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Looking Under the Valeant Pharmaceuticals Rock

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.

25 comments on “Looking Under the Valeant Pharmaceuticals Rock”

  1. Rule (of 5) Breaker says:

    First thing I thought of: “Enron”

  2. Very interesting! I commented on a previous Valeant post asking “how does Valeant actually sell these over-priced, undifferentiated prodcuts?”. If you take a look at their product line, it’s most generic drugs or “new” drugs that are just combination generic drugs. Payers could easily say “no” to most of these drugs and patients could find cheaper alternatives.

    It looks like we have our answer.

    From other news sources I’ve seen, Valeant has close arrangements with these “special” SPs. When a script is written, it doesn’t go to a normal SP (since it would immediately be rejected after checking the patient’s insurance plan). It goes to an SP like Philador who fills the Rx right away, then tries it’s hardest to get the patient’s insurance company to pay for the drug. A lot of the time the insurance companies still say “no” and the company eats the cost, but enough insurance companies say “yes” (probably due a lack of sophistication) and the company turns a tidy profit.

    I’m typically a defender of the biotech industry, but Valeant is looking more and more like a “bottom feeder”. Playing games with the system in order to turn a profit on otherwise low value products.

  3. johnnyboy says:

    Michael Pearson was right: R&D is a fool’s game – it’s pays so much more to invest in fraudulent schemes. At least for a while.

  4. DanielT says:

    I bet those Valeant shares are getting hard to borrow to short these days.

  5. IHateBlackBanner says:

    Please remove the black banner, I really hate it. Or just make it stay where it is.

  6. DS says:

    Great coverage as always! One minor correction – Philador should be Philidor.

  7. matt says:

    Oh the niagara of schadenfreude…Bill Ackman, of shorting Herbalife and exposing its frauds fame, getting to see his pharma darling shorted and frauds exposed.

    Like Enron (or Watergate for that matter), I suspect there is considerably more to the story. So not only were they ditching R&D, not only were they jacking up prices, they were using the old “I’m washing your windshield now you owe me money” extortion method, and possibly some accounting fraud by a form of channel stuffing?

    Valeant says they wouldn’t book a sale until the medicine was received by a patient, but of course now we realize that’s not a sale. The sale doesn’t actually happen until the insurer pays, otherwise it was a free sample. Still, that channel scheme is just a temporary smokescreen.

    The nice thing, speaking of smokescreens, is the cloud of horse crap about it being cheaper to ditch R&D and somehow turn a profit by making investments where the risks have been retired, is shown up for what it was.

  8. Bruce Grant says:

    “…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.”

    The actual Pearson quote was more pungent. He characterized R&D as “value-destroying.”

    Looks like there’s more than one way to destroy value.

  9. Kelvin says:

    ^”The actual Pearson quote was more pungent. He characterized R&D as “value-destroying.”

    Technically, if you look at overall return on investment in R&D across the pharma industry, he is actually correct: R&D *is* value-destroying, and rapidly becoming even more so as ROI continues to decline. Thus preventing such value destruction (as Valeant is doing) does actually create value, in a relative sense, as money saved can be re-invested in other (more-value-adding) activities.

    Having said that, it is clear that Valeant’s business model is not sustainable as it doesn’t create value in an absolute sense. Ultimately, it will only last as long as Pharma continues to destroy value with R&D before the industry either fixes its R&D productivity, or else eats itself out of existence.

    Ironically, Valeant may be the best wake-up call and catalyst for change that the industry needs: Adapt or die, it’s your choice.

  10. Magrinho says:

    Destroying value: look what happened to biotech stocks after the Valeant and Shkreli dustups. Granted, there was froth in the market but those were major catalysts for selling. I own a handful of high quality, long terms biotech stocks and it cost me $5000 minimum. The overall sum is billions and billions (as Carl Sagan might say).

    Thanks guys – your ‘wealth creating’ credentials are as real as everything else in your life.

  11. Mark Thorson says:

    Second the motion for removing the black banner. I can’t scroll down a page at a time because the banner covers up text that I haven’t seen yet. Whoever did the web design is incompetent

  12. Anon says:


    You’re confusing perceived value with real value.

    Unfortunately, so does everyone else.

  13. peej says:

    The Philodor thing smells funny. My daughter was rx’ed a Valeant product for acne – clinda/tretioin gel. Apparently, the pharmacy dispenses it and mail orders it out, and whatever discount card they apply makes the drug free, although they seem to charge the insurance company a considerable amount. The cash price for this drug is (I kid you not) $800 per 2 oz tube.

    The kicker is, if the insurance company pays, Philodor fills the rx, leaves a message on your phone and says they will send it in 24hrs unless you call them back. This has led to my daughter having a large stockpile of giant Ziana tubes, (college students dont return calls, you know) and she’s a supplier to all her friends with acne at who knows what cost to the insurance company.

    Dermatology is a total racket. The same derm recommended Solodyn for my other daughter – which is just XR minocycline at a really, really obnoxious cost ($600/mo if I recall) . As a pharmacist, I told the doc just to give the generic minocycline, but she insisted she saw better results with the XR, plus the handy discount card made it the same price! I bet the insurer ate a lot on that script too.

    1. Charles Ornstein says:

      Hi there, I am a reporter at ProPublica in New York and hope to talk to you. My email is Thank you.

  14. Lickme says:

    Ha, so funny when ya hoos like you weigh in on pharma when you have no experience in the industry and have no understanding of it. You think you are helping people but all you are doing is confusing others that are as stupid or actually dumber than you, which based on your understanding of all of this is hard to believe. All the company is doing is selling direct to consumers, which is what pharma has done for years. You guys are running around like idiots saying dumb things which will only leave you looking like fools.

  15. Gerry Smith says:

    Let’s not forget the genesis of the company, this was the offspring of the troubled Biovale………..a fraud plagued company.

  16. Proust says:

    @Lickme: Are you descendant of The Bard? Your prose is magical.

  17. PorkPieHat says:

    This whole notion of R&D being value destroying is just amazing.
    There is no value to be considered until somewhere, somehow, some R&D is done. Then, and only then, is value created. The clinical/marketing/commercial folks then ‘realize’ value. But there is no value to be destroyed until R&D creates it.

    I think its when R&D, as a cost center, is yoked to a commercial organization, which is a profit center, that R&D is viewed as “value destroying”. What Valeant has seemed to try to do in the past is to decouple companies’ cost centers from profit centers and have them exist as purely profit centers. The problem with that from my perspective, as a preclinical drug discovery person, is that it destroys potential sustainable innovation at that company. Given how long it takes to create an R&D engine, its tough to see so many R&D centers dissolved. Having lived through more than my share of them, its not only painful, but an entropic waste.

  18. Kelvin says:

    @PorkPieHat: “This whole notion of R&D being value destroying is just amazing. There is no value to be considered until somewhere, somehow, some R&D is done. Then, and only then, is value created…”

    Nobody in Pharma (except maybe Valeant) is arguing that you can create value without R&D. But that doesn’t mean you can’t destroy value with R&D. The two statements are not mutually exclusive.

    Everyone knows and accepts that you can destroy value with R&D by developing a drug that later fails. Money spent, no value gained, thus value is destroyed.

    But now the evidence is clear that R&D is also destroying value ON AVERAGE. In other words, the incremental value (clinical benefit) coming out of R&D is now less than the R&D investment required to deliver that incremental value/benefit. This is a direct result of the law of diminishing returns, as return on investment in R&D have been falling by 50% every 9 years for the past 60 years (check out Eroom’s Law).

    Is that so difficult to understand?

    1. PorkPieHat says:

      Kelvin: I take your point. The efficiency of R&D has indeed been dropping in Pharma for decades. Guess I was looking at the future of the industry and wondering where will value (pharma drug innovation) come from then if we keep losing integrated R&D capacity? Even academic basic research is shrinking in investment, and now the whole premise is being questioned (see today’s post from Derek).

      If I had a strong sense of the diminishing return of R&D over the past few decades, I may not have entered pharma at the preclinical level (might have chosen some clinical expertise, or some other field altogether). Sigh…

  19. K says:


    Diminishing returns are a natural result of prioritizing opportunities by their expected return: As long as we have always pursued the best opportunities with the greatest expected returns first, then we can always expect lower returns in the future, and those returns will eventually turn negative. Diminishing returns are an unavoidable law of nature.

    The current sequential bottom-up knowledge/target-based approach to drug discovery has simply fulfilled its potential and run out of steam. It’s like drilling for oil. Initially, tons of high-quality oil gushed out when you poked your finger in the ground, but now we are left digging miles under deep oceans into small pockets of dirty oil, or even oily dirt.

    The only way to improve returns (at least temporarily) is to develop a completely new and different approach to drug discovery, rather like fracking in the oil industry. Throw out the current paradigm and start with a blank sheet of paper.

    But ultimately, Pharma will have to find another business model altogether, just like we will need to find another source of energy. Adapt or die.

    1. Pennpenn says:

      Bit late to say this, but the primary problem with your analogy is that while alternate sources of energy can be found, developed, harnessed, and so on (solar, wind, nuclear, tidal, whatever), we are rather stuck with the complicated, contrary, confusing, un-designed mess that the human body, and all it’s many, many, many variables. No amount of new paradigms are going to change that.

      We can’t start with a blank sheet of paper short of finding some way to swap into completely new (non-human, probably non-biological) bodies. Every piece of paper we pull out to start working on the problems in the pharma industry and human health in general has “I hope you’re willing to do a lot of hard work and blow a lot of resources on something that might come to nothing” stencilled in chunky black capitals across the top. Every. Last. One.

  20. Kelvin says:

    PS. To answer your question more directly – “where will value (pharma drug innovation) come from then if we keep losing integrated R&D capacity?”

    From finding better new ways to solve problems, and more capacity/investment is not the answer. In fact, too much capacity/investment is actually our problem while we deliver too little, so capacity/investment will (and should) continue to shrink until we can figure out how to do more with less.

    Necessity is the mother of all invention. 😉

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