Tuesday, September 29, 2015

Valeant Pharmaceuticals: some comments

Mike Pearson - the CEO of Valeant Pharmaceuticals - released a letter in response to recent stock price falls. You can find the letter in an SEC filed 8-K. The letter was released before yesterdays 16.5 percent fall.

In the letter they state that [Valeant] "expect the Salix business to represent approximately 20% of our 2016 revenue and expect double-digit script growth and corresponding revenue growth trends to continue".

This surprised me. Valeant sales are over $10 billion per annum. They were 2.695 billion in the last quarter (including sales from Salix).

If organic sales growth is 20 percent and the sales grow double-digit then Salix sales should be at least $2.2 billion during 2016.

During the last year Salix was a public company (2014) Salix revenues were $1.13 billion.

I guess they can square this circle with massive price increases for Salix products. However in the same letter Mike Pearson denies that Valeant's growth is dependent on price increases for pharmaceuticals.

Mr Mike Pearson, I do not believe you.

What would make Mr Pearson more plausible?

There are numerous instances where I have found myself disbelieving Valeant's numbers and PR spin. If you want a really good analysis read AZ Value's wonderful blog. However I keep coming down to people and their personal credibility. You catch way too many strange, even implausible numbers at Valeant.

And there are reasons to distrust the people more generally.

It would be better if the Chair of the Audit and Risk Committee of the board did not have close association with past securities frauds. Let me introduce you to Norma Provencio.

Ms Provencio is founder of Provencio Advisory Services, a healthcare consultancy.  Ms Provencio has been involved with Valeant for some time. She was on the board of legacy Valeant and signed the original offer letter to Mike Pearson in 2008.

http://www.sec.gov/Archives/edgar/data/930184/000095013708001675/a37735exv10w1.htm

Searching the SEC database for "Provencio Advisory Services" not in reference to Valeant turns up a relationship with Signalife (aka Heart Tronics) back in 2007:

http://www.sec.gov/Archives/edgar/data/810365/000081036508000002/sgnsb2foryaglobalsedav5final.htm (p. 19)

And if we go way back, it turns out she participated in the same financing for a predecessor company to Signalife, Recom Managed Services, as an attorney named Mitchell Stein in 2003:

http://www.sec.gov/Archives/edgar/data/810365/000114420404007314/v03550_10ksba.htm

"On May 15, 2003, we completed the first tranche of a private placement pursuant to which we sold 82,667 units to Mr. Mitchell Stein, SJ Investments and Ms. Norma Provencio at $3 per unit for cash amounting to $248,000. Each unit consisted of one common share and one warrant. Each warrant is exercisable at $3 until May 14, 2004. Upon exercise of the warrants each investor will receive one common share and an additional warrant to purchase one common share $6 per share until November 15, 2004."

Ms Provencio was a director of Signalife (aka Heart Tronics), which is not mentioned in her official Valeant biography.  This is a worrisome omission.

Mitchell Stein, the controlling shareholder and Provencio's co-investor got into a bit of trouble and is now serving a lengthy prison sentence.

http://www.justice.gov/opa/pr/attorney-convicted-multimillion-dollar-stock-fraud

http://www.justice.gov/criminal/vns/caseup/steinm.html

http://www.sec.gov/litigation/litreleases/2011/lr22204.htm

Here's a mention (including an email from Provencio) in a filing by the defendant Mitchell Stein in his sentencing hearing, claiming that she knew about the transactions at issue:

http://www.freemitchellstein.com/MTC.pdf

Ms Provencio wasn't charged, but she was involved since the early days of the company, coming in alongside its principal mastermind and serving as a Director, Audit Chair, and consultant.

This seems like a meaningful omission from her biography and raises questions about her suitability as audit chair for a company as complex and acquisitive as Valeant.

We do not have any affidavits Ms Provencio made in her defence in the Signalife matters - though we have affidavits from other board members who ran the defence that Mr Stein controlled all aspects of Signalife and hence they (as directors) were not responsible. [Kindly this is the "asleep at the wheel" defence.]

Ms Provencio was also in the board of International Aluminum Corp, which went bankrupt at some point back in the mid-2000s (and is not mentioned either).

Approach to relevant Congressional staffers

There is discussion in the news about Valeant possibly receiving subpoenas concerning drug price hikes.

If the congressional staffers concerned want more material on Valeant which helps them target their subpoenas then I can offer some low-level assistance.



John

11 comments:

buyersstrike said...

We first stumbled upon the Signalife fraud in connection to the Kerr/Quiel group of scams in 2012. https://buyersstrike.wordpress.com/2012/04/26/like-father-like-daughter-the-kerr-family-and-sefe-inc-sefe/

Glenn Chan said...

A 2013 PRE filing mentions signalife in her biography.
http://www.sec.gov/Archives/edgar/data/885590/000134100413000318/0001341004-13-000318-index.htm

You can use Sentieo / AlphaSense / DisclosureNet to quickly search SEC filings... I think you'll find those tools extremely, extremely useful for your short selling if you aren't using them already.

Anonymous said...

Salix was heavily discounting its products because of the inventory scandal. Xifaxan has been approved for the IBS-D indication and is growing very fast. You don't seem to be taking this into account.

Buboe said...

If organic sales growth is 20 percent and the sales grow double-digit then Salix sales should be at least $2.2 billion during 2016.

john,
I think you mean " if Salix sales are 20%".

Anonymous said...

wow, jealous much hempton?

Anonymous said...

It's funny how you seem to point this out on Valeant yet you own Herbalife who has a board member, Pedro Cardoso, who is wanted for embezzlement in Brazil. Strange

Buy-side manager said...

Agree with anon above about clearing the channel inventory last year so all clear for sell through this year. Xifaxan got approved for a new indication which will significantly lift sales in the next year to come. Salix sales will more than double this year, could do over $2.5 Billion.

No position.

Beppaun said...

Hi, just to highlight there is Citron Research with a piece about VRX:

valeantpricing.com

citronresearch.com/why-a-congressional-subpoena-to-valeant-about-price-gouging-on-drugs-should-be-granted

Anonymous said...

To me, Valeant is essentially a rollup. Hence, there is always a need to buy larger and larger companies until: the firm is sold at (hopefully an inflated price) or cannot find any more acquisitions to make. In the latter case, the comapny has grow much more slowly on its own and see its multiples decline. Valeant has had a great run, as other successful rollups have enjoyed until they hit a wall. That could be what we are now seeing with Valenat.

For the record, I have no position in Valeant, although I do own shares in Sequoia, whose value has been significantly enhanced by the Valeant stock price increase over the years. I never understood what the PMs at Sequoia really saw in the company, but I could not argue with success, until now.

Anonymous said...

Provencio's also been a director at Beazer Homes (BZH) since Nov. 2009 and is now chair of the audit committee there. This was after the fraud at BZH which the SEC alleges occurred in 2006 & first 2 quarters of 2007. https://www.sec.gov/news/press/2009/2009-146.htm
But, a curious choice for BZH considering her prior association w/ Signalife and BZH's past history of fraud.

Anonymous said...

You comments on Salix are likely wrong. Salix has its own story. Salix markets a blockbuster druge Xifaxan (rifaximin). Sometime in later 2014, the analyst started prodding the company on channel inventory. Company didn't have IMS data and CFO messed up and said that they think its likely 2-3 months. Subsequently, company investigated and found that channel inventory was more like 9 months. CFO was fired, share price fell and company after investigation agreed to aggressively destock to 3 months, which meant that 2015 sales were going to be very low anyways. In mid-2015, the Xifaxan was also FDA approved for another indication - IBS (Irritable Bowel Syndrome). Salix was an amazing buy and a steal. Their sales force is top notch. Anyway, I am late to Valeant drama and your blogs are getting longer and longer so difficult to follow. I was scrolling through and saw something about Salix so thought I will point it out. I stopped following Salix after acquisition so am not sure about price increase.

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