Well if you haven't seen or heard about Valeant Pharmaceuticals (VRX) today, or at least recently, then you're living in a closet. For those that know nothing about this here's a basic timeline.
- Valeant is a serial acquirer of smaller pharmaceutical companies and has always gotten bad press for it
- Many HFs have invested in Valeant over the last few years and its share price has compounded significantly (known as a Hedge Fund Hotel)
- Following the Turing Pharma incident (huge price increases), Valeant was brought back into the spotlight due to its similar tactics of significantly raising prices after acquiring a new drug
- Stock was at $263 in August and had settled around $170 in recent weeks
- Some news related to a specialty pharmaceutical, Philidor, came out and it was ultimately related to Valeant; management included it in the earnings call
- This morning, Citron Research released a report calling Valeant the next Enron (found here: http://www.citronresearch.com/wp-content/uploads/2015/10/Valeant-Philad…)
- Valeant shares slid as low as $88 and trading was halted
- Valeant issued the statement below
We have a community of finance people here, many of whom I am sure are following this. Curious to hear everyone's opinions. So the question for WSO: Valeant Pharmaceuticals, fraud or not?
Valeant Pharmaceuticals Responds To Erroneous Report10/21/2015
LAVAL, Quebec, Oct. 21, 2015 /PRNewswire/ -- Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (TSX: VRX) today responded to recent accusations made regarding its financial reporting and operations.Philidor Rx Services is a pharmacy licensed in Pennsylvania and also provides back-end services, including call center, claims adjudication, IT and logistics support, as well as compliance/HIPPA regulation guidance, to other pharmacies, including R&O Pharmacy. This includes a common call center phone number serviced by Philidor for the Philidor network pharmacies.
All shipments to Philidor and other pharmacies in the Philidor pharmacy network, including R&O, are not recorded in Valeant's consolidated net revenue. Sales are recorded only when the product is dispensed to the patient. All sales to Philidor and Philidor network pharmacies are accounted for as intercompany sales and are eliminated in consolidation. They are not included in the consolidated financial results that Valeant reports externally.
Any inventory at pharmacies in the Philidor pharmacy network are included in Valeant's consolidated inventory balances – there is no sales benefit from any inventory held at these specialty pharmacies and inventory held at the Philidor network pharmacies is reflected in Valeant's reported inventory levels.
The $69 million at wholesaler acquisition cost of products shipped by Valeant to R&O were not recorded as revenue to Valeant when shipped to R&O. When R&O dispensed those products Valeant recognized the net realized amount due from patients and payors (approximately $25 million) and reduced the associated inventory from Valeant's balance sheet. In this case, we estimate the net amount of revenue for the $69 million at WAC would be approximately $25 million.
The timing of our revenue recognition by selling through the Philidor pharmacy network is actually delayed when compared to selling through the traditional wholesaler channel.
that name is familiar... reminds me of cheap canadian drugs emails that goes into my spam box
interested
Best Biotech Penny stock scam ever
Ackman purchased 2 MM more shares. But then again he is one for Pyramid Schemes.....
The list of investors in the company is ridiculous, in addition to Ackman. He kinda had to buy more shares today or else he'd be admitting his thesis for years has been wrong. He originally invested in Valeant at $11.
You mean $196?
Agreed. Can't believe Simpson + Greenberg have 10-30% of their fund invested.
Hempton with the incisive analysis as per usual: http://brontecapital.blogspot.com/
That write-up is a little worrisome, but I think it's more likely that Philidor management / employees used fake invoices to rip off Valeant / health plans. I highly doubt that Valeant is complicit in the possible fraud. I can't imagine the company has been stuffing the channel for the last few years.
I have no position, I'm just a huge Hempton fanboy. I generally like to avoid battleground stocks and observe from afar.
This is unbelievably juicy.
I'm genuinely curious; how is it that so many prominent investors did not notice this when conducting due diligence? It reminds me of Paulson's investment in the Sino Forest fiasco. Or, perhaps, are they most likely aware of it and found nothing wrong with the practise?
A lot of really respectable people have positions in this; funds I respect in particular, brave warrior, paulson, value act, and a number of tiger cubs own this stock. Their price positions are like in the teens, but keep in mind they most likely bought on their way up. The truly scary ones are Sequoia/Ruane, Cunniff, Goldfarb (30-35% of assets), Pershing, at like 30%, and Brave Warrior at 35%.
Regardless, I think this is a cautionary tale. Don't be an idiot and put 30% of your money into a investment, even if its amazing, so much unsystematic risk its crazy. I think Valeant isn't a zero, they do make real products. Bausch & Lomb, CeraVe are both consumer facing brands with decent sales. Its a real company people.
And I don't think they can fake their sales 100%, there is a lot of data in the channel, and if it was outright fraud on the books industry datasets would most likely be able to tell the difference regardless of crazy channel stuffing or not.
I think its somewhere between the 2 extremes. Is it a beastly roll up w/ 30%+ organic growth? Hell no. Is it a zero? Also hell no. Who knows what they will find when the roaches come crawling out, but I have a feeling there will be at least SOME legal fees, and Valeant won't be the darling it once was. Its going to be interesting for sure.
I was under the impression that some equity L/S funds were intentionally focused upon taking large, concentrated positions, with significant idiosyncratic risk? The diversification responsibility lies with the institutional investors who invest in these numerous individual funds and their diverse strategies. As such, this actually allows institutional investors to subsequently become more diversified and increase their sharpe ratio?
They are. I guess from that perspective sure its the allocator's fault, but I also think its just bad investing. It kind of just makes for junky 1 sided bets that workout until the fund collapses.
There is definitely a school of thought that thinks swing really really really big and hope for it, but I think that some of them become benefactors of luck not skill so in hindsight they were like yeah that was genius, but they don't exist in the probability that it went bad. I follow more along the lines of risk management of like marks/taleb kind of stuff.
To each their own.
I don't think that's accurate for Paulson. His cost basis is around ~$200. The other guys are well below today's price (though I think VAct sold out most of their position already) but won't help quarterly marks. Bill is getting raped, which I don't mind.
I think there are a lot of people who don't mind.
Yeah I don't follow paulson, so I wouldn't know.
I don't think VAct is out of it at all, still a huge position last time i looked.
Was crazy watching this unfold today. I think some of the points in the Citron piece are nonsense and others are pretty disturbing. I don't cover or know anything about VRX, but having worked on the Enron litigation there are some disturbing similarities. I would not be surprised to see this thing grind lower into an SEC investigation.
Was funny this morning in our morning meeting a PM literally said "I'm not sure what it is about these ex-McKinsey directors, but they all seem to get into huge ethics violations and turn out to be frauds".. Went on to cite Jeff skilling, rajaratnum, and now Michael Pearson. Does the McK brand get tarnished at some point?? Tbd.
I suggest having a read of Bronte Capital's piece. It's much better in my opinion.
Wow, that is pretty strong.
Does it bother anyone else that this website in dispute is called "RandoPharmacy.com"? Sure sounds legit.
Frankly this blowout pales in comparison to SUNE.
The onslaught continues.
There are plenty of sell-side analysts that have come out with buy recommendations. Meanwhile, a few have come out and put out sell recommendations. This is going to be very interesting.
Also, does anyone know how much Ackman is now down for the year?
about 17% on his longs. so worse with HLF short
Can we keep a running list of all the random Chess terminology that keeps coming up in these various entities. Whoever is behind this massive fraud (and I am increasingly convinced that is what it is) must be some weird chess dork or something...
1) Philidor - the 'Philidor Defence' is a famous chess opening 2) Lucena - the Lucena position is a important chess endgame position. Note that Lucena appears to be the LLC that takes ownership interest in these downstream pharmacies (e.g. west wilshire) 3) BQ6 - shorthand for Bobby Fischer's move against Boris Basky. In re VRX, BQ6 Media was the pharma marketing co, formerly headed by Philidor CEO Davenport. 4) Kings Gambit Accepted - KGA - a specific chess opening.
Am I missing any? I mean seriously, this is just some idiot coming up with fictitious business names to paper over his revenue scandal. The question ultimately will be how high does this go. Anyone know any Valeant execs who are known to enjoy a chess game?
As a top nationally ranked chess player, I am not only surprised I missed all of that but also impressed you caught that.
Anyway, I'm inclined to think it's a scam--the Bronte Capital piece is pretty insane. However, as S&P stated to why they haven't downgraded the stock, there isn't really hard proof. This is all in the realm of speculation. Additionally, this is also giving light to the rise of the speciality pharmacy industry that people still don't 100% understand and has operated under the radar for some time. Time will tell...
This is exactly how I feel right now. Fucking love finance.
Lmao that is amazing.
So is this in the same vein as Enron naming their off balance sheet entities after Star Wars? If I remember correctly they had LLC's and LP's like Chewco, Jedi, Obi-1 (that was my favorite), a few Skywalker and Leia's and I think they even had the Death Star strategy. Should you short a company once you start seeing LLC's and counterparties that all follow a theme, and especially a theme that only your fellow geeks would find amusing? Someone needs to start researching who owns entities like Picard, Kirk and Sisko LLC and look into the parent co.
Someone is definitely committing fraud, the question is who? My guess is that Valeant's management wasn't involved in the fraud, but used sketchy specialty pharmas because they wanted to boost revenue so they took and easy way that they knew would eventually come back to bite them. They just happen to pick one that is committing serious fraud.
That's my guess after everything I've read but who knows? Great discussion here!
Went short at $188. Surprising to see it already down at $117.
There is fraud involved here. It's just a matter of who.
Haha just found another one...
Isolani - an isolated queen's pawn is typically called an 'isolani'. In re VRX, Isolani appears to be the company with 10% ownership stake in R&O pharmacy. Seems analogous to Lecena in the structure.
Man I can't wait to see what grandmaster they designate as the expert witness on this litigation.
He doesn't have a name, they just call him The Sicilian
I need to brush up on my chess and star wars if I want to have any chance at investing
So the story is there are allegations of channel stuffing. Citron/Hempton say that Philidor is a 3rd party that is owned by Valeant and is defrauding insurance plans (potentially Medicare/Medicaid) by waiving copay requirements. In other words, when you get a prescription, Philidor essentially renews it for you at a quantity that far exceeds anything close to what you need to treat your medical issue. As a result, Valeant books revenues and then transfers inventory to Philidor. I think there are two issues here:
1) The accounting perspective. The allegation is that Valeant's revenues are fraudulent or maybe more specifically, phantom revenues. I think this is false because Philidor is a 100% consolidated entity with Valeant (no off balance-sheet funkiness). So if you're truly worried about these revenues, you'd check the B/S and CFS and see if there were massive accruals in inventory that weren't in line with revenue growth. I looked at annual financials as of Feb/2015 and that was not the case, but Valeant has yet to release a proper B/S and CFS for their latest quarter so I'm not fully satisfied to this question yet.
2) The second more difficult to answer and potentially more damaging factor is whether Valeant is engaged in fraud with insurance companies and/or the Federal government. If these allegations prove true, and Valeant was driving revenues by waiving copay requirements and getting insurers/the Fed to fund unnecessary prescriptions, then there's a big problem here. That big problem will come in the form of a massive fine which is something that Valeant can't really afford right now with their debt load.
Also, Citron's report was fucking garbage. The whole comparison of Valeant management and Enron management quotes smacks of something produced by a second-rate tabloid.
Yeah, the citron report was meh. Bronte's was better, w/ the crossing management with the we are doing no discounts and finding discounts in like 30 seconds.
Citron really built a strong narrative for Valeant, drawing really strong parallels helps their bear case. Even if it has nothing to do with each other. If they can frame their narrative like "Enron had McK, Valeant has McK, Enron said this, Valeant said this", then through shitty logic Enron=Valeant. Its clever for manipulating other people's emotions, ie making this stock go into full fear mode.
Here's my take based on what evidence is available thus far... Note that I'm not even remotely a healthcare analyst.
1) It seems pretty apparent to me that there is fraud at the Philidor level. The numerous non-operating companies, with often duplicate websites, IP addresses, signatory on the docs, named after famous chess moves etc. really seems to suggest to me that these are "shells". I'd also suggest watching this video interview with Philidor /BQ6 CEO Andy Davenport, if you haven't already. If you've played any amount of poker or spent time with actual CEOs, there are going to be a number of "tells" in this interview that suggest that this guy is full of shit.
2) What is less clear is the degree of Valeant's involvement. It is possible that Philidor is a fraudulent business and is seeking to boost its private market valuation so that VRX is tempted to overpay for them. I suspect, given the facts as they stand, Valeant is going to do whatever they can to distance themselves from Philidor on the call on Monday, and for subsequent litigation.
3) That being said, it doesn't make a lot of sense to me, logically, how Philidor could defraud Valeant in a sustainable way. Yes, they can round-trip revenues and falsify perscriptions. Yes, they can claim that their downstream pharmacy customers are not paying for product they've supplied. But ultimately (and fairly quickly), that straw man falls apart. Valeant would realize that they've got a serious receivables collection issue with Philidor and they would probably cease to do business with them. I suspect (but don't have a fact based support for this yet) that VRX was using Philidor to hit their numbers. Just like when HealthSouth CEO Dick Scrushy would come up short, he would direct his lieutenants "to find the dirt to fill the holes," so could VRX be using Philidor to generate dirty revenue/EPS. If you look at Valeant's earnings surprise history, you will see that they have NEVER missed a quarter (20 consecutive beats). The last three years, they have beaten consensus numbers by a very consistent 1-6%. This is really hard to do. Unless you have a lever you can pull to generate some extra sales and profits.
4) I certainly don't think Valeant is a fake business. They have real products and there is apparently some decent independent data that tracks their sales. But once you f*ck around with accounting misstatements, it becomes extremely difficult to disentangle what the business is actually worth. All of those deals that VRX has done has been on falsified financials, so they received favorable interest rates on debt issuance, and if there were any stock deals there will be even bigger problems. These guys could face securities class actions not only from VRX shareholders, but also former owners of Bausch & Lomb, Salix, Dendreon and all the smaller targets. With $30B in debt, this is a very precarious position. Cost of financing most certainly goes up on a go-forward basis, and you'll have a litigation overhang on the stock for the next 3-5 years.
I personally kinda wish I could short this sucka after the call on Monday, but compliance ain't gonna let me do it... :(
I think the truth lies somewhere in the middle. Where there's smoke....there's fire. VRX does have tangible drugs and business lines but is such a mess of moving parts.
Valeant's business model has never made sense to me (rollup acquisitions of competitors bootstrapping EPS, almost zero organic growth until the last couple quarters, an R&D budget of effectively zero relative to other competitors) I believe it was Jim Grant who said it best, I'm paraphrasing but essentially "the business model and structure is too complicated to properly value"
This stock has single handedly carried the TSX the last 12 months, so it has swung the market dramatically intraday this week. On a side note from US monkeys, Canada has recently elected a Liberal government (higher personal taxes, I believe higher business taxes to follow) it will be interesting to see if this prevents future tax aversion moves similar to what Valeant and Burger King have done in the past.
Scam? From the investor's position it's very real once you close your position and you either make money or lose it.
That said the company itself is obviously engaged in some form of fraudulent activity. The blogspot linked earlier is particularly great.
Also keep in mind that there are a number of legitimate companies which operate in a similar manner by snapping up small acquisitions. I'm not particularly impressed by the business model because even without any accounting fraud going on, it is dependent on both healthy M&A markets and on maintaining good lines of credit. Those conditions are not infinitely sustainable for a high-borrowing business.
I wish I could see the shit-eating grin on Icahn's face.
Why? Did Icahn put out a statement on VRX?
No, but he hates Bill Ackman with an absolute passion. I can only imagine the level of glee he is experiencing throughout this ordeal.
Thread tldr... basically philidor is a call center trying to sell illegally in california without a license by using R&O's license number. Owner of R&O caught onto this and started withholding checks that are owed to Philidor. VRX then tried to get the money from R&O, R&O files for relief.
There are real receipts with drug by drug purchases... so it's real sales. They are not faking any sales. They also (as they claim) only recognize revenues when the actual patient prescription is filled out, and that intercompany transfer of inventory does not affect revenue.
Nuff said.... buy on the dip Monday if it doesn't spike up pre-market
So much misinformation in this thread I don't even know where to start.
Valeant isn't fraudulent. Just check IMS...
Maybe you can start with why Valeant isn't fraudulent big guy
From the very little I know/have read there is a strong chance you are right and I agree that some commentators have been quick to just agree with the headlines without knowing what they are saying. But just because a company has genuine sales that come up on channel surveys does not mean its not fraudulent.
So any thoughts following the call? Are we feeling better or worse about the integrity of this management team?
Closing price after Acumen's 4-5 hours 'reassurance' conference call: $93.81.
My prediction, its going to be a rollercoaster moving both up and down in coming months. Like $HLF.
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