Glossary of Hostile Takeover Terms with Discussion

That, I feel, is the heart of the problem. Dan.

 

Headline update:

Tanner (Valeant) and Davenport (Philidor CEO) were convicted of fraud.

https://www.bloomberg.com/news/articles/2018-05-22/ex-valeant-executive-guilty-of-taking-pharmacy-ceo-s-bribe

As the long-time readers of this thread may remember, those two (along with Pearson, Schiller, and Shacknai) were on my list of those I expected to end in Prison.

However, I think that what they were convicted of they were innocent of (well, 'innocent' may not be the best word here); and the real crime hasn't been prosecuted (yet?).

Imagine a mob boss paying a hit man $10K to kill someone. Neither the hit man nor the mobster are ever prosecuted for the murder, but since the hit man can't give any credible answer as to why he was paid $10K, he is convicted of stealing (defrauding) the money from the mobster (who is suddenly a victim in this narrative!). In my book, they are both guilty of murder, but the hit man didn't "steal" any money from the mobster; he received it for services rendered (as criminal as those services were). This is basically what happened, in my view, here.

Philidor was never a legitimate business. It always was an insurance fraud front for Valeant. It pretended to be a pharmacy (an organization licensed to act in the interest of patients) while actually being an arm of a drug maker (acting in the opposite interest). Insurers were being fooled, pressured, and defrauded to cover not-particularly-effective $1000 branded ointments -- often on never-asked-for auto-refill plans -- when more effective $10 generic options were available. Overall, by my guess, about $2B were stolen from insurers before Philidor imploded.

To a certain degree, the Philidor (very temporary) success fueled Valeant's attempt to acquire Allergan (my opinion). And, to a lesser extent, the uncompromising Allergan defense helped start the process that eventually unmasked Philidor. Valeant, according to some of the publicly available documents I read when I was engaged in this story, was pleasantly shocked with just how much Philidor was bringing in, and figured (my opinion) that important segments of the Allergan product portfolio were just perfect for the Philidor method. They planned to acquire Allergan and then make a killing by Philidor-izing the product portfolio. Allergan knew about Philidor and just how sleazy it was. Allergan very lightly worked some of that into it's anti-Valeant story, but stopped at saying that Valeant was increasing its profit through unwarranted and unsustainable price hikes of existing products (which Philidor certainly made more possible) rather than going all out and claiming insurance fraud. It wasn't until about a year afterward when independent journalists uncovered (what Allergan already knew and never fully leveraged) the Philidor story that the full implosion took place.

I have sometimes wondered, in the "what-if" world of alternative history, if Allergan missed a killer defense opportunity. We now know that Wall Street didn't have a clue about Philidor (before the implosion, I automatically assumed that it did -- Philidor wasn't a secret -- Allergan knew about it, the doctors knew about it, even I knew about it and I'm not even in the industry; and no one who knew about Philidor thought of it as anything other than a Valeant front). We also know that as soon as Wall Street found out about Philidor, Valeant imploded even faster and more forcefully (total-dollar-wise) than Enron did two decades before. One has to wonder what would have happened if Allergan forcefully pointed attention to Philidor.
(To be fair, John Hempton, an Australian tax investigator turned hedge fund manager, did figure enough of this out to short Valeant while the Allergan battle was ongoing, and he did write about it in his newsletter at the time; his fund, Bronte Capital, ended up making $5M on the short sale -- which is a ridiculously small profit to be made when you are the first to foresee a $90B collapse!)

But, back to the newly convicted.
While Philidor was pretending to be a Pharmacy, and not an arm of a drug maker, it had a nominal CEO -- Davenport. But the man really in charge was a Valeant executive (Tanner). Ostensibly, Valeant had no ownership interest in Philidor; but through a series of shell companies and "zero-priced options", it had full control. (The whole concept of ZPO -- the right to buy an asset for $0 -- does not pass the accounting smell test, in my opinion; if you purchase the right to buy something for $0, you own it; don't pretend otherwise) Tanner and others used a whole ensemble of subterfuges and slights of hand (like using fake email aliases) to avoid (in their mind) generating a paper trail of the Valeant control of Philidor; but no one was even pretending to be fooled. Everyone who knew Philidor, knew it was controlled by Valeant (even if they didn't know or care about the legalese of the mechanism). Tanner and Davenport were handsomely rewarded for the services they were performing for Valeant. Davenport got $50M for those ZPOs. Since Valeant couldn't directly pay Tanner -- their own employee -- for the equity of Philidor (an ostensibly independent company), they had Davenport pass $10M of the $50M he got to Tanner. Considering that Philidor was bringing in something like $2B in (insurance fraud) money to Valeant, paying $50M to the executives who made it work was just a modest bonus.
But then, when the investigators arrived, rather than zeroing in on the $2B insurance fraud (maybe that's still in the works, idk, I'm only opining from what we know now), they asked about those payments. The $50M from Valeant to Davenport, that could be explained. Davenport was selling them ZPOs in Philidor (whether one considers ZPOs as options or as selling the company is beside the point, Davenport was selling something real -- the Philidor equity -- for the $50M). The $10M from Davenport to Tanner, like the payment from a mobster to a hit man, that couldn't be explained. If Tanner is a Valeant employee, and Philidor is not a part of Valeant, then Tanner shouldn't be paid by Valeant for the equity in Philidor. The real explanation, that Tanner was controlling Philidor on behalf of Valeant and was being paid for that, like the real explanation that the hit man didn't steal the money from the mobster but earned it fair and square (ish), could not be used in any legal setting.
So, again, like the hit man being convicted of stealing money from the mobster, Tanner was convicted of stealing the $10M from Valeant. According to the conviction, Tanner was controlling Valeant (or, at least influencing it, with respect to Philidor) on behalf of Philidor and was paid a $10M bribe for his services (whereas, in actuality, the line of control was in exactly the opposite direction -- Tanner was controlling Philidor on behalf of Valeant and was paid a bonus for doing such a great job).

I suppose it's still possible, between now and sentencing, that our convicted "hit man", in exchange for a reduced sentence and no further prosecution against him, will testify that he didn't steal the money from the mobster, but rather was paid a fee for committing a murder ordered by the mob boss -- and thus get the mob boss convicted of murder. Or, in this situation, have Tanner and Davenport admit that Valeant was paying them to push Valeant products under the guise of being an independent pharmacy.

We shall see.

Have a great Memorial Day, everyone!

Dan.

 

Quick note:

A few hours after I wrote this post, Bloomberg had an editorial that basically said the same thing.

https://www.bloomberg.com/view/articles/2018-05-23/valeant-pharmaceuticals-kickback-case-has-shades-of-enron

 

Hi everyone.

I finally got around to trying to figure out -- not very successfully, I must admit -- what's the deal with AbbVie.

With Valeant, I understood the point: Valeant was a fraud (readers of this board know I maintained this view long before the market figured it out too). They planned to defraud Allergan shareholders by giving them a small cash payment and a lot of near-worthless (as we later found out) Valeant stocks in exchange for a profitable company. They would have fired most employees to minimize expenses and got as much as they could, as fast as they could, out of already existing sales momentum before the products would've inevitably collapsed for lack of ongoing support. Fortunately, the Allergan board was resolute enough and astute enough to figure it out and successfully defended.

With Actavis, I also got the point: It was an inversion. A gimmick to game the taxing system into moving the company base outside the US so as to avoid the overreach of US corporate taxes (The US taxes worldwide profits, every other country only taxes profits made in that country; therefore companies with significant non-US sales can reduce their taxes by expatriating themselves). I am not at all a fan of gaming the tax (or any legal) system, but it was perfectly legal and in the interest of the shareholders. Inversions were quite popular then, and the size of the deals were getting too large for the taxing authorities to ignore. This was one of the last big deal before the taxing authorities changed the rules and largely ended inversions.

With Pfizer, I also got it, sort of: It was meant to be another inversion, and a much bigger one (if competed, it would have been the biggest inversion of all times, more than 3 times larger that the largest completed inversion ever). At the time, I thought that there had to be a better (value creation) reason to the deal, because if it's only about inversion, no way the taxing authorities would just let it go unchallenged. I was waiting for the legitimate reason to be detailed. There was no legitimate reason, and the taxing authorities (to the surprise of the market, but not to the surprise of readers of this board) changed the rules, cracked down on inversions in general, and the deal collapsed.

This time, with AbbVie, I just plain don't get it. I don't see any fraud -- AbbVie is a legitimate company in every respect I can judge. I don't see gaming the tax, patent, regulatory, or any other legal framework (all of which post-Actavis Allergan has been trying at various points). But, I am also not seeing any real synergies or other value creation process. The addressed markets and R&D are too different -- this is not a situation where the sales or scientists of the two companies could somehow do better when combined (or do equally with less resources). So, where is the value creation? The question is not if AbbVie "needs" Allergan to grow once the Humira patents expire or if Allergan is getting a good price (the questions that seem to obsess the analysts covering the transaction), but if the combined company can create more value than the two companies can separately. If not, then there is no price which is a win-win for both sets of shareholders. I do expect the deal to close, because none of the constituencies that matter (the two sets of shareholders, primarily; but also other relevant stakeholders like management, employees, and customers) are really opposed (ok, there are some unions and public interest groups that are whining, but they are not really very relevant constituencies); but I still don't see the purpose of this deal.

-- Hope everyone is doing great!

Dan.

PS: A bit of a personal update since last time here -- I left Farmers Insurance to join an Artificial Intelligence startup where I am the Chief Science Officer. Vicky left Sente to start her own startup, Flawless Canvas (If you want to know what she's up to, follow her instagram at www.instagram.com/vicky_vega_phd). And, as always, if you want to know more or get in touch, hit me on LinkedIn (or hit Vicky on instagram); I always accept requests from Allergan people.

 

Relevant writeup in FiercePharma:

https://www.fiercepharma.com/pharma/ftc-throws-extra-hurdle-before-abbvie-s-allergan-buy-as-roche-and-spark-dwell-limbo

Short version: The FTC is not quite ready to greenlight the AbbVie merger.

Dan.

 

Hey everyone!

Another year passing, more holiday greetings. Hope all are doing well!

Vicky's instagram blog ( www.instagram.com/vicky_vega_phd ) is getting some attention. She writes a lot about the science of skincare. I've been 'betting' her that she'll reach 1000 followers by new year (she is at around 900 now). So, if you guys can push her over the top, I promise to spend a half day writing another serious blog post here. Deal?

Happy holidays!

Dan.

 

Hey, the deal was that if Vicky reaches 1000 followers for her instagram blog by New Year, I'd spend half a day writing a post. Between when I posted this deal (12/23) and New Year, her follower count went up by only a handful (from just under 900 to just over 900). So, no going around saying I broke the deal! She is now a bit over 1600, but not on the strength of my shameless promotion...

That said, I'm always happy, when asked, to add a few words.

FTC: Yes, the FTC has pretty much approved the deal. There are other regulators involved, but the FTC was the big one. If they really want to close the deal now, not much stands in the way. (Except for the overall shutdown of just about everything due to COVID-19)

Consent Decree: That's the regulators equivalent of an out-of-court settlement. Regulator says "I'm concerned about X, Y, and Z". Applicant says "If I did A, B, C; will that address your concern?". {some negotiations}. Both sides sign a deal where applicants agrees to take some specified actions and regulator agrees that those actions are sufficient to address their concerns. Regulators prefer CD over just denying an application (and then, likely, having to defend that denial in court when the applicant appeals), and applicants prefer the certainty of a CD over taking the confrontational approach with its long delays.

COVID-19: That's been scrambling everything, so no prediction here (personally, if I may venture a bit of a political editorial, I feel that, at this point, the mitigation is more damaging than the threat; and there is a competition between media-facing experts, politicians, and talking head about who can propose the most economically destructive ideas so they can show "courage" and "leadership" -- the curve is already too flat, further flattening is counterproductive).

Stock Market: The one thing that could permanently blow this deal to pieces is if share prices were to diverge or decline to a point where the $120 cash component would no longer make sense (so far, the share price of the two companies, even with the overall market volatility, is not very far from where it was when the deal was signed). As long-time readers of this thread may remember, at the time of the Teva deal, I was concerned that Teva would pull out because the overall pharma market declined a lot between when the deal was signed and when it was to close (my comments were that Teva should bail, but won't. In actuality, Teva didn't pull out, the deal closed, Allergan made out like bandits, and we now know that Teva almost went bankrupt when the added revenues couldn't support the added debt). At this point, I still don't think that AbbVie should pull out, but with further stock market declines (or, with the blizzard of new decrees, some major governmental intervention to the detriment of the long-term health of the industry), I may change my mind. If it was an all-stock deal, no problem -- both stocks would just move in tandem (so Allergan shareholders trade their less valuable AGN shares for equally less valuable ABBV shares). However, with a huge portion of the deal in cash, ABBV would be giving a lot of cash for a company that is worth less than before.

Dan.

PS, with continue shameless promotion of Vicky's blog, here is the link: https://www.instagram.com/vicky_vega_phd/