Behind the Valeant (VRX) Report

Andrew Left, founder at Citron Research, the stock-commentary site that raised questions about Valeant Pharmaceuticals (VRX) that led to a stock rout spoke to Bloomberg Television today. He discussed his allegations against Valeant and Philidor, Bill Ackman, and the stock reaction.

On whether he has proven the claims he’s made, Left said: “It’s also not my job to actually prove it. I promise, if you gave me subpoena power, six months and unlimited resources, I would be no doubt be able to prove it.” He added: “What they are doing right now appears to be illegal.”

When asked to describe his accusations against Valeant, Left said: “It has been 24 hours since I have put this story out. The reason why I did not respond yesterday is I wanted to hear the company’s response…It has been 24 hours and I am more confused today than yesterday about the actual ownership structure and the chain of command there.”

On the responses from Valeant and Philidor, Left said: “To be honest — The responses are amateurish. And that’s why the stock’s reacting the way it is.” He added: “There’s a reason why the stock is down even today is because once everybody saw the responses from the sellside and from the company and Philidor, Wall Street’s decided that there’s a better chance than not that this smoke is actual fire.”

ALIX STEEL: Here to talk about the report is the man behind the analysis, Andrew Left. He is the founder of Citron Research and he joins us exclusively now from Los Angeles.

Also our own Drew Armstrong is joining us. He has been following this story very closely for Bloomberg News.

Andrew, thank you so much for joining us. It was an incredible story yesterday when that Valeant news broke from your research firm.

What is the No. 1 thing you are accusing Valeant of and what is your proof to back it up?

ANDREW LEFT: If you read the story, you will see what I’m accusing Valeant of and it’s not as much of an accusation, but we see it, is the specialty pharma company that they are running many of their prescriptions through, is called Philidor. And last week, a unique document came out which came from Valeant’s general counsel requesting a $69 million payment from a small pharmacy in Camarillo, California.

And then it came out to be that the pharmacy does not actually owe the money to Valeant, but they owe the money to, instead, the specialty pharmacy company called Philidor. Which, if you read on Citron, or you could read on the Southern Investigative, SIRF, it is a very shadowy organization.

And then it came to the ownership structure of it. And what it seemed to be then is Valeant was issuing an invoice to themselves. It has been 24 hours since I have put this story out. The reason why I did not respond yesterday is I wanted to hear the company’s response. I wanted to hear the sellside analyst response, and I wanted to hear Philidor’s response. It has been 24 hours and I am more confused today than yesterday about the actual ownership structure and the chain of command there.

DREW ARMSTRONG: Andrew, but we do have those statements out right now from the entities you mentioned. So what is your response? You have seen what Valeant has to say. They say no, in fact, we are recording this revenue properly. Philidor has been out there explaining some of their relationships.

So when you see that, given the claims that you have made, which are pretty extraordinary claims, you know, channeling stuffing, phantom accounts, you compare them to Enron, you know — What is your response to what they say is a dismissal of your claims?

LEFT: OK. We’ll start with the claims made by Valeant that Philidor — they do not owe Philidor, but they run the Philidor financials through Valeant. So Valeant has been an overdiscussed company on Wall Street for the past year and a half. From the analyst community, obviously it is a hedge fund darling. There is not one person who have even heard about Philidor until three days ago. And now, we not only hear about it, but they have an ownership structure – they do not own them, but they consolidate their financials underneath them. When they gave that as an answer, obviously, it is not me. Look what the market is telling you. When a stock this morning is trading 25 million shares at $100 a share, that is Wall Street saying hey, we do not trust your answer.

Now, we’ll move to the second part, which is actually even more extraordinary. Why Philidor would have the same exact fax number and the same contact information as one of the pharmacies they supplied to, which was the subject of this $69 million invoice. And the response was Philidor provides web services and IT support for this pharmacy. So Valeant, which apparently controls Philidor, which Philidor in turn provides IT services for pharmacies, Valeant is making websites for pharmacies? And pharmacies are outsourcing their chief privacy officer for Philidor? None of it makes sense, as a matter of fact, and maybe I will do this in the next few days. If I take all the responses from all the sellside and I include with it the responses from the companies, you will see three different stories. To be honest — The responses are amateurish. And that’s why the stock’s reacting the way it is.

ARMSTRONG: You’re saying that this stuff does not make sense and I think a lot of people are looking at Valeant right now and asking a lot of questions. But some of those questions are different than the ones that you’ve raised and they’re more fundamental to Valeant’s business model, but less focused on, you know, illegality, fraud, channel stuffing and some of these comparisons.

Do you feel you have really actually proven some of the claims you make? I mean, you have a title in your reporter, you know, “The Smoking Gun,” as if you have nailed this thing down. That seems like a pretty bold claim to make when most of what you’re doing is raising questions.

LEFT: It is an absolutely bold claim. It’s also not my job to actually prove it. I promise, if you gave me subpoena power, six months and unlimited resources, I would be no doubt be able to prove it. But – based on the available public information that’s out there, on the publicly available information, when I can show shared ownership of something and then I can show an invoice going from one entity to the next, that is what we pretty much call a lot of smoke. And if you don’t want to say there’s fire – There was smoke with Valeant last week and then the smoke keeps increasing on a daily basis. And I think when you saw today all – There’s a reason why the stock is down even today is because once everybody saw the responses from the sellside and from the company and Philidor, Wall Street’s decided that there’s a better chance than not that this smoke is actual fire.

SCARLET FU, BLOOMBERG NEWS: Andrew, you say it’s not your job to prove it, so what is your next step? Are you calling regulators? You mentioned that you might compile the responses and publish another note. But what further action do you take?

LEFT: Right now this is bigger than me. It’s very nice that I got the discussion started. And right now I do believe that there’s a lot of phone calls being made as I sit here asking for actual accountability for Philidor, accountability — not just for R&O pharmacy, but I think we presented five or six other shadowy pharmacies out there that have the same backend administration (INAUDIBLE). And there are a lot of questions being asked.

And as you see today, I think a few broker firms (ph) actually suspended coverage, not because they do not believe in the Valeant business or understand the Valeant business. They suspended coverage because their questions weren’t answered. It is an uninvestable company if you do not know — Two weeks ago, the argument about Valeant was about price gouging, cutting R&D spending, raising prices. While people might not like it, it is legal. It is a legal policy. It might not be a way to build a business and it might be a way to exploit the health care system, but it is legal. What they are doing right now appears to be illegal.

ARMSTRONG: Andrew, I want to ask you. You guys are short seller. When did you get into this trade, how big is your position, are you still in it, and how long are you guys going to be in here? What is the end goal? We talked to people like Bill Ackman in Herbalife. He wants to see it go to zero. Where do you want to see this thing – Where do you want to see this thing up? What are you trying to achieve?

LEFT: I don’t want to see anything anywhere. This is not personal. This is a company —

ARMSTRONG: Well, it has to be a little bit personal — I assume that you have a financial stake in the outcome here.

LEFT: I absolutely have a financial stake but —

ARMSTRONG: How big is it?

LEFT: As a short seller, if you start making things personal, you’re going to go broke real fast. It is not personal. This is business. And as for what do I want to see happen, I want to see the truth come out. Once the truth comes out, I will let the market dictate what will happen. I cannot force the issue. So unlike, let’s say, Mr. Ackman, who thinks he can take the — I know he has probably spent $50 million with Herbalife right now trying to force the issue — I cannot force the issue. It is bigger than me.

I think right now the investors, the shareholders, instead of Mr. Ackman buying 2 million shares yesterday, if I were him, I would be on the phone with the CEO asking for answers immediately. And what is amazing is I think Mr. Ackman gave 170 slides why people should short Herbalife. I wish someone could give us three slides as to the actual ownership structure of the specialty pharmacy companies with Valeant.

ARMSTRONG: Let me just follow up real quickly. Can you say how large your position is? How big are you guys into the short position?

LEFT: I do not discuss my trading.

FU: Have you done anything to change your position since yesterday?

LEFT: I don’t discuss my trading.

STEEL: Andrew, part of what will happen now sort of going up against Valeant is you are really going up against Bill Ackman. He added positions yesterday, Valeant is his biggest portfolio holding. How do you feel about that? What is your relationship with him?

LEFT: I am not going against Bill Ackman. Bill Ackman runs a hedge fund. He could sell out of Valeant tomorrow and move onto another stock.

STEEL: But he’s made it clear he’s definitely not going to do that. He added positions.

LEFT: I’m not talking about his children. I’m talking about a company that he owns. And I think he made a mistake. Mr. Ackman has made mistakes in the past, he will make mistakes in the future.

STEEL: What I mean about going up against is that we have seen, as through Herbalife, is that when Bill Ackman gets behind or against a company he really believes in one way or another, he will sort of fight to the death of that company. It seems like Valeant is the company that he is really supporting.

LEFT: Well that is wonderful that I wish – that I missed the boat because I should have gone up against him in JCPenney. There is no going up against Bill Ackman. Nothing that I have — None of my investment thesis on Valeant has anything to do with Bill Ackman whatsoever. And neither – And what you’re saying, actually, is very dangerous. I don’t think any investor should ever buy a stock because of Bill Ackman or even for that matter, Warren Buffett owns a stock. Do your own research and your own due diligence.

Similarly, you should never short a stock because I come out and say short a stock. What I want you to do is don’t look at the messenger, look at the message. Don’t worry the fact — We know Mr. Ackman is very successful. He owns a beautiful apartment. He is a billionaire. All those great things. Who cares? At the end of the day, look what Valeant is doing. Where is the disclosure with this company? What are the risks currently facing this company and what is the sustainability of their business model? That is what you have to ask yourself.

ARMSTRONG: Andrew, one other question. About the industry, there was a lot of noise yesterday after your report came out, you know, are there other specialty pharmaceutical companies that might be doing the same thing? Do you have any reason to believe that some of these other entities out there that have made comments saying, hey, not us, like Endo, like Horizon, like any number of other large drugmakers? Any reason to believe that there is more of these or additional reports that you plan to publish or research that you’re looking into elsewhere inside this section of the industry?

LEFT: At this point in time, there is no — I do not find any other companies that are using this type of operation as Valeant. It is funny you say that. It makes you even more questionable about Valeant’s business that the other companies yesterday, without even being asked, immediately said, oh, we don’t own a specialty pharmacy. So apparently owning a specialty pharmacy, and I do not know the legality behind that, but it has become the scarlet letter within the past 24 hours and the other ones have said that. So there is a problem.

ARMSTRONG: I want to ask you. You brought up this, you know, ignore the messenger, but I’m sure you are well familiar with this, you have a section on your website that addresses this. There’s people out who have questioned your character before, they’re pointed to — you got in a fight with a dry cleaner at one point, you have been sued a number of times, you know, some company that you were involved with earlier in your career resulted in some sanctions. How do you respond to that, people who are out there saying we should not listen to this guy, his character may not be up to snuff as a credible messenger and researcher on these companies?

LEFT: Don’t listen to me. I have been writing this for 14 years. My newsletter, my track record speaks for itself. I’m a well-rounded person, I have many different facets to my life. I do not wake up and go to work and then just come back. There are many different things that happen in life. I’ve lived a nice 45 years. #you can look at my track record. It speaks for itself. Also, if you do not like what I have to say, I do not care. Read what I write and judge the information in a vacuum.

If — people haven’t learned anything in the stock market in the past 10 years, how absolutely ridiculous is it that every single day there’s buy recommendations from Goldman Sachs, Morgan Stanley, the biggest names on Wall Street, and stocks seem to go down every day? What, because Goldman Sachs hasn’t bought it, does that necessarily mean it’s going to go higher? Absolutely not. Look at the information that’s being presented. Do not be so concerned about the messenger.

STEEL: Andrews, can I ask a really dumb question? You laid out a really strong case of what you — why you think what Valeant is doing is illegal. Technically, though, I mean, owning a shared ownership company, owning your — your distributor, is not actually technically illegal. So you might not like it, you might not like the CEO, you might think they’re too aggressive, but what did they actually do that went against the law?

LEFT: What it seems to be was this. And this is the question – and this is – it’s the question. It is not definitely, throw the handcuffs on them, let’s take them to jail today. It is something that needed an answer. And look at the stock price today. Wall Street was not happy with the answer. And the question was very simply this. There was a $70 million invoice that seemed to be unpaid by R&O Pharmacy, and for those who are more familiar with the story, you will see there are two different R&O pharmacies. One is there are two different websites that are registered. It has really turned into a crazy story . Maybe something that they will write about in books one day.

But that being said, if you’re writing yourself an invoice that is for $70 million that’s unpaid, what is the purpose behind it? Either, as written by the attorneys in the lawsuit, someone is pulling a big fraud on Valeant, or Valeant is trying to pull the wool over someone’s eyes. In this case, it could be an auditor.

FU: So explain to us again why then Valeant would be an Enron. The title of your report is “The Smoking Gun: Pharmaceutical Enron.” Why is it an Enron?

LEFT: What is the title of my report?

FU: “Valeant: Could This Be The Pharmaceutical Enron?”

LEFT: Exactly. The title is “Could This Be the Pharmaceutical Enron?” Not it is. And when I write “could this be,” it is the situation. If people remember, Enron was using to hide losses some offshore entities. OK? They were using shadowy entities to hide losses. Is Valeant using shadowy entities to book revenue? That is a very valid question today. Not to mention the fact if you look — and I actually go in detail in my report — and if you look at it, you will see similarities between the responses and the posturing of the management of Valeant compared to the posturing of the management of Enron. And it also should be known that until the last day of trial, both Lay and Skilling, still blame the short-sellers for Enron.

FU: Andrew, you say that your job here is to ask questions and to put it out there for people to debate and to look into to do their own due diligence. What answers have you gotten that you’re comfortable with in the last two days?

LEFT: Oh. The only thing I am more certain about now is that I am more uncertain. Exactly what I told you. If you look at the responses — and it is not just me — It’s the analysts who cover this company. And it is most surprising to see this because there is no doubt that in the next year Valeant will have to turn to Wall Street to raise money. That being said, watch an analyst today say, hey, we do not really understand what is happening here, is quite alarming. There is no real answer. I am supposed to now believe that Valeant has a pharmacy company that sets up websites for other pharmacy companies and the privacy officers of a local pharmacy, they subcontract out to this pharmacy, which runs its financials through Valeant, although no one has ever heard of it?

And not to mention the fact that if you go look at this Philidor, they were denied accreditation in the state of California because they did not properly disclose who owns them? It is an extremely shady organization. That is it. I mean, if you want a specialty pharma, Express Scripts owns them. This, by the way, not to mention, it is a specialty pharmacy who only has one customer – appears – and that’s Valeant. One supplier, excuse me. And that’s Valeant. So they are buying a pharmacy that they are the only customer of the pharmacy, the only seller to the pharmacy, and they have been running their financials but no one has ever heard of them until two days ago? That is a problem.

ARMSTRONG: Now the Enron comparison, what’s – Remember, you know, Enron went to zero. The company is not around anymore in a meaningful way on the equity markets. What is your target price on Valeant?

LEFT: Boy. So that is more difficult. If you look at every — Valeant is a – pretty much a combination of all the companies that they bought and they pretty much brought everyone for debt. That is their debt. Now we’re going to worry about the equity of Valeant? So what is the equity worth is what we’re asking, the actual stock price?

How much more – Well I think they have a big problem, obviously. We saw two days ago when you saw the stock fell off on earnings, because the debate that has been happening recently about them raising prices. They cannot raise prices. There is competition to their drugs. Right now, I do not think they can acquire any – I don’t think they can acquire McDonald’s franchise right now. I do not think anyone will sell themselves to Valeant, whoever’s speaking right now about it. So you can put that away. And actually you saw the quality of their acquisitions. By the way, no offense to McDonald’s whatsoever.

STEEL: They had good numbers today.

LEFT: Oh my — breakfast all day. Perfect. You see the quality of their acquisitions going down. That being said, if the company is worth – If you want to say the debt is what they bought these companies for – and not to mention the fact they overpaid for everyone of these companies they bought — So they overpaid, and they did it by the tax inversion strategy and by raising prices. So if they lose a little bit of the tax inversion strategy and their inability to raise prices, there is an argument out there that this company is worth its debt. If you want to say no, no, they’ve actually by slashing the research and develop by firing the 2,000 people at Bausch & Lomb who work there and help do it, they have actually built equity by doing that. And then you want to say fine, so if they pay $30 billion and we will put on an extra $15 billion, 50 percent, they have raised the value, then the equity will be worth $15 billion.

So that is where the numbers seem to fall, somewhere in between. But if you believe what we see now is just a hiccup, and everything is wonderful, and they will be able to raise prices and buy other companies and this is just short-term noise, then maybe the stock deserves to be where it is right now.

STEEL: Andrea, talking about what kind of revenue has exposure here to the specialty pharmaceuticals, you’re looking at like $900 million. I mean, it is 10 to 15 percent of Valeant sales. They made over $8 billion next year. So even if what you say is true, it is illegal, someone messed up, someone will have to pay for that — so what? It is $900 million. I mean, can’t Valeant have a huge business model that can offset that?

LEFT: Well first of all, it’s not just a matter of the top line revenue. It’s what percent does that $900 million bring to the bottom line. That is the first thing, not to mention this is a situation of a – what they call a turd in a punch bowl. I mean, you want to say 900 million compared to eight billion. As we just saw with this invoice that’s being questioned by Wall Street, who knows what is real and what is not real? So I understand presumably it seems that specially pharma might be a small part of their business. We do not know. More importantly, what percent is specialty pharma to their profits? And that goes directly to their ability to repay debt.

STEEL: All right. Well Andrew, thank you so much for your time. Your research was fascinating to read yesterday. We really appreciate it. Andrew Left, founder of Citron Research joining us there. Thank you very much for your time.

LEFT: Thank you.

Video for viewing here.

Bloomberg Television

• Become A Funded Futures Trader