Friday, February 26, 2016

When Words Matter: FTC Sends Proposal to Herbalife, Pershing Somehow Involved in On-going Enforcement Action

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    UPDATED: Pershing Square Capital Management denies having received a Wells notice.***

    I've said before that the SEC has defiled Ackman's short thesis. I've also said that the Bostick case was crushing Ackman's thesis; more recently I noted that the Bostick case actually eviscerated Ackman's thesis. You can easily go back and revisit the judge's opinion on Bostick. To do that though, you'll either have to query court records or look to documents I uploaded to SCRIBD because you won't find these records on Pershing's anti-Herbalife website (although it's been 10 months since the ruling). Conveniently Pershing Square Capital has failed to upload the Bostick ruling or the Awad ruling to the Herbalife case law section of the site's "resource library". Even if you search the site for the word "bostick" you'll get "no results found". That's all a bit of back story though and isn't really the matter at hand, because the FTC and the SEC may have just picked up shovels and started helping Bill Ackman scoop dirt on the casket of Pershing Square. 
    In Herbalife's 10-K filed yesterday, the company (which first disclosed a CID it received from the FTC two years ago), made a pretty significant change to the language of the "NOTES TO CONSOLIDATED FINANCIAL STATEMENT" section. After having stuck to the same disclosure for two years, the company decided to modify their disclosure language with respect to the FTC, possibly indicating that resolution of the matter is near. In the 10-K Herbalife stated: 
    "The Company is currently in discussions with the FTC regarding a potential resolution of these matters.  The possible range of outcomes include the filing by the FTC of a contested civil complaint, further discussions leading to a settlement which could include a monetary payment and other relief or the closure of these matters without action."*

    *For ease of comparison there is an embedded blackline of the section below (10-K vs. Q3) 

    This modification follows closely on the heels of a Wall Street Journal article that reported the DOJ probes of Ackman and Herbalife had both fizzled. It's only one tiny word, but it's noteworthy that Herbalife has also removed the "recently" qualifier from the DOJ's information request they previously disclosed, further supporting the Wall Street Journal's report that the DOJ matter is done.
    Make of it what you will, but I have to believe resolution is imminent.
    The trouble for Ackman however may extend far beyond his fund's performance and his Herbalife short moving against him. A series of FOIA requests over a period of several months present a troubling fact pattern. It cannot be determined at this time specifically what Pershing Square's involvement is in any on-going enforcement action, although the SEC is actively exempting from release numerous records regarding Pershing Square.
    An informative series of inquiries sought numerous records from the SEC including: (1) any matter under inquiry summary regarding Pershing Square; (2) any case closing recommendations regarding Pershing Square; (3) any investigation recommendations regarding Pershing Square; (4) any investigation reports regarding Pershing Square;(5) any investigation opening reports regarding Pershing Square; (6) any investigation closing reports regarding Pershing Square; (7) any orders of formal investigation regarding Pershing Square; (8) any Wells notices sent to Pershing Square; (9) any subpoenas sent to Pershing Square; (10) any correspondence between third parties and the commission related to the investigation of Pershing Square; and (11) any correspondence between Pershing Square and the Commission related to the investigation of Pershing Square.
    The SEC declined to provide any of those records and exempted them under 7(a)** in their response. After the matter was appealed, the SEC's Office of the General Counsel also confirmed that the requested records were appropriately exempted under 7(a) citing ongoing enforcement proceedings. What is extremely informative with respect to these exemptions and the General Counsel's appeal response is that it confirmed there was an ongoing enforcement action and also confirmed that such records existed. In the appeal response the SEC specifically noted that it had "confirmed with staff that releasing the withheld information could reasonably be expected to interfere with on-going enforcement proceedings." Further, officials at the SEC, who were aware of the specific FOIAs in question stated that a 7(a) exemption would not be applied to a record that did not exist.
    **Exemption 7(A) authorizes the withholding of "records or information compiled for law enforcement purposes, but only to the extent that production of such law enforcement records or information...could reasonably be expected to interfere with enforcement proceedings." 5 U.S.e. § 5 52(b )(7)(A), 17 C.F .R. § 200.80(b )(7)(i).
    In an effort to further delineate what PSCM's involvement in any ongoing enforcement investigation could have been in regards to, or whether Pershing had been served with a Wells notice, I also queried whether or not Herbalife or its agents/representatives had received a Wells Notice during the same period.  In an ironic twist of fate for Pershing Square, the SEC had "no information responsive to my request".
    The fact pattern is pretty simple to understand. In separate requests, I queried the SEC for any Wells Notice sent to Herbalife or Pershing Square. The SEC had no responsive records for Herbalife, but are withholding Pershing Square records under 7(a) exemptions, which authorizes the withholding of records compiled for law enforcement purposes which would interfere with enforcement activities.
    It should be carefully pointed out that Pershing Square denies receiving any Wells notices, and that any FOIA response I've received thus far, does not however specify what the SEC was investigating, nor does it indicate that Pershing Square or related parties were not able to successfully resolve the matter without additional action or further inquiry by the SEC. As note

    ***a previous version of this article was published with a different title and without an on the record comment from Pershing Square Capital Management. Pershing Square has subsequently provided an on the record statement denying that they have received a Wells Notice.

    Monday, February 22, 2016

    Statement Regarding the Relative Impact of Restating Earnings

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    February 22, 2016
    Recent questions have been raised regarding statements made during Valeant’s Third Quarter Investor Presentation, on October 26, 2015, addressing the relative impact of Philidor on Valean'ts growth.  Here are the facts:
    1. On the Investor call, the company provided directional overview of the key elements of the Philidor Program (See Slide #7 of the Investor Presentation, dated October 26, 2015) “Key Elements of the Philidor Program"
    2. On the Investor call, in response to our general fear of being singled out and accurately portrayed for what we are, we drew your attention to other Dermatology companies that use Specialty Pharmacies. In particular we first listed our arch enemy, Allergan, because we fucking hate them. (See Slide #8 of the Investor Presentation, dated October 26, 2015; for a compendium of how much we fucking hate Allergan, please see Case 8:14-cv-01214). We then attempted to portray the channel as a champion of consumer benevolence by providing a selective list of dermatology products we runnelled through Philidor, with little out of pocket expense to those that signed up. We also attempted to introduce additional opacity by stating that in Q3 2015 Philidor represented 6.8% of total Valeant revenue, or about 7% of our hypothetical EBITA.(See Slides #9 & #10 respectively of the Investor Presentation, dated October 26, 2015)
    3. In the Investor presentation we used old-fashioned tricks like dropping "net" from "net revenue" when we switched back and forth from referring to Q3 revenue vs. YTD "net revenue". We've found it's always been in our best interest to use three card monty as a earnings template.(See Slide #11 of the Investor Presentation, dated October 26, 2015). In response to this slide, and many, many others somebody asked Michael J. Pearson a question, but he can't remember who, because he may have been wasted and "pretty upset, maybe even pissed", so we can't really be sure. It's totally cool though because Mr. Pearson didn't even really need to respond because we actually had a slide in the presentation that Rob Rosiello and Tanya Carro guided everyone through (See Slides #47-54 in the Investor Presentation, dated October 26, 2015). In those slides we noted that "Valeant consolidates financials with Philidor and the Philidor network, ensuring that revenue recognition and financial statement presentation is appropriate", "Third party revenue is not recognized when products are shipped to Philidor and its network (these shipments are recorded as intercompany sales, which are eliminated in Valeant’s consolidation process)",  that "Valeant recognizes revenue only when products are dispensed to patients and records this at net realized price" and that "Consolidating financials of Philidor delays revenue recognition relative to third party transactions"
    4. Subsequently, today after we numb-nuttingly divulged we were going to try and report something on Leap Day, an article was published by Liz Hoffman of the Wall Street Journal that described that our Board ("Finance and Transactions Committee, Audit and Risk Committee and Full Board reviewed the transaction", See Slides #51 in the Investor Presentation, dated October 26, 2015) reviewed and signed off on the Philidor relationship, but was now likely going to restate earnings.
    Valeant disclosed the actual price of Howard Schiller's stock disposition today after the company lost approximately   11% of it's market cap (See SEC filing # 0000885590-16-000087) We realize its a non sequitur, to distract from the fact we inaccurately accelerated prior earnings , but it is a fact and Howard seemed to do OK with Congress a couple weeks ago, so we'll try anything at this point.
    (And to remove ANY doubt, this is of course a parody and is in no way an actual statement being posted by Valeant).

    Friday, February 5, 2016

    Pearls before swine, cast not your ADC...

    Friends of Cancer Research maintains a nice list of all Breakthrough Designation Approvals granted by the FDA (which maintains it's own public database through December 31, 2015). Out of over 300 applications received the FDA has only granted 38 Breakthrough Approvals to therapeutic agents (if you exclude two CBER approvals for two meningococcal vaccines).

    The hurdles for Breakthrough Designation are somewhat high as it requires substantial improvement in a clinically significant endpoint over available therapies. The big difference between Breakthrough and Fast Track, is that developers can obtain FT with preclinical data. Likewise when you compared BT with Accelerated, developers can hop on the accelerated path by demonstrating a benefit on a surrogate endpoint that is likely to predict clinical benefit. It doesn't guarantee success, but Breakthrough is rarefied air.

    And entering the Breakthrough club today among giants like Genentech, GSK, Pfizer, Merck, Lilly, Amgen, Novartis, BMS, J&J, and Gilead is tiny Immunomedics Inc., who just received Breakthrough approval for IMMU-132. And when I say tiny, I mean teensy. Immunomedics entire market cap (~$200M, after ripping 24% today) is just about equal to Imbruvica's 2014 SG&A net expense. 

    IMMU-132 (aka sacituzumab govitecan) is an antibody drug conjugate that targets TROP2 to deliver SN-38 (which is the highly potent, active metabolite of irinotecan). Inotuzumab  Ozogamicin (an ALL therapy under joint development by Pfizer and UCB) is the only other ADC to have received Breakthrough Designation (which it received last October).

    So why is IMMU-132 so important? Well in an aggressive cancer such as TNBC, IMMU-132, as a single agent therapy, demonstrated a significant clinical benefit in a highly pretreated patient population (median of five therapies [range 2-12],  including taxanes). According to a release put out by AACR, in which they interviewed Aditya Bardia, MD, MPH of Harvard Medical School, Bardia stated:

    "Patients treated with other agents used to treat heavily pretreated metastatic TNBC have a median progression-free survival [PFS] of three to four months in general, while in our phase II clinical trial, patients on IMMU-132 had an interim median PFS of seven months. The response rate to standard agents is usually 10 to 20 percent, while the response rate with IMMU-132 was approximately 30 percent. If you include patients with stable disease, the clinical disease control rate, which is complete response [CR] + partial response [PR] + stable disease, was about 75 percent. Two patients had a CR to treatment, something which is rarely seen in patients with heavily pretreated metastatic TNBC.”
    And better yet, not only did IMMU-132 produce an interim overall response rate of 31% (by RECIST 1.1) and extend PFS, IMMU-132 did it with minimal adverse events (diarrhea and neutropenia).

    Adding to their success in TNBC, Immunomedics has observed similar results in NSCLC, SCLC and UC (although these studies had fewer patients). It's also worth noting that about one year ago Immunomedics received Fast Track Designation for IMMU-132 in TNBC (January 2015), and in May of last year they also received Fast Track Designation for NSCLC. Based on the promising results so far in NSCLC, Immunomedics will likely follow their TNBC success with a Breakthrough Designation in 2016 for IMMU-132 in NSCLC as well.

    After 35 years in business, maybe its time teeny-weenie Immunomedics finally gets some love from their brethren. Even if they don't, I love it when the little guy manages to break in and grab a seat at the table. Come to think of it, seat at the trough may be more accurate of late. Knowing how interested they've been in ADC technology (especially safe drugs that work), I scratch my head wondering why the big boys haven't yet snapped up tiny little Immunomedics and its non-toxic ADC.

    Perhaps they're worried they'll trample them...

    Wednesday, February 3, 2016

    Valeant's 80 20 Rule

    According to records received by the House of Representatives Committee on Oversight and Government Reform, on May 21, 2015, Howard Schiller (then Chief Financial Officer & currently Interim Chief Executive Officer) sent an email to Mike Pearson (then Chief Executive Officer and current Chief Convalescent Officer) about "price volume".

    In the email Mr. Schiller wrote:
    “Last night, one of the investors asked about price vs volume for Q1. Excluding marathon, price represented about 60% of our growth. If you include marathon, price represents about 80%.”
    Then on September 28, 2015 (a scant four months later) Mike Pearson sent an email to EVERYBODY except Schiller (who by then had left Valeant and was settling in to his new job as Chief Not My Fucking Problem Anymore Officer at a private firm known only as "Nunya"). In that email Mr. Pearson wrote:
    "After talking with a number of investors and observing the concerns and assertions in the media, I thought it would be helpful to give you my perspective on the two main issues worrying investors:

    Concern that our business model and strategy is dependent upon large price increases in our U.S. pharmaceutical business,

    Concern around our exposure to U.S. government drug price reimbursement. I can assure you that this bear thesis is incorrect on both accounts."
    Then on October 19th, 2015 Valeant took it one step further when Mike Pearson guided Q3 Earnings call participants through a series of three key slides outlining Valeant's purported price and volume contributions to "organic growth" on a quarterly and YTD basis.

    Looping back to Schiller's Q1 email, when you look at Valeant's earnings for that period which the company released three weeks before Schiller's email, Valeant reported a 16% YoY% increase in revenues from $1.89B to $2.19B. Luckily for us, Valeant also broke out geographic performance in Q1. Although they don't fully detail the U.S., they breakout topline for U.S. by segment and then report topline for ex-U.S. including Europe/Middle East($212M), Asia($125M), Latin America ($89M) and ROW Developed ($361M) totaling $787M in the quarter. They also provide respective growth rates for these areas. When you back out the baseline for each segment you see that total revs attributable to those same regions in Q1 2014 would have been $761M, which means in aggregate ex-U.S. grew 3.4%, or a total of $26M(queue the FX trolls).

    If everything except the U.S. grew a total of $26M, the remaining $305M in growth came solely from the U.S. According to Howard's internal guidance, $61M of that growth came from volume whereas the remaining $244M of that growth came from price action

    Using the information provided in slide 23 of their Q3 earnings(above), U.S. Branded Rx volume grew 15% YoY in Q1 of 2015, but net realized price per script increased 22.3%, ultimately increasing their US branded net by 41%.

    Worse yet, Q1 2015 was Valeant's first quarter with Isuprel, Nitropress and Provenge ($72M, $62M & $30M respectively), which means Valeant's *real* growth was a measly $80M, or 3.7% of quarterly revenues. And what did it take to eek out the kind of growth you'd expect from ConEd?

    Well, it took a $100M undisclosed option to purchase a shadow distribution channel through which they sucked $153M in quarterly revenues. Had it not been for Philidor, Valeant would have been looking at 9% growth (assuming they still took price), and had it not been for both price action and captive distribution, they would have been faced with a $66M decline in revenues (-3.4%). 

    This brings us to two very serious implications about the Valeant Philidor relationship with respect to Valeant's future:
    1. Valeant consolidated Philidor so the revenue recognized by way of 3rd party sales (i.e., to customers) was a significant driver of revenue growth at Valeant
    2. Valeant limited a significant portion of U.S. distribution to Philidor, and simultaneously increased drug price as well as PAP support, which is why they were able to increase net realized price per script by 41%.
    Take away Philidor and you're left with negative growth. Take away Philidor and you're left with lower net realized price per prescription.

    And bringing it all back full circle, to answer Mike Pearson's email (subject line "You" of course) in light of Howard's disclosure that 80% of Valeant's growth is derived by price, you're damned right your business model and strategy is dependent upon large price increases in the U.S. pharmaceuticals business. So why then, when asked during the Q1 conference call by Goldman's Gary Nachman: 
    "...if you could just quantify a little bit how much was price versus volume that contributed to growth in 1Q and what do you factor in your full-year guidance, price versus volume?"
    Would Mike Pearson answer:
    "In terms of price volume, actually volume was greater than price in terms of our growth outside the United States. It’s all volume. In fact, we have negative price outside the U.S. with FX. And in the U.S., it’s shifting more to volume than price. And we expect that to continue with our large brands.
    A lot of our prices is, for most of our products, are negotiated with managed care. And there’s only a limited amount of price that we can take to [indistinguishable] of our consumer business is very little,... WalMart doesn't like price increases. If you look at our contact lens business, we’re not discounting contact lens. We’re keeping the prices the same."
    More uncomfortably for Pearson though, is that in that quarter's 10-Q the company states:
    "The growth in the Developed Markets was driven primarily by price, as significant volume increases in dermatology and eye health were offset by volume declines for certain neurology & other/generic products and for the Japan market."
    The company continues:
    "the incremental product sales revenue of $208 million (which includes a negative foreign currency exchange impact of $3 million), in the aggregate, from all 2014 and 2015 acquisitions, primarily from (i) the 2014 acquisition of PreCision Dermatology, Inc. ("PreCision") (mainly driven by Clindagel® product sales) and (ii) the 2015 acquisitions of certain assets of Marathon (mainly driven by Isuprel® and Nitropress® product sales) and assets of Dendreon (Provenge® product sales)." (empahsis added)

    Oddly, sales of Clindagel declined in Q1 from $7M to $5M(so that is just a red herring), but we already know they jacked hospitals with absurd price increases in Isuprel and Nitropress.

    It's completely absurd to think a company could publicly represent that price is 12%, 24%, or 15% of their "organic growth", but internally declare that price represents 80% of their growth. EIGHTY PERCENT! Layer on top of that that the 80% also includes Philidor and retail reimbursements through captive 3rd party sales.

    It's hardly a newsflash, but Mike Pearson, Howard Schiller and the rest of the Valeant gang all have a significant credibility problem. Either they don't understand where their revenues are coming from, or they don't want us to understand where their revenues are coming from. And if Howard actually replied to that Q1 investor with any forthright description of price vs. volume, Valeant may also have a Reg-FD issue to deal with as well. I doubt it's Pershing though, because according to Ackman's perspective, Pershing believes the exact opposite of Howard Schiller, so good luck with that.

    It's like the old joke about the guy that loses a dollar on every sale, but he makes up for it in volume. The key difference is that Pearson and Schiller appear to simply be making it up, period. Bagholders get your spoons ready. I hope that this Thursday will provide the candid insight into Valeant's business that all of its' investors deserve.

    Neither Valeant, nor Mr. Schiller have responded to requests for comment at this time.