VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

Does M&A Still Have a Future in Big Pharma?

 

http://www.gurufocus.com/news/369832/does-ma-still-have-a-future-in-big-pharma

 

Cheers,

 

Gio

[Happy]

Anyone else getting a really queasy feeling when Roddy Boyd, who's clearly working with the other shorts, writes under the name 'Southern Investigative Reporting Foundation' and gets quoted as that elsewhere? Maybe next Andrew Left can rebrand as the 'Public Foundation for Truth and Common Good' or something.

Yes, it definitely seems like they are trying hard to get more credibility than they deserve. It makes me more skeptical about their writings.

[Ham Hockers]

Spoke with some healthcare bankers at a top 3 bank about VRX. FWIW (and this is hearsay, obviously), the thing that they always found most concerning about VRX was the speed with which they were able to move acquired assets into tax-advantaged jurisdictions, almost immediately post closing. From their perspective, based on conversations with tax lawyers and experience with other companies, it was odd, they couldn't figure out how they were doing it, and it made them uncomfortable.

 

Don't think this should influence anyone's investment thesis, but just some more color for y'all.

[sswan11]

 

http://nypost.com/2015/10/27/valeant-short-smells-smoke-even-when-theres-no-fire/

[KCLarkin]

 

http://nypost.com/2015/10/27/valeant-short-smells-smoke-even-when-theres-no-fire/

 

“Where there’s smoke, there’s fire,” he wrote in his first report on that company — Fairfax Financial, dated Oct. 21, 2005.

 

I know we aren't allowed to compare Pearson to anyone other than Skilling or Satan, but "these similarities are too close to ignore".

 

---

Same date exactly 10 years later. He has a sense of humour. At  least he has enough integrity to leave the Fairfax report on his blog:

http://www.citronresearch.com/stocklemon-reports-on-fairfax-financial/

 

[giofranchi]

I find slide n.74 of yesterday's presentation very funny! ;)

 

Cheers,

 

Gio

[KCLarkin]

I find slide n.74 of yesterday's presentation very funny! ;)

 

Maybe I am crazy but Pearson and board members on the call were making light-hearted jokes. Not exactly the behavior you would expect from fraudsters whose vast criminal conspiracy was just uncovered by a Lemon.

 

---

Interesting article on drug pricing:

http://www.cnbc.com/2015/10/27/merck-ceo-discussed-drug-prices-with-obama.html

 

Drugs are only 10% of total health care costs. In many cases, they actually have negative costs to insurers (the cost of curing Hep C is much lower than treating a chronic condition). I know Valeant only sells dermatology and ophthalmology drugs, so they are evil. But I still find the political hysterics hard to fathom. What about the doctors who order completely unnecessary MRIs? Or the lawyers who get rich from sketchy malpractice suits? Or the hospitals that charge $1 million for treating a premature baby?

 

The lawyers, doctors, and hospitals can go decades fleecing patients, medicare, and insurers. The drug companies often only have 10 or 20 years before all of their R&D and clinical trial work is given, for free, to generic competitors. The whole system is a mess but I'm not sure pharma deserves to be the poster-child.

 

I don't really want to get into a moral debate, but I do believe this makes large cap pharma a dangerous investment. In theory, Valeant's strategy overcomes these challenges. But everybody hates the ugly duckling, not because they are wrong, but because they are different. The entire pharma industry is going to throw Valeant under the bus.

 

/End rant

[Liberty]

A bit cryptic.. I wonder what they refer to, and why it hasn't been released yet (maybe needed more time for lawyering on some stuff, or to have some external forensic accounting firm do a report on operations from the spec pharmas or whatever -- some of these things take more than a week):

 

http://blogs.wsj.com/moneybeat/2015/10/27/what-wasnt-said-on-valeants-conference-call/

 

In a note Tuesday, analysts at Nomura said that insiders at Valeant would “gladly buy” company stock on the open market – if only their lawyers would let them. The holdup, according to Nomura, is that Valeant’s internal legal counsel has blocked any purchase, “as management possesses inside information refuting the veracity of short-seller accusations.”

 

Nomura learned this after meeting with Valeant Chief Executive J. Michael Pearson following the investor call. While management may indeed be receiving such advice from legal counsel, investors ought to wonder what private information Valeant would have to refute recent allegations about its business model that it hasn’t already disclosed.

[KCLarkin]

A bit cryptic.. I wonder what they refer to, and why it hasn't been released yet

 

Well they can't comment on the R&O lawsuit (or the subpoenas for that matter). At the very least, I assume they probably have material information that refutes some of the more outrageous R&O allegations.

[Liberty]

A bit cryptic.. I wonder what they refer to, and why it hasn't been released yet

 

Well they can't comment on the R&O lawsuit (or the subpoenas for that matter). At the very least, I assume they probably have material information that refutes some of the more outrageous R&O allegations.

 

Yeah, that's probably it. With these things, you always have one side that is all tied up with lawyers and the SEC while the other side can basically say anything as long as there's a "maybe" in there somewhere.

 

They might also have a ton of audit materials for the spec pharmas from regulators and PBMs that shows compliance for which drugs have been shipped where from whom, and under which insurance coverage, etc. Probably not the kind of stuff you can release at a week's notice...

[original mungerville]

The shorts are preying on your emotions. The company is responding with facts. Emotions will win:

 

Is this a tweet of yours?

If not are you on twitter?

 

Thank you,

 

Gio

 

No and no. Marc Cahodes is an infamous short seller. He appears to be friendly with Roddy Boyd and Left. He is not involved directly in VRX but there was some chatter before the bear raid. I like to keep tabs on the shorts. Unlike Left, Marc seems smart.

 

I had forgotten about Marc Cahodes.  Ah yes, memories:  http://archive.fortune.com/2008/10/10/news/economy/river_boyd.fortune/index.htm

 

Eric, this is FFH all over again, and around the price where you come in and buy a shit ton of call options to take you from $10 million to $50 million. But unlike back then with the FFH options so cheap (because the naked short selling was impacting the call option premiums synthetically making them extremely inexpensive), these f*$% calls are expensive.

 

At least buy a token few for old times sake! I know you are thinking about it...

[original mungerville]

I am wondering what is giving you more conviction today? Price?

 

OM,

First of all yesterday presentation showed that sales at VRX are recorded properly. That was important for me. Also the stock price is a very attractive one to average down.

 

This being said, you know how I invest by now: I think we all have very limited information about a business we don’t manage personally in an industry in which we don’t work on a daily basis. Therefore, I look for very high quality businesses (high net margins, low cyclicality, ample opportunities for growth, a competition that is not too fierce, etc.) led by great capital allocators. Why the combination of the two? Because very high quality businesses have a good probability of growing organically, and with a great capital allocator they also have a good probability of growing through acquisitions. This imo is the definition of the fastest growing business that could be found in the stock market (with some predictability at least!). Finally, I hope I can recognize an attractive price, when I see one.

Then I accept my risks: if I have chosen the wrong horse, business results going forward will be disappointing and my investment will be proven a poor one. Period. I accept this without any problem.

 

I leave sophisticated analysis both on the long side and on the short side to other board members! Nor do I try to outsmart a manager with a fantastic track record: “he should do this”, “he should do that”, “he is not investing wisely”, etc. … I think everyone is entitled to have his/her opinions … I just don’t see why those opinions should be taken more seriously than Pearson’s or other operators which have proven to be highly successful in the past.

 

What I had an hard time to deal with was the accusation of fraud… VRX is the first company I have owned which was publicly accused of fraud… The lesson imo is a manager should care for reputation a lot! And we should invest with people who understand how much reputation truly counts in business. Pearson imo has never been very focused on his reputation… And now he is paying the price of that mistake, together with every other shareholder! I’ll keep monitoring how he deals with his and VRX’s reputation going forward very closely. I hope he takes a lesson in this regard from Buffett of course, but also from people like Watsa and Leonard.

 

Cheers,

 

Gio

 

Yes, I know the way you invest, we look for similar things and then let management take care of the rest. In any case, I agree: for sure no securities fraud (although the SEC could investigate), they could get fined for Philidor, and some ambitious attorney general could go after them for regulatory or other legal breaches, as well as some Senators for political theatre. So we should expect some negative news flow and some fines - but I can't see it getting too out of hand because this is a small component of their biz.

[original mungerville]

I don't think anyone has posted this yet, but Novartis settled a $3.4 billion suit with the US for $390 million today.  The settlement relates to Novartis' supposed practice of paying kickbacks to specialty pharmacies over a 10 year period from 2004 to 2013 in the form of rebates to encourage them to recommend refills of a specific drug for Medicaid and Medicare patients. 

 

http://www.reuters.com/article/2015/10/27/novartis-results-idUSL8N12R0GW20151027

 

So even if Valeant did something wrong (which so far it appears they did not), are we talking about something worth the $13 billion in market cap that it lost since the Citron report?

 

No, we are not. And Valeant has only been doing this stuff with Philidor in volume for about a year, not 10 years. So even if its 10x as bad, the fine would not be more than half a billion. I am guessing, not an expert at all.

[original mungerville]

OM, the link is on the pershing square holdings web site.

 

https://www.pscmevents.com/conference-call-webcast/

 

Thks

[scorpioncapital]

http://www.valueinstitute.org/imgdir/docs/36045_Specialty_Drug_Industry_the_Alchemy_of_Finance.pdf

 

Argues that roll-ups in specialty pharma don't experience same degree of economies of scale as say in the cable industry.

 

 

[original mungerville]

Anyone else getting a really queasy feeling when Roddy Boyd, who's clearly working with the other shorts, writes under the name 'Southern Investigative Reporting Foundation' and gets quoted as that elsewhere? Maybe next Andrew Left can rebrand as the 'Public Foundation for Truth and Common Good' or something.

 

I don't get queasy, I just think the public reality they have created around Valeant is nothing short of amazing. I feel sorry for people who take these guys or the headlines at face value. I take one look at these guys and I know they are crooked...then they open their mouths. 

[original mungerville]

More from Matt Levine. (As a side note, if you're not getting his daily e-mails to your inbox, you're missing out on some fantastic and humorous finance writing.)

 

http://www.bloombergview.com/articles/2015-10-27/bad-bonuses-and-a-hedge-fund-priest

 

Me yesterday.

 

I wrote about Valeant and Philidor. I worry that I was a little too broad in saying "If you have an option to buy a thing for zero dollars, you own the thing." That is true if the thing is a limited-liability thing -- as corporate stock (theoretically) is -- but actual ownership tends to bring the risk of liabilities that the option (theoretically) avoids. My point was something like: The option structure was meant to avoid the liabilities of actual ownership, but may not have been entirely successful in doing so.

 

I agree with his angle here. The question is how much $ could that cost Valeant 95% of the time? (ie let us not assume an attorney general on a war path that also gets a little lucky in the court proceedings).

[ourkid8]

How was Ronald. H Farmer able to buy 1500 shares on October 21, 2015?

 

A bit cryptic.. I wonder what they refer to, and why it hasn't been released yet (maybe needed more time for lawyering on some stuff, or to have some external forensic accounting firm do a report on operations from the spec pharmas or whatever -- some of these things take more than a week):

 

http://blogs.wsj.com/moneybeat/2015/10/27/what-wasnt-said-on-valeants-conference-call/

 

In a note Tuesday, analysts at Nomura said that insiders at Valeant would “gladly buy” company stock on the open market – if only their lawyers would let them. The holdup, according to Nomura, is that Valeant’s internal legal counsel has blocked any purchase, “as management possesses inside information refuting the veracity of short-seller accusations.”

 

Nomura learned this after meeting with Valeant Chief Executive J. Michael Pearson following the investor call. While management may indeed be receiving such advice from legal counsel, investors ought to wonder what private information Valeant would have to refute recent allegations about its business model that it hasn’t already disclosed.

[jay21]

More from Matt Levine. (As a side note, if you're not getting his daily e-mails to your inbox, you're missing out on some fantastic and humorous finance writing.)

 

http://www.bloombergview.com/articles/2015-10-27/bad-bonuses-and-a-hedge-fund-priest

 

Me yesterday.

 

I wrote about Valeant and Philidor. I worry that I was a little too broad in saying "If you have an option to buy a thing for zero dollars, you own the thing." That is true if the thing is a limited-liability thing -- as corporate stock (theoretically) is -- but actual ownership tends to bring the risk of liabilities that the option (theoretically) avoids. My point was something like: The option structure was meant to avoid the liabilities of actual ownership, but may not have been entirely successful in doing so.

 

I agree with his angle here. The question is how much $ could that cost Valeant 95% of the time? (ie let us not assume an attorney general on a war path that also gets a little lucky in the court proceedings).

 

The issue is if they admit the call options were to protect themselves from legal liability than they admit there was an identified legal liability risk.

[ERICOPOLY]

The shorts are preying on your emotions. The company is responding with facts. Emotions will win:

 

Is this a tweet of yours?

If not are you on twitter?

 

Thank you,

 

Gio

 

No and no. Marc Cahodes is an infamous short seller. He appears to be friendly with Roddy Boyd and Left. He is not involved directly in VRX but there was some chatter before the bear raid. I like to keep tabs on the shorts. Unlike Left, Marc seems smart.

 

I had forgotten about Marc Cahodes.  Ah yes, memories:  http://archive.fortune.com/2008/10/10/news/economy/river_boyd.fortune/index.htm

 

Eric, this is FFH all over again, and around the price where you come in and buy a shit ton of call options to take you from $10 million to $50 million. But unlike back then with the FFH options so cheap (because the naked short selling was impacting the call option premiums synthetically making them extremely inexpensive), these f*$% calls are expensive.

 

At least buy a token few for old times sake! I know you are thinking about it...

 

The FFH calls expiring 18 months out were really cheap and the hurricane season would come to an end after the first 4 months or so, at which time the options would likely have risen in value even if a costly hurricane season had come to pass.  That's because, as you say, it was the pressure from the synthetic shorts that was driving down the call premiums... so after some post-hurricane covering it would have boosted the value of the calls even if the stock price hadn't budged.  It was quite unbelievable how much upside there was given the downside risk.

 

Today there isn't that tailwind in the VRX calls from possible short covering.  Instead, it's a headwind that will eat into prospective returns.

[original mungerville]

I find slide n.74 of yesterday's presentation very funny! ;)

 

Maybe I am crazy but Pearson and board members on the call were making light-hearted jokes. Not exactly the behavior you would expect from fraudsters whose vast criminal conspiracy was just uncovered by a Lemon.

 

---

Interesting article on drug pricing:

http://www.cnbc.com/2015/10/27/merck-ceo-discussed-drug-prices-with-obama.html

 

Drugs are only 10% of total health care costs. In many cases, they actually have negative costs to insurers (the cost of curing Hep C is much lower than treating a chronic condition). I know Valeant only sells dermatology and ophthalmology drugs, so they are evil. But I still find the political hysterics hard to fathom. What about the doctors who order completely unnecessary MRIs? Or the lawyers who get rich from sketchy malpractice suits? Or the hospitals that charge $1 million for treating a premature baby?

 

The lawyers, doctors, and hospitals can go decades fleecing patients, medicare, and insurers. The drug companies often only have 10 or 20 years before all of their R&D and clinical trial work is given, for free, to generic competitors. The whole system is a mess but I'm not sure pharma deserves to be the poster-child.

 

I don't really want to get into a moral debate, but I do believe this makes large cap pharma a dangerous investment. In theory, Valeant's strategy overcomes these challenges. But everybody hates the ugly duckling, not because they are wrong, but because they are different. The entire pharma industry is going to throw Valeant under the bus.

 

/End rant

 

Yup, nobody likes different.

[original mungerville]

My guess: he is small fry and so, unlike the exec team, is not privileged to the confidential info. Either that or the article is BS.

[ourkid8]

I doubt it as he is a board member and privy to Material non-public information hence why I think the article is BS. 

 

My guess: he is small fry and so, unlike the exec team, is not privileged to the confidential info. Either that or the article is BS.

[Liberty]

I find slide n.74 of yesterday's presentation very funny! ;)

 

Maybe I am crazy but Pearson and board members on the call were making light-hearted jokes. Not exactly the behavior you would expect from fraudsters whose vast criminal conspiracy was just uncovered by a Lemon.

 

---

Interesting article on drug pricing:

http://www.cnbc.com/2015/10/27/merck-ceo-discussed-drug-prices-with-obama.html

 

Drugs are only 10% of total health care costs. In many cases, they actually have negative costs to insurers (the cost of curing Hep C is much lower than treating a chronic condition). I know Valeant only sells dermatology and ophthalmology drugs, so they are evil. But I still find the political hysterics hard to fathom. What about the doctors who order completely unnecessary MRIs? Or the lawyers who get rich from sketchy malpractice suits? Or the hospitals that charge $1 million for treating a premature baby?

 

The lawyers, doctors, and hospitals can go decades fleecing patients, medicare, and insurers. The drug companies often only have 10 or 20 years before all of their R&D and clinical trial work is given, for free, to generic competitors. The whole system is a mess but I'm not sure pharma deserves to be the poster-child.

 

I don't really want to get into a moral debate, but I do believe this makes large cap pharma a dangerous investment. In theory, Valeant's strategy overcomes these challenges. But everybody hates the ugly duckling, not because they are wrong, but because they are different. The entire pharma industry is going to throw Valeant under the bus.

 

/End rant

 

A long time ago I read a book called Economics in One lesson. The lesson is:

 

"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

 

The lesson can be generalized and applied to other things, IMO.

 

For example, if you look only at drugs where prices are increasing but you don't look at those going generics - sometimes billions and billions of dollars worth - you are not getting the full picture. If you look at the absolute dollar spending on drugs but you don't look at population growth, aging, demand for healthcare, and number of new conditions being treated over time, you're not getting the full picture. Etc.

 

If you only look at the drugs where VRX has increased (gross) prices by a lot, you don't get the full pictures, which includes hundreds of products with flat or only modestly increasing pricing.

 

If you only look at the absolute percentage increase in a drug price but don't look at the context, you might not see how it is actually possible for drugs to be mispriced. For example, if your drug has competitors that are selling for much higher prices and they still sell and are considered good values, maybe your price is too low. If the alternative to your drug is many days in the hospital and hundreds of thousands of dollars in costs, maybe you are providing a lot of value and should capture some of that value. After all, someone somewhere has to determine a price for all drugs, the numbers don't come down from the sky... And we can probably assume that some drugs are mispriced, some too high, some too low. If someone has expertise in identifying mispriced drugs, buying them cheaply, and repricing them, that could be a good business. And it was, until recently...

 

I'm not saying that all cases are like that and that some drugs aren't repriced too high, but to some people, any price increases are automatically bad while the huge price decreases from generics and competition are taken for granted. There's a lot of anchoring going on; if Isuprel and Nitropress had always been selling for current prices, it's probable nobody would bat an eye. But because at some point they sold for another price, that automatically makes that earlier price the correct one...

[100 Shares]

I doubt it as he is a board member and privy to Material non-public information hence why I think the article is BS. 

 

My guess: he is small fry and so, unlike the exec team, is not privileged to the confidential info. Either that or the article is BS.

October 21st is before the short report. That's probably it.