Valeant shares nosedive on short seller's 'phantom sales' allegations

Valeant has faced its fair share of questions from lawmakers, prosecutors and presidential candidates over the past several weeks--and now, it's facing a whole lot more from investors.

The company's stock tanked by nearly 40% on Wednesday on a report from short seller Citron Research, which likened Valeant ($VRX) to Enron and claimed it used its relationship with specialty pharmacies--Pennsylvania's Philidor Rx and those connected to it--to inflate its top line.

"It is apparent to Citron that Valeant has created a network of 'pharmacies' as clones of Philidor," the report says. "Why do these exist? Citron believes it is merely for the purpose of phantom sales or stuff the channel, and avoid scrutiny from the auditors."

Valeant CEO J. Michael Pearson

Shares bounced back a bit on a response from the Canadian pharma, which stated that it was not improperly handling inventory or using Philidor to bump up revenue numbers.

Valeant's relationship with specialty pharmacies came into the spotlight earlier this week, when a New York Times report raised questions about its Philidor relationship. Late last week, Valeant received two federal subpoenas requesting information about Valeant's patient assistance and financial support programs that specialty pharmacies help facilitate.

Valeant's supporters have so far stuck by it, though; on Wednesday, one-time deal partner and enthusiast investor Bill Ackman said he'd nabbed an additional 2 million shares in the company, telling CNBC he believes in Valeant despite the Citron allegations.

And Nomura analyst Shibani Malhotra dismissed the claims on Wednesday, too. "While we have been unable to share our analysis with or speak with Valeant, our own diligence suggests that this is not accurate," she wrote to clients, recommending they use the shares' current weakness as a buying opportunity.

- read Citron's report (PDF)
- see Valeant's release 
- get more from CNBC

Special Reports: 10 big brands keep pumping out big bucks, with a little help from price hikes | The top 10 most expensive drugs of 2013

Read more on