Shares of one-time hedge fund darling Valeant (VRX) rose sharply Tuesday, after the Canadian pharmaceutical giant announced that it had finished its internal review of accounting practices related to controversial mail-order pharmaceutical company, Philidor Rx Services.
The stock jumped nearly 10% Tuesday morning following the news that Valeant “has not identified any additional items that would require restatements beyond those required by matters previously disclosed.”
The firm reiterated the intent to release its annual report on or before April 29, a deadline the company has to meet to stay in compliance with its loan agreements. Investors and regulatory agencies have been clamoring because of Valeant’s repeatedly delays in filing its 2015 annual report as a result of the ongoing internal review of how Valeant accounted for revenue through Philidor. There were fears that if the company does not file its annual report by the end of this month lenders could force the company into default.
The problematic relationship between Valeant and its specialty pharmacy division Philidor first came to light in October, when short seller Andrew Left of Citron Research released a scathing report about Valeant, alleging that the company had fraudulent accounting practices similar to what went on at the famously corrupt energy company Enron. Later that same month, amid allegations of price-gouging and a congressional review, Valeant severed its relationship with the drug delivery company.
“After conducting more than 70 interviews and reviewing over one million documents, the Ad Hoc Committee has not identified any additional items requiring restatements beyond those matters previously disclosed,” Robert Ingram, the chairman of the board said in a statement. Valeant plans to dissolve the Ad Hoc Committee and appoint the board of directors to resume responsibilities stating the annual report.
Many now believe that Citron’s accounting accusations were overstated. But Valeant probably isn’t in the clear just yet.
The committee did discover that Valeant had mistakenly reported $58 million in revenue in 2014 for sales to Philidor, before the division’s financials were consolidated with Valeant. It then booked sales of those same drugs again in 2015, when Philidor ended up selling the drugs to users, and its revenue was included as Valeant’s. The result was the company essentially double dipped. As a result, Valeant restated its 2014 revenue, lowering it by $58 million. Earnings for 2015 also rose, because the expenses of those double-dipped sales had already been recorded.
Although $58 million may seem like a small number for a company now worth $9.5 billion, the accounting mistake may point to bigger book keeping problems at the company. According the New York Times, while Valeant reported sales of two drugs, omeprazole/sodium bicarbonate, and Glumetza, rising significantly at the end of 2015, prescriptions actually fell. Meaning the actual sales to consumers may have been lower.
Despite the recent jump, it’s not been a good year for the beleaguered company: Shares have plummeted 72% year-to-date after a disastrous fourth quarter earnings report.