Valeant cutting ties with Philidor

31 Oct 2015 | Author: | No comments yet »

Bill Ackman spends 4 hours defending Valeant investment.

Hedge fund mogul Bill Ackman, who complained it was “freezing” in his conference room, held a marathon call Friday to defend his big investment in Valeant, the Canadian drug giant whose shares have been in a free fall since its relationship with specialty pharmacy Philidor came under scrutiny.Activist investor Daniel Loeb’s Third Point LLC said it acquired a stake in Japan’s second-largest grocery and retail group Seven & i Holdings Co. and proposed a spinoff of its supermarket unit.The tangled relationship between Valeant Pharmaceuticals International Inc. and mail-order pharmacy Philidor Rx Services LLC is sparking broad questions about the way some drug makers use pharmacies to sell their products.Pfizer Inc. and Allergan Plc are making progress on the year’s biggest acquisition and are working toward agreeing on a deal as early as next month, people with knowledge of the matter said.

NEW YORK — Valeant Pharmaceuticals, a company that has come under intense scrutiny for its drug prices, has cut ties with Philidor following accusations that it was a ‘‘phantom pharmacy’’ used solely to artificially boost sales. Valeant’s critics say the flap shows some pharmaceutical companies have established or controlled pharmacies expressly to dispense their drugs and ensure reimbursement by insurers—sometimes through aggressive tactics that evade insurers’ efforts to control costs. The drugmakers are keen on a friendly deal and hope to agree on the terms of the takeover, including who will lead the combined company, by Thanksgiving, the people said, asking not to be identified as the discussions are private. The imminent end of Philidor comes just hours after the nation’s two largest pharmacy benefit providers, Rhode Island-based CVS Health and Express Scripts, said that they had ended all interactions with the company citing its business practices. If anyone thought the bad news was behind Valeant, however, a short-seller who last week likened it to a “pharmaceutical Enron,” and accused it of using Philidor to inflate sales, punctured that illusion.

It also proposed the Japanese company’s unit Ito-Yokado Co., which has “notable record of underperformance,” should be spun off and restructured as a standalone company. Once a beloved company among many investors and analysts, Valeant is now under siege from short sellers, who have criticized its accounting and sales tactics.

Valeant bought the right to own Philidor for $100-million (U.S.) last year, but that investment appears to be lost after the pharmacy said Friday that it would shut down operations. Citron Research’s Andrew Left tweeted Friday at 11:25 a.m. that he would release a new Valeant short report on Monday showing it is “dirtier” than anyone knows. Loeb’s investments come as he has extolled Prime Minister Shinzo Abe’s efforts to improve corporate governance, saying the move opens the way for activist investors to gain by helping improve the way companies deploy cash. Such pharmacies distribute costly drugs that require special handling, such as refrigeration, to patients through the mail, and often follow up with patients to ensure they are taking the medicines correctly. Valeant has faced harsh criticism that began earlier this fall when lawmakers in the United States raised red flags over price increases in the drug industry.

Valeant had become a Wall Street favorite and its shares hit a record high as recently as August, but it has been hammered relentlessly since coming under a national spotlight. Ackman repeatedly argued Valeant’s case, conceding that the company may have made missteps but ultimately it was sound, would pay fines if necessary and move on. Allergan is expecting to get more than $350 a share from Pfizer, though talks have not yet gotten into specifics, one person close to the target company said.

Pershing Square walked away with a reported gain of more than $2 billion. “Unfortunately we have a great amount of experience in dealing with activist short-sellers,” said Alan Hoffman, an Herbalife executive vice president. “We’re happy to give Ackman some advice if he needs it.” In his long talk, Ackman answered nearly 200 questions sent by email from investors and reporters. Some 10,000 listeners tuned in to hear the presentation, which was interrupted by technical glitches, hold music and even a bathroom break for the billionaire investor. Now, with Philidor – which accounted for roughly 7 per cent of Valeant’s revenue – out of the picture, concerns are mounting that the company’s broader business could encounter a hard new reality.

While traditional pharmacies dispense medicines made by a number of pharmaceutical companies, Philidor dispensed almost exclusively Valeant drugs, according to former employees. Pfizer also sees the deal as a way to accelerate the break up of the company and may pursue a sale of its generics business as part of the agreement, said the people. Doing so would follow Allergan’s lead, after the company agreed in July to sell its generic-drug business to Israeli rival Teva Pharmaceuticals Industries Ltd. for about $40.5 billion. The debt-rating agency noted that alleged wrongdoing at Philidor “weakens Valeant management’s credibility, further harms the company’s already tarnished reputation, and that these developments exacerbate potential legal, regulatory, and reputational headwinds for the company.” “Pharmaceutical companies deal in a sensitive industry. Then Ackman, whose Pershing Square hedge fund has now lost about $2 billion on paper on its Valeant investment, launched into his defense, even invoking Warren Buffett’s investment in American Express after a huge scandal in 1963, which turned out to be a winner.

The largest U.S. drugmaker said Thursday it’s in “preliminary friendly discussions” about combining with Allergan, which had a market value of $113 billion the day before the talks were announced. Reputation is very important,” said David Kaplan, primary credit analyst at S&P. “The company has a lot of salespeople that market directly to doctors … and when that reputation is tarnished, how does that affect the salespeople’s ability to influence doctors?” Uncertainty over Valeant’s business model has shaken investor confidence. He also listed a slew of drug companies that have survived criminal judgments and said there’s no reason to believe Montreal-based Valeant won’t, too. “Some of the best regarded drug companies are repeat offenders,” said Ackman, listing 20 that have paid a total of $30 billion in fines since 1991. Left’s previous accusations were “completely untrue.” In a statement, the company added: “We have no doubt that he will continue to mislead investors about our business, and we will be ready to respond accordingly.” Valeant declined to comment on Mr. Previously, a spokesman said it “is the patient’s advocate in seeking to ensure that they receive the medication that was prescribed by their doctor at the lowest possible cost to them.” Some industry experts refer to Philidor as a “captive pharmacy,” or one established primarily to distribute a single company’s drugs.

Longtime Ackman-watchers said the conference call — so mobbed by investors and financial reporters that the call-in system suffered technical snafus — was emblematic of a high-risk, high-wire career made up of big bets punctuated by a series of dramatic public confrontations. Ackman’s investing style, while often riveting, is also source of frustration for his investors, said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “There are two Bill Ackmans,” he said. “The public sees him as a guy who’s obstinate to the point of ridiculous.

Their aggravation comes when they think about whether he could make them a lot more money if he wasn’t so obstinate.” The Valeant fracas is part of a wider debate over Wall Street’s so-called activist investors who use large stakes in public companies to influence their direction, often through noisy publicity campaigns. Express Scripts says it is scrutinizing all 70,000 of its pharmacy relationships to examine all “captive pharmacy arrangements” that may raise issues. “We’re more broadly asking…how many are there?” Mr. Henry said. “It’s important for us to understand if there are other models like this, circumventing solutions we’ve put in place to save money on prescription drugs.” Some other drug makers have said they own their own pharmacies. Ackman, one of the company’s largest shareholders, now has a $2 billion paper loss at his $16 billion hedge-fund firm, Pershing Square Capital Management LP. “Life will go on for Valeant,” Mr.

Claire McCaskill (D-Mo.) , the ranking member of the Senate Aging Committee, has sent letters demanding information about the Laval, Quebec, company’s business practices. ABBV 10.07 % said it owns Pharmacy Solutions, which it said helps patients and doctors establish whether they have insurance coverage for expensive AbbVie drugs including Humira, which treats rheumatoid arthritis and other conditions. Ackman said Valeant’s business is fundamentally strong, investors have overreacted and the drug company’s stock is “tremendously undervalued.” He said Valeant shares could more than triple in the next few years if the company reduces its leverage, buys back stock and improves its credit rating. Losing the support of pharmacy-benefit managers, which manage some drug-purchase agreements for their corporate clients as well as process prescriptions and approve payments, was a blow to Philidor.

They’re providing acne medicine—which you can get at your normal pharmacy—at a very high price,” Robert Fulcher, chief operating officer of the National Association of Specialty Pharmacy, said in an interview. Returns of Pershing Square’s closed-end mutual fund, seen as a proxy for Ackman’s overall hedge fund operation, were off 15.9% for the year through Oct. 27. The 49-year-old New York area native started his first investment firm with a partner shortly after graduating from Harvard Business School in 1992, then started Pershing Square in 2004. He became known for placing a few out-sized bets based on meticulous financial research, often backed by political-style campaigns to sway other investors to his side. While the overall percentage of Valeant’s top line has been small, the sales growth through Philidor has been powerful at a time when Valeant, a serial acquirer, is trying to show investors it can grow its own business operations rather than just bulk up through takeovers.

One of his biggest successes involved a years-long campaign in the mid-2000s against most of the rest of Wall Street, warning that the $2.5 trillion bond-insurance industry was a catastrophe waiting to happen. Ackman began speaking Friday, an Herbalife spokesman released a statement comparing the Valeant investment to some of Pershing Square’s previous money-losing bets. His attack on Herbalife sparked heated arguments among hedge fund managers, such as Carl Icahn, who took the opposite position and began buying shares as he clashed with Ackman in several televised interviews.

Ackman has scored big wins at Canadian Pacific Railway Ltd., where the share price has nearly doubled since Pershing Square won a board fight in 2012, and Air Products & Chemicals Inc., where a CEO supported by Mr. At one point during Friday’s call, a Pershing Square lawyer made the case that even if Valeant did something wrong, it probably won’t cost the company too dearly.

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