Thursday, November 26, 2015

Philidor 2.0: Valeant and Stephen King play Chess with a lot of pharmacies

Valeant (VRX:NYSE) has managed the improbable.

It sells 

(a). Generic drugs often with close substitutes,

(b). It has raised their prices sometimes to absurd levels ($1000 acne antibiotics with full generic substitutes is an example)

(c). It claims to raise volumes of these products.

I call this the improbable trio. It seems improbable that a company could do this. Not impossible, just improbable.

The trick it appears is reliance on non-traditional distribution models. 

The size of non-traditional channels

Valeant's non-traditional channels are very large. During the dispute between Allergan and Valeant Allergan noted that the IMS sales data for Valeant products was crappy. 

Valeant responded that IMS data was unreliable for Valeant. To quote:

U.S. IMS data will cover less than 30% of Valeant’s business and, for that portion of Valeant’s business IMS covers, the IMS data will not properly collect sales through a numbers of channels (e.g., specialty pharmacy, physician dispensed sales, corporate accounts, and alternative fulfillment).

The non-traditional distribution methods are hugely important in Valeant.

The Philidor allegation

The Philidor allegation is that Valeant [through undisclosed proxies] established or owned pharmacies (such as R&O in California) and used their pharmacy numbers to deceive insurance companies into believing that scripts for expensive drugs with generic substitutes were being presented at smaller suburban pharmacies rather than at a Valeant captive pharmacy. 

If however they put all those scripts through one Valeant associated pharmacy the insurance companies would wise up.

So they put the scripts through multiple pharmacies - deceiving the insurance companies into not checking for the fraud.

How many pharmacies?

One of the games we have been playing is spot-the-Valeant proxy pharmacy.

We know pharmacies outside the Philidor web: the proxy captive pharmacies extend beyond Philidor.

But the scale of Philidor problems is not widely understood and has not been disclosed to the market. I doubt Mr Ackman would have adopted his Martingale strategy had he fully understood.

So lets start.

All these pharmacies were registered in Delaware. Many are named after chess terms (as are many previously disclosed Philidor entities) but we are also noting a distinct Stephen King theme.

This should keep the fraud investigators for various insurance companies busy. I suspect this will also get added to the list of things Congress is investigating.

EntityStateEntity IDRegistered AgentNotes
Fifty Moves, LLCDE5640758Corporation Service CompanyChess term: Fifty Move Rule
ELO Pharmacy, LLCDE5762328Corporation Trust CompanyChess term: ELO ranking system
C-K Pharmacies, LLCDE5762330Corporation Trust CompanyChess term: The Caro-Kahn defence
Tarrasch Pharmacy Holdings, LLCDE5762881Corporation Trust CompanyChess term: Tarrasch was a great player
NC3 Pharmacy, LLCDE5770687Corporation Service CompanyChess term: The rarely used Dunst Opening
Lasker Pharmacies, LLCDE5770702Corporation Service CompanyChess term: After the great player and theorist Emmanuel Lasker.
B&W Pharmacies, LLCDE5770706Corporation Service CompanyBlack and White: the usual colours of chess pieces.
NC3 Pharmacy Holdings, LLCDE5770708Corporation Service CompanyAnother Dunst Opening reference
Knight & Knight Pharmacies, LLCDE5770718Corporation Service CompanyChess Knights I presume.
First Rank Pharmacies, LLCDE5770741Corporation Service CompanyAnother entity is called "Back Rank: another chess term.
Forsta, LLCDE5774549A Registered Agent, Inc.Entity by same name sought wholesale pharmacy registration in AZ with Gary Tanner (Owner) and Jacob Power (Pharmacist-in-Charge), both ex-Philidor/VRX
Charmberlain Pharmacy, LLCDE5775980Corporation Service CompanyNamed for a favourite Stephen King location...
Mears Pharmacy, LLCDE5775991Corporation Service CompanyNamed for a repeated Stephen King character...
Marsten House Pharmacy, LLCDE5775997Corporation Service CompanyNamed for a key location in Salem's Lot. Notably a symbol of evil.
Torrance Pharmacy, LLCDE5776000Corporation Service CompanyNamed for key characters in The Shining.
Overlook Pharmacy, LLCDE5776004Corporation Service CompanyThe Hotel in The Shining.
Topiary Pharmacy, LLCDE5776008Corporation Service CompanyTopiary animals in The Shining.
Hallorann Pharmacy, LLCDE5776022Corporation Service CompanyNamed for the chef at the Overlook Hotel in The Shining.
Decker Pharmacy, LLCDE5776025Corporation Service CompanyPossibly named for another Stephen King character...
Twinner's Pharmacy, LLCDE5776026Corporation Service CompanyNamed for Stephen King's repeated doppleganger meme.
Parkus Pharmacy, LLCDE5776027Corporation Service CompanyA Stephen King character in The Talisman.
Halleck's Pharmacy, LLCDE5776029Corporation Service CompanyNamed for another major Stephen King Character.
Flagg Pharmacy, LLCDE5776032Corporation Service CompanyRandall Flagg is a major Stephen King Character
Derry Pharmacy, LLCDE5776033Derry is a repeated location in Stephen King novels.
Pennywise Pharmacy, LLCDE5776037Corporation Service CompanyPennywise the Clown is a recurring Stephen King character.
Plymouth Pharmacy, LLCDE5776038Corporation Service CompanyThe iconic Stephen King car in The Shining and others was a Plymouth.
Hanscom Pharmacy, LLCDE5776039Corporation Service CompanyFrom Ben Hanscom, a Stephen King character
Trips Pharmacy, LLCDE5776042Corporation Service CompanyFrom Captain Trips, a virus that exterminates most the human population in The Stand, a Stephen King novel.
Delain Pharmacy, LLCDE5776044Corporation Service CompanyFrom Delain, a mythical Stephen King domain.
Creed Pharmacy, LLCDE5776045Corporation Service CompanyFrom Louis Creed, the main character in a Stephen King novel.
Odetta Pharmacy, LLCDE5776046Corporation Service CompanyFrom Odetta Holmes, a recurring Stephen King character
Hemingford Pharmacy, LLCDE5776047Corporation Service CompanyFrom Hemingford Home, a Stephen King location.
Ludlow Pharmacy, LLCDE5776048Corporation Service CompanyFrom Ludlow Maine, a Stephen King location.
Crandall Pharmacy, LLCDE5776050Corporation Service CompanyFrom Jud Crandall, a Stephen King character.
Sheldon Pharmacy, LLCDE5776053Corporation Service CompanyFrom Paul Sheldon, a major Stephen King character.
Freemantle Pharmacy, LLCDE5776054Corporation Service CompanyFrom Abagail Freemantle, a major Stephen King character.
Revlowe Pharmacy, LLCDE5776055Corporation Service CompanyPresumably from the Reverend Lowe in the Cycle of the Werewolf.
French Landing Pharmacy, LLCDE5776058Corporation Service CompanyThe location in Black House, a Stephen King novel.
Wilkes Pharmacy, LLCDE5776059Corporation Service CompanyFrom Annie Wilkes, a Stephen King character.
Henreid Pharmacy, LLCDE5776060Corporation Service CompanyPossibly from Lloyd Henreid, a minor Stephen King character.
Beaumont Pharmacy, LLCDE5776062Corporation Service CompanyFrom Thaddeus Beaumont, another Stephen King character.
Sawyer's Pharmacy, LLCDE5776064Corporation Service CompanyFrom Jack Sawyer, another Stephen King character.
DH Stark Pharmacy, LLCDE5776065Corporation Service CompanyPossibly short for Dark Half from the novel of the same title. George Stark is the major character.
Shardik Pharmacy, LLCDE5776066Corporation Service CompanyShardik is one of the twelve guardians of the Beams that hold up the Dark Tower (again a Stephen King reference). 
TCM Pharmacy, LLCDE5776067Corporation Service CompanyWe are fairly sure this is associated - but have not worked out the link.
Burlingame Pharmacy, LLCDE5776070Corporation Service CompanyJessie Burlingame is a major Stephen King character.
Lauder & Cross Pharmacy, LLCDE5776071Corporation Service CompanyTry these names...
Claiborne Pharmacy, LLCDE5776072Corporation Service CompanyDolores Claiborne is a Stephen King novel.
Edgecombe Pharmacy, LLCDE5776073Corporation Service CompanyFrom Paul Edgecombe, who used to run Death Row in a Stephen King novel.
Georgia Pines Pharmacy, LLCDE5776074Corporation Service CompanyGeorgia Pines is a retirement home in Stephen King novels.
Garraty Pharmacy, LLCDE5776075Corporation Service CompanyFrom Ray Garraty, another Stephen King character.
Cold Mountain Pharmacy, LLCDE5776076Corporation Service CompanyThe Cold Mountain Penitentiary is where Paul Edgecomb ran death row.
Coffey's Pharmacy, LLCDE5776078Corporation Service CompanyJohn Coffey is another Stephen King character.
Stillson Pharmacy, LLCDE5776079Corporation Service CompanySteve Stillson is the President of the United States in a Stephen King novel.
Rainbird Pharmacy LLCDE5776080Corporation Service CompanyJohn Rainbird is a Vietnam Veteran in a Stephen King novel.
Longmont Pharmacy, LLCDE5776083Corporation Service CompanyLongmont VA is a location in the Stephen King novel, The Shop.
Dawes Pharmacy, LLCDE5776086Corporation Service CompanyBarton George Dawes is another Stephen King character. 
Castle Rock Pharmacy, LLCDE5776088Corporation Service CompanyCastle Rock Maine is a location of paranormal activity. I guess like a Valeant pharmacy. 
The Shop Pharmacy, LLCDE5776089Corporation Service CompanyThe Shop is a secret Government Agency in Stephen King novels. I guess this is a secret Valeant agency.
Cambers Pharmacy, LLCDE5776096Corporation Service CompanyJoe Cambers, a Stephen King character runs an auto-repair shop in Castle Rock. Probably another paranormal shop.
McGee's Pharmacy, LLCDE5776099Corporation Service CompanyCharlie McGee, a Stephen King character, has pyrokinetic powers - perhaps they include ripping off insurance companies.
Juco Pharmacy, LLCDE5776103Corporation Service CompanyA nickname for Joe Cambers rabid family dog. 
Roland's Pharmacy LLCDE5776108Corporation Service CompanyRoland Deschain, a major Stephen King character. 
Tower Pharmacy, LLCDE5776110Corporation Service CompanyPossibly a reference to The Dark Tower, a Stephen King novel.
Hawkmarten Pharmacy, LLCDE5776111Corporation Service CompanyWe think this is one of the many aliases of Joe Flagg. Suggestions accepted. 
Carrietta Pharmacy, LLCDE5776115Corporation Service CompanyThe full first name of Carrie, of the infamous Stephen King novel. 
PBG RX Pharmacy, LLCDE5794828Corporation Service CompanyWe have not found the reference here. The registration details make us think it is related.
Decker Pharmacies, LLCDE5794834Corporation Service CompanyAnother reference to Decker.
French Landing Pharmacies, LLCDE5794836Corporation Service CompanyAnother reference to French Landing.
NC3 Pharmacies, LLCDE5794839Corporation Service CompanySee the above chess reference.
C-K Pharmacy, LLCDE5794840Corporation Service CompanySee the above chess reference.
ELO Pharmacies, LLCDE5794842Corporation Service CompanySee the above chess reference.
Roland's Pharmacies, LLCDE5794844Corporation Service CompanySee the above reference to Roland Deschain.
Hemingford Pharmacies, LLCDE5794849Corporation Service CompanySee the above reference to Hemingford Home
Flagg Pharmacies, LLCDE5794852Corporation Service CompanyJoe Flagg again.
Overlook Pharmacies, LLCDE5794854Corporation Service CompanyThe hotel in the Shining again. Do we see a recurring theme.
Fischer Pharmacy Holdings LLCDE5805160Corporation Service CompanySurely a reference to Bobby Fisher, world Chess Champion

We are just playing with one State here.

There are pharmacies in other states. And they are all we think related to Valeant.

But here is the gem. The registration of false pharmacies continued AFTER Philidor was exposed and after Valeant said that they would stop doing business with Philidor.

And the people on registration documents are also often on the pay roll of Valeant (not Philidor).

I hope the longs can explain that inconvenient fact away - because it is not obvious how you do that.


Thursday, November 19, 2015

Channel stuffing by Valeant in Europe confirmed

The original Citron post which caused Valeant stock to crash alleged that Valeant used a hitherto undisclosed relationship with Philidor to stuff the channel.

This was (correctly) denied by Valeant who noted that they could not use specialty pharmacies to stuff the channel as the sale by a specialty pharmacy was only recognised by Valeant when the end customer was identified (and the drugs effectively sold to the end consumer).

It turns out that specialty pharmacy (and its attendant issues of ripping off insurance companies) is common at Valeant. It extends well beyond Philidor (as I will demonstrate in a future post).

In other words it is unlikely the channel is stuffed at all in America. But insurance copayment issues are far more widespread than Valeant asserts.

Yet receivable levels at Valeant are fairly high which leaves open the possibility that the channel was stuffed in places other than America.

This is now confirmed.

The Slovenian business press have done a fabulous job tracking down the stuffed warehouses in Slovenia. It is the front story on the main Slovenian business website (link) and they have kindly reproduced the story in English (link).

With a few forthcoming speciality finance scandals and confirmed channel stuffing this is getting uglier by the minute.


PS. Letter to Valeant longs (ie tragics)...

Dear former winners,

Valeant owns the big branded analgesic business in Russia (one example). Branded versus unbranded paracetamol/acetaminophen etc.

This sort of stuff is economically sensitive. No-name but identical products sell on the same shelves at 10% of the cost of the branded stuff.

Did you ever wonder why the sales of this did not fall in Russia and Eastern Europe given the economic issues there?

That is right - they stuffed the channel.

Keep your spirits up.

It is only (your clients') money.


SunEdison's new shareholders

There are 316 million SunEdison shares outstanding and - at pixel time - which is still before close - 128 million have traded.

There will be plenty of day-traders.

But even then there is likely to be one or two very large new shareholders. I have no idea who they are.

Whatever: I can't imagine them leaving Ahmad Chatila (the CEO) in place.

He has refused to resign, doesn't speak to reputable credit analysts and is responsible for the VSLR purchase.

The only remaining question: how bloody is the fight over his removal?

Mr Chatila should resign quickly and leave it to the new shareholders (if they wish to identify themselves) to pick his successor.

Ultimately he won't have any choice - but going without a fight will minimise the damage.


Whether the new shareholders are new bag holders is yet to be seen. I don't think they will be but the market disagrees with me.

Tuesday, November 17, 2015

Sun Edison disclosure practice

I have - on the grapevine - been sent a research report from Credit Sights on Sun Edison. "The title: Sun Edison and Terraform: Dual 10Q cut. Recourse?"

It is complete with the usual suggestion that there is debt at Sun Edison that is both (a) recourse to the parent company and (b) does not have sufficient and allocated cash left to settle it.

That is the central question with Sun Edison. Bears suggest that Sun Edison has parent company debt that they do not have the wherewithal to pay. The company has steadfastly denied this. They state all debt is either (a) non-recourse or (b) has well determined cash flows that will be used to pay it. Alas certain debts have shifted from the non-recourse to the recourse column.*

I confess I am concerned with the Credit Sights note. I own Sun Edison stock which I purchased in distress (about $9). This was after it lost two thirds of its value.

Proving my ability to pick stocks that halve it halved again.

The line in the Credit Sights report that concerns me most however is not assertions about recourse versus non-recourse. That is the bet I have taken.

My concern is this:
SUNE stopped returning our emails and phone calls over a month ago so we are unable to confirm this new recourse status with the company as the missing one letter footnote could just be a typo.
Sun Edison is a financial institution. It requires the trust of financial markets to do business.

Credit Sights is a highly reputable (if somewhat bearish) debt research shop.

Not returning their calls is simply unacceptable. The management of Sun Edison (as this blog has stated) have to start sounding like and behaving like the management of a mortgage REIT.

They are not doing so. Financial institutions do not ignore the people who analyse their debt.

So Mr Ahmad Chatila (CEO Sun Edison), how about you return Credit Sights' phone call?

Or, failing that, will the board of Sun Edison please fire the CEO now.

John Hempton
Disclosure: Long Sun Edison (unfortunately)

* One reclassified debt: a margin loan on Terraform stock was once classified as non-recourse and is now classified as recourse.

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