What's up guys and welcome back to wall street millennial on this channel, we've covered many corporate frauds and failures. Today we're taking a look at one of the biggest frauds in the u.s pharmaceutical industry, which was worth tens of billions of dollars at its peak. The fraud pitted two hedge fund titans bill, ackman and andrew left against each other in a high-stakes battle, with billions at stake. We're talking about the 2015 valiant scandal before we get into the video we'd like to thank our channel members.

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Valiant pharmaceutical can trace its roots back to 1959, when a young yugoslavian refugee named milan, panic started the international chemical and nuclear corporation or icn in his california, home. In the early days, he developed a drug called ribovarin which treats hepatitis c. Instead of using these profits to fund new research and development, he used it to acquire other niche pharmaceutical companies. Many of the acquisition targets were small operations and the founders were willing to cash out for a cheap price.

By acquiring many smaller companies, he was eventually able to build icn into a massive player in the generic drug industry. In 1994. He enlisted the company on the new york stock exchange, the company's strong growth allowed the stock price to surge 8 700 percent. When panic eventually stepped down as ceo in 2002, the company changed its name to valiant pharmaceuticals and continued milan's strategy of acquiring smaller players within the industry in 2008, valiant hired a new ceo by the name of michael pearson, he doubled down on the company's strategy of Growth through acquisition signing well over 10 billion dollars worth of deals by 2014, and the strategy seemed to be working in the five years after pearson took over as ceo, the company's revenue increased more than tenfold to 10.4 billion dollars in 2015..

Their earnings before interest taxes, depreciation and amortization increased more than 20 fold. During the same period, the acquisitions were funded primarily by issuing debt when pearson took over. The company only had a few hundred million dollars worth of long-term debt after his acquisition spree. This number grew to over 30 billion dollars, because valiant was spending all of its money on new acquisitions.

They didn't have any left to do research and development over time. Their drug portfolio would become outdated and they would lose market share to new drugs from competitors. This is why they had to keep acquiring new companies with new drugs just to maintain their current competitive position. Despite the high debt load and lack of organic innovation, investors loved the growth story and went all in on valeons the stock price, which had languished over the prior 10 years, surged more than 26 times to a high of dollars per share.

In 2015., one of the investors attracted to valeon's growth story was bill. Ackman ackman is the founder and ceo of the pershing square hedge fund, which at the time managed roughly 20 billion dollars around the same time valiant proposed their biggest merger. Yet they offered to buy rival pharmaceutical company allergan for cash and stock consideration worth roughly 50 billion dollars. Ackman's hedge fund was the largest single shareholder in allergan.

At the time with the 9.7 stake, ackman was a large supporter of the deal, as it represented an almost 30 percent premium over allegheny's stock price. Within a month of receiving the proposal, allergan's board of directors rejected the deal. Valeon's strategy is to acquire companies and strip them to the bone by cutting r d expenses. This allows them to squeeze out a few years of high free cash flow, while the takeover bid did represent a substantial premium over the existing stock price.

Much of the consideration was in valiant stock allergan's, ceo david piott said, quote: baion's model of cutting and slashing really doesn't work for more than a very short period of time. Unquote, while allergan rejected valeon's offer, they did accept a higher offer from another pharmaceutical company called actavis, which valued allergan at 66 billion dollars being a significant shareholder of allergan ackman made more than two billion dollars from this transaction, but he wasn't ready to go home just Yet he was a big believer in valeon's, slash and burn strategy. He bought a 10 stake in the company at a cost basis of 190 per share. This represented a roughly 4 billion dollar investment and was one of the biggest positions in pershing square's portfolio, but just a few months after ackman made his position, another hedge fund manager, andrew left, shorted valiant, shares and published a report alleging fraud in the company.

He published an eight-page report in which he compared the pharmaceutical company to enron at the crux of the short case was valiant's relationship with a small pharmacy company called philidor. Rx valeon purchased an option to acquire philidor while they technically didn't own philidor. The option allowed them to consolidate philidor's financials into their own income statement, and balance. Sheeting left claimed that philidor owned.

Another pharmacy company called rno, which is a customer of valiant valiant, was using this structure to improperly book inner company revenue as real revenue. They were essentially using philidor to book fake sales. What is your response to? What they say is a dismissal of your claims. Okay, we'll start with the claims made by valiant that philidor, they do not own philidor, but they run the philidor financials through valiant.

So valiant has been an over discussed company on wall street for the past year and a half from the analyst community. Obviously it's a hedge fund darling, there's not one person, who's even heard about philidor until three days ago, and now we not only hear about it, but they have an ownership structure. They don't own them, but they consolidate their financials underneath them when they gave that as an answer. Obviously it's not me.

Look what the market's telling you when a stock this morning is trading 25 million shares at 100. A share: that's wall street, saying hey, we don't trust your answer. Well now we'll move to the second part, which, which is actually even more extraordinary, why philidor would have the same exact, uh, fax, number and the same contact information as one of the pharmacies they supply to, which was the subject of this 69 million dollar invoice and The response was philadel, provides web services and i.t support for this pharmacy, so valiant, which apparently controls philidor, which philidor in turns, provides i.t services for pharmacies, valiants making websites for pharmacies and pharmacies are outsourcing their chief privacy officer to philidor. None of it makes sense, additionally, valiant would use their relationship to philidor to increase sales of their expensive brand name.

Drugs valiant employees, pretending to be philidor employees would advise customers to buy the valiant name brand drug, even when there is an identical generic drug available. For a fraction of the price, this amount to a transfer of wealth from the unsuspecting pharmacy patients to valiant after a short report was released. The stock price started to free fall. It was now looking like michael pearson's success over the past five years was built on a foundation of deception.

Despite the allegations, ackman defended his investment in valeon, saying the company is strong and will recover from the short seller attacks. Another controversial part of valeon's business was their practice of acquiring the rights to life-saving drugs and jacking up the prices immediately thereafter. They basically did the same thing that martin shkreli did, but on a much larger scale, valiant didn't get as much media attention as krelly, because michael pearson was a much less exciting person. A few examples of valiant's price gouging include fluke design, an anti-fungal medication.

They raised the price of this drug in the united states to be 100 times more expensive than in other parts of the world. They raised the price of heart disease medication isoprene by more than 500, just a few months after they acquired the relevant patents. They raised the price of diabetes medication glumetza by 800, shortly after they acquired the company that produces it in 2015., their price gouging eventually raised scrutiny from regulators and they were forced to ease off this strategy going forward. In light of the accounting fraud allegations, the sec u.s attorney's office, as well as regulators in canada, were investigating the company with the new public and regulatory spotlight.

Shined onto them valiant had to change its whole strategy away from price, gouging and accounting gimmicks. Unfortunately, they lacked the r d infrastructure and expertise to be successful by legitimate means. They were also saddled with 30 billion dollars of debt, which they were very close to technical default on virtue, hathaway's, charlie munger described valiant as a morally bankrupt business and compared it to a sewer bill. Ackman really wanted you to speak to him because he said you're doing reputational damage to a company.

You don't understand he wanted you to change your mind. Will you change your mind on valiant? I don't think so. You know, there's been a complaint about my saying that valiant is the sewer, but i thought the complaint would come from the sewers, never heard to me that anybody would be defending valiant. The main thing that valiant did that was unbelievably clever was to pay the consumers part of the deductible for the drugs.

They were selling. That is totally illegal criminal under the medicare laws, but that doesn't apply under the laws under various state laws and they saw that loophole, and so they did with all the drugs that weren't covered by medicare. They paid the consumer share of the deductible and they tried to pretend that it was a charitable contribution when really it was the functional equivalent of bribing the other fellows purchasing agent. So it was sewer was too light a word one tip off when they paid a hundred million dollars for an option on the company to buy it for a dollar or something the sort.

I've never seen that in my life and kept it secret and changed the account yeah that that you know something's wrong, and anybody knows something anybody in wall street would tell you that there's there's something nefarious behind a transaction like that man in early 2016, michael pearson, Was forced to step down as ceo in light of the company's improper financial conduct, their new ceo, joseph pappa, tried to make a turnaround by selling off their non-core assets and rebranding to bausch health companies in an effort to move on from the troubled past. But turning around the company is easier said than done. As of the end of 2020, they've only been able to reduce the debt, modestly, from 30 billion to 24 billion dollars. Since the new ceo took over, the stock has traded sideways, while he was at least able to stop the bleeding it significantly underperformed the rest of the market in 2017.

Ackman finally threw in the towel and sold the stake in the company for a four billion dollar loss. This makes it one of the most disastrous investments in hedge fund history: alright guys that wraps it up for this video. What do you think about the valiant scandal? Let us know in the comments section below, if you enjoy this content, make sure to hit the like button and subscribe. So you don't miss future uploads as always.

Thank you so much for watching and we'll see in the next one wall, street millennial signing out.