Valeant stock falls as report of criminal probe adds to woes

NEW YORK (Reuters) – Valeant Pharmaceuticals International Inc shares fell about 10 percent on Thursday as new details about a criminal investigation into the drugmaker raised investor concerns about risks related to the company’s past business practices.

News of the investigation, reported by the Wall Street Journal on Wednesday, was a setback to the Canadian company’s efforts clean up its image, with some in the market concerned it could face penalties and may have to pay more to borrow as renegotiates debt.

After the article was published, Valeant said in a statement it had disclosed it was being investigated by the U.S. Attorney’s Office in October and that it continued to cooperate with that probe.

Concern about other investigations, which focused on its drug pricing and accounting practices, had already cut its share price by about 90 percent in one year.

The stock had gained 25 percent on Tuesday after Chief Executive Officer Joseph Papa, who joined in May, outlined a plan to sell assets, pay down debt and focus on dermatology, consumer and Bausch Lomb eyecare.

Lawyers at the U.S. Attorney’s Manhattan office are probing whether Valeant obscured from insurers its relationship with a specialty pharmacy, Philidor Rx, that helped inflate its drug sales, the Journal reported on Wednesday, citing sources.

The investigation could lead to criminal charges against former Philidor executives and Valeant as a company, the report added.

Laval, Quebec-based Valeant’s U.S.-listed shares were down $2.61 at $24.71 on Wednesday. It peaked at $263.81 a year ago.

The investigation reflects lingering issues facing Valeant and shows that it is “nowhere close to out of the woods,” said David Neuhauser, managing director of Livermore Partners, who added his firm covered its profitable short position in Valeant this quarter.

INVESTOR, POLITICAL SCRUTINY

Valeant’s relationship with Philidor was revealed last fall, including the aggressive tactics Philidor used to receive payment from insurers.

That news as well as investor and political scrutiny of its sharp drug price increases led to several investigations into pricing and its patient assistance programs, including one by the U.S. Attorney’s Office in New York.

Valeant has more than $30 billion in long-term debt and some investors have been worried that is too much, given that it may not be able to raise prices as it did before and has moved away from its strategy of growth through serial mergers and acquisitions.

Valeant cut ties with Philidor last year and overhauled its board of directors, bringing on its top investor, activist Bill Ackman.

After the investigations were disclosed last year, Wall Street began expecting that there could be fines issued against the company.

“It is not possible for us to know how this investigation will turn or if charges will be pursued,” Wells Fargo analyst David Maris said in a client note.

“We believe that with Valeant having such high debt, the impact of financial or commercial penalties is high.”

Mizuho Securities analyst Irina Koffler wrote that Valeant’s credit may now be perceived as riskier and that the company may have to pay higher interest rates under loan amendments it is negotiating.

Reuters, citing sources, reported earlier this week that Valeant is offering to pay lenders a higher interest rate in order to obtain an amendment to its debt agreement that would loosen one of its covenants.

(Reporting by Natalie Grover in Bengaluru, Caroline Humer in New York and Rod Nickel in Winnipeg, Manitoba; Editing by Maju Samuel and Jeffrey Hodgson)