VRX - Valeant Pharmaceuticals International Inc.

[APG12]

Evercore ISI on the Valeant-Philidor relationship:

Valeant disclosed this week that it has an option to buy one of the pharmacies in question, Philidor RX Services, a relationship other companies don’t appear to have, said Mark Schoenebaum, an analyst with Evercore ISI. He said Pfizer Inc., Amgen Inc., Gilead Sciences Inc. and seven other drugmakers of comparable size don’t have such arrangements. Horizon Pharma Plc and Endo International Plc., two other specialty pharmaceutical companies, said they don’t have ownership interests in the pharmacies they work with.

 

http://www.bloomberg.com/news/articles/2015-10-22/valeant-still-has-explaining-to-do-citron-research-s-left-says

 

Again, what is nefarious about cutting out a middle man?

[Guest Schwab711]

Evercose says that the 10% of R/O that Philidor bought cost them $350k. Now, even if Philidor is much bigger than R/O, isn't it possible that Philidor just isn't that big compared to a large cap and the option to buy control would fall in the bucket where Valeant puts non-material deals that they don't disclose because they're too small? This would make sense if Philidor moves a lot of product but only captures a very tiny slice as margin, making the business not worth that much compared to its revenues.

 

http://sirf-online.org/2015/10/19/hidden-in-plain-sight-valeants-big-crazy-sort-of-secret-story/

 

SIRF estimated Philidor's revenue at $1.5b based on daily prescriptions (tough to say how accurate this is since I have no idea how to judge if $480 is a conservative estimate).

 

52 weeks * 5 day/week * 12,000 prescriptions/day * ~$480/prescription

*Adj the math as necessary

 

If Philidor only sells US branded pharmaceuticals which are the highest-margin products VRX has. R&O should be fairly large even if they only handled CA prescriptions. Both pharmacies appear to be large enough to warrant disclosure though.

 

Let's just ignore that his specialty pharma estimate was way wrong:

 

A better description is a "specialty pharmacy," filling, shipping and getting insurance approval for prescriptions of the more complex drugs Valeant makes. In its third quarter conference call last year, the only instance where Philidor has been publicly mentioned by an analyst, Valeant chief executive Mike Pearson said that perhaps 40% of its business flows through specialty pharmacies. In July, he reiterated the company's guidance for up to $11.1 billion in 2015 revenue, implying that as much as $4.4 billion in product could move through this channel.

 

He applied 40% of all revenue when Valeant referred to 40% of Jublia revenue.  Very different things.

 

Philidor said themselves they are doing 12,000-15,000 prescriptions/day. I'm just showing you how to get $1.5b in revenue with that fact from Philidor. I didn't use any specialty pharma estimates. Just look at the accuracy of the information!

[gr33ngi4nt]

Here is the lawsuit where Evercore gets a lot of its facts regarding the relationship between R&O pharmacy and Philidor.  If you read the lawsuit, you will see clearly that Citron is completely wrong, but that there might be another issue of how aggressive Philidor was in using R&O to get a "backdoor" license into CA.  It is unclear whether VRX would be liable for those bad actions and what damages those would be.  However, my spidey sense tells me it is nowhere near the loss in market cap for VRX this week....

 

http://www.docdroid.net/izhHFWD/isolani-complaint-against-rietz.pdf.html

 

Bloomberg TV is scheduled to have ISI analyst on air at 3:40pm. Looking forward to it.

[KCLarkin]

Philidor said themselves they are doing 12,000-15,000 prescriptions/day. I'm just showing you how to get $1.5b in revenue with that fact from Philidor. I didn't use any specialty pharma estimates. Just look at the accuracy of the information!

 

Philidor was not listed as a 10% customer in the last annual report, so they must have done less than $800 million last year. I assume the pharmacy margins are very small. Let's say 10%. That's $80 million net revenue for Philidor. Doesn't seem material for a company with a $100B EV.

[cogitator8]

I am not sure if at this point Jason Donville coming out and calling names will help VRX, that 45% ROI is an illusion fueled by debt binge of Mckinsey Cocktail Pearson has been drinking. If business model has materially broken down then one doesn´t have business. Let us see what happen on Monday, Donville thinks syndicates are going after Canadians !

[doughishere]

Jason Doneville on BNN:

http://www.bnn.ca/Video/player.aspx?vid=733570

 

He is downright livid and almost delirious.

 

I don't know if this interview says much about Valeant- it certainly says a lot about Jason Donville.

 

Sounds to me like hes getting paid for AUM. I'd be livid too if I got paid for performance annually then some guy comes out with a short report.

 

Thats the game buddy.

[berkshire101]

Jason Doneville on BNN:

http://www.bnn.ca/Video/player.aspx?vid=733570

 

He is downright livid and almost delirious.

 

I don't know if this interview says much about Valeant- it certainly says a lot about Jason Donville.

 

I highly respect Jason Donville.  However, he sounds like a conspiracy theorist towards the end of the interview.  If the business model and fundamentals are strong then the "bear raid" should be temporary, ala Fairfax. 

[Liberty]

Philidor said themselves they are doing 12,000-15,000 prescriptions/day. I'm just showing you how to get $1.5b in revenue with that fact from Philidor. I didn't use any specialty pharma estimates. Just look at the accuracy of the information!

 

Philidor was not listed as a 10% customer in the last annual report, so they must have done less than $800 million last year. I assume the pharmacy margins are very small. Let's say 10%. That's $80 million net revenue for Philidor. Doesn't seem material for a company with a $100B EV.

 

If Philidor truly is "captive", margins could be even lower, which would be kind of the point (reduce leakage from middlemen taking a cut), so what Philidor keeps could be even lower than 10%.

[KCLarkin]

Sounds to me like hes getting paid for AUM. I'd be livid too if I got paid for performance annually then some guy comes out with a short report.

 

He closed his funds to AUM, so he is not an asset gatherer. He does get paid for performance though. I think his bigger point is that it is retail investors who get hurt by market manipulation like this. The people who hold through the crash do fine, the shorts make a mint, the HFs and traders play both sides. If the professionals all make money, who loses?

[ZenaidaMacroura]

Here is a story about Pearson that you should think about.  He does a big deal.  He meets with the employees in a big meeting.

He tells them he will keep the company the same and leave it the way it was.  Basically the employees were worried about layoffs and he told them what they wanted to hear.  After the deal closes he goes in and lays off like 90% of the employees because he said things had changed etc. 

 

What's the source of this story? What "big deal" was this? Thanks.

 

My own source.  Not everything is published on the internet.

The dramas in these companies aren't generally published.

 

This was a great post by Shoham.

http://cafepharma.com/boards/threads/glossary-of-hostile-takeover-terms-with-discussion.559657/page-26#post-5539609

I read most of Shoham's posts.  It was really interesting and I especially enjoyed the background information on Chess!  That said, I get the gut feeling he's a confederate of Andrew Left/Hempton/and or Roddy Boyd.  I mean he's fairly skeptical and critical of all the characters involved (which is consistent enough) but describes the short sellers in all but glowing terms.  Ok fine, but then he meticulously covers the background of Citron/Boyd and makes them sound like vigalante's.  If you know him then I totally retract my statement.  Just a gut feeling.

 

His join date is fairly recent too...

[Guest Schwab711]

Philidor said themselves they are doing 12,000-15,000 prescriptions/day. I'm just showing you how to get $1.5b in revenue with that fact from Philidor. I didn't use any specialty pharma estimates. Just look at the accuracy of the information!

 

Philidor was not listed as a 10% customer in the last annual report, so they must have done less than $800 million last year. I assume the pharmacy margins are very small. Let's say 10%. That's $80 million net revenue for Philidor. Doesn't seem material for a company with a $100B EV.

 

If Philidor truly is "captive", margins could be even lower, which would be kind of the point (reduce leakage from middlemen taking a cut), so what Philidor keeps could be even lower than 10%.

 

Would Philidor be listed as a 10% customer as a VIE? That's the issue, right?

 

Philidor is consolidated so all we care about is net revenue. The gross amount is not relevant. Also, the lawsuit implies a 35.7% margin ($25m net revenue/$70m WAC). I don't know why we are using any other estimate of margins without sources.

 

$800m revenue (5 day/week pharmacy with Philidor's quote for prescriptions/day) implies roughly $300/prescription. Hard to judge whether this is anymore reasonable than $1.5b.

 

Finally, why would we compare Philidor's revenue to VRX's enterprise value to determine if it is material? Why not VRX's revenue? Everything looks immaterial compared to VRX's EV (hint, hint).

[ZenaidaMacroura]

Evercose says that the 10% of R/O that Philidor bought cost them $350k. Now, even if Philidor is much bigger than R/O, isn't it possible that Philidor just isn't that big compared to a large cap and the option to buy control would fall in the bucket where Valeant puts non-material deals that they don't disclose because they're too small? This would make sense if Philidor moves a lot of product but only captures a very tiny slice as margin, making the business not worth that much compared to its revenues.

 

http://sirf-online.org/2015/10/19/hidden-in-plain-sight-valeants-big-crazy-sort-of-secret-story/

 

SIRF estimated Philidor's revenue at $1.5b based on daily prescriptions (tough to say how accurate this is since I have no idea how to judge if $480 is a conservative estimate).

 

52 weeks * 5 day/week * 12,000 prescriptions/day * ~$480/prescription

*Adj the math as necessary

 

If Philidor only sells US branded pharmaceuticals which are the highest-margin products VRX has. R&O should be fairly large even if they only handled CA prescriptions. Both pharmacies appear to be large enough to warrant disclosure though.

 

Let's just ignore that his specialty pharma estimate was way wrong:

 

A better description is a "specialty pharmacy," filling, shipping and getting insurance approval for prescriptions of the more complex drugs Valeant makes. In its third quarter conference call last year, the only instance where Philidor has been publicly mentioned by an analyst, Valeant chief executive Mike Pearson said that perhaps 40% of its business flows through specialty pharmacies. In July, he reiterated the company's guidance for up to $11.1 billion in 2015 revenue, implying that as much as $4.4 billion in product could move through this channel.

 

He applied 40% of all revenue when Valeant referred to 40% of Jublia revenue.  Very different things.

 

Philidor said themselves they are doing 12,000-15,000 prescriptions/day. I'm just showing you how to get $1.5b in revenue with that fact from Philidor. I didn't use any specialty pharma estimates. Just look at the accuracy of the information!

SIRF said they were doing $1.5b (which is somewhat different from what VRX said in their call).

 

Philidor mentioned the prescription volume.

 

You are comparing statements from two different parties -I don't think they are compatible.  $1.5B is almost certainly high.

[Guest Schwab711]

I wrote it out so others could adjust the $/prescription. I even used 5 days/week and 12,000 prescriptions/day to be conservative.

[gr33ngi4nt]

Here is the lawsuit where Evercore gets a lot of its facts regarding the relationship between R&O pharmacy and Philidor.  If you read the lawsuit, you will see clearly that Citron is completely wrong, but that there might be another issue of how aggressive Philidor was in using R&O to get a "backdoor" license into CA.  It is unclear whether VRX would be liable for those bad actions and what damages those would be.  However, my spidey sense tells me it is nowhere near the loss in market cap for VRX this week....

 

http://www.docdroid.net/izhHFWD/isolani-complaint-against-rietz.pdf.html

 

Bloomberg TV is scheduled to have ISI analyst on air at 3:40pm. Looking forward to it.

 

Well that was weird. The interview wasn't shown for some reason... had gotten an e-mail saying there would be something... sorry guys.

[Picasso]

I wrote it out so others could adjust the $/prescription. I even used 5 days/week and 12,000 prescriptions/day to be conservative.

 

If you read the letter Valeant sent to McCaskill, they disclosed average sales price per perscription in 3Q 2014 at $280.82 and in 3Q 2015 at $316.86.

 

So your $480 is way, way off.

 

http://www.mccaskill.senate.gov/imo/media/doc/Pearson%20Letter%20to%20Sen%20McCaskill%202015-10-14.pdf

[gr33ngi4nt]

Here is the lawsuit where Evercore gets a lot of its facts regarding the relationship between R&O pharmacy and Philidor.  If you read the lawsuit, you will see clearly that Citron is completely wrong, but that there might be another issue of how aggressive Philidor was in using R&O to get a "backdoor" license into CA.  It is unclear whether VRX would be liable for those bad actions and what damages those would be.  However, my spidey sense tells me it is nowhere near the loss in market cap for VRX this week....

 

http://www.docdroid.net/izhHFWD/isolani-complaint-against-rietz.pdf.html

 

Bloomberg TV is scheduled to have ISI analyst on air at 3:40pm. Looking forward to it.

 

Well that was weird. The interview wasn't shown for some reason... had gotten an e-mail saying there would be something... sorry guys.

 

http://www.bloomberg.com/news/videos/2015-10-23/digging-into-valeant-are-we-seeing-phantom-revenue-

 

[cogitator8]

It makes me laugh when Ackman compared VRX with Berkshire and other great plateform companies. Sometimes I wonder, to be successful in this industry, you have to be a salesman too, actually more salesman than investor. I have never heard Klarman ever talking publically about his holdings !

[feynmanresearch]

It makes me laugh when Ackman compared VRX with Berkshire and other great plateform companies. Sometimes I wonder, to be successful in this industry, you have to be a salesman too, actually more salesman than investor. I have never heard Klarman ever talking publically about his holdings !

 

You know that saying:" say it long and loud enough, and people will believe it to be the truth"

[KCLarkin]

Would Philidor be listed as a 10% customer as a VIE? That's the issue, right?

 

Philidor is consolidated so all we care about is net revenue. The gross amount is not relevant. Also, the lawsuit implies a 35.7% margin ($25m net revenue/$70m WAC). I don't know why we are using any other estimate of margins without sources.

 

$800m revenue (5 day/week pharmacy with Philidor's quote for prescriptions/day) implies roughly $300/prescription. Hard to judge whether this is anymore reasonable than $1.5b.

 

Finally, why would we compare Philidor's revenue to VRX's enterprise value to determine if it is material? Why not VRX's revenue? Everything looks immaterial compared to VRX's EV (hint, hint).

 

WAC is list price. Your "Net Revenue" is Valeant's actual revenue. I am trying to find Philidor's net revenue. For consolidation, I was trying to find out whether the ownership option of Philidor was material enough to disclose. So, I would compare Philidor's Enterprise Value to Valeant's. You can just assume it is 1% of Valeant's value, based on revenue, but I think the EV of Philidor is much less than 1% of Valeant (since Philidor is likely unprofitable).

 

Anyway, this is just idle speculation. It was not disclosed. The SEC will decide whether that was the right decision or not.

[Guest Schwab711]

I wrote it out so others could adjust the $/prescription. I even used 5 days/week and 12,000 prescriptions/day to be conservative.

 

If you read the letter Valeant sent to McCaskill, they disclosed average sales price per perscription in 3Q 2014 at $280.82 and in 3Q 2015 at $316.86.

 

So your $480 is way, way off.

 

http://www.mccaskill.senate.gov/imo/media/doc/Pearson%20Letter%20to%20Sen%20McCaskill%202015-10-14.pdf

 

5 * 52 * 12,000 * $316.86 = $988.6m

5 * 52 * 15,000 * $316.86 = $1.235b

 

So revenue is between $1b and $1.25b in 2015 ($886m - $1.1b in 2014), according to them. Greater than 10% in every period.

 

This link also seemed relevant:

https://www.youtube.com/watch?v=Bc3gXnhSy4E&feature=youtu.be&t=15s

[doughishere]

Sounds to me like hes getting paid for AUM. I'd be livid too if I got paid for performance annually then some guy comes out with a short report.

 

He closed his funds to AUM, so he is not an asset gatherer. He does get paid for performance though. I think his bigger point is that it is retail investors who get hurt by market manipulation like this. The people who hold through the crash do fine, the shorts make a mint, the HFs and traders play both sides. If the professionals all make money, who loses?

 

 

I guess i would ask this question. If you dont do the work to determine the intrinsic value and know the company well enough to hold through a "bear raid" ....should you even be in the game in the first place? How can i take Donville as a serious professional investment manager when he says that he sells his shares because the sole fact that the share price goes down, because mr market gets manic on one of the stocks he owns, and not because the intrinsic value of the company is is less than the market price.

 

I hate to sound like a douche but i knid of want to think this one though. Whats the difference between Citron and Bill Ackman when Bill comes out shorting HLF? That Bill is trying to the public "good" in trying to shut down(or at least correct some of HLF "bad" business practices)?

 

Donville here almost claims that we should pay no attention to the report because there is "no accountability." That we should limit Citrons freedom of speech to question accounting standards. Why shouldn't there be more debate? There should be more public scrutiny and discussion? ie. Blogpost, releasing reports, forums like COBF.

 

What if someone posted a short theisis on this Forum?

 

Instead of getting all worked up over trying to limit Cirtrons freedom of speech we should be trying to refute what they say in their report. If people are so easily swayed to listen to Cirrons report then the should be just as eaisly swayed by Donvilles refute of Citrons report. Short reports like Citrons are healthy parts of the markets(a place where people come together to and trade ideas.) Donville kinda does like 3/4 of the interview on why we should legilsate "freedom of speach" rather then step through the numbers to refute Citrons report.

God, I almost thought he was going to use the term "financial terrorism."(I should copywite that). If Citron is a big enough crank then people will stop listening to them.

 

Now to not sound like a douche, and a actual human being, i get the pain he feels. That if they profit from the quick sell then yeah i have a problem with that. I'm fine with that. But on the other hand if what citron says is true we wouldn't be having this discussion. 

 

I'm not trying to be a douche I just think there should be some honest talk about things before we jump to legislation by limiting, yes even "scummy" Citrons freedom of speech....

[KCLarkin]

I'm not trying to be a douche I just think there should be some honest talk about things before we jump to legislation by limiting, yes even "scummy" Citrons freedom of speech....

 

I have a real problem with the media reporting these allegations without doing any research on their own. At the very least, they should be interviewing Roddy Boyd or Hempton. People who've done actual work and not just spouted sensational allegations.

[PatientCheetah]

I have no problem with citron's report but I do have a problem with its timing. It is clearly taking advantage of the negative sentiment in the sector after Hillary's tweet, akin to pouring more oil into a fire. Similar to an activist investor, its intention is to move the stock prices for its own profit. The average investors that do not have the time and ability to discern news flow are ones selling at these distressed price to others.

[Picasso]

I wrote it out so others could adjust the $/prescription. I even used 5 days/week and 12,000 prescriptions/day to be conservative.

 

If you read the letter Valeant sent to McCaskill, they disclosed average sales price per perscription in 3Q 2014 at $280.82 and in 3Q 2015 at $316.86.

 

So your $480 is way, way off.

 

http://www.mccaskill.senate.gov/imo/media/doc/Pearson%20Letter%20to%20Sen%20McCaskill%202015-10-14.pdf

 

5 * 52 * 12,000 * $316.86 = $988.6m

5 * 52 * 15,000 * $316.86 = $1.235b

 

So revenue is between $1b and $1.25b in 2015 ($886m - $1.1b in 2014), according to them. Greater than 10% in every period.

 

This link also seemed relevant:

https://www.youtube.com/watch?v=Bc3gXnhSy4E&feature=youtu.be&t=15s

 

First off, the 12,000-15,000 per day is towards the end of 2015.  They were doing around 6,000 a day in April of this year and expect to ramp up to 12,000-15,000 by the end of 2015.

 

So not only is the average price way too high, but you're also annualizing the highest volume of the end of the year.

 

Watch the interview: https://www.facebook.com/senatorgreenleaf/posts/807822615960322

[cogitator8]

I never liked Valeant´s business model to begin with, so there is more reason to dislike it now. Pharma companies are Cash horders, but VRX is opposite, it is a debt horder ! This story sound more and more implausible, there is no way they can earn 45% ROI in this situation. Aetna, Cigna, BCBS, all will be cutting reimbusement like crazy, physicians in our community don´t like its products, so where is that Competitive Advantage, it is not there and it is not coming back. What VRX need to worry about is the debt load ! $30B is no pocket change. I would have felt very comfortable if they had $30B is cash, I could have cared less. As Munger said ¨one can do very well by simply avoiding stupidty¨.