[music playing]
[Don Dahler] You see how greedy this move looks?
Yeah, I could see how it looks greedy,
but I think there's a lot of altruistic properties to it.
[reporter 1] Martin Shkreli brashly raised the price of Daraprim
from $13.50 a pill to $750.
[Lester Holt] The most hated man in America
provoked a lot of anger on Capitol Hill today.
[reporter 2] The "pharma bro" CEO grinned before Congress...
[reporter 3] Martin Shkreli lived up to his bad-boy reputation...
Smirkfest.
[Elijah Cummings] It's not funny, Mr. Shkreli.
People are dying and they're getting sicker and sicker.
[camera shutters clicking]
[reporter 4] The poster boy for hiking drug prices
arrested today for securities fraud.
I was sitting with an investor who was complaining to me
about how awful and unethical Martin Shkreli's actions were
in hiking up the price of Daraprim.
I said to him, "Why is what Valeant's doing any different?"
And he said, "Well, that's a good question."
If Martin was the minnow in all of this...
then Valeant CEO Mike Pearson was the whale.
[theme song playing]
[Fahmi Quadir] I was always this Pollyanna growing up
and thought science and drugs are all for the good.
But that was kind of idealistic and unrealistic.
These are capitalist businesses.
They're trying to make profits for their shareholders
and sometimes they use tactics I wouldn't necessarily agree with.
Short sellers tend to get a bad rap
because we say a lot of things that people don't want to hear.
There are a lot of people who don't like me.
Valeant management certainly does not like me.
But that doesn't stop me,
because I'm driven by doing good by the people
that have been taken advantage of by companies like Valeant.
What I do is not about making money.
Your interest has to be in bringing some of these companies to justice.
[Erin Lee Carr] Can you talk about the rise of the company?
Sure, I can do this really well,
because I have been fighting the company for decades.
Uh, Valeant's forbearer or its origin was a company called Biovail,
which is a corporate clogged toilet based in Canada.
We've got a merger in medicine...
[Boyd] In 2010, there was a sort of a merger of equals
with Valeant Pharmaceutical.
Valeant planted a foreign flag to save money
as a way to skip paying taxes stateside.
[Boyd] And a guy named Mike Pearson took over the remaining company.
Our job is to create shareholder value.
And, uh, so people shouldn't be afraid of...
of anything that happens that helps them create shareholder value.
That's our job.
[Bethany McLean] When Mike Pearson stepped in to run Valeant,
its stock was maybe less than $15 a share.
But at its peak, it hit $262 a share.
It was an incredible, incredible ride.
One of the greatest money-making, uh, opportunities Wall Street has ever seen.
Valeant Pharmaceuticals is continuing its shopping spree,
announcing that it's to buy orphan drug maker Aton Pharma.
Billion-dollar takeover deal in the pharmaceutical industry.
Canada's Valeant is buying Medicis Pharmaceutical for $2.6 billion in cash.
That is about $44 a share.
Over to you, Seema.
Maria, Valeant Pharmaceuticals acquiring Bausch and Lomb for $8.7 billion.
That was a big move in the health-care scene.
Our strategy is a pretty simple one.
Uh, since I joined the company three plus years ago, we've made 22 acquisitions.
We'd like to do this still, but if not, we'll do something else.
[cheers and applause]
[Boyd] Valeant Pharmaceuticals is just simply hoovering up companies.
They're like a vacuum sucking up companies out of the public markets.
At one point, I'd tracked that they had bought 110 companies.
For a while, the entire pharmaceutical industry was terrorized by
and terrified of Valeant,
because they were the company that was getting all of Wall Street's admiration.
This was the hot stock and supposedly these guys were the ones
who had figured out how the pharmaceutical industry was supposed to work.
[woman] Valeant, Valeant, Valeant, Valeant.
On Wall Street, there's smart and dumb money.
The smart money are the premier hedge funds,
some of the best investors of our time.
From the Sequoia Fund, which was run by a protégé of Warren Buffett's,
to Bill Ackman, whose hedge fund Pershing Square
was one of the biggest, most successful hedge funds out there,
to ValueAct.
This fund that is always below the radar, but is regarded as being very smart.
All of these guys were in Valeant.
We originated with Mike this strategy of rolling up,
to use your words, consolidating the pharmaceutical industry.
And Mike has proven that the execution is there.
[McLean] They saw a CEO who promised a revolutionary strategy
that was smarter than what everybody else in the pharmaceutical industry was doing.
It was music to the ears of people on Wall Street,
who tend to think they're smarter than everybody else.
So, if somebody markets themselves as smarter than everybody else,
wow, it's like meets like.
[Boyd] I think, to look at Valeant, you had to be an outsider.
If you're in the Wall Street machine,
you just wanted their share price to go up and up and up.
But on the other hand was this small minority of dissenters
called short sellers.
Two thirds of the broader global financial community
views them as...
loosely affiliated with, let's say, ISIS/Al-Qaeda.
For example, there is this colorful guy out in Beverly Hills,
guy named Andrew Left.
[Carr] In simplest terms, what is short selling?
Oh, boy.
It's amazing 'cause every day the stock market opens.
So every day, any stock has an equal chance of going up or down.
But everybody only thinks stocks can go up.
If 90% of America is looking at what stock's gonna go up the next day,
what if I just flip that thought and say,
"Why don't I try to make a living," a tough one at that,
"saying what stocks are gonna go down tomorrow?"
[Boyd] There are a lot of very, very smart people on Wall Street,
but Fahmi Quadir, she is just a next-level intelligent person.
To use the chess analogy, she saw three to four moves ahead on Valeant.
[Quadir] No company is telling you
why you should short their stock.
Every source of information, everything that the company tells you,
everything you hear on CNBC is largely people telling you to buy a stock.
So to go short, you need to go out there and find the information on your own.
Oh, I forgot one other. Uh, John Hempton in Australia.
[John Hempton] We like to find people who are cheating other people.
[Carr] Why?
Because sometimes they give you trading opportunities that are oblique.
For instance, this highly reputable-looking
pharmaceutical company called Valeant,
was in reality a house of cards,
with people cheating other people left, right and center.
We figured that, at some stage, all of this cheating would come undone,
and the Valeant stock would go down a long, long way.
We follow bad people in markets,
we're very good at picking apart bad accounts,
and we short-sell them.
And that means we make a profit when stocks go down.
Fahmi, Andrew Left, maybe Hempton,
maybe seven people in the world are questioning,
"This emperor has no clothes."
If you haven't noticed about us, we're mostly outsiders. [chuckles]
We didn't need to believe the bullshit.
Fahmi and I chatted maybe 20 times,
and of all the people I spoke to,
she was the person that had the most original observations.
[Quadir] I never, in my life, thought I would be a short seller.
I was just planning to take a gap year
and then start my PhD in algebraic topology.
Um, but that never happened.
I got pulled into Big Pharma consulting.
And then a famous short seller saw the way I thought
and the kinds of lengths I would go to conduct my research.
He saw that I was a short seller before I even knew it.
The thing is, with Valeant, no one wanted to hear the short side of the story.
It was all about the magical numbers that Valeant was putting out.
These non-GAAP adjusted, EBITDA metrics, pro forma cash, EPS, et cetera.
And that's all investors wanted to hear about.
Valeant Pharmaceuticals' main source of growth isn't new drugs.
It's been growing revenue by buying out smaller companies.
Mike, it's all about acquisitions, why?
We've looked at the return on research and development in total.
Um, for the last decade or so, it has not been positive for the industry.
And, um, so we think a much better use of our capital
is to, uh, buy products that are approved,
buy companies that have approved products, and grow that way.
Pearson was a real skeptic of the money that most pharmaceutical companies spend
developing new drugs.
He thought that most of those dollars were wasted. They weren't efficient.
There were better ways to run a pharmaceutical company
much more efficiently in order to make more money for its shareholders.
You might go for three or four years running a pharmaceutical company
and not have any breakthroughs.
And if you're someone who's a McKinsey analyst or a hedge funder,
you might say, "Waste of money," and throw your hands up.
But if you're a scientist, you understand it's just time.
It's time, data and understanding, and you're gonna find it.
If you slash that research and development,
that all goes to the bottom line. It's all profitability.
[Hempton] They bought over 100 companies.
Their formula was relatively simple.
"We will consolidate the accounting, we will consolidate the sales force,
and we won't do science."
And the formula seemed to work.
People had literally made billions of dollars by backing Mike.
They wanted to tell Wall Street that,
"All this money we make, that belongs to you."
But this was a company that pretended to be cheap,
but owned the most expensive corporate jets you could find.
They went and bought a Gulfstream 650.
This is a corporate jet that can fly nonstop from New York to China.
[Carr] Valeant had a 650. What does that say to you?
They like to fly in style.
It's the biggest...
I don't even wanna say "the biggest swinging dick you can have,"
but that's essentially what it is.
[Quadir] Mike Pearson had this reputation of spending most of his time
just talking to investors, taking them on his Gulfstream 650,
flying them out to Duke basketball games.
What you would hear on the street is, you know,
"Oh, don't worry about the balance sheet, don't worry about the fundamentals.
Just talk to Mike."
People thought that Pearson was infallible.
They failed to do basic research on what is Valeant.
But with short bets, it's always wise to do your research first.
I started by looking at the entire history of Valeant's prescription products.
What Valeant was doing after it acquired these businesses
was increasing the prices exponentially and then the sales volumes,
so the patients taking the drug would substantially decline,
but the dollars that Valeant's generating are going up.
So, this is my nighttime reading material
for the past two years.
Some people like to read Buffett biographies,
some like to read Fifty Shades of Grey,
but I spent the last two years of my life
reading every single publicly available document on Valeant Pharmaceuticals.
This is Valeant's investor day at the end of 2012.
They were really ramping up with their acquisitions
and maximizing their value on those products
through co-pay assistance, patient assistance and increasing price.
Health care is just a certain field where, if you're committing fraud,
you're not just committing fraud against your shareholders,
you're potentially committing fraud against patients.
[Carr] When did you and your wife meet?
[John] In the late '80s, in Chicago, through work.
[Carr] What was it like when she told you she had Wilson's disease?
What did you think at the time?
I didn't think anything about it.
She was taking a simple drug four times a day and she was fine.
[woman] Wilson's disease is simply the inability to process copper.
It builds up and, ultimately, it poisons you through your liver.
About one in 30,000 people have it.
[woman] The medication I take for Wilson's is Syprine.
[Carr] Can you talk to us about why it's important for you to be anonymous?
[coughs] Um...
[John] We had spent maybe $30 a month
and that would come out of our flexible savings.
You just paid it, took the drug and you went on.
And then all of a sudden, right after Christmas,
she goes to Walgreens,
and, uh, she calls me and says they want $20,000
for her drug.
[woman] "This can't be my drug. This can't be happening.
I've been on this medication for years."
It just kept going up and up and up.
Today, it's $200-plus per tablet.
[Carr] What's the math on that, $200 per tablet?
It's about, uh, $289,000 a year.
We probably have about $80,000 worth of it in our refrigerator today.
[Carr] What would happen if you stop taking the medication?
[woman] I'd die.
And you're insulated from the cost, until you're not.
Until you lose your job.
Until you find that you can't get health insurance
because the cost of your medicine is so exorbitant.
Until it wipes out your family because you have to pay for it,
because you're gonna die if you don't.
She worries that if her company knew that her insurance was so costly,
that she would be targeted for layoff.
And if she gets laid off,
she's gonna have a hard time finding another job,
given her age and healthcare issues.
And if she has to pay for her medicine herself,
they'll be bankrupt, within a few years.
[woman] I decided I didn't wanna show my face as I work through all of that.
Everybody runs scared from these drug companies.
Because the drug companies
have somehow convinced patients and the advocacy groups,
"If you don't let us have our way, we'll just not make the drug."
[woman] It's really personal and to see such greed and avarice go unchecked,
I think was maddening to him.
And if you know John, he can't stand by and watch it.
[John] You start to try and figure out what's going on.
For 20 years, Merck sold it for about a dollar a tablet.
In about 2007, we noticed that the price of the drug had doubled.
Merck put it into a company called Aton.
Three years later, Valeant acquired Aton.
And that's when the price really started to accelerate.
Syprine had risen to be one of their top 30 drugs.
Well, to be a top 30 drug, it kinda had to have some volume,
and we knew that this didn't have volume. So it was all price.
[McLean] If you're willing to take the price of a drug
that was selling for a dollar a pill
and boost it to $300,000 a year,
if you've figured out that lever and you're willing to use it...
Well, you've got a gusher.
I mean, you really have found the ability to turn straw into gold.
[Quadir] Those in finance, those on Wall Street,
you know, the talking heads that came on CNBC,
they loved Valeant because it functioned as if it was a hedge fund.
Bill Ackman is here,
he is the CEO and founder of Pershing Square Capital Management.
It currently has nearly $6 billion under management.
You were a very good short seller.
Uh, occasionally, we got it right.
-You were a very good short seller. -Occ---
Not always. It's a difficult business.
Bill Ackman is a smart, savvy businessman.
I think he's opportunistic,
and I mean that not in a negative way, but in a positive way.
This is a time of opportunity for people with money.
Absolutely.
It's the single best time in my career to invest.
-To invest money? -Yes.
[Katz] I think Bill is impressed with Valeant's results,
and I think Mike Pearson was an impressive guy
from a financial perspective.
I think Bill Ackman
was in the business of investing money to make money.
Mike Pearson's goal was to be a top five pharmaceutical company by 2016.
And the only way they could really do that
was to buy something even bigger than Valeant.
Allergan was an obvious choice.
[McLean] Allergan is, in a way, the anti-Valeant.
It's an incredibly successful company,
mainly that specialized in cosmetic products.
Any woman who's used Botox would know what Allergan is
because Allergan was the inventor of Botox.
Whatever you think of Botox, it was an invention
and an incredibly successful one at that.
I'm not the Dalai Lama.
Somebody says, "Oh, Dolly, you always just look so happy."
-I say, "That's the Botox." So... -[audience laughing]
Everything was going along just fine.
And here came a company, uh,
really hell-bent on short-term profit and greed.
Enter Valeant.
[applause]
[announcer] Please welcome J. Michael Pearson,
chairman and CEO of Valeant.
It did feel a little like Pearl Harbor.
An explosion of M&A action in pharma.
That is our big story. We've got every angle covered for you.
Top-gun activist Bill Ackman
teams up with Valeant, Canadian drug company,
to bid for the Botox maker Allergan.
We call it Pharmapalooza. What does it mean for you?
This, folks, is Power Lunch,
and this, Sue, is your Power Lunch on drugs.
Uh, so, why does this make sense?
[McLean] Valeant didn't have the money to buy Allergan.
So just briefly on Pershing Square...
[McLean] And so they teamed up with Bill Ackman,
who quietly accumulated the stake in Allergan.
And then tried to, basically,
sway the rest of Allergan shareholders to go with Valeant.
The outsider. That will be the theme...
[McLean] Bill, who's suave and tall, perfectly dressed,
with this shock of white hair, and very healthy,
and then Mike, who's sort of gruff and a little overweight
and kind of slovenly, do this presentation.
In terms of historically, we've grown our business about 55% a year.
Uh, they've grown their businesses in the emerging markets, about 11% a year.
Both Bill Ackman and Mike Pearson were masters in use of fact,
to lead to, in my humble view, erroneous and misleading conclusions.
In the R&D number, you'll see 1.3 minus 900...
That, uh, Allergan's R&D efforts, uh, hadn't been good.
And that we'd wasted money.
Allergan was functioning like a proper pharmaceutical company.
It had a strong focus on R&D.
Mike Pearson talks a lot about how R&D is so inefficient
and he doesn't want to spend money on it.
You know, he says, "Bet on management, not on science."
Our operating committee...
[Pyott] From, uh, Bill Ackman's perspective,
I think he was, uh, very enamored,
and maybe I could use the word beguiled, uh, by, um, Mike Pearson's pitches.
Our job, Howard and mine, and Ari's job is to create value for our shareholders.
I found the first pharmaceutical CEO that I could actually,
"Hey, I could think about investing in this business."
And this is a business that has an incredible story.
[McLean] There's a book called The Outsiders
that became, sort of, cult reading on Wall Street,
and it celebrates CEOs who are mavericks in their industry.
[Ackman] So, we think the only problem with the book
-is they left Mike off the book, -[laughter]
so he'll be, I guess, in the second edition.
[McLean] Bill thought that in Mike Pearson,
he had found another outsider
who was every bit as legendary
as the people who are celebrated in this book.
There are copies of the book as our gift to you.
Encourage you to read it.
It seems in a weird way to me
that Bill Ackman developed a huge crush on Mike Pearson.
Um...
[stuttering] Why did you feel it necessary
to team up with Bill, as charming as he is?
-[Pearson] He's charming? -[laughter]
He was willing to invest $4 billion in us.
Um, or in this transaction.
[stammering] I also think that he has
real credibility in terms of being a smart investor.
If Allergan does not want to negotiate with you,
uh, what are the next steps?
Well, maybe we should ask the 10% owner of Allergan.
So what we do for a living, is we buy stakes in companies, uh,
and we work with them to help them do the right thing for shareholders.
And that's what we're gonna do here.
We have all kinds of ways of making that happen.
[laughter]
What Ackman basically did was quietly acquire this stake in Allergan
in order to help Valeant with its takeover attempt.
And you look at that on the outside and you think,
"That's got to be insider trading. That can't be legal."
You're actually permitted to trade on inside information
as long as you didn't receive the information
from someone who's breached...
[McLean] Even at the time, people said,
"Well, I guess he's checked the letter of the law,
but this doesn't smell right to us."
So it was a controversial company trying to take over a beloved company
using incredibly controversial tactics. The whole thing was ugly.
We really question
the sustainability of the Valeant business model in its entirety.
They are proposing cutting R&D 90%.
We personally take the view that is value destruction, not creation.
To us, it was very clear that their approach
was, uh, in plain English, "asset stripping."
[McLean] They launched this devastating counterattack.
Basically calling Valeant a fraud.
They even compared it to Tyco, which was a notorious 1990s company
where the CEO ended up going to prison.
What's going on at Allergan, I think is unprecedented.
It's completely inappropriate, possibly illegal.
Having Bill, um, out there in the public, you know, he doesn't give up.
Uh, we don't give up either. So, I think that helps...
[McLean] Most people, at least quietly, were on Allergan's side.
A prominent Wall Streeter said to me,
"It's like the dirty drunk attacking your beloved uncle."
[Betty Liu] The scuttlebutt was that, if you were gonna sell,
it was gonna be to anybody else but Valeant. Is that right?
Really, the prime objective was to prevent Valeant
from stealing us at a ridiculously low price.
[Pyott] We had a big fight on our hands.
But for Allergan, there is a good and happy end to this whole tale.
[McLean] Allergan found another bidder, a company called Actavis,
and acquired it for a higher price than Valeant was willing or able to pay.
All of a sudden, Valeant was front page news.
And with the attention came scrutiny.
Why are you short?
[McLean] Jim Chanos, who's a very well-known short seller,
started to talk about all the flaws in Valeant's business model.
Chanos forwards all his work to Bill Ackman and says,
"You're making a mistake on this company. I think it's got real problems."
And unfortunately, Jim does not have Valeant right.
[McLean] Bill Ackman would have walked away from the Allergan deal
with a great deal of money
because Allergan's stock price went up quite a bit during this exercise.
But he didn't walk away.
Instead, he took all that money and then some
and acquired a huge stake in Valeant.
He didn't seem to recognize what other people saw so clearly.
[Hempton] Bill is a funny guy.
I think there's a Wall Street expression for this.
It's, um, "Often wrong, never in doubt."
And people who are often wrong, never in doubt,
are very good to trade against.
They will double up,
they have large amounts of money to bet when they're wrong,
and Bill truly believes it.
[Boyd] The American system takes our best and brightest people,
of which Bill Ackman is certainly a member.
And they get paid outlandish sums to look the other way.
If you're Bill Ackman or other people like him,
they invent rationalizations around it.
[Hempton] These big-name hedge fund managers
are just as capable of cognitive dissonance as everybody else.
The skeptics came out of the woodwork
around the time of the Allergan bid in 2014,
and for the next year or so they couldn't have looked more wrong
as Valeant stock just went higher and higher and higher.
[David Faber] You came out of the Allergan fight a loser.
But there are those who'll say, this company is only built to acquire.
I don't think we were a loser. We were disciplined.
A lot of analysts are expecting some more M&A.
That's your business model. Can we expect more big M&A from you guys?
We'll absolutely start getting back in M&A.
Valeant is now buying bankrupt cancer vaccine maker Dendreon.
It is the deal of the day, if not one of the biggest of the year.
Valeant agreeing to buy Salix Pharmaceuticals for a hundred...
You're never gonna stop doing deals, are you?
Uh, probably not. Life would get boring.
The market was dismissing the skeptics' concerns. End of story.
All I hear is, "Valeant is brilliant. Bill Ackman's a genius.
Mike Pearson is changing the landscape of American pharmaceutical management."
And then, I'm here saying, "I think they're very wrong."
So, I'm on a message board called cafepharma.com.
And I see a bunch of ex-Valeant sales executives
griping about something called Philidor.
Another ex-Valeant rep says,
"What's Philidor? I've never even heard of it."
And they're like, "We're trying to keep it on the down low.
No one really is supposed to know about it."
As a reporter when you hear the--
You know, the magic phrase, "No one's supposed to know about it,"
it's kind of like a teenage boy looking at Playboy.
"I want to know about it."
I found something in the California Pharmacy Board decision,
that denied Philidor the license to operate as a pharmacy.
So right then and there I know Philidor's a pharmacy.
I call up the California Pharmacy Board and they tell me,
"Read that decision closely. We think Philidor's a fraud."
[Hempton] Roddy was the first person to say
that Philidor was specifically a device to rip off insurance companies.
On the face of it, it was just a mail-order pharmacy.
[Boyd] It's designed to be kind of user-friendly.
Low co-pays, three months' supply on your doorstep the next day.
The patient doesn't have to go to CVS or Walgreens,
but the prices are incredibly high.
I mean, they're charging hundreds of dollars for Retin-A.
Clearer skin in two weeks? It's possible with Retin-A Micro...
[Boyd] This is the economic engine of Valeant.
[man] Toe nail fungus? Don't hide it! Tackle it with new FDA-approved Jublia!
[Boyd] Jublia, foot fungus cream,
that if you actually look into it, often doesn't work.
Almost $1,000 per. I mean, it's incredible.
This would have been found out by the customer straight away
if they were asked to pay $1,000 for their vitamin A cream,
but that money was stuck to the insurance companies.
Thousands of scripts for expensive drugs were coming from Philidor.
But the insurance companies started getting wise
and they started rejecting more of the scripts that came from Philidor.
So, Philidor would buy a suburban pharmacy.
And then they would pretend that the script came through that pharmacy.
But the problem is, you can't buy enough suburban pharmacies
to deceive the insurance companies.
So, maybe you could start inventing fake suburban pharmacies,
and I guess you can invent as many fake suburban pharmacies as you want.
In Delaware, 70 different pharmacies were registered by the same lawyer.
My staff member goes down them and says, "Isn't that a character from The Shining?"
Mr. Hallorann? Are you scared of this place?
No, scared of nothin' here.
It's just that,
you know, some places are like people.
Some shine, and some don't.
I guess you could say the Overlook Hotel here
has something almost like shining.
Hello, Danny.
They're Stephen King novels.
[Boyd] I had to connect, inarguably, Valeant and Philidor.
Because Philidor was an actual, literal smoking gun.
So, what is a Philidor?
It's a chess reference.
It's a reference to a famous French chess player
of the, uh, 18th and 19th centuries.
I started throwing other chess terms into search engines
and I came up with one that connected into Valeant
and that was King's Gambit Accepted.
King's Gambit Accepted in chess speak is KGA.
Buried in Valeant's 2014 annual report,
KGA was disclosed as being owned by Valeant.
Eventually, I found one state that had KGA as the owner of Philidor.
At that moment, I knew I had solved it.
[Hempton] Roddy Boyd worked out what Philidor did.
Then, Roddy Boyd found R&O,
which was a suburban pharmacy in California they had bought
in order to hide scripts.
[Boyd] I believe that Philidor was getting around the fact
that they were denied a California State Pharmacy Board license.
They were pulling out all the stops to lie to people, to cover it all up.
R&O Pharmacy was a cutout.
One day, R&O Pharmacy gets a demand letter
for almost $70 million from a guy named Robert Chai-Onn,
who was general counsel of Valeant Pharmaceuticals International.
I mean, Valeant made a big mistake here.
Valeant set the trap itself when it had sent the letter to R&O,
because that opened up the Pandora's Box.
I'd found enough cockroaches and then when I didn't understand this,
I would assume that there was another cockroach behind
and mostly there was.
It's just that Philidor was a rather big cockroach to find. [chuckles]
John Hempton, along with this other band of skeptics,
had been doing a lot of work into Philidor and he knew it was about to come out
and so he sent Bill Ackman just a one-word note.
It was exactly the line from The Graduate.
I just want to say one word to you. Just one word.
"Are you listening?"
-Are you listening? -Yes, I am.
Philidor.
[Boyd] When Bill Ackman initially bought his huge stake,
Philidor probably wasn't apparent to him.
But his staff had been through Philidor.
He could get material non-public information on Valeant.
He had been legally an insider in the company.
[Hempton] The truth is usually a simple story and it's not hidden.
But lies are well hidden and this one had lots and lots of lies.
They didn't have enough cash,
so they invented Philidor so that they'd get more cash.
And they bought this Syprine drug,
which they started ripping off people
to the tune of a quarter of a billion dollars
by holding a gun at their head.
Revenue was going... [whistles] Right.
The formula looked like it worked.
Every quarter, you go to the investors section.
And most of the good stuff is in the footnotes.
So, here, it's a perfect example.
They said they had higher sales of orphan products and they cite Syprine.
They didn't have higher sales.
More people didn't get Wilson's disease.
What they did is they raised the price.
Syprine is tough because it has a really small patient population.
Yet, Valeant somehow figured out how to turn that into a $300 million drug.
Of which they probably make 250 million in profit every year.
Valeant was very good at creating an illusion that they were growing.
And they tried to manipulate the numbers in a way that may have been legal
but was certainly giving investors the wrong impression.
[Quadir] When you're a short seller, you want to know what the company is doing
because they're not gonna tell you.
I'm here on the East Coast.
I can go to Pennsylvania and New Jersey pretty easily.
So I would kind of do a stakeout.
The way I function is I do my work in the shadows
and I take my work and send it to the appropriate authorities.
That might mean I send my work to journalists and the mainstream media
or to Valeant's auditors or to the SEC.
I spoke with as many Valeant employees as I could.
There was a real inflection point in the morale of Valeant employees.
Fahmi had worked out vast amounts that I hadn't
and I had worked out vast amounts that Fahmi hadn't.
And I'm a better accountant than Fahmi,
but Fahmi knows far, far more about drugs than I do.
Fahmi is a medical specialist.
So, all the bits that I work out about, "Hey, they've raised the price,"
Fahmi would tell me, "Uh, yeah, and it's got seven generic alternatives,
and here's why, and here's why this price is silly,
and this is why the system's being ripped off."
[Quadir] And this was the second short position I ever put on
in my entire career.
It was a huge moment for me,
especially since at the time, very few people were shorting the stock.
But I, as I had said, thought it was the perfect moment.
Because I thought the balance sheet was completely tapped out.
Even though I thought I got my timing right,
I still went into the summer of 2015 with health care at all-time highs,
and Valeant went all the way up to $262 a share.
I wasn't too disheartened because I had other short sellers in my ear saying,
"Fahmi, when things get tough,
you just gotta stick with it because you've done the work."
So I stuck with it, and I continued to do my work,
because I was still at that point in my career
where I had to prove to everyone that I knew what I was doing.
So...
after that, Hillary Clinton came out with her tweets about drug pricing.
This is a letter from someone who's here.
She has to take a brand name drug, been taking it since the early 1980s.
At that time, it cost approximately $180 for ten shots.
The latest refill was $14,700 for the same ten vials.
And the company is called Valeant Pharmaceuticals.
I'm going after them.
This is predatory pricing and we're going to make sure it is stopped.
As a short seller, the key thing is waiting for the catalyst.
At what point do people say, "Now it matters."
And I think the election and Shkreli were a turning point.
[Jason Carroll] The drug in question is called Daraprim.
It used to cost $13.50 per pill.
Turing changed the cost to a whopping $750.
That's price gouging, pure and simple.
Did you not expect a 5,000% price increase would result in that kind of attention?
Maybe, maybe not. It depends on how, uh, focused people want to be on the industry.
There have been much larger drug price increases
by much bigger drug companies.
Martin Shkreli bought Daraprim
and he stuck a whole lot of cost to insurance company and HIV patients,
and he got rich. Right?
Valeant didn't just do it with Daraprim, it did it with about 100 drugs.
The Valeant formula was, "We'll do it with everything we can."
This was Wall Street at its worst, funding a drug company at its worst.
When I saw Shkreli in the election, I'm like,
"It's time to dig deep and hard and fast."
Some breaking news on Valeant.
We had heard earlier how the stock was tumbling. How's it going so far?
It still remains sharply lower.
On a report coming out from Citron Research, which asks,
"Could this be the pharmaceutical Enron?" So quite an inflammatory report.
If you read the story, you'll see what I'm accusing Valeant of.
[McLean] Andrew Left is this irascible, West Coast guy who weighed in on Valeant,
calling it the Pharmaceutical Enron.
It should be noted that his financial analysis wasn't right.
He thought that Valeant was using Philidor
to stuff the channel to create sales that weren't really there
and that's not quite what was happening.
But he was absolutely right in the cultural comparisons to Enron,
because both companies had this culture of trying to work the rules,
not paying any attention to the ethics.
Andrew Left's story is wrong.
But the company can't come out and defend it.
And the reason it can't come out and defend it is that
if they defend it, they have to state what's really happening.
And ripping off Wall Street is sort of one thing.
Ripping off Middle America is another thing.
Listen, these are allegations, of course, and often times, you don't wanna be in...
I can't be in a position to tell you whether they are true or not,
but they are focused on a drug called Philidor...
[Boyd] The minute attention went on Philidor,
Valeant sales started completely imploding.
Valeant, let's take a little look at the stock.
But I'm not sure if it's, uh, continued to move down or stabilized in any way.
Where is it now? Now it's in a complete free fall...
This is about $18 billion of wealth that has been destroyed...
It's a snowball that keeps getting bigger and bigger for Valeant.
The stock has since lost $22 billion, a fourth of its value,
and whoever owns those puts basically two million shares...
[Pearson] After we saw the false report for Citron,
we request that the SEC investigate Mr. Left and Citron.
It's very nice and I feel flattered that he's made me a poster child.
But, uh, am I the one who laid off everyone
at the Bausch and Lomb research and development department,
who's raised the price of heart medication?
There's reasons why his stock is here and it's not because of me.
We'll call it what it is, I'm a market participant.
So, obviously, I was interested in the stock price of Valeant.
That being said, the outrage was
when you look at Pearson and Ackman speaking like Valeant's doing God's work.
Then you're like, "Come on."
If we're gonna have a fair dialogue about this, back and forth,
then let's be honest with one another.
And I think what people are really wondering about is,
with all of this business with Philidor,
just how much did you know about what was going on?
Lots of allegations have been made, but, um, nothing has been proven yet.
And I was unaware of any of the allegations.
[Pearson over phone] Good morning...
[Hempton] The company came out with a conference call,
and they were distancing themselves from Philidor as fast as they can.
[Pearson speaking]
But they did put $100 million into Philidor.
And the whole board of Valeant apparently had gone to visit Philidor
before they put the money in.
So it's very hard to distance themselves,
but that was the tone of the conference call.
[Pearson speaking]
[operator speaking]
One investor told me that he thought,
"They'll have answers for this on the conference call on Monday.
They'll take the weekend, they'll have this conference call,
and they'll tell me everything I need to know."
And when they didn't and were evasive on the conference call,
and didn't really give answers, he said, "That's it. I'm selling all my stock."
[music playing]
[Ackman speaking]
Bill Ackman had a conference call,
and it was really clear from the conference call
that Bill had no idea what Philidor did.
[Ackman speaking]
That was a conference call that was done a little bit in delusion.
-And the delusion... Oh... -[Carr] He sounds nervous, right?
Do you remember that? He was very nervous...
He was nervous, except he bet another billion dollars on it.
[Ackman speaking]
Bill wrongly or rightly started to see it as a war of public perception.
And that if he could step in
and answer the questions that Valeant wasn't answering well,
it would turn the tide on this thing.
I think he didn't realize that now it had become reality,
it was no longer about perception. Reality was winning.
[Ackman speaking]
[line disconnects]
There is this one e-mail, um, from Bill Ackman
to Pearson and others at Valeant, saying...
"When every state trooper follows you,
even if you're not guilty, you'll get charged with something."
[McLean] Just when you think things can't get worse,
the news breaks that Pearson has to take medical leave from the company.
There is a fair amount of speculation
that his very hard-living lifestyle caught up with him.
But there's no question that he was very, very, very sick.
But even though Pearson had led them to this point,
they all seemed to believe he was the only one who could save them.
So back Mike Pearson comes.
[Pearson speaking]
Mike Pearson disappeared from the scene
just as the Philidor thing was getting to the point of Philidor being one-off,
to Philidor being indicative of the whole structure.
[Pearson speaking]
With him away for a month and a half, he couldn't control the narrative anymore.
[Pearson continues speaking]
[investor speaking]
[Pearson speaking]
There was a lot of drama that came out,
that was leaked to the press, around Pearson.
Well, what about the whole Philidor aspect of...
[Quadir] ValueAct was obviously on the board,
so they wanted to keep Pearson around.
Do you think Michael Pearson is still the guy for this job?
Mike, he's a great problem solver and we're solving problems as we speak.
Really being as determined as we can be to solve his problems.
We think Mike is the right guy for the job now.
-[applause] -Bill Ackman is here.
[Quadir] But Ackman, who started to ramp up his activism in Valeant,
did not want Pearson around.
So what did we miss?
We missed that someone with a superb track record
of making acquisitions could do something...
Mike Pearson went crazy, in my opinion.
First weekend on the board,
uh, we convinced the rest of the board that Mike had to go.
I was the guy the board asked to call him to tell him he was fired.
[Hempton] Ackman effectively took control of the board.
He fired Pearson,
he got people to the board who were all friends of his.
Then the stock continued going down.
This whole thing made a mockery of this idea
that a company with this august hedge fund on its board was a well-managed company,
because it was all just a complete, um, swear-word show. [chuckles]
[Carr] You can swear.
It was all a complete shitshow. It really was.
It was just a disastrous, uh, couple of weeks that have to go down in history
as the worst crisis management ever.
[Quadir] Mike Pearson went from being a billionaire on paper
because of the work he did at Valeant and the deals he made,
to being a potential criminal
and being investigated on some very serious claims.
So I can't imagine what goes on in his mind.
[Carr] What would you say to Mike if he were sitting here?
Good luck.
[gavel banging]
[Susan Collins] The hearing will come to order. Senator McCaskill.
Thank you. According to your SEC filings, Mr. Pearson,
beginning in first quarter of 2013 through the third quarter of 2015,
you state in your filings that your revenue,
changes in revenue have been driven primarily by price.
Um, yes, uh, pricing has driven more growth than volume,
although that is changing over time.
The average price of your top 30 products
is up 78% over last year.
Now, you can't attribute that to R&D 'cause you don't spend that much on R&D.
Uh, we spend 8% of our pharmaceutical revenue on R&D.
Whoa. Mr. Schiller, didn't you agree in the hearing in the House
it was actually 3%?
Do I need to pull that testimony out?
[clears throat] My recollection was I said it's 3% of total revenue.
Right. This is the business model.
This was not, um, researchers or scientists or academicians
that were trying to buy a pharmaceutical company
in order to promote new drugs.
This was purely a hedge fund move.
You can create as much value acquiring
small, fast-growing companies that develop drugs
as you can by developing them yourselves.
-But doesn't that require price increases? -[Ackman] No.
Wait a minute. You're telling me you're gonna go buy a company
-that's selling a drug for price X. -[Ackman] Right.
And you're gonna give them a price for their company and, therefore, that drug.
-[Ackman] Correct. -And that's gonna be a profit for them?
-[Ackman] Very much so, yes. -Yeah.
And then you're gonna take that drug and charge the same price
after you have put your capital and given them a profit?
-Don't you have to raise the price? -No, I think--
Can you find me one drug that Valeant didn't raise the price on?
I don't know off-hand. [stammers] I don't have the price list.
Mr. Pearson? One drug.
That you didn't raise the price on after you acquired it?
[Pearson] Not in the United States.
They found a drug that had a monopoly.
They bought the company, stripped out all the R&D in the company.
Made no changes to the drug,
and then jacked the price up 300, 400, 500, 700%.
And the American people were left holding the bag.
[stammers] Mr. Ackman, Exhibit Number 81
is an e-mail you received in January 2015 from a man by the name of Drew Katz.
He had Wilson's disease.
I first was diagnosed in the very early '80s.
I'm a lucky one. I'll have my medicine one way or another.
When you invest in a hedge fund, you're investing in managers
and the managers are then going to invest your money.
Once it was disclosed what, uh, the hedge fund owned
and I saw that it owned a lot of Valeant Pharmaceuticals,
it was really, um, challenging.
It was very challenging for me.
-He had contacted you... -[Ackman] Yes.
...about the incredible problem
and the fact that death could result if people couldn't get this drug.
[Ackman] Absolutely.
-And the incredible increase in price. -Yes.
-You called Mr. Pearson. -I sent him an e-mail.
My understanding from you talking with the committee
is that he assured you that anybody who needed help could get it.
Did you follow up to see what they had done about the price of this drug?
No, I took him at his word.
[stammers] We have invested, and for many years
since I joined the company,
uh, heavily in patient assistance programs so we follow up patient by patient.
Their PR that they had patient assistance programs
and it was really helping families that couldn't afford the drug,
we certainly heard testimony from people that said
that couldn't be further from the truth.
[John] Whenever you see a big increase in a drug,
what the drug company will do is they'll come out and say,
"If you can't afford it, it's free."
All they're doing is trying to keep the patients quiet
so the insurer will pay the whole bill.
But that's not how that works.
All insurance is pooled money. Everyone pays for this.
That is why our insurance is so expensive. Those costs get passed on to us.
This is a cost that's being spread to you.
This is why health care, generally, is so damn expensive.
Valeant became one of the most egregious examples,
but they're far from alone.
Huge price hikes over the past five years...
[McLean] Other companies were set up precisely to do the same thing.
[Norah O'Donnell] The price of insulin more than tripled
to more than $700 per patient...
[Anne Thompson] Fifteen new cancer drugs
that cost more than $10,000 a month...
[reporter] EpiPen prices are increasing by 400% since 2008.
All of biopharma's earnings growth last year came from drug price increases.
I texted our board chair while I was listening to the hearing
and suggested we have a board call tomorrow
to discuss, uh, the drugs that are the subject of today's hearing.
And my recommendation is gonna be to reduce the prices of those drugs.
I'm sitting in my office, watching it on a web stream,
and you see Ackman say, "That's it, we surrender.
I'm texting the board, we're lowering the prices."
And a giant...
You kind of exhale, and say, "That's it, we won! It's over."
A year later, nothing's changed.
We've been successful, had some good articles written.
We did try to shame 'em. I thought that would do it.
And sometimes you say to yourself, "Why fight this fight?"
And I think about my daughters.
What if they had lost the genetic lottery? What if they had this disease?
What if they had this $300,000-a-year drug bill
hanging around their neck for the rest of their life like a stone?
Their lives would be destroyed. It'd be terrible.
And it's not just my kids, it's everybody's kids.
My children would be disappointed if I stopped fighting.
They wouldn't know who I was.
[McLean] The great tragic irony is that
their victims are now the ones helping to keep the company afloat.
Valeant can't afford to reduce their profits
by reducing the cost of these drugs.
[Hempton] Valeant told Congress
that they were going to lower the price of these drugs.
And then they didn't do it.
If they dropped the price of the drugs, they will not be able to pay their debt.
Right, so Valeant's still in the business of ripping people off to this day.
[Carr] And now where is it at today?
So today, it is at $16 and change.
And when investors ask me why I'm not taking profits,
I say there is still another 16 bucks to go.
We've taken seriously the requests and the inquiries from this committee.
And we have, uh, dramatically, um, taken
a much more conservative approach to pricing,
and I think that we're the lowest in the industry now
over that time period in terms of pricing.
So we certainly have listened.
If you are an industry leader in this area,
we'll need to have a lot more hearings with a lot more drug companies.
[John] Mike Pearson...
I never really thought about him on a personal level.
I just think he was a bad actor,
operating in an environment where there was no rules to stop him.
So he was just a pirate.
I just look at him and I see a pirate. I don't see anything else.
Clearly, there were things I did not understand about the business
and this was a failure of due diligence on my part, for sure.
[McLean] This is the good side of Bill Ackman.
I think he felt that he had a responsibility to fix it.
Now, perhaps you might say there is still a lot of arrogance at work
in the belief that he could fix it.
To me, the scariest thing about the Valeant story
is this divergence between what's good for investors
and what's good for people in society.
And, in this story, they were two different things
and that didn't matter.
Thank all of you for being here today,
and, um, we are glad, Mr. Pearson, you're feeling better.
Thank you very much.
[Carr] How much of what Valeant was doing and taking part in what we discussed,
how much of it was legal versus illegal?
I think we didn't find anything they were doing that was illegal.
And that's the thing that's startling about this.
-["Lie, Cheat, Steal" playing] - ♪ Authorities have spoken ♪
♪ Demanded your pure devotion ♪
♪ Get magnetized to the ground While the falcons of murder close in ♪
♪ I chose to go guano Y'all know, kinda bat shit ♪
♪ The bright lights of fuckery Stuck in me automatic ♪
♪ I’ll teabag a piranha tank Heart barely beatin' ♪
♪ A wild one who’ll swim like Directly after he's eaten ♪
♪ While holding a toaster oven That's plugged with a fork in it ♪
♪ 'Cause death by electrocution's Like life in New York, isn't it? ♪
♪ Jewel runner bitch make the name stick Not for sale but I'm takin' payments ♪
♪ Lie, cheat, steal, kill, win, win Everybody doin’ it ♪
♪ Lie, cheat, steal, kill, win ♪
♪ Like who really run this? ♪
♪ Like who really run That man that say he run this? ♪
♪ Who, who really run That man that say he run this? ♪
♪ Like who really fund this? ♪
♪ Like who really fund Who say he fund this? ♪
♪ Like who in the world Gon' tell Donald Sterl ♪
♪ Who to put On the “you can’t come” list? ♪
♪ Lie, cheat, steal, kill, win, win Everybody doin’ it ♪
♪ Lie, cheat, steal, kill, win ♪
♪ Everybody doin’ it ♪
♪ Everybody doin’ it Doin' it ♪
♪ Everybody doin’ it ♪