The rise and fall of Valeant

source
Reuters

Valeant Pharmaceuticals’ share price went on a wild ride last week.

The Canadian drug company’s stock ended the week at $115.85, having started at $169.80 and fallen to as low as $88.50.

Short selling firm Citron Research published a report comparing it to Enron on Wednesday.

Its share price slumped, and then rebounded after billionaire investor Bill Ackman upped his stake in the company.

The share-price performance over the past few months has put an end to a seeming inexorable rise in the company’s share price.

It moved from $26.30 October 22, 2011, to a high of $262.50 in August 2015.

The company will host a conference call Monday to address allegations made by Citron.

The participants on the call include CEO Michael Pearson, general counsel Robert Chai-Onn, Chief Financial Officer Robert Rosiello, and a number of board and risk-committee members. Ten Valeant executives will be on the call in total.

Here is a timeline for the Valeant story so far.


Michael Pearson takes the helm.

source
Reuters

Valeant appointed former McKinsey executive Michael Pearson as chairman and chief executive officer, and he embarked on an acquisition spree, buying Coria Laboratories and Dermatech in 2008. In 2009, the company bought Dow Pharmaceutical Sciences and Tecnofarma.


Valeant moves to Canada.

source
REUTERS/Mark Blinch

Valeant merged with Biovail in 2010, with the combined company retaining the name Valeant and basing itself in Canada. Pearson remained chief executive of the new group.

The acquisitions continued, with Valeant acquiring Switzerland-based generics company PharmaSwiss, Lithuania-based AB Sanitas, Canadian health-science company Afexa Life Sciences, prescription=products company iNova, and Medicis Pharmaceuticals.


Bill Ackman gets involved.

source
YouTube / Saïd Business School, University of Oxford

In April 2014, Ackman acquired a stake in Allergan and tried to force the drugmaker to accept a takeover from Valeant.

All of Ackman and Valeant’s offers for the Botox-maker were rejected. By November 2014, the Irish pharmaceutical company Actavis said it would buy Allergan in a deal valued at $66 billion.

Even though Valeant was unsuccessful in its takeover attempt, Ackman, who had started buying Allergan’s stock in February 2014, made an estimated $2.7 billion on his position. At the time, Ackman didn’t own any shares of Valeant.

In mid-March 2015, Ackman’s Pershing Square Capital Management disclosed that it had acquired 19,473,933 shares of Valeant, or a 5.7% stake.


Jim Chanos goes short.

source
Reuters

Hedge fund billionaire Jim Chanos announced that he was short Valeant, saying the company played “aggressive accounting games.”

Allergan revealed during the takeover battle with Valeant and Ackman that Morgan Stanley, an adviser to Valeant on the deal, had initially pitched for a role advising Allergan, and that it had called Valeant a “house of cards.”


The Martin Shkreli saga begins.

caption
Martin Shkreli, chief investment officer of MSMB Capital Management.
source
Screenshot/Getty Images

The overnight price hike of Daraprim, a drug to treat AIDS, cancer, and malaria, by a biotech company led by Martin Shkreli in mid-September garnered public outrage and political backlash.

Democratic presidential candidate Hillary Clinton described the move as “outrageous.”


Short-sellers start ramping up the pressure.

source
Citron Research

Short-selling firm Citron Research published a report on Valeant in September, citing evidence of huge drug-price hikes.

“The real problem with drug pricing in America is forged in a single word: Valeant … Martin Shkreli is merely a rogue trying to play the gambit that Valeant has perfected,” Citron wrote in its report.

It continued: “This article is not for you hedge fund managers who believe that this quarter’s performance is more important than human decency or longterm viability; this article is for the millions of Americans who together can be strong enough to mandate change. Wall Street will understand in time.”


Politicians sit up and take notice.

caption
US Rep. Jason Chaffetz (R-Utah).
source
Flicker/Michael.Jolley

Democrats on the US House of Representatives Oversight and Government Reform Committee sign a letter sent to their chairman, Rep. Jason Chaffetz (R-Utah), asking him to subpoena Valeant.

They say they are looking for information on two specific drugs used to treat heart conditions that have seen “massive price increases.”

“Valeant is using precisely the same business model as Martin Shkreli,'” the letter said.

US Sen. Claire McCaskill (D-Missouri) went one better and, in her capacity as head of the Senate Investigations Committee, asked the company to specifically respond to price increases in two of its drugs.


The pressure keeps building.

source
Mark Wilson/Getty Images

Valeant disclosed October 15 that it had received at least two subpoenas regarding its drug-pricing strategy.

The company also disclosed that CEO Pearson addressed the company’s pricing decision related to two of its drugs in response to a letter from McCaskill.

“It appears obvious to me that Valeant has been anything but responsive or transparent – it refused to take any action until served with federal subpoenas, and is still refusing to provide answers to many of the questions I’ve asked,” McCaskill said in a release following Valeant’s letter. “I look forward to continuing my investigation of drug pricing and plan to further explore Valeant’s inadequate response.”


Valeant beats earnings estimates, but it isn’t enough.

source
REUTERS/Christinne Muschi

The embattled pharmaceutical company reported stellar third-quarter earnings, with revenue up 36% from the same period in 2014. But the stock price still fell.

CEO Pearson said the company would change strategy on the earnings call.

Valeant will increase its spending on research and development, potentially buy back stock, perhaps spin off one of its entities with a growth model dependent on pricing increases, and attempt to cap price increases at 10% of realized revenue. It will also engage in fewer acquisitions.

“During my 23 years at McKinsey, we found that companies that were successful over long periods of time had one thing in common,” he said. “They were willing to move in and out of geographic and business areas over time, and they have modified and changed their strategy as the environment changed. We plan to be one of these companies.”


Citron Research publishes a second scathing research note.

source
Citron

Citron Research released another report, this time highlighting Valeant’s mysterious relationship with Philidor, a pharmacy that distributes drugs for specialty pharmacies, which it has the option to purchase.

Citron spends the rest of the report pointing to instances where Valeant looks a whole lot like Enron, from its management to its insistence that it has been transparent in all its dealings.


Valeant responds.

source
REUTERS/Christinne Muschi

Valeant said that Philidor is a legitimate distribution network through which Valeant sells some of its products.

A Valeant representative added: “We categorically deny the allegations made in the Citron Report. Citron’s false and misleading statements about Valeant appear to be an attempt to manipulate the market in an effort to drive down Valeant’s stock price. As disclosed in our third quarter earnings presentation and further today, Valeant has a contractual relationship with Philidor and properly accounts for sales to, and inventory at, Philidor and Philidor’s network pharmacies. We are confident in our full compliance with all applicable accounting rules, regulations and laws.”


Bill Ackman doubles down.

source
REUTERS/Brendan McDermid

Ackman purchases 2 million more shares of Valeant amid the stock’s decline.


Martin Shkreli buys in.

source
Martin Shkreli via Twitter

Former hedge fund manager and controversial biotech CEO Martin Shkreli posted on Twitter that he has gone long Valeant.

“I have taken a long position in [Valeant] and shorted [Allergan] as a hedge. Both companies have similar prospects and one is at half the price,” Shkreli tweeted.


The web keeps getting wider

source
Flickr/cybershotking

BMO Capital Markets released a report downgrading pharmaceutical firm Valeant on Thursday. BMO did it because they “cannot defend the specialty pharmacy structure” that Valeant has built within its business.

Investigative-journalism website ProPublicareported that specialty pharmacy Philidor Services – which is connected by Valeant and at the center of the allegations of financial impropriety – was denied permission to operate in California.

Months later, an employee of the specialty pharmacy purchased a stake in another California pharmacy, West Wilshire Pharmacy, amounting to about 10%,Charles Ornstein reported.


source
Reuters/Stringer

On Thursday night Evercore analyst Ummer Raffat released a report about all the unanswered questions surrounding pharmaceutical company, Valeant, and the “specialty pharmacies” it uses to distribute its product.

Raffat also reports that he has found another name for Philidor: Isolani.

Raffat also cites legal documents in which R&O’s pharmacist-in-charge, Russell Reitz, alleges that Isolani is a shell company for Philidor to “perpetrate a massive fraud not only against not only Mr. Reitz and R&O, but also the California State Board of Pharmacy, various payer networks and as yet unknown entities and individuals.”