Courtesy of ZeroHedge. View original post here.
The stock of infamous pharma rollup Valeant peaked almost exactly one year ago. Since then it has been one relentless, first slow then precipitous drop, which wiped out more than 90% of the company's market cap, forced the CEO to resign, led to various Congressional hearings and civil lawsuits after it became a symbol of what is wrong with corporate America, and brought the company to the verge of a technical default. That was the good news.
Now the bad – Valeant is now under criminal investigation.
The WSJ reports that the Feds are investigating whether Valeant also defrauded insurers by shrouding its ties to the infamous mail-order-pharmacy, Philidor, whose emergence on the scene from obscurity one year ago, catalyzed the early days of the stock crash.
The WSJ writes that the lawyers, in the U.S. attorney’s office in Manhattan, "are pursuing an unusual legal theory, previously unreported, that Valeant and a closely linked mail-order-pharmacy, Philidor Rx Services LLC, allegedly defrauded insurers by hiding their close relationship."
The U.S. attorney’s office in Manhattan, headed by Preet Bharara, is investigating possible mail and wire fraud violations, one of people familiar with the matter said. The wide-ranging mail and wire-fraud statutes make it illegal to use interstate communications as part of a scheme to defraud another out of money.
In a statement emailed by a Valeant spokeswoman, the company said Wednesday: “Valeant has been cooperating and continues to cooperate with the ongoing Southern District of New York investigation.” A spokeswoman for the U.S. attorney’s office declined to comment.
The probe is expected to be the most serious Valeant currently faces, and could lead to criminal charges against former Philidor executives and Valeant as a company, one of the people said. The investigation could conclude as soon as this year, the person said, adding that the timetable could also slip.
Ultimately the issue at hand is price, and whether Valeant's management defrauded clients by not disclosing its Philidor relationship.
Prosecutors are investigating whether Philidor, now defunct, made false statements to insurers about its ties to Valeant, something the company has been widely accused of in the media before. Philidor helped patients get insurance coverage for higher-priced Valeant drugs, for example for toenail fungus or acne treatment, instead of cheaper alternatives. At issue is whether insurers thought Philidor was neutral rather than in the service of Valeant, the person said.
Lawyers for Philidor in an April 2016 letter to a Senate committee said Philidor’s conduct was “agnostic” to its ties to Valeant and it dispensed drugs that “mirrored the independent judgment” of prescribing doctors.
The government lawyers are also examining some of Philidor’s business practices, including rebates and other compensation provided by the pharmacy to customers who used Valeant products, as well as Philidor’s efforts to seek reimbursement from insurers, the person said. As such, it is possible that Valeant will be made into a sacrificial lamb to "explain away" soaring drug prices; one where Michael Pearson may well end up going to prison.
Philidor has previously said its employees “behaved ethically” when dispensing drugs to patients. Philidor representatives couldn’t be reached for comment.
The probe will likely not come as a surprise. Valeant has previously said in public filings that U.S. Attorney offices, including in Manhattan, have requested information from it on a wide range of subjects including “patient assistance programs…its former relationship with Philidor and other pharmacies” and “the Company’s pricing (including discounts and rebates), marketing and distribution of its products.”
The WSJ adds that prosecutors are investigating Andrew Davenport and Matthew Davenport in connection with Philidor. Corporate reports show Andrew Davenport was one of two founding Philidor principals. He was Philidor’s chief executive officer when the Philadelphia area-based company wound down its business earlier this year.
Documents filed with California’s Board of Pharmacy in December 2014 and June 2015 list Matthew S. Davenport as Philidor’s chief executive. Matthew Davenport is an executive with BQ6 Media Group, its website says. The company shares Philidor’s address. The Wall Street Journal has reported that former Philidor employees said BQ6 consulted for Valeant. Neither Matthew Davenport nor Andrew Davenport could be reached for comment, and BQ6 didn’t respond to requests for comment.
The probe will focus not only on Philidor management but also the extent of the ties, including Valeant’s role in Philidor’s growth. Valeant told investors in October that ”the bulk of Philidor’s volume is related to Valeant products.” A lawyer for Philidor the following month referred to Valeant North America as its only client.
It is unclear if former CEO Michael Pearson is involved in the lawsuit – he is not named in the WSJ piece, although it is difficult to see how he would avoid being implicated in a full blown criminal probe.
Ironically, he may not be the biggest loser: at worst he will end up in some "Martha Stewart" special, in a minimum security facility for white collar criminals, where he will do 2-4. A far worse fate could befall Valeant's biggest "lifetime" investor, Bill Ackman, who appears to have put on the worst trade in history: short Herbalife, where he has a $1 billion short on the expectations it is a criminal ponzi scheme (and which has soared recently after being cleared by the FTC), and is long Valeant… which may end up being the real criminal fraud.
[And read this from Business Insider, Bill Ackman and Valeant can't shake this problem that everyone forgot about.]
The stock is plunging -14% after hours. It has much more to drop.
