Bill Ackman spends 4 hours defending Valeant investment.
Before the group of East Coast investors arrived late last year, Camarillo pharmacist Russell Reitz had been promoting his modest prescription-filling business as “your local pharmacy.” That abruptly changed when he agreed to sell his pharmacy, in a quiet suburban office park, to the group for $350,000. 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.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. As he continued as manager, Reitz began finding his store’s name and his national pharmacy license number on an avalanche of prescriptions nationwide. The billionaire investor spent four hours — stopping for a bathroom break and to order lunch — telling investors how the besieged drug maker could weather the storm of investigations and negative headlines even if they lead to big fines. “Life will go on for Valeant,” said Ackman, adding that Valeant Chief Executive Michael Pearson was “headed in the right direction” by severing ties with Philidor. In a matter-of-fact tone, Ackman spent more than four hours mostly defending the high-flying Canadian pharmaceuticals giant against allegations ranging from price gouging to presiding over an interrelated web of companies that resembles, in the word’s of a short-seller, “Enron part deux.” “Even with very reputable companies, stuff happens,” said Ackman, who runs Pershing Square Capital Management. “The best thing about a company that goes through a scandal means they’re going to be that much more careful about this kind of thing going forward.” Amid much fanfare nearly three years ago, Ackman alleged publicly that Herbalife, a Los Angeles nutritional products company, was operated as a pyramid scheme and that its shares would fall to zero. 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. 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. 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. 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 became one of the hottest healthcare stocks in recent years by buying other firms’ medicines and then swiftly hiking their prices by as much as 500%. 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.
Specialty pharmacies such as Philidor are part of a little-known strategy by Valeant and other pharmaceutical companies to sell high-priced drugs that insurers otherwise wouldn’t pay for. 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. 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. The overall picture that Ackman, and his coterie of legal and financial advisers, sought to paint was one of a misunderstood and occasionally bumbling, but essentially decent business.
Many of Valeant’s expensive brand-name medicines — including Jublia for toenail fungus and Solodyn for acne — are similar to generic medicines available for far less. 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.
He dedicated little time to exploring the question of Valeant’s relationship with Philidor, the pharmacy at the center of the recent scandal rocking Valeant’s shares, and instead lashed out at what he characterized as an inept public and investor relations effort by Valeant. When patients fill those prescriptions at the pharmacy, insurers often require the druggist to switch to the generic — causing Valeant to lose the sale. 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.
Particular criticism was leveled at a Valeant PR adviser, who Ackman described as having done a “horrible job.” “Ackman cannot know what Valeant is really doing and this call proved that,” said Bill Kavaler, a New York-based managing director at brokerage firm Olivetree Financial. “There is nothing he said that isn’t already known.” He also blamed rival drugmakers for stirring the pot when it came to Valeant’s reputation, suggesting envy at Valeant’s success had contributed to the company being cast in a negative light during recent weeks. “There are a lot of people in the pharma sector who don’t like” Valeant CEO Mike Pearson, Ackman said. To get around that blockade, Valeant has been distributing coupons on the Internet and to doctor’s offices across the country that allow patients to lower or even avoid a co-pay — if they ordered the drugs through Philidor. 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. 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.
District Court in Los Angeles, few people knew about Valeant’s close ties to Philidor, even though the mail-order pharmacy was increasingly crucial to its bottom line. 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. Left took another poke at Valeant and Ackman while he spoke today, saying that the drugmaker was more likely than Herbalife Ltd. — a stock Ackman has been betting against for years — to fall to a stock price of zero.
Last week, under pressure from angry investors, Valeant revealed more about Philidor, saying it had an expanding “network of pharmacies” across the nation. The concern among investors is that the giant drugmaker’s fast-rising sales growth is dependent on these mail-order pharmacies, which could be operating illegally. 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. Wearing a burgundy T-shirt and jeans, Reitz seemed forlorn as he sat at a wooden desk, a crisp white pharmacy coat hanging from the back of his chair.
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. 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. His efforts to link the two companies became so frequent that one person who dialed into the call said Ackman was trying to wrap “himself up in Buffett’s clothes.” Valeant, while cutting ties today with Philidor, has denied Left’s claims that its accounting is fraudulent. As Reitz pressed executives at Philidor’s headquarters in Hatboro, Pa., for answers about the questionable practices, his emails became increasingly desperate. “Time is of the essence,” Reitz wrote to Andy Davenport, Philidor’s chief executive, on July 20. “You must provide me with substantive responses immediately, as my license and professional reputation are at stake.” What Reitz hadn’t known at the time he signed the sale agreement was that Philidor — and Valeant — were facing a hurdle in getting prescriptions filled in California, the largest market for medicines among the states. 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. Valeant’s bonds declined, with the company’s 2025 debt falling 3 percent, the most in a month, to 84.12 after Standard & Poor’s Ratings Services downgraded the company’s rating to “B+” from “BB-“. 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.
Valeant’s shares plunged 38% on Oct. 21 when Andrew Left, a short-seller at Citron Research in Beverly Hills, released a report accusing the drug company of using the pharmacies in an Enron-like scheme of inflating profits. 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.
Yet on Thursday, Valeant’s stock fell again when the nation’s three largest drug-benefits managers — CVS Health Corp., Express Scripts Holding Co. and UnitedHealth Group Inc.’s OptumRx — said they were removing Philidor from their pharmacy networks. Ackman began speaking Friday, an Herbalife spokesman released a statement comparing the Valeant investment to some of Pershing Square’s previous money-losing bets. Philidor was shutting down operations, he said. “We understand that patients, doctors and business partners have been disturbed by the reports of improper behavior at Philidor,” Pearson said, “just as we have been.”
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.