Is Valeant Pharmaceuticals Intl Inc (VRX) The New Enron?

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October 28, 2015 11:06am ETF BASIC NEWS

wall-street-etfJack Delaney:  Valeant Pharmaceuticals International Inc. (NYSE:VRX) stock saw a major pullback from investors in October because Valeant is under federal investigation and accusations of fraud were recently brought forward from a short seller.

On Oct. 19, the VRX stock price opened at $169.80. By the end of the week, the VRX stock closed at $116.16. VRX lost 31% of its value in just five days.

With the questionable business practices and VRX stock plummeting, many investors are drawing comparisons between Valeant and another mismanaged company…

Is Valeant Pharmaceuticals the New Enron?

Valeant is being compared to Enron because of Enron’s deceptive financial accounting and criminal practices.

As Money Morning previously reported on Oct. 15, Valeant is under federal investigation in Massachusetts and New York for its drug-pricing practices.

Then short seller Citron Research accused Valeant of fraud in a report released Oct. 21. In the report, Citron accused Valeant of using Philidor Rx Services to create phantom sales by storing inventory and recording it as transactions.

In the case of Enron, former Enron Chief Financial Officer Andrew Fastow specifically directed his team to create off-book companies. These entities were created to hide company losses as well as to make the company seem more profitable and mislead investors.

Under Fastow, the accounting department treated anticipated future profits as current deals in their financial filings.

Valeant’s comparison to Enron isn’t just surrounding its accounting practices. The VRX stock price could start to mimic Enron’s stock price.

On Oct. 4, our Global Credit Strategist Michael Lewitt called Valeant a “deeply troubled company.” He covered the massive decline in the stock in early October.

“Wave after wave of bad news – now including allegations of outright criminal behavior – brought the shares down 40% in one morning, from $148 to below $89 yesterday,” Lewitt told Money Morning readers. “The shares eventually rebounded to $118, but not for any good reason.”

Lewitt expects the troubled VRX stock to fall a lot farther before it craters.

 Valeant Pharmaceuticals the new Enron

Enron stock reached a peak in August 2000 of $90.56. Executives told investors the stock could continue to increase to the $130-$140 range.

While executives kept reassuring the public of the strength of Enron stock, these insiders were selling more and more shares. The Enron stock price declined by nearly 50% a year later, selling for $42 on Aug. 15.

On Nov. 28, news of Enron hiding losses and massive insider trading reached the public. The stock started to trade for under a dollar.

Much like Enron, the VRX stock reached an all-time high in the month of August at $263.68 per share.

Even though it happened on a much faster pace, VRX stock price has declined over 50% since August, similar to Enron’s 50% free fall from August 2000 to August 2001.

The Bottom Line: While some investors may consider the drop in the VRX stock price as a signal to buy, Valeant’s business model and investigations may cause the VRX stock to drop even farther.

Valeant is known for buying other companies through junk bond financing, firing large amounts of employees from acquired companies, and raising the prices of drugs they just acquired the roots to.

As Lewitt says, this an “ugly business model” that only has $9 billion in revenue compared to $30 billion of debt in the past year.

Money MorningWritten By Jack Delaney From Money Morning

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