Valeant – Could This Be The Pharmaceutical Enron? by Citron Research
Price Target lowered to $50
Just four days ago in the world of Valeant, no one had ever heard of Philidor RX. Recent concerns about the company focused on its unsavory business practices of massive prices raises on pharmaceuticals acquired in a rapid succession of acquisitions, while slashing research and development. But no one had discussed how these drugs were distributed….until this week.
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On Monday morning before earnings, a report came out of SIRF, uncovering undisclosed relationships with specialty pharmas, namely Philidor RX. Most importantly, the article introduced Wall Street to a court filing made by a company called R&O Pharmacy, filed with the California District Court in September, in which this small regional pharmacy claims it had received an improper demand for payment from Valeant to the tune of $69 million.
Just yesterday, the New York Times increased its scrutiny on Philidor by questioning if its operation was the target of subpoenas recently served on Valeant over its pricing strategy, covered the prior week.
This is Not Where the Story Ends; it is Where the Story Begins
With its quarterly earnings report scheduled for first thing Monday morning, Valeant was well aware of the scrutiny that was about to come down on Philidor and the R&O lawsuit, as both SIRF and the NYT had contacted management. Valeant came prepared for the conference call with pre-written questions and answers — one about Philador, and one about R&O — in its slide deck. This is where the cover up begins.
We will let the New York Times start:
“Valeant had said little about Philidor until Monday, when J. Michael Pearson, Valeant’s chief executive, revealed on his company’s quarterly earnings call that Valeant had purchased an option to acquire Philidor late last year. He said that Valeant consolidated Philidor’s results in its own financial reports.”
An option? To acquire a company to which you are the only customer? Why would Valeant, a major big cap pharma, a darling of the hedge fund crowd, a suitor of Allergan and an aggressive acquirer of pharmas like Salix, Bausch & Lomb, etc., etc., be secretly maneuvering to buy a little known pharmacy with a dubious ownership structure? And then consolidate its financials? Why was this entity NEVER disclosed in any prior company disclosure? (See Valeant Slides on Philador here.)
What is being covered up??
In the same slide presentation we read Valeant’s explanation of a mysterious court document. R&O Pharmacy filed for pre-emptive relief in California District Court for having received a demand for $69 million from Valeant, stating it had no invoices from Valeant. Valeant’s explanation was this one slide:
So we are to believe that Valeant putatively owns Philidor and is acting as its “protector” in sending the demand letter to R&O for payment? The story seemed a bit far-fetched, but it was somewhat plausible if you wanted to suspend all disbelief.
But after a fair amount of due diligence Citron is about to post the line that should send alarm through all Valeant shareholders:
Philidor Owns R&O Pharmacy.
Citron believes the whole thing is a fraud to create invoices to deceive the auditors and book revenue. PHANTOM ACCOUNTS. Here is the reasoning.
The Smoking Gun!!
From the links below, it is obvious that Philidor and R&O are ARE THE SAME COMPANY AND SHARE MANAGEMENT. The two companies have the same patient privacy disclosure, in fact formatted identically, on both companies’ websites. Note the R&O website refers to themselves as Philidor.
(Yes we’ve archived these pages and will republish them in case the links are down by the time you click on them.)
If you dial the fax # on the R&O website and press 1, you will get Philidor RX. It does not stop at an R&O phone.
And as if this isn’t enough, it appears to Citron that Valeant/Philidor have created an entire network of phantom captive pharmacies … the same privacy notice appears on several other “ghost ship” putative pharmacy websites.
Oh, and as by mere coincidence, these all have the same Privacy Officer contact phone number: (855) 815-7688. And these domains were all registered on the same day! [ Click Here to See them all ]
It is apparent to Citron that Valeant has created a network of “pharmacies” as clones of Philidor. Why do these exist? Citron believes it is merely for the purpose of phantom sales or stuff the channel, and avoid scrutiny from the auditors.
How Can This Be, Citron ? Doesn’t the Head of the Audit Committee have Any Responsibility Here?
Let us not forget that the head of the Valeant audit committee is Norma Provencio. Mrs. Provencio herself was a director of Signalife which was run by now convicted stock fraudster Mitchell Stein. She was in fact his close associate for years — information now conveniently omitted from her biography. Mrs. Provencio’s integrity was first challenged by Bronte Capital in this posting you should read for yourself. Now the relevance of its full context becomes clear.
Is this Enron part Deux??
These similarities are too close to ignore. Does everyone remember during the Allergan takeover battle, when Allergan chose the words “house of cards” ? Look at the following similarities between statements by Valeant and those of Enron:
Enron CEO Jeff Skilling, phone call with Fortune, 2/14/2001: “It is unfair to us and unethical if you don’t take the time to understand our business… we are doing it purely right… people who raise questions are people who have not gone through our business in detail…” vs. Valeant Chairman, CEO Michael Pearson, investor presentation, 5/28/2014: “So again, it is unfortunate that Allergan has not taken the time to understand our business… There is a number of inaccuracies in the report that was put out yesterday… They are just factually incorrect…”
Enron CEO Jeff Skilling, phone call with Fortune, 2/14/2001: “[Enron] is a very simple model… it is a logistics company, not a trading company.” vs. Valeant Chairman, CEO Michael Pearson, Sanford Bernstein conference, 5/28/2014: “[Valeant] is more like a professional services firm than a sort of traditional pharmaceutical company.”
Enron CFO Andy Fastow, meeting with Fortune, 2/15/2001: “[Enron’s] disclosure is more complete than anyone’s.” vs. Bill Ackman, conference call hosted by Pershing Square, 7/17/2014: “I will also point out that Valeant gives massively more disclosure about its business and did so prior to this transaction than Allergan.”
Enron Chairman, Ken Lay, email to employees August 2001: “I have never felt better about the prospects of the Company… our growth has never been more certain.” vs. Valeant Chairman, CEO Michael Pearson, 2Q 2014 earnings press release, 7/31/2014: “As we look across the entire business, I have never been more confident about the growth trajectory across the entire company.”
See full PDF below.