VRX - Valeant Pharmaceuticals International Inc.

[Rainforesthiker]

I am not condoning any of the VRX / Philidor behavior; mostly likely some bad acts have happened and there will be serious repercussions both civil and possibly criminal.  But if you consider the health care industry - how it is so highly regulated, with so much bureaucracy and red tape, with such a large misplaced incentive structure, to the point of being socialized, I am sure it actually encourages its participants to game the system, take shortcuts, get close to the line, etc.  You try submitting an invoice to an insurance company one way to get it paid, and it is denied, then you try a different way, and it works, and of course you start figuring out how best to submit things to get your job done (and of course maximize your income).  And since the system is so screwed up it is easy to rationalize that it is required to "game the system" a bit just to get things done.  It's kinda like the old Soviet Union, where with such mindless bureaucracy people had to game the system just to survive. 

 

I have been following this thread to learn more about pharma and health care, and what I am reading should scare every American.  A fundamental truth of economics is that when people do not pay the true price of something, they consume it inefficiently.  It's no wonder our health care costs are spiraling out of control. 

[ERICOPOLY]

There was absolutely nothing about the structure of the Philidor arrangement that incentivized illegal behavior.  If you think there was, you are just biased by hindsight. 

 

They got $100 million up front ($80 million after capital gains tax) and could get up to $133 million through earn out milestones (which btw would get taxed at an income rate probably, so after tax this would probably be another $80 million).

 

$80 million is a lot of f***ing money to lose.  Human beings are inherently risk averse.  Not many people would risk losing their $80 million fortune to gain $80 million. 

 

Sergio Marchionne has massive earn out payments if he hits his five year plan, $200 million in stock, and an immaterial salary compared to that.  Why don't people say he is perfectly incentivized to break the law and push every ethical boundary to make money? 

 

If I was Pearson, I would think this was the perfect comp structure for these guys.  If I think the regulatory environment is murky for specialty pharmacies and these guys know the laws better than I do, let me make them wildly rich up front, so they'll have an incentive to protect that fortune by not doing something stupid, and then give them earn outs so they are still motivated to grow the business.

 

But hindsight bias is powerful.

 

They didn't hide their relationship with Sergio Marchionne.

 

Let's say that what Philidor does is standard industry practice.  What's the point of the deception?  That's what the trouble is -- sneaking around.  Why?

 

Is the answer this: "we were just doing what everyone else does, but we wanted to be secret so that nobody would find out what we were doing... which is what everyone else does anyway, so why would we feel a need to hide it?".

 

The copay thing -- raise prices by $30 while eliminating $30 copay.  I've been told everyone does that... okay, so what part of Philidor was important to conceal?

[Rainforesthiker]

There was absolutely nothing about the structure of the Philidor arrangement that incentivized illegal behavior.  If you think there was, you are just biased by hindsight. 

 

They got $100 million up front ($80 million after capital gains tax) and could get up to $133 million through earn out milestones (which btw would get taxed at an income rate probably, so after tax this would probably be another $80 million).

 

$80 million is a lot of f***ing money to lose.  Human beings are inherently risk averse.  Not many people would risk losing their $80 million fortune to gain $80 million. 

 

Sergio Marchionne has massive earn out payments if he hits his five year plan, $200 million in stock, and an immaterial salary compared to that.  Why don't people say he is perfectly incentivized to break the law and push every ethical boundary to make money? 

 

If I was Pearson, I would think this was the perfect comp structure for these guys.  If I think the regulatory environment is murky for specialty pharmacies and these guys know the laws better than I do, let me make them wildly rich up front, so they'll have an incentive to protect that fortune by not doing something stupid, and then give them earn outs so they are still motivated to grow the business.

 

But hindsight bias is powerful.

 

They didn't hide their relationship with Sergio Marchionne.

 

Let's say that what Philidor does is standard industry practice.  What's the point of the deception?  That's what the trouble is -- sneaking around.  Why?

 

Maybe because the standard industry practice is to game the system, because the system is so screwed up?

[ERICOPOLY]

I ask a lot of questions but I'm sort of just brainstorming with the expectation of critical feedback.  Including some of the conspiratorial musings...

 

What if some insurance execs own the Philidor shares?  That would be something worthy of concealment, but perhaps it would be way too blatantly conflict-of-interest and nobody would be stupid enough to go there.

 

[original mungerville]

We noted that the shorts are of low character and therefore have problems judging character. Similarly, I get the feeling some of these guys in business in are exposed to so much stuff that is close to the line, that they forget where the line is in due course.

 

IF you take the ex-CFO at his word, as described by Ackman (ie growing fast, wanted exclusivity/captured channel, Philidor wanted to expand to other pharma makers, did not know that part of the industry well, regulated in each state), in terms of the reason for the option ownership structure, then from that angle there was no deception, and they did not really want to report on it too early for competitive reasons because it gave them an advantage.

 

I bet Valeant knew some of the bad practices going on at Philidor (but maybe not all); but I also think that illegal activity did not spread all across Valeant to all the entities they control (understanding that someone is probably doing something illegal at every large corporation every day).

 

 

 

 

 

[ERICOPOLY]

Philidor immediately agreed to wind down operations.  For people with so much money in performance milestones that they were anchored to, they gave it up with just hours to make that call.

 

It's true that with all the major CVS style partners pulling out it was game over.  But I'm just amazed at how fast that happened.  It's easy to see why Valeant wanted to immediately sever the tie, but the Phildor guys don't need to run so fast do they?  Or perhaps they just need to shut it down to contain the spreading rate of potential liability -- that sounds reasonable. 

[ERICOPOLY]

There was absolutely nothing about the structure of the Philidor arrangement that incentivized illegal behavior.  If you think there was, you are just biased by hindsight. 

 

They got $100 million up front ($80 million after capital gains tax) and could get up to $133 million through earn out milestones (which btw would get taxed at an income rate probably, so after tax this would probably be another $80 million).

 

$80 million is a lot of f***ing money to lose.  Human beings are inherently risk averse.  Not many people would risk losing their $80 million fortune to gain $80 million. 

 

Sergio Marchionne has massive earn out payments if he hits his five year plan, $200 million in stock, and an immaterial salary compared to that.  Why don't people say he is perfectly incentivized to break the law and push every ethical boundary to make money? 

 

If I was Pearson, I would think this was the perfect comp structure for these guys.  If I think the regulatory environment is murky for specialty pharmacies and these guys know the laws better than I do, let me make them wildly rich up front, so they'll have an incentive to protect that fortune by not doing something stupid, and then give them earn outs so they are still motivated to grow the business.

 

But hindsight bias is powerful.

 

+1

 

I'm as cynical and suspicious about Valeant as anyone, but there's probably some hindsight creeping into the incentive structure discussion.

 

+1

 

It's very difficult to gaze at the stars in the sky without your mind wanting to form shapes out of them.

 

If you've heard about unicorns before, you'll see a pattern that makes out a unicorn.  But you won't see a unicorn if you haven't.  In the stars you can find whatever it is that you are looking for.

[kevin4u2]

There was absolutely nothing about the structure of the Philidor arrangement that incentivized illegal behavior.  If you think there was, you are just biased by hindsight. 

 

They got $100 million up front ($80 million after capital gains tax) and could get up to $133 million through earn out milestones (which btw would get taxed at an income rate probably, so after tax this would probably be another $80 million).

 

$80 million is a lot of f***ing money to lose.  Human beings are inherently risk averse.  Not many people would risk losing their $80 million fortune to gain $80 million. 

 

Sergio Marchionne has massive earn out payments if he hits his five year plan, $200 million in stock, and an immaterial salary compared to that.  Why don't people say he is perfectly incentivized to break the law and push every ethical boundary to make money? 

 

If I was Pearson, I would think this was the perfect comp structure for these guys.  If I think the regulatory environment is murky for specialty pharmacies and these guys know the laws better than I do, let me make them wildly rich up front, so they'll have an incentive to protect that fortune by not doing something stupid, and then give them earn outs so they are still motivated to grow the business.

 

But hindsight bias is powerful.

 

They didn't hide their relationship with Sergio Marchionne.

 

Let's say that what Philidor does is standard industry practice.  What's the point of the deception?  That's what the trouble is -- sneaking around.  Why?

 

Is the answer this: "we were just doing what everyone else does, but we wanted to be secret so that nobody would find out what we were doing... which is what everyone else does anyway, so why would we feel a need to hide it?".

 

The copay thing -- raise prices by $30 while eliminating $30 copay.  I've been told everyone does that... okay, so what part of Philidor was important to conceal?

 

The mail fraud, the wire fraud, the lying on the California state application, the misuse of pharmacy numbers, possibly modifying prescriptions, and that VRX had people employed to create Philidor, and intimately knew about the company.  The fact that VRX had made numerous other acquisitions of smaller size and plastered their news releases with but failed to ever mention Philidor? 

 

If this is playing "close to the line" you have got to be kidding me.  I wonder if Philidor was making up scripts, given everything else that was going on.  Don't need to worry about channel stuffing when you can jam it down the throat of an insurance company.   

 

This is so similar to the subprime mortgage crisis.  Everyone was doing it so what is the problem?  The copay thing is the least of their worries, and the R&O guy knows it. 

 

VRX suing R&O is also so mind blowing.  Did VRX not get the facts from Philidor first or even talk with the guy from R&O first?  His allegations should have been enough for Pearson to call for a full investigation, not sue the guy.  Why didn't Pearson call for a full investigation?  He knew at that time some really bad stuff was alleged to be going on.   

[CONeal]

The question that keeps running through my head  Is everyone looking at The scripts filled at Philidor wrong and the impact to VRX?

 

Philidor had multiple pharmacy licenses they were using.  Is the %of scripts filled via Philidor wrong that VRX is reporting wrong and they just don't know it yet?  When Philidor filled a script using another Pharmacy id (ex Wilshire) is that script fill recognized by VRX as being filled at Philidor or Wilshire? According to the insurance claim the script would have been filled by Whilshire.

 

Either way the scripts would be part of "specialty pharmacies."

 

Not exactly.  1) you have to know how VRX defines speciality pharmacy as there are grey areas in it.  2) you don't know what other pharmacy licenses Philidor was using to fill scripts.  They could just as easily been using a retail pharmacy license for the stuff that were not considered a speciality drug.

 

Have to admit this is becoming a fun exercise on critical thinking.

This is getting ridiculous.  Ok let's think about it critically -if you're philidor what's your angle?  You want to unlock further milestone payments?  Then are you going to hide the fact that you originated many of these scripts and let parent-valeant think they are attributable to someone else?  Why even risk breaking the law if some other Podunk pharmacy gets full credit (per your thought "what if valeant didn't know all the scripts attributable to philidor").

 

It's all about incentives right?  If that's the case then philidor is going to try and take credit for as much of the contribution as possible -At the expense of other channels.  The numbers that valeant hq has can only be high, not low.

 

If a drug keeps getting rejected using Philidor's id the script still has to be filled/already sent to the customer whether they get credit for it or not. 

[ERICOPOLY]

Valeant says that not too much will change in their numbers without Philidor. 

 

A trusting girlfriend would believe them and go out and buy the stock.

 

A suspicious girlfriend wouldn't buy it:  she'd think that Valeant management is reciting a scripted dialog written for a part in a movie where the character is a naive farm-boy unaware of what goes on in the big city.

 

It's the kind of statement you'd make if you were trying hard to look like you are unaware of any fraud -- so says a suspicious girlfriend.

 

So there really isn't anything they can say that will calm a market where they've lost trust.

 

[constructive]

If a drug keeps getting rejected using Philidor's id the script still has to be filled/already sent to the customer whether they get credit for it or not. 

 

Which is why Valeant needed a bigger network of shady, pseudo-independent specialty pharmacies.

[ccplz]

http://www.latimes.com/business/la-fi-1101-valeant-pharmacy-20151101-story.html

[AzCactus]

Valeant says that not too much will change in their numbers without Philidor. 

 

A trusting girlfriend would believe them and go out and buy the stock.

 

A suspicious girlfriend wouldn't buy it:  she'd think that Valeant management is reciting a scripted dialog written for a part in a movie where the character is a naive farm-boy unaware of what goes on in the big city.

 

It's the kind of statement you'd make if you were trying hard to look like you are unaware of any fraud -- so says a suspicious girlfriend.

 

So there really isn't anything they can say that will calm a market where they've lost trust.

 

Didn't Bill Ackman add 2,000,000 shares ? That makes him one naive bitch or a very trusting one.

[LC]

Philidor immediately agreed to wind down operations.  For people with so much money in performance milestones that they were anchored to, they gave it up with just hours to make that call.

 

Reminds me of ocwen/altisource.

 

Sub-company with shady practices overcharging clients? check

Main company billing sub-company at inflated prices? check

 

Bill erbey still walked away rich even after their stock was decimated.

 

Sounds like valeant found a way to squeeze a ton of cash out of insurer's pockets, at least temporarily. Are people still under the impression they are revolutionizing the pharma industry?

 

edit: here's another post i made in the ocwen thread:

I feel you...I've narrowly avoided a few bad eggs too, probably by luck. But now I just behave conservatively when it comes to people... I never go into business with (i.e. make an investment in) someone who rubs people the wrong way. Good businessmen, good people can manage their image. They can figure out how to make money without leaving a trail of tears in their wake.

[ZenaidaMacroura]

The question that keeps running through my head  Is everyone looking at The scripts filled at Philidor wrong and the impact to VRX?

 

Philidor had multiple pharmacy licenses they were using.  Is the %of scripts filled via Philidor wrong that VRX is reporting wrong and they just don't know it yet?  When Philidor filled a script using another Pharmacy id (ex Wilshire) is that script fill recognized by VRX as being filled at Philidor or Wilshire? According to the insurance claim the script would have been filled by Whilshire.

 

Either way the scripts would be part of "specialty pharmacies."

 

Not exactly.  1) you have to know how VRX defines speciality pharmacy as there are grey areas in it.  2) you don't know what other pharmacy licenses Philidor was using to fill scripts.  They could just as easily been using a retail pharmacy license for the stuff that were not considered a speciality drug.

 

Have to admit this is becoming a fun exercise on critical thinking.

This is getting ridiculous.  Ok let's think about it critically -if you're philidor what's your angle?  You want to unlock further milestone payments?  Then are you going to hide the fact that you originated many of these scripts and let parent-valeant think they are attributable to someone else?  Why even risk breaking the law if some other Podunk pharmacy gets full credit (per your thought "what if valeant didn't know all the scripts attributable to philidor").

 

It's all about incentives right?  If that's the case then philidor is going to try and take credit for as much of the contribution as possible -At the expense of other channels.  The numbers that valeant hq has can only be high, not low.

 

If a drug keeps getting rejected using Philidor's id the script still has to be filled/already sent to the customer whether they get credit for it or not.

 

Are you talking about actually filling the prescription or the insurance reimbursement?

 

 

my question was how are they incentivized to hide the origination from valeant?

[rb]

Valeant says that not too much will change in their numbers without Philidor. 

 

A trusting girlfriend would believe them and go out and buy the stock.

 

A suspicious girlfriend wouldn't buy it:  she'd think that Valeant management is reciting a scripted dialog written for a part in a movie where the character is a naive farm-boy unaware of what goes on in the big city.

 

It's the kind of statement you'd make if you were trying hard to look like you are unaware of any fraud -- so says a suspicious girlfriend.

 

So there really isn't anything they can say that will calm a market where they've lost trust.

 

Didn't Bill Ackman add 2,000,000 shares ? That makes him one naive bitch or a very trusting one.

Or trying to increase market confidence in order to pump up the price for the other 20,000,000 shares he has.

 

yup. speculation is fun

[constructive]

my question was how are they incentivized to hide the origination from valeant?

 

Philidor owner incentives are a red herring. Valeant was in functional control of the company, they directed Philidor's actions.

[ERICOPOLY]

http://www.latimes.com/business/la-fi-1101-valeant-pharmacy-20151101-story.html

 

"We understand that patients, doctors and business partners have been disturbed by the reports of improper behavior at Philidor," Pearson said, "just as we have been."

 

 

Except that they were only disturbed enough to take action when the patients, doctors, and business partners found out.  That's when they severed their ties to Philador.

 

Or perhaps they didn't know.

 

[ERICOPOLY]

The question that keeps running through my head  Is everyone looking at The scripts filled at Philidor wrong and the impact to VRX?

 

Philidor had multiple pharmacy licenses they were using.  Is the %of scripts filled via Philidor wrong that VRX is reporting wrong and they just don't know it yet?  When Philidor filled a script using another Pharmacy id (ex Wilshire) is that script fill recognized by VRX as being filled at Philidor or Wilshire? According to the insurance claim the script would have been filled by Whilshire.

 

Either way the scripts would be part of "specialty pharmacies."

 

Not exactly.  1) you have to know how VRX defines speciality pharmacy as there are grey areas in it.  2) you don't know what other pharmacy licenses Philidor was using to fill scripts.  They could just as easily been using a retail pharmacy license for the stuff that were not considered a speciality drug.

 

Have to admit this is becoming a fun exercise on critical thinking.

This is getting ridiculous.  Ok let's think about it critically -if you're philidor what's your angle?  You want to unlock further milestone payments?  Then are you going to hide the fact that you originated many of these scripts and let parent-valeant think they are attributable to someone else?  Why even risk breaking the law if some other Podunk pharmacy gets full credit (per your thought "what if valeant didn't know all the scripts attributable to philidor").

 

It's all about incentives right?  If that's the case then philidor is going to try and take credit for as much of the contribution as possible -At the expense of other channels.  The numbers that valeant hq has can only be high, not low.

 

If a drug keeps getting rejected using Philidor's id the script still has to be filled/already sent to the customer whether they get credit for it or not.

 

Are you talking about actually filling the prescription or the insurance reimbursement?

 

 

my question was how are they incentivized to hide the origination from valeant?

 

There is potentially a ledger somewhere where credit is given come performance milestone time, so they get paid the performance incentive from Valeant either way.

 

But of course that book isn't shown to the insurers.

[ZenaidaMacroura]

The question that keeps running through my head  Is everyone looking at The scripts filled at Philidor wrong and the impact to VRX?

 

Philidor had multiple pharmacy licenses they were using.  Is the %of scripts filled via Philidor wrong that VRX is reporting wrong and they just don't know it yet?  When Philidor filled a script using another Pharmacy id (ex Wilshire) is that script fill recognized by VRX as being filled at Philidor or Wilshire? According to the insurance claim the script would have been filled by Whilshire.

 

Either way the scripts would be part of "specialty pharmacies."

 

Not exactly.  1) you have to know how VRX defines speciality pharmacy as there are grey areas in it.  2) you don't know what other pharmacy licenses Philidor was using to fill scripts.  They could just as easily been using a retail pharmacy license for the stuff that were not considered a speciality drug.

 

Have to admit this is becoming a fun exercise on critical thinking.

This is getting ridiculous.  Ok let's think about it critically -if you're philidor what's your angle?  You want to unlock further milestone payments?  Then are you going to hide the fact that you originated many of these scripts and let parent-valeant think they are attributable to someone else?  Why even risk breaking the law if some other Podunk pharmacy gets full credit (per your thought "what if valeant didn't know all the scripts attributable to philidor").

 

It's all about incentives right?  If that's the case then philidor is going to try and take credit for as much of the contribution as possible -At the expense of other channels.  The numbers that valeant hq has can only be high, not low.

 

If a drug keeps getting rejected using Philidor's id the script still has to be filled/already sent to the customer whether they get credit for it or not.

 

Are you talking about actually filling the prescription or the insurance reimbursement?

 

 

my question was how are they incentivized to hide the origination from valeant?

 

There is potentially a ledger somewhere where credit is given come performance milestone time, so they get paid the performance incentive from Valeant either way.

 

But of course that book isn't shown to the insurers.

Yea I can understand that but he's saying vrx doesn't have a grasp on that -which is hard to comprehend given valeant/Pearson are paying these milestones.

[original mungerville]

Valeant had to be pretty clueless about the whole situation at Philidor to not have noticed something was wrong - especially once the lawsuit was filed against R&O.

 

How can that lawsuit be filed without Valeant understanding the details of what was going on between Philidor and R&O?

 

I guess only if Philidor really lied to Valeant as they prepared the lawsuit...and Valeant was naive enough to just take their word for it?

 

[ERICOPOLY]

Valeant had to be pretty clueless about the whole situation at Philidor to not have noticed something was wrong - especially once the lawsuit was filed against R&O.

 

How can that lawsuit be filed without Valeant understanding the details of what was going on between Philidor and R&O?

 

I guess only if Philidor really lied to Valeant as they prepared the lawsuit...and Valeant was naive enough to just take their word for it?

 

And from the looks of things the thing that was truly "wrong" from their perspective (when they severed their ties to Phildor) is that the music had already stopped and the CVS (etc...) had severed their ties.  That's when it stunk enough to distance themselves from it.

 

Valeant needs to have been the first one out the door.  It was the last.

[Guest Dazel]

 

 

What's VRX worth if it liquidated tomorrow?

 

 

[Picasso]

 

 

What's VRX worth if it liquidated tomorrow?

 

Probably a lot less than the current share price. Their assets are more valuable under the current structure than sold off in pieces.

[ERICOPOLY]

I wonder if keeping secret deceptive practices (even if legal)... if that's considered a competitive advantage like intellectual property...  So perhaps some of that goodwill really is still an earning asset after the drugs go off-patent and doesn't deserve to be written down!  Hah Hah.