Valeant debt clobbered as report alleges fraud; other pharmaceuticals fall; oil credits lower

By Paul Deckelman

New York, Oct. 21 – Valeant Pharmaceuticals International Inc.’s already beleaguered bonds swooned in heavy trading Wednesday after a report by a trading firm that specializes in selling short against target companies alleged that the Canadian drug manufacturer was using Enron-style accounting tricks to artificially and fraudulently swell its revenues, a charge that Valeant denied.

Valeant’s bank debt was also seen on the slide, as were its shares, which fell sharply for a third consecutive session.

Valeant’s troubles, along with recent political criticism of the drug industry, caused other biotechnology and pharmaceutical credits to fall, including Endo International plc and Mallinckrodt plc.

Those drug sector woes also knocked Concordia Healthcare Corp.’s new eight-year notes lower for a second consecutive day. The latter company’s deal had priced on Tuesday and then immediately traded down sharply.

In the convertibles market, Horizon Pharma plc’s 2.25% convertibles were “swinging all over the place” but ultimately ended down a point or two points on swap, traders said. Horizon shares also fell but recovered some ground by the close after Valeant attempted to refute the trading firm’s allegations about business practices associated with its specialty pharmacies.

Traders said that the falling pharmaceuticals dominated things in the distressed market and in the larger high-yield market on Wednesday.

Away from the drug makers, energy names such as California Resources Corp. and Chesapeake Energy Corp. continued to lose ground as crude oil prices plunged again, as the latest U.S. government figures showed that domestic oil production increased despite recent industry cutbacks in drilling activity.

Valeant news overshadows all

In the secondary sphere, a trader said that “Valeant’s news dominated the entire market” after the Laval, Quebec-based specialty pharmaceuticals maker was the subject of a scathing research report put out by a trading house – one that specializes in selling short against the target companies.

“That’s where all of the concentration was.”

He said that the company’s most active issue, its 6 1/8% notes due 2025, dropped by about 15 points at one point during the session from Tuesday’s close in the middle 90s to around 80 bid before coming back to end at 88 bid.

He saw its 6¾% notes due 2018 as also being “among the Most Actives.” He said the notes “were down 10 points at one point during the day, but then they came back,” trading down to 92 bid from prior levels around 102 before finally ending around 96¾, “so they bounced back by 4 points or so,” he said.

There was “heavy volume on both.”

A market source said that more than $180 million of the 6 1/8% notes traded, pegging them down 7¾ points at 87 bid, while over $90 million of the 6¾% notes changed hands. He saw the latter issue ending down 6 points at 96 bid.

The company’s 5 7/8% notes due 2023 ended down 7 1/8 points Wednesday at 87¼ bid, with more than $86 million having traded.

“Obviously, Valeant was the biggest story today,” yet another junk bond trader said. “They traded down 10 or more points, then they came back to end down only 7 to 8 points.

“Valeant was the focus for a lot of accounts today.”

In the bank loan market, Valeant’s term loan paper likewise fell dramatically following the damaging research report, although it rebounded slightly later in the day.

By late afternoon, the company’s term loan F was quoted at 93½ bid, 94½ offered after having hit levels as low as 89 bid earlier in the session, one source said. On Tuesday, he saw the F loan quoted at 97¾ bid, 98½ offered.

“The short seller put out their report, the stock plunged, loans and bonds dropped a lot. The company put out their rebuttal, the stock recovered a lot, loans and bonds did too, but none of the three is close to yesterday’s price. Personally, I thought the short-seller’s piece lacked in detail and was strong on assertion without a clear basis,” the source continued.

Closer to the end of the day, a different source was quoting the company’s term loan F at 94½ bid, 95½ offered. He put Tuesday’s levels at 97¾ bid, 98 offered.

Valeant’s New York Stock Exchange-traded shares meantime plunged as much as 40% on Wednesday before coming off the bottom to end down $28.13, or 19.71%, at $118.61. Volume was 86.8 million shares, more than 21 times the usual activity level.

The bonds and shares gyrated around at lower levels after Citron Research issued a report charging that Valeant's previously undisclosed ties to specialty pharmacies helped the company create “phantom sales” of its products.

The report said that the firm believes that “the whole thing is a fraud to deceive the auditors and book revenue.”

It invoked the name of one of the most notorious fraud-related corporate failures in American business history, as it rhetorically asked, “Is this Enron part deux? These similarities are too close to ignore.”

For its part, Valeant responded with equally vitriolic language, categorically denying the allegations and charging that Citron’s “false and misleading statements about Valeant appear to be an attempt to manipulate the market to drive down Valeant’s stock price.”

It also posted an explanation on its website about its dealings with the specialty pharmacies in an effort to defuse the allegation of fraud.

The bonds, loans and shares rebounded from their lows after Valeant delivered its rebuttal.

Other drug names feel pinch

Valeant’s troubles, as well as recent rumblings coming from the U.S. political sphere castigating “Big Pharma” generally as unscrupulous profiteers, have weighed on its sector peers, especially on Wednesday.

Endo International’s 6% notes due 2023 fell 4¼ points on Wednesday to end at 97 bid, a market source said, while the Ireland-based drug manufacturer’s 6% notes due 2025 were seen down 1¾ points at 98¼ bid.

Volume was brisk at $29 million and $13 million, respectively.

Fellow Irish pharmaceuticals company Mallinckrodt’s 5 5/8% notes due 2023, $750 million of which priced just last month at par, slid by 2¾ points Wednesday to 91½ bid, with over $14 million traded.

New Concordia slide continues

The newly priced 9½% notes due 2022 from Canadian pharmaceuticals manufacturer Concordia Healthcare were another victim of Wednesday’s sour market sentiment towards that sector.

That $790 million of notes had priced at par on Tuesday but then proceeded to plunge below the 96 bid level in very heavy trading later on that session, causing one trader to exclaim that “I find it bizarre that CXR would just drop by almost five points.”

The carnage continued on Wednesday, with a trader seeing the Oakville, Ont.-based drug maker’s new bonds “trading a little bit lower,” around 94 bid going home.

A second trader said that the bonds fell as low as a 90-to-92 bid context early on but then traded between 92 and 95 before finally narrowing toward the close to a 94-to-94¼ range.

More than $60 million of the notes changed hands on Wednesday, with another market source quoting them at 93 1/8 bid, down 2 1/8 points.

Its existing 7% notes due 2023, which had firmed on Tuesday, dropped as low as 80 in early trading Wednesday before finishing around 84 bid, 84½ offered – still down 1 3/8 points, with over $18 million having traded.

Over in the convertibles market, Horizon Pharma’s 2.25% convertibles were actively gyrating around, hurt as the other drug makers were by the allegations against sector peer Valeant as well as by its own company-specific problems.

The Horizon move – ultimately ending down a point or two on swap, even as its shares retreated – extended the outright losses seen on Tuesday, although the paper was seen moving down in line, or flat, on a hedged basis in that session. That drop had been precipitated by a New York Times article critical of pricing of its Duexis pain reliever drug and Prescriptions Made Easy program.

The Irish pharmaceutical company was under fire for its drug pricing and PME program, which has doctors send prescriptions directly to mail-order specialty pharmacy outlets affiliated with Horizon rather than to retail pharmacies.

On Wednesday, Horizon put out a release on its distribution practices, but its shares were fractionally lower in after-hours action.

Energy retreat continues

Away from the drug makers, traders said that oil and natural gas credits continued to lose ground on Wednesday, in line with lower crude oil prices.

A trader quoted California Resources’ 5½% notes due 2021 down 1½ points on the day to 70 bid, on volume of more than $15 million.

He saw the Los Angeles-based exploration and production operator’s 6% notes due 2024 down 1¾ points, at 68½ bid, on “good volume” of around $13 million.

He saw Oklahoma City-based Chesapeake Energy’s 4 7/8% notes due 2022 off by 2¼ points at 66 bid, with over $12 million traded.

Its 5¾% notes due 2023 were down a deuce on the day at 67½ bid, as over $11 million changed hands.

Sara Rosenberg and Rebecca Melvin contributed to this review

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.