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Sequoia Fund: Valeant accused of fraud, called "Pharma Enron" -37%
OTTER CREEK LONG/SHORT OPPORTUNITY fund OTCRX Sept 30 2015 Fact Sheet The largest winners in our short portfolio included Valeant Pharmaceuticals, Stifel Financial, and Lululemon Athletica which contributed 47bps, 29bps, and 28bps respectively. We have been skeptical of Valeant’s aggressive accounting and M&A strategy. The combination of a subpoena request by the government into the company’s businesses practices combined with Valeant being a consensus and crowded hedge fund long investment drove material weakness in the stock. We have trimmed our put exposure http://www.ottercreekfunds.com/media/pdfs/OCL_Factsheet.pdf
Thur PM Update Thu Oct 22, 2015 6:05pm EDT Valeant vows to refute 'phantom sales' allegations TORONTO/NEW YORK | BY EUAN ROCHA AND RANSDELL PIERSON Valeant said it would refute them in detail on a conference call with investors.
Valeant shares have lost more than 25 percent of their value since influential short-seller Citron Research made the allegations on Wednesday. The company had already issued statements denying the claims.
Valeant said at least 10 of its executives and board members would participate in a call on Monday,(Oct 26th ) including Chief Executive Michael Pearson, its current and former chief financial officers, and board member Robert Hale, who represents key shareholder ValueAct Capital. "We look forward to our call on Monday where we will address and refute recent allegations," Pearson said. Valeant's swoon this week has hurt major shareholders, including billionaire William Ackman whose Pershing Square Capital Management hedge fund lost about $500 million alone in Wednesday's rout. Rival specialty drugmakers including Horizon Pharma Plc (HZNP.O) and Endo International (ENDP.O) also fell sharply. But the company has also seen signs of support. Ackman bought additional Valeant shares during Wednesday's rout. Standard & Poor's also said it is sticking by its ratings on Valeant, saying speculation about potential fraud was unfounded. http://www.reuters.com/article/2015/10/22/us-valeant-pharms-canada-idUSKCN0SG1WJ20151022
Brings up some interesting scenarios. Is Valeant the only HC company doing what they do or will other Health Care companies (?in your portfolio) be accused of the same? Are the Citron accusations true or have they stretched the story for other reasons? I'm guessing some have already made a killing on this drop. The stock was already down a lot this past week when management said they were increasing research dollars instead of following an acquisition strategy that had made the stock successful in the past.
It does point out the risk you take with a focused fund like SEQUX though. I personally like focused funds. And this fund has the best track record in mutual fund history. If it opens again due to redemption, I will buy.
Brings up some interesting scenarios. Is Valeant the only HC company doing what they do or will other Health Care companies (?in your portfolio) be accused of the same? Are the Citron accusations true or have they stretched the story for other reasons? I'm guessing some have already made a killing on this drop. The stock was already down a lot this past week when management said they were increasing research dollars instead of following an acquisition strategy that had made the stock successful in the past.
It does point out the risk you take with a focused fund like SEQUX though. I personally like focused funds. And this fund has the best track record in mutual fund history. If it opens again due to redemption, I will buy.
Endo (which is headed by a former Valeant exec) is the other main healthcare platform company aside from Valeant. There are a couple of other smaller ones, but I'm not recalling names.
At the last shareholder conference for Sequoia, there was an interesting discussion about Valeant:sequoiafund.com/Reports/Transcript15.htm Here's an excerpt: Question: I guess it is no surprise that most of the questions are about Valeant. So I will add one more. A few weeks ago in the papers it was reported that Valeant raised the price on a particular drug by 400% – 500%, within a very short period of time after purchasing the rights to that drug from another company. I was troubled by reading that. I am curious to hear your reaction. Rory Priday:
I understand why reaction to that could be negative. Obviously, Sequoia and our clients that own Valeant are benefiting from those price increases. But in general, the capitalistic approach to pricing is to charge what the market will bear. Valeant believes that when it buys a drug and it is underpriced, it should charge a price that will maximize the company’s long term cash earnings. Some people maybe feel differently about healthcare. It is obviously a more sensitive topic. Bob Goldfarb:
Embedded in the asking price for Marathon — which is the company that sold these drugs to Valeant — embedded in the sale price was a significant increase in the price of those drugs. In fact, Rory, what had Marathon’s management been advised to do with its prices? Rory Priday:
We were told that Marathon had hired a consulting firm that advised it to take huge price increases. So Valeant was following the advice of the consulting firm, not that Mike would shy away from taking a price increase if he saw an opportunity. We are not really sure why the company decided to sell these drugs, but I think part of the reason was that management was looking at selling another asset. So Marathon needed to get this deal done. That is the one that David mentioned earlier when Valeant was working at 8:00 p.m. on New Year’s Eve. Bob Goldfarb:
A point that the article missed, and I am not faulting the Wall Street Journal, is that either those prices or the volumes at those elevated prices are going to be very short-lived because both of those drugs are subject to genericization and Valeant management expects that they will be genericized within a couple of years. So Valeant had to recoup its investment and more within that short window of time in order to achieve the returns that management was expecting."
There's a lot more in the transcript on the company about it being a serial acquirer, etc. that is interesting. I find it a little disturbing that the fund managers keep referring to Valeant's CEO as "MIke." It seems a little dangerous when a professional investor is on a first name basis with a company CEO. What's that old saw about falling in love with your stocks?
From slides CONCLUSION Seek to achieve: Absolute risk adjusted returns Capital preservation in periods of dislocation Low correlation relative to the market indices Below average volatility relative to the S&P 500 Index
Brings up some interesting scenarios. Is Valeant the only HC company doing what they do or will other Health Care companies (?in your portfolio) be accused of the same? Are the Citron accusations true or have they stretched the story for other reasons? I'm guessing some have already made a killing on this drop. The stock was already down a lot this past week when management said they were increasing research dollars instead of following an acquisition strategy that had made the stock successful in the past.
It does point out the risk you take with a focused fund like SEQUX though. I personally like focused funds. And this fund has the best track record in mutual fund history. If it opens again due to redemption, I will buy.
Endo (which is headed by a former Valeant exec) is the other main healthcare platform company aside from Valeant. There are a couple of other smaller ones, but I'm not recalling names.
Unless I'm missing something in this story, I don't see how Endo would be viewed in the same light given their R&D pipe.
The Sequoia Fund released a three-page letter to shareholders Wednesday, Oct. 28, on their Valeant investment. Link: http://www.sequoiafund.com
Toward the end of their letter, Sequoia fund managers, Robert Goldfarb and David Poppe, state:
"We have been asked by clients and friends why we own such a company. In our view, Valeant is an aggressively-managed business that may push boundaries, but operates within the law. When ethical concerns arise, management tends to address them forthrightly, but in the moment. We would stress the importance of taking a more systemic approach to managing business practices with an eye on the company’s long-term corporate reputation. We believe the company will learn from the current crisis the importance of reputation and transparency to all stakeholders, especially the shareholders."
"We work hard to understand Valeant and its business model. Our belief has always been that Pearson is honest and extremely driven. He does everything legally permissible to maximize Valeant’s earnings. One lesson of recent events is that sometimes doing everything legally permissible to maximize earnings does not create shareholder value. All enduring businesses must strive to earn and maintain a good reputation. Because of its large indebtedness and need to tap the capital markets to make acquisitions Valeant in particular needs the confidence of the credit market to execute its business model."
Is this a teachable moment for Sequoia and Valeant? Think about the ethics of a company that seeks to do everything legally permissible to generate profits no matter how shady it looks morally to consumers, regulators and the public at large.
Another choice quote: "It seems Valeant initially made some effort to conceal its involvement with Philidor, which Pearson concedes was “stupid.” And clearly, Philidor exists to dispense Valeant-branded prescriptions to patients who might be asked to accept a generic substitute at a drug store. This bothers some observers, though every prescription that Philidor fills is written by a doctor who intended that the patient receive a Valeant drug. Our research suggests many dermatologists like Philidor and resent having their prescribing decisions questioned by managed care."
I wonder if their research also indicates that doctors can be compensated by drug companies for choosing certain drugs over others: https://projects.propublica.org/docdollars/ https://openpaymentsdata.cms.gov/ Is there perhaps a conflict of interest when a dermatologist on Valeant's payroll chooses Valeant's drugs over a cheaper generic version and then the consumer doesn't even know because he/she is sent to a Valeant owned pharmacy that doesn't tell them that there is a cheaper generic? Things to ponder.
@Scott That sounds really serious. Wow. I have to figure there will be some criminal investigation and suits over this. What is shocking to me is also how Sequoia missed all of this. I have long been a fan of the fund, but it is surprising when you have a fund this concentrated and a scandal like this breaks and management is completely blindsided. I guess hindsight is always 20-20, but if I was running one of the most famous funds in history and I had 30% of my portfolio in one stock, I would be turning over every rock within a 50-mile radius of that company to see if there were any problems with my investment thesis. I would be calling the companies' clients and its suppliers and the suppliers to its suppliers to see if everything was truly on the up and up. I would have a team of accountants going over the balance sheet. This reminds me of the disappointment I felt about Oakmark Select when Washington Mutual blew up. In a way that one was worse because banks' balance sheets are always a little dodgy so it seems rather foolish in retrospect to invest double digits in a single bank. But still, 30% in this one drug company--in a large fund with I assume the resources for deep analytical research--and one lone short seller games them and spies the first cockroach before they do? It's pretty embarrassing.
This bit of news might seem scary, but I think it's a testament to the fund that its independent directors are actually willing to act independently. Not sure I could say the same about my holdings.
This is why if one plays with focused funds, best to "diversify" and buy many of them
I'm just glad I ended up not buying GOODX and SEQUX. Not that I will never do so. Like I have said many times, when you buy always important than what you buy. And also when you sell. These funds are not buy and hold in my opinion. One way I tackle complacency is by not reinvesting dividends and always re-examining reason for buying the focused fund.
There are a lot of focused funds. Keep monitoring and playing them.
Interesting. When you bring SEQUX up in M* the stewardship part says "Under Review". Apparently because 2 independent trustees resigned. I'm not a premium M* member so I can't read the whole story.
Vintagefreak, if SEQUX hasn't been a buy and hold fund then no fund has been. This has been a great money making fund for over 20 years. You would likely not have gotten as good a return moving out after it lagged in a year, and how would you know when to get back in? IMO, you don't "play" with with a fund like this, you hold on long term to reap the benifits.
IMO, you don't "play" with with a fund like this, you hold on long term to reap the benifits.
I'm thinking Bruce Berkowitz (FAIRX) might be a buyer of SEQUX. At the very least he's appreciating the company...concentrated fund managers often spend some of their time in the "hot seat".
Comments
http://www.osterweis.com/mutual_funds/osterweis/portfolio
Valeant Pharma= 4.3%
citronresearch.com/wp-content/uploads/2015/10/Valeant-Philador-and-RandO-final-a.pdf
OTCRX Sept 30 2015 Fact Sheet
The largest winners in our short portfolio included Valeant Pharmaceuticals, Stifel Financial, and Lululemon Athletica which contributed 47bps, 29bps, and 28bps
respectively. We have been skeptical of Valeant’s aggressive accounting and M&A strategy. The combination of a subpoena request by the government into the
company’s businesses practices combined with Valeant being a consensus and crowded hedge fund long investment drove material weakness in the stock. We
have trimmed our put exposure
http://www.ottercreekfunds.com/media/pdfs/OCL_Factsheet.pdf
Thur PM Update
Thu Oct 22, 2015 6:05pm EDT
Valeant vows to refute 'phantom sales' allegations
TORONTO/NEW YORK | BY EUAN ROCHA AND RANSDELL PIERSON
Valeant said it would refute them in detail on a conference call with investors.
Valeant shares have lost more than 25 percent of their value since influential short-seller Citron Research made the allegations on Wednesday. The company had already issued statements denying the claims.
Valeant said at least 10 of its executives and board members would participate in a call on Monday,(Oct 26th ) including Chief Executive Michael Pearson, its current and former chief financial officers, and board member Robert Hale, who represents key shareholder ValueAct Capital.
"We look forward to our call on Monday where we will address and refute recent allegations," Pearson said.
Valeant's swoon this week has hurt major shareholders, including billionaire William Ackman whose Pershing Square Capital Management hedge fund lost about $500 million alone in Wednesday's rout. Rival specialty drugmakers including Horizon Pharma Plc (HZNP.O) and Endo International (ENDP.O) also fell sharply.
But the company has also seen signs of support. Ackman bought additional Valeant shares during Wednesday's rout. Standard & Poor's also said it is sticking by its ratings on Valeant, saying speculation about potential fraud was unfounded.
http://www.reuters.com/article/2015/10/22/us-valeant-pharms-canada-idUSKCN0SG1WJ20151022
UPDATE 10/29/2015
After hours trade 10/29/2015 VRX (-13.68%)
Dow Jones 17,755.80 -0.13%
S&P 500 2,089.41 -0.04%
Healthcare -0.77%
VRX 111.51 -4.69%
111.51 -5.49 (-4.69%)
After Hours: 96.26 -15.25 (-13.68%)
Oct 29, 7:59PM EDT
https://www.google.com/finance?q=NYSE:VRX&ei=bcQyVrHVCOjGigLAoZWYAg
It will be interesting how quickly these two M* data points change.
http://analysisreport.morningstar.com/stock/research?t=VRX®ion=USA&culture=en-US&productcode=MLE
It does point out the risk you take with a focused fund like SEQUX though. I personally like focused funds. And this fund has the best track record in mutual fund history. If it opens again due to redemption, I will buy.
Ta da ta-da da....
Harummmphhh, Short-Term-Vintage-Freak alter ego says should have moved all of it.
http://finance.yahoo.com/news/controversial-biotech-ceo-martin-shkreli-202123687.html
Here's an excerpt:
Question:
I guess it is no surprise that most of the questions are about Valeant. So I will add one more. A few weeks ago in the papers it was reported that Valeant raised the price on a particular drug by 400% – 500%, within a very short period of time after purchasing the rights to that drug from another company. I was troubled by reading that. I am curious to hear your reaction.
Rory Priday:
I understand why reaction to that could be negative. Obviously, Sequoia and our clients that own Valeant are benefiting from those price increases. But in general, the capitalistic approach to pricing is to charge what the market will bear. Valeant believes that when it buys a drug and it is underpriced, it should charge a price that will maximize the company’s long term cash earnings. Some people maybe feel differently about healthcare. It is obviously a more sensitive topic.
Bob Goldfarb:
Embedded in the asking price for Marathon — which is the company that sold these drugs to Valeant — embedded in the sale price was a significant increase in the price of those drugs. In fact, Rory, what had Marathon’s management been advised to do with its prices?
Rory Priday:
We were told that Marathon had hired a consulting firm that advised it to take huge price increases. So Valeant was following the advice of the consulting firm, not that Mike would shy away from taking a price increase if he saw an opportunity. We are not really sure why the company decided to sell these drugs, but I think part of the reason was that management was looking at selling another asset. So Marathon needed to get this deal done. That is the one that David mentioned earlier when Valeant was working at 8:00 p.m. on New Year’s Eve.
Bob Goldfarb:
A point that the article missed, and I am not faulting the Wall Street Journal, is that either those prices or the volumes at those elevated prices are going to be very short-lived because both of those drugs are subject to genericization and Valeant management expects that they will be genericized within a couple of years. So Valeant had to recoup its investment and more within that short window of time in order to achieve the returns that management was expecting."
There's a lot more in the transcript on the company about it being a serial acquirer, etc. that is interesting. I find it a little disturbing that the fund managers keep referring to Valeant's CEO as "MIke." It seems a little dangerous when a professional investor is on a first name basis with a company CEO. What's that old saw about falling in love with your stocks?
http://gawker.com/heroic-uhhh-pharmaceutical-company-savagely-undercu-1738185665
OTCRX updated 10/27/2015 Webcast and slides from Oct 14th presentation including discussion of potential capacity.
http://www.ottercreekfunds.com/index_webcasts101415.html
From slides
CONCLUSION
Seek to achieve:
Absolute risk adjusted returns
Capital preservation in periods of dislocation
Low correlation relative to the market indices
Below average volatility relative to the S&P 500 Index
Toward the end of their letter, Sequoia fund managers, Robert Goldfarb and David Poppe, state:
"We have been asked by clients and friends why we own such a company. In our view, Valeant is an aggressively-managed business that may push boundaries, but operates within the law. When ethical concerns arise, management tends to address them forthrightly, but in the moment. We would stress the importance of taking a more systemic approach to managing business practices with an eye on the company’s long-term corporate reputation. We believe the company will learn from the current crisis the importance of reputation and transparency to all stakeholders, especially the shareholders."
Bloomberg has a piece on this release from Sequoia Fund, and Bloomberg notes that two independent directors of Sequoia Fund, Vinod Ahooja and Sharon Osberg, resigned from the board last weekend.
Link: http://www.bloomberg.com/news/articles/2015-10-29/valeant-s-largest-investor-defends-drugmaker-amid-stock-slide
I remain comfortable with my investment in the Sequoia Fund.
"We work hard to understand Valeant and its business model. Our belief has always been that Pearson is honest and extremely driven. He does everything legally permissible to maximize Valeant’s earnings. One lesson of recent events is that sometimes doing everything legally permissible to maximize earnings does not create shareholder value. All enduring businesses must strive to earn and maintain a good reputation. Because of its large indebtedness and need to tap the capital markets to make acquisitions Valeant in particular needs the confidence of the credit market to execute its business model."
Is this a teachable moment for Sequoia and Valeant? Think about the ethics of a company that seeks to do everything legally permissible to generate profits no matter how shady it looks morally to consumers, regulators and the public at large.
Another choice quote: "It seems Valeant initially made some effort to conceal its involvement with Philidor, which Pearson concedes was “stupid.” And clearly, Philidor exists to dispense Valeant-branded prescriptions to patients who might be asked to accept a generic substitute at a drug store. This bothers some observers, though every prescription that Philidor fills is written by a doctor who intended that the patient receive a Valeant drug. Our research suggests many dermatologists like Philidor and resent having their prescribing decisions questioned by managed care."
I wonder if their research also indicates that doctors can be compensated by drug companies for choosing certain drugs over others:
https://projects.propublica.org/docdollars/
https://openpaymentsdata.cms.gov/
Is there perhaps a conflict of interest when a dermatologist on Valeant's payroll chooses Valeant's drugs over a cheaper generic version and then the consumer doesn't even know because he/she is sent to a Valeant owned pharmacy that doesn't tell them that there is a cheaper generic? Things to ponder.
LOL.
This is even bigger:
http://www.bloomberg.com/news/articles/2015-10-29/philidor-said-to-modify-prescriptions-to-boost-valeant-sales
And with that, my view of Valeant:
http://www.bloomberg.com/news/articles/2015-10-30/valeant-says-it-s-cutting-ties-with-troubled-pharmacy-philidor
I'm just glad I ended up not buying GOODX and SEQUX. Not that I will never do so. Like I have said many times, when you buy always important than what you buy. And also when you sell. These funds are not buy and hold in my opinion. One way I tackle complacency is by not reinvesting dividends and always re-examining reason for buying the focused fund.
There are a lot of focused funds. Keep monitoring and playing them.
Vintagefreak, if SEQUX hasn't been a buy and hold fund then no fund has been. This has been a great money making fund for over 20 years. You would likely not have gotten as good a return moving out after it lagged in a year, and how would you know when to get back in? IMO, you don't "play" with with a fund like this, you hold on long term to reap the benifits.