Exclusive: SEC probe of Valeant began with review of short seller - sources

NEW YORK (Reuters) - A U.S. regulatory probe of Valeant Pharmaceuticals International Inc VRX.TO, disclosed by the company on Monday, is focused on the drugmaker's relationship with specialty pharmacy Philidor RX Services and was triggered by Valeant’s own request that regulators investigate a short seller's allegations, people familiar with the matter said.

The headquarters of Valeant Pharmaceuticals International Inc., seen in Laval, Quebec November 9 2015. REUTERS/Christinne Muschi

The Monday disclosure of the Securities and Exchange Commission investigation put new pressure on Valeant, contributing to a nearly 20 percent drop in its shares. The company on Monday confirmed the probe but did not provide any details on it. Valeant did not immediately respond to a request for comment on Tuesday.

The Wall Street Journal reported that the probe was focused on Valeant’s relationship with Philidor.

Some of the people interviewed by Reuters said that Valeant Chief Executive Michael Pearson described the Philidor link to some brokerage analysts during one-on-one conversations on Monday and Tuesday.

Pearson said the SEC review was a continuation of an investigation, requested by Valeant, of a short seller that raised questions about Valeant’s business model and ethics, the people said.

In October, Valeant invited the regulator to investigate what it called “completely untrue” allegations from Andrew Left, a short seller and founder of Citron Research, that Valeant used its relationship with Philidor as part of an effort to book false revenues.

The SEC probe that resulted has placed focus on Philidor but has also looked into other areas of Valeant’s operations, the people said.

It is separate from an existing investigation into Salix Pharmaceuticals, which was purchased by Valeant last year, according to a person familiar with the matter.

In that matter, the SEC is primarily focused on whether the former executives misled investors about inventory levels for certain key drugs.

News of the investigation on Monday added to investor uncertainty after Canada-based Valeant withdrew 2016 earnings guidance and announced the return of Pearson, who had been on extended medical leave after a bout of pneumonia.

Valeant shares fell about half a percent on Tuesday, closing at $65.45 per share on the New York Stock Exchange.

Investors in the drugmaker still face significant uncertainty, including the outcome of the investigation by an ad hoc board committee into Valeant’s relationship with Philidor, its upcoming earnings report and annual report and its 2016 earnings guidance.

Valeant told analysts it planned on revealing the SEC investigation in its 2015 annual 10-K report, which has not yet been filed after being delayed by the company, the people said.

The company’s stock has dropped nearly $200, or about 75 percent, from its peak last year.

Editing by Peter Henderson and Leslie Adler