VRX - Valeant Pharmaceuticals International Inc.

[rb]

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.

 

I agree but Left's exagerations claiming Enron does not make me think he is of high character.

When have these short sellers that publicize their research heavily have ever been on high character? The Enron comparison is par for the course as well. These guys always make big flashy statements - it gets more publicity. But Ericopoly is right without citron we wouldn't know about Philidor so the devil deserves its due on that one. My thinking is that the next revelation will be another fishy VIE. Companies that use those never have just one.

 

The thing that no one seems the mention here is what will happen if revenues and volume start to go down. IMO this is starting to be a real possibility after they've pissed off every insurance company in the land, at least one government, and lost one of their competitive advantages in the captive pharmacies. Normally if volumes go down I guess they'd raise prices but that's a little hard to do when your company is under congressional subpoena for raising prices.

[Liberty]

Looking forward to what the investigations will reveal about what was going on at Philidor. Until then we can only speculate, but I think it's likely that if the Philidor guys gamed the system, it was to get their performance earnouts. I seriously doubt that Valeant asked them to break the law or knew that they were, they have a lot more to lose than to gain from that, just like with fraud in any other part of their business; the Philidor people, though, probably had a lot to gain proportionally to their net worth by meeting their earnout targets.

 

Ackman talked to Howard Schiller (former CFO) and got a bit more color on why they structured the option that way. I think it sounds plausible; they had that young experiment in distribution which was growing fast and working well, Philidor probably wanted to start expanding to more drugs from other manufacturers, which would have reduced the attention/throughput/service that Valeant would've gotten. Valeant didn't know the specialty pharmacy business, which is different from the pharma business, with complex laws and regulations in each state, so they did an option which bought them the exclusivity they wanted without the headaches of actually running operations.

 

I think it was interesting to see how many settlements most big pharmas paid out and how big they were (Merck had 29!). Some of them for really bad stuff that went on for over a decade and put people's lives at risk... Kinds of put things in context.

 

Ackman also made it sound like the superhero emails at Philidor were to keep patient information at Philidor out of Valeant. He didn't say this exactly, but to me it sounds like because when people email each other they have autocomplete fill out the address, and if one name is linked to two emails, sometimes you have emails going to the wrong place (and a lot of modern email clients even hide the email and just put the name, so it's even harder to notice), and you don't want emails with patient info to end up on Valeant's servers. So you make up ridiculous names to make sure the two emails are completely separate. Probably seemed benign at the time...

 

It's not like Philidor is the only specialty pharmacy out there. There are other third-party specialty pharmacies that Valeant could use, and they offer the same kind of things (auto-refills on no-copays, co-pay assistance, etc). The difference is that they probably would be more expensive to use than a captive spec pharma, so margins would be a bit lower, and if Philidor did screw with the prescriptions, some of the fraudulent volume will be gone. How much was that? Hard to say... You can't do that on every prescription, but even if you assume half (which is probably high -- it would show in audits if it's that much), that's still low single digit impact. Not sure that's worth a more than 60% drop in market cap.

 

So yeah, it appears there's bad stuff going on, and I hope they are ruthless in getting to the bottom of it and step up the transparency a lot. Of course I don't like it. But some people seem quick to jump to the conclusion that this was VRX and not Philidor acting independently. In normal times, this would probably barely make the paper (like the recent Allergan settlement, or the Novartis thing with their specialty pharmas, etc), but in the current panic, everything is magnified a hundredfold.

[original mungerville]

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.

 

Agree, if Pearson is proven generally dishonest and operating in various place near the edge of the law. Having said that you have to put this in context of past examples where one or two instances came up where you felt it crossed the line, were unsure if others, but were comfortable overall that they were isolated.

 

[KCLarkin]

Regarding that Citron tweet, not taking anything away from the work that Andrew Left does, but how can people take this new piece of "research" on Monday seriously when everyone admits that he was initially wrong calling this company Enron and his first paper on Valeant is false?

 

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?

 

I don' think Left found anything. I believe Roddy Boyd was first to report on this. And even he was likely fed intel from a bigger hedge fund.

 

Also, the company has disclosed they have two other immaterial VIEs.

 

This is a smelly POS right now. if you are long, you are best to lock the certificates away for 3 to 5 years. Otherwise, you are going to get whip-sawed from all the volatility.

[Guest Grey512]

Credit where credit is due. This guy (Xuhua Zhou) made an early, brilliant call. Some of the things he focused on (leverage; general growth &  business model sustainability issues) are a bit lost in all the noise right now, though.

 

http://seekingalpha.com/article/3536686-the-drug-carry-trade-valeants-massively-leveraged-long-short-strategy-is-about-to-unwind

 

 

[jay21]

 

If you listened to the end of Ackman's call, you would have heard him personally call out the good work of Hempton. This despite their animosity.

 

He said he liked Hempton's work but respectfully disagreed with his conclusions.

 

 

That's fair; I meant the ratio of air-time allocated to Citron Citron Citron vs Hempton, particularly by VRX and some other shareholders that have come out in force in the past 2 weeks to publicly declare their support for VRX and their scorn for Citron.

 

It also (IMO) behooves Ackman to go through Hempton's points in greater detail. Not to mention to read AZ's post personally, not allocate an analyst to do that (this is a 30% position for Pershing!).

 

Most likely he read it but denigrated it but deferring to an analyst. The likely interpretation of his answer is "Bill Ackman does not concern himself with trivial unanimous bloggers. Maybe one of my analyst had some spare time to read it and can comment."

[ERICOPOLY]

Also, the company has disclosed they have two other immaterial VIEs.

 

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.

[original mungerville]

The shorts know Left/Citron is probably their best marketing/news outlet at this point. So if they have something, I could see it going through Left (and he gives them credit for the research). Just guessing, but if they have found something, we could hear it from Left on Monday.

 

If not, I have no other proof of further wrong doing. And unless there is proof Pearson knew all the details at Philidor, this thing is a long. Like I said, I hedged for next week. Who knows, next week might be where Citron goes long.

[rb]

I fully get that. What I mean is that Ackman & Sequoia may not get a choice. Redemptions are redemptions (nothwithstanding Ackman's PSH permanent vehicle, most of his capital is not permanent).

Sequoia has lots of cash to meet redemptions. Not sure about Pershing. Pershing may have lockups. But I think is Sequoia may be seriously reevaluating their thoughts on this one.

[ATLValue]

If you listened to the Ackman call, that guy is completely trapped.

https://www.youtube.com/watch?v=aR52zv1GqBY

 

Both Ackman and Sequoia.

 

Non-zero probability of redemptions at the Sequoia Fund and Pershing Square.  ------> Selling pressure at VRX ------> VRX stock price far from hitting bottom (yet).

 

No way unless more allegations come out which are likely true / or partially correct at least. Sequoia let two directors resign instead of reducing a position that was more than double the market value of the current position, so they aren't going to sell due to external pressures. Same for Ackman.

 

Mungerville, I don't think you get his point. Sequoia and Ackman might not have a CHOICE if their investors start to pull out of their funds. Assuming from a portfolio management perspective that each doesn't want VRX to be a larger % of their funds then they NEED to sell VRX if they receive an elevated level of redemption's.

[AzCactus]

16% cash for SEQUX. 

[ERICOPOLY]

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?

 

 

[KCLarkin]

Also, the company has disclosed they have two other immaterial VIEs.

 

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.

 

"Valeant consolidates two VIE’s in addition to the Philidor network: (1) PT Kukah Usaha Maju (PT KUM), the 15% minority interest owner of a company we acquired in Indonesia, last year and (2) Al Balsam Al Shafi Gen Tr LLC (UAE Corp), a local shareholder of a company acquired in the UAE last year," it said.

 

I'm not saying there aren't other skeletons, they just aren't hiding in VIEs.

 

[original mungerville]

If you listened to the Ackman call, that guy is completely trapped.

https://www.youtube.com/watch?v=aR52zv1GqBY

 

Both Ackman and Sequoia.

 

Non-zero probability of redemptions at the Sequoia Fund and Pershing Square.  ------> Selling pressure at VRX ------> VRX stock price far from hitting bottom (yet).

 

No way unless more allegations come out which are likely true / or partially correct at least. Sequoia let two directors resign instead of reducing a position that was more than double the market value of the current position, so they aren't going to sell due to external pressures. Same for Ackman.

 

Mungerville, I don't think you get his point. Sequoia and Ackman might not have a CHOICE if their investors start to pull out of their funds. Assuming from a portfolio management perspective that each doesn't want VRX to be a larger % of their funds then they NEED to sell VRX if they receive an elevated level of redemption's.

 

Sure I get it. If investors withdraw a lot of money, they will have to sell down all positions accordingly. But the investor bases of these firms are generally long-term and don't expect perfection. They will redeem (if fraud is proven widespread, or if Pearson involved), but I think in lower quantities than otherwise would be the case.

 

 

[ATLValue]

16% cash for SEQUX.

 

Doesn't matter, if they receive redemption's and pay in cash rather then selling proportionally then they are effectively increasing VRX exposure. I did not get the impression that this was something they were planning on doing after reading their letter to shareholders

[AzCactus]

To me this is a good example of management getting to close to the sidelines/not staying in the middle of the field.  I have no idea how this ends but I do know that I expect management to improve the way that they communicate (read more transparency) moving forward. 

[farnamstreet]

That  moment when you issue a press release knocking your most vocal detractor with a spelling mistake. ... It's JC Penney ;)

 

as an aside I can't recall seeing many legitimate companies issue a press release like this ...

 

Probably the best thing to come out of this mornings Ackman call:

 

Alan Hoffman, executive vice president at Herbalife, a company in which Ackman has a short position on, said in a Friday statement: "I hope Bill Ackman has done more research on Valeant than he did on Herbalife, Target, Borders and J.C. Penny."

 

It's just too much to take....Please, no more...I'm running out of popcorn....

[AzCactus]

16% cash for SEQUX.

 

Doesn't matter, if they receive redemption's and pay in cash rather then selling proportionally then they are effectively increasing VRX exposure. I did not get the impression that this was something they were planning on doing after reading their letter to shareholders

 

Well yeah of course lower cash increases effective exposure.  It sounds like you are assuming that Sequoia will get this large amount of redemptions which may or may not happen. 

[Guest Grey512]

Kinda funny, I but I do have *some* sympathy for VRX managers & board of directors. There are just pages & pages & pages of questions coming at them from all directions: press, shareholders, Citron, Hempton, etc. VRX is overwhelmed. They are known for running a "lean operation" so they do not have 1000s of people who can be thrown at this. Then (to hedge) they discuss and run everything past their lawyers, etc. This process takes time. Those who expect an *immediate* answer to all the concerns will be disappointed.

 

This will be a long and arduous road for VRX imo. Lots of volatility ahead. Likely pointing downwards.

[feynmanresearch]

To me this is a good example of management getting to close to the sidelines/not staying in the middle of the field.  I have no idea how this ends but I do know that I expect management to improve the way that they communicate (read more transparency) moving forward.

If they are proven to be liars, which is definitely a possibility, by more transparency do you mean you expect them to become more effective liars?

[Guest Grey512]

16% cash for SEQUX.

 

Doesn't matter, if they receive redemption's and pay in cash rather then selling proportionally then they are effectively increasing VRX exposure. I did not get the impression that this was something they were planning on doing after reading their letter to shareholders

 

Well yeah of course lower cash increases effective exposure.  It sounds like you are assuming that Sequoia will get this large amount of redemptions which may or may not happen.

 

Human psychology (to me) says that there's an 80%+ chance that redemptions will happen. And in size. But what do I know.

[Viking]

Last night after reading all the releases regarding Phillidor I thought perhaps we were going to see some panic selling and a possible bottom in the shares (thinking it likely it will not get worse from here). I wonder now if VRX is not the gift that is going to keep on giving for short sellers (and those able to take advantage of extreme volatility).

 

I felt greed take over and purchased a very small position early this morning. I have since covered at a small loss. I consider the small loss tuition. It happens every year or two where I can't help my self and I deviate from a model that works year in and year out. Back to the model!

[ATLValue]

If you listened to the Ackman call, that guy is completely trapped.

https://www.youtube.com/watch?v=aR52zv1GqBY

 

Both Ackman and Sequoia.

 

Non-zero probability of redemptions at the Sequoia Fund and Pershing Square.  ------> Selling pressure at VRX ------> VRX stock price far from hitting bottom (yet).

 

No way unless more allegations come out which are likely true / or partially correct at least. Sequoia let two directors resign instead of reducing a position that was more than double the market value of the current position, so they aren't going to sell due to external pressures. Same for Ackman.

 

Mungerville, I don't think you get his point. Sequoia and Ackman might not have a CHOICE if their investors start to pull out of their funds. Assuming from a portfolio management perspective that each doesn't want VRX to be a larger % of their funds then they NEED to sell VRX if they receive an elevated level of redemption's.

 

Sure I get it. If investors withdraw a lot of money, they will have to sell down all positions accordingly. But the investor bases of these firms are generally long-term and don't expect perfection. They will redeem (if fraud is proven widespread, or if Pearson involved), but I think in lower quantities than otherwise would be the case.

 

Investors of all type chase performance, look at Legg Mason and Bill Miller, you cant generalize that $30B of AUM are all long term. There will be more selling pressure coming from the very people defending this name

[ATLValue]

Too bad VRX isn't a bank or financial services company that can receive billion dollar fines and the market just shrugs!!!

[ERICOPOLY]

Also, the company has disclosed they have two other immaterial VIEs.

 

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.

 

"Valeant consolidates two VIE’s in addition to the Philidor network: (1) PT Kukah Usaha Maju (PT KUM), the 15% minority interest owner of a company we acquired in Indonesia, last year and (2) Al Balsam Al Shafi Gen Tr LLC (UAE Corp), a local shareholder of a company acquired in the UAE last year," it said.

 

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.