation from management around the risk related to the issues facing the company for the stock to potentially begin healing. That said, we continue to like VRX’s diverse business mix, sticky and durable asset base, and low product concentration risk. Reiterate Buy …”
The price will rally as Valeant addresses more questions, UBS says.
Price Target: $285
Comment: “… We believe as investors fully incorporate Valeant’s comments, shares will recoup more ground … Valeant addressed most of these issues on its conference call the other day, so we were surprised that this report generated such a reaction. That said, we understand that investors in this market environment are extra cautious and continue to have a ‘sell first and ask questions later’ attitude. As questions are answered, as noted above, we expect the stock to recoup lost ground …”
If it turns out not to be a fraud, it’s a buy, Morgan Stanley says.
Rating: Equal Weight
Price Target: $204
Comment: “… We are Equal Weight Valeant shares, but if allegations of fraud are wrong, depressed VRX shares appear to present a buying opportunity … Beyond allegations of fraud, why is Valeant’s Philidor business so controversial? We do not know if Valeant was the victim of or involved in any fraud. It is not common for pharmaceuticals companies to directly own or control pharmacies. That said, it is not illegal. As we understand it, the business strategy of Philidor is to circumvent payer constraints and enhance patient access to Valeant drugs … “
We can’t defend their business practice, BMO says.
Rating: Market Perform
Price Target: $141
Comment: “… While this question applies to every company in our coverage, the existence of a questionable, not fully disclosed business practice increases the risk of others. The stock is unquestionably cheap in our view, but for the upside to materialize, we believe investors need to become comfortable with this uncertainty. Unlike most other allegations, we cannot defend this practice; thus, we cannot argue for an Outperform thesis even though the rest of our bullish views are unchanged … “
If we had to make a call, we’d say investors will be vindicated, Raymond James says.
Price Target: N/A
Comment: “… We don’t cover Valeant, so our dog isn’t in this fight, at least sort of, as the collateral damage from this latest round of negative pharma news flow has dragged down nearly every name in our coverage universe. For our part, if we had to bet, we would say that Valeant will likely be vindicated and its claims about the appropriateness of the usage of specialty pharmacies and the resulting revenue recognition will be borne out. For the short term, however, the company seems to be fighting a credibility battle that it isn’t winning, and every other pharma stock, or the vast majority, is also guilty by virtue of proximity … “