What: Valeant Pharmaceuticals (NYSE:VRX) fell more than 12% today after Bloomberg reported yesterday that employees at a specialty pharmacy Philidor RX Services were changing prescriptions so that Valeant's dermatology creams and gels would be dispensed rather than generic drugs.
Philidor is the gift that keeps on giving. You'll recall, Valeant Pharmaceuticals' relationship with Philidor, including an option to buy the specialty pharmacy, has created problems for Valeant Pharmaceuticals. Philidor was also at the center of the Citron Research report that claimed Valeant might be using it to artificially inflate sales, which Valeant vehemently denies.
So what: This morning, Valeant Pharmaceuticals severed ties with Philidor, which Valeant said will shut down operations as soon as possible.
"We have lost confidence in Philidor's ability to continue to operate in a manner that is acceptable to Valeant and the patients and doctors we serve," J. Michael Pearson, Valeant's chairman and CEO, said in a press release.
Valeant said previously that Philidor accounted for 6.8% of the drugmaker's third-quarter revenue. Some of that will be picked up by prescriptions being filled by other pharmacies, but Valeant also said that it'll cover the cost of drugs for patients that have managed care plans no longer reimbursing for its drugs, so Philidor's shutdown will create a cost in addition to the lost revenue.
Now what: In addition to the reduced revenue and earnings, there are a couple of issues here that could change Valeant's valuation. If Valeant knew about, or worse yet, promoted the changing of the prescriptions, it could result in further investigations. It's also not clear how much of the company's revenue growth was helped by this strategy.
At some price, even with the bad news, Valeant is buy. But with new information coming in on a daily basis, figuring out that level is difficult.
Brian Orelli has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.