Valeant sets tone for post-M&A accounting scrutiny

By Robert Cyran

Valeant Pharmaceuticals sets the tone for intensifying accounting scrutiny once merger activity slows. The drugmaker’s stock ended Wednesday down 19 percent after a short-seller and others questioned its bookkeeping and relationships with other companies. The $40 billion serial acquirer’s history may make it an obvious target, but as growth and mergers slow a renewed investor focus on companies’ figures is a logical shift.

Valeant has bought several dozen firms since 2008. The company’s stock rose more than 20-fold after Chief Executive Michael Pearson took the helm that year to a peak this past summer as deal after deal transfixed Wall Street. Since then, though, the shares have tumbled by more than half. Democratic presidential frontrunner Hillary Clinton’s stance against drug companies that raise prices but do little research and development put Valeant’s business model in the spotlight. During its latest earnings call, the company said that it would undertake fewer acquisitions, limit price increases and invest more in R&D.

Investors are now examining much more closely the stalled Valeant deal machine. There are discrepancies, for instance, in statements from the various parties about how the company is connected to two specialty pharmacies which help dispense drugs and assist patients with payments – Philidor Rx Services and R&O Pharmacy. To make it more convoluted, R&O is suing Valeant. The confusion has sparked questions about Valeant’s bookkeeping for drug sales through pharmacies like these. Valeant has categorically denied any improper accounting.

American healthcare reimbursement is complex, opaque and sometimes prone to fraud. There could be an element of confusion over similar company names. Or it may just be that Valeant’s multiple deals have created a web in which one strand has little idea what another is doing. When chief executives like Pearson do a dozen deals a year, they may spend too little time getting their new charges to work together.

Either way, the Valeant turbulence is a sign of a cyclical change in investor thinking. When growth through acquisitions dries up, there’s greater focus on the reality of sales and profit. Watchdogs, too, have shifted their attention from insider trading to accounting issues. The Securities and Exchange Commission’s newish audit task force, for example, is using special software to spot unusual numbers, dodgy off-balance sheet transactions and auditor changes. As the recent surge of M&A dies down, both investors and regulators may find they have their number-crunching hands full.

Published on Oct. 22, 2015

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