Bronte Capital: February 2016

Bill Ackman gave a presentation on Valeant (NYSE:VRX) and its relationship with Philidor on 30 October 2015. Most people remember the presentation because it went for four hours.

I just remember this slide:

It says that Pershing Square's perspective is - and I quote:

Volume is primary growth driver for ~90% of Valeant’s business

It also states that there will be "no more “price increase” deals and that price increase deals were only four out of approximately 150 historical acquisitions.

Mike Pearson (the CEO of Valeant - now on medical leave at an undisclosed location) has repeatedly supported roughly this view. After all look at the first quarter conference call from last year (transcript here). Mike Pearson is asked specifically about price versus volume. To quote:

Gary Nachman - Goldman Sachs - Analyst

...And then if you could 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?

The response:

J. Michael Pearson - Valeant Pharmaceuticals International Inc - Chairman & CEO

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 had negative price outside the US with FX. And in the US it's shifting more to volume than price, and we expect that to continue with our launch brands.

A lot of our prices for most of our products are negotiated with managed care. And there's only a limited amount of price that we can take. And then if you look at our consumer business, very little. Walmart doesn't like price increases. If you look at our contact lens business, we're not discounting contact lenses. We are keeping the prices the same. I think there is some noise in the market that there's discounting going on. We're not discounting, but that's all volume growth. And similarly in the cataract surgery market, again, we're just holding our prices. So it's primarily volume, and we expect that to continue.

You see everything that Bill Ackman said was consistent with what Mike Pearson was saying.

Alas it is not true!

Today we got an insight into Valeant's price and volume strategy and it categorically demonstrates that Pershing Square's perspective (as quoted above) is false. The source is a summary of Valeant's documents given in response to Congressional subpoenas.

One tartly pertinent quote:

On May 21, 2015, then-Chief Financial Officer Howard Schiller sent an email to Mr. Pearson with the subject “price volume.” He 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%.”

You see Mike Pearson apparently knew that growth was driven by price. If you include Marathon (the Nitropress and Isuprel acquisition) price represented 80 percent of volume. And that was an email from Howard Schiller (current acting CEO) to Mike Pearson (now CEO).

Mike Pearson lied in the conference call. This seems beyond dispute. Just compare the quotes.

Moreover the Congressional documents show that multiple acquisitions have been driven by a pricing strategy. Bill Ackman said that "price increase deals" were a minor part of Valeant's strategy. He has been proven wrong.

I do not think Mr Ackman was deliberately wrong. Mike Pearson misled the world in the first quarter conference call (and in other conference calls). Mr Ackman was wrong because Mike Pearson misled him.

And that is understandable. Mike Pearson convinced many people.

So Bill, you told the world untruths, but they were not deliberate. Mike fooled you.

Love as always,

John

Post script:

Some may ask why I picked on Pershing Square as the victim of Mike Pearson's apparent deceptions. After all Ruane, Cuniff & Goldfarb, T. Rowe Price, ValueAct Capital Management, Viking Global, Paulson & Co. and an ambush of Tiger Cubs are major Valeant holders.

I picked on Pershing Square because of this - a slide in an old Pershing Square presentation:

Pershing Square signed a confidentiality agreement (9 February 2014) and this allowed them to conduct "substantial due diligence" on Valeant. This included:

extensive management interviews
a review of parent and regional business plans
a review of historical and projected organic growth by business unit and region.

We now know that many acquisitions were price driven and growth was driven by pricing but Mr Ackman told us otherwise...

Either

(a) Mr Ackman knew that price not volume was the driver but told us otherwise

or

(b) Mr Ackman thought he was telling the truth when he said that volume, not price was the driver. But he thought that because the company systematically misled him. The deception came not only from Mr Pearson but was repeated throughout "extensive management interviews".

I believe Mr Ackman thought he was telling the truth. (I could be persuaded otherwise but at this time Mr Pearson's credibility is more questionable.)

And if Mr Ackman thought he was telling the truth and he was systematically misled it is pretty obvious what he must do. He must sell his stock. He owns lots of Valeant stock.

If he keeps his stock now he is stating loudly and clearly that it is acceptable for him to invest 30 percent of his clients' money in a company which systematically misled him not just at CEO level but during "extensive management interviews".

Pershing Square surely cares more about the investment process than that.

J

Bronte Capital

Thursday, February 25, 2016

The amazing Zatarra Research piece on Wirecard

Thursday, February 11, 2016

Valeant - links

Wednesday, February 3, 2016

Mr Ackman, I forgive you. Mike fooled almost everybody...