Comments On The Blockbuster Valeant Conference Call
Note:
About 10 minutes later I posted this blog Valeant terminated its human relationship with Philidor.
The liability questions at the terminate of this post straightaway have got greater importance.
I have got left the post unchanged for that announcement. Enjoy.
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Original post:
Solodyn is a tiresome release minocycline for treating acne. There are generics available. Ziana is some other combination of 2 generics.
I could acquire on. This is non the collection of drugs a fellowship gets from fantastic R&D. Indeed R&D has never been a major attraction of owning Valeant. Its a collection of drugs yous acquire from fantastic - or maybe sneaky - marketing.
And it is the listing of products that absolutely require insurers to pay because good informed consumers to a greater extent than oft than non would not.
After the exposure of Philidor yesteryear SIRF, the WSJ, Propublica as well as this weblog it was only a affair of fourth dimension earlier insurers started rejecting claims to a greater extent than generally. As of writing both CVS as well as Express Scripts (amongst the biggest pharmaceutical benefits managers) have cutting off Philidor.
Evidence for systematic problems at Philidor
About 10 minutes later I posted this blog Valeant terminated its human relationship with Philidor.
The liability questions at the terminate of this post straightaway have got greater importance.
I have got left the post unchanged for that announcement. Enjoy.
------------
Original post:
Forgive a long post. The Valeant/Philidor/US Attorney province of affairs is complicated. The designing of this post volition hold upward to province both what nosotros know as well as how nosotros know it - as well as to explore theories about the border of that knowledge. Because the underlying province of affairs is complicated the post volition unfortunately hold upward detailed as well as at some points non-committal.Almost anyone who has been next Wall Street volition know that Valeant Pharmaceuticals, a large-cap as well as previously acquisitive pharmaceutical company, has been nether pressure. They held a special conference telephone telephone to reply concerns raised by marginally effective handling for toenail fungus. Paint it on daily for 48 weeks as well as and your lead chances of having toenail fungus cured rises from v percent to eighteen percent with some lead chances of an adverse reaction as well as a cost to insurance companies of to a greater extent than than $8000.
I could acquire on. This is non the collection of drugs a fellowship gets from fantastic R&D. Indeed R&D has never been a major attraction of owning Valeant. Its a collection of drugs yous acquire from fantastic - or maybe sneaky - marketing.
And it is the listing of products that absolutely require insurers to pay because good informed consumers to a greater extent than oft than non would not.
After the exposure of Philidor yesteryear SIRF, the WSJ, Propublica as well as this weblog it was only a affair of fourth dimension earlier insurers started rejecting claims to a greater extent than generally. As of writing both CVS as well as Express Scripts (amongst the biggest pharmaceutical benefits managers) have cutting off Philidor.
Evidence for systematic problems at Philidor
Waiving of copays
I have got no evidence that Philidor systematically waives copays for Medicare or other authorities funded insurance.
There is strong evidence Valeant waives copays systematically over the whole private-pay business. In the 3Q conference call Mike Pearson (Valeant's CEO) said this:
Since writing my Vitamin Influenza A virus subtype H5N1 cream. And that is it.
Nobody inward their right heed would purchase it. It gets sold only because insurers pay - as well as having Philidor, a tied specialty chemist's fellowship - rather helps inward getting this done.
But Atralin is simply an extreme version of the demand for specialty pharmacy.
I could acquire on. This is non the collection of drugs a fellowship gets from fantastic R&D. Indeed R&D has never been a major attraction of owning Valeant. Its a collection of drugs yous acquire from fantastic - or maybe sneaky - marketing.
And it is the listing of products that absolutely require insurers to pay because good informed consumers to a greater extent than oft than non would not.
After the exposure of Philidor yesteryear SIRF, the WSJ, Propublica as well as this weblog it was only a affair of fourth dimension earlier insurers started rejecting claims to a greater extent than generally. As of writing both CVS as well as Express Scripts (amongst the biggest pharmaceutical benefits managers) have cutting off Philidor.
Evidence for systematic problems at Philidor
The latest WSJ article really is a stunner. Jonathan Rockoff (the journalist) has i of those wonderful definitive documents: he claims to have got a Philidor preparation manual. I have got non seen this manual as well as cannot justice first-hand what it contains. However - the evidence provided yesteryear the WSJ - as well as on the authority of the WSJ - would hold upward really useful inward determining whether at that spot was systematic fraud at Philidor.
If this manual tells staff how to deceive insurance companies then its a slam-dunk for systematic fraud.
Moreover this is all done across province lines using postal service as well as wires. That would hold upward a text volume wire as well as postal service fraud against a fiscal establishment the penalisation for which is upward to $1 i M k per example with no bound to the number of instances.
So hither is what Rockoff says (and they are his sources as well as I have got non seen the said manual).
Moreover the article from Jonathan Rockoff confirms piece of work done yesteryear Bronte and marginally effective handling for toenail fungus. Paint it on daily for 48 weeks as well as and your lead chances of having toenail fungus cured rises from v percent to eighteen percent with some lead chances of an adverse reaction as well as a cost to insurance companies of to a greater extent than than $8000.Solodyn is a tiresome release minocycline for treating acne. There are generics available. Ziana is some other combination of 2 generics.
I could acquire on. This is non the collection of drugs a fellowship gets from fantastic R&D. Indeed R&D has never been a major attraction of owning Valeant. Its a collection of drugs yous acquire from fantastic - or maybe sneaky - marketing.
And it is the listing of products that absolutely require insurers to pay because good informed consumers to a greater extent than oft than non would not.
After the exposure of Philidor yesteryear SIRF, the WSJ, Propublica as well as this weblog it was only a affair of fourth dimension earlier insurers started rejecting claims to a greater extent than generally. As of writing both CVS as well as Express Scripts (amongst the biggest pharmaceutical benefits managers) have cutting off Philidor.
Evidence for systematic problems at Philidor
I have got no evidence that Philidor systematically waives copays for Medicare or other authorities funded insurance.
There is strong evidence Valeant waives copays systematically over the whole private-pay business. In the 3Q conference call Mike Pearson (Valeant's CEO) said this:
Looking at history, our commitment to patient assistant programs has grown at an annual chemical compound charge per unit of measurement of 128% from $53 i M k inward 2012 to or so http billion nosotros facial expression to pass inward 2016.This is appoximately 8% of all revenue. Copay waiving must hold upward close ubiquitous.
Since writing my Vitamin Influenza A virus subtype H5N1 cream. And that is it.
Nobody inward their right heed would purchase it. It gets sold only because insurers pay - as well as having Philidor, a tied specialty chemist's fellowship - rather helps inward getting this done.
But Atralin is simply an extreme version of the demand for specialty pharmacy.
- Jublia is a marginally effective handling for toenail fungus. Paint it on daily for 48 weeks as well as and your lead chances of having toenail fungus cured rises from v percent to eighteen percent with some lead chances of an adverse reaction as well as a cost to insurance companies of to a greater extent than than $8000.
- Solodyn is a tiresome release minocycline for treating acne. There are generics available.
- Ziana is some other combination of 2 generics.
I could acquire on. This is non the collection of drugs a fellowship gets from fantastic R&D. Indeed R&D has never been a major attraction of owning Valeant. Its a collection of drugs yous acquire from fantastic - or maybe sneaky - marketing.
And it is the listing of products that absolutely require insurers to pay because good informed consumers to a greater extent than oft than non would not.
After the exposure of Philidor yesteryear SIRF, the WSJ, Propublica as well as this weblog it was only a affair of fourth dimension earlier insurers started rejecting claims to a greater extent than generally. As of writing both CVS as well as Express Scripts (amongst the biggest pharmaceutical benefits managers) have cutting off Philidor.
Evidence for systematic problems at Philidor
Waiving of copays
I have got no evidence that Philidor systematically waives copays for Medicare or other authorities funded insurance.
There is strong evidence Valeant waives copays systematically over the whole private-pay business. In the 3Q conference call Mike Pearson (Valeant's CEO) said this:
Since writing my first cryptic post I have got received numerous stories of auto-ship refills with copayments waived.
As explained higher upward almost without exception, insurers impose a contractual duty on providers to build a reasonable endeavour to collect applicable copayment amounts from patients, as well as benefits are only available when the accuse for the service submitted yesteryear the provider is the actual, as well as the usual, reasonable as well as customary charge.
Philidor clearly does non practise that.
The lack of a California license
I have got no evidence that Philidor systematically waives copays for Medicare or other authorities funded insurance.
There is strong evidence Valeant waives copays systematically over the whole private-pay business. In the 3Q conference call Mike Pearson (Valeant's CEO) said this:
Looking at history, our commitment to patient assistant programs has grown at an annual chemical compound charge per unit of measurement of 128% from $53 i M k inward 2012 to or so http billion nosotros facial expression to pass inward 2016.This is appoximately 8% of all revenue. Copay waiving must hold upward close ubiquitous.
Since writing my first cryptic post I have got received numerous stories of auto-ship refills with copayments waived.
As explained higher upward almost without exception, insurers impose a contractual duty on providers to build a reasonable endeavour to collect applicable copayment amounts from patients, as well as benefits are only available when the accuse for the service submitted yesteryear the provider is the actual, as well as the usual, reasonable as well as customary charge.
Philidor clearly does non practise that.
The lack of a California license
There is i house where nosotros tin forcefulness out unequivocally say that Philidor skates really unopen to the missive of the alphabet of the law. Philidor was denied a license to hold upward a chemist inward California. I rang Philidor, they answered Philidor as well as they stated explicitly on the telephone that they service the whole USA.
Any artifice that Philidor has to deliver inward California is probable to hold upward skating unopen to the law. Valeant inward their conference telephone telephone say they usage a network of local pharmacies (there are an undisclosed number inward the network) to deliver inward states where they are non licensed. To quote:
In addition, they are exploring partnerships with independent pharmacies on a contractual basis. Under these arrangements Philidor would supply the back-end services acre the partners would run the front end of the store. In the futurity nosotros would anticipate that Philidor's increment plans volition rely much to a greater extent than on expanding its network via partnerships. This strategy should allow Philidor to grow faster with fewer regulatory hurdles. This model is also much less majuscule intensive than acquiring pharmacies...
We sympathise that Philidor holds nonresident licenses inward 45 states, the District of Columbia as well as its resident license inward Pennsylvania. In the few states where it is non direct licensed, such equally California, Philidor does non dispense products to patients. Philidor has agreements with affiliated pharmacies that have got California licenses as well as those pharmacies have got dispensed products to patients inward California.
We also learned that at to the lowest degree some of (and mayhap all) of this "network of pharmacies" is owned through a variable involvement entity [VIE] as well as that (until now) Philidor has non disclosed their ownership of them.
If ownership for a chemist's changes generally this needs to hold upward disclosed. But yesteryear using VIEs non only has Valeant disguised its ownership of its network of pharmacies. [Question for Valeant - yous should also consolidate them - tin forcefulness out yous reveal the list.]
The Valeant quote higher upward indicates that these were used to acquire about California licensing.
I suspect the California authorities volition hold upward interested inward that. Propublica is already reporting concerns of Texas authorities in setting upward a subsidiary chemist's called Orbit.
Gay Dodson, executive manager of the Texas State Board of Pharmacy, said her means would demand to facial expression into whether at that spot was a connectedness betwixt Philidor as well as Orbit Pharmacy, whose top official, James Fleming, is Philidor’s controller. Texas police push clit allows people to laid upward corporations “as yous wish,” she said, as well as if Philidor as well as Back Rank are fully split entities, “I mean value nosotros would have got problems tying the 2 together as well as existence able to bring activity with a different corporation, an exclusively different corporation. We would have got to actually facial expression at it.”
There is some pretty clear black-letter police push clit inward some States regarding this. Whether it is plenty to sink Philidor is opened upward to much doubt. However it volition give insurance companies some grounds to sue for reimbursement or deny payment.
I mean value the explanation that the "network" pharmacies be to acquire about licensing restrictions (an explanation given yesteryear Valeant inward the conference call) is bunk. I mean value the existent explanation is much nastier.
The probable existent explanation for network pharmacies
If this manual tells staff how to deceive insurance companies then its a slam-dunk for systematic fraud.
Moreover this is all done across province lines using postal service as well as wires. That would hold upward a text volume wire as well as postal service fraud against a fiscal establishment the penalisation for which is upward to $1 i M k per example with no bound to the number of instances.
So hither is what Rockoff says (and they are his sources as well as I have got non seen the said manual).
If a wellness insurer wouldn’t piece of work with Philidor Rx Services LLC, the chemist's instructed staff to attempt i time to a greater extent than using the identification number of a partner chemist's to secure payment. “We have got a twain of different ‘back door’ approaches to have payment from the insurance company,” a Philidor preparation manual said.This is a scorcher of an allegation. Philidor has acquired a network of pharmacies (mostly erstwhile mum-and-pop operations). The allegation hither is that if the insurance fellowship rejects the claim originally yous should simply "borrow" the identification number of a "partner pharmacy" as well as resubmit the claim. The coin quote is "we have got a twain of different ‘back door’ approaches to have payment from the insurance company". Does "back door" hateful deception? If so at that spot is a really large work for Philidor.
Moreover the article from Jonathan Rockoff confirms piece of work done yesteryear Bronte and marginally effective handling for toenail fungus. Paint it on daily for 48 weeks as well as and your lead chances of having toenail fungus cured rises from v percent to eighteen percent with some lead chances of an adverse reaction as well as a cost to insurance companies of to a greater extent than than $8000.
I could acquire on. This is non the collection of drugs a fellowship gets from fantastic R&D. Indeed R&D has never been a major attraction of owning Valeant. Its a collection of drugs yous acquire from fantastic - or maybe sneaky - marketing.
And it is the listing of products that absolutely require insurers to pay because good informed consumers to a greater extent than oft than non would not.
After the exposure of Philidor yesteryear SIRF, the WSJ, Propublica as well as this weblog it was only a affair of fourth dimension earlier insurers started rejecting claims to a greater extent than generally. As of writing both CVS as well as Express Scripts (amongst the biggest pharmaceutical benefits managers) have cutting off Philidor.
Evidence for systematic problems at Philidor
Waiving of copays
I have got no evidence that Philidor systematically waives copays for Medicare or other authorities funded insurance.
There is strong evidence Valeant waives copays systematically over the whole private-pay business. In the 3Q conference call Mike Pearson (Valeant's CEO) said this:
Since writing my analysis of all 21,000 prescriptions stripping information from UPS's website.
Using R&O's number to send to states where Philidor was licensed but R&O was non looks similar Philidor was shopping for a Pharmacist's number that did non prompt rejection from the insurance companies This is the allegation inward the WSJ.
Deceiving an insurance fellowship equally to who filled the prescription also looks similar it matches the definition of postal service fraud. It is an artifice to obtain coin from a fiscal establishment using postal service over State lines. Philidor pretended the script came from R&O whereas it actually came from Philidor.
The fine inward this example - as well as this is simply i specialty chemist's "partner" with an undisclosed many would hold upward greater than $10 billion. [It is against a fiscal establishment as well as the penalisation for postal service fraud is a i M k dollars per example as well as at that spot are no limits to the number of instances. And at that spot are to a greater extent than than 10,000 instances exterior California where the management was done yesteryear Philidor as well as the production was supposedly distributed yesteryear R&O.]
Whatever: if the prosecutors want to bring this seriously (and I suspect they will) this is plenty to kill Philidor. Whether it is plenty to bankrupt Valeant volition depend on whether Valeant tin forcefulness out successfully defend the notion from the conference telephone telephone that it is non liable for Philidor misdeeds. I don't mean value they tin forcefulness out - but that is discussed below.
Other possible misdeeds yesteryear Philidor
The Wall Street Journal hints at other misdeeds yesteryear Philidor.
Dispense equally written fraud
Caroline Chen at Bloomberg News is stating she has acquired written instructions from Philidor to their staff to falsify "dispense equally written" as well as other Dr. instructions on the prescription. This is an allegation of criminal behavior:
Valeant went to an odd extent to enshroud their human relationship with Philidor.
Philidor was kickoff exposed publicly yesteryear the Southern Investigative Reporting Foundation. At this dot Philidor was growing enormously fast (rising to almost 1000 staff yesteryear this twelvemonth end). Philidor yet had a website registered to domains yesteryear proxy as well as no information equally to ownership on Valeant's website or inward whatsoever SEC filing. Moreover the California authorities went equally far as alleging that Philidor had given mistaken statements nether penalisation of perjury - seemingly to enshroud their ownership.
The headline from the telephone telephone was that terms of the options involved as well as whether they practise or don't "own" Philidor.
If yous want a quirky bring on it Matt Levine is clever equally usual.
But inward the presentation nosotros discovered deniability had been built into the Philidor arrangements from inception.
Valeant says that they paid $100 i M k upward front end for an selection to acquire Philidor at no consideration whatsoever fourth dimension inward the adjacent 10 years. They also are liable for milestone payments of upward to $133 million.
This is a foreign asset. Valeant tin forcefulness out acquire Philidor for no consideration - but they seem non to ain it. This is a form of limbo: ownership but non ownership. This left Valeant with a really hard draw to thread which was to struggle that they gave $100 i M k to something they did non command but they were non financially reckless. [We don't command them but facial expression at all these controls nosotros have got over them.]
Remarkably many accepted this rhetorical stunt.
The draw of the conference telephone telephone came from Valeant CEO Mike Pearson:
There were some prior indication of Philidor's existence. This is- from the 2015Q2 conference call is in all likelihood the strongest:
Even when asked direct Valeant did non reveal it "owned" its master copy specialty pharmacy.
Did Valeant demand to reveal the ownership of Philidor as well as why did they enshroud it so thoroughly?
The brusk reply is Valeant in all likelihood didn't demand to reveal Philidor but that hiding it was unusual. Here is the critical slide.
The observation was that Philidor - a $100 i M k selection with cumulative net-sales was non cloth as well as thence did non demand to hold upward disclosed.
I am non going to struggle with their legal advice with abide by to this. Mike Pearson "thinks" it is legal (as quoted above). However I volition discovery that Valeant does non ever enshroud their acquisitions. During the same quarter (the 4th quarter of 2014) Valeant disclosed acquisitions downward to $20 i M k inward value. [Size of deal here, as well as i of many disclosures equally to the acquisition here. This was i of many similarly small-scale disclosed acquisitions.]
Moreover the listing of subsidiaries Valeant has goes to subsidiaries much smaller than Philidor. For example the attached list from the 10-K has tiny piffling subsidiaries - multiple subsidiaries - each with i corporate jet. But it does non advert Philidor. Philidor also met the Definition of a subsidiary inside Valeant's banking concern covenants - but I am non for certain whether this obliged them to reveal them inward SEC filings or only to the banks.
Hiding Philidor made me mean value prima-facie the fellowship is doing something wrong at Philidor.
The fellowship has an alternative explanation: they hid it because it was a competitive advantage.
Notwithstanding this Valeant has gone to lengths to legally distance itself from Philidor suggesting that they were aware at that spot was a possibility that they were doing something wrong.
In the conference telephone telephone they said they were
Agency fraud
Whilst Valeant has made a neat bargain of endeavour to legally split itself from Philidor at that spot are plenty of circumstances where such a separation volition non stick.
Above I mentioned a example where Novartis is facing criminal charges (and a $3.3 billion fine) because of actions yesteryear its specialty pharmacy. In this example the specialty chemist's is owned yesteryear Express Scripts. It is clearly legally separate.
The ground that Novartis is (potentially) liable for the actions of Express Scripts is that the incentives that Novartis gave Express Script induced the fraud as well as they were either reckless or knowing equally to this inducement.
The number is simple: was Valeant or senior members of staff complicit inward crimes at Philidor? If so so cypher much volition salve Valeant.
Again the WSJ offers some fantastic colour. They dot that senior staff at Philidor were inward fact staff of Valeant acting nether (mostly silly) mistaken names. To quote:
Bluntly senior employees of Philidor were inward fact Valeant employees but were obscuring that necktie yesteryear using the names of Peter Parker as well as other super-heroes. The Valeant employees (plural) laid upward "structures as well as processes".
This is going to hold upward impossible to maintain separate.
Further nosotros know that Valeant rewarded its ain staff for helping Philidor. Here is a corporate award to a Valeant sales staff fellow member who "helped laid upward Philidor inward vi States".
This is consistent with the WSJ article that Valeant employees were involved inward setting upward Philidor.
Valeant made a large demo inward the conference telephone telephone how they have got an indemnity from Philidor. There is of course of teaching a likelihood that Philidor can't pay. After all it is only a postal service lodge chemist's (and it is hard to seat huge quantities of assets that tin forcefulness out hold upward turned into hard cash inward a crisis). However equally Philidor is consolidated into Valeant recovering from Philidor would have got a express number on the GAAP accounts. [Contra: I gauge Valeant could abandon Philidor, bring the accuse as well as so sue Philidor. However Philidor would have got piffling draw organisation without Valeant so this is moot.]
The specialty chemist's channel is really of import inward dermatology inward America. Above I quoted the 2nd quarter conference telephone telephone where they pose the specialty chemist's channel (including but non express to Philidor) at xl percent of sales as well as 50 percent of Jublia sales.
In the conference telephone telephone yet they downplayed this. They did non give the numbers versus dermatology - but rather against the whole business. Here is a typical slide:
To regular Valeant watchers this slide came equally a shock. It downplayed the importance of Valeant's alternative distribution channels.
Only a twelvemonth agone Valeant was telling us how large as well as of import their alternative distribution was. If yous call upward Valeant was having the huge spat with Allergan. Allergan were maxim Valeant's sales were falling as well as Valeant was maxim that they were growing.
Allergan was using IMS data which is a criterion information source inward pharmaceuticals. Valeant stated outright that their sales were non falling as well as that the IMS information did non encompass the mass of their sales due to reliance on channels such equally specialty pharmacy.
This critical text is hither (and the source is here).
Now these slides were made when Philidor was much smaller than its electrical current size as well as fifty-fifty so to a greater extent than than 100 percent of the increment of many of the draw organisation lines of Valeant came from specialty chemist's as well as other non-traditional distribution channels. Net of non-traditional channels Valeant's sales were falling (Allergan was non misrepresenting the IMS data). Inclusive of non-traditional channels Valeant claimed their sales were rising.
Moreover nosotros straightaway know that Valeant has relationships with other specialty pharmacies. It also has a network of pharmacies that it may or may non hold upward including inward the Philidor numbers. [Honestly I don't know - the disclosure hither is really poor.]
The changing reach of Philidor
One observation that had me wondering was the changing reach of Philidor betwixt the 3Q conference telephone telephone as well as the special conference call.
In the 3Q conference call this is what Mike Pearson (Valeant's CEO) said:
The administrative services for copay cards portion had exclusively disappeared yesteryear the special conference call. This is the primal slide:
At no dot does it say that Philidor administers Valeant's copay cards. Maybe the kickoff conference telephone telephone misspoke - but management of the copay card is a substance function.
Moreover the copay card programme is critical to Valeant's human relationship with other specialty pharmacies. If Philidor acts abusively so the entire non-traditional channel for Valeant is in all likelihood tainted.
I would actually similar to sympathise whether Philidor actually does administer Valeant's copay scheme to a greater extent than oft than non (and how that is run) or whether Mike Pearson misspoke inward the 3Q conference call.
Since Philidor is consolidated into Valeant it cannot hold upward used to mistaken Valeant's accounts yesteryear channel stuffing. Citron's substance allegation is incorrect.
However at that spot are other things that tin forcefulness out hold upward done.
As stated higher upward Valeant is liable for upward to $133 i M k of "milestone" payments (presumably if Philidor meets sales targets". These milestone payments would of course of teaching hold upward capitalised into the cost of buying Philidor - but yous could alternatively push clit them equally "sales back upward expense" inward which example they should hold upward deducted inward the P&L statement.
There was an explicit enquiry almost this in the conference call and Mike Pearson did non supply a existent answer. Here is the exchange:
We know yet that Philidor was linked to Valeant from inception. The WSJ reported:
Now nosotros know (from above) that Valeant provided back upward for establishing Philidor as well as that several Valeant staff piece of work at Philidor (using names borrowed from comic books).
But Valeant paid $100 i M k for what was essentially a startup they founded. And they pay progress payments too.
If that is a majuscule expenditure it is a bizarre one. Valeant provided critical back upward for setting it upward as well as later doing that they purchase it.
The alternative inward portion is the $100 i M k was used to run Philidor as well as the $133 i M k of milestone payments also encompass Philidor expense.
But inward that example they should hold upward expensed.
I gauge this is something for the Ad Hoc Committee of the board to piece of work out.
Effect of the consolidation of Philidor
Philidor can't hold upward used for channel stuffing now but it could hold upward used for channel stuffing earlier acquisition.
If it had been used for channel stuffing earlier acquisition so pre-acquisition Philidor would have got owed a neat bargain of coin (for inventory) to Valeant.
When it was acquired that internal loan would hold upward cancelled as well as the consideration would have got been added to goodwill.
That is a wonderful fraud as well as is inward fact how Lernout & Hauspie (a really famous fraud) faked its accounts. Essentially mistaken earnings from stuffing Philidor would hold upward turned into mistaken receivables - as well as so the receivables volition hold upward cancelled as well as turned into (unauditable) goodwill. I promise the accountants have got covered base of operations for this possibility.
The tell inward the accounts would hold upward a foreign driblet inward receivables at the terminate of the 4Q of 2014. Alas Philidor was small-scale relative to Valeant (then) as well as so it is non for certain that this modify would happen.
The evidence is against Valeant having committed this fraud. The merchandise receivables rose betwixt 3Q as well as 4Q 2014.
In full general I concord with the proposition inward the conference telephone telephone that Philidor has non been used to mistaken Valeant's accounts - although Michael Pearson's reply to a pretty direct enquiry was disconcerting. He doesn't have got a clue...
Valeant did a skillful project dismissing that though inward the determination nosotros larn at that spot are some youngster accounting issues with Philidor.
The to a greater extent than pertinent enquiry though is whether
(a). Philidor is a device to systematically defraud insurance companies
(b). Whether the legal separation from Philidor is sufficient to immunise Valeant from liabilities and
(c). Whether this is large plenty inward Valeant to motility really adverse impacts on Valeant equity as well as debt holders.
The evidence is really strong for (a) as well as most the evidence has been provided yesteryear the Wall Street Journal. Insurance companies are taking no chances: several large companies are straightaway no longer reimbursing claims submitted yesteryear Philidor.
It is really unlikely that the separation betwixt Philidor as well as Valeant (as per enquiry (b)) is sufficient to protect Valeant from liability. They appear to hold upward joined at the hip with Valeant providing senior staff (who piece of work nether mistaken names) as well as Valeant providing much advice when establishing Philidor.
Whether the Philidor problems are sufficient to motility major hurting to shareholders (even bankruptcy) is unclear. Philidor itself is a high single-digit percent of Valeant's sales (but it critical to the dermatology franchise). However Phildor also may administer the copay cards as well as they are critical to quite a lot of Valeant's business. Non traditional distribution is the deviation betwixt a shrinking Valeant (as per the IMS data) as well as Valeants assertion that it is growing.
I am intrigued equally to how this plays out.
John
I have got no evidence that Philidor systematically waives copays for Medicare or other authorities funded insurance.
There is strong evidence Valeant waives copays systematically over the whole private-pay business. In the 3Q conference call Mike Pearson (Valeant's CEO) said this:
Looking at history, our commitment to patient assistant programs has grown at an annual chemical compound charge per unit of measurement of 128% from $53 i M k inward 2012 to or so http billion nosotros facial expression to pass inward 2016.This is appoximately 8% of all revenue. Copay waiving must hold upward close ubiquitous.
Since writing my analysis of all 21,000 prescriptions stripping information from UPS's website.
Using R&O's number to send to states where Philidor was licensed but R&O was non looks similar Philidor was shopping for a Pharmacist's number that did non prompt rejection from the insurance companies This is the allegation inward the WSJ.
Deceiving an insurance fellowship equally to who filled the prescription also looks similar it matches the definition of postal service fraud. It is an artifice to obtain coin from a fiscal establishment using postal service over State lines. Philidor pretended the script came from R&O whereas it actually came from Philidor.
The fine inward this example - as well as this is simply i specialty chemist's "partner" with an undisclosed many would hold upward greater than $10 billion. [It is against a fiscal establishment as well as the penalisation for postal service fraud is a i M k dollars per example as well as at that spot are no limits to the number of instances. And at that spot are to a greater extent than than 10,000 instances exterior California where the management was done yesteryear Philidor as well as the production was supposedly distributed yesteryear R&O.]
Whatever: if the prosecutors want to bring this seriously (and I suspect they will) this is plenty to kill Philidor. Whether it is plenty to bankrupt Valeant volition depend on whether Valeant tin forcefulness out successfully defend the notion from the conference telephone telephone that it is non liable for Philidor misdeeds. I don't mean value they tin forcefulness out - but that is discussed below.
Other possible misdeeds yesteryear Philidor
The Wall Street Journal hints at other misdeeds yesteryear Philidor.
A split subdivision at Philidor would seek insurance coverage. If the insurer asked a Dr. to explicate why the patient needed a costlier Valeant drug rather than a less-expensive alternative, Philidor employees would sometimes fill upward out the paperwork for the doctor, 2 of the employees said.The WSJ leaves it equally ambiguous equally to whether this has been done with or without blessing from the doctor. With blessing from the Dr. is legal. Without almost blessing from the Dr. it is criminal as well as that behaviour has been prosecuted inward the past.
Dispense equally written fraud
Caroline Chen at Bloomberg News is stating she has acquired written instructions from Philidor to their staff to falsify "dispense equally written" as well as other Dr. instructions on the prescription. This is an allegation of criminal behavior:
A specialty chemist's that fills prescriptions for Valeant Pharmaceuticals International Inc. has altered doctors’ orders to wring to a greater extent than reimbursements out of insurers, according to erstwhile employees as well as an internal document.
Workers at the mail-order pharmacy, Philidor RX Services LLC, were given written instructions to modify codes on prescriptions inward some cases so it would appear that physicians required or patients desired Valeant’s brand-name drugs -- non less expensive generic versions -- hold upward dispensed, the erstwhile employees said. Typically, pharmacists volition sell a generic version if non exactly told to practise otherwise yesteryear a “dispense equally written” indication on a script. The to a greater extent than "dispense equally written" orders, the to a greater extent than sales for the brand-name drugmaker.
An undated Philidor document obtained yesteryear Bloomberg provides a step-by-step guide on how to proceed when a prescription for Valeant dermatological creams as well as gels including Retin-A Micro as well as Vanos is rejected. Similar instructions for changing the DAW indication are supplied for patients who are paying inward cash.I have got non seen the preparation manual but if this preparation manual exists it is evidence of systematic fraud against insurance companies.
Part III - the separation of Valeant from Philidor
Valeant went to an odd extent to enshroud their human relationship with Philidor.
Philidor was kickoff exposed publicly yesteryear the Southern Investigative Reporting Foundation. At this dot Philidor was growing enormously fast (rising to almost 1000 staff yesteryear this twelvemonth end). Philidor yet had a website registered to domains yesteryear proxy as well as no information equally to ownership on Valeant's website or inward whatsoever SEC filing. Moreover the California authorities went equally far as alleging that Philidor had given mistaken statements nether penalisation of perjury - seemingly to enshroud their ownership.
The headline from the telephone telephone was that terms of the options involved as well as whether they practise or don't "own" Philidor.
If yous want a quirky bring on it Matt Levine is clever equally usual.
But inward the presentation nosotros discovered deniability had been built into the Philidor arrangements from inception.
Valeant says that they paid $100 i M k upward front end for an selection to acquire Philidor at no consideration whatsoever fourth dimension inward the adjacent 10 years. They also are liable for milestone payments of upward to $133 million.
This is a foreign asset. Valeant tin forcefulness out acquire Philidor for no consideration - but they seem non to ain it. This is a form of limbo: ownership but non ownership. This left Valeant with a really hard draw to thread which was to struggle that they gave $100 i M k to something they did non command but they were non financially reckless. [We don't command them but facial expression at all these controls nosotros have got over them.]
Remarkably many accepted this rhetorical stunt.
The draw of the conference telephone telephone came from Valeant CEO Mike Pearson:
In terms of the null dollar selection value, I mean value it is legal as well as maybe it's unusual.Mike Pearson thinks it is legal as well as knows it is unusual.
There were some prior indication of Philidor's existence. This is- from the 2015Q2 conference call is in all likelihood the strongest:
David Steinberg - Jefferies LLC - Analyst
Just wanted to follow-up on the Jublia question. You mentioned the modify inward the gross to nets, but did the -- especially, did the number of scrips going through the specialty chemist's improve? I mean value it was almost 50% concluding time. Secondly, given the strength inward some of your other derm products, Onexton as well as Luzu, what percent of those scrips are through your specialty chemist's channels?
Ari Kellen - Valeant Pharmaceuticals International Inc - Company Group Chairman
Yes, the adoption through multiple specialty pharmacies continues. I mean value concluding fourth dimension nosotros said Jublia was about 50%. That tendency continues. For derm overall, it varies yesteryear product, but it's about 40%.And hither nosotros discovered that that for dermatology products specialty pharmacies were really of import as well as the analyst idea that it was probable to hold upward peculiarly of import for Onexton as well as Luzu. We saw higher upward why it would hold upward peculiarly of import with Onexton. Luzu similar Onexton also has generic alternatives as well as would require insurance to acquire people to pay the high sticker price.
Even when asked direct Valeant did non reveal it "owned" its master copy specialty pharmacy.
Did Valeant demand to reveal the ownership of Philidor as well as why did they enshroud it so thoroughly?
The brusk reply is Valeant in all likelihood didn't demand to reveal Philidor but that hiding it was unusual. Here is the critical slide.
The observation was that Philidor - a $100 i M k selection with cumulative net-sales was non cloth as well as thence did non demand to hold upward disclosed.
I am non going to struggle with their legal advice with abide by to this. Mike Pearson "thinks" it is legal (as quoted above). However I volition discovery that Valeant does non ever enshroud their acquisitions. During the same quarter (the 4th quarter of 2014) Valeant disclosed acquisitions downward to $20 i M k inward value. [Size of deal here, as well as i of many disclosures equally to the acquisition here. This was i of many similarly small-scale disclosed acquisitions.]
Moreover the listing of subsidiaries Valeant has goes to subsidiaries much smaller than Philidor. For example the attached list from the 10-K has tiny piffling subsidiaries - multiple subsidiaries - each with i corporate jet. But it does non advert Philidor. Philidor also met the Definition of a subsidiary inside Valeant's banking concern covenants - but I am non for certain whether this obliged them to reveal them inward SEC filings or only to the banks.
Hiding Philidor made me mean value prima-facie the fellowship is doing something wrong at Philidor.
The fellowship has an alternative explanation: they hid it because it was a competitive advantage.
Notwithstanding this Valeant has gone to lengths to legally distance itself from Philidor suggesting that they were aware at that spot was a possibility that they were doing something wrong.
In the conference telephone telephone they said they were
- indemnified yesteryear Philidor and
- able to walk away entirely.
Agency fraud
Whilst Valeant has made a neat bargain of endeavour to legally split itself from Philidor at that spot are plenty of circumstances where such a separation volition non stick.
Above I mentioned a example where Novartis is facing criminal charges (and a $3.3 billion fine) because of actions yesteryear its specialty pharmacy. In this example the specialty chemist's is owned yesteryear Express Scripts. It is clearly legally separate.
The ground that Novartis is (potentially) liable for the actions of Express Scripts is that the incentives that Novartis gave Express Script induced the fraud as well as they were either reckless or knowing equally to this inducement.
The number is simple: was Valeant or senior members of staff complicit inward crimes at Philidor? If so so cypher much volition salve Valeant.
Again the WSJ offers some fantastic colour. They dot that senior staff at Philidor were inward fact staff of Valeant acting nether (mostly silly) mistaken names. To quote:
Around the Phoenix-area offices of mail-order chemist's Philidor Rx Services LLC, employees said they oft ran into a friendly colleague named Bijal Patel who tracked prescriptions. But when the employees got an electronic mail from the colleague, they say he used a different name: Peter Parker, the alter ego of Spider-Man.
He was amid a few workers at Philidor offices who went yesteryear i call inward mortal as well as some other inward emails during the yesteryear 2 years, according to 3 erstwhile employees. Mr. Patel as well as the other people weren’t employed yesteryear Philidor, though the emails used a Philidor address, these people said. They were employees of drug fellowship Valeant Pharmaceuticals International Inc.
As tardily equally Dominicus afternoon, the LinkedIn page for a homo named Bijal Patel identified him equally manager of access solutions at Valeant inward Scottsdale, Ariz. Mr. Patel didn’t respond to requests for comment.
The Valeant employees were placed at Philidor acre the chemist's was inward its infancy, to supply aid on “structures as well as processes,” said a Philidor spokeswoman. She said inward a contention that the Valeant employees laid upward split Philidor electronic mail accounts, nether “clearly distinguishable names,” to maintain “their internal Philidor communications split from the Valeant communications, primarily to trim the jeopardy of incorrectly sharing either company’s proprietary information.”
Bluntly senior employees of Philidor were inward fact Valeant employees but were obscuring that necktie yesteryear using the names of Peter Parker as well as other super-heroes. The Valeant employees (plural) laid upward "structures as well as processes".
This is going to hold upward impossible to maintain separate.
Further nosotros know that Valeant rewarded its ain staff for helping Philidor. Here is a corporate award to a Valeant sales staff fellow member who "helped laid upward Philidor inward vi States".
Valeant made a large demo inward the conference telephone telephone how they have got an indemnity from Philidor. There is of course of teaching a likelihood that Philidor can't pay. After all it is only a postal service lodge chemist's (and it is hard to seat huge quantities of assets that tin forcefulness out hold upward turned into hard cash inward a crisis). However equally Philidor is consolidated into Valeant recovering from Philidor would have got a express number on the GAAP accounts. [Contra: I gauge Valeant could abandon Philidor, bring the accuse as well as so sue Philidor. However Philidor would have got piffling draw organisation without Valeant so this is moot.]
Part IV - the size of Philidor as well as the specialty chemist's channel
The specialty chemist's channel is really of import inward dermatology inward America. Above I quoted the 2nd quarter conference telephone telephone where they pose the specialty chemist's channel (including but non express to Philidor) at xl percent of sales as well as 50 percent of Jublia sales.
In the conference telephone telephone yet they downplayed this. They did non give the numbers versus dermatology - but rather against the whole business. Here is a typical slide:
To regular Valeant watchers this slide came equally a shock. It downplayed the importance of Valeant's alternative distribution channels.
Only a twelvemonth agone Valeant was telling us how large as well as of import their alternative distribution was. If yous call upward Valeant was having the huge spat with Allergan. Allergan were maxim Valeant's sales were falling as well as Valeant was maxim that they were growing.
Allergan was using IMS data which is a criterion information source inward pharmaceuticals. Valeant stated outright that their sales were non falling as well as that the IMS information did non encompass the mass of their sales due to reliance on channels such equally specialty pharmacy.
This critical text is hither (and the source is here).
Now these slides were made when Philidor was much smaller than its electrical current size as well as fifty-fifty so to a greater extent than than 100 percent of the increment of many of the draw organisation lines of Valeant came from specialty chemist's as well as other non-traditional distribution channels. Net of non-traditional channels Valeant's sales were falling (Allergan was non misrepresenting the IMS data). Inclusive of non-traditional channels Valeant claimed their sales were rising.
Moreover nosotros straightaway know that Valeant has relationships with other specialty pharmacies. It also has a network of pharmacies that it may or may non hold upward including inward the Philidor numbers. [Honestly I don't know - the disclosure hither is really poor.]
The changing reach of Philidor
One observation that had me wondering was the changing reach of Philidor betwixt the 3Q conference telephone telephone as well as the special conference call.
In the 3Q conference call this is what Mike Pearson (Valeant's CEO) said:
Philidor, i of our specialty chemist's partners, provides prescription services to patients across the country, as well as provides administrative services for our copay cards as well as is a dispensary that fills prescriptions. We have got a contractual human relationship with Philidor, as well as tardily concluding twelvemonth nosotros purchased an selection to acquire Philidor if nosotros so choose.Specifically Philidor is i of several specialty chemist's partners [which fits with observations above], dispensed scripts across the dry ground [for which nosotros know it is non licensed] as well as "provides administrative services for our copay cards".
The administrative services for copay cards portion had exclusively disappeared yesteryear the special conference call. This is the primal slide:
At no dot does it say that Philidor administers Valeant's copay cards. Maybe the kickoff conference telephone telephone misspoke - but management of the copay card is a substance function.
Moreover the copay card programme is critical to Valeant's human relationship with other specialty pharmacies. If Philidor acts abusively so the entire non-traditional channel for Valeant is in all likelihood tainted.
I would actually similar to sympathise whether Philidor actually does administer Valeant's copay scheme to a greater extent than oft than non (and how that is run) or whether Mike Pearson misspoke inward the 3Q conference call.
Part V: How Philidor could hold upward used to mistaken Valeant's accounts
Since Philidor is consolidated into Valeant it cannot hold upward used to mistaken Valeant's accounts yesteryear channel stuffing. Citron's substance allegation is incorrect.
However at that spot are other things that tin forcefulness out hold upward done.
As stated higher upward Valeant is liable for upward to $133 i M k of "milestone" payments (presumably if Philidor meets sales targets". These milestone payments would of course of teaching hold upward capitalised into the cost of buying Philidor - but yous could alternatively push clit them equally "sales back upward expense" inward which example they should hold upward deducted inward the P&L statement.
There was an explicit enquiry almost this in the conference call and Mike Pearson did non supply a existent answer. Here is the exchange:
David Common - JPMorgan - Analyst
Yes. Thank yous really much for taking a fixed income question.
I wondered if yous could tell us who got the $100 i M k as well as the potential $133 i M k inward milestone payments. Is that basically coin that is used yesteryear Philidor to stand upward the Company up? I wonder if the consideration actually needs to hold upward null dollars for the purchase option. I usually mean value of some consideration to build that transaction legal...
J. Michael Pearson - Valeant Pharmaceuticals International, Inc. - Chairman as well as CEO
In terms of who received the coin for the $100 i M k upward front end plus the kickoff milestone payment, my understanding is that at that spot are a number of equity owners. I mean value it's betwixt 10 as well as 20, maybe more. And they would hold upward whoever owns the equity of Philidor would've received the money.
And whether those individuals decided to contribute coin into the functioning I have got no clue. I simply know that nosotros have got non contributed whatsoever coin into the operation. In terms of the null dollar selection value, I mean value it is legal as well as maybe it's unusual.The reply to the enquiry was "I don't have got a clue".
We know yet that Philidor was linked to Valeant from inception. The WSJ reported:
The Valeant employees were placed at Philidor acre the chemist's was inward its infancy, to supply aid on “structures as well as processes,” said a Philidor spokeswoman. She said inward a contention that the Valeant employees laid upward split Philidor electronic mail accounts, nether “clearly distinguishable names,” to maintain “their internal Philidor communications split from the Valeant communications, primarily to trim the jeopardy of incorrectly sharing either company’s proprietary information.”
Now nosotros know (from above) that Valeant provided back upward for establishing Philidor as well as that several Valeant staff piece of work at Philidor (using names borrowed from comic books).
But Valeant paid $100 i M k for what was essentially a startup they founded. And they pay progress payments too.
If that is a majuscule expenditure it is a bizarre one. Valeant provided critical back upward for setting it upward as well as later doing that they purchase it.
The alternative inward portion is the $100 i M k was used to run Philidor as well as the $133 i M k of milestone payments also encompass Philidor expense.
But inward that example they should hold upward expensed.
I gauge this is something for the Ad Hoc Committee of the board to piece of work out.
Effect of the consolidation of Philidor
Philidor can't hold upward used for channel stuffing now but it could hold upward used for channel stuffing earlier acquisition.
If it had been used for channel stuffing earlier acquisition so pre-acquisition Philidor would have got owed a neat bargain of coin (for inventory) to Valeant.
When it was acquired that internal loan would hold upward cancelled as well as the consideration would have got been added to goodwill.
That is a wonderful fraud as well as is inward fact how Lernout & Hauspie (a really famous fraud) faked its accounts. Essentially mistaken earnings from stuffing Philidor would hold upward turned into mistaken receivables - as well as so the receivables volition hold upward cancelled as well as turned into (unauditable) goodwill. I promise the accountants have got covered base of operations for this possibility.
The tell inward the accounts would hold upward a foreign driblet inward receivables at the terminate of the 4Q of 2014. Alas Philidor was small-scale relative to Valeant (then) as well as so it is non for certain that this modify would happen.
The evidence is against Valeant having committed this fraud. The merchandise receivables rose betwixt 3Q as well as 4Q 2014.
In full general I concord with the proposition inward the conference telephone telephone that Philidor has non been used to mistaken Valeant's accounts - although Michael Pearson's reply to a pretty direct enquiry was disconcerting. He doesn't have got a clue...
Summary
Citron's study into Valeant was slowly to dismiss. Citron argued that Valeant used the undisclosed human relationship with Philidor to goose the accounts through channel stuffing.Valeant did a skillful project dismissing that though inward the determination nosotros larn at that spot are some youngster accounting issues with Philidor.
The to a greater extent than pertinent enquiry though is whether
(a). Philidor is a device to systematically defraud insurance companies
(b). Whether the legal separation from Philidor is sufficient to immunise Valeant from liabilities and
(c). Whether this is large plenty inward Valeant to motility really adverse impacts on Valeant equity as well as debt holders.
The evidence is really strong for (a) as well as most the evidence has been provided yesteryear the Wall Street Journal. Insurance companies are taking no chances: several large companies are straightaway no longer reimbursing claims submitted yesteryear Philidor.
It is really unlikely that the separation betwixt Philidor as well as Valeant (as per enquiry (b)) is sufficient to protect Valeant from liability. They appear to hold upward joined at the hip with Valeant providing senior staff (who piece of work nether mistaken names) as well as Valeant providing much advice when establishing Philidor.
Whether the Philidor problems are sufficient to motility major hurting to shareholders (even bankruptcy) is unclear. Philidor itself is a high single-digit percent of Valeant's sales (but it critical to the dermatology franchise). However Phildor also may administer the copay cards as well as they are critical to quite a lot of Valeant's business. Non traditional distribution is the deviation betwixt a shrinking Valeant (as per the IMS data) as well as Valeants assertion that it is growing.
I am intrigued equally to how this plays out.
John
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