Liberty

Do you agree that the current news cycle (Hillary, price increases) could in itself be reason enough to put a letter out to try to correct some misconceptions?

He said "bear thesis" so you think he pays a lot of attention to blog posts and the stock price? That's pretty thin evidence. It's probably just how he talks, and he didn't filter the letter through 15 layers of PR people and lawyers to turn it into the blandest of legalese... Have you ever actually listened to Pearson speak about the business? That's a good one: https://www.dropbox.com/s/v903zgq32qnq7ki/VRX-presentation-sd4782fa%20-%20Copy.mp3?dl=0 The guy cut his salary to $1/year, owns over a billion of VRX stock that he can't sell until years after he retires. He's basically perfectly aligned with long-term shareholders. A big part of his strategy is based on doing things that will look bad in the short term, but will create value in the long term (like buying businesses with hair on them, like Salix or Dendreon, buying tail products that nobody else wants, cutting low-ROI R&D, taking big restructuring charges that kill earnings but will save tons of money over time, etc). He almost had never done interviews until he tried to buy AGN, and when he does he's usually unpolished and looks like he doesn't want to be there. Opposite of the slick stock-promoter. I think what probably happened is he was in his office and constantly got calls from panicking investors asking about how "Hillary's going to kill your business" and "what will you do if you can't do those massive price increases anymore?", and he was counting the days until some WSJ or NYT journalist riding the current wave of attention for this topic did a piece on Valeant (with quotes by Pyott and Melnyk, probably), or some populist politicians on the election trail targeted that "tax inverted foreign company that raised prices on drugs X, Y, and Z", and they they'd be stuck with that label forever, because soundbytes trump facts. But since the facts are that they are only a little exposed to government reimbursement issues, that price increases are only important to a small and declining part of their business, and that organic growth is very strong, well, why not put the facts out there clearly before someone else picks the narrative. One reason why they might want to protect the stock price at this point is that they could be far along in talks with a very big acquisition or merger target, and that would require a significant equity component... But we can't know that for sure.

I generally view a CEO defending his company's stock price as a kiss of death. He's doing it out of desperation- he needs the market to believe. And HY markets aren't going to be as comfortable lending to fuel M&A given VRX's business plan is now the political topic du jour. Thank goodness- the mexico wall topic was annoying me. I saw it more as learning from the AGN media sh*tstorm (and many of the false accusations sticking to this day) and trying to get in front of the Hillary/price increases media cycle that tries to lump them with other very different companies by basically giving the facts about government reimbursement risk being low, price increases being a small part of the strategy, and organic growth being strong. The two things he addresses specially in the letter have to do with that news cycle; I'm sure he was getting questions about them because of the drop in share price, because that's how investors think ("the price dropped, you guys must be in trouble, right?"), but I think he's mostly trying to avoid having some new label (like the "doesn't believe in R&D") attached to the company forever... The business is performing very well at this time and they are issuing relatively little equity for acquisitions, so I don't think a low stock price hurts them (a year ago it was much lower and that wasn't a problem).

They also apparently made the 6s feel a lot grippier than the 6, which was a pretty slippery beast. Another good improvement (though they no doubt made a lot of money from people buying cases for the 6 ;) ).

I have that one on my shelf, looking forward to reading it. I wasn't that familiar with Mr. Hamilton until someone - I don't remember who it was at the moment - explained why he was such a special man and that made me want to learn more. I'm currently reading a book about the Apollo Project. Not sure what I'll read next, but this thread has definitely bumped the Hamilton bio up the stack....

That's fine, everyone has a different approach. Only do what you're comfortable with.

"Looks like Apple made the iPhone water resistant and didn't tell anyone" Via

You can't break out organic growth indefinitely because acquired businesses get integrated into the overall business, parts get divested, bolt-ons are added, etc. At some point the numbers become meaningless when compared to the original thing anyway (though they've broken down performance for all major acquisitions a few times for what that's worth). This is not a conglomerate that keeps businesses as is. VRX market cap is 68bn, not 100bn (never was, at least not in USD). Whether you believe in the durability of a big part of the portfolio or not is part of the analysis. You can look at the reasons they give for why they think it's durable and look at past performance and decide if that makes sense to you or not. But don't just assume that what they have is the same as just any random pharma out there, because the company was built from the ground up with a different strategy than most pharmas out there. You are looking at depressed Salix performance right now because of the inventory issues. If you look at normalized performance, the multiple is much lower (they guided to a "conservative 7.5bn EBITDA" next year). I'd be surprised if cash EPS wasn't at least $18-19 in 2 years, and that doesn't take into account a big merger, which might be done on a friendly basis this time and be a deleveraging event (speaking of which, just with organic growth and Salix normalizing, the debt should go under 4X very rapidly in the next year). But anyway, what you say has been said before, and what I'm saying has been said before, so better leave it here.

Just had a quick look at my notes. This is from a presentation that Pearson gave: As for keeping up with the competition, the proof's in the pudding. You can look at things they've owned for years and see how the organic growth and products did, as well as get an idea from the current organic growth does and what the trend there is (ie. they accelerated organic growth at B&L significantly after acquiring it). But I still think it's a mistake to look at % of R&D and use that as some kind of perfect predictive proxy for future performance, especially across businesses that aren't the same (ie. Alcon doesn't have the same portfolio makeup as VRX and so its R&D needs are different, but they might also be less efficient per dollar of R&D invested vs output, but they also might not have much of a choice if they don't have the expertise in doing effective M&A at scale (VRX's decentralized model helps a lot with that -- people forget that not everybody can just turn around and decide to be good at M&A)).

Picasso, what you are not mentioning is that it's possible to buy other people's R&D. If you compare VRX to P&G, you have to compare the whole strategy, not just one aspect of it. Valeant is more acquisitive, especially when it's more efficient or there's a better risk-reward ratio than developing in house. That's what a lot of these bolt-ons and licensings are -- the R&D happened, just at some other company. They also have a large branded generics/OTC portfolio that doesn't required much R&D at all, so the R&D that is left is mostly spent on a smaller portion of the portfolio, not spread across it evenly (I think Pearson once said that if you adjust for it, they are spending equivalent of 6-8% on R&D, but that's from memory so I could be wrong). I also believe that there's a pretty wide range of levels of effectiveness on R&D spending. I'm sure we all know lots of examples of throwing money at a problem not always being a solution, and organizations that spend less but are way more productive than others. With pharma R&D, everybody seems so focused on dollar inputs, but what really matters is outputs. I'll take 3% of R&D that delivers X rather than 10% or R&D that delivers that same X. I think the 3G-like culture helps helps there (zero-based budgetting, outsourcing to external labs that have overcapacity so lower prices, focusing the efforts on more certain things rather than longshots, etc). Management recently said that they are continuing almost all of Salix's R&D efforts. It's not like they blindly slash and burn everything. When stuff makes sense financially and meets their expected returns, they'll do it.

Clinton tweet. Seriously. There are some vocal shorts, too, who have gotten steamrolled and feel that MNK being a sham means VRX is vulnerable as well. Volume/price are ~50/50. You can read the MD&A in the Q where they disclose that sales are driven mostly by price in the developed world (~80% of sales) and by volume in EM (price was actually negative in EM segment last Q). That is likely to shift more towards volume in coming years as the product mix shifts away from "tail" assets in the US (volumes higher in derm/eye last Q and lower in neuro/generic/other which is the holding tank for tail assets) and growth is driven by products like Jublia, Xifaxan, B+L Ultra, etc. It's important to note that the large price increases that most people talk about (Isuprel and Nitropress, the two Marathon products) are not included in organic growth since VRX hasn't owned them for a year. Virtually all of the "extreme pricing" at VRX occurs in one of two situations: 1) newly acquired products that management believes were mispriced (eg the Marathon assets and a few small assets that came with SLXP); and 2) drugs that are nearing a patent cliff (eg Glumetza) in which VRX does what every other pharma co does by trying to milk the last bit of cash out of the franchise. Glumetza price is up 50% and volumes down 25% over the last month. It will go to 0 in January, I believe, so that is an "eye watering" price increase to use Pyott's terminology, but not one that is driving long-term sales growth. I posted some earlier thoughts on Clinton's proposals. Assuming she gets elected and then could ever get them through Congress (historically drug pricing proposals have been a hard sell bc pharma only makes up ~10% of all HC spend so there isn't much leverage there to "bend the cost curve"), the impact to VRX would be small, as US govt reimbursement is ~15% of sales and lower than that of profitability. '16E Cash EPS is something like $16-$17, so even if you make the excessively draconian assumption that the whole 15% goes away AND that it is at corp average profitability, VRX cash EPS would be ~$14 next year, implying a 14.5x PE. Exactly. Many pharmas like to get rid of their tail products before they go generic so they aren't the ones taking the price increases, but VRX has historically picked up alot of these products (can get good prices since others don't want them), so they are showing more price increases. But it's still a small part of their business (they've mentioned that pricing is about flat outside the US and about 5% in the US). From the last Q transcript:

The CEO denying he knew would be more plausible if he wasn't known as a control freak deeply involved in all kinds of tiny details for his products: http://www.bloomberg.com/news/articles/2015-09-22/volkswagen-ceo-s-history-of-sweating-the-details-now-haunts-him

That should be fun. Thanks.

It is, but that tradeoff is very clear cut: An almost imperceptible change in weight and size in exchange for a very useful new input method that most people will likely use dozens and dozens of times a day, making their experience noticeably better, as well as creating a new tool that developers can take advantage of. That's a no brainer. Battery life is less clear cut, and I think Apple's solution to have a low power mode in iOS 9 that significantly reduces power usage while keeping the phone quite useable is a winner (they also made it more efficient overall so that existing phones will also get more battery life even when not in low power mode). The issue is that people who don't have battery life issues don't care if at the end of the day their phone has 50% or 60% left. It's totally equivalent. So if you make the battery bigger, they only get the downsize of a heavier and bulkier phone. But once in a while, these people might need more battery life (they travel, go to the airport, have a long flight, etc). That's when the low power mode can significantly extend their battery, yet the rest of the time no extra size/weight. By the way, another factor is that Apple is partly a victim of its success here. From all usage stats, it's clear that iOS devices are used more than Android devices on average. People use more apps, visit more websites, do more searches, consume more content, buy more things, etc. So while the iPhone and iPad are very power efficient, they are also used more. I bet that if we were to normalize for both battery size and usage, we'd find out that most of the competition is significantly less power-efficient. But hey, it's a high quality problem to have.

Do they really, though? I think there's sample bias. People who want longer battery life are vocal about it, people who are satisfied don't think about it much and don't say anything, so you only hear about the first camp. Apple has more data than anyone else on this, and they are more successful than anyone with their phone designs. I think they know what they're doing and they've picked a good point on the battery life vs size/weight continuum. If they make the phones thicker and heavier to please the 5-10% of people who want more battery but it makes the phones less attractive to the 90-95% of people who are totally fine with the current battery life, that might not be a good move. Thinness is especially important with larger screens. If they hadn't done so much work before going from the 4 to the 5, the larger 6 wouldn't have been nearly as compelling. Also, iOS 9's new low power mode can add around 3 hours of use when the battery gets under 20% (or you can activate it manually earlier and have even more than that), so complaints about battery life should actually be even lower than they were. Oh, and the 6 Plus has more battery life than the 6, so that's one more choice for those who really need it.

Yes! Think about what Apple could achieve simply by solving this single (very solvable!) issue. ;) Cheers, Gio Apple's battery life is great for the volume of the phones it sells. Most of the competition with longer battery life is from phones with much bigger volumes, and thus much bigger batteries. Design is about tradeoffs; there's a point between size and battery life that is optimal for the most high-end users, and Apple is targeting that point. If they were just maximizing battery life, they could just make the phones thicker. My wife rare gets below 50% at the end of the day on her iPhone 6. I use my iPad Air 2 very intensely, hours and hours each day, and I've never run out of juice.

I think this is kind of a long discussion, but the short version is: 1) They don't have to. 2) From documentation, other people, or being trained to look for such feature via the obvious features. Number one means that someone could use their phone and never know about all kinds of 'second level' feature and never not be able to do something. There are just shortcuts and nice little extras hidden everywhere, but the regular way still works (kind of like on a PC you can do things with a mouse, but it's faster if you know the keyboard shortcuts). Some people might not even know that you can swipe up to get the control center, but they can get to these things via other ways that are more obvious. Number two has more to unpack: I'm sure it'll be documented somewhere on the site, so if someone is looking for features, it'll be there. But most people learn about tips and tricks from friends, online videos and reviews, etc. If something is really useful, it usually gets to people and doesn't stay obscure for long. But most interesting is that you can teach one new interaction paradigm to users, such as doing harder presses to get more options on various things (icons, links), and let them experiment and find more places where it applies. The keyboard will likely be one of those places. It's a bit like how long-presses or swipes are used to activate certain modes or options. Once people are aware of long-presses and swipes, you don't have to explicitely teach them every single place where it can be used. That was probably more than you wanted to know, sorry, I'm interested in that kind of stuff and get carried away :) Here's a video of the feature in action. Very cool:

Surprised they didn't mention this feature in the keynote (no time, obviously). This is going to be so useful:

http://www.ft.com/intl/cms/s/0/300f3dd6-615a-11e5-a28b-50226830d644.html Intelsat looking to sell some assets to pay down debt, apparently talking to Liberty Media (LMCA).

I thought the 5s was a huge release too. The A7 SoC was a huge leap forward in performance and introduced a new ARM instruction set (64 bits and more efficient) that took the rest of the industry by surprise, and Touch ID brought security and convenience to many aspects of the product and paved the way for Apple Pay. And Touch ID, like 3D Touch, made better an interaction that happens many, many times a day, so that matters a lot, unlike a cool demo feature that you never use. Also, looks like the switching from android is going well: http://www.marketwatch.com/story/apple-widens-gap-between-ios-android-use-in-us-2015-09-22?siteid=yhoof2

http://9to5mac.com/2015/09/22/iphone-6s-review-3d-touch-live-photos-cameras/ Review roundup. Very positive overall. 3D touch will be a big one, everything without it will feel broken in a little while, IMO. Mossberg saying it's the best phone on the market: http://www.theverge.com/2015/9/22/9367511/walt-mossberg-reviews-iphone-6s

Indeed it is. I had not seen it. Sorry about that.

To go back to the earlier discussion, this guy has some thoughts about the S cycle: http://www.aboveavalon.com/notes/2015/9/21/the-pixar-iphone

I am pretty sure Spier said that he does not invest in any healthcare companies (including DVA) for the reason you gave above. But it was some time ago, so I don't remember what exactly he said. He also may have changed his opinion in different interviews. Unless you count his investment in some healthcare companies through Berkshire (I would be surprised if he didn't own it).