Hacker News new | comments | show | ask | jobs | submit login
Pharmacist at center of Valeant scandal accuses drugmaker of 'massive fraud' (latimes.com)
45 points by 001sky 515 days ago | hide | past | web | 54 comments | favorite



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.


> 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.

Notably Ackman has a very large position. The Swiss National Bank also owns 1.3 million Valeant shares.

The similarities to Enron are uncanny, as pointed out in the research report that started this all: http://www.citronresearch.com/wp-content/uploads/2015/10/Val...


Normally I like Citron's work, but when it comes to Valeant he is a total clown. Like most of the delusional defenders such as Ackman, Citron focuses on the wrong things like accounting and channel stuffing (although I believe there is some channel stuffing going on, it's relatively unimportant). Trust me the guy is totally clueless, but he is certainly a useful idiot if there ever was one.


The allegations of channel stuffing were pretty reasonable from the outside.. When Left wrote his report, it was clear that Valeant had extensive relationships with several pharmacies that weren't disclosed -- he couldn't have known that although Valeant didn't own any of them, they were rolling up their financials. His intuition was pretty spot on though, since he felt there must be something shady going on given that Valeant hadn't disclosed their relationship and it was clear they were responsible for hundreds of millions in revenue.


Genuine question - is not the big downside of shorting that there is a real non-zero risk that there won't be a company to have shares in shortly?


Nope; if the company goes bust, you make full profit, because you don't need to return useless shares. See http://www.investopedia.com/ask/answers/03/082803.asp


It's funny you should say this! I actually asked a couple of days ago if one should short the fuck out if it https://news.ycombinator.com/item?id=10460488


I must know! Did you then proceed to short the fuck out of it?


Haha, can't find it in the Swedish marketplaces.


Have you written any online resources regarding this? I'd love to deep dive (and perhaps even short myself, for activist reasons).



No but there have been enough news stories in the last week or two to get up to speed. Happy to answer any specific questions.


What is Valeant doing that is illegal/unethical? After reading the article and your comment I still don't really understand what they did.

All I know for sure is that Valeant buys a lot of pharmacies, and one of them accused them of fraud? What are the specifics of what they're doing, and how is it harmful to consumers?



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


It's still what's known as "general collateral" - it's not only easy but free to borrow shares. I shorted more shares yesterday.


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


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.


So take a position that makes money on large swings?


I remember when I had first read the gushing profile of "Mike Pearson" http://www.theglobeandmail.com/report-on-business/rob-magazi...

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.


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?


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?


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...

> 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.


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.


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).


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 ...


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


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...


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...


"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...


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.


WOW. I hadn't read that.

Some else posted this link a few days ago.

http://azvalue.blogspot.com/2015/08/valeant-detailed-look-in...

I think the cash flow analysis is pretty damning. Valeant says they are pulling in a lot of cash from all of their acquisitions, but if you calculate what the cash flow would need to be for that to be true, it's over 200% of what Valeant actually has on it's 10-Ks!


Thank you. On a "motivation" note it would be interesting to know when the insurers policy on brand vs generic came in and when Valeant started using Philidor in earnest.

One would assume this was not begun as a scam, but at some point they looked at a sudden decline in revenue and thought, if only that pharmacy group we almost own could help ...

Nah. It's a scam. They took pains not to own the pharmacy ... I am too forgiving.


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.


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?


> 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.


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.


> 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.


Many of the "best possible treatments" are expensive crap, barely better than a cheap generic or even than no treatment at all (especially cancer treatments).


I consider myself relatively libertarian, so I find myself nearly in shock that I believe a single payer system is the inevitable, and perhaps best, solution. (Although your generic vs branded thing makes no sense, no offense) Our problem is that we have made thing SO dysfunctional that a few laws here and there probably cant fix it - that's how broken it is. There would be drawbacks for sure, but we're at the point where things are so bad that the incremental drawbacks would be far outweighed by the benefits. It's pretty depressing to think about in all honesty.


Why do you assume a single payer is inevitable? Are there some countries with great healthcare systems that are multi-payer? Switzerland comes to mind. Singapore?


There was a really interesting episode of the podcast called White Coat Black Art that generally covers the Canadian health care system. In the recent election a single payer pharamacare system was part of one of the platforms, so the podcast host went to Sweden to see how they do it.

http://www.cbc.ca/radio/whitecoat/blog/pharmacare-sweden-sty...


This would be fine, so long as we made drugs go generic much faster. Which would require more public funding for drug research. Which would turn the system on its head.


The FDA allowing the purchase of generics from reputable manufacturers in India and China, regardless of patent law, would also decimate the current system.


So basically invalidate the patents that exist? That would certainly disrupt the system and would likely results in no new drugs.


You mean no new drugs funded by for-profit companies. Drugs would continue to be developed by governments and non-profits.


Please list all of the drugs that have been developed by government and non-profits. And by developed, I mean actually brought to market. The list will be very short.

Yes, the NIH funds basic scientific research. The NIH does not create new drugs. Even if an NIH research had discovered a new drug (they usually don't, they discover new science that leads to new drugs), that's about 5% of what it actually takes to get a drug to market.

If you look R&D spending by pharma companies, the research part costs about 1/3rd. The development part is 2/3rds of the cost.

Take a look at the Nature article that traced who discovered new drugs over the past decade or so. Over 2/3 were NOT invented by gov't or non-profit funding.


> If you look R&D spending by pharma companies, the research part costs about 1/3rd. The development part is 2/3rds of the cost.

You left off the marketing expense:

"In 2012, the pharmaceutical industry spent more than $27 billion on drug promotion— more than $24 billion on marketing to physicians and over $3 billion on advertising to consumers (mainly through television commercials)."

http://www.pewtrusts.org/en/research-and-analysis/fact-sheet...

> Take a look at the Nature article that traced who discovered new drugs over the past decade or so. Over 2/3 were NOT invented by gov't or non-profit funding.

But that doesn't mean government can't invent or fund drug discovery.


You left off the marketing expense

It seems like we're on a different topic now. My original point was private companies do most of the drug discovery now with gov't funds helping out. The marketing expense doesn't change that.

As for the marketing expense, selling drugs is a high touch business. You can't just run ads, you need sales people to go and visit doctors, answer their questions, provide educational materials. That costs a lot of money. The $24B in marketing to physicians is likely mostly the salary of sales reps.

And before you say that it's not needed, I've spoken to a number of doctors that have a good relationship with sales reps and find them helpful. They don't have time to keep up on every new piece of data on a drug.

If you're drug is crap, you won't be able to sell it, period. A great example is Pfizer's inhaled insulin, Exubera. It barely sold $20M at peak. You'd think a company like Pfizer who are marketing geniuses could move anything, but they couldn't move Exubera because it was a crap drug.


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


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...

[2] http://www.theglobeandmail.com/report-on-business/valeants-s...

[3] http://www.propublica.org/article/pharmacies-valeant-affilia...

[4] http://sirf-online.org/2015/10/25/the-kings-gambit-accepted-...

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

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


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.


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.


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




Guidelines | FAQ | Support | API | Security | Lists | Bookmarklet | DMCA | Apply to YC | Contact

Search: