Friday, November 18, 2016

Valeant and Philidor after the criminal charges

On 15 October 2015 I posted a brief post which was (I believe) the first public reference to Philidor, the now notorious speciality pharmacy business at Valeant.

I had known about Philidor since February and had told many people including Roddy Boyd and Andrew Left but I did not understand in any comprehensive way how Philidor worked and why Valeant had gone to such lengths to hide it. Jim Chanos (entirely separately) had I believe also found Philidor.

On 19 October 2015 Roddy Boyd published the seminal journalist article explaining much of the mystery. Roddy's article was the main piece in the undoing of Valeant's stock. I am still amazed how much of the story Roddy worked out. This was one great piece of journalism.

Today one Valeant executive and the Phildor CEO have been charged in a fraud and kickback scheme. That is more than a year later.

It is however worth revisiting Valeant's first major Philidor disclosure.

On 26 October 2015 Valeant had its first conference call to explain Philidor. This conference call dumped almost the entire board into this mess. Board members were at this call and it was made plain that they understood how Philidor worked. Moreover Board members toured Philidor before Valeant agreed to buy an option to purchase Philidor.

Given that criminal charges have now been laid those board members should now be considering their position.

You can find a full transcript of that call here, but I just quote a pertinent part.

Seana Carson Valeant Pharmaceuticals International, Inc. - Chief Compliance Officer 
Thank, Tanya. Good morning. I'm Seana Carson and I am Valeant's Chief Compliance Officer. At this point I will share with you some information regarding the diligence conducted by Valeant prior to entering into its option agreement with Philidor, as well as details regarding Valeant's oversight and rights. 
All agreements between Valeant and Philidor have been reviewed or drafted by legal counsel. Our legal, compliance, regulatory and business diligence was conducted in connection with the purchase option and distribution services agreement with the assistance of our external advisors. This included multiple site visits. 
Furthermore, Valeant negotiated representations, warranties, indemnities and ongoing covenants for its protection. The diligence conducted covered legal, regulatory, and compliance matters, including but not limited to corporate structure, pharmacy licensing, federal healthcare program requirements, privacy, pharmacy practices, and IT security. Last year the majority of Valeant Board, including the entire Audit and Risk Committee, went to tour the Philidor facility in Pennsylvania in person, ahead of completing the transaction. 
Turning to Valeant's rights under its options, as mentioned, Philidor operates independently from Valeant. Valeant has contractual rights to inspect Philidor's books, records and facilities. Further, Philidor must give Valeant prompt notice of any events that result in a material breach of its covenants or could reasonably expect to result in a breach of its representations and warranties. 
Valeant also has the right to appoint employees to Philidor, including a head compliance officer and an in-house lawyer. The option agreement also provides for a joint steering committee, composed of members from Valeant and Philidor, the purpose of which includes the exchange, assessment, and discussion of matters relating to compliance of Philidor with applicable laws, material contractual obligations, and Philidor's internal policies and processes. 
We maintain regular contact between business and functional leads. Pursuant to our rights in the option agreement, Philidor, with input from Valeant, hired both an in-house lawyer and a head of compliance with relevant experience. As mentioned, Philidor is included in Valeant's SOX 404 internal control testing and internal audit program for 2015. In addition, on October 2, a big four accounting firm with asked to prepare plans for an internal audit of Philidor. The scope was intended to include an assessment of operation and data systems, quality and regulatory practices, adjudication and reimbursement practices, contractual compliance, government pricing, as well as prescription level testing and sampling. 
Because of the nature and volume of inquiries related to Philidor after our October 19 earnings call the audit has been delayed to revise scope accordingly. Additionally, we understand that Philidor and its network pharmacies have complied with several hundred desk audits from payers and have participated in more than two dozen live audits involving major pharmacy benefit managers.


The boss of Philidor, Andrew Davenport, is one of two people charged today. Here is a video of him being interviewed by a State Senator about Philidor. I wonder whether he was this evasive when the Valeant board went to visit him.


I am not going to list the board members who went on tours of Philidor. It is up to other people to ask them questions.

I remain short some Valeant.


PS: For completeness here is a video of Gary Tanner applying for a pharmacy license along with Philidor's old pharmacist in charge. It is pretty clear from the description that this was also to serve the same dermatology market as Philidor.


Unknown said...

Just trying to figure out what emotion to have here:

First US legal action on Valeant has Valeant as the victim. Do you cry? Do you laugh? Do you shout "rigged"?

Unknown said...

New thought: are these arrests a way to get these guys to testify against Pearson et al? Please tell me that this is the beginning, not the end.

Mother Cabrini said...

What did Bill Ackman know and when did he know it? If he truly did not grasp the extent of the fraud he should shutter his fund immediately. And if as a member of the Board he did subsequently learn of the fraud why did he not call Preet? After all he did fire Mike and Schiller.....

And why does no one on the buy side model the disgorgement of hundreds of millions of dollars of ill gotten Philidor gains by VRX??

This thing collapses in litigation inside 6 months.

Anonymous said...

Seana Carson, VRX Chief Compliance Officer, says in the transcript that "In addition, on October 2 (2015), a big four accounting firm (was) asked to prepare for an internal audit of Philidor. The scope was to include...(lots of stuff)."

According to Valeant's press release today, Gary Tanner "ceased to be a Valeant employee on September 13, 2015."

The requested audit appears to be in close proximity with the exit of Gary Tanner, rather than to be some sort of ongoing, additional due diligence exercise. Carson's statement reads like Valeant was taking extra steps to be careful in their dealings with Philidor, but actually it looks more like they were being reactive to something that they had missed well after the fact.

Anonymous said...

Thanks for the update. Do you think these charges or the inability to rely on their previous financial statements will trip any of their debt covenants? Thanks.

Anonymous said...

John, I was curious to know whether you have an opinion on theranos? This was a story which I was very positive upon and was sucked into the media hype around its business models. Looking back I can see the warning signs, but as someone who tracks these situations I am curious to know what (if any) red flags you saw>

GlobalTrader said...

You are suggesting the board members are criminally liable because they toured Philodor facilities, this is so beyond ridiculous you should be embarrassed to even post it

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