Monday, March 21, 2016

Valeant Updates Schiller's Website Profile

First off, click on the image below to read the screen grab from Valeant's updated website.

Despite the Board's protestations and public accusations, under section 14.10 of Valeant's Articles, Schiller can only be removed if he's no longer qualified as a director. According to the Business Corporations Act of British Columbia, Schiller is undoubtedly still qualified. Furthermore it would require a Special Resolution to remove him if he continues in his refusal to offer his resignation; such a special resolution would require a two thirds vote of Valeant shareholders. Although the updated website profile is a TOTAL SPOOF, based on the above facts of law regarding whether Schiller is still qualified, I expect things may remain pretty tense in Valeant's Board Room for a while to come, particularly as they are accusing him of things he clearly disagrees with.

Wednesday, March 2, 2016

Valeant's Humpday: SEC Subpoena, Arizona Targets Company and Jorn Resigns

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    If this week wasn't bad enough for Valeant, Deb Jorn, the Executive Vice President and Company Group Chairman resigned today from the company. Ms. Jorn was responsible for all major US product launches as well as the Dermatology and GI therapeutic areas. These two areas were Valeant's most important, representing HALF of Valeant's forecasted 2016 US revenues. Moreover, Ms. Jorn was also responsible for the huge push of Dermatology products through the captive pharmacy channel they'd established with Philidor and it's subsidiaries.

    Philidor is basically in a world of shit, which could be why Ms. Jorn resigned. We know from an action taken by the California Board of Pharmacy that Philidor, Valeant's captive specialty pharmacy, was denied a license to operate in the state of California. This led Philidor to attempt to purchase R & O pharmacy through a series of shadow transactions, which could allow Philidor to operate in California, or at least that was the plan. Those well versed in the story are aware that this deal completely fell apart after Russel Reitz, the owner and pharmacist operating R & O Pharmacy accused Valeant, Philidor and others of committing fraud in Federal court. We also know from other court records that Philidor, through R&O, pushed thousands of prescriptions for Valeant products out to over 30 separate states.

    Leading into Jorn's resignation, this past Monday Valeant's situation became even more tenuous when it disclosed it had been subpoenaed by the SEC. In yet another laughably ridiculous PR effort, this past Tuesday Valeant is attempting (through private calls with sell side analysts) to spin this SEC investigation by claiming that this is somehow related to Citron Research's report on the company. The guts of this claim is completely incredible in that Valeant was SUBPOENAED. It very well may be that it was started because they complained about Citron, but you don't subpoena Valeant for information they would willingly provide about a short seller. It's amateurish drivel that got pushed out to the market through what could be Reg FD violations. 

    Worse still for Valeant adn Ms. Jorn, the concerns surrounding Philidor persist like toenail fungus or IBS.  Sources have confirmed that the State of Arizona is targeting Valeant and its affiliates. In what I consider to be a model of transparency, you can actually watch the full Arizona Board of Pharmacy Meetings via Arizona's open meeting process. Additionally you can review the full agenda for each meeting at the Board's event portal.

    This transparency allows you to see that back on November 18th, shortly after Valeant detailed it's relationship with Philidor, the Arizona Board reviewed an August pharmacy application by Forsta LLC.

    Forsta was formed by none other than Philidor's Gary Tanner(aka Valeant's Gary Tanner), and it's pharmacist in charge was none other than Philidor's Jake Power. As evidenced by the minutes, the Board discussed Forsta's application at the meeting, as well as Valeant's relationship with Philidor. It should be noted that Forsta was one of four resident wholesaler applicants and one of 6 resident pharmacy applicants at the November meeting. Flash forward to the January 27-28, 2016 meeting, and you see that Forsta LLC was on the agenda yet again. Although Forsta's peers from the previous meeting all received approval for license, Forsta was held back with a provisional approval(rendering Forsta non-operational). According to sources familiar with the matter, Forsta was asked to attend the meeting specifically because of it's ties with Philidor and Valeant and the Board wanted very much to explore these connections. Forsta cancelled their appearance right before the meeting and did not attend.

    Although the meeting agenda has not yet been made public, sources indicate the Board has asked both Forsta and Philidor to appear at the upcoming March meeting, although it is unclear whether either plans to attend. As a suggestion, I'd like to recommend that both companies just send Gary Tanner and Jake Power. Maybe Deb now that she's unencumbered. 

    In addition to probing the interconnections of Valeant, Philidor and Forsta,the Board has also taken issue with Philidor's call centers. Despite Philidor's public claims about winding down their business, sources familiar with the matter indicate that the Board believes the Philidor call centers in Phoenix and Tempe are operating in violation of state laws. The Board has also been presented with evidence demonstrating that Philidor has been attempting to hire pharmacists and technicians in Arizona. This is a curious discovery particularly because Philidor filed a WARN notice in Arizona, on January 5th, 2016 indicating they were providing a 60 day notice period that they planned to eliminate 264 jobs in Arizona as well as a WARN notice for 262 employees in Pennsylvania on November 23rd. Stranger still is that AFTER their public claims of winding down operations, Philidor applied for another license in Arizona on December 15th; that application is currently listed by Arizona as in process. 

    The issues faced by these companies in Arizona shouldn't be underestimated given the prestige and level of national engagement of Arizona's Board of Pharmacy members. During his time as Executive Director of the Arizona Board, Hal wand, who is currently currently the NABP President-elect, overlapped with his friend and recent Arizona Board President Dennis McAllister. Mr. McAllister, is a current member and the former President overseeing the above referenced proceedings that reviewed Philidor and Forsta. Mr. McAllister also sits on the National Association of Boards of Pharmacy's ACPE Board. In addition to his role at the Arizona Board of Pharmacy, Mr. McAllister is also the Senior Director of Express Scripts's Pharmacy Regulatory Affairs group where he directly oversees Express Scripts' relationship with 18 separate state Pharmacy Boards. Yes, the same Express Scripts that was hoodwinked by Philidor/R&O and yes the same Express Scripts blocking access to overpriced Glumetza

    To a certain extent you may be thinking, "'s Arizona, so what! Why do I care and why would the Arizona Board care so much about Valeant, Philidor and Forsta?" Well, it wouldn't just be the AZ board, but the Feds may get involved as well. You'll remember from the Isolani lawsuit documents that R&O, which was not licensed in Arizona, shipped prescriptions to Blue Cross and Humana patients in Arizona. While this was going on, Philidor (who was located in Arizona, but not licensed in California) was controlling outbound shipments to Arizona from R&O(who was located in California but not licensed in Arizona). Because the parties had not yet closed the purchase agreement for R&O the effect was that one unlicensed non-resident pharmacy forced another unlicensed non-resident pharmacy to illegally ship prescriptions via mail, across state lines, when they could have simply filled those prescriptions from their own authorized jurisdictions. Smart right? (insert Valeant business model joke)

    You can readily observe from their meetings that due process is a cornerstone of the Arizona Board of Pharmacy's review and enforcement processes. Although the matters are still under the Board's review, in the absence of meaningful records production or participation in the due process extended to them, an industry expert indicated that it is highly unlikely that either Philidor or Forsta's applications will receive final approval. Beyond the denial of the respective applications, the principals of those companies could also face disciplinary action in Arizona, and other jurisdictions, further entangling Valeant in their ongoing self-destruction. 

    Tuesday, March 1, 2016

    Major Flaw in Valeant Ad Hoc Committee's Statements

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    Late on February 22nd, 2015 after four months of work, Valeant released a statement about their Ad Hoc Committee's review of Philidor and related accounting. As of today, Valeant has yet to file an 8-K with respect to that statement, but they may be distracted by other priorities, such as their recently disclosed SEC subpoena

    There is a major problem with the statement they put out on February 22nd and reiterated in their NT 10-K filed yesterday. Before we get to the major problem with the statement, lets explore some other background issues from a year ago.
    • On February 20th, 2015 Valeant shares closed at $173.26
    • On February 22nd, 2015 Valeant reported earnings (GAAP of $1.56, and CASH EPS of $2.58; when the street was expecting between $2.45-$2.55)
    • On February 23rd, 2015, the next trading day, Valeant closed at $198.75 on close to 20M shares traded; that is a 14.7% move (or close to $9B in market cap)
    Bringing it back to today, if you assume that Valeant's recent restatement (which they continue to waffle on per the NT 10-K) is limited to the $58M and that such a restatement is appropriate (which are both BIG assumptions) if they had reduced GAAP EPS by $.10 in Q4 2014 it would have caused Valeant to miss Q4 Cash EPS estimates. Kind of makes you wonder how they would've traded on February 23rd, but one could only speculate.
    Valeant practically begs us to speculate when it comes to their relationship with Philidor. Tantalizingly, Valeant informed us that they "identified certain sales to Philidor during 2014, prior to Valeant's entry into an option to acquire Philidor, that should have been recognized when product was dispensed to patients rather than on delivery to Philidor." (emphasis added) This statement supports the entire basis of their restatement. Here is the really outrageous aspect of their claim.

    In making this statement, Valeant seems to have conveniently forgotten their October 26, 2015 investor presentation. In slide 48 of that presentation they very clearly outline that before their Purchase Option Agreement (executed in December of 2014) that sales were recognized upon transfer to Philidor.

    In fact Valeant is quite adamant about how they account for Philidor sales and very explicitly instruct us that before the Purchase Option Agreement "all sales to Philidor accounted for as Valeant does with any third party" and "sales recognized upon transfer of inventory to Philidor". They even boastfully point us to the fact that consolidating the VIE delays revenue and that there is "no way to stuff the channel". 

    This all begs the question: if the restated revenues were before the option agreement, why would those sales ever need to be recognized when sold to the patient? 

    It's nonsensical. The only reason the sales to Philidor would ever need to be recognized upon sale to a patient would be if Philidor was a VIE prior to the option agreement. Valeant says so much in the October 26 presentation(see slide 51), but also claim that they weren't the primary beneficiary of the VIE so consolidation was not appropriate.

    To put this all another way, the only way that $58M in net revenues which occurred prior to the option agreement would have to now be restated is if Valeant became the primary beneficiary (i.e., controlling interest) prior to the option agreement

    For that to be true, it would mean that Valeant (at the very minimum) would have had to have invested in Philidor prior to the option agreement as well as be the primary beneficiary(see ASC 810-10-20). But yet again that can't be true either because Valeant specifically tells us that "Valeant did not invest or lend any money to the Philidor scaleup." Despite Valeant's protestations otherwise they would have had to either obtained "the power to direct the activities that most significantly impact the VIE’s economic performance" or obtained "the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE." YIKES! 

    And in yet another wrinkle for Valeant, in that same October 26th, 2015 presentation Valeant stated that as of the December 2014 option agreement, Philidor only had $111M in net sales YTD. So, based on the disclosed $58M restatement, Valeant must now also admit that over half of Philidor's 2014 net sales were flowing into Valeant, because they were the primary beneficiary/controlling interest.

    All of this must be very off putting for their newly minted partner, Walgreens, especially since a major Presidential candidate is vowing to go after Valeant(see video below). For the detail oriented, Walgreens and Valeant inked their 20 year distribution agreement on December 14th. If Valeant failed to disclose the SEC Subpoena and investigation to Walgreens, it could be grounds for termination of that distribution partnership. Hypothetically, if your 2016 guidance was based on that new distribution agreement, and if the agreement were terminated, it would be a much better reason than a $58M restatement to pull 2016 guidance.

    Nonetheless, based on the restatement, it seems that Valeant may have been purposely accelerating revenue (so they wouldn't miss) and that they did so by stuffing a channel that they claimed they didn't control (although they did or they wouldn't have to restate) and were trying to fully control. Oh, yeah, they also did all this without disclosing it to their shareholders and then when they did disclose, it seems they may have meant to say something different from what they actually said. It wouldn't be the first time.