giofranchi

Ok, so let me sum this up: I started this thread basically because I loved the business model and the super efficient Pearson. Then the Allergan saga came along, accusing VRX they didn’t have organic growth (among many other things which didn’t bother me much). I wasn’t sure about Allergan’s accusations, but I was positive organic growth is important, and to tell the truth VRX wasn’t disclosing enough about it. I therefore sold my investment, and started watching from the sidelines. Showing, at least I hope so!, that I am not emotionally attached to a business, but that, when I don’t see what I want to see, I am able to part ways with any investment of mine. Almost a year passed without major acquisitions during which: 1) VRX’s GAAP Results started to converge with Adjusted Results very quickly, 2) VRX’s Debt went down very quickly, 3) Most important to me: VRX started disclosing organic growth on a quarterly basis. I liked what I saw and I built again a meaningful position in VRX. Fast-forward a few months and some guys, who have never expressed any opinion about VRX before, start calling it a fraud: it is true VRX is reporting organic growth finally… but it is useless because they are telling you lies! And why do they think VRX is a fraud?... Because an anonymous blogger seems to have found some inconsistencies in the numbers of a small acquisition made by VRX years ago… No matter VRX has made 140 acquisitions so far, many much larger than the one found by that anonymous blogger… If the numbers don’t add up for that acquisition, surely the whole VRX must be a fraud too! Right?... And has that anonymous blogger checked his so-called “analysis” with VRX? Has he asked questions to VRX’s IR? In order to be sure he hasn’t missed anything? Or misinterpreted something? Absolutely not!... In any argument you must hear both parties, before coming to a conclusion, won’t you agree? If you had lived through the Allergan saga, you would know this very well: every Allergan’s accusation was shown to be false, when VRX meticulously replied. Sorry, if I don’t change my mind, it is not because I am not able and I never do… As I have already proved with VRX!... But it is because the reasoning that should change my mind again about VRX is either nothing new, or weak and unconvincing. Cheers, Gio

Ross, Cash EPS have nothing to do with their “Deal Model”. The great majority of pharma companies which buy other companies (see AGN, PRGO, ENDP, etc.) report Adjusted EPS, and they make the same adjustments VRX makes to calculate Cash EPS. Let’s say I have verified overall results instead of their “deal model”, and I have not find anything unusual. If you think I am glossing over their IRR calculation, it is simply because I basically think it is no more than guesswork… I don’t really think we have enough information to come to any meaningful conclusion. Until, that is, they provide us at least one detailed example of how their “deal model” actually works… By the way, you may ask: why haven’t they already provided that detailed example? Again: has Mr. Joffe discussed in great detail one acquisition Bidvest has made in the past? It might be so, I don’t know… But I would say that is the exception rather than the rule! Cheers, Gio Gio, You are just talking past me on this one. Saying your deal model is one thing (acquisition/restructuring costs added to purchase price), then reporting a number that has restructuring costs added into Cash Generated is a huge red flag in my opinion. I am asking how you are comfortable with this. I have a lot of respect for Value Act and I would trust their analysis, but I don't understand how you can add restructuring costs back into your cash flow.... As for Bidvest. You are right, they don't provide a huge amount of detail for any given acquisition, but the numbers work out for the company as a whole. Their website gives an enormous amount of detail on how every operating segment of their business is performing. One of my huge hangups with VRX is the way they operate in general. I guess there are two ways to do business. The Valeant model in which you gut the company you acquire and strive for ruthless efficiency, or the Berkshire/Bidvest model where you acquire good businesses and give them a competitive advantage i.e. Berkshire with capital or Bidvest with vertical integration. Think about VRX vs Berkshire or Bidvest in 20 years. If VRX stopped acquiring, their revenues would decline over the long term due to patent expiration and being out innovated. What you have in VRX is a company that operates like a PE corporate raider. The model is good for investors, but destroys the companies they target. They don't produce anything, they don't innovate. They maximize current products and pay to develop the last few drugs in their pipeline and that's it. Hopefully they don't get too big and successful because that would literally be detrimental to our health. Ross, Have you read the Sequoia transcript? They clearly say VRX adds resteucturing costs to the purchase cost... You think you have found an instance in which they didn't?... And what should that prove?... Without the right context, how could you judge? And what that should tell us about the remaining 139 acquisitions? Imo nothing. The Sequoia guys have been following VRX for many years now... They have expressly said VRX does add restructuring costs to the purchase cost... A possible exception, which probably has an explanation we simply ignore, doesn't bother me much! As far as VRX business model is concerned, I have no doubt about it, as I have already expressed many times before. Cheers, Gio

Is this gio fellow for real? Maybe I haven't expressed my thought clearly enough... I meant: either you can muster confidence enough in what they are saying or you can't... Just don't think you can "prove" anything about a company which has made 140 acquisitions so far... Because you simply can not. At least not with the amount of information they discolse. Of course then you could believe whatever you'd like!? Cheers, Gio

Ah! Of course it might be that AGN, PRGO, ENDP, etc. are all frauds… But, when JNJ or NVS make some acquisitions, they also adjust results the same way (at least they did, when I was investing in them). JNJ and NVS are not frauds, right? ;) Cheers, Gio Moreover, the way they adjust results to report Cash EPS was strongly accused and put to test by Allergan last year. VRX replied very clearly and convincingly! This is why I think they would most probably respond very convincingly about their "deal model" too. Cheers, Gio

Ah! Of course it might be that AGN, PRGO, ENDP, etc. are all frauds… But, when JNJ or NVS make some acquisitions, they also adjust results the same way (at least they did, when I was investing in them). JNJ and NVS are not frauds, right? ;) Cheers, Gio

Ross, Cash EPS have nothing to do with their “Deal Model”. The great majority of pharma companies which buy other companies (see AGN, PRGO, ENDP, etc.) report Adjusted EPS, and they make the same adjustments VRX makes to calculate Cash EPS. Let’s say I have verified overall results instead of their “deal model”, and I have not find anything unusual. If you think I am glossing over their IRR calculation, it is simply because I basically think it is no more than guesswork… I don’t really think we have enough information to come to any meaningful conclusion. Until, that is, they provide us at least one detailed example of how their “deal model” actually works… By the way, you may ask: why haven’t they already provided that detailed example? Again: has Mr. Joffe discussed in great detail one acquisition Bidvest has made in the past? It might be so, I don’t know… But I would say that is the exception rather than the rule! Cheers, Gio

I don’t know Ross, I think we should ask Pearson how they calculate IRR, if it is so controversial… personally I don’t care much… Becuse I believe 5 years from now VRX’s revenues will be more than double what they are today. Cash EPS will have grown faster than revenues. Debt / EBITDA will be lower than it is today. If they lie about their “Deal Model”, how is it possible that overall results will be that good? Probably, you don’t think they will be that good… Or do you think they are telling lies about overall results too? Cheers, Gio

Allergan Successfully Completes Naurex Acquisition - Two Lead Development Products Rapastinel (GLYX-13) and NRX-1074 Demonstrated Rapid Onset of Action and Robust Efficacy in Phase 2 Studies in Major Depressive Disorder - - Adds Potential Breakthrough Treatments for Depression - - Enhances Allergan's World-Class Position in Mental Health - http:​//www.​prnewswire.​com/news-releases/allergan-suc​cessfully-completes-naurex-acq​uisition-300135009.html​ Cheers, Gio

Well, I would be very surprised if 5 years from now VRX’s sales aren’t more than double what they are today. And that’s basically what I care about. Well, compared to the amount of acquisitions they have made, I think Pearson has issued very little shares! He has often said he wouldn’t do that because he knows what they are truly worth! Could you name some companies that grow both organically and through acquisitions and which break down their subs performance much more extensively than VRX does? I would be greatly interested in getting to know those companies! Cheers, Gio

Last time I checked Ackman talked about VRX with Munger and Munger admitted he only took a very superficial look at the company. Last time I checked insiders were buying not selling. This being said, I like your post and imo it is by far the best bear case (or “stay away” case) I have heard so far. Meaning that's all bears really know about this company. Imo much more convincing than those numbers taken from presentations and 10-Ks of years ago! Cheers, Gio

I am pretty sure she could have invested with madoff, but passed. I am pretty sure lots of people who bet on buffett and sequoia passed on madoff. investing is about judgement. judgement about facts, situations, people. that's all it comes down to. do you invest with this person, or that person? do you bet on this report from an anonymous blogger, hempton, chanos, and the other bears, or do you bet on pearson valueact sequx and ackman, and your own due diligence and gut? it's a decision right? do you bet on the arcane analysis of a small merger from 3 years ago? or do you bet on the accumulated record of cash earnings growth shown in the 10ks over several years? lots and lots of little decisions adding up to a big one. do you bet money on it? that's what it comes down to. Conviction. I am not predicting who will be right. but everyone can make that bet. investing is about judgement. that's all it's about. I couldn't agree more! ;) Moreover, could you answer this simple question: how did Madoff make money?... Because this is the first thing I always try to understand: how does a business make money?! I can answer in the case of VRX and others, while I couldn’t in the case of Madoff. Simple as that! Cheers, Gio

I cannot really believe this… Look, I was talking yesterday to the CEO of the largest cement company in Italy, who has recently sold to a German company. And he told me this: “I never had the strength to fire all those unnecessary employees that destroyed the profitability of my company… Now I am sure those Germans will do so at last!”. Now, guess who’s the hardest competitor: the Italian or the German CEO?! This is completely misleading, and another proof of the fact you could read all the 10-Ks you want and still miss the most basic and important features of a business! It is because the pharma industry has been so successful and profitable in the past that VRX is able to do what it is doing! “Successful” and “profitable”, as far as I am concerned, are the opposite of “stupid”… Unnecessary costs and R&D investments that don’t lead to satisfactory financial returns are byproducts of a widespread “complacency” the pharma industry could afford because of its past successes and profitability. At last, one thing we can agree upon! And, believe me, AZ_Value has a very incomplete view of all the moving parts in VRX too! That’s why, as I have always repeated, a qualitative assessment of VRX’s management is so important: they are the only ones with full information about the company, and therefore you should muster enough confidence to trust what they say. Cheers, Gio

Are you serious, or only joking?! He did nothing but repeating again what has been already said many times on this thread just some months ago... Also repeating what AZ_Value said about Sanitas... Which by the way made me grin...!! Come on, guys! When people so much sophisticated lie, they do so convincingly! Won't you agree? $99 million instead of $15 million... Please, believe an Italian guy as long as lies are concerned!?? True scoundrels don't tell lies as stupid as that one! Cheers, Gio

I don't have a bone to pick here either. What I will say is that AZvalue's previous piece on FFH was factually flawed and I pointed that out to him and he has failed to reply. He incorrectly concluded that FFH had underperformed BRK over 5, 10, 15, 20 and 25 year time periods. The truth is he excluded dividends from his book value calculations. Ironically, many people on this forum agreed with him and bashed FFH on the basis of the comparison to BRK. http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/good-blog-post-on-ffh/ Calculated correctly, FFH outperforms BRK in every time period, except 5 years... Oops. (not to mention this issues with US gov't debt in the article) Back to watching the mudslinging from the sidelines. Well, surely I wasn't among the ones who agreed with him! At around the same time he posted his analysis about FFH I started a thread titled "Is it the right time to buy FFH again?", suggesting that it clearly was!... FFH's stock price then increased 40% in a matter of months... Cheers, Gio

I keep seeing this idea that nobody can understand what's going on at Berkshire or prove that the financials are true. As someone who's read all the BRK ARs. I feel that I know what's going on and how the business is performing and I can show that the financials are true. I also think that anyone with a good understanding of accounting and finance can understand them with a reasonable amount of work. If anyone has any questions about BRK financials please post them in a BRK thread and I'll be glad to help. Gio, you do know that a lot of BRK businesses file financials separately. Well, for those businesses which report financials separately of course it is different! But that's not the point! BRK was just an example... Maybe not the best one! Think instead of CSU, TDG, Malone's companies, to give examples of some other companies I am investing in and therefore I have been following closer recently than BRK... Or think about big banks! Come on! Buffett himself said he didn't understand BAC balance sheet so well, and he invested because BAC "was not going away"... By the way, do you feel you understand BAC balance sheet better than Buffett? Because BAC is a very large investment for BRK... If you don't... Well, that's what I meant!? Cheers, Gio

What you are saying simply is not factually accurate -- especially about Berkshire. Have you read through all 50 years of Berkshire shareholder letters and filings? I have. (Recently, actually.) And I can guarantee you that you could follow things year by year through reading his filings. For a while, he even broke down the aggregate ROIC for each "industry" in which he was invested. Well, I have! Maybe not recently, but I have in the past! "By industry" doesn't mean for every single business, and ROIC numbers are of course something you have to trust and that you cannot prove, unless a whole 10-K is published for each single business... In my experience it is simply a matter of "quantity": I experience serious difficulties to follow all the details of the three businesses I own... There are lots of people much brighter than me... And surely Buffett can follow every detail of BRK's 75 businesses, like I think Pearson can follow every detail of VRX's 140 businesses... But to comunicate to outside investors all that would be necessary to prove how all those businesses are truly performing?!... Really?!... I am not convinced! Cheers, Gio

I hate to get dragged down in this stupid thread but I feel a strong urge to post my thoughts: there is something wrong on the internet. Gio: I am sure you know this but let me point out the difference between Berkshire and Valeant. Buffett has a 50-year track record. Berkshire is not very leveraged, generates loads of cash and has tons of liquid assets on its balance sheet. Buffett is guiding towards 10% growth in the foreseeable future. Pearson has a 7-year track record, Valeant has 40b in intangibles vs 6b in equity and 30b in debt and promises 20% CAGR on all its acquisitions. Berkshire is trading at 1.4x book, Valeant is trading at 12.6x book. We can't even compare price to tangible book because VRX doesn't have any tangible book value. Now, with regards to this "trust" thing you are talking about: suppose both Buffett and Pearson are way too optimistic about their own companies. Let's say Berkshire makes a small loss over the next decade, and Valeant only manages to grow by 5% annually over the next decade. Guess which stock would do better? And which scenario do you think is more likely? That the guy with a 50-year track record predicting 10% growth is too optimistic or that the guy with a 7-year track record predicting 20% growth is too optimistic? The fault that I think you are making is that you frame the 'trust problem' as if it is a multiple choice question: either you trust management (in that case Valeant is the better buy) or they are fraudsters (in that case both Berkshire and Valeant are worthless). I, on the other hand, think this is a 'fifty shades of grey' problem. I agree with you that it is almost impossible to state with certainty whether a company is completely honest, a total fraud or something in between. However, I think there are some heuristics that I can apply to get an indication of a) how likely it is that there are some rats in the kitchen and b) what will happen if we find some rats in the kitchen. All these heuristics point towards BRK as a safer and more believable company. That does not mean that I think that Valeant is the next Enron but it means that I think it is more likely something bad will happen at Valeant. And, if something bad happens, the consequences are probably harsher for Valeant. Which means, in turn, that I require more certainty before concluding Valeant is a good investment than I would require for Berkshire. I almost deleted this entire post because I wanted to rephrase it but I'll leave it here and write a second post later. I'm going to enjoy the sun. I think I need a break because this pointless thread is devouring this forum up to a point where I want to stab myself and now I am even contributing to it. Of course, I agree. But we are not talking about the future. We are talking about the past. We are talking about our abilities "to prove" beyond doubt from 10-Ks and conference calls (in the case of Valeant) or annual letters (in the case of Berkshire) that what Pearson is telling us about VRX's 140 businesses or what Buffett is telling us about BRK's 75 businesses is right beyond doubt. And I think in both cases it is not possible with the information we have as outside shareholders. Then, of course, I agree BRK is a much safer investment than VRX... But that's not what I was interested in and talking about! Finally, I can surely understand why some of you cannot stand this thread any longer... But evidently some of us still find the discussion worthwhile... Won't you please just let us talk about what we find interesting and look elsewhere instead? Thank you, Gio

Happy I didn't disappoint. ;) My answer is that with enough digging (probably more than just 10-Ks and management presentations), anyone (including me) could get to a point where they feel comfortable enough to exercise their judgement on whether VRX is a fraud or not. As for conclusively proving one way or another? Also, probably. I suppose it depends on how much effort you're willing to expend and how far off the beaten path you're willing to go to find evidence. Btw, in an effort to extricate me from either of the tribes, I haven't a clue if VRX is a fraud or not right now. I just like the digging process. Ok, let me be as clear as I can about this topic: Though I surely cannot know for ALL companies, I believe what you have just said is simply not true for the companies I am interested and I invest in. Those companies grow faster than the other because they grow both organically and through acquisitions. This way they tend to become very complex entities to analyse... You don't have to analyse 1 business... But 140! Furthermore, once they have acquired all those businesses, the companies I invest in don't disclose in their 10-Ks the GAAP results for each businesses they own, but only the numbers for the whole company. The same is true for meaningful non-GAAP numbers through conference calls and presentations. Now: I think almost nobody would have the TIME to "prove" how each single business of theirs are doing, but, even if you are 1 in a million, and you could find the time needed, you don't have the INFORMATION required to do so. At least if you are an outside investor, without access to insider information. Why do I invest in such complicated companies then? Because imo they are the ones which will go on growing the most quickly! In other words, all others are lower quality imo. Qualitative reasons why management could be trusted of course are not 100% certain... They will never be... But in my experience they have always worked so far and are very important... Why should otherwise Buffett put so much emphasis on "reputation"? Isn't reputation something intrinsically qualitative? Of course it is! If you don't believe what Buffett says, BRK is not a business in which you could invest. Cheers, Gio

I am sure you are a genius. But let me ask you: do you think even someone with your IQ and intellectual prowess could prove VRX is a fraud or that it isn’t, reading 10-Ks and listening to results reported by management? If your answer is “yes”, I sincerely fear your genius is too detached from reality. Cheers, Gio Why pose it as a question if you're not actually interested in the answer? Your post basically translates to asking me the following. (Allow me some theatrics.) Gio: Can you _______? If you answer yes, you are a pedophile. (A toucher of children, in case that doesn't Google Translate correctly for you, Gio.) Me: Well, I certainly don't want to be a pedophile, so... ;D ;D ;D I was expecting a witty reply! ;) Ok! Let me ask you: do you think even someone with your IQ and intellectual prowess could prove VRX is a fraud or that it isn’t, reading 10-Ks and listening to results reported by management? Cheers, Gio

Ross, if that is what you want, I think Bagehot has answered your need just a couple of posts before yours… Hasn’t he? He has shown you how you could reasonably arrive at a 20% IRR with Salix. This being said, of course, you wanted a demonstration of what exactly? How an investment of theirs could pay itself back in 5-6 years? And what about the remaining 139 acquisitions? Do you really invest that way? In other words, what does Bidvest discloses that Valeant doesn’t? You truly know the rate of return of any investment made by Mr. Joffe during the last 10 years? Not only! Do you truly know how to prove that those rate of returns are not made up by Mr. Joffe & Co.? Because that’s what we are talking about: we are not talking about business results here… We are talking about proving those results are real! Cheers, Gio

I am sure you are a genius. But let me ask you: do you think even someone with your IQ and intellectual prowess could prove VRX is a fraud or that it isn’t, reading 10-Ks and listening to results reported by management? If your answer is “yes”, I sincerely fear your genius is too detached from reality. Cheers, Gio

It's hard to pull the Kool Aid away when their hands are taped to the jug. I agree, but really all I'm saying is that it doesn't take much little leg work to show how absurd some of the claims management make, and AZ shows us. Back to an earlier point I mentioned. It's clear that there is doubt over some of the claims and you would have to make some pretty big leaps of faith to prove the numbers. People here have made a lot of money off the stock, and probably have a large portion of their portfolio invested in it. All I'm saying is scale back, there is a shadow cast over the stock, so why not de-risk a bit and pull out the house money and let the rest ride if you think Pearson is a genius. Why do you bears post something like that? It disqualifies you very much… 1) Words like “religion” or “cult”… Come on! Haven’t you seen there is a poll on this thread? A poll started by a bull, not a bear? I really don’t understand if yours is only cheap sarcasm, or you are serious… I hope the former! It would just mean you have a poor sense of humor… Furthermore, what I find truly hilarious is those same people who talk about “religion” and “cult” might be investing right now in big banks!! 2) “Little work to show how absurd some of the claims management make”… Here again, I don’t understand if you are joking or incredibly naïve… You know what? I own and personally manage 3 businesses, 2 of which are substantial, the third not so much. I have lots of people I trust who help me. Yet, to know everything there is to know about them (or, as Mr. Ergen would put it “to sign all the checks”) is a full time job for me! Now, let’s suppose I am a lazy guy… And AZ_Value can do twice what I am able to do in half the time… Do you really think he could be able to prove anything about a business he has never worked for, whose management he has never met, without the least piece of insider information, a business which has made 140 acquisitions so far all over the world?!... Sincerely, I don’t know how Pearson himself is able to keep track of all these things!!... Probably, he doesn’t need sleep… Therefore, no, I don’t think you are able to prove anything about VRX, no matter the amount of research you think you are doing. You have neither the time nor the information required to prove anything about VRX. Cheers, Gio

Well, if I tell you something, I am sure you will find the way to tell me the opposite. Always! Because all of you are intellectually very bright and active! What that has to do with business though… I still have to figure out! In the end either you are right about business or you are wrong. Period. Cheers, Gio

http://news.investors.com/business-the-new-america/082715-768505-perrigo-should-grow-even-without-mylan.htm Cheers, Gio

By the way, the work I have done with VRX is surely not less, and most probably it is much more, than with any other investment of mine. For all of you who don’t believe in ideas (what you sarcastically like referring to as “stories”), and don’t believe in trust, let me be very clear about this: I have never lost a meaningful percentage of my firm’s capital in any single investment of mine so far. Of course, you might say VRX will be the first one… We will see! ;) As an aside: Sometimes I think the true reason why financial markets will always offer good opportunities is the following: those who really do business are too busy and preoccupied with the management of their companies to develop a real interest in the financial markets, therefore financial markets are left for the most part to people who basically have never and will never run a company in their whole life! Cheers, Gio