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Embattled pharma company Valeant Pharmaceuticals (NYSE:BHC) has been one of the worst performers in the stock market, losing almost 90% of its value in just the past year. A combination of regulatory probes, a highly leveraged balance sheet, turnover among top executives, and increasing scrutiny of the pharmaceutical industry's pricing policies generally have helped send Valeant shares plunging. Yet recent reports that the company might be facing a criminal investigation raise the stakes for Valeant and are causing investors to bid the stock downward even further, with shares having fallen by more than 10% during the pre-market trading session.

At this point, long-term investors who've remained committed to the stock throughout the company's ordeal have to wonder if there's anything else that could possibly go wrong for Valeant.

What's happening to Valeant now?

Late Wednesday, The Wall Street Journal reported that federal prosecutors at the U.S. Attorney's office in Manhattan are looking at whether Valeant was involved in a scheme to defraud health insurance companies by failing to reveal Valeant's relationship with Philidor Rx Services, the mail-order pharmacy company that has been linked to the drugmaker. According to the report, prosecutors believe Philidor might have misled health insurers by appearing to be neutral in recommending Valeant products, when a number of facts suggest a deeper relationship. The investigation will look at the degree to which Valeant might have exercised control over Philidor in its decisions to offer Valeant drugs and to give incentives to customers who chose Valeant products.

Investors fear the investigation could lead to criminal charges against Valeant as a business entity. The Journal's sources say an investigation might finish by as soon as the end of 2016.

Valeant's response was fairly terse, acknowledging that it had already disclosed the fact that the U.S. Attorney's Office for the Southern District of New York had started an investigation into the company. It chose not to confirm or deny the reported criminal investigation, saying, "we do not comment on rumors about investigations, and cannot comment on or speculate about the possible course of any ongoing investigation."

Why Philidor won't go away

The main problem Valeant faces with the issue reportedly spurring the criminal investigation is that its alleged relationship with Philidor was highly unusual. In late April, the Senate's Committee on Aging released more than 800 pages of documents that helped shed more light on Valeant's operations, especially as they concerned Philidor.

In particular, the Senate committee's questions honed in on the relationship between Valeant and Philidor, questioning why the larger company didn't simply buy out the mail-order pharmacy company. According to Philidor's representatives, Philidor believes if Valeant had bought the company, it might have damaged the relationships Philidor had made with the pharmacy benefits management companies that purchased Valeant drugs. Instead, Valeant made arrangements with Philidor to make payments based on certain milestone targets. Given that this isn't the standard practice in the industry, analysts like Fool contributor Alex Dumortier came to the conclusion that Valeant was intending to give Philidor what amounted to an earn-out.

Combined with a $100 million payment to secure an option to purchase Philidor without any obligation to follow through, as well as another milestone-related payment, arguments that Valeant did everything but make a formal buyout of Philidor look quite convincing. When Valeant terminated the relationship in late 2015, Philidor went out of business.

Can Valeant survive?

Already, some major investors in Valeant have chosen to give up on the company, including longtime large shareholder Sequoia Fund. Activist investor Bill Ackman has chosen to retain his stake so far, but many question just how long he'll stick with it.

For value investors looking to hunt for bargains, Valeant's plunge makes the stock appear to be a potential steal if the business can survive the onslaught of pressure from regulators and customers. Given how much damage the company has already sustained to its reputation, however, a criminal investigation might prove to be the nail in the coffin that finally erases any hope of Valeant becoming anything more than a shadow of its former self.

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