Valeant's Quantum Entanglement Issue

Recently we learned that quantum entanglement is real. Despite their protestations, it is apparent that Valeant's actions at a distance still maintained a spooky financial and operation control over Philidor, and thus R&O.

Aside from the profound philosophical ramifications of considering whether financial control constitutes control, and whether a zero dollar option constitutes a fully consummated transaction there are some peculiarities in Valeant's statements on their call today. An embarrassment of riches. Before I cover the accounting issues in upcoming posts (particularly with respect to shareholder's equity) let's just focus on the easy stuff for now.

Valeant received a question(apparently from an investor) asking:

Did Philidor commit wrongdoing by shipping products to California residents without a California license? 

Valeant's answer:

We understand that: 

• Philidor did not dispense products to patients in California 

• Philidor only dispenses products to patients in states where Philidor has a non-resident license, and that does not include California 

• Philidor has agreements with affiliated pharmacies that have California licenses and those pharmacies have dispensed products to patients in California

Aside from the fact they didn't actually answer the question I suppose it depends upon what the meaning of the word 'is' is.

I teased everybody last week that the Valeant/Philidor was much bigger than just access to California. 

R&O / Philodor is NOT just about access to California. It's much bigger and I'm about to prove it to you.... $VRX

— The Skeptic (@TheSkeptic21) October 24, 2015

Despite Valeants assurances otherwise, R&O really is about access to California...just as much as it isn't.

Valeant told us on their conference call that they have a no cost option for the next ten years to acquire Philidor, which owns R&O. To any normal person that isn't from Laval or Hatsboro that would mean they own Philidor, which owns R&O. Ergo any prescription sent by R&O would mean that it was actually sent by Philidor, which would actually mean it was sent by Valeant. 

Valeant's statement is particularly peculiar when you consider previously unreported data that shows California is the number one recipient of prescriptions fulfilled by R&O under the Philidor regime. Ah-hah! So it is about access to California.

Worse yet for Valeant, out of the 21,000+ prescriptions I've been able to analyze so far, R&O shipped to at least 33 states under the Philidor/Valeant regime. Oh, so...it's a lot about California, but not entirely? 

Valeant carefully minced their words to avoid the pitfall of Philidor's false statements made in connection with their rejected California Pharmacy license, but if you look at the data you'll immediately see that it was about access to California, and 32 other states.

As far as I can currently tell, out of the 33 states that R&O shipped to, about 2/3's had active Pharmacy licenses for both R&O and Philidor; the remaining 33% were split between R&O's license, Philidor's license or neither being licensed. 
(I have been unable to verify WA & MN)

Sidestepping the channel stuffing allegations, that presents a very simple conundrum for Valeant management, and thus Philidor managment and thus R&O management, which is how could you make the claim that a pharmacy you own(really, but not really) legally ship prescriptions to states which your pharmacy is not licensed? It also calls into question management's statements regarding Philidor's ability to ship in California.

Perhaps in some wormhole of FASB accounting standards or ancient bibliographic tomes on American corporate structures one could make an argument that you own a controlling financial interest, but don't actually own the underlying company, however in the real world if you and 6 of your closest friends on The Board say Philidor doesn't ship to states it doesn't have a license, Philidor better not ship to those states, and neither should any of it's consolidated subs. The only thing worse would be if neither had a license, which of course there are few instances of that too.

After analyzing over 21,000 individual prescription records (at an average cost of over $800/prescription) for less than three months of Valeant products moved through R&O, it is apparent that Mike Pearson's statement was correct that Valeant does not have operational control over R&O, so cut him some slack guys! I mean, obvs, if he had known about all these illegal shipments of drugs out of R&O while under the control of Phildor/Valeant, he wouldn't have made all those certified statements to the contrary, right???



If you're curious, the states analyzed are listed below and all 21000 prescriptions available at the following link.

Ship To State	NUMBER OF R&O SHIPMENTS	Percent of R&O	R&O LICENSED?	PHILIDOR LICENSED?	JOINT APPROVAL
CA	7678	35.32%	YES	NO	NO
IL	6091	28.02%	YES	YES	Dual Approval
CO	1303	5.99%	YES	YES	Dual Approval
UT	908	4.18%	YES	YES	Dual Approval
NV	876	4.03%	YES	YES	Dual Approval
WA	856	3.94%	UK	UK	UK
FL	711	3.27%	YES	YES	Dual Approval
MS	522	2.40%	YES	YES	Dual Approval
ID	518	2.38%	YES	YES	Dual Approval
PA	506	2.33%	NO	YES	NO
OH	338	1.55%	YES	YES	Dual Approval
NY	187	0.86%	YES	YES	Dual Approval
OK	155	0.71%	YES	YES	Dual Approval
SD	141	0.65%	YES	NO	NO
IA	135	0.62%	YES	YES	Dual Approval
RI	117	0.54%	YES	YES	Dual Approval
TX	114	0.52%	YES	YES	Dual Approval
IN	111	0.51%	YES	YES	Dual Approval
MI	97	0.45%	YES	YES	Dual Approval
MO	68	0.31%	YES	YES	Dual Approval
WI	60	0.28%	YES	YES	Dual Approval
MN	57	0.26%	UK	UK	UK
KS	43	0.20%	YES	YES	Dual Approval
WY	42	0.19%	YES	NO	NO
CT	28	0.13%	ACTIVE 09/01/2015* (SHIPMENTS PRIOR)	YES	SORT OF
MA	24	0.11%	NO	NO	NEITHER
NJ	16	0.07%	YES	YES	Dual Approval
VT	14	0.06%	YES	NO	NO
AZ	13	0.06%	NO	YES	NO
DE	5	0.02%	YES	YES	Dual Approval
AK	1	0.00%	YES	YES	NO
DC	1	0.00%	YES	YES	Dual Approval
NH	1	0.00%	YES	YES	Dual Approval

***Correction: a previous version of this table incorrectly reported some of the states R&O did not have a license