J. Michael Pearson, CEO of Valeant.
Photograph by Kevin Van Paassen — Bloomberg via Getty Images
By Stephen Gandel
October 22, 2015

Valeant Pharmaceutical has been embroiled in controversy for a while, first for its acquisition strategy, then because of its practice of acquiring drugs and jacking up prices. But the allegations of Andrew Left, who runs a one man research shop out of Beverly Hills, along with a similar report from the Southern Investigative Reporting Foundation earlier this week, have finally put the company in crisis mode.

It wasn’t the first report that Left, who runs a firm called Citron Research, had published on Valeant. But it contains the most damaging allegations of all his reports far. Left, 45, claims that Valeant essentially owns a specialty pharmacy company Philidor that, in turn, runs a network of other pharmacies. Through Philidor, Valeant ships drugs to controlled pharmacies, creating fake sales.

Valeant (VRX) has called Left’s report erroneous. Hedge fund manager Bill Ackman, who is one of Valeant’s largest investors and has defended the company’s business model in the past, said that he bought an additional 2 million shares in the company on Wednesday. Valeant says Philidor provides back end support to a network of pharmacies, which are also separate companies. Valeant says its sales numbers are not inflated, and that it doesn’t book sales until drugs are “dispensed to a patient,” not when it is shipped to a pharmacy. Left calls Valeant’s response “nonsense.” He talked to Fortune about it.

Why did you start looking into Valeant in the first place?

Left: I saw the controversy around the company’s aggressive price increases, Bernie Sanders was talking about it, and that started me into my inquiry

How long have you been researching the stock?

A month.

Are you shorting the company’s stock?

I don’t talk about my trading positions.

Did you contact Valeant before you published your report?

No, and I have not heard from them since it was published.

In your report, you say that Valeant appears to be using a specialty pharmacy that it controls to fake sales. How much do you think the company has inflated sales?

I have no idea. It’s like a turd in punch bowl. When you catch your wife cheating, does it really matter how often? We have caught them with one instance of a fake sale. But I don’t have all the receipts. How big is the problem? It’s a problem.

Did Valeant’s response today answer any of your questions?

No. I am only more confused. They say they don’t own the related pharmacies, but then they say all of the sales through those pharmacies are recorded as inter-company sales, and that the inventory at Philidor is included in Valeant’s inventory. I don’t know what that means, but I do believe there is an unholy alliance here. Then they say they are going to have a conference call to explain this. But why wait until Monday? What are they going to spend the weekend doing? That alone raises questions. Their response today was nonsense. I guess they are going to try to tighten it up by Monday.

Have you looked into the other accounting issues at the company?

This has been an accountant’s dream for years. People are also looking at the taxation issue. There is a lot of hair on it. I just focused on this one issue.

Valeant’s stock is down by a third since you published your report. Are you surprised by how much the stock has dropped?

No. When you have a company that is this leveraged and you have a question about their integrity, then who knows what will happen to the stock price?

Do you think the company is over leveraged?

No. Based on their cash flow I think they are fine, as long as they can continue their business model of acquiring companies and raising prices.

But they have said they are going to shift away from that strategy?

That’s a problem. It’s not too much leveage if they can continue the cash flow. The question is how much comes from Philidor. Philidor is obviously there to service their cash flow.

Are you surprised by how much attention your report has gotten?

It’s a bigger company with a bigger reach. It’s also a controversial one, and one that has had controversy for a while. And then there’s Ackman, who is a controversial figure, and people love to read about him. But for me, it’s just another stock to uncover. This is my 120th company I have investigated. I wake up every day and look for wrongdoing and misinformation in the marketplace. For me, it’s just another stock.

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