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More Trouble Ahead? Valeant Under Criminal Investigation

More Trouble Ahead? Valeant Under Criminal Investigation - Valeant Pharmaceuticals International, Inc. NYSE:VRX

Just as things were starting to look up for bruised and battered Valeant Pharmaceuticals Intl Inc VRX, another round of bad news sent the stock plummeting in Wednesday's after-hours session. The Wall Street Journal reported an ongoing criminal probe focused on the company's relationship with a closely linked mail-order-pharmacy named Philidor RX Services LLC. The investigation is being run out of the Manhattan U.S. Attorney's office.

Philidor is the same pharmacy that had previously been connected to allegations of accounting improprieties at Valeant. Specifically, back in October 2015, prominent short-seller and fraud-buster Citron Research posted a piece titled "Valeant: Could this be the Pharmaceutical Enron?" In the report, Citron accused the company of creating a network of linked pharmacies in order to book fraudulent revenue and deceive its auditors.

Valeant responded to the report, saying it "previously disclosed in October 2015 that the United States Attorney's Office for the Southern District of New York commenced an investigation involving Valeant. We have been fully cooperating with the authorities throughout the investigation...We do not comment on rumors about investigations, and cannot comment on or speculate about the possible course of any ongoing investigation."

Initially, Citron had published a negative report on Valeant in September 2015, which focused on the company's practice of price gouging patients by significantly raising prices for many of its drugs. The bearish research on the stock caught the attention of Wall Street and shares fell sharply between the September Citron report and the October Citron report, which alleged fraud. Not only was the stock clobbered in the wake of Citron's allegations, but a Congressional investigation followed along with management restructurings and plenty of suspicion that the company's problems ran even deeper.

Overall, the stock has plunged around 90 percent over the last 52 weeks. The company's market cap has gone from over $100 billion to under $12 billion. At its peak, Valeant was trading at 10x annual revenue, whereas today the shares trade at roughly 1xp sales.

According to both Bloomberg and WSJ, the legal argument being pursued by the U.S. attorney's office is considered unusual and has not been reported up until Wednesday. The Feds are basically alleging that Valeant and Philidor disguised the true nature of their relationship and that the latter company assisted patients in getting insurance coverage for high priced Valeant drugs.

The news comes at a particularly unfortunate time for both Valeant and its shareholders as the stock had surged in recent days in the wake of the company's Q2 earnings results. There was even some chatter on the Street that the recent lows in the name would mark a long-term bottom and that the stock was setting up for a rebound. The significant surge in volume on Monday and Tuesday lent credence to this argument.

Although Valeant reported both earnings per share and revenue that missed Wall Street expectations, the company reaffirmed its previous full-year guidance. This news helped to catalyze a better than 25 percent rally in the share price on Tuesday as investors were likely relieved that Valeant is not slashing its outlook.

The rally was also triggered by news that the pharma company has received unsolicited bids for some of its core assets and that management is also looking to unload as much as $8 billion of non-core assets in order to pay down a massive debt load. On Monday, the stock closed around $22.45 before trading as high as $28.00 on Tuesday.

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