When I last discussed Valeant Pharmaceuticals, in this rather testy post, I expressed a desire for the company to get what’s coming to it. Little did I know.
Valeant recently announced that they’re not planning on growing by what’s brought them along so far (the sorts of price-raising described in that post and the links in it). No, they’re now going to ramp up their own R&D efforts, despite years of CEO Michael Pearson saying that such things are not the company’s business at all. One might see this as a change of heart, although the line from Miller’s Crossing (“What heart?”) comes to mind there, or one might see it as merely an attempt to deflect criticism and buy time.
But things may be even worse than that. Several analysts have been rooting around in Valeant’s financial statements, among them Bronte Capital and Roddy Boyd at the Southern Investigative Research Foundation. A New York Times article by Andrew Pollack dragged some of this out into the larger press. There’s a report out now from Citron Research, a short-selling firm, that addresses the same issues, and what issues they are!
The Times article mentions how Valeant disclosed that it was going to purchase a pharmacy operation called Philidor, a mail-order service that patients have been encouraged to use to have their Valeant products dispensed from. No one knew much about Philidor until then. But that SIRF article linked above shows that Philidor and Valeant are already closely connected financially, even though Philidor, for its part, has tried to obscure its ownership by a number of methods. Meanwhile, an odd story has been developing around another pharmacy called R&O, in California, who claim that they’ve been improperly billed for $69 million dollars (!) by Valeant. R&O says that it has no invoices from Valeant, and is not on the hook for any such amount. Valeant, for its part, says that R&O is “improperly holding significant amounts it has received from payers”.
But it turns out (see the Citron Research piece) that Philidor and R&O are the same company, run by the same people, and all connected to Valeant. The same duplicated information (such as each company’s “Privacy Officer” phone number) also occurs on several other pharmacy web sites that no one seems to have heard of, and all of those domains were registered on the same day. As the Citron piece points out, Bronte Capital had already found that the head of Valeant’s audit committee was actually been a longtime close associate of someone who had been convicted of stock fraud, a fact which did not quite make it onto her c.v. So that might explain how these things manage to flourish.
Taken together, all this looks like an attempt to book sales that may not even have occurred, and for Valeant to stuff the distribution channels by creating those channels itself. Valeant’s stock is getting destroyed today, down $34 a share as I write, so there are clearly people taking this possibility seriously. At the very least, there’s a lot that the company has not been revealing about its finances, and its investors should take that behavior into account.
Postscript: if anyone wants to dispute some of the articles I’ve linked to on the basis that they’re coming from people who are short Valeant stock, take it somewhere else. Short-sellers can cross the line, but they’re also often the only people who are willing to look under the hood like this, and I’ve long thought they provide a valuable counter to the relentless rah-rah stuff that rains down over the financial markets day in and day out.
Update: corrected the spelling of Philidor.