Wednesday, November 18, 2015

Bill Ackman: DOJ's Inside Spoon

Calendars being calendars, they reliably determine for us year after year that January, February and March are in fact all after the preceding November (or Movember for interns). 

In their  1st quarter 10-Q (covering January-March, again for the interns) Herbalife disclosed that "The Department of Justice recently sought information from the Company, certain of its Members and others regarding allegations being made about the business practices of the Company and its Members." That sentence got everybody in a hot frothy lather. Even yesterday when it was first announced that the DOJ and FTC were having a presser about dietary supplements, Herbalife, Vitamin Shoppe and GNC all crapped the bed to varying degrees (GNC being the Joey Chestnut of the three and down as much as -25%). After the full DOJ announcement and the market realization that neither Herbalife, GNC nor Vitamin Shoppe were the target of the enforcement actions all three recovered, although GNC still closed down -6.4%.

So if yesterday wasn't about Herbalife et al, what was it about?

It was about enforcement actions against a bevy of dietary supplement manufacturers and marketers. Sadly for Bill Ackman Herbalife was not one of those manufacturers. The people that were on that list sound like they did some pretty bad stuff; a lot worse than sweetening caffeinated soft drinks. The complaints released yesterday allege all sorts of unsavory things, like importing synthetic ingredients from China under fake CofA's for geranium flower powder and then labeling your products as containing natural plant extracts. Even worse, some of these firms didn't bother to determine if some of their new synthetic ingredients were even safe in humans. USP Labs seems to be the most egregious of the bunch, and the only entity being charged criminally. In fact the FDA sent USP Labs a warning letter in April of 2012 warning that 1,3- dimethylamylamine HCl , which is one of the ingredients in its Oxy Elite Pro and Jack3D products, was a new dietary supplement which they were selling illegally. The FDA also sent USP Labs a similar warning letter in October of 2013 for another ingredient, aegeline(which you can buy on Alibaba although you probably don't want to). Terribly, 14 of 20 case reports submitted to the FDA by the Hawaii Department of Health indicated that USP Labs' products were the sole commonality across 14 cases of severe hepatotoxicity. People were really sick, and not in the Jeremy Piven/spicy tuna sort of way.

As part of yesterday's joint task force announcement the FTC also put a helpful, but LONG, infographic to help consumers steer clear of dubious products.
That infographic had four key warnings against which USP Labs perfectly illustrates:

  • Dietary supplements are not evaluated by the FDA for safety and effectiveness
  • Supplements are not meant to prevent, treat or cure diseases
  • "Natural" doesn't doesn't always mean safe
  • Supplements could have hidden ingredients.
The problem with synthetic active ingredients being hidden in "natural" products is so bad that the FDA has actually set up a laboratory dedicated to detecting synthetic additives in "natural" products. Bought "herbal viagra" recently? Chances are, it actually has Chinese bootleg viagra (like actual sildenafil citrate) sprinkled in, so when you take your "all natural" Horny Goat Weed, and suddenly get the urge to be the outside spoon, it's probably due to a modern Chinese manufacturer and not ancient Chinese folklore.

All told, yesterday's enforcement actions brought one criminal case and eight civil complaints from both the DOJ and the FTC. The DOJ's press release pointed out that the action was the product of a "nationwide sweep" that "pursued civil and criminal cases against more than 100 makers and marketers of dietary supplements." The DOJ also specifically noted that:
"During the period of the sweep, 117 individuals and entities were pursued through criminal and civil enforcement actions.  Of these, 89 were the subject of cases filed since November 2014."
The release continues:
"The actions discussed today resulted from a year-long effort, beginning in November 2014, to focus enforcement resources in an area of the dietary supplement market that is causing increasing concern among health officials nationwide.  In each case, the department or one of its federal partners allege the sale of supplements that contain ingredients other than those listed on the product label or the sale of products that make health or disease treatment claims that are unsupported by adequate scientific evidence." [emphasis added]
So all in, we know:
  1. that Herbalife was contacted by the DOJ sometime after November 2014 
  2. Calendars instruct us that Q1 2015 is after November 2014(again for your interns)
  3. the DOJ investigation spooled up in November of 2014
  4. today's DOJ/FTC actions are the culmination of over a year of effort investigating over 100 entities
  5. Herbalife was not on yesterday's list.
If you go to all the trouble to set up a multi-agency task force between the DOJ, FTC & FDA(and also folded in USPIS, IRS, DoD and USADA) and you spent more than a year investigating "makers and marketers of dietary supplements" and host a presser highlighting the accomplishments of your enforcement investigations you'd probably want your actions to capture as many of your investigative targets as possible right?

Simply put, you don't culminate a multi-agency year long investigation of 117 different entities with a "sweep" action that doesn't capture every single viable target you're pursuing. "Sweeps" usually don't work like that or they'd probably call them something else.

And if the DOJ/FTC broom has passed you over, perhaps its an indication that any investigations or potential enforcement proceedings against you have been abandoned. Perhaps yesterday's DOJ action is the vindication that Herbalife has been waiting for and the federal investigative records of Herbalife have now been closed.

I wonder if Bill Ackman likes to be the inside spoon.

Sunday, November 1, 2015

Valeant Needs More Cowbell

As the Blue Oyster Cult of financial journalists, short sellers, and investigators (including  Andrew Left, Roddy Boyd, John Hempton, Jonathan Rockoff, Charles Ornstein, Caroline Chen...) fervently ascend through their literary scales of Don't Fear the Reaper, despite Wall Street's fatigue, the Bruce Dickinson in me can't help but want more cowbell. 

After reading through more transcripts, analysis, powerpoints, investor calls and letters than I could ever want, I found that I still had a fever....and the only prescription was more cowbell.

Turns out, that additional analysis of accounts receivable data generated by Philidor has uncovered an odd subset of prescriptions which apparently were never meant to be filled.

As is to be expected of Valeant, it's not straightforward so let's keep it as simple and rhythmic as possible.

On June 23rd, Philidor claims that prescription 40031052 was dispensed and shipped. Philidor's records also show that they are due $973.21 from the the PBM/Processor Caremark.

What is quite odd about this particular receivable is the shipping history associated with this prescription. Instead of originating at R&O on June 23rd, it actually originates in Hammond, Indiana on June 29th, before making its way to R&O in Camarillo, California, where it was received on July 2nd and signed for by "Al." This is troubling for many reasons. At first I  thought perhaps it was a return, but that can't be the case, because it's a credit on the receivables. It would also stand to reason that if it were a return, the same exact script number would be referenced with a reimbursement due to Caremark, but this is the only reference to prescription 40031052.

In an even stranger twist there are prescriptions which appear to be billed to payors, but were never shipped into or out of R&O. It's like the Wonka factory for price gouged drugs. As seen here, prescription 40045409 claims to have been filled on July 6th, and shipped on July 7th, with the payor on the hook for $1017.30.

When you refer to the shipping history for that particular prescription though, you can see it wasn't even scheduled to be picked up until July 9th at 7:46pm, and the scheduled pickup was from Oak Park, IL, destined for Camarillo, California. It never got there though. You can see from its shipping history that it wasn't even scanned in by UPS.

More troubling still for Philidor and Valeant is that these two simple examples are not the only examples uncovered in their accounts receivables. These are just two little plunks of the stick on the cowbell.

Using other pharmacy's provider numbers seems bad enough, but billing for prescriptions which were never filled seems like outright insurance fraud, which would be in addition to whatever insurance fruad they were already perpetrating.

Plunk, plunk, plunk, plunk, plunk, plunk, plunk...
All our times have come.....

For those curious, the origins of these phantom shipments I've uncovered thus far are: