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Bill Ackman calls in ex-prosecutor to explain why it doesn't matter if Valeant broke the law
Unless you are a drug dealer or a securities lawyer, the odds are quite good that you have never heard of Jenna Dabbs.
Jenna Dabbs is what I would call a bit player in the second best drama unfolding in the world of business (Theranos may be even better, but for very different reasons): The unraveling of Valeant Pharmaceuticals and one of its biggest investors, hedge fund manager Bill Ackman.
Last week, Citron Research issued a report charging Valeant with accounting shenanigans — largely through a stake in a specialty pharmacy investors had never heard of. By now, however, Philidor RX Services is practically a household name.
Philidor handled Valeant’s priciest drugs, ensuring that patients who wanted their products didn’t get cheated with the generics that cost-conscious pharmacies like CVS Caremark prefer to dispense. No one knew that Philidor was essentially a Valeant subsidiary and may have been improperly booking sales of Valeant drugs.
On Friday, Ackman hosted a four-hour long conference call (10,000, including NexChange, dialed in) to defend his investment, which is now estimated to be down $2 billion (don’t cry, he’s STILL a billionaire). Yes, Ackman says, he wished that Valeant had mentioned Philidor to investors and the fact that the company had a $100 million option to buy Philidor outright. Bad judgment, that.
Ackman added that specialty pharmacies served a public good — making pricey drugs available to consumers. That’s a complex assertion that sounds great on the surface but is quite self-serving, especially for a company that wasn’t doing original research and development. Valeant is simply an agglomeration of companies cobbled together by the c-suite which then turned around and drastically hiked prices on pre-existing drugs.
I’m sympathetic to manufacturers charging high prices if they reward spending 10-to-20 years on R&D. But today there are a bunch of drug trolls in the market snapping up other people’s work and squeezing individuals or insurance companies for big dineros.
But let’s return to Jenna Dabbs. Ackman introduced her with great flourish: A Columbia Law School grad, a clerk for a federal judge, associate at Covington Burling, and a prosecutor in the office of Prett Bharara, the grand enemy of inside traders. Ackman didn’t mention this, but Dabbs was in charge of narcotics investigations for her last year and a half in the district attorney’s office. Tough. As. Nails.
Dabbs came onto the call to present Valeant’s true liabilities should the company be found guilty of breaking the law.
Bu way of introduction, Ackman noted: “Merck had 27 violations” between 1991 and July 2012. They paid nearly $2 billion in fines. In the past five years, its stock is up more than 50%. Pfizer is up 96%, and it has shelled out nearly $3 billion in fines.
Ackman concluded: “It’s the nature of the industry.” (See chart from the Pershing slide presentation, below.)
Dabbs and her credentials joined Pershing earlier this year, and presented the rationale for investing in drug companies, even if they are dirty players.
“Investigations take a fair amount of time,” explained Dabbs. Take Novartis, one of a string of pharmaceutical companies to come under the scrutiny of the Department of Justice (DoJ). The case became public in April 2013 and the government eventually sought $3.35 billion in damages and civil fines.
Last week, Novartis announced an agreement in principle to pay $390 million. The kicker? Novartis was already operating under a “corporate integrity agreement” — which means it had already been slapped by the government for breaking the rules and was supposed to be on extra-good behavior.
At this point, I left the call. Dabbs had made her point: Even if Valeant broke the law, who cares? Investors care only about the financial impact. Based on the extensive history of the pharmaceutical industry, there is no reason to worry about Valeant’s future. These cases take so long to investigate and are so complex that both the media and Main Street lose interest, enabling the bad actors to survive and even thrive.
But is she right this time?
Twitter always gets the last word on these things. Robert Cyran of Reuters Breakingviews pierces the armor of invincibility in 14o characters:
Ackman’s case is big fines standard for pharma, but don’t bankrupt. OK, but $VRX debt load, lack of R&D, need for M&A etc. are not typical.
— robert cyran (@rob_cyran) October 30, 2015
Andrew Left, the man behind the devastating Citron Research report, had this little promise:
— Citron Research (@CitronResearch) October 30, 2015
Photo: Insider Monkey