It’s been a long week for Valeant(VRX), a longer weekend, and with the fresh allegations published tonight in the Wall Street Journal, it’s going to be a long night. The week began with Valeant changing its business model completely, putatively in the face of pressure on raising prices on “mispriced” drugs. In reality, a business model based on serial acquisitions funded by cheap debt and overprices stock had ended, as it always does, with a pullback caused by opposition to predatory drug price increases.
The company responded aggressively, vowing to stop acquisitions, jettison a unit containing drugs which benefited from this repricing, pay down debt, and increase R&D spending. No sooner had this strategic change been announced when the company was hit with a scathing report from Roddy Boyd’s SIRF, introducing the world to Philidor Rx Services. SIRF painted a picture of a series of shady entities with chess-inspired names, all tying back to Valeant itself. Not much notice was made until a day later when Ctiron Research issued a report comparing Valeant to Enron and the its chess-named pharmacies to Enron’s Star Wars-themed special purpose entities. The stock plunged, recovering a bit after Valeant issued a tepid rebuttal. Later that evening Philidor issued its own rebuttal. Meanwhile Bronte Capital and others continued to reveal new irregularities and raise new questions. Analysts began to downgrade Valeant stock.
In the face of this, the company announced a conference call for tomorrow, featuring a broad lineup of Board members and executives to “lay out the facts including allegations made against our company regarding our relationship with Philidor and R&O, our accounting practices, and channel stuffing that contain numerous errors, unsupported speculation and incorrect interpretations of facts and circumstances to the detriment of the shareholders of the Company.” While the company has been scrambling to prepare for this call, reporters have been digging as well. This evening, the Wall Street Journal reported that Valeant employees had worked at Philidor under what everyone knew to be fake names such as Peter Parker.
It’s hard to pin down exactly what is going on here, and it is unlikely that tomorrow’s call will give any more clarity. What is clear is that whatever has been going on here with these pharmacies, whether Valeant owned them or not, whether it controlled them or not, smells fishy and looks funny. It doesn’t matter whether what Valeant did was legal or profitable- the perception itself poses an existential challenge for the company. The only rational response for the company is to come out and say that what they were doing was proper, but, effective immediately, they will not use these specialty pharmacies and they renounce any ownership stake, option for ownership or control that they may have. At the same time, the company should announce that it will spin off Neuro with as much debt as it can handle, as well as Bausch & Lomb. Ideally the company can get to a core with a strong enough balance sheet to allow them to transition to a traditional pharma model. If the company continues its intransigence, it risks losing everything. Discretion is, after all, the better path for Valeant.
Disclosure The author owns Valeant puts.