SMITH BRAIN TRUST -- Valeant Pharmaceuticals’ stock dive, after short-selling research firm Citron called it "pharmaceutical Enron,” “is a gross overreaction in the market caused by charges thus far that are unsubstantiated and denied by Valeant," says clinical professor of finance David Kass at the University of Maryland’s Robert H. Smith School of Business.
“Valeant investors, including Jeff Ubben and Bill Ackman (who purchased an additional $2 million in shares during Wednesday's turmoil) are extremely sophisticated and successful hedge fund managers,” says Kass, a long-time observer of Valeant stock and former health economist for the Federal Trade Commission.
“It’s difficult to fathom these star investors allowing for, or being unaware of, Valeant manipulating a network of specialty mail-order pharmacies in order to inflate the sales of its high-priced drugs,” Kass says. “And unlike Enron, Valeant has real products through brands like Bausch & Lomb and popular pharmaceuticals.”
Nonetheless, “there’s confusion in the market,” Kass says, referring to Valeant stock opening Wednesday at $148 and dropping to $88 before climbing back to $120 in mid-afternoon as Valeant refuted Citron’s claim. “Today’s trading volume has been 10 times heavier than usual. Traders sense real problems with the stock, regardless of the validity of the allegations.”
Valeant was trading at $240 about a month ago. But its stock went in decline, Kass says, because CEO Michael Pearson –- in bowing to regulator-scrutiny of its patient assistance programs, drug distribution and pricing decisions –- announced the company would change its profitable business model of acquisitions, subsequent cost cutting and price increases. “This alone, negatively affects Valeant’s expected rate of growth,” Kass says.