VRX - Valeant Pharmaceuticals International Inc.

[ERICOPOLY]

If it were a movie, we'd learn that the reason for Valeants apparent inaction is that they've referred the matter to the FBI.

[Picasso]

$2.3 billion in operating cash flows, including $397.5 million of cash proceeds representing the return on our investment in PS Fund 1

from the appreciation in the Allergan share price and our right to 15% of the net profits realized by Pershing Square on the sale of

Allergan shares. Refer to note 23 to the 2014 Financial Statements for additional information; and

 

From the same 10-K.  I see it separated on the income statement, but wouldn't it be on gains from sale of investments in the cash flow statement?

 

This was an unusual transaction but I don't see why gains/losses on a stock sale should be included in operating cash flow?  This is a stock which is valued on free cash flow after all.

[ourkid8]

Did Carl Icahn join the party?

 

http://finance.yahoo.com/news/icahn-nods-valeant-interest-pushes-233355132.html

 

"I'm not in Valeant, well, I don't want to say I'm not completely in it but I'm not going to tell you where I am with it," Icahn said, when asked about the company at the New York Times DealBook conference. He did not explain further.

 

 

[ERICOPOLY]

I can see where you're coming from but I feel like if the aim was truly to shine a light on malfeasance at Philidor would Reitz really have his lawyer respond to Valeant by saying: "We've never heard from you before.  I don't know you, let go of my purse!" And this is while sitting on WAC $6mm USD in boxes of inventory with Valeant's logo plastered on it?

 

 

What makes you believe that Reitz fully understood that Valeant is the controller of the Philador network?

 

Was that in his contract, clearly spelled out?

 

They worked damned hard to conceal their ownership.  The shareholders didn't know about it.

 

It's a meaningless side show -- the fraud allegations were made (and not investigated) before it got to this point.

[ERICOPOLY]

Plus, if you are Reitz then you don't want to sent any money to Valeant (or anyone for that matter) for the same reason that you previously stated.

 

In other words, "if I send this money I am an agent of your fraud", or however he phrased it.

 

So why would Valeant just keep trying and trying the same approach.

 

Let's say Valeant is right -- why didn't Valeant sue him?  I'm just genuinely curious.  Not as curious though as to why they didn't investigate the fraud claims.  They knew why he didn't want to pay, but they didn't want to investigate.  Instead, they just demanded that he'd pay knowing that he won't pay because of his stated reasons?

 

[Rasputin]

$2.3 billion in operating cash flows, including $397.5 million of cash proceeds representing the return on our investment in PS Fund 1

from the appreciation in the Allergan share price and our right to 15% of the net profits realized by Pershing Square on the sale of

Allergan shares. Refer to note 23 to the 2014 Financial Statements for additional information; and

 

From the same 10-K.  I see it separated on the income statement, but wouldn't it be on gains from sale of investments in the cash flow statement?

 

This was an unusual transaction but I don't see why gains/losses on a stock sale should be included in operating cash flow?  This is a stock which is valued on free cash flow after all.

 

The reason is under Note 23:

 

In the consolidated statement of cash flows, $75.9 million of the total proceeds was included as an investing activity as it represents a return of the Company's initial investment. The remaining portion of the proceeds of $397.5 million , representing the Company’s return on investment, was classified as an operating activity, as were the payments related to the commitment letter fees and legal, consulting, and other related expenses.

[ZenaidaMacroura]

I can see where you're coming from but I feel like if the aim was truly to shine a light on malfeasance at Philidor would Reitz really have his lawyer respond to Valeant by saying: "We've never heard from you before.  I don't know you, let go of my purse!" And this is while sitting on WAC $6mm USD in boxes of inventory with Valeant's logo plastered on it?

 

 

What makes you believe that Reitz fully understood that Valeant is the controller of the Philador network?

 

Was that in his contract, clearly spelled out?

 

They worked damned hard to conceal their ownership.

 

It's a meaningless side show -- the fraud allegations were made (and not investigated) before it got to this point.

It's sort of a judgement call (like I think Pearson not-divulging the extent of it can be interpreted).  R&O's lawyer Kaufman was referring to them in emails as "Valeant/Isolani/Philidor."  I see how the covert nature of the organization can cause reasonable minds to doubt. 

 

I agree with you on the side show comment -it's kind of fun to speculate and interesting as hell but the window to look forthcoming and "get it all out" has come and passed.

[cmlber]

Let's say Valeant is right -- why didn't Valeant sue him?  I'm just genuinely curious.  Not as curious though as to why they didn't investigate the fraud claims.  They knew why he didn't want to pay, but they didn't want to investigate.  Instead, they just demanded that he'd pay knowing that he won't pay because of his stated reasons?

 

Perhaps they couldn't sue him?  Isolani had the direct relationship and did sue him.  R&O might legally owe Valeant nothing, they owe Isolani something who owes Philidor something, who owes Valeant something. 

 

They only counter sued after they got sued by R&O and had to respond to that claim.

[ERICOPOLY]

I can see where you're coming from but I feel like if the aim was truly to shine a light on malfeasance at Philidor would Reitz really have his lawyer respond to Valeant by saying: "We've never heard from you before.  I don't know you, let go of my purse!" And this is while sitting on WAC $6mm USD in boxes of inventory with Valeant's logo plastered on it?

 

 

What makes you believe that Reitz fully understood that Valeant is the controller of the Philador network?

 

Was that in his contract, clearly spelled out?

 

They worked damned hard to conceal their ownership.

 

It's a meaningless side show -- the fraud allegations were made (and not investigated) before it got to this point.

It's sort of a judgement call (like I think Pearson not-divulging the extent of it can be interpreted).  R&O's lawyer Kaufman was referring to them in emails as "Valeant/Isolani/Philidor."  I see how the covert nature of the organization can cause reasonable minds to doubt. 

 

I agree with you on the side show comment -it's kind of fun to speculate and interesting as hell but the window to look forthcoming and "get it all out" has come and passed.

 

But suppose you are Valeant:  you know the guy is saying he won't pay you because he doesn't want to implicate himself any further in your fraud.  So why keep asking? 

 

It's possible Reitz' lawyer advised him to say that he doesn't recognize Valeant as his business partner.  I'm not sure that a brief introduction by email "Hi, I'm Valeant but I'm also your real master" is all that is required to make Reitz recognize you as a legal agent of who you are contracted with.

 

Anyways, Reitz is suing them so it's not like he fled to a foreign country to hide with bags of cash.  Why would he do that?  Why would refuse to pay yet not run off with the money, instead turn around and sue Valeant?

[Picasso]

Right but do you consider that gain "operating activity?"  I don't because they went long a stock and sold it for a profit.  The whole company was being valued at 15x cash flows, why would we pay ~$6 billion for those cash flows?  I don't think they were planning on reproducing those efforts every year.

 

Anyway I guess that's just the accounting treatment of it.  I personally found it aggressive.  But other investors could have a different opinion about it since it was broken down on the income statement and explained in footnotes.

[ERICOPOLY]

Let's say Valeant is right -- why didn't Valeant sue him?  I'm just genuinely curious.  Not as curious though as to why they didn't investigate the fraud claims.  They knew why he didn't want to pay, but they didn't want to investigate.  Instead, they just demanded that he'd pay knowing that he won't pay because of his stated reasons?

 

Perhaps they couldn't sue him?  Isolani had the direct relationship and did sue him.  R&O might legally owe Valeant nothing, they owe Isolani something who owes Philidor something, who owes Valeant something. 

 

They only counter sued after they got sued by R&O and had to respond to that claim.

 

R&O is the deadbeat that won't pay up right?  Why is he the first of anyone to sue here?  I'm just a bit confused.

[sswan11]

http://www.nytimes.com/2015/11/01/business/valeant-shows-the-perils-of-fantasy-numbers.html?_r=1

[rishig]

It certainly is never good when big problems surface at companies you own, especially when there could be fraud. It's possible that I have been fooled by management. It's not really a consolation, but if that is the case, at least I was in good company; someone who can fool Jeff Ubben and Mason Morfit for years while they are on the board can probably fool many people. I know it's now popular to say that the bears warned us, but what they actually said isn't quite what ended up happening, and I find the revelations about possible fraud at Philidor a lot more worrying than what had been raised before.

 

This is a good case study in reverse halo effect. When things were going well, everything about the company was great (management, the structure, the assets). Now that things are going badly, everything about the company is terrible (management, the structure, the assets). I think when the dust settles, reality will probably be more nuanced, and even if things are bad enough that ValueAct and the board has to fire management and put others in place, I doubt there won't be value there.

 

I'm in the camp that is waiting for more information. I think many people act like everything is known, but I think (to paraphrase Rumsfeld) that there are probably still many unknowns unknowns that will come out and that aren't even part of the speculation at this point, and when we have a more complete picture, we'll be able to judge things better. Most of what we have from management was a response to the original accusations of channel stuffing and fake sales. I want to hear what they have to say on this more recent stuff.

 

I think it's a good sign that they put that ex-federal judge and deputy attorney general on the investigation committee. The guy seems to have a sterling reputation, I don't think he'd join a kangaroo court. Same for Morfit and Ingram.

 

Liberty, thank you for your response. It is fair to say that there are many unknown unknowns and no one can tell what the final outcome is.

 

However, don't you think there were signs that one could have seen that would have prevented one from taking a very large position in a company with $120B enterprise value and less than $5B in EBITDA? My only point was that no one could have foreseen everything that has happened, but could one have seen some disconfirming evidence to have stayed away or reduced one's position?

 

 

 

 

 

 

[Rasputin]

Right but do you consider that gain "operating activity?"  I don't because they went long a stock and sold it for a profit.  The whole company was being valued at 15x cash flows, why would we pay ~$6 billion for those cash flows?  I don't think they were planning on reproducing those efforts every year.

 

Anyway I guess that's just the accounting treatment of it.  I personally found it aggressive.  But other investors could have a different opinion about it since it was broken down on the income statement and explained in footnotes.

 

It's just GAAP, nothing to do with aggressive or conservative.

 

ASC 230-10-45-16

 

All of the following are cash inflows from operating activities:

 

b.  Cash receipts from returns on loans, other debt instruments of other entities, and equity securities—interest and dividends.

 

 

[ERICOPOLY]

So... perhaps he sued Valeant in order to bring full daylight onto the structure if he's suspecting a coverup (after all, nobody investigated his claims).  It wasn't until after the court filing of the R&O lawsuit that everyone became aware of it.

 

That would be a motive to sue Valeant.  There's nothing financial to gain from suing Valeant, other than more sunk legal fees.  He can't keep the money he's withholding, so what's his angle?

[ZenaidaMacroura]

I can see where you're coming from but I feel like if the aim was truly to shine a light on malfeasance at Philidor would Reitz really have his lawyer respond to Valeant by saying: "We've never heard from you before.  I don't know you, let go of my purse!" And this is while sitting on WAC $6mm USD in boxes of inventory with Valeant's logo plastered on it?

 

 

What makes you believe that Reitz fully understood that Valeant is the controller of the Philador network?

 

Was that in his contract, clearly spelled out?

 

They worked damned hard to conceal their ownership.

 

It's a meaningless side show -- the fraud allegations were made (and not investigated) before it got to this point.

It's sort of a judgement call (like I think Pearson not-divulging the extent of it can be interpreted).  R&O's lawyer Kaufman was referring to them in emails as "Valeant/Isolani/Philidor."  I see how the covert nature of the organization can cause reasonable minds to doubt. 

 

I agree with you on the side show comment -it's kind of fun to speculate and interesting as hell but the window to look forthcoming and "get it all out" has come and passed.

 

But suppose you are Valeant:  you know the guy is saying he won't pay you because he doesn't want to implicate himself any further in your fraud.  So why keep asking? 

 

It's possible Reitz' lawyer advised him to say that he doesn't recognize Valeant as his business partner.  I'm not sure that a brief introduction by email "Hi, I'm Valeant but I'm also your real master" is all that is required to make Reitz recognize you as a legal agent of who you are contracted with.

 

Anyways, Reitz is suing them so it's not like he fled to a foreign country to hide with bags of cash.  Why would he do that?  Why would refuse to pay yet not run off with the money, instead turn around and sue Valeant?

I would think that if Reitz had any real reservation as to the identity of Valeant/isolani/Phil he would have said more than essentially:

 

1. Philidor is committing fraud against us

 

or

 

2. You (Valeant) are in on it.

 

Either way we're keeping the money.

 

He didn't even really imply that valeant could do anything to remedy the situation -it was kind of a tacit "get lost if you don't want trouble." 

 

To your other point- in one of the Isolani emails to Reitz, Isolani said they would seek legal action if Reitz didn't resign immediately and make good on the money.  The screencap I have then cuts off but it looks like Reitz is humorously replying/implying that he would not resign.  Which is funny if he thought he was implicated in fraud!

[ZenaidaMacroura]

Let's say Valeant is right -- why didn't Valeant sue him?  I'm just genuinely curious.  Not as curious though as to why they didn't investigate the fraud claims.  They knew why he didn't want to pay, but they didn't want to investigate.  Instead, they just demanded that he'd pay knowing that he won't pay because of his stated reasons?

 

Perhaps they couldn't sue him?  Isolani had the direct relationship and did sue him.  R&O might legally owe Valeant nothing, they owe Isolani something who owes Philidor something, who owes Valeant something. 

 

They only counter sued after they got sued by R&O and had to respond to that claim.

 

R&O is the deadbeat that won't pay up right?  Why is he the first of anyone to sue here?  I'm just a bit confused.

R&O sued Valeant to avoid payment.  Doesn't that seem like a money grab?

 

According to bloomberg:

[R&O] asked for a declaration that it owed Valeant no money...

 

EDIT: that isn't really rhetorical - I mean couldn't they have sued them on the improper use of their license (the thing that you say they are really on the hook/liable for?)

[Picasso]

You're right Rasputin. I found myself having to make my own adjustments for real operating cash flows to bridge to sustainable free cash flow. Another example would be amortization of the Marathon deal or drugs going off patent.

 

Anyway if someone is going to look at previous free cash flows you have to adjust for those situations. I agree that I should take that off my list.

[Rasputin]

For me, I use 2014 EBITDA (ex gains on investment and divestitures) as baseline for non philidor operating performance (philidor was negligible in 2014).

 

I get roughly $3.6 B EBITDA in 2014.  This INCLUDE restructuring, integration expenses. 

Salix 2016 EBITDA should be around $1.1 B (Salix management forecast posted by Bagehot, ty Bagehot)

This excludes all 2015 launches, B&L manufacturing line expansion, and Philidor expansion.

 

Conservative 2016 EBITDA should be around $4.7 B

2016 Interest $1.7 B ( i assume 5.5% avg rate)

2016 Capex $0.4 B

2016 Working capital (assuming no growth) $0.1 B

2016 Income Tax $0.15 B

2016 FCF $2.4 B or $6.8 per share

 

This estimate exclude costs associated with fixing current problem.  So it's currently at 15 times conservative fcf.

 

I'm very familiar with their acne franchise (i've taken solodyn when I was younger), fraxel/thermage and cerave.  I'd love to buy Atralin for $125 cash if I knew I could get it for $125 from Philidor.  Insurance companies don't cover tretinoin prescription once patient is above age 35 because they don't think ppl above age 35 can still get acne.  So generic for me costs almost the same.  Atralin's delivery system is far superior to generic tretinoin 0.05 since it has more emollient ingredients, more hydrating. 

 

Tretinoin is the only fda approved ingredient to reduce fine lines/wrinkles.  All other products can only say "reduce the APPEARANCE of fine lines/wrinkles" even though non tretinoin products don't always obey the rule.  A lot of vain ppl such as myself use retin a nightly for this purpose.  I've used Atralin before and it's night/day vs generic tretinoin or retin A 0.05 cream.  Due to Atralin price went up so much (I think it's $600 at Costco), I've been buying my retin-A from canadian pharmacy for about the $125 Atralin cash cost from Philidor.  You can compare non active ingredient of Atralin vs generic tretinoin.  Look at glycerin and sodium hyaluronate in Atralin...none in generic tretinoin. 

 

Fraxel is the gold standard in fractionated laser.  Even though there are newer laser like picosure, it doesnt have as long safety profile as Fraxel.  Same with Thermage. 

 

My mother takes occuvite daily since she has AMD, so that part of B&L i'm familiar too.

 

I find what management has done with Cerave and B&L is quite 3G like. 

 

 

[ERICOPOLY]

Let's say Valeant is right -- why didn't Valeant sue him?  I'm just genuinely curious.  Not as curious though as to why they didn't investigate the fraud claims.  They knew why he didn't want to pay, but they didn't want to investigate.  Instead, they just demanded that he'd pay knowing that he won't pay because of his stated reasons?

 

Perhaps they couldn't sue him?  Isolani had the direct relationship and did sue him.  R&O might legally owe Valeant nothing, they owe Isolani something who owes Philidor something, who owes Valeant something. 

 

They only counter sued after they got sued by R&O and had to respond to that claim.

 

R&O is the deadbeat that won't pay up right?  Why is he the first of anyone to sue here?  I'm just a bit confused.

R&O sued Valeant to avoid payment.  Doesn't that seem like a money grab?

 

EDIT: that isn't really rhetorical - I mean couldn't they have sued them on the improper use of their license (the thing that you say they are really on the hook/liable for?)

 

It doesn't sound like a money grab and here's why.

 

You don't start out a game of "I never got it and I don't have it" by writing a letter that starts out with "I'm going to stop paying you because of fraud suspicions.".

 

First you admit that you are going to stop paying and this is how you are going to keep the money for yourself?  Weird!

[ERICOPOLY]

Let's say Valeant is right -- why didn't Valeant sue him?  I'm just genuinely curious.  Not as curious though as to why they didn't investigate the fraud claims.  They knew why he didn't want to pay, but they didn't want to investigate.  Instead, they just demanded that he'd pay knowing that he won't pay because of his stated reasons?

 

Perhaps they couldn't sue him?  Isolani had the direct relationship and did sue him.  R&O might legally owe Valeant nothing, they owe Isolani something who owes Philidor something, who owes Valeant something. 

 

They only counter sued after they got sued by R&O and had to respond to that claim.

 

R&O is the deadbeat that won't pay up right?  Why is he the first of anyone to sue here?  I'm just a bit confused.

R&O sued Valeant to avoid payment.  Doesn't that seem like a money grab?

 

According to bloomberg:

[R&O] asked for a declaration that it owed Valeant no money...

 

EDIT: that isn't really rhetorical - I mean couldn't they have sued them on the improper use of their license (the thing that you say they are really on the hook/liable for?)

 

They don't owe money to Valeant though.  They don't!  They owe money to Philador.  Why is it proper to send the money to Valeant?  There might be a legal reason why they want to force Philador back into the dispute without Valeant's presence.  I don't know why, but I would start out with the suspicion that R&O is contracted to do business with Philador and not Valeant.

[cmlber]

So... perhaps he sued Valeant in order to bring full daylight onto the structure if he's suspecting a coverup (after all, nobody investigated his claims).  It wasn't until after the court filing of the R&O lawsuit that everyone became aware of it.

 

That would be a motive to sue Valeant.  There's nothing financial to gain from suing Valeant, other than more sunk legal fees.  He can't keep the money he's withholding, so what's his angle?

 

I agree, I can't come up with a reasonable motive to sue Valeant. 

 

If it was a money grab, he would do that privately, bringing this all to light would eliminate all of his leverage in a money grab attempt. 

 

But if the lawsuit was intended to bring light to a potential fraud that concerned him, why lie in your lawsuit by saying you don't know who Valeant is and have never heard from them?  If your intent was just to bring this to light, why not sue Valeant and just say we don't believe we are obligated to make these payments to you because the transactions were fraudulent and we've turned the funds over to the court?

 

So neither of those motives make sense, what other possibilities are there?  Did he want to create confusion for some reason?  Was he just pissed he sold too cheap and wanted to create chaos?  Was it a money grab attempt and he just didn't think this would become so public?

[ERICOPOLY]

R&O sued Valeant to avoid payment.

 

Maybe R&O sued Valeant in order to shine the light of day on the relationship between Valeant and Philador for all the world to see.

 

Gets more visibility on his fraud claims -- he might be worried that it's a big coverup.  Discovering Valeant's involvement in Philador might have just cemented his paranoia.

 

Bring the board in to investigate the whole Valeant/Philador relationship...

 

you know... exactly what basically played out.

[cmlber]

Also, Eric, why have you completely ruled out the possibility that Valeant did investigate R&O's claims of fraud and determined he was wrong and therefore it was just a collections dispute?  The committee could be looking into claims that he did not make (like fake emails which he wouldn't know about, or altering prescriptions which he might not know about)?  Or, they could have formed the committee to investigate what they already investigated because from a PR perspective it is much better to say we are investigating these serious claims and let the story fizzle out than it is to say we already investigated this stuff and it's borderline unethical but not fraudulent so we let it continue.

[original mungerville]

Yes, I agree Eric.

 

I see Pearson involved in two possible ways:

 

1)Either he was involved from day 1 and it's revealed that these specialty pharmacies were established with Pearson's knowledge  to specifically defraud insurance companies with the intent of boosting sales and earnings for VRX, or;

 

2) It may also be that Davenport took it upon himself to pump sales through Philidor to hit earn-out targets given his 27% ownership in Philidor. And when Reitz withheld reimbursement cheques after discovering his methods,  it eventually made its way back to Valeant as they hadn't received their money. In this scenario, Pearson, may have tried to keep the issue private and made an enormous management  mistake by covering up Davenports actions.

 

Both scenario's are clearly - not good.  But I think scenario #1 is worse.

 

If it was Pearson's intent (scenario #1) ... I would question everything he's done because there are likely more skeletons in the closet.  If, on the other hand,  he's simply made a stupid decision trying to sweep things under the rug (scenario #2) - simply replace him and the remaining businesses move forward. He's already cut ties to Philidor and being young (Philidor), the impact while meaningful is not insurmountable.

 

From an investment standpoint, the two speculative scenarios I envision result in a different conclusion as to whether I should meaningfully invest funds.

 

Problem is 1) is a disaster scenario (ie likely other skeletons) and 2) is not good either. I guess with Pearson gone under #2), the ex-CFO could come in and replace him (ex-CFO could not come in under #1 because he would be complicit as well). Although 1) and 2) may not be provable in court, I can't see another real option frankly, there is no #3 scenario here.

 

Not pretty.