BMO Thinks Valeant's Structure Is 'Questionable,' Says Investigation May Be Needed To Resolve Uncertainty

• Valeant Pharmaceuticals Intl Inc VRX shares have slumped 48 percent in the last month, and are trading significantly below their 52-week high of $263.81.
• BMO Capital Markets’ Alex Arfaei downgraded the rating on the company to Market Perform, while reducing the price target to $141.
• Valeant’s specialty pharmacy affiliations appear to be aggressive and questionable, Arfaei said.

Valeant’s shares plummeted on allegations of wrong-doing from Citron Research based on the company’s specialty pharmacy affiliations.

Analyst Alex Arfaei noted that about 10 percent of Valeant’s revenues were contributed by specialty pharmacies. “While other companies also use specialty pharmacies, the structure of Valeant’s network seems different.”

Referring to Philidor, Arfaei mentioned that Valeant consolidates their financials and appears to have “a controlling financial interest,” while the affiliated specialty pharmacies of other companies are said to be “fully independent.”

“Valeant’s structure may not be illegal, but we find it aggressive and questionable,” the analyst said. He added, however, that “proof of a questionable business practice is not proof of financial wrong-doing.”

BMO Capital Markets’ analysis of Valeant’s cash flows suggests that that the company’s structure is not like Enron’s, as indicated by Citron.

“But we cannot refute Citron’s allegation either. So we’re left with their well-timed allegations, Valeant’s “categorical” denials and audited financial statements that support, but not necessarily prove Valeant’s position,” Arfaei wrote.

There is uncertainty related to the rest of the company’s business, and this is unlikely to be completely resolved till the investigation takes place. This uncertainty could exert pressure on Valeant’s shares, Arfaei commented.