
Pharmacist at center of Valeant scandal accuses drugmaker of 'massive fraud' - 001sky
http://www.latimes.com/business/la-fi-1101-valeant-pharmacy-20151101-story.html
======
bedhead
Full disclosure: Valeant is my largest short position.

99% of the time, shorting stocks is unemotional. Valeant is much, much
different. This company is a _CANCER_ on our society, and I don't say that
lightly. It is a microcosm for why we have the most dysfunctional, expensive,
and unsustainable healthcare system on the planet. They are leading the charge
when it comes to figuring out ways to legally (but unethically) and illegally
bilk the public for their own interest. I have studied the company for the
past two years and it is absolutely rotten to the core. I hope all of senior
management wind up in prison...unfortunately it might only be a couple when
the dust settles.

I am going to sincerely enjoy this company going supernova, and I might get
just as much pleasure watching it take down a bunch of lazy and ethically-
challenged fund managers as well. Valeant is going to wreck many people's
careers.

The ironic thing is that this is good for us in the long-run. This is exactly
the kind of wake up call we need to fix our healthcare system.

~~~
danieltillett
How hard is it these days to actually get the shares to short?

~~~
jsprogrammer
Why do you need to short if you can just purchase (or sell) options?

~~~
PhantomGremlin
The price of put options on VRX is extremely high.

For example, VRX closed on Friday at $93.77. The cost of a 1 week put at 90
strike was about $5.70. The cost of a 2.5 month put at 90 strike was about
$15.00. The cost of a 15 month put at 50 strike was about $10.00.

I doubt that VRX will collapse immediately. These things always take a while
to play out. With that in mind, look at that last data point. You would have
to pay $10 for an option that won't have any value at all unless VRX goes from
$94 to under $50 in the next 15 months.

It might make more sense to sell a call spread instead of purchasing puts, but
the option prices are very high and this stock swings wildly. This is
definitely adult swim, the very deep end of the pool.

I'm not brave enough to play this stock. It's much like playing Herbalife,
where you've got billionaires like Ackman on one side, billionaires like Icahn
on the other side. Often the best move for a small investor is to not play at
all.

~~~
jsprogrammer
So take a position that makes money on large swings?

------
suprgeek
I remember when I had first read the gushing profile of "Mike Pearson"
[http://www.theglobeandmail.com/report-on-business/rob-
magazi...](http://www.theglobeandmail.com/report-on-business/rob-magazine/how-
valeant-became-canadas-hottest-stock/article8889241/?page=all)

It contained the all important paragraph:

"Pearson’s next suggestion was even more daring: Cut research and development
spending, the heart of most drug firms, to the bone. “We had a premise that
most R&D didn’t give good return to shareholders,” says Pearson. Instead, the
company should favour M&A over R&D, buying established treatments that made
enough money to matter, but not enough to attract the interest of Big Pharma
or generic drug makers"

TLDR: Cut R&D, buy successful but smaller drugs and then because of no
competition make a killing by jacking up prices.

This firm and its nasty business model of profiteering off the backs of sick
desperate people, deserve to die. They are no better than vultures that feed
on the dying.

------
jjoonathan
I remain impressed as ever by the health insurance & pharmaceutical markets'
ability to distribute financial rewards to sources of value creation.

Speaking of which, even though my libertarian days are long passed on account
of forming a realistic picture of what does and does not constitute value
creation in the eyes of the market, I never went to the trouble of studying
"blackhat" business tactics intentionally. Perhaps I should. Any recommended
reading?

~~~
randomname2
I'm curious, what does fraud have to do with "libertarianism"? Don't most
libertarians loathe fraud and think it should be cracked down on harder?

~~~
jjoonathan
If a libertarian took a broad enough view of fraud to object to Valeant's core
business tactics then we'd get along just fine. I suspect that most do not.

Tactic 1: buying other firms' medicines and then swiftly hiking their prices

Tactic 2: exploiting the principal agent problem between insurer and insuree
with bribes (err, I mean "coupons")

There was a comparison to Enron earlier in this thread. While accounting fraud
brought them down, their core business model was legal, compatible with market
philosophy, and familiar:

Tactic 3: buying up the power generation infrastructure and creating
artificial scarcity to ramp prices.

For companies that are actively engaging in this sort of nonsense, see telcos.
Or Goldman Sachs -- they were in the news a while ago for doing it with
Aluminum. Anyway, the fraud is almost incidental, it's the "innovative"
business models that drive me nuts. Because at the same time as pharma
investors, execs, and lawyers are raking in the cash, Chem PhDs and postdocs
are getting paid peanuts if they can find a job at all:
[http://chemjobber.blogspot.com/2010/07/whats-happening-to-
ph...](http://chemjobber.blogspot.com/2010/07/whats-happening-to-
pharmaceutical.html)

> To illuminate for US readers, a UK-based PhD chemist such as myself with
> about 10 years post-PhD experience can expect to earn 35-40k GBP, which
> translates to about 55-60k USD

No, I'm not one, I code now, but I would have chosen differently if the market
hadn't hammered so hard to shoo me away from contributing to, IMO, the more
important cause. I'm convinced that the non-excludable (and therefore
"valueless," per the market's reasoning) goods produced in academia account
for a healthy fraction of the value in the pharma and medical industries, and
it pains me that the market not only disagrees but strenuously so. It gets its
priorities not just wrong but completely backwards. A "circus of values," as
one popular philosopher put it.

~~~
microcolonel
The market response to this misconduct has been enormous. The legal response
hasn't even been decided or implimented.

They're already a failed company because the insurers won't touch them.

You don't have to feel guilty that you once believed in something.

~~~
jjoonathan
We're hearing about them because they went too far, not because the incentive
landscape keeps the rest of their peers headed in the opposite direction (as
it ought to and doesn't).

------
lifeisstillgood
I am coming late to the game but cannot find useful, clear explanations (I
read the rather over wrought citron doc ... Is this a genuine stock
researcher?)

So as I understand it :

\- valeant sells over priced medical drugs, which are named on a prescription
by a doctor (?) but if you Are with insurer X, the insurer requires the
druggist To replace expensive named brand with generic alternative.

\- Valeant "owns"/has crushingly close relationship with Philidor a network of
local pharmacies / druggists.

\- philidor then buys a small druggist in Canada named R&O who then gets
orders from all over the country and stops sending the cash to HQ because they
were bought for 350k and now have revenue of 69m a few months later

\- And ... Exactly how does Philidor do this fraud thing? If you are supposed
to swap NameBrand out for GenericBrand, how does sending in 69M of invoices
for NameBrand help? Philidor / valeant were not supposed to be selling it
anyway? How does this coupon thing help?

This is one of the annoying things about fraud - it is all simple when you
eventually understand it.

Ps if anyone cares to explain how one can make and obtain money from having
"stolen identity" please post that too ...

~~~
refurb
This is my take (based on other articles I've read):

\- Most of Valeant's drugs have cheap generic options, so most insurance
company's say "no" when a pharmacy tries to fill it, hence it's hard as hell
for Valeant to sell their drugs

\- Valeant forms a cushy relationship with Philidor. Unlike most pharmacies,
Philidor puts a LOT of effort into getting the insurance companies to say yes
(they just give the drug to the patient before getting paid; if the drug gets
denied, they try many others ways to get paid)

\- Philidor was starting to get shutdown by payers, basically, any request
from Philidor was red flagged by the payers to double check to see if
something fishy was going on

\- Philidor also tried to get a pharmacy license in California, but the
authorities said no because they lied on who actually owned what (apparently
getting a "no" to a license is really bad)

\- Philidor then decides to buy R&O to get their licenses and their payer
contracts. Basically it's a run around, the insurance company will see the
script coming from R&O and basically think "ahh.. at least it's not Philidor"

\- However, Philidor starts playing loose and fast with R&O license even
before they closed the deal. Philidor would bill an insurance company using
R&O's pharmacy ID, which is a HUGE no-no

\- R&O sees what's up and says "screw this crap, I'm not going to give Valeant
any of the insurance money I have until I get some goddamn answers as to what
they are doing"

\- Valeant (in all it's wisdom) sues R&O for non-payment and R&O says "I never
got a invoice from you" and all hell breaks loose as the story unwinds

~~~
mikeyouse
One important note that was just uncovered that Valeant was abusing the DAW
designation. Doctors can write "Dispense As Written" on a prescription to
imply that they want the Brand Name drug rather than the generic one. IE, a
doctor will often write something like "Tylenol 500mg" but they don't really
care if the patient gets any random acetaminophen. If they write "Tylenol
500mg DAW" that means they want the patient to get the brand name Tylenol.

It's looking more and more likely according to internal documents that
Philidor was changing doctors' prescriptions by writing DAW on them so that
the patients would get the much more expensive Valeant option instead of the
cheap generic version -- this is highly illegal, people will definitely be
going to jail for that.

Edit to add a source:

[http://www.bloomberg.com/news/articles/2015-10-29/philidor-s...](http://www.bloomberg.com/news/articles/2015-10-29/philidor-
said-to-modify-prescriptions-to-boost-valeant-sales)

~~~
PhantomGremlin
_Philidor was changing doctors ' prescriptions by writing DAW on them_ ...
_this is highly illegal, people will definitely be going to jail for that._

Oh, boy, this could get exciting quite quickly.

Valeant owns an option that lets them buy Philidor for $0 (plus possible
incentive payments).[0] Yes, that's not a typo. This was submitted to HN a few
days ago but didn't generate any comments.

The executives still (at least nominally) running Philidor must be shitting in
their pants right about now. It looks like Valeant is out to make them look
like bagmen. But why would they go down without a fight? The internecine
warfare is about to get very interesting, or in more colloquial terms, the
shit is really about to hit the fan.

[0] [http://www.bloombergview.com/articles/2015-10-26/valeant-
s-p...](http://www.bloombergview.com/articles/2015-10-26/valeant-s-pharmacy-
relationships-were-complicated)

~~~
kenesom1
"SIRF reporting reveals that Valeant has been closely involved with Philidor
at every stage of its life-cycle, controlling it in all but name, since day
one."

[http://sirf-online.org/2015/10/19/hidden-in-plain-sight-vale...](http://sirf-
online.org/2015/10/19/hidden-in-plain-sight-valeants-big-crazy-sort-of-secret-
story/)

~~~
PhantomGremlin
The key is "all but name". If I'm Andy Davenport, Philidor's CEO, I
immediately get together with my brother Matthew Davenport, also mentioned in
your link, to get my story straight. Because it _is_ their name on all the
documents.

Sarbox has put a damper on the Sgt. Schultz defense of "I hear nothing, I see
nothing, I know nothing!". CEOs can go to jail even if they claim they were
just ignorant figureheads.

So if I'm the Davenports I immediately go to the Federales and cut a deal. I
rat out Mike Pearson (Valeant's CEO) and claim that he put them up to it. Note
that its in the Davenport brothers interest to lie and make up shit if they
have to, because that's probably their best way they avoid Club Fed (or
worse).

Like I said, this could get interesting pretty quickly.

------
Alex3917
The real solution is that we need single payer healthcare that only covers
generics. Then if people want to experiment with patent medicine, they can get
supplemental insurance from the private markets or pay for it out of pocket.
Until then the whole system is fucked.

~~~
refurb
Not sure where you're going with this. That would mean that no one would have
access to any drug until it had already been on the market for at least 8 or
more years, unless they were willing to pay it out of pocket (if they can't
afford the insurance).

On Medicaid and have HER+ breast cancer? Tough, you can take some horrible
chemotherapy that will give you 6 months, not the new HER2 drugs that will
give you 5+ years of life.

How would that even work?

~~~
Alex3917
> On Medicaid and have HER+ breast cancer? Tough, you can take some horrible
> chemotherapy that will give you 6 months, not the new HER2 drugs that will
> give you 5+ years of life.

Which is exactly how it should work. The government should allow limited
monopolies as an incentive for innovation, but it shouldn't be subsidizing
them with taxpayer dollars.

The vast majority of new drugs have few if any benefits over existing drugs,
they're just government handouts to the wealthy. So I fail to see how a system
that provided the best possible treatments for 99% of health problems for
every American at a fraction of the current cost wouldn't be vastly better
than our current system.

~~~
refurb
_So I fail to see how a system that provided the best possible treatments for
99% of health problems for every American at a fraction of the current cost
wouldn 't be vastly better than our current system._

If you're excluding patented drugs, you're excluding some of the best possible
treatments out there.

Also, your statement that "the vast majority of new drugs have few if any
benefits over existing drugs" is not true. Some drugs are not any better, but
most are better, although many only slightly.

You have to realize that similar to tech, not every new drug can be a
breakthrough. Most new drugs have incremental benefit, but it expands the
boundaries of what's possible. If you look at the treatment of colon cancer,
each new drug only added a few months of life, but after 10 years, the benefit
had extended to over 5 years.

~~~
Alex3917
> If you're excluding patented drugs, you're excluding some of the best
> possible treatments out there.

The issue is that allocating taxpayer dollars to the best treatments is bad
policy, if you can get better outcomes from worse treatments for the same
amount of dollars. E.g. for most diseases the most effective treatments are
probably alternative medicine, but it's also probably not cost effective for
the government to be paying for everyone to get whatever alternative medicine
they want.

------
rjurney
I'm always fascinated by scams. As entrepreneurs we look for holes in the
system to fix, whereas scammers look for holes to exploit.

------
kenesom1
SIRF's report on October 19 [1] discusses operating structure and entities,
many of which are named after chess references. From several articles:

"Philidor" ["Francois-Andre Philidor was an 18th century French Chess master"]

"BQ6 Media" ["named after the chess shorthand for Bobby Fisher's legendary
move against Russian chess master Boris Spassky in 1972"]

"End Game LP" ["stage of a chess game when there are few pieces left"]

"KGA Fulfillment Services Inc." ["popular chess move is the King's Gambit
Accepted, or as it's often referred to in chess notation, KGA."]

"Isolani LLC" ["Isolani refers to an isolated queen’s pawn."]

"Lucena Holding LLC" ["Lucena position - one of the most famous and important
positions in chess endgame theory"]

"Back Rank" ["a checkmate move in which a rook or queen takes the king on the
back row of the board."]

[1] [http://sirf-online.org/2015/10/19/hidden-in-plain-sight-
vale...](http://sirf-online.org/2015/10/19/hidden-in-plain-sight-valeants-big-
crazy-sort-of-secret-story/)

[2] [http://www.theglobeandmail.com/report-on-
business/valeants-s...](http://www.theglobeandmail.com/report-on-
business/valeants-sales-network-the-firms-and-chess-terms-tied-to-
it/article27009058/)

[3] [http://www.propublica.org/article/pharmacies-valeant-
affilia...](http://www.propublica.org/article/pharmacies-valeant-affiliates-
not-disclosed-california-license-denial)

[4] [http://sirf-online.org/2015/10/25/the-kings-gambit-
accepted-...](http://sirf-online.org/2015/10/25/the-kings-gambit-accepted-the-
annals-of-fraud/)

[5]
[https://en.wikipedia.org/wiki/Chess_endgame](https://en.wikipedia.org/wiki/Chess_endgame)

[6]
[https://en.wikipedia.org/wiki/Lucena_position](https://en.wikipedia.org/wiki/Lucena_position)

------
qj4714
I don't understand one thing. All the articles I read about Valeant and
Phildor say that Phildor only represents 6% or revenue. Does that mean the
other 94% is legitimate and comes from pharmacies where Valeant does not have
an option to buy them? That is the piece I don't understand.

~~~
alexhu11
Only 6% percent of Valeant's revenue goes through Philidor. However, this
raises HUGE questions about the legitimacy of the other 94% of Valeant's
revenue streams. How many other arrangements like this does Valeant have. Is
it conducting it's business on its other channels in an above board manner?

A huge portion of Valeants growth strategy comes from specialty pharmacies
like Philidor. The integrity of the strategy has now been called into question
by investors.

------
TYPE_FASTER
How is Valiant different from Uber? They both ignore regulations to serve a
market. They both increase prices when there is a demand.

