VRX - Valeant Pharmaceuticals International Inc.

[rishig]

Look, the battle between PBM's and manufacturers has been going on for quite some time. As drugs come off patent, generic alternatives negatively impact margins for the manufacturers and at the same time it can positively influence PBM's. PBM's endorse the widespread use of generics (especially where they receive rebates) while the manufacturers attempt to preserve their historical margins and brand strength.

 

Its an epic game of Chess. (hint: Phillidor, Isolani, Lucena, Back Rank, BQ6, KGA .....)

 

The two groups are diametrically opposed. The money at stake here is significant. To put that in perspective, here is an article going back to September, 2011 discussing the billions of dollars in brand revenue that were to be lost with the onset of new generics.

 

http://www.drugchannels.net/2011/09/medcos-latest-update-on-generic-wave.html

 

The manufactures have tried to retain their brand strength and high margins by utilizing copay strategies. This is the heart of Phillidor. A strategy perhaps adopted from the deal with Medicis. Valeant isn't alone here though. Horizon pharma, Pfizer ... all do it.  One example would be Pfizer's $4 copay card for Lipitor which they actively advertised as:  "LIPITOR for Less than the Average Cost of a Generic Statin."

 

Some doctors and patients like copays because patients can stay on a successful treatment (doctors have already studied the and know the drug) at a competitive price. The bear argument suggests copays will only serve to raise premiums. PBM's are not innocent. As noted above, an argument can be made that PBM's dislike copays because they don't get rebates. And they have played their own game of Chess.. For example, introducing the fairly new - Tier 4  level in their formularies which adopts a more punitive coinsurance model. 

 

http://www.drugchannels.net/2013/09/how-fourth-tier-coinsurance-boom-drives.html

 

I will continue to study the developments but on the surface, this looks like another intelligently organized bear raid to me. The grounds of this industry are fertile and a planted seed of doubt can grow quickly. 

 

But I doubt thus far that Pearson is fraudulent. I think he was playing the same game as his competitors but has become the poster boy for the anti-copay contingent.

 

Replacement with generics lowers the cost of health care delivery. PBMs and manufacturers play the cat and mouse game, but when PBMs win, it's a win for the private insurer (i.e. the patient's employer) and to the patient. There is a reason why FDA allowed the merger of the two largest PBMs - Express Scripts and Medco. FDA understood that giving leverage to the PBMs is good for the consumer.

[ourkid8]

Where did you see this? If that is true, the potential noise Monday morning maybe nothing. 

 

And by the way, I think that fucker at Citron went long Friday.

[original mungerville]

How much is this thing worth without Pearson? It doesn't take a genius to buy debt at market and below par while buying-in common shares at a low price.

 

What I am trying to get at is what is the value of this thing in a Pearson-is-out-and-ValueAct-assigns-an-interim-CEO-scenario. All the fines, etc are peanuts. At a certain price, its all priced in. It comes down to how much did they push the envelope in the other areas of their business, but all their bloody competitors are also handing out coupons to doctors/patients in order to avoid the copays.

 

And by the way, I think that fucker at Citron went long Friday.

 

I've been thinking about this.

 

Free cash flow should be around $10/share next year.  That might erode slowly over time if they only buyback debt and stock.  Instead I think you can imagine them retiring debt and making small acquisitions to slowly grow FCF/share.  None of this "top 5 pharma by 2016" crap. 

 

What would you pay for something earnings $10 of FCF with $85/share of debt and no "outsider" CEO?  Especially with some  nasty hair it has on it.  Maybe 10x?  That puts you at $100/share. 12x, 13x?  That's still only $120-130.  Doesn't seem that compelling if you halt the growth and see the impact of negative growth from 20-30% of the existing revenue.

 

Now how many sell side analysts have a $120-130 price target?  Just doesn't seem like we've seen capitulation at all.

 

Why do you think Citron went long?

 

So $100 in your worst case scenario, and if the issues are limited to Philidor, and the board backs Pearson, Valeant moves on and Ackman probably turns out to be correct that the stock is at least a double from here.

 

I think Citron and the hedge fund(s) it works will try to make money on both sides. Unlike this board, they don't care about the truth and morality. You can't believe most of the stuff in the papers about this situation, because a lot of that was probably either planted or copied from planted material. And Left just did an about-face over the weekend.

[original mungerville]

Where did you see this? If that is true, the potential noise Monday morning maybe nothing. 

 

And by the way, I think that fucker at Citron went long Friday.

 

http://www.wsj.com/articles/valeant-short-seller-dials-back-warning-of-bombshell-report-on-monday-1446417120

[thefatbaboon]

Eric, what do you think usually happens in a collections dispute and lawsuit? You don't think there are all kinds of weird and wonderful allegations made?  What do you expect the non payor to say? I'm not paying because I don't feel like it. I'm not paying because the fairies told me not to.

 

  If Pearson believes or knows that the California pharmacy was selling medicines legally on behalf of Philippe/valeant then his reply that it is a collections dispute is perfectly reasonable. He's not going to say it's a fraud if he doesn't think it's a fraud because in his mind it's a collection dispute.

 

Let's go back to the facts that we know about rather than engage in theoretical speculation:

 

1) July 2015:  R&O sent a message that they believe there is widespread fraud at Philiador and they will stop payment on tens of millions of dollars owed to Valeant.

2)  Several months go by.  Valeant keeps doing business with Philador

3)  late October 2015:  newspaper headline that Philador exists with associated speculation over the lawsuit at R&O

4)  late October 2015:  Management says "holy shit, this sounds serious, let's investigate Philador right away".  Oh and by the way, it's just a "standard collections issue" as if to suggest that this day is the first day anybody has tipped us off -- no reason to investigate Philidor ever before!

 

Uh huh.

 

R&O's lawyers write a letter saying they won't participate in your widespread fraud, and you DON'T EVEN INVESTIGATE!  There's nothing standard about that kind of reasoning for nonpayment.

 

You wouldn't need to convene a special board committee to investigate R&O for fraud if you had already done so!

 

How could you have such a  partner (Philador) and not bother to look into it when you've got $60+ million at stake that won't be collected until you've satisfied his worries about widespread fraud?  That's just ridiculous.

 

Why don't we interview ex-cons for the next CEO position to replace Pearson, after all... there's a chance that they are honest people who were wrongfully convicted.  I mean, you cannot prove that they weren't, because you never know right?

 

No disrespect intended but I think you've rather lost the plot on this one.

 

The timeline you refer to doesn't prove anything. Moreover it's barely a timeline.

 

For example, If r and o refered to sales that valeant knew to be genuine as frauds then they wouldnt make a grand investigation. They'd just treat it as a collection issue. Philidor would say hey we're having trouble collecting from this guy, they say we're a fraud. Maybe you should get in touch directly.  Valeant would say ok we'll write to them as they'll recognise valeant as a genuine company whose products they've been selling. Perhaps they didn't recognise you (Philidor) as you're just an unknown specialty pharma.

 

The subsequent convention of the Philidor committee seems more a reflection of the enormous public criticisms that had at that point be levelled at the specialty pharma situation and the broad aggressive/possibly fraudulent sales, dwr, patient stuffing, allegations.

 

There are many different possible interpretations and series of possibilities here ranging from the OK to the terrible.

 

And seriously what do you expect Pearson to say when asked about r and o?  "Yes. They haven't paid us because they think we're a massive fraud". Why do you think he'd say that? No ceo would make that sound bite for his company.

[Picasso]

Valeant was sinking the whole time Ackman was talking and was around $98 by the time Citron said they had something else on Monday.  Is he trying to play both sides? I don't know.

 

So are we now going to believe that Reitz was planted at R&O to allow Philidor to abuse his license?  And then he was six months in and the shorts said "okay now stop paying Valeant so we can highlight how aggressive they are in pushing altered prescriptions..." ?  And then those legal documents are now planted so that the shorts can convince the longs of Enron like fraud?  And then he starts talking to the LA Times (just wait for the planted NYT article to come out! That will be a doozy...) to plant more fun things like "A lot more will be coming out." ??? Then the shorts will get the PBM's to say they failed some audits and drop coverage of Philidor.  Maybe the shorts planted Eric Rice's signature on R&O's audits and hacked into Valeant's network and put "standard collection dispute" on their slide deck.

 

Or maybe the shorts got freaking lucky as hell and stumbled into a way to kill off a big growth driver for Valeant. 

[ourkid8]

"On Sunday, Mr. Left said didn’t have plans for further major allegations against Valeant, after having consulted with lawyers. "  This means, the sell-off on Friday was overdone and we should have a nice bounce tomorrow. 

 

I am also thinking the SEC contacted andrew left which is why he is now lawyered up. 

 

Where did you see this? If that is true, the potential noise Monday morning maybe nothing. 

 

And by the way, I think that fucker at Citron went long Friday.

 

http://www.wsj.com/articles/valeant-short-seller-dials-back-warning-of-bombshell-report-on-monday-1446417120

[lessthaniv]

Look, the battle between PBM's and manufacturers has been going on for quite some time. As drugs come off patent, generic alternatives negatively impact margins for the manufacturers and at the same time it can positively influence PBM's. PBM's endorse the widespread use of generics (especially where they receive rebates) while the manufacturers attempt to preserve their historical margins and brand strength.

 

Its an epic game of Chess. (hint: Phillidor, Isolani, Lucena, Back Rank, BQ6, KGA .....)

 

The two groups are diametrically opposed. The money at stake here is significant. To put that in perspective, here is an article going back to September, 2011 discussing the billions of dollars in brand revenue that were to be lost with the onset of new generics.

 

http://www.drugchannels.net/2011/09/medcos-latest-update-on-generic-wave.html

 

The manufactures have tried to retain their brand strength and high margins by utilizing copay strategies. This is the heart of Phillidor. A strategy perhaps adopted from the deal with Medicis. Valeant isn't alone here though. Horizon pharma, Pfizer ... all do it.  One example would be Pfizer's $4 copay card for Lipitor which they actively advertised as:  "LIPITOR for Less than the Average Cost of a Generic Statin."

 

Some doctors and patients like copays because patients can stay on a successful treatment (doctors have already studied the and know the drug) at a competitive price. The bear argument suggests copays will only serve to raise premiums. PBM's are not innocent. As noted above, an argument can be made that PBM's dislike copays because they don't get rebates. And they have played their own game of Chess.. For example, introducing the fairly new - Tier 4  level in their formularies which adopts a more punitive coinsurance model. 

 

http://www.drugchannels.net/2013/09/how-fourth-tier-coinsurance-boom-drives.html

 

I will continue to study the developments but on the surface, this looks like another intelligently organized bear raid to me. The grounds of this industry are fertile and a planted seed of doubt can grow quickly. 

 

But I doubt thus far that Pearson is fraudulent. I think he was playing the same game as his competitors but has become the poster boy for the anti-copay contingent.

 

Replacement with generics lowers the cost of health care delivery. PBMs and manufacturers play the cat and mouse game, but when PBMs win, it's a win for the private insurer (i.e. the patient's employer) and to the patient. There is a reason why FDA allowed the merger of the two largest PBMs - Express Scripts and Medco. FDA understood that giving leverage to the PBMs is good for the consumer.

 

Rebates represent a significant part of PBM revenue. PBM's are known to direct patients to drugs offering the best rebates.  Lots of press on this. How is this in the patients best interest?

 

 

[Picasso]

No disrespect intended but I think you've rather lost the plot on this one.

 

The timeline you refer to doesn't prove anything. Moreover it's barely a timeline.

 

For example, If r and o refered to sales that valeant knew to be genuine as frauds then they wouldnt make a grand investigation. They'd just treat it as a collection issue. Philidor would say hey we're having trouble collecting from this guy, they say we're a fraud. Maybe you should get in touch directly.  Valeant would say ok we'll write to them as they'll recognise valeant as a genuine company whose products they've been selling. Perhaps they didn't recognise you (Philidor) as you're just an unknown specialty pharma.

 

The subsequent convention of the Philidor committee seems more a reflection of the enormous public criticisms that had at that point be levelled at the specialty pharma situation and the broad aggressive/possibly fraudulent sales, dwr, patient stuffing, allegations.

 

There are many different possible interpretations and series of possibilities here ranging from the OK to the terrible.

 

And seriously what do you expect Pearson to say when asked about r and o?  "Yes. They haven't paid us because they think we're a massive fraud". Why do you think he'd say that? No ceo would make that sound bite for his company.

 

Did you bother reading the legal documents from the R&O dispute?

[original mungerville]

Picasso, what specifically are you referring to in the R&O suit?

[original mungerville]

Valeant was sinking the whole time Ackman was talking and was around $98 by the time Citron said they had something else on Monday.  Is he trying to play both sides? I don't know.

 

So are we now going to believe that Reitz was planted at R&O to allow Philidor to abuse his license?  And then he was six months in and the shorts said "okay now stop paying Valeant so we can highlight how aggressive they are in pushing altered prescriptions..." ?  And then those legal documents are now planted so that the shorts can convince the longs of Enron like fraud?  And then he starts talking to the LA Times (just wait for the planted NYT article to come out! That will be a doozy...) to plant more fun things like "A lot more will be coming out." ??? Then the shorts will get the PBM's to say they failed some audits and drop coverage of Philidor.  Maybe the shorts planted Eric Rice's signature on R&O's audits and hacked into Valeant's network and put "standard collection dispute" on their slide deck.

 

Or maybe the shorts got freaking lucky as hell and stumbled into a way to kill off a big growth driver for Valeant.

 

Yes, I think they got lucky, however, I think a lot of their half- or non-truths got way too much coverage and there is a lot of disinformation out there.

[shalab]

OM, I think you are right with this logic. If there aren't any more roaches that come out, I think these guys will end up doing ok.

 

So $100 in your worst case scenario, and if the issues are limited to Philidor, and the board backs Pearson, Valeant moves on and Ackman probably turns out to be correct that the stock is at least a double from here.

[ourkid8]

Exactly and we all need to be rational. There are very few facts so the majority that is being released is "noise" and there is a strong special committee investigating the issue. (Value act + previous AG)  Now we should be discussing, what can Valeant earn without Philidor?

 

Yes, I think they got lucky, however, I think a lot of their half- or non-truths got way too much coverage and there is a lot of disinformation out there.

[Picasso]

http://sirfonline.wpengine.netdna-cdn.com/files/2015/10/Isolani-vs.-Reitz-Gary-Kaufman-Declaration.pdf

[lessthaniv]

lessthaniv,

 

I don't think anyone has issue with co-pay assistance.  It's the various methods Philidor used to make sure generics were not used such as altering prescriptions, improper audit signatures, etc.

 

In court papers, Reitz detailed how he had discovered that Philidor was using his national pharmacy identification number on prescriptions being filled at other pharmacies — and even on some that were filled and billed before he signed the agreement to sell R&O on Dec. 1.

 

He also found that, without his knowledge, a Philidor executive who had never visited the Camarillo pharmacy was answering questions about the pharmacy's billing practices during an audit by an insurer.

 

That goes beyond offering copay assistance, no?

 

Yes, that's definitely a fair statement. If true. I say that because I think it's possible that  Reitz realized he sold too cheap and was looking for leverage to renegotiate his deal. None of this has yet been proven in a court. Until then, I'll reserve judgement and keep digging.

[rb]

For example, If r and o refered to sales that valeant knew to be genuine as frauds then they wouldnt make a grand investigation. They'd just treat it as a collection issue. Philidor would say hey we're having trouble collecting from this guy, they say we're a fraud. Maybe you should get in touch directly.  Valeant would say ok we'll write to them as they'll recognise valeant as a genuine company whose products they've been selling. Perhaps they didn't recognise you (Philidor) as you're just an unknown specialty pharma.

Seriously? Perhaps R&O just didn't know who Philidor is? Yea it's just the entity that controls R&O. A total unknown!

[Picasso]

Yes, I think they got lucky, however, I think a lot of their half- or non-truths got way too much coverage and there is a lot of disinformation out there.

 

I have a few issues with this logic.

 

1) Those half truths got their main organic growth driver killed.  Without organic growth (recall the previous issues they had with Solodyn outside the AF channels) the amortization is looking more like some amount of an expense.

2) Ackman spent four hours going over all the facts.  It still didn't convince people of the truth.

3) Even Citron has admitted they were off on the Enron-like fraud, but it's not like the stock went to $0.  This still has a $62 billion enterprise value.

 

Like I said, the shorts got lucky but they got lucky because they noticed a trend of problems from Valeant.  And they did end up uncovering a real problem so there is something to be said for that.

[Picasso]

lessthaniv,

 

I don't think anyone has issue with co-pay assistance.  It's the various methods Philidor used to make sure generics were not used such as altering prescriptions, improper audit signatures, etc.

 

In court papers, Reitz detailed how he had discovered that Philidor was using his national pharmacy identification number on prescriptions being filled at other pharmacies — and even on some that were filled and billed before he signed the agreement to sell R&O on Dec. 1.

 

He also found that, without his knowledge, a Philidor executive who had never visited the Camarillo pharmacy was answering questions about the pharmacy's billing practices during an audit by an insurer.

 

That goes beyond offering copay assistance, no?

 

Yes, that's definitely a fair statement. If true. I say that because I think it's possible that  Reitz realized he sold too cheap and was looking for leverage to renegotiate his deal. None of this has yet been proven in a court. Until then, I'll reserve judgement and keep digging.

 

If this is true then we should see Davenport/Philidor sue Valeant for terminating their agreement over a "standard collection dispute." 

[ERICOPOLY]

For example, If r and o refered to sales that valeant knew to be genuine as frauds then they wouldnt make a grand investigation. They'd just treat it as a collection issue. Philidor would say hey we're having trouble collecting from this guy, they say we're a fraud. Maybe you should get in touch directly.  Valeant would say ok we'll write to them as they'll recognise valeant as a genuine company whose products they've been selling. Perhaps they didn't recognise you (Philidor) as you're just an unknown specialty pharma.

Seriously? Perhaps R&O just didn't know who Philidor is? Yea it's just the entity that controls R&O. A total unknown!

 

1)  A 64 year old pharmacist is somehow naive about how things are really done in his industry

2)  He therefore can easily mistake something that is obviously normal practice for a fraud

3)  He gets to the end of his long career and suddenly starts to withhold tens of millions of dollars of his partner's money due to his imaginings that legit stuff is actually a fraud

 

Hmm... 

 

Nope, nothing he would say could be taken seriously.  No need to investigate his fraud claims.  Carry on, sue him as a regular collection problem.

[ERICOPOLY]

And seriously what do you expect Pearson to say when asked about r and o?  "Yes. They haven't paid us because they think we're a massive fraud". Why do you think he'd say that? No ceo would make that sound bite for his company.

 

I expect him to have sat down with Reitz roughly three months ago when the serious allegations were reported.  After all, the longer a fraud continues the greater the shareholder financial liability and more serious the potential damage to the corporate reputation.

 

I don't expect him to have said anything about the matter this past week.  I expect him to have already been to the bottom of this long beforehand!  Not pretending to be completely surprised!

 

[yzstevie]

http://www.bloomberg.com/news/articles/2015-11-01/munger-isn-t-done-bashing-valeant-after-months-of-holding-nose

 

FYI - interesting comments from Munger.

 

[thefatbaboon]

For example, If r and o refered to sales that valeant knew to be genuine as frauds then they wouldnt make a grand investigation. They'd just treat it as a collection issue. Philidor would say hey we're having trouble collecting from this guy, they say we're a fraud. Maybe you should get in touch directly.  Valeant would say ok we'll write to them as they'll recognise valeant as a genuine company whose products they've been selling. Perhaps they didn't recognise you (Philidor) as you're just an unknown specialty pharma.

Seriously? Perhaps R&O just didn't know who Philidor is? Yea it's just the entity that controls R&O. A total unknown!

 

1)  A 64 year old pharmacist is somehow naive about how things are really done in his industry

2)  He therefore can easily mistake something that is obviously normal practice for a fraud

3)  He gets to the end of his long career and suddenly starts to withhold tens of millions of dollars of his partner's money due to his imaginings that legit stuff is actually a fraud

 

Hmm... 

 

Nope, nothing he would say could be taken seriously.  No need to investigate his fraud claims.  Carry on, sue him as a regular collection problem.

 

Rb,

Yes. Reitz can have known Philidor as the buyer of his pharmacy but, like every one else in the world at that point, not known that Philidor was a plausible, non-fraudulent source of tens of millions of immediate new sales.

 

Eric,

Yes, yes and yes to 1 2 and 3. They are all very possible.  Think about it. You sell an option to buy your peanut gallery pharmacy for 350k- what I imagine you must think is a fair price (otherwise you wouldn't sell). You then find your option holder can do 10000 times the business you thought could be done the very next day.

 

I'm not saying that there isn't a fraud at Philidor or its network. There might be. But I don't think we have enough facts. We need to see the full docket develop. Not just one sides half assed initial brief. 

Until then I'll also reserve judgement on Pearson/valeant because I don't know what happened. And the facts such as they are permit a number of interpretations along the spectrum of legality/illegality, proper/improper response.

 

[Guest Grey512]

http://www.bloomberg.com/news/articles/2015-11-01/munger-isn-t-done-bashing-valeant-after-months-of-holding-nose

 

FYI - interesting comments from Munger.

 

Womp wooooomp.

[jay21]

 

Can I ask a stupid question here?  Another stupid question I guess.

 

Why hasn't Valeant published the full manual if it's being quoted out of context?

 

Not that Valeant is expected to be forthright at this point after we've seen what a "standard collections dispute" looks like... but if they'd just go ahead and put the manual on their website it would settle all this speculation.  We would either see a stock ticker in the green or orange jumpsuits.  At least it would speed things along.

 

It's a Philidor manual not a VRX one. They didn't write it. Don't own it and probably can't publish it.

[ERICOPOLY]

Until then I'll also reserve judgement on Pearson/valeant because I don't know what happened. And the facts such as they are permit a number of interpretations along the spectrum of legality/illegality, proper/improper response.

 

We know that they pretended to be completely unaware just last week.  We know that they continued to do business through Philador.  We know that the board hadn't yet bothered to investigate widespread fraud claims by an entity controlled by Philador -- you know, within your own friggin network of pharmacies!

 

The company could have said "yes, we've investigated Reitz's claims yet found them to be false.  We are therefore pursuing the matter as a standard collections issue".  That would have made a better soundbite.