ERICOPOLY

Doesn't Allergan own Warner Chilcot who pled guilty to felony health care fraud scheme? $125m payment to resolve criminal liability and False Claims Act allegations.

Remember when we had the 10% of book value "whoops" restatement from FFH in July 2006? Trying to keep this in perspective. The thing I'm most worried about (where so much of the value lies) is if the current management is unable to continue forward (like they're in jail or something). However I bought some back. The real thing that is bugging me and driving me insane is that literally there is a 50 acre fire out my window. It started at 5am and I woke up smelling smoke. At 6am I went to the bathroom, looked out the window, and said "that's nice the mountain is glowing red". So now my kids were home all day from school because a lot of the families are now under evacuation orders. The forecast is for a 40 MPH sundowner blowing in my direction tonight, and we're actively packing for evacuation of my house. This sucks! So yes, there really is smoke and fire!

My feeling at this point is that the execs at Valeant have known for some time exactly what was going on at Philador. Hence the option agreement to attempt to contain potential fallout. I actually dumped at $98 because I need to rethink this. I thought very little of Jay Brown at MBIA for pretending like he didn't know what was going on in those Countrywide loans he was backing.

This was listed third in the press release, so I assume the "kickbacks" and "speaker fees" were considered more damning. Hard to handicap whether Philidor's misdeeds are worth more or less than $125 million. The criminal charges against executives might be more material to the Valeant thesis. So this sounds like what the Philidor employees claim was going on at Philidor.

Is the option held in the US? They can at least wring some tax savings from it when they write it off.

Sorry, I was being lazy. Okay, so I've already compared VRX with BAC, and concluded that VRX if anything looks better. BAC at $5 was really just a 15% earnings yield that effectively grew earnings at 20% a year for 4 years and maybe 5. VRX is looking like the same or better. Incidentally, back when BAC was just a $5 stock, the at-the-money $5 strike 2014 BAC puts were going for $2 each, or 40% of at-the-money strike price. 2018 VRX puts today are also roughly 40% of at-the-money strike price. Somebody who bought those at $2 could be rolling to today's $5 strike for just pennies. So while it's expensive non-recourse leverage in year 1 and year 2, if the stock is really high in the future it will similarly be extremely cheap to continue to roll those $110 strike VRX puts along.

Why did a short sale restriction go into effect today at 12:39 as reported by my IB Trader Workstation?

How can you get to 20% just from buying your stock? Well they have 10% organic growth and you have a 10% FCF yield. That's 20% if the 10% FCF is returned to shareholders and the stock advances 10% with the organic growth rate.

Yes I see what you mean. The higher expected return in VRX compensates for the cost -- probably better risk/reward in the VRX options if you started off owning neither one. I'm just trying not to have to sell my BAC shares because then I'd have a big tax bill and I would have less to deploy in VRX. So I decided to spend a relative pittance on the BAC puts to keep my tax liability working for me as an asset. I expect BAC's returns to mostly just cover the cost of the puts. I had to choose either the BAC or the VRX puts, or choose neither and pay the tax. I chose the BAC puts. OK, thanks. I almost posted one to two weeks ago (I actually wrote it and was about to post and then did not) that this was about the time and price when Ericopoly would come in a buy big). I saw you coming man - maybe just a couple days before you started reading the start of the thread! Anyway, glad to have you on board. Was waiting to ask you this, so you think you agree that buying 2018 VRX LEAPS on the above basis is not completely wacked (clearly, I have to be right on the high EPS growth in order to assume the cost is reasonable whereas with BAC that assumption is not necessary; so my additional cost is really this assumption which I think holds, especially at this multiple due to the fact they can buy-in shares). I don't know. Have to think about it. I just feel a bit better with the common but a lower premium would change my mind.

okay. I see your FCF number. Regarding BAC. Instead of saying it was a 40% normalized earnings yield, let's frame it differently using our hindsight knowledge. Compared to what actually happened, was it similar to a 15% earnings yield that grew at a 20% clip for 4 years through reinvestment of all free cash generate? A 15% yield on $5 stock is 75 cents. 75 cents growing at 20% a year for 4 years becomes $1.296 (not far from 2015 BAC numbers!). The question is, did BAC make this much money roughly over the past 4 years in earnings, and is it earning $1.80 in 2016 after another 20% of growth? year 1: .75 year 2: 0.90 year 3: 1.08 year 4: 1.296 That would be a total of 4.02 per share in earnings for BAC over the past 4 years. Now, a lot of complicated things have happened, such as higher capital requirements and capital generation being in excess of earnings due to the tax assets and such. But I don't get the feeling that we currently have $4.02 per share of accumulated earnings that can be returned to BAC shareholders. It mostly went into higher capital requirements that will support the forward looking earnings against which the market cap and share value is supported. Similar to how VRX could take all of it's FCF and invest at 20% clip and not be able to both return it and support the new earnings at the same time. So they are very much alike in valuation. But then what we didn't talk about is how Pearson believes there is 10%+ organic growth for the rest of the decade in VRX... so I don't know. Also that 20% was unlevered without use of debt. I'm just saying it can be a lot more than 20% annual growth in earnings.

Yes I see what you mean. The higher expected return in VRX compensates for the cost -- probably better risk/reward in the VRX options if you started off owning neither one. I'm just trying not to have to sell my BAC shares because then I'd have a big tax bill and I would have less to deploy in VRX. So I decided to spend a relative pittance on the BAC puts to keep my tax liability working for me as an asset. I expect BAC's returns to mostly just cover the cost of the puts. I had to choose either the BAC or the VRX puts, or choose neither and pay the tax. I chose the BAC puts.

Or expressed differently... BAC is $17 today versus $5 four years ago. We've made 3.4x in four years. VRX if priced at 15x is a double from here (priced at 7x 2016), and it can't generate 50% increase in earnings over the following 3 years by organic growth (10%+) as well as shrewd allocation of incoming cash? So it's better than BAC.

I'll be surprised if total fines exceed $500 million and my tail-event cap is $1 billion (my expectation, if they are found guilty, is low 100 millions). This is exactly my logic (posted somewhere in this long thread previously!): the Philidor channel has not been a material channel for more than a year which, you would think, would cap the fine - if there even is one. First they have to prove Valeant has legal control over Philidor and its network (and the R&O suit is a great example of why that is not the case). You are correct of course -- why do they need lawyers to get R&O to pay them if R&O is just an arm of Valeant that allows them to backdoor into California without a license?

Seems a little different to me. At the time, Bank of America was trading at around a 40% normalized earnings yield while Valeant seems to be trading at a 10% free cash flow yield to 2016 numbers (based on Sequoia's math). You'd have to be significantly more sure of Valeant's business model surviving than Bank of America's business model surviving to get a similar return, IMHO. But, then again, it might not be an apples to apples comparison since I don't have a good sense of what a "normalized earnings yield" would be for Valeant. May not even make sense as a concept given the possibility of growth... But BAC doesn't have a snowball's chance in hell at reinvesting earnings at a 20% clip. All BAC becomes after revaluation is like a 10% payout machine. It's deceptively cheaper than VRX when just comparing the two based on earnings yield. Here is the last paragraph of Sequoia's most recent writing, which suggests more like a 15% yield that is growing at a high rate: We note a few things in closing. The company has a robust pipeline of new products and has said that it will not need significant price increases over the next three years to achieve double-digit earnings growth. In 2016, we believe Valeant should grow earnings by at least 30%, generate free cash flow in excess of $4 billion and have the liquidity to pay down some of its bonds before their scheduled maturities. At a recent price of $110, Valeant trades for about seven times the consensus estimate of 2016 cash earnings, which does not strike us as a rational price for a company with a diverse collection of product lines and strong earnings growth.

But anyways, IMO that was because BAC's discount at $5 had more to do with Euro implosion fears than it did with legal liability. I think similarly the current discount in VRX has more to do with the Enron story than with settlements over aggressive drug pricing and tactics of Philidor.

Of course the Philidor problem on its own is small potatoes - I agree. If I had to guess VRX probably presses a lot of edges that maybe considered "unethical". I think even Sequoia is acknowledging this and basically saying maybe it's better to not press every edge to squeeze out every penny of profit. Being a BAC shareholder, you should know the punishment doesn't always fit the crime. I'm sure the Ocwen shareholders feel the same thing. Look i'm not even saying it will happen -- I'm just saying I think there is a larger tail risk (due to politics) regarding this company than most bulls are willing acknowledge. I agree with your last statement about the 2 separate declines in the stock. If I thought I could buy it, and simply wait a few months to let the "fraud' allegations pass and ride that recovery I would. I personally think the bright lights will continue to shine on Valeant (you're going into an election year), and I don't think that it's good for the business. I just remember that buying BAC at a heavy discount didn't treat me poorly despite several more years of "unexpectedly" large lawsuits. I mean, really punishingly unprecedented $17 billion settlement sized crap. It was just on and on and on. Result is that the stock was already more than a double before the $17billion number came out and the gains didn't go away with the settlement. The discount just dwarfed even the gargantuan fines.

In my house there is still a residential cable bill for the internet pipe. It will be terminated when there is a faster/cheaper wireless network. Hopefully that's coming in the next decade.

It plays really well in the hands of a Hillary Clinton or Bernie Sanders. But how much would the penalty be for Philidor practices where the option/owner relationship dates back one year? I mean, let's get creative and say they have to settle accusations for 2x or 3x the "ill-gotten" profits from the Philidor channel, and then terminate that relationship? Okay, is that anywhere remotely close to the decline in market cap? What happened is first that kind of political risk stuff was discounted in the stock, and then the stock took on a whole new fraud/Enron discount that hasn't been lifted. IMO that's why the discount makes no sense in relation to the political/settlement risk.

There's two parts to Valeant. One is the durable business (give this your multiple) and the rest is better valued using discounted cash flow. You account for the issue by separating the two. Based on the current business mix, it's probably 80% durable and 20% DCF. Or you can just blend a smaller multiple to make it easier I guess. So the PFE/AGN potential deal at $400 would value AGN at 16x 2017 cash EPS. The generic drug sale to TEVA probably paved the way for this to happen. I know this is going to sound like someone with rosy colored glasses, but the debt burden at Valeant is a partial deterrent to a buyout during a market decline. I'd rather own Valeant for a really long time than have someone buy them out for $200. I respectfully disagree. a) multiple is shorthand for DCF b) If someone bought Valeant for 200, I could always just buy that company after juicing a 100% return out of this. Value inestors seem to always think short term gains are bad. Speed of gains is a key component of long term returns. for b), he means that Pearson won't be running the new company and the capital allocation story falls apart. So he'd rather just have a guy allocating capital at a high return for a decade than make a one-time pop and try to keep finding one-time pops.

I agree that #1 can cause some costs -- after holding BAC for 4 years I've got the US Government on automatic bill pay. However #2 is mitigated by the current price. You don't need an acquisition if the shares are at this level in order to compound at 15%+ rate. You can simply retire shares with the earnings. However that would go away if the share price rallied -- oh no!

No, it doesn't make sense to do that. Similarly, it makes no sense to announce a big charge to Microsoft's present quarterly earnings simply because the Windows franchise has a finite life. You can't assume that they are going to develop another similarly fantastic Windows franchise to replace the current one simply because they did so decades ago with entirely different people in an entirely different competitive landscape. They might try to acquire the next one, in which case today's free cash flow isn't really free cash flow by your argument. So that means they have no earnings today? I don't know what you mean by "free cash flow". What I mean by that phrase is the cash I can put in my pocket today after spending (or reserving) the amounts necessary to maintain current profits. Let's take a shipping example. If you buy one ship that lasts for 20 years and must then be scrapped, your "cash earnings" [or operating cash flow minus capital expenditures] are going to look great for a long time, but they're overstating the true economic returns because "cash earnings" include a return of capital, rather than simply a return on capital. If Valeant is essentially buying ships, i.e., finite-lived assets, then the same principle applies, though that doesn't necessarily mean that reported amortization is the right capital charge to use. Put another way, if you were building a DCF with steady profits, the cash flow you're getting in year 1, year 2 and so forth shouldn't be the cash earnings number that Valeant reports if they're buying "ships." Instead, it should be something lower. If you think otherwise, then where is the capital coming from to replace the ships (drugs) that must be scrapped (go off patent or whatever)? On the other hand, if Valeant is really buying "Coke," rather than ships, then the principle doesn't apply, because the expenses needed to maintain and grow the Coke-like Valeant are marketing, distribution, R&D and so forth. Assuming those expenses run through the income statement, they are already included in operating cash flow and there's no need to make another adjustment. You can model future earnings from an asset over time making various assumptions of the life of the portfolio of assets. There is no reason anyone needs to muddy current income to do such an exercise. That's my point. Investors don't look at Microsoft and assume it will forever generate income from Windows at current levels simply because they don't take impairment charges on the goodwill that we all know is there. So why adopt a different system simply because the income stream was acquired?

No, it doesn't make sense to do that. Similarly, it makes no sense to announce a big charge to Microsoft's present quarterly earnings simply because the Windows franchise has a finite life. You can't assume that they are going to develop another similarly fantastic Windows franchise to replace the current one simply because they did so decades ago with entirely different people in an entirely different competitive landscape. They might try to acquire the next one, in which case today's free cash flow isn't really free cash flow by your argument. So that means they have no earnings today?

http://www.forbes.com/sites/stephenbrozak/2015/10/29/ackman-to-the-rescue-can-he-make-the-case-for-valeant/?utm_campaign=yahootix&partner=yahootix The topic of this Forbes piece is to explain that Philidor/Valeant cozy relationship is just basically a vertical integration. Hopefully this will help to settle things down -- Philidor is Citron's "smoking gun"... which is funny because you can't "stuff the channel" with Philidor due to the consolidation.

You invest X in a company, and you get paid back X in cash earnings over first 6 years. Now you have your "X" back plus whatever earnings are still being produced by the asset acquired in that initial outlay 6 years earlier. So you invest X once again... Now you have growth because you've got a brand new X invested, plus some remaining income from the first iteration. Then rinse and repeat. That is real growth in earnings and it is sustainable. It is enough to merely value it based on the earnings and ignore all the goodwill bullshit.

The earnings stream is declining? By this you mean organic earnings growth is actually negative, I presume? In what quarter has that happened? You should be able to easily point to it if what you say is true, and why wouldn't it be true if you are saying it?