I have long been an admirer of yours. It began back in 2003 when I first received a copy of your report on MBIA questioning its triple-A status. Though a lot of the content and terminology contained in it was unfamiliar and difficult to understand at the time, I immediately considered it one of the best pieces of research to ever be published on Wall Street. In closely following your career since then, I have always held in high esteem both your investing acumen, and your comportment. Though some others ridiculed your publicity-seeking nature, I recognized the important role that it played in your advocating for change, and the resulting performance numbers that you attained. It’s frequently the way things need to get done when investing in many publicly traded companies in the 21st century, and you did it better than most everyone.
In addition to your omnipresence, I also admired your tenacity in fighting established and well-funded corporations. Whether it be MBIA or Canadian Pacific, you played an essential and influential role in the capital markets, and they are better off for it (though regressing in so many other ways). I didn’t always agree with some of your investment choices, but if you had a position in a company, I would not even bother taking the other side based on my intuition, knowing that your due diligence was maniacally thorough.
Then came Herbalife. The thoroughness was certainly evident, and at this point the rest of the investment community (and press) had caught on to your brilliance, and deservedly gave you center stage to announce your thesis. While there had always been a lot of questions surrounding the company, you brought a new spin to it, which while quantifiable1, also required a regulatory effort to put the nail in the coffin. This was a perfect mix for your skills. First, you and your team laid out a succinct road map for public officials and prosecutors to follow in shutting down Herbalife. Then, you masterfully utilized PR, media, and lobbying to make sure that government agencies and politicians would be incentivized and/or compelled to root out any fraud.
In my quest to understand both sides of this story, I came across John Hempton’s detailed post about visiting a Herbalife nutrition club in Queens. In reading it, I started wondering if there weren’t considerably more pernicious financial schemes plaguing immigrants and the poor? While I personally may find the underlying business model of Herbalife distasteful and of no economic value, the American view of huckster-like sales tactics is a mixed one. Think of P.T. Barnum on the positive side, or maybe the dual impression of the word ‘chutzpah.’ Using my own standards, I may take issue with Disney World helping to part the lower quartile from their money in a less than judicious manner, but I’d never make the case it should be shut down. Nevertheless if you could convince the authorities to close Herbalife, I wouldn’t shed a tear.
Fast forward almost three years since the beginning of your HLF fight, and I open up my Sunday New York Times in early October and read an article entitled “Valeant’s Drug Price Strategy Enriches It, but Infuriates Patients and Lawmakers.” Heretofore I had always been curious about your long thesis on Valeant, but never had the time to analyze the company closely. Moreover, I had never seen any VRX presentation where you detailed the thesis as succinctly as say, MBIA. After reading the NYT story, I understood why:
And consumers like Bruce Mannes, a 68-year-old retired carpenter from Grandville, Mich., are facing the consequences.
Mr. Mannes has been taking the same drug, Cuprimine, for 55 years to treat Wilson disease, an inherited disorder that can cause severe liver and nerve damage. This summer, Valeant more than quadrupled its price overnight.
Medicare will now have to cover about $35,000 for the 120 capsules he takes each month, and he will have to pay about $1,800 a month out of pocket, compared with about $366 he paid in May.
“My husband will die without the medicine,” said his wife, Susan, who is now working a second part-time job to help pay for health care. “We just can’t manage another two, three thousand dollars a month for pills.”
Cuprimine is just one of many Valeant drugs whose prices have spiked as part of the company’s concerted strategy, which has richly rewarded its investors and made it one of Wall Street’s most popular health stocks.
In a nutshell, what’s good for Valeant, is really bad for Bruce Mannes – and anyone else in his position. Upon finishing the article, I wasn’t sure that buying other pharmaceutical companies and greatly boosting prices on the newly acquired drugs was the sole rationale behind Pershing Square’s thesis to take an enormous position in Valeant, but it was enough for me to have no further interest in the company. In the back of my mind I had a feeling I wouldn’t like what I saw, but it left me with a nagging question “How does Bill Ackman reconcile his moral crusade on Herbalife, with his championing of the management and strategy of Valeant?”
Three weeks later that ‘don’t-dig-any-deeper’ feeling was confirmed. Valeant’s convoluted structure and questionable practices were laid bare for all to see by a journalist working for the Southern Investigative Reporting Foundation named Roddy Boyd, and also from a slightly different angle by the aforementioned John Hempton.
At this point, I became captivated. In reading Hempton’s short-sale recommendation of Valeant, all I could think was that I hadn’t seen such a great piece of detailed securities analysis since …Bill Ackman’s report on MBIA back in 2003! As Wall Street slugfests go, this was Ali vs. Frazier. Unfortunately amid all my excitement over this tete-a-tete, I was also saddened, as Hempton and Boyd’s reports revealed what I feared: Valeant’s business model exemplified the worst of what passes for entrepreneurship in the 21st century. No matter how much you try to convince me Bill, there is no value-added. Worse, in the words of Charlie Munger, Valeant’s practices are ‘Deeply immoral.’
Because in addition to Bruce Mannes, a 68-year old retired carpenter from Grandville, Michigan whose monthly co-pay went from $366 to $1,800, there’s another big victim: the United States. America is slowly being strangled by healthcare costs, and practices like those at Valeant are at the forefront as to the reasons why. Your gain, via your ownership in Valeant, is the country’s loss. I don’t mean to personalize it, because the reality is that in absolute numbers there are a lot of other people and companies benefiting financially from exceedingly high healthcare costs. But the management savvy at Valeant that you laud as the reason for its success, comes across as exploitative, unethical, and possibly fraudulent under close scrutiny2.
In addition to the ‘carpenter’ anecdote above, two others revealed by Hempton, exemplify how Valeant taps the humongous and ambiguous honeypot that is America’s healthcare spending:
Jublia – an ointment with an 18 percent chance of reducing toe-nail fungus and a cost of over $8,000 per course of treatment
Hmm, that doesn’t sound like a very good prospective ‘investment’ were the average workingman have to pay out of pocket. In fact, my guess is that the number of people willing to hit “Buy” on that trade as is, could be counted on one finger. But because of “honeypot” economics, Jublia was created. What are “honeypot” economics? Read for yourself via John Hemptons explanation of a second Valeant drug:
- Onexton – an acne cream. Onexton is a mix of two well known treatments for acne – clindamycin phosphate and benzoyl peroxide. Both these products are available as generics at low cost. However the combination has a price of $478 per tube. If you went to your local pharmacy they would (if they were competent and unbiased) suggest you buy the two generics. However if you go to the captive specialty pharmacy you will be sold the expensive drug (and the cost will largely be borne by your insurance company).
- Specialty pharmacies are often very willing to waive copays and other charges to sell the drug. To put it mildly Valeant would be more interested receiving hundreds of dollars a tube for Onexton than actually collecting the copay. This is not limited to Valeant.
Anyway, as exemplified by these two drugs, Jublia and Onexton3, Valeant is playing the part of the lowest common denominator in the pharmaceutical sector. The company creates an umbrella under which all the other drug manufacturers try to behave slightly-less bad, but also prods them to push the limit because others in its industry act more egregiously. Kind of like the guy going 90 mph makes other nearby drivers think ‘Oh I should be ok going 80-85,’ and so they speed up. In business (especially publicly traded companies) they feel compelled to ‘speed up’ in order to keep up with their peers metrics, which inevitably leads to some cowboy pushing it up to 100 mph. That would be Valeant. You very well may disagree, but I’ll ask you one simple question Bill.
“Would these two drugs ever have come into existence without Honeypot economics?”
The answer is no. Never. Honeypot economics combine all the worst aspects of capitalism and socialism, and at 17% of U.S. GDP, no business taps into it to a greater extent than healthcare. Unfortunately, your gains from Valeant are the country’s loss.
So actually I do mean to personalize it Bill. Why? Well as I said at the outset, I am a big admirer of yours. Therefore, I am asking you to do a complete reversal: sell your stake in VRX and put all your energy into exposing the healthcare dilemma and the effect it is having on the USA, as well as developing and advocating for a completely new plan (may I suggest this as a starting point?). Though many others are also attempting in earnest to reverse this crippling plague, for all the reasons I mentioned – your brilliance, charisma, and tenacity, I can’t think of anyone better suited to actually making it happen.
I know this reversal would be very difficult for you in particular to do, the mea culpa being the least of it, given all that you have at stake. First of all you are somewhat backed into a corner from an investment perspective – the position is too big in regards to the size of the fund, the stock’s liquidity, and the imprimatur your owning it has on how it’s regarded by others. But at this point there’s still enough of a cushion for you to net $80 a share after paying someone to take you out of the block, either directly or through a hedge. If this stock nears $60, the strike on the puts you sold, it may be too late.
Based on your recent option position, I know you’ve done a re-evaluation of the company’s value, but I think there’s a lot of credence in Hempton’s report4. Looking at it objectively, as I can do because I have no financial position, and coming into the story thinking the two main competitors are equally brilliant, Hempton’s argument comes across as way more plausible, because it’s supported by hard facts. Whereas your arguments defending VRX are vague at best, and lacking math. Your attack on Coca-Cola was indicative of your playing a very weak hand, both financially and in the PR department. It’s petty and beneath someone of your intelligence and stature to make negative references towards KO to try to defend VRX’s methods. Given that there’s a higher than normal probability that this investment could be a zero due to the combination of regulatory fines, insurance ‘nix’s’, and excessive debt; and that the upside has been greatly diminished due to truncated growth, the stock is way past the stage where you’re buying a dollar for fifty cents.
Of equal importance, I know that you’ve been working hard the last few years at creating a brand5, and have built an unparalleled infrastructure and soon a new office complex. Though none of it may be in financial jeopardy were the worst-case scenario play out in Valeant, it will all be a white elephant if it were to.
So instead of looking at a possible sale of your Valeant investment as a defeat, you should view your insight to both the company and the industry as a huge opportunity. At some point in your life, and it may not be for another 10-20 years6, making a huge difference on this planet and humanity, will supersede making a large fortune7. Unfortunately were you to wait that long you may not find such a crucial and timely issue about which you are so knowledgeable, and you may not have the visibility that you do currently, vis-a-vis being in the public’s eye. In other words, the timing is right.
And you are the right person. We need someone with your financial skills, because from an economic standpoint, no issue is greater to America than healthcare. It is slowly strangling this country, and only this country, as all others have made whatever compromises are necessary8 to keep costs in check – largely thanks to our ridiculously inefficient system subsidizing their R&D and other expenses. You should take on the healthcare issue with the same determination you do everything, and spend the next decade doing so. Much like Tom Steyer did when he left the firm he founded to halt climate change.
In summary, you have a very difficult choice to make: support Valeant and maybe see it make you and your investors money, or save America. I for one, would hate to see your marvelous talents wasted on making an incremental buck9 from a business such as Valeant. In order for you to do so, the company, and by extension the healthcare industry, would have to be allowed to resume its prior “growth” course, and in so doing laying waste to the U.S. economy and our way of life. Deep down I think you are one of the few people aware of this predicament, and a decade from now would come to regret the profits you made from Valeant. The only question you have to ask yourself is “Do I want to be a multi-billionaire in a devastated country, or a superhero in the one that I know now?”
- roughly ‘what % of revenues were sold internally to distributors?’ [↩]
- and I’m sure that you, of all people, have scrutinized this closely – though possibly too late [↩]
- and they very well may be the worst of the batch – and thus best tagged as anecdotes. But I think this is just because VRX execs were just able to do their best work on them [↩]
- the one linked to above [↩]
- permanent capital, not calling yourself a hedge fund [↩]
- though given your age, my guess is it will happen sooner, possibly much [↩]
- this is not an anti-money rant, it’s just the impression I get from having read about you and thus knowing your background [↩]
- socializing medicine, curtailing use of expensive products, ignoring patent laws, not paying doctors a free market wage [↩]
- remember Bill, the marginal value of a dollar, or billion, after the 1st billion, is highly diminished. Personally, I wouldn’t know that for a fact, but it sounds right, no? [↩]