Is Valeant Pharmaceuticals Really the 'Pharmaceutical Enron'?

Valeant Pharmaceuticals International (TSX:VRX,NYSE:VRX), Canada’s largest publicly traded company, took a dive on Wednesday following a negative report from Citron Research.
The company’s share price was down nearly 20 percent in both Toronto and New York, ending at C$154.21 and US$118.32 on each exchange, respectively. According to the Financial Post, Valeant dropped as much as 39 percent earlier in the day on the NYSE.
Calling its findings a “smoking gun,” Citron accused Valeant of using Philidor RX — a company that Valeant has an option to purchase — and other related companies to “create invoices to deceive the auditors and book revenue.” Citron also compared the company to Enron, citing similar statements made by Enron management in 2001 and by Valeant management in 2014.
The firm has put its price target for Valeant at $50. Citron is headed by controversial activist short seller Andrew Left.

The news came shortly after Valeant was subpoenaed by US Democrats following drug price increases. According to Bloomberg, House Democrats asked to see documents from Valeant relating to a 212-percent increase in the price of heart drug Nitropress and a 525-percent increase in the price of Isuprel on the same day Valeant acquired rights to sell the drugs. Bloomberg also reported that Valeant spent “far less than companies of similar size” on research and development last year — about US$246 million.
Democrats accused Valeant of using the same business model as Martin Shkreli, who came under fire last month after his company, Turing Pharmaceuticals, increased the price of Daraprim by more than 5,000 percent. Shkreli has defended Valeant on twitter:

Valeant $VRX reported sales match IMS almost exactly. Company is not overreporting revenue. Give me a break.

— Martin Shkreli (@MartinShkreli) October 21, 2015

Meanwhile, Forbes reported that Bill Ackman of Pershing Square Capital has taken advantage of the plunge in Valeant’s share price; Pershing bought 2 million shares of the drugmaker after its share price dropped on Tuesday.
Valeant has responded to Citron’s allegations and called the report “erroneous,” stating, “[t]he timing of our revenue recognition by selling through the Philidor pharmacy network is actually delayed when compared to selling through the traditional wholesaler channel.”
 
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.