Shares of Valeant Pharmaceuticals International Inc. rebounded after billionaire investor William Ackman told CNBC he bought 2 million shares of the drugmaker.
The stock had fallen as much as 30 percent after an influential short-seller accused the company of fraud, saying it used its relationship with specialty pharmacies to inflate revenue.
As a result, William Ackman's hedge fund Pershing Square Capital Management was estimated to have lost as much as $820 million.
The stock recovered some of the loss after his CNBC interview, and was down 19 percent to $118.97 in intraday trading. The 2 million additional shares would bring his holdings to 21.5 million.
The hedge fund manager had bought 19.5 million shares at the start of the year when the stock was trading between $160 and $202 a share. Ackman spent roughly $3.3 billion on the bet and had lost as much as $1.8 billion, an investor in his fund said on Wednesday.
The report by Citron Research, a short-selling firm run by Andrew Left, said Wednesday that Valeant's previously undisclosed relationship is a sign of a cover-up. Valeant spokeswoman Laurie Little was not immediately available for comment.
The Citron Research report hit shares hard shortly after 10 a.m. EDT in New York trading.
Shares of some key competitors, including Allergan Inc., Endo International Plc and Mallinckrodt Plc also fell sharply.
Citron alleged that Valeant was using specialty pharmacies — include Philidor and R&O Pharmacy Inc. — to create "phantom sales" of its products or pushing more product through distribution channels than sales would warrant, and to avoid scrutiny from auditors.
"Citron believes the whole thing is a fraud to create invoices to deceive the auditors and book revenue," the note said.
Valeant has been under fire for several weeks over its practice of raising drug prices sharply once it acquires new medications. Last week, it disclosed that it was under investigation by federal prosecutors in New York and Massachusetts.
The government requested information on pricing and on programs that help patients cover their out-of-pocket expenses for Valeant's drugs. Those drugs are often distributed by specialty pharmacies.
On Monday, during a conference call with investors, Valeant defended its pricing and declined to comment on the federal investigations, saying it was cooperating with authorities.
But the company disclosed new information about its dealing with two pharmacies, which distribute specialty drugs to patients, including that it had purchased an option to acquire Philidor and was already consolidating its results.
Len Yaffe, an investor at StocDoc Partners, who is short on Valeant, said that he is not yet sure of what to make of Citron's claims. He said the notion that Valeant would need to resort to phantom sales to juice revenues heightens existing widespread concerns about the company's ability to produce growth in an increasingly hostile pricing environment.
Valeant's stock took a significant hit in late September in response to criticism from Democratic presidential candidate Hillary Clinton about rising drug prices and media reports of its particularly steep price increases.
Independent Canadian equity research firm Veritas said it saw significant unquantifiable risks overhanging Valeant.
Analyst Dimitry Khmelnitsky sees Valeant at risk of losing its 'secret sauce' that made it a darling of many investors due to the pullback in its share price. Valeant has traditionally used its highly-valued shares to pursue accretive acquisitions and tack on debt.
The selloff on Wednesday knocked off $15 billion in market capitalization from Valeant, which was valued as high as $90 billion in early August. It has since lost more than half of its value.