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Murky Water in Valeant Share-Drop Dispute

TRENTON, N.J. (CN) - The latest report sending Valeant Pharmaceutical shares into a tailspin quickly brought federal shareholder complaint against the Canadian drugmaker, but Valeant fired back today over the headline labeling it "the pharmaceutical Enron."

Calling on the Securities and Exchange Commission to investigate Citron Research, Valeant CEO Michael Pearson said Citron's head, Andrew Left, crafted "the report to frighten our shareholders to drive down the price of our stock so he could make money for his short-selling," as quoted by Reuters.

"Left's "motivation is the same as one who runs into a crowded theater and falsely yells fire. He wanted people to run," Pearson said.

Left has reportedly denied the allegations, telling Reuters that "yelling fire in a crowded theater is a lot different than walking into a theater, smelling smoke and yelling, 'Hey everyone, there could be a fire.'"

In a federal class action filed Friday in New Jersey, the home of Valeant's U.S. headquarters in Bridgewater, shareholder Lihao Chen notes that the smoke has been building ever since Democrats on the House Oversight Committee began investigating Valeant's drug pries nearly a month ago.

Among the myriad press reports that followed, Chen notes that The New York Times reported that Valeant had brand-name drug prices by an average of 66 percent.

"On this news of governmental scrutiny and Valeant's lack of response, shares of Valeant dropped $32.97/ share, or over 16%, to close at $166.50/share on September 28, 2015," the complaint states. "Valeant's stock continued to fall on September 29, 2015 falling $8.42, or 5%, to close at $158.08."

Chen's shareholder class action accuses Valeant of misleading investors with a form it filed with the SEC on Sept. 28 and corrected on Oct. 5.

The correction still failed to disclose that Valeant faced "government scrutiny for its financial assistance programs for patients, pricing decisions and the distribution of its products," the 50-page complaint states.

Chen says the investigations of Valeant stem from another issue it failed to disclose -specifically its "true relationship" with the specialty pharmacy Philidor.

Often used for hard-to-get drugs, specialty pharmacies send medication directly to patients, and then seek reimbursement from insurers.

Chen says the Southern Investigative Reporting Foundation brought this relationship to light in an Oct. 19 report, saying "Philidor has gone to great lengths to conceal its ownership."

Valeant finally disclosed its special relationship with Philidor during a third-quarter earnings call that very day, according to the complaint.

Chen says Valeant has been relying on Philidor to boost its sales of certain high-priced dermatological drugs.

"We find specialty pharmacies improved patients' access to medicines at an affordable price and help ensure physicians are able to prescribe the medication they believe most appropriate for their patients," Pearson said, according to the complaint. "Any non-Valeant prescription dispensed by Philidor are recorded as other revenue in our income statement, not product sales."

Chen says Pearson defended the Philidor-Valeant relationship during the earnings call and acknowledged investigations by U.S. attorneys in Massachusetts and New York.

Citron's Oct. 21 report says Valeant created a "network of 'pharmacies' as clones of Philidor" to avoid auditor scrutiny.

Valeant stock plunged 30 percent after Citron's report.

In asking the SEC investigate Citron, Valeant claims that Citron is a short seller that bet against Valeant stock rising to reap profits when its reports make shares fall.

On the day of Citron's report, hedge fund manager Bill Ackman told CNBC that he had not lost faith in Valeant.

Ackman's firm, Pershing Square, was already one of Valeant's largest shareholders, and Ackman announced a new purchase of 2 million shares when shares dropped on Oct. 21.

Playing down the investigations it faces, Valeant says most of the documents subpoenaed by Congress related to either its patient-assistance programs or customary information provided to the Centers for Medicare and Medicaid Services.

In transcripts from a conference call today, Pearson said Philidor makes up only 5.5 percent of Valeant's revenue and that specialty pharmacies in total only account for 7.2 percent.

Pearson also stressed that Valeant still only holds the option to purchase Philidor. Until it does so, it has "limited power" over the specialty pharmacy, Pearson said.

An internal committee will study the allegations of impropriety regarding Philidor, Pearson added. "We operate our business based on the highest standard of ethics, and we are committed to transparency," Pearson told investors.

Philidor meanwhile said it is "proud of the company we have built and value our working relationship with Valeant."

Chen is represented by Laurence Rosen of South Orange, N.J.

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