Jameson Berkow

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Many of Canada's top money managers are keeping their clients' cash away from Valeant Pharmaceuticals (VRX.TO), recent BNN surveys reveal, but not because of the company's fight against allegations of accounting fraud.

Investors who regularly provide expert analysis and advice on BNN's Market Call and Market Call Tonight programs were recently asked to share their views via two informal online questionnaires. The results of both surveys paint a picture of veteran investors growing increasingly wary of the drug giant.

The first survey, conducted on October 26th just a few days after Citron Research first alleged Valeant was a "pharmaceutical Enron" due to its relationship with the mail-order specialty pharmacy Philidor, asked respondents whether they considered Valeant an investable stock as well as whether the Citron allegations changed their opinion on the stock. Those who said Valeant was not investable outnumbered those who said it was by more than a 2-to-1 margin (16 out of 25 said either 'no' or not currently investable while only seven said 'yes').

Michael Smedley of Morgan, Meighen & Associates was among the four respondents who was, to some extent, on the fence. Valeant is "perhaps" investable "at a future valuation," he said, "but [not] in the midst of this controversy."

Those opinions were largely unaffected by Citron's allegations of questionable accounting practices at the Laval, Quebec-based company. The same 2:1 margin existed for responses to the question of whether the Citron report changed their opinions on Valeant, with 17 of 26 respondents saying 'no' and only seven saying 'yes'.

Don Lato of Padlock Investment Management said the Citron report only served to "fortify" his opinion of Valeant not being investable, while John Stephenson of Stephenson & Company Capital Management said he was "somewhat" influenced as it "highlighted a significant risk in the stock."

Norman Levine of Portfolio Management Corp. was far more blunt in his response, saying he was not influenced by the Citron report because he "always thought Valeant was a house of cards."

The second survey was conducted 10 days later on November 4th and 5th, a few days after Citron backed away from its direct attack on Valeant by deciding not to release further allegations. Results suggest opinions were almost entirely the same, with only two out of 24 respondents saying their opinion of Valeant had changed now that Citron is out of the picture.

"They have no further negative allegations to make," explained John Zechner of J. Zechner and Associations for why he said his opinion had indeed changed. The other respondent to say 'no' did not provide an explanation.

Several respondents who said their opinion had not changed after Citron halted its offensive expressed concern with Valeant's growth-by-acquisition strategy. Davis Rea CEO John O'Connell said he has "always been concerned with the grow and slash strategy."

"That they fly close to the sun on ethics just reaffirms my desire to stay away," he said. "A tiger does not change his stripes."

Meanwhile, a controversial specialty pharmacy used by Valeant will cease operations by the end of January, Valeant’s chief executive said on Tuesday.

As of last week, Philidor Rx Services has stopped adjudicating insurance claims for drugs, Chief Executive Officer Mike Pearson said in a conference call with investors and analysts.

“The past few weeks have been a painful learning experience for me personally,” Pearson said, adding that he would listen better to patients, partners and critics.

Pearson said short-term disruption in Valeant’s dermatology business would be significant as Philidor winds down.

Valeant’s priority for the near term will be paying down debt, he said.

- With files from Reuters