ERICOPOLY

The other thing is that a journalist was able to find the irregularities at Philidor in about a week. But Valeant who controls Philidor and had people on the premises didn't know anything about that. That's a little hard to believe. Besides wasn't the argument that Valeant's people at Philidor were there to make sure Philidor doesn't do things the wrong way? Seems like either the superheroes were involved or they weren't very good at their jobs. Happy to make money doing business with a counter-party that's likely breaking rules as long as there's no legal liability, as if ethics and legal liability are exactly aligned! So you don't have ethics -- you just have a lawyer to tell you what's going to get you in jail and what isn't. So maybe there is a need to legislate morality after all. But yes I am assuming a big thing -- that management knew. I think after watching everyone at AIG, MBIA, etc... doing business with Countrywide and others, as counterparties, I don't think it's all that unlikely that the same kind of thing could go on at Valeant. They profited with Ackman on what looks a lot like insider trading which looks pretty bad too, but legal. Agree. How is that fire by your house? Did it get better today? Yes, thank goodness. The most important thing on my mind. We were all packed and ready to go. I had the computer backup drives with all the photos in the car.

The other thing is that a journalist was able to find the irregularities at Philidor in about a week. But Valeant who controls Philidor and had people on the premises didn't know anything about that. That's a little hard to believe. Besides wasn't the argument that Valeant's people at Philidor were there to make sure Philidor doesn't do things the wrong way? Seems like either the superheroes were involved or they weren't very good at their jobs. Happy to make money doing business with a counter-party that's likely breaking rules as long as there's no legal liability, as if ethics and legal liability are exactly aligned! So you don't have ethics -- you just have a lawyer to tell you what's going to get you in jail and what isn't. So maybe there is a need to legislate morality after all. But yes I am assuming a big thing -- that management knew. I think after watching everyone at AIG, MBIA, etc... doing business with Countrywide and others, as counterparties, I don't think it's all that unlikely that the same kind of thing could go on at Valeant. They profited with Ackman on what looks a lot like insider trading which looks pretty bad too, but legal.

They will have disclosed them when they have disclosed them. Given the shit storm they are in, their best idea is to say they are immaterial? The same thing they said about Philidor! Man they're stupid. Eric, you seem off tilt. They have disclosed the names of the VIEs. I'm not saying there aren't other skeletons, they just aren't hiding in VIEs. I'm a little off tilt. Fair enough. I think, I had my "would be" fortune yanked from me and I'm going through some sort of deprivation. Sort of like "if only I trusted these guys I'd have this big pile of gold, so damn those bastards for keeping the gold from me!". Oh well, I need to be cool.

My best advice to Valeant management would be to disclose your other "immaterial" VIEs before Andrew Left discloses them for you. You don't like the way he characterized it as Enron did you? Are you just waiting for it to happen a second, and then a third time because you're betting he won't find them? And if he finds them you don't think it will once again be sensationalized?

They will have disclosed them when they have disclosed them. Given the shit storm they are in, their best idea is to say they are immaterial? The same thing they said about Philidor! Man they're stupid.

Sequoia wrote a letter to sooth their shareholders and defended Philidor against the channel stuffing claims. So they felt a need to tell their fundholders that Sequoia does not invest in any capital allocators that engage in criminal activity. They are going to have to write a similar letter now explaining how the laws (most likely) broken at Philidor were just small and it's okay because we'll still get rich long term anyway even though we can't really trust these guys anymore the way we did when we took a position sizing reminiscent to our long term successful Berkshire Hathaway investment? Man I love run-on sentences when I'm not getting graded on it! So they will have to sell out a big chunk at the very least. They don't have Buffett and Munger here running their new investment vehicle. They've told their fundholders that they think Pearson is basically honest. That opinion will now be out the window I think.

I don't think Andrew Left was just lucky. I think no matter what you're going to make money on the short side disclosing something that management has been hiding from the company owners. For those of you that gut this out, he has done you a service and not just because you might have got more shares at a lower price. He's caught the deception early on before it grew to be far more costly for you. Second, management might behave much better after this experience going forward.

He found a hidden undisclosed pile of shit. But technically, yes, his suspicions of what it was for were wrong. He thought it was a channel stuffing thing and it wasn't. But it didn't smell good and that's why it was hidden. So has he dug up another hidden thing that technically he'll be wrong about? And do you want to find out what it is this time?

Can't argue with that. I have a hard time trusting them after this -- they look like they knew exactly what was going on yet they didn't put it on the slides they made for people like you and me. They thought they would grow revenue a bit faster via Philidor and hide how they did it because they didn't want the stock to put a multiple on their sleezy method. Philidor is going to leave an ugly scar on their hands. I'm nervous at what we'd see if they rolled up their sleeves. I did.. I fear there is going to be another hidden special investment vehicle where they decided that disclosure was unnecessary due to it's relative size according to GAAP. That seems to be the standard by which they hang their business practices and their duty to keep their shareholders informed as to what kind of business they own, so why would it be unlikely to hear them once again saying they had no obligation to disclose it? What's the point of doing research and reading the 10-Ks when you suspect these guys will hide anything they're not required to disclose? We've caught them once already and it's been dirty. These are very driven and creative people -- how do they spend their time? This isn't like BAC where it's just a boring lending business. VRX is using a lot of creativity to wring value out of things, and their creativity seems to know only one boundary -- what they are legally required to disclose and whether or not they can contain fallout from sleeze within a separate legal entity like Philidor. Once and I've had enough even if there's potentially no legal liability on this one. I hope my greed doesn't overcome my suspicions again. Glad I have my locked up money with Sanjeev and Mohnish.

Can't argue with that. I have a hard time trusting them after this -- they look like they knew exactly what was going on yet they didn't put it on the slides they made for people like you and me. They thought they would grow revenue a bit faster via Philidor and hide how they did it because they didn't want the stock to put a multiple on their sleezy method. Philidor is going to leave an ugly scar on their hands. I'm nervous at what we'd see if they rolled up their sleeves.

Is volume discounting a possibility? Like if there is growth for a new expensive product and volumes are going up, the discount to WAC would be higher? Maybe I'm reaching, but looking to see if there is more than one possible reason. Do you think there are other possibilities? There was that memo to employees about how the strategy is volume over pricing or something like that. Do I remember wrong?

They get to buy their inventory at a lower price. Gross to net went from 32% last Q to 41% this Q. That's a very large move in one quarter, especially for a business that is as diversified as VRX. Salix went from decreasing gross to net last Q (ie being sold at a smaller than 32% discount to WAC) to increasing gross to net this Q. It is quite fishy and another in a fairly long line of instances where Mike Pearon's words on the earnings call deviate from the language in SEC documents. I'm sure that's perfectly clear to an adult, but I don't grasp what you are saying. Also, pretend that I know what you are saying and that I agree it's fishy. How does this benefit Pearson? How does he personally cash in on this sort of thing? The police when they suspect foul play start thinking if somebody has a motive. What is Pearson's?

Regarding the Salix channel-stuffing accusation... You are Pearson and you can't sell your shares. But there are rewards if it can be proven that an acquisition is working out well within a year right? The channel-stuffing can't be done through a consolidated entity like Philidor, so they would have to be getting third-party entities to agree to buy the product, correct? So if those third parties can't unload the huge new inventory on the customer, it merely robs from the next quarter's demand for Salix products. So what is the incentive for Pearson to run the company on a quarterly channel-stuffing basis -- and again doesn't he need a complicit third-party that agrees to buy a lot of inventory exactly when it suits Pearson's quarterly numbers? What do the third party pharmacies get out of it by helping out with the quarterly pumping?

I see. I go to Philidor and enroll in auto-refills. They wave the copays. I might stop taking the drug (I'm cured or the side effects are terrible) but I can't be bothered or I forget to ask them to stop refilling it. So it would boost sales volumes. However, as a customer I would vastly prefer that experience rather than going to CVS to keep getting refills every 30 days. What a chore if it's a long term chronic problem. I hate standing in line and I hate doing things that can be automated. So it's not like Philidor doesn't serve the customer well -- it does. But clearly without it sales for Valeant won't "ahem" be better off.

Been gone from this thread for two weeks and a couple hundred pages, but the question in my view is not how much the legal liability might be for Philidor (and anyway, it's likely that if this stuff rises to the level of a criminal charge whatever veil VRX thinks it has will be pierced), the question is how much VRX can grow without Philidor. B+L/Salix/Consumer are good assets. The rest of the business is iffy and might reset to a much lower base without Philidor. For example, last Q Jublia was 40% of total US organic sales growth and 50% of sales went through Philidor. What is the true demand for Jublia without Philidor jamming the insurers? I don't know. It also looks for all the world like VRX stuffed the channel with Salix to make their 3Q numbers (check their $300M salix sales estimate on the 2Q call v actual salix sales of $450M in 3Q combined with Xifaxan scripts growing at only 15% sequentially and then go read the gross:net disclosure in the 10Q MD&A--as an aside it's hard for me not to see how exploding gross:nets are not indicative of a broader issue in the business, but that's not the real point here). At any rate, the risk runs much deeper than the size of the fine in my view. Thanks for posting. For what it is worth, I think it is a good idea to review Bagehot's posts about VRX, if you have or want to make an investment in VRX. I believe Bagehot has made some of the highest quality posts since I have followed the thread. It is unfortunate that his/her post has been buried because of all of the breaking news and subsequent chatter. Good luck to all. I agree. So, basically he is saying that without Philidor VRX’s organic growth will take a hit. And that they will probably show no organic growth in the quarters ahead. Have I understood correctly? If it is so, well then it looks to me very much like the thesis of those people who think VRX is a fraud. Cheers, Gio Like somebody else pointed out though, why would Jublia sales be lower without Philidor if there is no generic substitute available? So last quarter, 50% of Jublia sales went though Philidor, which amounts to Philidor->Jublia sales tallying 20% of the total organic sales growth. But it sounds like the Philidor is mainly useful to Valeant in situations where they can try to block a generic from being substituted?

I took that to mean the ones that Philidor holds options on, and thus within the "Philidor network". Is that not correct? Because I read that Philidor has options on yet other specialty pharmacies. I can't find the source where I read it now. You could be right I figure one of them was that "West Wilshire" one with the California license, and another is that "Cambria" one. You know how they would submit claims and shuffle around which pharmacy submitted the claim until finally it was not refused? That's why they would want to investigate their relationship with the others and not just Philidor alone.

Probably, but I have been thinking 1/3rd for buy-backs and 2/3 for accelerated debt repayment. 7% of revenues went away, 7% of debt (I think they are at $35 billion or so) is around $2.5 billion. Add $500 million for fines. They have to buy back less than $3 billion in debt to keep leverage the same. And I suppose by end of June the organic revenue growth that is allegedly in excess of 10% will restore revenues to where they were before losing Philidor. So if you did retire $3b of debt/fines, you'd be 7% deleveraged at that point relative to where you were before the Philidor story broke. From that point on I suppose you could call it deleveraging if instead of retiring more debt you just make more acquisitions with cash only where the cash yield from the new assets greatly exceeds the coupon on the existing debt. That's probably a lot less risky than retiring shares and thus my preference even if the return on either is 20%. It's less risky because it adds more income relative to a static debt amount, and that new income adds to the diversity of the income stream so it's more dependable.

I took that to mean the ones that Philidor holds options on, and thus within the "Philidor network". Is that not correct? Because I read that Philidor has options on yet other specialty pharmacies.

So I'm going to adjust my model such that in the first year or two the EPS growth can't be as high as it was over the last year (even after adjusting for losing Philidor), because they are going to be allocating their incoming cash into relatively low return debt instead of high return acquisitions. Sort of like how BAC made money for a while just to support their existence (retaining income capital to hit the new SIFI guidelines). Or we could record a special one-time charge to next quarter's income in recognition that past reported income wasn't what it looked like due to needing to pay down the debt that supported those income levels. That seems really popular. It's kind of like they will be reporting earnings for a bit that aren't really earnings because those earnings can't be distributed. So that's worth a discount of some sort -- surely we're already there in spades though.

So taking an abrupt cut to revenue with Philidor being dropped by CVS, etc... They need to forget about buying back shares and instead retire debt pronto right? I mean, they just got a lot more leveraged by the disappearing revenue, even if it's just mostly temporary (until they set up new relationships with third party specialty pharmacies where they can restore a % of their prior revenue). Buybacks are just returning cash to shareholders when there is no better use for cash in the business. It would seem that doesn't fit the current situation. It isn't time to boost leverage by returning cash. It's more likely a better time to reduce leverage by either holding the cash to stay liquid or pay down debt so the debt isn't so visible.

Lol, did you really just compare VRX's price increases to expensive chocolate candy... this thread has reached a new low! http://www.cookingwithcolor.com/chocolate/choc_drugs.htm Chocolate contains small quantities of anandamide, an endogenous cannabinoid found in the brain. Buffett was just preying on menopausal women who cannot do without their medication. EPICATECHIN (FLAVENOID) --Flavonoids are naturally-occurring compounds found in plant-based foods that have been shown to have a number of health-benefiting properties including anti-inflammatory, anti-allergic, and anti-cancer activity. Valeant jacked up the price of heart medication. So did Buffett: Dark chocolate is full of the flavonoids epicatechin and gallic acid, which are antioxidants that help protect blood vessels, promote cardiac health, and prevent cancer. It also has been effectively demonstrated to counteract mild hypertension.

Forget exactly where, but I'm pretty sure I read that in management's 10%+ organic growth forecast for the rest of the decade they said it didn't rely that much on price increases. I think the price increases were just one-time things where they felt like a product was underpriced at the time of acquisition. So if there are no more acquisitions, there are no more huge price increases. And if there are still acquisitions, there still may not be more huge price increases. The didn't do it on every single acquisition, it's just that on certain occasions they did. Like Buffett at Berkshire with See's Candies -- he and Munger saw that the owners were underpricing the product. They could see a lot more revenue post-acquisition when they immediately raised prices. But that's not his playbook with every acquisition that Berkshire made.

Let me ask a stupid question: why does any of that matter? Under what reality would they consider breaking it all up and selling it back to their original owners when it's worth so much more to keep it together? They're not going to avoid fines/settlements by breaking up.

ummmm... if you think it is worth less than total spent on acquisitions, you should be massively short, not long. They have $30B of debt. It's at a $62B EV and still implies value creation. No position, but felt the need to point out the apparent inconsistency. I said in worst case they would sell all the pieces, and yes, in that case it would be worth 1/4th of what it is today. Thanks for pointing that out - it was unclear in my original comment. Hence, I have a very small position. Why is it only worth 2.5x 2016 FCF?

At least this means the banks will be left alone for a while. The govt lawyers now have a pharma payments pipeline building.