Dirty Money (2018–…): Season 1, Episode 3 - Drug Short - full transcript

[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."

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, win
Everybody doin’ it ♪

♪ 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 ♪