Enron Performance

Valeant’s Scandal

Wael Elmgirbi

260212210

McGill University

On October 21, 2015, Citron Research, a short seller company with a high track record identifying fraud and terminal business models, has accused Valeant pharmaceutical to inflate its sales through Philidor, one of Valeant customers. That caused the price of Valeant Shares to drop sharply from $262 to $75, Hedge funds short sellers also accused Valeant to have problem in its accounting practise. Valeant in the late of 2014 paid $ 100 million to Philidor  that give  Valeant  the option to purchase for $0 later, then Valeant started to consolidate Philidor in its balance sheet and income statement as VIE , however, Valeant didn’t disclose these information  to the investors. The sales to Philidor is intersales transaction with no effect in the income statement and the balance sheet. And in the pharmaceutical business usually the sales is not recorded till the pharmacy dispense the drug to the patient. Valeant also sale to R&O pharmacies, which Philidor said  has the option to buy it, therefore, all the sales from Valeant to Philidor and R&O are intersales transaction. Even these transaction are not intersales, Valeant has to disclose its clients who made more than 10% of Valeant sales. Valeant sales to Philidor and R&O separately count for less than 10% of Valeant total sales, therefore, Valeant didn’t disclose their sales information. Another thing to consider that Philidor and R&O sale other drugs not just Valeant’s drugs. On October 30, Valeant cut its ties with Philidor, then Philidor shutdown and being accused to alter the drugs prescriptions to sale expensive drugs instead of the cheap alternative.

This case remind me of what Enron did in 2001 with its SPE, in Valeant it’s VIE, and I will called small fraud entity. It is interesting that after almost 14 years we still having the same issues with disclosing these entities information. And audit firm like PwC fail to investigate or talk about this issue, rises big question!

My conclusion, the rules and the regulation for investing in these small enteritis should be changed by limiting the numbers of the small entities the company can invest in and these entities information should be fully disclosed.