VRX - Valeant Pharmaceuticals International Inc.

[Liberty]

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?

 

Rishi, I think that's very easy in hindsight. Less obvious at the time.

 

I do know at least two other investors who sold in the 230-250 range because of valuation concerns, so it certainly isn't unheard of. But if I put myself back in the mindset at that time, the factors were: EBITDA was going up quite fast, with conservative guidance (which they usually beat) of 7.5bn for 2016 with no additional M&A. Even at the peak of 120bn EV (and it didn't spend that long there), that's a bit more reasonable. Also, with a decently high stock price, it was expected that they would probably do a big merger of equals at some point, and that could have changed everything (especially if a big part was done with equity). They were also growing quite fast, delevering just by virtue of normalizing salix inventories and had many new succesful products, restructuring charges were falling away, etc. At the time the stock didn't seem too expensive when considering all the opportunities that laid just ahead on the road, and it didn't seem that speculative considering their succesful track record. Growth is another part of value, after all, and they seemed to have a very good recipe for profitable growth.

 

Of course in hindsight, we know what happened to the stock... Now the question is, what actually happened at the company? And what is the value of all this?

[cmlber]

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.

 

He could have brought this all to light without lying and destroying his credibility though...

 

Maybe the lawsuit was intended to give Valeant a way to back down from his money grab attempt?  He might have thought Valeant would see this and just cut ties with Philidor or tell Philidor to drop it and write this off, since he money grabbed in a way that made it seem like Valeant was totally uninvolved?  Highly unlikely, but nothing makes sense, so anything is possible...

[ERICOPOLY]

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? 

 

I'm taking him on his word (worded by his lawyer) that more than a month had passed without hearing back from management about any of his concerns.

 

Is it normal to not at least reassure him that a team of investigators is looking into the matter?

[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? 

 

I'm taking him on his word (worded by his lawyer) that more than a month had passed without hearing back from management about any of his concerns.

 

Is it normal to not at least reassure him that a team of investigators is looking into the matter?

 

Why take him at his word when he has said he has never received an invoice from Valeant when we know he received 75 invoices from Valeant and paid them all?

 

[ERICOPOLY]

He could have brought this all to light without lying and destroying his credibility though...

 

Explain the exact lie.

 

His credibility is destroyed?  He a licensed pharmacist entrusted to hundreds of millions of dollars of Valeant's revenue.  The bizarre denial of who Valeant is and why they are trying to collect on behalf of Isolani/Philador looks like some strategy to force Valeant to CLEARLY EXPLAIN exactly how they are tied to Philador.  "Uh, I don't know who the fuck you are".  So they have to reply with documents that prove the relationship.  Or something like that.

[ERICOPOLY]

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? 

 

I'm taking him on his word (worded by his lawyer) that more than a month had passed without hearing back from management about any of his concerns.

 

Is it normal to not at least reassure him that a team of investigators is looking into the matter?

 

Why take him at his word when he has said he has never received an invoice from Valeant when we know he received 75 invoices from Valeant and paid them all?

 

Again, that sounds so stupid that I believe he is likely drawing a distinction that Valeant is not Philador until it is proven to him.

[lessthaniv]

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.

 

The purpose of this action is for R&O to get to the bottom of this, avoid accrual

of avoidable damages, if any, and secure an early adjudication without waiting until

Valeant sees fit to file suit.

Accordingly, R&O seeks a declaratory judgment from this Court that Valeant’s

claims are without merit and that R&O owes Valeant nothing. R&O will conduct

discovery, including written discovery and depositions, in order to determine Valeant’s

involvement, if any, in a scheme to defraud R&O and others.

 

 

[cmlber]

He could have brought this all to light without lying and destroying his credibility though...

 

Explain the exact lie.

 

His credibility is destroyed?  He a licensed pharmacist entrusted to hundreds of millions of dollars of Valeant's revenue.  The bizarre denial of Valeant looks like some issue to force Valeant to CLEARLY EXPLAIN exactly how they are tied to Philador.  "Uh, I don't know who the fuck you are".  So they have to reply with documents that prove the relationship.  Or something like that.

 

He was not entrusted to hundreds of millions of dollars of Valeant's revenue before his credibility was destroyed, so I don't think that's a fair argument.

 

It's possible that he lied for some reason I don't understand (and therefore I'm wrong in saying his credibility was destroyed), but why would he want Valeant to clearly explain how they are tied to Philidor?  And even if that's what he wanted to hear from Valeant, "Idk who the fuck you are" isn't a great way to draw that out, because they can easily respond with "Yes you do, you've emailed us 75 times," and make you look like a total idiot.  Why not say we know who you are but don't know how you are affiliated with Isolani which is the company claiming we owe them money that you also claim we owe you?

 

I don't know what the right answer is, and appreciate your posts because they help me think about the issues.  But I don't think it's certain that management has lied and don't think you can rule out that Reitz had some financial motive.

[ZenaidaMacroura]

[pre][/pre]

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? 

 

I'm taking him on his word (worded by his lawyer) that more than a month had passed without hearing back from management about any of his concerns.

 

Is it normal to not at least reassure him that a team of investigators is looking into the matter?

That's sort of the crux of my point -for management to investigate or take him seriously he needed to have not made half of his reply blatantly untrue.  Because he awkwardly inserted claims that both parties knew to be untrue it makes it look like the fraud claims are an angle he's trying to work.  I think at that point VRX sorta realized they should step back and let the Isolani legal action play out.  The correspondence from valeant legal council was meant to be a last call on the off chance that Reitz had actual misgivings about the org structure. 

[ERICOPOLY]

Here is what LessThanIV just wrote which makes a lot of sense to me, rather than explanations that don't make sense which seem to satisfy many that he's a discredited idiot:

 

 

The purpose of this action is for R&O to get to the bottom of this, avoid accrual

of avoidable damages, if any, and secure an early adjudication without waiting until

Valeant sees fit to file suit.

Accordingly, R&O seeks a declaratory judgment from this Court that Valeant’s

claims are without merit and that R&O owes Valeant nothing. R&O will conduct

discovery, including written discovery and depositions, in order to determine Valeant’s

involvement, if any, in a scheme to defraud R&O and others.

 

 

[ZenaidaMacroura]

reading your replies Eric I wonder if both sides were essentially talking (indicating in this case -with legal action) past each other.  Like they each thought they were being fairly obvious but it devolved into a confusing cluster

[ERICOPOLY]

He reported his worries over a month before he decided to stop making payments.

 

He was not yet "discredited as a money grabber" at that point during that first month.

 

At that time, he was still just the licensed pharmacist entrusted to hundreds of millions of dollars in revenue.

 

It was only after they completely ignored him that he felt his suspicions are confirmed by their silence.

 

That's when he began to stop making payments.  So they can't say those refusals to pay are ground for them to not trust him.

 

Have to look at the timeline.  They completely ignored their pharmacist in charge, handling hundreds of millions of dollars.  That isn't worrisome enough to investigate -- hundreds of millions of dollars in the hands of a credible witness blowing the fraud whistle?

 

Later on they call him a liar, but come on... there was that entire month before the money stopped rolling in before we got to that point.  And what, they investigated his claims and refused to tell him?

 

 

[Guest Schwab711]

A lot of these finite possibility situations have other possibilities.

 

As to future FCF estimates, there is no way that VRX's tax rate will be single digits in 2016. Why are we still assuming that VRX will have such a low tax rate when this has not been reality for over a year in spite of SLXP producing negative income?

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/80/

[lessthaniv]

Here is what LessThanIV just wrote which makes a lot of sense to me, rather than explanations that don't make sense which seem to satisfy many that he's a discredited idiot:

 

 

The purpose of this action is for R&O to get to the bottom of this, avoid accrual

of avoidable damages, if any, and secure an early adjudication without waiting until

Valeant sees fit to file suit.

Accordingly, R&O seeks a declaratory judgment from this Court that Valeant’s

claims are without merit and that R&O owes Valeant nothing. R&O will conduct

discovery, including written discovery and depositions, in order to determine Valeant’s

involvement, if any, in a scheme to defraud R&O and others.

 

This was taken directly from the complaint for declaratory judgement.

[Picasso]

Rasputin,

 

What do you think about a trade on the bonds?  Your assumption takes into account a 5.5% cost of debt capital which is a long way from the current market yield.

 

If you can buy ten years bonds at 10% and in one year get back to a 6% yield the upside is almost identical to the stock over the next year. The difference is the long-term compounding of the stock if Valeant gets through this unscathed.

[ERICOPOLY]

Here is what LessThanIV just wrote which makes a lot of sense to me, rather than explanations that don't make sense which seem to satisfy many that he's a discredited idiot:

 

 

The purpose of this action is for R&O to get to the bottom of this, avoid accrual

of avoidable damages, if any, and secure an early adjudication without waiting until

Valeant sees fit to file suit.

Accordingly, R&O seeks a declaratory judgment from this Court that Valeant’s

claims are without merit and that R&O owes Valeant nothing. R&O will conduct

discovery, including written discovery and depositions, in order to determine Valeant’s

involvement, if any, in a scheme to defraud R&O and others.

 

This was taken directly from the complaint for declaratory judgement.

 

Makes sense that they have to drag Valeant into it in order to see if they have any involvement in a fraud scheme. 

 

The "gee, I don't know who you are" line looks like it was necessary in order to establish an excuse to sue Valeant just to start the discovery into Valeant's involvement -- "stop billing me I don't know who you are, I haven't seen any invoices, and I don't owe you anything... I just have to sue you now because you won't leave me alone".  Clever I guess.

[Guest Schwab711]

Here is what LessThanIV just wrote which makes a lot of sense to me, rather than explanations that don't make sense which seem to satisfy many that he's a discredited idiot:

 

 

The purpose of this action is for R&O to get to the bottom of this, avoid accrual

of avoidable damages, if any, and secure an early adjudication without waiting until

Valeant sees fit to file suit.

Accordingly, R&O seeks a declaratory judgment from this Court that Valeant’s

claims are without merit and that R&O owes Valeant nothing. R&O will conduct

discovery, including written discovery and depositions, in order to determine Valeant’s

involvement, if any, in a scheme to defraud R&O and others.

 

This was taken directly from the complaint for declaratory judgement.

 

Thanks for posting IV.

 

If folks trust VRX is innocent because Reitz made a single claim then they should take a step back and evaluate the implications of Eric's original statement (paraphrasing) "[fraud accusations]... are considered a standard collections dispute"! More than likely, if VRX had looked into Reitz/R&O and convinced themselves that fraud was not taking place and that this incident was truly just a standard collections dispute, why wouldn't they have disclosed that conclusion on their conference call? The lack of disclosure is extremely concerning given the court documents available for the case.

 

By the way, anyone with a PACER account (and a few $s) can view the court documents first hand. Don't pay Pacermonitor and get an actual account.

 

https://www.pacermonitor.com/public/case/9534689/R_and_O_Pharmacy,_LLC__v_Valeant_Pharmaceuticals_North_America_LLC

[Guest Schwab711]

Here is what LessThanIV just wrote which makes a lot of sense to me, rather than explanations that don't make sense which seem to satisfy many that he's a discredited idiot:

 

 

The purpose of this action is for R&O to get to the bottom of this, avoid accrual

of avoidable damages, if any, and secure an early adjudication without waiting until

Valeant sees fit to file suit.

Accordingly, R&O seeks a declaratory judgment from this Court that Valeant’s

claims are without merit and that R&O owes Valeant nothing. R&O will conduct

discovery, including written discovery and depositions, in order to determine Valeant’s

involvement, if any, in a scheme to defraud R&O and others.

 

This was taken directly from the complaint for declaratory judgement.

 

Makes sense that they have to drag Valeant into it in order to see if they have any involvement in a fraud scheme. 

 

The "gee, I don't know who you are" line looks like it was necessary in order to establish an excuse to sue Valeant to stop asking them to pay them?

 

Agreed. I'm not a lawyer but I think this is a fairly common court strategy in general. I don't believe this will be held against Reitz/R&O or effect the merit of his complaint.

[cmlber]

Here is what LessThanIV just wrote which makes a lot of sense to me, rather than explanations that don't make sense which seem to satisfy many that he's a discredited idiot:

 

 

The purpose of this action is for R&O to get to the bottom of this, avoid accrual

of avoidable damages, if any, and secure an early adjudication without waiting until

Valeant sees fit to file suit.

Accordingly, R&O seeks a declaratory judgment from this Court that Valeant’s

claims are without merit and that R&O owes Valeant nothing. R&O will conduct

discovery, including written discovery and depositions, in order to determine Valeant’s

involvement, if any, in a scheme to defraud R&O and others.

 

This was taken directly from the complaint for declaratory judgement.

 

Makes sense that they have to drag Valeant into it in order to see if they have any involvement in a fraud scheme. 

 

The "gee, I don't know who you are" line looks like it was necessary in order to establish an excuse to sue Valeant just to start the discovery into Valeant's involvement -- "stop billing me I don't know who you are, I haven't seen any invoices, and I don't owe you anything... I just have to sue you now because you won't leave me alone".  Clever I guess.

 

Couldn't he have sued by saying "I know who you are, but I don't think I owe you anything because my contract is with Isolani and I think you are all engaged in fraud" to get the same effect? That would also drag Valeant into this so you could begin a discovery process but you wouldn't look like a liar.

[Picasso]

I thought these were Philidor invoices not Valeant invoices?

[KJP]

Curious why the class period doesn't include the day that management presented the issue as a "Standard Collections Dispute".  I guess there will have to be another class organized to cover those individuals should this turn out, as I strongly suspect, to be anything but a standard dispute:

 

http://finance.yahoo.com/news/shareholder-alert-brower-piven-encourages-222500030.html

 

The class period likely will be extended by the time a motion for class certification is filed, which is a long ways away.  There likely will be many putative class actions filed on behalf of Valeant shareholders.  The cases will be consolidated in one court, and then that court will appoint a lead plaintiff and lead counsel.  Lead counsel will then file an amended complaint that updates and expand all of the allegations and, most likely, includes a longer class period.   

[cmlber]

I thought these were Philidor invoices not Valeant invoices?

 

I think they are Valeant invoices to R&O Pharmacy, which is owned by Isolani which is owned by Philidor, but R&O Pharmacy isn't the issue, it's Reitz not depositing checks in the R&O bank account, and Valeant can't sue Reitz because it doesn't have a contract with Reitz, it has a contract, through it's shipment of product, with R&O.  Only Isolani has a relationship with Reitz and therefore only Isolani can sue Reitz.

[Picasso]

Has anyone seen an invoice from Valeant to R&O then? 

[lessthaniv]

Here is one thing I don't understand. (there are many... but here is one)

 

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

 

In Exhibit 4:

 

Andy Davenport is responding to Russell Reitz by email confirming that he as stopped the practice of using R&O's NPI numbers. But in that email he says ..." While we remain comfortable with the practice, we halted activity pending coming to some alignment with you". 

 

Q? Why would Andy Davenport put in writing that he is "comfortable with the practice"?

 

In Exhibit G:

 

This is an email exchange between Russell Reitz and Jaime Fleming. Jaime is apologizing for "jumping the gun on an IHS Audit response. She sends Russell suggested answers to the questions they've asked.

 

Q? Why did they cut the document off with her actual suggestions in red?

 

In Philidor's news release, Andy maintains they've done nothing wrong. This is with hindsight as to whats already on the record and printed in the press? 

 

Are we missing some legal angle whereby Philidor can use the NPI numbers for instance? In any event, reading the 2015 Pharmacy Lawbook, it appears that using NPI numbers incorrectly while improper, is considered only a misdemeanor? 

 

http://www.pharmacy.ca.gov/laws_regs/lawbook.pdf

 

 

4329. Misdemeanor: Non-Pharmacist Acting as Manager, Compounding, Dispensing or

Furnishing Drugs

Any non-pharmacist who takes charge of or acts as supervisor, manager, or pharmacist-in-charge

of any pharmacy, or who compounds or dispenses a prescription or furnishes dangerous drugs

except as otherwise provided in this chapter, is guilty of a misdemeanor.

 

 

[rishig]

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?

 

Rishi, I think that's very easy in hindsight. Less obvious at the time.

 

I do know at least two other investors who sold in the 230-250 range because of valuation concerns, so it certainly isn't unheard of. But if I put myself back in the mindset at that time, the factors were: EBITDA was going up quite fast, with conservative guidance (which they usually beat) of 7.5bn for 2016 with no additional M&A. Even at the peak of 120bn EV (and it didn't spend that long there), that's a bit more reasonable. Also, with a decently high stock price, it was expected that they would probably do a big merger of equals at some point, and that could have changed everything (especially if a big part was done with equity). They were also growing quite fast, delevering just by virtue of normalizing salix inventories and had many new succesful products, restructuring charges were falling away, etc. At the time the stock didn't seem too expensive when considering all the opportunities that laid just ahead on the road, and it didn't seem that speculative considering their succesful track record. Growth is another part of value, after all, and they seemed to have a very good recipe for profitable growth.

 

Of course in hindsight, we know what happened to the stock... Now the question is, what actually happened at the company? And what is the value of all this?

 

Fair. All of this is hindsight. Do you think one could have just stayed away by saying this is out of one's circle of competence.

 

In 2011, I remember reading Goldfarb at Sequoia saying something along the lines that they have not made large investments in pharma and the last time they owned a pharma manufacturer was J&J in some early 90s. Combine this with the fact that their pharma analyst was a fresh graduate from Harvard at his first job. It's possible that they are stepping out of their circle of competence. Or may be, its in their circle of competence, but not in mine. May be that I don't really understand how a drug could be a branded generic and yet be durable. What gives it durability? How these products flow from manufacturer to the patient.