By Caroline Humer and Euan Rocha
(Reuters) - Drugmaker Valeant Pharmaceuticals International Inc (TO:VRX) (N:VRX) laid out a detailed defense on Monday of its relationship with a little-known specialty pharmacy, but its arguments failed to calm all investors' concerns.
Valeant's shares were up about 1 percent in New York and Toronto after tumbling as much as 14 percent before normal trading hours. They had plunged 35 percent last week following a critical report by short-seller Citron Research, run by Andrew Left.
Laval, Quebec-based Valeant said it has asked U.S. securities regulators to investigate Citron's "completely untrue" allegation that the company used its ties with a specialty pharmacy to inflate revenue, and said it would conduct a review of its pharmacy network.
About a dozen executives, a former chief financial officer and directors - some of whom Chief Executive Mike Pearson (L:PSON) said were operating on little sleep - made up Valeant's defense team on a conference call with investors and analysts. The call included an unequivocal endorsement of Pearson by lead director Robert Ingram.
"(Left's) motivation is the same as one who runs into a crowded theater and falsely yells fire. He wanted people to run," Valeant Chief Executive Mike Pearson said. "He intentionally designed the report to frighten our shareholders to drive down the price of our stock so he could make money for his short-selling."
Left disputed Pearson's comment in a statement.
"Yelling fire in a crowded theater is a lot different than walking into a theater, smelling smoke and yelling, 'Hey everyone, there could be a fire.'
"Now the information is out, people have had an opportunity to inspect the theater and they have chosen to leave ... maybe there is fire."
Valeant cleared the air somewhat, but not enough, said BMO analyst Alex Arfaei, in a note.
"There is still much more that needs to be done to rebuild investor confidence, which we argue has been significantly weakened."
Arfaei said he wondered what other undisclosed business practices Valeant might be involved in that could undermine the stock.
J.P. Morgan analyst Chris Schott said in a note, however, that concerns about Valeant's connection with a specialty pharmacy were "overblown."
Valeant said it paid $100 million (65 million pounds) in December 2014 for its option to buy Pennsylvania-based Philidor Rx Services Llc, which also included contractual rights, such as influence over certain personnel hirings and a place on a joint steering committee.
Philidor accounted for about 7 percent of its total revenue and EBITDA in the third quarter, and 44 percent of sales of Jublia, Valeant's toenail fungus treatment, Valeant said.
Even so, Valeant described Philidor as independent, and said Valeant does not have legal liability for it.
The company said a board review had found that the company was in compliance with the law on revenue recognition from drugs sold through the specialty pharmacy, Philidor.
It said it would set up an ad-hoc committee to look into allegations related to the company's association with Philidor.
Valeant's link to Philidor and its option to buy the company came under scrutiny after a New York Times report said that Valeant and other drugmakers were using specialty drug distributors to circumvent barriers to raising prices.
Valeant has said it properly accounts for sales through its pharmacy partners and only books revenue once one of its medicines reaches a patient.
Specialty pharmacies are designed to handle complex medications that have unique requirements for storage or administration. But Valeant has also used such pharmacies to sell more conventional medicines directly to patients, and work out reimbursement from insurers afterward.
That may allow them to get past limits on a drug's use imposed by insurers or a retail pharmacy. In Valeant's case, the company has been under scrutiny for its ties to Philidor, which has been accused by one of its affiliates of improper billing practices.
The Wall Street Journal reported on Monday that Valeant and Philidor are more interconnected than previously disclosed, and highlighted business practices that included a few Valeant workers who used alternative names, sometimes fictional ones, while working in Philidor's office.
Valeant chief compliance officer Seana Carson said the company's ad-hoc committee will also review that report.
Pearson said Valeant will consider all options, including buying Philidor or severing ties with it, as well as using other specialty pharmacies.
The acquisitive company has been considering a sale or other options for its neurological business, but such a move is now on the back-burner, Pearson said.