VRX - Valeant Pharmaceuticals International Inc.

[mcmaaaaath]

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.

 

 

Thanks for reminding us the other side of the argument Liberty, but I don't buy this argument as much. To me, they could have bought Philidor for the same price $100M and having that entity as part of the organization would only incur some additional salary/admin expense etc. for them. For the size of VRX, I don't think that additional cost would have been significant. I have no idea how many people work at Philidor but VRX could have easily afforded to employ those people without entering into this very questionable mechanic with them. When you hear the business practices at Philidor, it's not hard to guess why they did not want to own them. VRX employees actively getting involved there etc. no way they did not know what was going on there...

 

I think the point was that they didn't want to buy it because being a pharmacy wasn't their business, they didn't understand it well. I don't think it was necessarily about size or costs. But it grew fast and they wanted exclusivity, and if it was to becomes important to them or down the road they decided that they wanted to make it their business (after learning about spec pharma over time), then they had that option. And pretend everything went well and Philidor became super important to their distribution 5 years down the line, they wouldn't want them to have leverage over them and threaten to go to other manufacturers or sell to a bigger competitor, so the option keeps them captive. You can believe that's not true and they were actually aware of bad practices and just wanted to play legal games to pretend there's no responsibility, but I think there's a logic to the CFO's version.

 

It's kind of like the superhero names. Maybe it didn't look like anything at the time, but now that there's a scandal, it looks suspicious as hell.

 

Oh come on are you serious? That's ridiculous! There is lots of evidence that they were running the operations of Philidor even if they didn't TECHNICALLY own it. The name alone (chess reference) makes it entirely obvious.

 

If you have (former?) employees working there, "joint steering committee" etc, and an OPTION STRUCK AT ZERO DOLLARS, then you are running that business. It is as simple as that.

 

The only reason to use an option struck at zero and not make an outright purchase is if you are trying to hide ownership from someone. If you say anything else you are totally deluded. Wake up from your slumber here and see the light of day.

 

The important question is materiality-- what's the actual effect on the business. Still ZERO people have tried to actually lay out all the ways Valeants products are distributed and try to see which ones could be affected.

 

I'll give you a start-- contact lenses are probably not affected. Sales through wholesalers and then through retail are probably not affected. I believe that already accounts for the majority of US sales. What about the rest? What about Europe?

[feynmanresearch]

 

Agreed. Valeant is worth about $35/share if you look at it rationally

 

Woaw $35 sounds really aggressive. Care to shed a little bit more light in terms of your thinking?

I'm assuming a multiple of around 20, and relatively unchanged EPS. That way you get a range of $30-$35. If things get worse as more revelations come to light  though, it could be lower than that

 

That's a fairly retarded way of valuing the stock.

And what would be your enlightened way of valuing the stock?

[Liberty]

I'm sorry but this looks like some extreme rationalizing... Read like you are in too deep.

 

I'm just trying to look at different scenarios. Right now, we just don't know what happened there and who's responsible. Maybe Pearson himself was at the call center filling orders and knew exactly what was going on and that's why they structured things with that option, or maybe they did those things for other reasons that now happen to look bad. I'm genuinely looking forward to the day when we can have answers on all this. I hope the investigations don't drag on too much.

 

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.

 

Yeah, maybe they were in on it and it's all a big cover-up.

 

But let's say that they truly don't have much operational involvement with Philidor. They have a few people over who set up the IT stuff, make sure it all works, keep track of some inventory, gather sales data, etc... But they aren't exactly looking over everyone's shoulder. And if Philidor really has been through lots of PBM audits and until now they were ok, it's possible that Valeant's own audits were fooled just the way the PBMs were.

[Picasso]

So you're right, my projection was somewhat optimistic

 

You might be right that it will trade down to $35, but it won't because that's how the stock should be valued.  Really, a multiple of trailing GAAP earnings?

[rb]

That said, I am not convinced Valeant mgmt did not know what was going on a Philidor. I would be surprised if it made it all the way to the c-suite though. We have all said that the bet has been on Pearson being honest. If we are wrong on that, we will be wrong on this investment. If middle management at Valeant is involved, I maintain fines will not be larger than .5 billion and definitely not more than $1B with my most likely scenario low 100 millions.

OM, I don't see why it's hard to believe that the goings on at Philidor were known to the c-suite. It's obvious that the reason for Philidor was to be aggressive in filling prescriptions with Valeant drugs. Valeant paid 100 million for control of Philidor. That amount of money must get approval from the CEO. So it looks like the C-suite was aware.

[feynmanresearch]

So you're right, my projection was somewhat optimistic

 

You might be right that it will trade down to $35, but it won't because that's how the stock should be valued.  Really, a multiple of trailing GAAP earnings?

What earnings/multiple would you take into account?

[original mungerville]

The issue isn't the fines.  The problem is the long-term affect on their operating business.  Medicis had big problems with Solodyn and other treatments because of the existing distribution method that Valeant likely has to go back to.  That's a bad thing because it's clear that was driving a lot of the organic growth.  The sell side is still saying they'll earn $16 of cash EPS. Throw those earnings out the window now that Philidor is gone.

 

The fines are irrelevant at this point.  What do you think the stock will do if they start showing negative growth?  All of a sudden the amortization is an expense and it's going to snowball.

 

How do you show negative growth when 7% of sales, at most, are gone. Ackman says only half of that 7% will be gone as Valeant drugs previously at Philidor will go through other channels. My take is, Philidor probably juiced things more than that, so I would say only one quarter of that 7% will remain, so about 2% remains and therefore a 5% loss in sales. Cash EPS declines to $14. (For example, Jublia is growing even without Philidor. Studies show it is at least 50% more effective than Lamisil (ie 15-20% effectiveness vs 10%) and so doctors like recommending it. If you ask me, none of those products work but at this point, they are the best options unless you want to shred your liver taking a pill along with applying these.) How do you get to negative cash EPS just because Philidor is gone?

[Guest Grey512]

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.

 

 

Thanks for reminding us the other side of the argument Liberty, but I don't buy this argument as much. To me, they could have bought Philidor for the same price $100M and having that entity as part of the organization would only incur some additional salary/admin expense etc. for them. For the size of VRX, I don't think that additional cost would have been significant. I have no idea how many people work at Philidor but VRX could have easily afforded to employ those people without entering into this very questionable mechanic with them. When you hear the business practices at Philidor, it's not hard to guess why they did not want to own them. VRX employees actively getting involved there etc. no way they did not know what was going on there...

 

I think the point was that they didn't want to buy it because being a pharmacy wasn't their business, they didn't understand it well. I don't think it was necessarily about size or costs. But it grew fast and they wanted exclusivity, and if it was to becomes important to them or down the road they decided that they wanted to make it their business (after learning about spec pharma over time), then they had that option. And pretend everything went well and Philidor became super important to their distribution 5 years down the line, they wouldn't want them to have leverage over them and threaten to go to other manufacturers or sell to a bigger competitor, so the option keeps them captive. You can believe that's not true and they were actually aware of bad practices and just wanted to play legal games to pretend there's no responsibility, but I think there's a logic to the CFO's version.

 

It's kind of like the superhero names. Maybe it didn't look like anything at the time, but now that there's a scandal, it looks suspicious as hell.

 

Oh come on are you serious? That's ridiculous! There is lots of evidence that they were running the operations of Philidor even if they didn't TECHNICALLY own it. The name alone (chess reference) makes it entirely obvious.

 

If you have (former?) employees working there, "joint steering committee" etc, and an OPTION STRUCK AT ZERO DOLLARS, then you are running that business. It is as simple as that.

 

The only reason to use an option struck at zero and not make an outright purchase is if you are trying to hide ownership from someone. If you say anything else you are totally deluded. Wake up from your slumber here and see the light of day.

 

The important question is materiality-- what's the actual effect on the business. Still ZERO people have tried to actually lay out all the ways Valeants products are distributed and try to see which ones could be affected.

 

I'll give you a start-- contact lenses are probably not affected. Sales through wholesalers and then through retail are probably not affected. I believe that already accounts for the majority of US sales. What about the rest? What about Europe?

 

+1

 

This for sure will become a case study at dozens of business schools.

[Picasso]

And what would be your enlightened way of valuing the stock?

 

The same way all other specialty pharma stocks are valued.  GAAP EPS + some % of amortization + restructuring expense net of tax savings and then give it a multiple based on the quality of earnings/leverage.  There's still probably around $10 of EPS in a worst case, maybe it's worth 10x and so $100.

 

There are bigger market forces at play with the stock.  Valuation will have little to do with it if it does hit low double digits.

[Guest Grey512]

The issue isn't the fines.  The problem is the long-term affect on their operating business.  Medicis had big problems with Solodyn and other treatments because of the existing distribution method that Valeant likely has to go back to.  That's a bad thing because it's clear that was driving a lot of the organic growth.  The sell side is still saying they'll earn $16 of cash EPS. Throw those earnings out the window now that Philidor is gone.

 

The fines are irrelevant at this point.  What do you think the stock will do if they start showing negative growth?  All of a sudden the amortization is an expense and it's going to snowball.

 

How do you show negative growth when 7% of sales, at most, are gone. Ackman says only half of that 7% will be gone as Valeant drugs previously at Philidor will go through other channels. My take is, Philidor probably juiced things more than that, so I would say only one quarter of that 7% will remain, so about 2% remains and therefore a 5% loss in sales. Cash EPS declines to $14. (For example, Jublia is growing even without Philidor. Studies show it is at least 50% more effective than Lamisil (ie 15-20% effectiveness vs 10%) and so doctors like recommending it. If you ask me, none of those products work but at this point, they are the best options unless you want to shred your liver taking a pill along with applying these.) How do you get to negative cash EPS just because Philidor is gone?

 

It's not because Philidor is gone. It's because payors / insurers / governments get pissed. Price goes down. Volume possibly too. To the extent VRX was aggressive in non-Philidor sales, newly emboldened lawyers & compliance reigns in those practices. Volumes go down more. I'm still thinking this through, but you get the idea.

[original mungerville]

That said, I am not convinced Valeant mgmt did not know what was going on a Philidor. I would be surprised if it made it all the way to the c-suite though. We have all said that the bet has been on Pearson being honest. If we are wrong on that, we will be wrong on this investment. If middle management at Valeant is involved, I maintain fines will not be larger than .5 billion and definitely not more than $1B with my most likely scenario low 100 millions.

OM, I don't see why it's hard to believe that the goings on at Philidor were known to the c-suite. It's obvious that the reason for Philidor was to be aggressive in filling prescriptions with Valeant drugs. Valeant paid 100 million for control of Philidor. That amount of money must get approval from the CEO. So it looks like the C-suite was aware.

 

They come in, do the deal. Ongoing throughout the year things get really aggressive. Valeant middle management bonuses are based on this channel doing well because they understand that economically they own this thing. Legally, they don't so controls aren't quite where they should be. Middle management looks the other way and enjoy big bonuses. Things are piping along at a good clip, Pearson thinks they hit a home run after rosy powerpoint slides from his middle management who want their bonuses. He therefore signs off on $33 million payment because Philidor hit all its targets and that was the deal. In large companies, there are also agency issues between the hierarchies - rosy stuff gets reported up, some not so rosy stuff doesn't.

[rb]

I'm sorry but this looks like some extreme rationalizing... Read like you are in too deep.

 

I'm just trying to look at different scenarios. Right now, we just don't know what happened there and who's responsible. Maybe Pearson himself was at the call center filling orders and knew exactly what was going on and that's why they structured things with that option, or maybe they did those things for other reasons that now happen to look bad. I'm genuinely looking forward to the day when we can have answers on all this. I hope the investigations don't drag on too much.

 

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.

 

Yeah, maybe they were in on it and it's all a big cover-up.

 

But let's say that they truly don't have much operational involvement with Philidor. They have a few people over who set up the IT stuff, make sure it all works, keep track of some inventory, gather sales data, etc... But they aren't exactly looking over everyone's shoulder. And if Philidor really has been through lots of PBM audits and until now they were ok, it's possible that Valeant's own audits were fooled just the way the PBMs were.

Everything is possible in this world, but some things are more likely than others. In this case it's way more likely that Valeant management knew what was going on and were ok with it. After all Philidor was doing exactly what Valeant made it do fill prescriptions aggressively.

[dbuch]

$11-$14 of FCF next year. They're trading at 8x conservative FCF. Even if they are fined and all of next year's cash flows are used up paying the fines this is crazy cheap. GlaxoSmithKline paid $8B in fines for 20 different settlements. Even if the next two years are wiped out and they never grow again this is cheap.

[ERICOPOLY]

Thanks for the extra color. I am also trying to keep an open mind on this but the optics also does not help. You pay $100M upfront for an option to buy for $0. Gives the feeling that you want some kind of control but not legal ownership. Don't know much about these specialty pharmacies but what's so special about Philidor anyways? If Philidor doesn't give you the exclusivity you want then you can contract with other special pharmacies as well so their leverage would be much less on you actually going forward... Well, if you want to enter into some very questionable business practices on an exclusive/secretive manner of course, it could be a little bit different :-) well just having some fun I guess...

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.

[original mungerville]

 

 

Tombgrt,

 

I am glad we are amusing for you.

 

That said, I am not convinced Valeant mgmt did not know what was going on a Philidor. I would be surprised if it made it all the way to the c-suite though. We have all said that the bet has been on Pearson being honest. If we are wrong on that, we will be wrong on this investment. If middle management at Valeant is involved, I maintain fines will not be larger than .5 billion and definitely not more than $1B with my most likely scenario low 100 millions.

 

I know hard to quantify at this point but hard for me to believe the legal fine would be the only financial impact on VRX.

 

Only financial impact? No, 5% of sales are gone, a % of ongoing growth is gone. Furthermore, their debt is more expensive to issue, and 50 billion plus of market cap is gone. And that assumes there are no more cockroaches.

[rb]

That said, I am not convinced Valeant mgmt did not know what was going on a Philidor. I would be surprised if it made it all the way to the c-suite though. We have all said that the bet has been on Pearson being honest. If we are wrong on that, we will be wrong on this investment. If middle management at Valeant is involved, I maintain fines will not be larger than .5 billion and definitely not more than $1B with my most likely scenario low 100 millions.

OM, I don't see why it's hard to believe that the goings on at Philidor were known to the c-suite. It's obvious that the reason for Philidor was to be aggressive in filling prescriptions with Valeant drugs. Valeant paid 100 million for control of Philidor. That amount of money must get approval from the CEO. So it looks like the C-suite was aware.

 

The come in, do the deal. Ongoing throughout the year things get really aggressive. Valeant middle management bonuses are based on this channel doing well because they understand that economically they own this thing. Legally, they don't so controls aren't quite where they should. Middle management looks the other way and enjoy big bonuses. Things are piping along at a good clip, Pearson thinks they hit a home run after rosy powerpoint slides from his middle management who want their bonuses. He therefore signs off on $33 million payment because Philidor hit all its targets and that was the deal. In large companies, there are also agency issues between the hierarchies - rosy stuff gets reported up, some not so rosy stuff doesn't.

Maybe, but Mike Pearson strikes me more like a guy that is in complete control at Valeant, not like the shy boy who doesn't know what's going on and his middle management is taking advantage of him by hiding things to pad they're bonuses.

[tylerdurden]

The issue isn't the fines.  The problem is the long-term affect on their operating business.  Medicis had big problems with Solodyn and other treatments because of the existing distribution method that Valeant likely has to go back to.  That's a bad thing because it's clear that was driving a lot of the organic growth.  The sell side is still saying they'll earn $16 of cash EPS. Throw those earnings out the window now that Philidor is gone.

 

The fines are irrelevant at this point.  What do you think the stock will do if they start showing negative growth?  All of a sudden the amortization is an expense and it's going to snowball.

 

How do you show negative growth when 7% of sales, at most, are gone. Ackman says only half of that 7% will be gone as Valeant drugs previously at Philidor will go through other channels. My take is, Philidor probably juiced things more than that, so I would say only one quarter of that 7% will remain, so about 2% remains and therefore a 5% loss in sales. Cash EPS declines to $14. (For example, Jublia is growing even without Philidor. Studies show it is at least 50% more effective than Lamisil (ie 15-20% effectiveness vs 10%) and so doctors like recommending it. If you ask me, none of those products work but at this point, they are the best options unless you want to shred your liver taking a pill along with applying these.) How do you get to negative cash EPS just because Philidor is gone?

 

It's not because Philidor is gone. It's because payors / insurers / governments get pissed. Price goes down. Volume possibly too. To the extent VRX was aggressive in non-Philidor sales, newly emboldened lawyers & compliance reigns in those practices. Volumes go down more. I'm still thinking this through, but you get the idea.

 

Agreed 100%. Payors for example, they probably had some idea about them getting screwed by VRX in some cases but it was not this obvious to them of course. Now I can see special teams getting assembled in order to deal with at least some of the tricks which was used by Philidor. It shouldn't be surprising to see extra vigilance applied to all VRX drugs going forward...

[merkhet]

I'm just trying to look at different scenarios. Right now, we just don't know what happened there and who's responsible. Maybe Pearson himself was at the call center filling orders and knew exactly what was going on and that's why they structured things with that option, or maybe they did those things for other reasons that now happen to look bad. I'm genuinely looking forward to the day when we can have answers on all this. I hope the investigations don't drag on too much.

 

I think that might be a long wait for a boat don't come -- mostly because the objective truth, to the extent that there is one, is probably gone at this point. For instance, let's assume it was a middle of the road situation where the C-suite knew that there was extreme shadiness but exercised willful ignorance. The two stories you're going to hear now are (A) the C-suite knew everything and were complicit and (B) the C-suite knew nothing and was duped. It reminds me of a choice quote from A Few Good Men.

 

 

At this point, it's about what can be proved by one side or the other.

[Picasso]

How do you show negative growth when 7% of sales, at most, are gone. Ackman says only half of that 7% will be gone as Valeant drugs previously at Philidor will go through other channels. My take is, Philidor probably juiced things more than that, so I would say only one quarter of that 7% will remain, so about 2% remains and therefore a 5% loss in sales. Cash EPS declines to $14. (For example, Jublia is growing even without Philidor. Studies show it is at least 50% more effective than Lamisil (ie 15-20% effectiveness vs 10%) and so doctors like recommending it. If you ask me, none of those products work but at this point, they are the best options unless you want to shred your liver taking a pill along with applying these.) How do you get to negative cash EPS just because Philidor is gone?

 

Not saying negative earnings, just a lot less than $16 cash EPS.  And who knows what actual free cash flow will look like relative to cash EPS at this point.

 

They can't show positive growth in US branded anymore, they lost control of being able to refill drugs (big difference between a 2x refill versus 3x or 4x), they can't buy tail assets, they can't raise pricing, etc.  Close to half the portfolio is now at best flat and the rest is under a lot of pressure to perform.  And if indications of channel stuffing at Salix are true, well that's even worse. 

 

I'm sort of curious if there's a specific reason why Salix stuffed the channels to begin with.  Maybe it's something drug/distribution related that didn't show up in models?  I don't know but need to look into it. 

 

Anyway I'm just looking at this from the markets point of view.  Negative growth in half the portfolio means amortization is now a cost.  That's why it's a problem, not so much the fines. 

[Liberty]

Oh come on are you serious? That's ridiculous! There is lots of evidence that they were running the operations of Philidor even if they didn't TECHNICALLY own it. The name alone (chess reference) makes it entirely obvious.

 

If you have (former?) employees working there, "joint steering committee" etc, and an OPTION STRUCK AT ZERO DOLLARS, then you are running that business. It is as simple as that.

 

The only reason to use an option struck at zero and not make an outright purchase is if you are trying to hide ownership from someone. If you say anything else you are totally deluded. Wake up from your slumber here and see the light of day.

 

The important question is materiality-- what's the actual effect on the business. Still ZERO people have tried to actually lay out all the ways Valeants products are distributed and try to see which ones could be affected.

 

I'll give you a start-- contact lenses are probably not affected. Sales through wholesalers and then through retail are probably not affected. I believe that already accounts for the majority of US sales. What about the rest? What about Europe?

 

I'm not saying they didn't have ultimate control over the entity's destiny. I'm saying that it's one thing to have high level, strategic control (of the kind of "we should get distribution in states X, Y and Z... we will invest in more staff to add two new products in 6 months...") and to have day-to-day control over how employees are trained, how they're told to fill out form, compliance, etc.

 

Maybe Valeant knew about everything and told them to do it. I don't know. But I think it's also plausible that Philidor management committed fraud to get their earnouts without the knowledge of Valeant. The net worth of Andrew Davenport and his cronies might double if they get those earnouts, so that's certainly an incentive for someone unscrupulous. But Valeant was doing quite well long before Philidor was ever on the scene, these tactics were worth at most a couple points of growth (I'm sure a lot of the 6-7% was legit, and if Philidor hadn't existed, it would've gone through other channels -- after all, doctors do prescribe the stuff), and the downside is huge...

 

So maybe they did it, I don't know. But I think right now a lot of people are ready to put handcuffs on management with very few hard facts.

[ERICOPOLY]

For all we know, Monday could be a moment where some uncomfortable whistle-blower employees have anonymously tipped off Citron with internal company documents or emails.  Could be about unsavory buried science regarding their drug development labs, or documented internal discussion about Philidor ("we're going to knife the baby!" type stupid comments). 

 

I mean... this would be the time when a person in search of a voice would come forward and Citron could be their mouthpiece.

 

Just wondering how he could suddenly have more supposedly damning info already.  He can't come out with complete bullshit, it's got to be some kind of company document or testimonial from an internal source.  He's already been referred by Valeant to the SEC so his lawyers would likely be making sure he has something real -- or would he ask his counsel first?

 

 

 

[feynmanresearch]

And what would be your enlightened way of valuing the stock?

 

The same way all other specialty pharma stocks are valued.  GAAP EPS + some % of amortization + restructuring expense net of tax savings and then give it a multiple based on the quality of earnings/leverage.  There's still probably around $10 of EPS in a worst case, maybe it's worth 10x and so $100.

 

There are bigger market forces at play with the stock.  Valuation will have little to do with it if it does hit low double digits.

I disagree with the way you're valuing the stock, but to each his own. I do agree with you, however, that there are bigger forces at play and valuation might be irrelevant compared to those market forces.

[original mungerville]

Thanks for the extra color. I am also trying to keep an open mind on this but the optics also does not help. You pay $100M upfront for an option to buy for $0. Gives the feeling that you want some kind of control but not legal ownership. Don't know much about these specialty pharmacies but what's so special about Philidor anyways? If Philidor doesn't give you the exclusivity you want then you can contract with other special pharmacies as well so their leverage would be much less on you actually going forward... Well, if you want to enter into some very questionable business practices on an exclusive/secretive manner of course, it could be a little bit different :-) well just having some fun I guess...

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.

 

Good, great to hear that.

 

Lets see what Left has to say on Monday, if its weak, this thing is probably a long.

 

Financial reinsurance cover of $1 Billion with only net coverage of $100 million while not describing those economics to us; that hole in the balance sheet you referred to (I don't remember that one as well as you do, but the reinsurance cover and his description left a bad taste in my mouth - just like this philidor shit); lot of creative restructuring for liquidity purposes (eg, US tax consolidation where he borrowed shares to get ORH consolidated, etc). It never all smells good, it can also get creative. Even Buffett with General Re, Clayton homes, Sokol, etc. The question is whether this is widespread throughout Valeant or not, and did Pearson know or not the details at Philidor. If Citron can't come up with something really good on Monday, I think this thing is a long and this seems like the point of maximum pessimism.

 

And I note, the LEAPS are more asymmetric than the shares. And if there is one thing that I have learnt over the past 15 years, its that asymmetry is good. You sleep a lot better rolling half a million and losing 100 grand a year in the process if things work out, instead of losing 2.5 million.

[wisdom]

Even VW wasn't treated this way and they had outright fraud for years.

[rb]

For all we know, Monday could be a moment where some uncomfortable whistle-blower employees have anonymously tipped off Citron with internal company documents or emails.  Could be about unsavory buried science regarding their drug development labs, or documented internal discussion about Philidor ("we're going to knife the baby!" type stupid comments). 

 

I mean... this would be the time when a person in search of a voice would come forward and Citron could be their mouthpiece.

 

Just wondering how he could suddenly have more supposedly damning info already.  He can't come out with complete bullshit, it's got to be some kind of company document or testimonial from an internal source.  He's already been referred by Valeant to the SEC so his lawyers would likely be making sure he has something real -- or would he ask his counsel first?

I think you're probably on to something here. After all Citron was looking for maximum publicity so you would think that they'd put most of the hard hitting stuff up front in the first report.