Glossary of Hostile Takeover Terms with Discussion
- Thread starter Shoham
- Start date
all very true...it is about shareholders short term interest at the cost of growing a long term healthy company - the whole system is messed up. And a ceo who cares too much about their employees will be fired in this day and age so of course this leads to a reciprocated I don't care about you (or the business) attitude by employees. This industry is being destroyed to feed hungry shareholders and I don't think it will get better until we are done as an industry and get to start over.
Perhaps being sold to Pfizer will end the whole thing in one large bang--as at that point companies will need to be spun off again.
Allergan stock is down so much--Saunders has his work cut out if he wants to do his duty to shareholders. No other company other than Valeant is down this much--and Valeant has at least dirty hedge fund activists to keep it going.
Valeant disclosed how they would rectify the situation and investors responded by stock nosediving today--hopefully Saunders doesn't have same situation.
Valeant is taking Allergan down with it...victory would have been to see Valeant burn and Allergan win but...Pearson is shameless.
Dan
As an M&A guy, what would you predict if a Pfizer purchase was a possibility. Currently with AGN stock down due to market volatility (not a company fundamentals issue), would more sooner rather than later be the time someone like Pfizer approaches AGN due to the cheaper cost to buy them with the stock down. This may seem like an easy question to ask but I tend to think AGN stock will rebound very nicely when Valeant gets sorted out and this bear market gets hot again. Also, if you were to think about what kind of per share price Pfizer would need to come to AGN with, what would that be? Thanks
As an M&A guy, what would you predict if a Pfizer purchase was a possibility. Currently with AGN stock down due to market volatility (not a company fundamentals issue), would more sooner rather than later be the time someone like Pfizer approaches AGN due to the cheaper cost to buy them with the stock down. This may seem like an easy question to ask but I tend to think AGN stock will rebound very nicely when Valeant gets sorted out and this bear market gets hot again. Also, if you were to think about what kind of per share price Pfizer would need to come to AGN with, what would that be? Thanks
- Shoham Oct 22, 2015 at 10:15: PM
Shoham
Member
Hi everyone:
We had another interesting few days.
Valeant is showing some serious signs of imploding. Their unraveling is weighing down on the entire sector, to include Allergan. So much so, that Allergan had to halt trading yesterday (for some minutes, but still, a trading halt is a big deal) just to put out a statement saying "we don't do what Valeant is doing." (Actually, a whole slew of Pharma companies issued similar statements too).
During the many months of the hostile takeover battle, Valeant share price was mostly in the $110-$130 range (equivalent to about $40B market capitalization). Long-time readers of this thread would remember that I could not, for the life of me, looking at the Valeant business model and financial statements, see what's in there that's worth $40B. All the cashflow, for many years to come, was spoken for by the debt holders, "organic" revenue "growth" seemed to come only from marketshare-destroying price hikes, and with no R&D, they have no products pipeline (except the little late-stage stuff they got in their acquisitions). So, what's worth $40B? Their business model seemed based on the practice of buying ever larger companies, destroying value with each transaction, but using financial machination to obfuscate this reality -- an unsustainable strategy. I was accused, on this thread, of comparing Valeant to Enron (Allergan openly compared them to Tyco -- another major financial scandal that ended up sending the CEO to prison). (If anyone thought I was harsh on Valeant, though, they should have tried reading Seeking Alpha.)
At the time, I posited that if Valeant fails to acquire Allergan (and readers of this thread know that I never wavered from my expectation that Valeant will fail, even on days the entire Wall Street media seemed to say the opposite), it will be taken as a sign that it can no longer find ever-larger acquisitions, thus bringing their unsustainable strategy to a crashing end. The House of Cards will then collapse.
While many of my speculations and predictions (if I may say so myself
) proved accurate; the one glaring exception was Valeant's shareprice after losing the Allergan battle. My expectation was that they will be forced to stop major acquisitions, at which point their value-destroying policies will be exposed (with no new acquisitions to obfuscate their financial statements), and the share price will crash to more realistic valuation (and maybe even insolvency -- given their huge debt). Valeant did, indeed, very shortly after losing Allergan, issued a statement that they will stop major acquisitions for a long time (making it sound like a proactive decision -- when it was, in my opinion, effectively forced upon them) (they did, later, come out of hibernation to buy Salix -- about a sixth the size of Allergan, but still a major acquisition -- but that was an unusual case because of the special situation there). However, far from cratering, their financial reports were stellar and their shareprice was skyrocketing -- leaving the rest of the industry in the dust. I openly volunteered, several times, on this thread, that I have no explanation other than that I don't get everything right.
On the day Valeant lost Allergan, November 17, 2014, it was trading at $134. By August 2015 it peaked at $260 (!) -- roughly doubling in less than a year. In contrast, Allergan (Actavis then), was trading at $248 on November 17, 2014 and peaked at $340 in the summer 2015 (a very respectful 36% gain, some of which directly attributed to the value creation of the merger, but still left in Valeant's dust). In fact, (old) Allergan shareholders, as of the peak point, may well have regretted not taking the Valeant deal. Under the last Valeant offer ($72 + 0.83 Valeant shares), any Allergan shareholder who would have traded in their share and kept the Valeant shares received in exchange to the peak point, would have seen the value of their take reach $288 per (old) Allergan share ( = $72 + 0.83 * $260). You could probably add another $15 on top of that (to $303) since Valeant was already on record, as of the day they lost, that they intended to so raise their offer for Allergan. In contrast, at the peak point, the Actavis deal Allergan shareholders chose to accept ($129 + 0.37 Actavis shares) was worth "only" $255 ( = $129 + 0.37 * $340). Of course, such "alternative history" math is really just idle talk; if Valeant had acquired Allergan it would have been such a different company than as things transpired, that it is completely meaningless to assume its shareprice would have followed a similar trajectory.
Things started going south about a month ago. Valeant had already taken some public perception damage during the Allergan battle for their practice of shutting down research in companies they acquire; but now a new element was forcefully added: That they apply unconscionable price increases to drugs they acquire -- sometimes thousands of percents for already expensive life-sustaining drugs. The New York Times had a front page story just on that (referring very specifically to Valeant). Hillary Clinton, while not specifically naming Valeant, was also making the issue of drug prices a major theme of her campaign. Whether Mrs Clinton will be the next president (or even her party's nominee) is anyone's guess (and even then, if she will try to do anything about drug prices, and if she will be successful). However, the fact remains that the theme has forcefully entered into the public discourse and there is the now heightened potential for legislative or regulatory action to curtail the Valeant business model. Some enterprising States Attorney Generals started issuing Valeant subpoenas (never good news). During the last few days in September 2015, Valeant shareprice declined to around $175 (about 33% drop from the peak). The rest of the industry was also taking damage, but not nearly as much. Allergan was down about 20% from the peak (to about $270).
[To be continued shortly]
We had another interesting few days.
Valeant is showing some serious signs of imploding. Their unraveling is weighing down on the entire sector, to include Allergan. So much so, that Allergan had to halt trading yesterday (for some minutes, but still, a trading halt is a big deal) just to put out a statement saying "we don't do what Valeant is doing." (Actually, a whole slew of Pharma companies issued similar statements too).
During the many months of the hostile takeover battle, Valeant share price was mostly in the $110-$130 range (equivalent to about $40B market capitalization). Long-time readers of this thread would remember that I could not, for the life of me, looking at the Valeant business model and financial statements, see what's in there that's worth $40B. All the cashflow, for many years to come, was spoken for by the debt holders, "organic" revenue "growth" seemed to come only from marketshare-destroying price hikes, and with no R&D, they have no products pipeline (except the little late-stage stuff they got in their acquisitions). So, what's worth $40B? Their business model seemed based on the practice of buying ever larger companies, destroying value with each transaction, but using financial machination to obfuscate this reality -- an unsustainable strategy. I was accused, on this thread, of comparing Valeant to Enron (Allergan openly compared them to Tyco -- another major financial scandal that ended up sending the CEO to prison). (If anyone thought I was harsh on Valeant, though, they should have tried reading Seeking Alpha.)
At the time, I posited that if Valeant fails to acquire Allergan (and readers of this thread know that I never wavered from my expectation that Valeant will fail, even on days the entire Wall Street media seemed to say the opposite), it will be taken as a sign that it can no longer find ever-larger acquisitions, thus bringing their unsustainable strategy to a crashing end. The House of Cards will then collapse.
While many of my speculations and predictions (if I may say so myself
On the day Valeant lost Allergan, November 17, 2014, it was trading at $134. By August 2015 it peaked at $260 (!) -- roughly doubling in less than a year. In contrast, Allergan (Actavis then), was trading at $248 on November 17, 2014 and peaked at $340 in the summer 2015 (a very respectful 36% gain, some of which directly attributed to the value creation of the merger, but still left in Valeant's dust). In fact, (old) Allergan shareholders, as of the peak point, may well have regretted not taking the Valeant deal. Under the last Valeant offer ($72 + 0.83 Valeant shares), any Allergan shareholder who would have traded in their share and kept the Valeant shares received in exchange to the peak point, would have seen the value of their take reach $288 per (old) Allergan share ( = $72 + 0.83 * $260). You could probably add another $15 on top of that (to $303) since Valeant was already on record, as of the day they lost, that they intended to so raise their offer for Allergan. In contrast, at the peak point, the Actavis deal Allergan shareholders chose to accept ($129 + 0.37 Actavis shares) was worth "only" $255 ( = $129 + 0.37 * $340). Of course, such "alternative history" math is really just idle talk; if Valeant had acquired Allergan it would have been such a different company than as things transpired, that it is completely meaningless to assume its shareprice would have followed a similar trajectory.
Things started going south about a month ago. Valeant had already taken some public perception damage during the Allergan battle for their practice of shutting down research in companies they acquire; but now a new element was forcefully added: That they apply unconscionable price increases to drugs they acquire -- sometimes thousands of percents for already expensive life-sustaining drugs. The New York Times had a front page story just on that (referring very specifically to Valeant). Hillary Clinton, while not specifically naming Valeant, was also making the issue of drug prices a major theme of her campaign. Whether Mrs Clinton will be the next president (or even her party's nominee) is anyone's guess (and even then, if she will try to do anything about drug prices, and if she will be successful). However, the fact remains that the theme has forcefully entered into the public discourse and there is the now heightened potential for legislative or regulatory action to curtail the Valeant business model. Some enterprising States Attorney Generals started issuing Valeant subpoenas (never good news). During the last few days in September 2015, Valeant shareprice declined to around $175 (about 33% drop from the peak). The rest of the industry was also taking damage, but not nearly as much. Allergan was down about 20% from the peak (to about $270).
[To be continued shortly]
- Shoham Oct 22, 2015 at 10:19: PM
Shoham
Member
Then came a very curious law suit.
It was filed by a company called R&O Pharmacy against Valeant. The lawsuit itself is essentially inconsequential, but it triggered events that quickly went out of control. Apparently, on September 4, 2015, this R&O Pharmacy, a California-licensed pharmacy, got a letter from the top lawyer at Valeant saying that there is an overdue $70M in product invoice(s); and if they don't pay quickly they would also be liable for additional collection costs (like legal fees) -- fairly standard lawyer-speak. R&O's attorney responded 4 days later saying that we never did any business with Valeant and never got any invoices, so maybe someone is committing fraud; lets get on the phone and get to the bottom of this matter. According to the lawsuit, there was no response from Valeant -- which is really weird: Usually, in billing disputes, if anyone is making themselves hard to reach, it is the debtor, not the creditor. But here it gets weirder yet: If someone told me I owe them money, and I tell them that I don't think so, buts lets get to the bottom of it, and then they just ignore me, I'd let it drop. Whether or not I really do owe them money, if I made a good faith effort to figure it out and they are being unreachable; what is it to me? They aren't going to get paid if they give me the silent treatment. If they sue, the judge will unlikely award them anything above what is genuinely owed given their lack of willingness to resolve the matter amicably. But that's not what R&O did. On October 6, 2015, they filed a lawsuit against Valeant (!), asking the judge to declare that they don't owe Valeant anything. Their rationale as to why they are suing (rather than just waiting to be sued and then defending) is that Valeant threatened them with these "additional costs," that will accrue if they sit and wait. in my opinion, this is a very weak rationale: If they are so sure they don't owe Valeant anything, they will win any suit Valeant files and there will be no "additional costs" anyway. Even if it turns out they do owe Valeant the money, given that they tried to resolve the matter in good faith and Valeant didn't, they probably won't be ordered to pay any such costs. And, finally, by filing a Federal suit, they are going to have those "additional costs" by their own decision (certainly if they lose, but even if they win, a judge might not feel compelled to award them legal costs since their filing was largely voluntary). You can read the complaint here:
http://sirfonline.wpengine.netdna-cdn.com/files/2015/10/1-Complaint-1-1.pdf
Although the disputed amount, $70M, is really peanuts for Valeant, lawsuits are public record, and it became a virtual certainty that investors will ask questions. As of last Friday, October 16, 2015, Valeant closed around $177. On Monday, October 19, 2015, when Q3 earnings were reported and Valeant held the associated investor conference call, they had a prepared answer: The R&O guys owe the money to Philidor Pharmacy, and since we own Philidor, they owe the money to us (not exactly the words they used, but close enough).
Valeant's ownership of Philidor was so widely known in the industry that it was not even considered an open secret, but, apparently, Wall Street haven't even heard the name until this week (My god! These Wall Streeters really live in a bubble; one of the most scrutinized, most discussed, most controversial, most Hedge-fund-invested publicly traded firm in existence is channeling some double-digit-percent of their sales through a funky distributor -- that just about every sales rep and doctor knows is a Valeant front -- and Wall Street haven't even heard the name before this week???). The whole issue of Valeant and Philidor, from a healthcare perspective, is quite controversial. One would normally think that Pharmacists (like Doctors) are licensed to act in the interest of patients, and therefore can't be owned or beholden to drug makers. People in the industry have been scratching their head asking how Valeant ownership of Philidor could possibly be legal? And if it is somehow legal, should they be doing the same? (Reminds me of when people were asking how the Ackman-Valeant deal could possibly not be Insider Trading? as it turned out, at least in the opinion of the relevant Federal Judge, it probably was)
Healthcare laws may sometimes be murky (and, I'm hardly an expert in such), but accounting rules are crystal clear: When you control another entity in effect (regardless of how the ownership is structured), you need to consolidate all of their activities with your own when reporting financial results. If Valeant controls Philidor, then sales from Valeant to Philidor don't count as revenues (only when the inventory is moved out of Philidor to patients or entities not controlled by Valeant, it is considered "sold," and the revenues are recognized). Anticipating the obvious next question, Valeant added that it has been consolidating Philidor all along (as they are supposed to). Of course, if they have been, how come the name Philidor has never made it to any Valeant financial reports, SEC filings, public statements, or press releases?
Some hours after the conference call, Roddy Boyd, of the Southern Investigative Reporting Foundation (SIRF), published a very interesting article on the subject. Boyd is a Seeking Alpha contributor and SIRF is a donation-supported nonprofit run by some investigative journalists that tries to do what used to be done by newspapers around the country, but now has nearly disappeared (along with many local newspapers). Sparked by the R&O lawsuit, Boyd was already and poking around, and the Valeant investor call (with the admission that they owned Philidor) really got him going. You can read the SIRF report here:
http://sirf-online.org/2015/10/19/hidden-in-plain-sight-valeants-big-crazy-sort-of-secret-story/
As uncovered by SIRF, the actual ownership of Philidor is obfuscated through various layers: The key people of Philidor are all employed by a marketing company called BQ6 Media; and their shares in Philidor are under a lien to a company called KGA Fulfillment Services. KGA is a wholly-owned subsidiary of Valeant that does not appear to have any activities other to hold those liens. However, the activities of Philidor made the affiliation clear: They only sell Valeant products (which is why, outside Wall Street, the connection wasn't a mystery at all). SIRF estimated that the rapidly growing Philidor will be doing about $1.5B sales this year. That's a significant portion of Valeant's overall business, and more than it's reported annual growth; if a material portion of that amount is questionable, it's enough to make the difference between the stellar company Valeant is reporting itself to be and one that is effectively insolvent.
The market was not amused. On Tuesday, it close around $150.
[To be further continued shortly]
It was filed by a company called R&O Pharmacy against Valeant. The lawsuit itself is essentially inconsequential, but it triggered events that quickly went out of control. Apparently, on September 4, 2015, this R&O Pharmacy, a California-licensed pharmacy, got a letter from the top lawyer at Valeant saying that there is an overdue $70M in product invoice(s); and if they don't pay quickly they would also be liable for additional collection costs (like legal fees) -- fairly standard lawyer-speak. R&O's attorney responded 4 days later saying that we never did any business with Valeant and never got any invoices, so maybe someone is committing fraud; lets get on the phone and get to the bottom of this matter. According to the lawsuit, there was no response from Valeant -- which is really weird: Usually, in billing disputes, if anyone is making themselves hard to reach, it is the debtor, not the creditor. But here it gets weirder yet: If someone told me I owe them money, and I tell them that I don't think so, buts lets get to the bottom of it, and then they just ignore me, I'd let it drop. Whether or not I really do owe them money, if I made a good faith effort to figure it out and they are being unreachable; what is it to me? They aren't going to get paid if they give me the silent treatment. If they sue, the judge will unlikely award them anything above what is genuinely owed given their lack of willingness to resolve the matter amicably. But that's not what R&O did. On October 6, 2015, they filed a lawsuit against Valeant (!), asking the judge to declare that they don't owe Valeant anything. Their rationale as to why they are suing (rather than just waiting to be sued and then defending) is that Valeant threatened them with these "additional costs," that will accrue if they sit and wait. in my opinion, this is a very weak rationale: If they are so sure they don't owe Valeant anything, they will win any suit Valeant files and there will be no "additional costs" anyway. Even if it turns out they do owe Valeant the money, given that they tried to resolve the matter in good faith and Valeant didn't, they probably won't be ordered to pay any such costs. And, finally, by filing a Federal suit, they are going to have those "additional costs" by their own decision (certainly if they lose, but even if they win, a judge might not feel compelled to award them legal costs since their filing was largely voluntary). You can read the complaint here:
http://sirfonline.wpengine.netdna-cdn.com/files/2015/10/1-Complaint-1-1.pdf
Although the disputed amount, $70M, is really peanuts for Valeant, lawsuits are public record, and it became a virtual certainty that investors will ask questions. As of last Friday, October 16, 2015, Valeant closed around $177. On Monday, October 19, 2015, when Q3 earnings were reported and Valeant held the associated investor conference call, they had a prepared answer: The R&O guys owe the money to Philidor Pharmacy, and since we own Philidor, they owe the money to us (not exactly the words they used, but close enough).
Valeant's ownership of Philidor was so widely known in the industry that it was not even considered an open secret, but, apparently, Wall Street haven't even heard the name until this week (My god! These Wall Streeters really live in a bubble; one of the most scrutinized, most discussed, most controversial, most Hedge-fund-invested publicly traded firm in existence is channeling some double-digit-percent of their sales through a funky distributor -- that just about every sales rep and doctor knows is a Valeant front -- and Wall Street haven't even heard the name before this week???). The whole issue of Valeant and Philidor, from a healthcare perspective, is quite controversial. One would normally think that Pharmacists (like Doctors) are licensed to act in the interest of patients, and therefore can't be owned or beholden to drug makers. People in the industry have been scratching their head asking how Valeant ownership of Philidor could possibly be legal? And if it is somehow legal, should they be doing the same? (Reminds me of when people were asking how the Ackman-Valeant deal could possibly not be Insider Trading? as it turned out, at least in the opinion of the relevant Federal Judge, it probably was)
Healthcare laws may sometimes be murky (and, I'm hardly an expert in such), but accounting rules are crystal clear: When you control another entity in effect (regardless of how the ownership is structured), you need to consolidate all of their activities with your own when reporting financial results. If Valeant controls Philidor, then sales from Valeant to Philidor don't count as revenues (only when the inventory is moved out of Philidor to patients or entities not controlled by Valeant, it is considered "sold," and the revenues are recognized). Anticipating the obvious next question, Valeant added that it has been consolidating Philidor all along (as they are supposed to). Of course, if they have been, how come the name Philidor has never made it to any Valeant financial reports, SEC filings, public statements, or press releases?
Some hours after the conference call, Roddy Boyd, of the Southern Investigative Reporting Foundation (SIRF), published a very interesting article on the subject. Boyd is a Seeking Alpha contributor and SIRF is a donation-supported nonprofit run by some investigative journalists that tries to do what used to be done by newspapers around the country, but now has nearly disappeared (along with many local newspapers). Sparked by the R&O lawsuit, Boyd was already and poking around, and the Valeant investor call (with the admission that they owned Philidor) really got him going. You can read the SIRF report here:
http://sirf-online.org/2015/10/19/hidden-in-plain-sight-valeants-big-crazy-sort-of-secret-story/
As uncovered by SIRF, the actual ownership of Philidor is obfuscated through various layers: The key people of Philidor are all employed by a marketing company called BQ6 Media; and their shares in Philidor are under a lien to a company called KGA Fulfillment Services. KGA is a wholly-owned subsidiary of Valeant that does not appear to have any activities other to hold those liens. However, the activities of Philidor made the affiliation clear: They only sell Valeant products (which is why, outside Wall Street, the connection wasn't a mystery at all). SIRF estimated that the rapidly growing Philidor will be doing about $1.5B sales this year. That's a significant portion of Valeant's overall business, and more than it's reported annual growth; if a material portion of that amount is questionable, it's enough to make the difference between the stellar company Valeant is reporting itself to be and one that is effectively insolvent.
The market was not amused. On Tuesday, it close around $150.
[To be further continued shortly]
- Shoham Oct 22, 2015 at 10:20: PM
Shoham
Member
The next day (yesterday), in another bombshell, short investor Citron Research published an even more damning report. Citron Research is a one-man operation run by a colorful individual, Andrew Left, that engages in a traditional short-selling fund strategy: He shorts a stock that he has a bad feeling about, dig really hard for dirt, and if he finds any, publicizes what he found, watches the stock price crater, and make a profit. This is perfectly legal because there is no insider information (only publicly available information) and no "stock manipulating," since he discloses what he is doing and why. In the early 2000's, Left opined that a handful of Chinese companies that went through the various legal and auditing hoops to be listed in US exchanges (thus, presumably, rising above the questionable integrity reputation of Chinese stock exchanges), were nonetheless financially deceptive and should be shorted. He was right. Every one of the Chinese companies he fingered subsequently bankrupted, wiping out all shareholders. Thereafter, he became somewhat influential and his newsletter (for which he does not charge) widely read. You can read the Citron report here:
http://www.citronresearch.com/wp-content/uploads/2015/10/Valeant-Philador-and-RandO-final-a.pdf
The Citron report built on the SIRF analysis, but took it a startling step further: He provided some very compelling evidence that not only Philidor is Valeant, but so is R&O (!!!!!) (and so are a handful of additional regional pharmacies Left identified). What the heck? It's weird enough for R&O to be suing Valeant over getting some invoice complaint and then the silent treatment; but if R&O is Valeant, then what? Valeant is suing itself??? In what universe could this possibly make any sense? How could R&O, in a Federal lawsuit, no less, say that they do not do any business with Valeant when they are Valeant??? Citron was less concerned with the lawsuit, then the possibility that Valeant is booking revenues through sales to controlled entities. In the pantheon of accounting frauds, this is the big one: Doing business with entities you control without disclosing. When you do that, you can have your financial statement do whatever you want, and the auditors (unless they are really sharp) won't see any problem. You want 10% growth? No problem. You want it without price increases? No problem. You want new products to rapidly gain marketshare? No problem. You just order your puppet entity to purchase whatever product you want, and whatever price they want, and, wholla, your financial statements look exactly they way you want them to look. When they don't pay (how can they pay? they are forced to buy more products than they can resell, at prices the seller determines), you have to send them a nasty lawyer-speak letter (pay or else). If you don't, your own auditors will start asking questions. This would explain why Valeant sent R&O the nasty letter and then didn't bother following up (the letter was just to impress the auditors). It doesn't explain why R&O sued.
Undisclosed controlled entities is exactly what Enron did (although, in their case, rather than to fake revenues, they were created to hide losses from the auditors. The auditors, Arthur Andersen, a 90-years old accounting firm with 85,000 employees, fell for it and ended up going down with Enron and disappearing). Citron did not shy from making the Enron comparison explicit -- even going as far as showing a series of statements by Enron senior management, as they were denying anything was amiss, and comparing each to a similar-sounding statement from Valeant.
With that news, Valeant imploded. No one really understands what's going on. If there is a perfectly acceptable explanation for everything, the time to disclose it would have been during the Monday investor conference call. But, in that call, they said that R&O owes the money to Philidor (and that Valeant owns Philidor); they didn't say anything about the nature of the ties to R&O (whether it's ownership, or whatever), obviously allowing the presumption that R&O is an independent entity unchallenged. By mid-day Wednesday, Valeant shareprice was down to $88 (down about 40% from the last close!). Trading was halted. Valeant put out a very vigorous defense saying that Citron is erroneous, and that Valeant consolidates all their pharmacies, including Philidor and R&O (!!). So, yes, at least for accounting purposes, Valeant admits that R&O is Valeant, but that nonetheless, they are following accounting rules correctly. (No words on why they didn't say so Monday, or why they are being sued by themselves). With that clarification, trading was resumed, and Valeant recovered about half their losses (but still, much blood was on the floor). Even our dear friend Ackman (who sold all his Allergan shares and bought a ton of Valeant at about $200) pitched in, announcing that he still believes in Valeant, and putting his (investors') money where his mouth is, he purchased 2M Valeant shares at the depressed price. Valeant closed yesterday at $119.
But we are not done yet. Wednesday night, another longtime Valeant critic, Bronto Capital, chimed in. You may recall that Bronto provided some of the ammunition I quoted here during the hostile takeover period. In a very long post, further building on the SIRF and Citron reports, Bronto (who clearly have been doing his own digging for some time) dropped additional bombshells: Philidor appear to have business practices that may be illegal or even criminal. For example, they systematically reimburse customers for co-pays. Co-pays are there for a reason, systematically reimbursing them is generally considered fraud against the insurer; if the insurer is the government, then it is criminal. Bronto found plenty of evidence of the former, and looked very hard for direct evidence of the latter, but couldn't find it. Nonetheless, he showed some speculative evidence that Valeant is using charitable foundations to reimburse co-pay to government-insured patients (which would really be at the edge of criminality). Bronto also found some intriguing evidence that there are actually two California pharmacies called R&O with two seemingly unrelated websites and phone numbers. It's unclear if both are Valeant entities, or just one. (Maybe the reason R&O sued is that Valeant sent the invoice to the wrong R&O ???). Bronto also showed that despite being rejected for license to sell in CA (because of materially perjury in their license application), Philidor is still shipping to CA (!). Additionally, they appear to be systematically shipping refills without being requested (but the patients don't mind, because they waive co-pays without even being asked). The list of transgressions went on and on for many pages. You can read it here:
http://brontecapital.blogspot.com/2015/10/some-comments-on-valeant-conference-call.html
Not surprisingly, Valeant, today, followed the same pattern as yesterday. It opened in the mid-90's. Again, about halfway through the day, while in full damage control mode and vigorously asserting that everything they have been doing was on the up-and-up, they promised to have another investor call Monday, with substantially the entire senior management team and board, and will answer all questions and address all concerns. And, again, their shareprice recovered half their losses for the day upon the reassurances (but, again, with much new blood on the floor). Valeant closed today at $110.
Not really additional news, but Andrew Left, the Citron guy, gave a long interview on Bloomberg TV saying that Valeant responses thus far are unsatisfactory. He also provided a broad stroke justification as to why he thinks Valeant is only worth about $50/share. His argument is actually very similar (but more charitable) than the one I was using during the hostile takeover period, for what a non-acquiring Valeant is really worth. You can watch the interview here:
http://www.bloomberg.com/news/videos/2015-10-22/inside-valeant-s-unknowns-and-company-statement
[To be further continued shortly]
http://www.citronresearch.com/wp-content/uploads/2015/10/Valeant-Philador-and-RandO-final-a.pdf
The Citron report built on the SIRF analysis, but took it a startling step further: He provided some very compelling evidence that not only Philidor is Valeant, but so is R&O (!!!!!) (and so are a handful of additional regional pharmacies Left identified). What the heck? It's weird enough for R&O to be suing Valeant over getting some invoice complaint and then the silent treatment; but if R&O is Valeant, then what? Valeant is suing itself??? In what universe could this possibly make any sense? How could R&O, in a Federal lawsuit, no less, say that they do not do any business with Valeant when they are Valeant??? Citron was less concerned with the lawsuit, then the possibility that Valeant is booking revenues through sales to controlled entities. In the pantheon of accounting frauds, this is the big one: Doing business with entities you control without disclosing. When you do that, you can have your financial statement do whatever you want, and the auditors (unless they are really sharp) won't see any problem. You want 10% growth? No problem. You want it without price increases? No problem. You want new products to rapidly gain marketshare? No problem. You just order your puppet entity to purchase whatever product you want, and whatever price they want, and, wholla, your financial statements look exactly they way you want them to look. When they don't pay (how can they pay? they are forced to buy more products than they can resell, at prices the seller determines), you have to send them a nasty lawyer-speak letter (pay or else). If you don't, your own auditors will start asking questions. This would explain why Valeant sent R&O the nasty letter and then didn't bother following up (the letter was just to impress the auditors). It doesn't explain why R&O sued.
Undisclosed controlled entities is exactly what Enron did (although, in their case, rather than to fake revenues, they were created to hide losses from the auditors. The auditors, Arthur Andersen, a 90-years old accounting firm with 85,000 employees, fell for it and ended up going down with Enron and disappearing). Citron did not shy from making the Enron comparison explicit -- even going as far as showing a series of statements by Enron senior management, as they were denying anything was amiss, and comparing each to a similar-sounding statement from Valeant.
With that news, Valeant imploded. No one really understands what's going on. If there is a perfectly acceptable explanation for everything, the time to disclose it would have been during the Monday investor conference call. But, in that call, they said that R&O owes the money to Philidor (and that Valeant owns Philidor); they didn't say anything about the nature of the ties to R&O (whether it's ownership, or whatever), obviously allowing the presumption that R&O is an independent entity unchallenged. By mid-day Wednesday, Valeant shareprice was down to $88 (down about 40% from the last close!). Trading was halted. Valeant put out a very vigorous defense saying that Citron is erroneous, and that Valeant consolidates all their pharmacies, including Philidor and R&O (!!). So, yes, at least for accounting purposes, Valeant admits that R&O is Valeant, but that nonetheless, they are following accounting rules correctly. (No words on why they didn't say so Monday, or why they are being sued by themselves). With that clarification, trading was resumed, and Valeant recovered about half their losses (but still, much blood was on the floor). Even our dear friend Ackman (who sold all his Allergan shares and bought a ton of Valeant at about $200) pitched in, announcing that he still believes in Valeant, and putting his (investors') money where his mouth is, he purchased 2M Valeant shares at the depressed price. Valeant closed yesterday at $119.
But we are not done yet. Wednesday night, another longtime Valeant critic, Bronto Capital, chimed in. You may recall that Bronto provided some of the ammunition I quoted here during the hostile takeover period. In a very long post, further building on the SIRF and Citron reports, Bronto (who clearly have been doing his own digging for some time) dropped additional bombshells: Philidor appear to have business practices that may be illegal or even criminal. For example, they systematically reimburse customers for co-pays. Co-pays are there for a reason, systematically reimbursing them is generally considered fraud against the insurer; if the insurer is the government, then it is criminal. Bronto found plenty of evidence of the former, and looked very hard for direct evidence of the latter, but couldn't find it. Nonetheless, he showed some speculative evidence that Valeant is using charitable foundations to reimburse co-pay to government-insured patients (which would really be at the edge of criminality). Bronto also found some intriguing evidence that there are actually two California pharmacies called R&O with two seemingly unrelated websites and phone numbers. It's unclear if both are Valeant entities, or just one. (Maybe the reason R&O sued is that Valeant sent the invoice to the wrong R&O ???). Bronto also showed that despite being rejected for license to sell in CA (because of materially perjury in their license application), Philidor is still shipping to CA (!). Additionally, they appear to be systematically shipping refills without being requested (but the patients don't mind, because they waive co-pays without even being asked). The list of transgressions went on and on for many pages. You can read it here:
http://brontecapital.blogspot.com/2015/10/some-comments-on-valeant-conference-call.html
Not surprisingly, Valeant, today, followed the same pattern as yesterday. It opened in the mid-90's. Again, about halfway through the day, while in full damage control mode and vigorously asserting that everything they have been doing was on the up-and-up, they promised to have another investor call Monday, with substantially the entire senior management team and board, and will answer all questions and address all concerns. And, again, their shareprice recovered half their losses for the day upon the reassurances (but, again, with much new blood on the floor). Valeant closed today at $110.
Not really additional news, but Andrew Left, the Citron guy, gave a long interview on Bloomberg TV saying that Valeant responses thus far are unsatisfactory. He also provided a broad stroke justification as to why he thinks Valeant is only worth about $50/share. His argument is actually very similar (but more charitable) than the one I was using during the hostile takeover period, for what a non-acquiring Valeant is really worth. You can watch the interview here:
http://www.bloomberg.com/news/videos/2015-10-22/inside-valeant-s-unknowns-and-company-statement
[To be further continued shortly]
- Shoham Oct 22, 2015 at 10:22: PM
Shoham
Member
One final, amusing, note:
The SIRF report stated that Philidor, BQ6, and KGA are all Chess terms. Philidor is a famous 18th century Chess player with many Chess terms named after him; BQ6 is the designation of a famous move by Bobby Fischer in his epic 1972 game against Boris Spassky; and KGA, meaning King Gambit Accepted, is the name of an aggressive Chess opening. I'm no Chess expert, but I dabble (or at least used to, in college). I knew about Philidor and KGA, and certainly about the spectacular 1972 world championship; but I never heard of BQ6. So I tried looking it up. The only google reference I could find for BQ6 (in this context) was, actually, in the website of BQ6 Media; where they explained their namesake (and presumably, from where SIRF copied the details). Here is what they say:
You can see it for yourself at: http://www.bq6media.com/introduction
(note a misspelled word in the last sentence -- so much for a media company).
So, I looked those games up. In modern notation, BQ6 would be written as Bd6 (with the B sometimes replace with a Bishop icon for internationalization, and d6 refers to the same square that, in old notation, is called Q6). I checked the 1957 Fischer-Reshevsky game. Sorry, but the 22nd move was not Bd6. It was an unremarkable Bh5 (as unremarkable as any Fischer move can ever be, that is). I also checked all 7 games Fischer won against Spassky in the 1972 World Championship. None of them had a BQ6 move by anyone.
But, before giving up, I wanted to check one more thing: Of all the Bobby Fischer games, the most famous one, dubbed "Game of the Century" took place in 1956 (when Fischer was 13 years old). Made famous by Fischer's move on turn 17. In the words of Chessgame.com annotator, "If this is the game of the century, then 17...Be6!! must be the counter of the century. Fischer offers his queen in exchange for a fierce attack with his minor pieces. Declining this offer is not so easy: 18. Bxe6 leads to a 'Philidor Mate...'" (http://www.chessgames.com/perl/chessgame?gid=1008361)
So, the most important move in the most important chess game of the century is Be6 -- not Bd6 (or, in classic notation, BK6 -- not BQ6). And, additionally, it was in 1956 (not 1957 and not 1972) and against Donald Byrne (not Reshevsky and not Spassky).
[Note that the next turn could lead to a Philidor Mate, as described by the commentator].
[There is also a Bobby Fischer connection to KGA: The gambit was quite popular until Bobby Fischer wrote an article that it is a losing play, and thereafter it's popularity nearly disappeared.]
-- You'd think that if a media company names itself after a Chess move, and provides a whole spiel about it on their website, they'd at least get it right...
That's all for tonight! Hope everyone is doing well.
Dan.
[The End]
The SIRF report stated that Philidor, BQ6, and KGA are all Chess terms. Philidor is a famous 18th century Chess player with many Chess terms named after him; BQ6 is the designation of a famous move by Bobby Fischer in his epic 1972 game against Boris Spassky; and KGA, meaning King Gambit Accepted, is the name of an aggressive Chess opening. I'm no Chess expert, but I dabble (or at least used to, in college). I knew about Philidor and KGA, and certainly about the spectacular 1972 world championship; but I never heard of BQ6. So I tried looking it up. The only google reference I could find for BQ6 (in this context) was, actually, in the website of BQ6 Media; where they explained their namesake (and presumably, from where SIRF copied the details). Here is what they say:
In 1957 Bobby Fischer beat Samuel Reshevsky for the US Chess Championship, heralding the arrival of a bold new player on the international chess scene. At just 14 years old, Fischer foiled his much older and more accomplished opponent with a “brilliancy”—chess parlance for a spectacular game full of unexpected strategies. The keystone of Fischer’s attack was a bishop to queen six play in the 22nd move. Again in 1972, this time on the world stage, Fischer used another variation of this bishop move to defeat Boris Spassky on his way to a stunning victory over the great Soviet world champion. It is from theise moves, both annotated as “BQ6” in classical chess notation, that BQ6 Media Group takes its name.
You can see it for yourself at: http://www.bq6media.com/introduction
(note a misspelled word in the last sentence -- so much for a media company).
So, I looked those games up. In modern notation, BQ6 would be written as Bd6 (with the B sometimes replace with a Bishop icon for internationalization, and d6 refers to the same square that, in old notation, is called Q6). I checked the 1957 Fischer-Reshevsky game. Sorry, but the 22nd move was not Bd6. It was an unremarkable Bh5 (as unremarkable as any Fischer move can ever be, that is). I also checked all 7 games Fischer won against Spassky in the 1972 World Championship. None of them had a BQ6 move by anyone.
But, before giving up, I wanted to check one more thing: Of all the Bobby Fischer games, the most famous one, dubbed "Game of the Century" took place in 1956 (when Fischer was 13 years old). Made famous by Fischer's move on turn 17. In the words of Chessgame.com annotator, "If this is the game of the century, then 17...Be6!! must be the counter of the century. Fischer offers his queen in exchange for a fierce attack with his minor pieces. Declining this offer is not so easy: 18. Bxe6 leads to a 'Philidor Mate...'" (http://www.chessgames.com/perl/chessgame?gid=1008361)
So, the most important move in the most important chess game of the century is Be6 -- not Bd6 (or, in classic notation, BK6 -- not BQ6). And, additionally, it was in 1956 (not 1957 and not 1972) and against Donald Byrne (not Reshevsky and not Spassky).
[Note that the next turn could lead to a Philidor Mate, as described by the commentator].
[There is also a Bobby Fischer connection to KGA: The gambit was quite popular until Bobby Fischer wrote an article that it is a losing play, and thereafter it's popularity nearly disappeared.]
-- You'd think that if a media company names itself after a Chess move, and provides a whole spiel about it on their website, they'd at least get it right...
That's all for tonight! Hope everyone is doing well.
Dan.
[The End]
Thanks Dan! I followed you daily here at Cafepharma during the nail-biting Allergan hostile takeover bid last year. Had a hunch you might have updated us on the current situation with Valeant. You are my roadmap to this never-ending saga!
- Shoham Oct 23, 2015 at 08:26: AM
Shoham
Member
Seems that every few months I get a question about Pfizer. I gave my best answer to that question a few hours before the Actavis-Allergan deal was announced (quoted below). The numbers changed a bit (especially after the Teva deal), but not the conclusion. Basically, the barriers to forming a combination this big would be huge; and there is no compelling reason or value creation to justify. The only value creation anyone seems to talk about is inversion (which was dubious a year ago, and even more so now), and that can be achieved with a much smaller (and thus less problematic) merger.
During the "musical chairs" period of the hostile takeover battle, Pfizer and Actavis briefly talked about it, but Pfizer quickly lost interest. If anything, Pfizer would be even less interested now.
I occasionally see some bored reporters writing about "Pfizer rumors." The basic premise goes something like this: Pfizer has mature, declining products. Their debt is all paid off, their products are very profitable, and they have a ton of cash. Why won't they use all this cash they got to buy [insert the name of some hot Pharma company with a rich pipeline] and solve their aging problem? The answer to that question is that unless there is value creation, mergers do not make sense. Sellers require a premium to hand over their company to someone else. Without value creation, if the buyer pays such a premium, then they are overpaying. You are not doing your shareholders any favor if you "solve" your declining "problem" by overpaying. If you really can't find anything profitable to do with your cash (what's wrong with investing it in your own R&D, BTW?), then you can just hand it over to the shareholders (through dividends or stock buyback). They'll thank you.
Dan.
During the "musical chairs" period of the hostile takeover battle, Pfizer and Actavis briefly talked about it, but Pfizer quickly lost interest. If anything, Pfizer would be even less interested now.
I occasionally see some bored reporters writing about "Pfizer rumors." The basic premise goes something like this: Pfizer has mature, declining products. Their debt is all paid off, their products are very profitable, and they have a ton of cash. Why won't they use all this cash they got to buy [insert the name of some hot Pharma company with a rich pipeline] and solve their aging problem? The answer to that question is that unless there is value creation, mergers do not make sense. Sellers require a premium to hand over their company to someone else. Without value creation, if the buyer pays such a premium, then they are overpaying. You are not doing your shareholders any favor if you "solve" your declining "problem" by overpaying. If you really can't find anything profitable to do with your cash (what's wrong with investing it in your own R&D, BTW?), then you can just hand it over to the shareholders (through dividends or stock buyback). They'll thank you.
Dan.
Dan, You need to add isolani to your list of chess terms / shady company names. See the latest ProPublica story.
- Shoham Oct 23, 2015 at 08:17: PM
Shoham
Member
Yup. Just saw it myself. And the name Isolani immediately jumped at me too. Isolani is the chess term for Isolated Queen Pawn.
The Propublica story:
http://www.propublica.org/article/f...duct-plague-valeants-pharmacies-in-california
The whole Chess thing, I viewed as harmless cuteness. But, if Valeant/Philidor have been actively obfuscating the connection between the web of companies; then whose bright idea was it to name all those shell companies after Chess terms???
I tried really hard to see if R&O is also a Chess term. As best I can tell, it is not. Of course, neither is BQ6 (despite the impressive spiel on BQ6 Media webpage). So, maybe, R&O is likewise some erroneous presentation of a Chess term. Maybe it's the first two letter of "ROOK"? (a chess piece). Or, maybe, it's some sort of a combination of the notation for a rook move (which will begin with "R") and a King-Side-Castle (noted "OO" or "O-O"), where both a rook and a king move at the same time. To be honest, both ideas look weak. More likely, it's the names of the people at the top. The pharmacist in charge of R&O is Russell Reitz (so we got the "R"); maybe there is someone else there providing the "O".
On another note, in my prior post I was wondering if the two R&O's are both related to Valeant or just one. I looked more carefully into the two websites. One website (http://r-opharmacy.com/) has the look of a real neighborhood business, with an address (651 Via Alondra #708, Camarillo, CA 93012) and the other is just a logo and a privacy and security policy and some phone numbers (http://randopharmacy.com/). It would seem that the second one has just the minimum some lawyer said they must publish. However, when I actually looked at the contact information of the privacy policy; it had the same address as the first one. So they are clearly related. Also, I took a Google-street look at the R&O address. It looked more like an office park than retail space.
Dan.
Dan, I followed you as well during the Valeant/Allergan bid, and am very happy to read your thorough, entertaining, informative analysis of the current Valeant situation. Keep up the excellent commentary!
I think R&O was named before Philidor got there, so it wouldn't have a chess name. They went
to buy it after they screwed up and couldn't get licensed in California.
Now if only someone can explain all the girls names used in Valeant subsidiaries (Stephanie, Tori, Katie, etc.). Someone's old girlfriends' names?
to buy it after they screwed up and couldn't get licensed in California.
Now if only someone can explain all the girls names used in Valeant subsidiaries (Stephanie, Tori, Katie, etc.). Someone's old girlfriends' names?
Dan
Thanks again for the in depth analysis.
In your opinion, what stock price does the current Allergan Financials justify.
What will it take for Sanders to get the Allergan stock back up to that price?
Thanks
Thanks again for the in depth analysis.
In your opinion, what stock price does the current Allergan Financials justify.
What will it take for Sanders to get the Allergan stock back up to that price?
Thanks