(Valeant) Shipping drugs knowing that you probably won’t be paid

Somewhere around July 27, 2015, Isolani became aware that Russell Reitz was withholding reimbursement checks from R&O’s accounts.  You might think that this would force the business to halt operations.  An Isolani court filing (page 8) against Reitz states:

As a result of Reitz’s and R&O’s material breaches of the MSA, Isolani will be forced to shut down operations at the Pharmacy within the next 10 days.

In fact, operations did not shut down.  Documents filed with the court suggest that Philidor continued to ship out drugs on R&O’s behalf until August 31, 2015.

I find this very strange.  Why send out drugs when it is highly uncertain as to whether or not your company will be paid?

When did Reitz’s counterparties know that he was withholding checks?

Russell Reitz’s lawyer: On or before July 27, 2015

In a September 7, 2015 letter to a lawyer representing Isolani (see page 27 from “5.pdf” available here), Reitz’ lawyer wrote:

Your firm and your clients have known for at least six weeks that Mr. Retiz was in receipt of checks paid to his company to protect himself and his company from the massive potential / actual civil, regulatory and even potential criminal liability that your clients have exposed him to due to their malfeasance.

6 weeks before September 7 would correspond to July 27, 2015.  The “at least” part could suggest that Isolani knew before July 27.

Jason M Ohta (Isolani lawyer): On or before July 31, 2015

A July 31, 2015 email to Reitz’s lawyer asks for Reitz to stop hiding checks.  See page 39 from “5.pdf” available here.

Jason M Ohta (Isolani lawyer): Sometime around July 22?

An August 12, 2015 email to Reitz’s lawyer makes various complaints about Reitz’s conduct (see PDF page 26 of “12.pdf” available here).

  • (from Isolani’s perspective) No checks, invoices, and payments have been received for 4 weeks.  4 weeks before August 12 would be July 15.  Later, both Valeant and VPNA (Valeant Pharmaceuticals North America, a subsidiary of Valeant) would state that the last payment received was on July 16.
  • (from manufacturer’s perspective) “The manufacturer has not shipped product in the last three weeks as bi-weekly payments for product due from the pharmacy have not been made”.  Three weeks before August 12 would be July 22.  While Valeant is likely the manufacturer in question, it is unclear to me who the manufacturer actually is.  An Oct 26 investor presentation by Valeant would later imply that Valeant stopped shipping products to R&O around the end of August 2015 (and not around July 22).  However, the presentation also mentions “bi-weekly payments” (see the image below).  This seems to be a very strange coincidence.

In any case, one of R&O’s manufacturer suppliers decided to stop shipping product around July 22 so they probably noticed what was going on.

Valeant: August (31???) 2015

The Oct 26 investor presentation states: “In August 2015, VPNA learned R&O had stopped making regular bi-weekly payments to VPNA.”


If Valeant found out earlier in the month of August, then it wouldn’t make sense that “The value of the intercompany payable at that time was $69M measured at WAC”.  Because shipments would have occurred after “that time” (as shipments occurred up to August 31), the inventory level would likely have fallen below the $69M figure given.  An inventory level (at WAC) below $69M would be inconsistent with subsequent claims.

When did Philidor ship drugs on R&O’s behalf?

According to a document filed with the court (see 12.pdf page 486 available here), R&O continued to ship drugs up to and including August 31, 2015.


On the same date (August 31, 2015) Reitz’s lawyer sent a scathing 4-page letter to the Isolani lawyers, providing “notice of termination of agreements procured by fraud”.  The letter starts on page 8 of “8.pdf” available here.  Here is an excerpt that basically summarizes Reitz’s dispute with Isolani and Philidor:


I believe that the shipments stopped after August 31, 2015.

Analyzing how much R&O actually owes

Looking at how much R&O owes also suggests that shipments stopped on August 31, 2015.  Slide 69 in the Oct 26 Valeant investor presentation gives figures for amounts owed as of “9/30/2015“: $19.3M in payments and $6M in inventory (list price).

Page 9 of the VPNA counterclaim filed October 29 goes back in time and provides similar figures for August 31, 2015.

33. Because R&O had been authorized to utilize Valeant’s copayment assistance program for dispensing these Valeant products, R&O did not collect the full $69,861,343.08 in co-payments and reimbursement checks. Valeant estimates that the total co-payments and reimbursement checks actually collected by R&O as payment for the prescriptions it dispensed amount to approximately $19.3 million.
34. Moreover, R&O is still retaining Valeant products in its inventory having a combined manufacturer’s list price of approximately $6 million as of August 31, 2015.

That the amounts owed stayed the same between the end of August and September suggests that drug shipments stopped after August 31.

Furthermore, the counterclaim states that the last payment was received on July 16, 2015 and that the purchase order terms gave R&O 45 days to pay.  August 31, 2015 is 45+1 days after July 16, 2015.

What is happening here?

It looks like Isolani/Philidor continued to use R&O to fill prescriptions despite:

  1. Reitz holding onto reimbursement checks, making it impossible for Isolani/Philidor to get paid.
  2. Reitz and his lawyer coming around to their viewpoint that Isolani/Philidor are engaged in various illegal activities.  Recall the scathing letter on August 31, 2015.

I have serious doubts that VPNA will be able to collect on these receivables.  While I am not a lawyer, it seems to me that:

  1. Russell Reitz has a strong case if he has the evidence he claims he has.
  2. Isolani has a terrible legal strategy.  Isolani’s court filings do not address Reitz’s claims that Isolani/Philidor behaved illegally.  Isolani’s lawyer insulted Reitz by making unreasonable demands as pre-conditions for non-binding arbitration.  Isolani did not seriously pursue the arbitration route.  Isolani did not answer Reitz’s questions as to which employees work for whom (Isolani?  Philidor?  Valeant?).  Crazily enough, Isolani/Philidor did not seem interested in settling out of court and avoiding scrutiny.  Had they done so, perhaps Valeant’s share price would be much higher today.
  3. VPNA has a terrible legal strategy.  Perhaps VPNA did not know it at the time, but it would be devastating if somebody were to draw concrete links between VPNA and Philidor.  If this were to happen, anybody suing Philidor could go after VPNA’s deep pockets.  As VPNA sent a letter to R&O, Reitz’s lawyer has gone after Valeant for declaratory relief and can try to determine the relationship between Philidor and Valeant.  Any payors defrauded by Philidor will be very interested in what happens in the R&O versus VPNA legal battle.

Aside from the legal strategies that don’t make sense to me, I find it strange that Isolani/Philidor and VPNA aren’t acting like normal businesses.  It makes little sense to continue shipping product when there is uncertainty over payment.  As well, normal businesses would try to quickly resolve disputes and to figure out whether or not they have been defrauded.

Here are some other things that don’t make sense to me:

  • Isolani seems to have a terrible collections strategy.  Isolani recognizes that time isn’t on their side, noting that payors can cancel checks that are in Reitz’s safekeeping.  Yet Isolani has dragged its heels in trying to resolve its dispute with Reitz, taking several weeks to make its ex parte filing.
  • VPNA seems to have a terrible collections strategy.  Reitz’s lawyer claims that R&O has never been invoiced by Valeant.  He requested all invoices from Valeant.  Normally, people who are trying to collect on a payment will re-send invoices.  The answer to complaint (“VRX Answer to Complaint.pdf” page 3, available here) suggests that VPNA did not do this: “As its response to paragraph 10, Valeant admits that it did not respond directly to the letter from Plaintiff’s counsel.”
  • VPNA did not bother to figure out the truth.  This is strange.  The claim that R&O has never been invoiced by Valeant is easy to verify.
  • When Valeant communicates to investors, it seems very adamant that its version of events is correct.  This is strange because basic facts conflict with Reitz’s version of events.

What I’m less confused about:

  • Valeant characterizes the dispute as a “collections issue”, when the real issue is whether or not Philidor (and/or Valeant) engaged in widespread fraud and malfeasance.  If Valeant’s counsel did some basic fact-checking (e.g. talking to Reitz or Reitz’s lawyer, reading the court filings between Isolani and Reitz, etc.), then this characterization seems misleading.
  • The way Valeant communicates to investors suggests that Valeant is very confident that it will collect.
  • Valeant’s Oct 26 investor presentation suggests that Valeant has limited legal liability from Philidor-related issues.  I would point out that Valeant does not necessarily retain the best lawyers in the world.  For example, VPNA’s answer to complaint (“VRX Answer to Complaint.pdf” page 3, available here) states that “Valeant denies that it is a publicly-traded company”.

Who controls the $6M inventory of Valeant products?  Who handled order fulfillment?  Where did the money for order fulfillment come from?

I don’t know the answer to these questions.

  1. Whoever fulfilled the orders likely threw inventory and fulfillment costs (e.g. UPS shipping fees) down a money pit.
  2. If R&O was actually running out of money (as claimed by Isolani’s lawyers), how did “R&O” pay for labour + shipping fees to ship the inventory?
  3. Why does Reitz’s lawyer not say anything about the inventory “at” R&O?  (See the section above “Analyzing how much R&O actually owes”.)  On October 6, 2015 Reitz’s lawyer claimed (letter to VPNA / Exhibit B) that R&O was never invoiced by Valeant.  If he’s not aware of invoices from Valeant, I would presume that he is not aware that “R&O” has $6M of Valeant product.
  4. If the inventory is controlled by Philidor, it seems strange that Valeant is going after the $6M at an entity it supposedly has (some) control over and consolidates as a VIE.

EDIT (11/1/2015):  TheSkeptic21 has an excellent analysis of the origins of the UPS shipments.  It seems that the shipments originated from various cities around the US.  TheSketpic21 also points out that some shipments were destined for Camarillo (R&O’s industrial park offices are located in Camarillo).  Some of them shipments were never shipped.  (And apparently I don’t know how to use the drop-downs on the UPS tracking website.)

Valeant’s claim that it has an ownership stake in R&O

August 31, 2015 is when Reitz’s lawyer sent a scathing letter to Isolani/Philidor, giving notice of the termination of the R&O sale agreement.  If the agreement is void, it means that Philidor/Isolani no longer has an ownership stake in R&O.
October 26, 2016 is when Valeant’s investor presentation claimed that it continued to have an ownership stake in R&O, as shown below in slide 68.


Did somebody at Isolani/Philidor fail to tell Valeant what was going on?

October 6, 2015 is when Reitz’s lawyer sends a letter to Valeant’s general counsel and chief legal officer Robert R. Chai-Onn stating that Valeant may be the victim of a grand fraud.  That was 20 days before Valeant’s presentation.  In that 20 days, perhaps Mr. Chai-Onn failed to perform basic fact-checking regarding R&O, Philidor and Isolani.  Perhaps he missed Reitz’s lawyer disputing ownership of R&O and the bitter dispute between Reitz and Isolani/Philidor.

I have trouble believing that Mr. Chai-Onn can be so incompetent.  Earlier, I mentioned that “Valeant admits that it did not respond directly to the letter from Plaintiff’s counsel [Mr. Reitz’s lawyer]”.  I suspect that Mr. Chai-Onn already had all the facts and therefore had no need to contact Plaintiff’s counsel.

Russell Reitz talks to the press

The excellent LA Times article Pharmacist at center of Valeant scandal accuses drugmaker of ‘massive fraud’ states:

Reitz declined to say whether he had spoken to law enforcement or regulatory officials.

“A lot more is going to be coming out,” he said.

His cryptic comment may or may not have anything to do with what I’ve discussed in this post.  I guess we’ll find out soon.

EDIT (11/23/2015): It’s possible that the thinking behind this is that Valeant was going to ship out heavily discounted drugs anyways.  Part of Valeant’s business model is to make sure that doctors can recommend a drug without having patients come back and complain about the price/unavailability of that drug.  So, Valeant ships out lots of heavily discounted drugs.  By trying to push through reimbursement from payors via R&O, Valeant would have a shot at getting paid closer to list price versus no chance at all.  Valeant may have reasoned that a slim chance of payor reimbursement is better than no chance of payor reimbursement.  However, this does not explain Isolani’s/Philidor’s or Valeant’s collections strategy.

*Disclosure:  No position in Valeant.

7 thoughts on “(Valeant) Shipping drugs knowing that you probably won’t be paid

  1. “When Valeant communicates to investors, it seems very adamant that its version of events is correct. This is strange because basic facts conflict with Reitz’s version of events.”

    Reitz = Valeant?

  2. Glenn, your analysis here is almost comically one-sided. Your ability to read legal documents, in particular should give you pause:

    “I would point out that Valeant does not necessarily retain the best lawyers in the world. For example, VPNA’s answer to complaint (“VRX Answer to Complaint.pdf” page 3, available here) states that “Valeant denies that it is a publicly-traded company”.”

    It is important to note that, in this document, “Valeant” is defined specifically as VPNA, which is a subsidiary of VRX, and not publicly traded. If Reitz’s lawyer claimed that VPNA was publicly traded, it would suggest that Reitz’s lawyer is woefully unqualified to do battle against Valeant’s lawyers. This is precisely opposite to your interpretation. Lawsuits are lost on small details like this. When you read a legal document, always make sure you read the “definitions”.

    • Hi Kyle,
      He should have simply stated that VPNA is a subsidiary of a publicly-traded company. Judges are human beings too and they may look down on lawyers who needlessly waste time and split hairs. If the lawyer thought that the distinction was important, he should not have referred to VPNA as “Valeant” as Valeant could be confused with the publicly traded company. He also should have explained the relevance. Also, the distinction seems irrelevant given that a subsidiary of a publicly-traded company (in most cases) might as well be a publicly-traded company. But to dig even deeper, making that silly statement opens up VPNA to questioning. A key issue is that Reitz’s lawyer is confused as to who is representing whom. Isolani and Philidor and Valeant employees have always been cagey as to who they work for. Whether Philidor = Valeant will be a key legal issue. The lawyer’s attempt to obfuscate VPNA’s identity is a big mistake in my non-lawyer opinion.

      I was well aware that VPNA was a subsidiary of Valeant (the publicly traded company)- I stated so in my post. I did not want to get bogged down in a silly detail.

  3. Pingback: What are Valeant’s (VPNA’s) credit terms? | Glenn Chan's Random Notes on Investing

  4. I think the amount they continued to send out through R&O is not really material to the results that they would sufficiently benefit from this “channel stuffing.” More likely they continue to ship out drugs even when payment is uncertain for the same reason they continue to send out drugs via Philidor during the shutdown transition despite possibly not getting reimbursed by the estranged PBM’s (CVS, Express Script). I think it would be a horrible PR move to just stop providing the medication. It would also be irresponsible.

    I don’t think they are doing it to game results…

  5. Pingback: Drug reimbursement shenanigans – Glenn Chan's Random Notes on Investing

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