Valeant’s Eastern Front

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Poland seems a most unlikely place for the next chapter of Valeant Pharmaceuticals’ saga to play out. Weighing in with about 3 percent of sales, the Polish operations are seemingly a modest contributor to Valeant’s fast-growing bottom line.

But Valeant’s Eastern European operations have recently been the source of a good deal of message board rumor, which in turn has prompted the company to quickly respond.

So the Southern Investigative Reporting Foundation set out to see whether Valeant’s units in Eastern Europe are as robust as their North American brethren. The foundation chose Poland to start with because it’s the third largest geographic segment and, along with Russia, a core component of the company’s emerging markets unit (which represented 25 percent of sales last year). Just as important, unlike Russia, Poland doesn’t have a rich civic tradition of killing investigative reporters or the people working with them.

There’s a lot more inventory in the corporate supply chain than meets the eye, and that’s rarely a good thing, at least in the long term. Moreover, this is occurring against the backdrop of a flat sales trend in Poland.

Given the complex Valeant Europe organizational chart, sussing this out wasn’t a walk in the park.

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On Nov. 10, Valeant’s chief executive officer, J. Michael Pearson, during a Screen Shot 2015-11-30 at 6.16.35 PM

 

 

 

 

 

So Valeant in Poland is clearly moving inventory less rapidly than its peers and per above, has put additional product into the channel earlier this year given the increase to four months of sales. To be fair, the comparisons are not exact given that the other three companies are purely wholesalers and Valeant has manufacturing operations.

A spokeswoman for Valeant, Renee Soto of Sard, Verbinnen & Co., said Polish inventory levels as of yesterday were back to three months’ worth of sales.

The supply chain process in Poland for getting a drug to a pharmacy from the plant is fairly described as labyrinth. Evidence the first is an occasional fourth step in the supply chain process called pre-wholesale warehouses, which are owned by the wholesalers but aren’t tracked by IMS Health. This inventory essentially falls “off the grid” and it’s nearly impossible to see how much is in there or how long it stays.

Industry insiders in Poland say that pre-wholesale warehouses hold inventory from manufacturers and charge them between 1.2 percent to 2 percent of the value of the inventory per month as a fee.

Then there is Myslowice, a 138,000-square-foot warehouse located equidistant between Valeant’s two other facilities in Jelenia Gora (546,000 square feet) and Rzeszow (412,000 square feet). One cannot easily find the facility listed on the company’s website because it leases it from DHL, the giant shipping and logistics company whose Exel unit often leases properties to work with key clients.

A recently granted license allows it to operate as a pharmaceutical wholesaler but unlike the other two facilities its permit allows it to sell on consignment. While consignment sales are fully legal, from an accounting perspective they often raise earnings-quality questions. (Bausch & Lomb, then an independent company, was ensnared in a consignment sale scandal in the 1990s.)

Valeant says the facility is currently its main distribution hub for Poland and Eastern Europe and that it does a small amount — about $4 million — of consignment sales there for a hospital unit. Read its full response.

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