Liberty

You're probably right. That's a good way to segment it too...

That's what I meant by "lite version". They pay more, don't cut as much, their tax rate isn't as low, etc. I guess that's less controversial. But still, are people not having trouble figuring out the performance of each of their acquisitions, figuring out the organic growth rate of everything (which they don't even break out most of the time), and untangling the accounting? Or are they not even trying because it's so much more fun to pile on Valeant?

By the way, not that I want start more controversy, but I was wondering if the people who are having trouble with VRX's model have looked at Actavis (now Allergan)? It's similar in many ways, yet doesn't seem to generate nearly as much controversy. I suppose that's the difference between getting first in the media with negative framing and that being stuck in everyone's mind forever and being the second company that follows in the already beaten path with a lite version...

Thanks, interesting read.

Thanks Jawn!

This is a real argument. I don't think it has anything to do with financials for VRX, but it's a different thing worth thinking about. I did consider it, and here's what my conclusions look like: Big pharmas are still very wasteful. The best place for a good portion of R&D is probably in smaller biotechs where drug discovery is the true incentive (rather than spend X% of revenue on amorphous R&D that keeps a lot of people employed by default whether they are working productively or not), or in those big pharmas that do have very productive operations. There are some things that big pharmas are best at, and they should keep doing those. When Valeant buys a small company for 500m or a billion dollars for their products and pipelines, it's pretty much equivalent to having spent money to develop those products. Valeant's bet is that often if they had developed those products internally, it would have cost them more than what they spent (especially after synergies and tax), and the uncertainty would be much higher (ie. safer to spend more on the 'D' in R&D). The money still has been spent on the R&D, just in roundabout way. It's a bit like in mining with majors and juniors. A lot of the riskiest exploration is done by juniors, and those that find something are then bought be the producers. When a major buys a junior, it's equivalent to having spent on exploration, only they did it through someone else but reduced risk by buying someone who has already found something. I think it's good for society when resources aren't wasted. If big pharma is finding fewer things per dollar than smaller companies, then the capital should be redirected to smaller companies and the big ones should focus on what they are best at. Discovering drugs is still so profitable that capital will always go in the field, you don't have to worry about it drying up and drugs not being found. The question is just how that capital is allocated within the sector. It's the same in other industries. You often have huge, slow, bureaucratic giants and small startups dancing all around them and building the future. I don't think it's fair to blame Valeant for not focusing on life-saving drugs or cancer or whatever. They specialize in certain areas that do help people (derm, eye health, GI, etc) and others focus on different areas. You can't blame Boeing for not looking for an AIDS cure or GM for not building hospitals for burn victims; it's simply not what they do.

Why do you say there won't be any R&D when you know it's factually wrong? Why do you keep writing as if Valeant has a portfolio that is at risk of having significant impact from generics competition when it clearly isn't? http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg233794/#msg233794 "People look at our R&D and say, that's a small percentage. But remember, big portions of our business like OTC/branded generics don't require much R&D. We probably spend 7-8% on R&D when you adjust it. It's low for some, but not as low as some." New product launches coming out of the R&D pipeline are helping them grow organically at double digit, and they've guided more of that for the coming years. This isn't a run-off portfolio of products. http://i.imgur.com/4QLdd5l.jpg Maybe I'm reading it wrong, but in this slide, it looks like the generic impact pretty much wipes out the sales each year a drug comes off patents. Buy hey why not let me show you only a 2% impact, because lets compare apples and oranges (A single product vs. the whole). Sorry, I'm officially done. Guess even after 4 times of me pointing it out (recently, also earlier in the thread) you still missed the part where only 15% of the assets were at risk and where even those that are at risk are being replaced multiple times over by new pipeline products and organic growth in other products. Another way to put it: Not the whole pharma industry faces patent cliffs. Valeant specializes in the parts that doesn't, even if they have some things that do (but which they get a good returns on even taking into consideration genericization).

http://variety.com/2015/digital/news/apple-eyes-move-into-original-programming-exclusive-1201582020/ Partnership with Cisco: http://bloom.bg/1Q459zH

This is a fundamental misunderstanding of the model. Saying "if they stop acquiring..." misses the whole point. Acquiring is part of the point, but if they couldn't, capital would be redirected internally. Most pharma companies have a huge bias toward internal development. Valeant is agnostic about where assets come from; some are developped internally, some are acquired, and some are licensed. As long as they meet certain financial criteria. This gives them a broader menu to pick from to select exactly the kind of assets that they want at the risk profile that they want (that's also why they focus on a lot of smaller products that don't interest most other big companies). It also helps that they are multinational but not truly global; they can focus on just certain geographies that grow faster or that have more bargains and ignore others, unlike most centralized pharmas that try to be truly global even if some areas are less attractive. There's also the meme that VRX doesn't do R&D. As has already been pointed out, OTC and generics don't require much R&D, so if you normalize for that, they spend a decent amount on the rest of the business. VRX doesn't spend a ton of money on R&D flyers with fingers crossed, hoping to find a blockbuster, they've looked at expected returns with that method today and it's not good enough, so instead they spend the development cash on more sure things and buy products outside the company and that makes things a lot more predictable. Since the pharma industry is quite fat (despite what the Allergan management claimed... Actavis ended up doing most of what VRX wanted to do), they can get nice synergies without cutting muscle (nobody's perfect but overall they seem to have a good track record); proof of that is in the organic growth in the segments that they've had for a long time and in the number of good things coming out of the pipeline. 3G and Capital Cities and Malone and most of the Berkshire companies understand how to operate very lean without cutting the wrong things, and I believe that VRX also does. What capital to relocate. They have a mountain of debt that needs to be paid back and need to achieve some pretty astronomical growth rates to pay it back before the cliff comes, because as you mentioned previously, sales are wiped out once a drug goes generic. I agree acquiring is the model, they need bigger deals (new debt to pay off the old debt) to keep it all going. One slip up on a large acquisition and it all comes crashing down. Either way I am done with this thread. No matter what types of issues are brought up, everything seems to be rationalized of why it makes sense. There is no way to convince someone here, or to even get them to contemplate the other side of the argument (why should management's claims be somewhat reflected in the 10-k's, am I right?). We sit here and compare Pearson to Buffet, but I don't recall Buffet having any track record problems over the last 50 years, or being leveraged 6 to 1. Then we talk about how durable a product that essentially goes to zero in 10-15 years is and proceed to compare it to Heinz or Coke. The CFO leaving, it's all good, why be part of the next Berkshire and make a killing when you can be a Board member, or Ackman's involvement with Allergan and Sprout, completely fine since Ackman has our best interests at heart. Sense, there is none here. Pretty much everything you said is wrong, so I'm glad you're done with this thread.

This is a fundamental misunderstanding of the model. Saying "if they stop acquiring..." misses the whole point. Acquiring is part of the point, but if they couldn't, capital would be redirected internally. Most pharma companies have a huge bias toward internal development. Valeant is agnostic about where assets come from; some are developped internally, some are acquired, and some are licensed. As long as they meet certain financial criteria. This gives them a broader menu to pick from to select exactly the kind of assets that they want at the risk profile that they want (that's also why they focus on a lot of smaller products that don't interest most other big companies). It also helps that they are multinational but not truly global; they can focus on just certain geographies that grow faster or that have more bargains and ignore others, unlike most centralized pharmas that try to be truly global even if some areas are less attractive. There's also the meme that VRX doesn't do R&D. As has already been pointed out, OTC and generics don't require much R&D, so if you normalize for that, they spend a decent amount on the rest of the business. VRX doesn't spend a ton of money on R&D flyers with fingers crossed, hoping to find a blockbuster, they've looked at expected returns with that method today and it's not good enough, so instead they spend the development cash on more sure things and buy products outside the company and that makes things a lot more predictable. Since the pharma industry is quite fat (despite what the Allergan management claimed... Actavis ended up doing most of what VRX wanted to do), they can get nice synergies without cutting muscle (nobody's perfect but overall they seem to have a good track record); proof of that is in the organic growth in the segments that they've had for a long time and in the number of good things coming out of the pipeline. 3G and Capital Cities and Malone and most of the Berkshire companies understand how to operate very lean without cutting the wrong things, and I believe that VRX also does.

There you go: https://www.dropbox.com/s/6xpowdh8zxn9svm/2014-jun-17-VRX%20Rebuttal%20Deck%20Final2.pdf?dl=0 Here, have the audio recording too: https://www.dropbox.com/s/vzsj6izy9zqdqdb/VRX-2014-jun-17-AGN-4th.m4a?dl=0

This is a strawman, though. I don't put no value on the audited numbers, I just haven't seen anything that makes me question them yet. I see a bunch of questions that don't always have answers, but I saw a bunch of questions with Hempton and Allergan too, and they were satisfactorily answered. VRX is one of the biggest pharma multinationals in the world which has been super heavily scrutinized in the past few years. Allergan even hired Goldman Sachs to attack Valeant, and Goldman had previously underwritten VRX equity so they were pretty familiar with it (lol). The very best that these teams of experts could find either didn't hold to a rebuttal from the company or was proven wrong by subsequent facts (wheels will fall off when they lap B&L, organic growth will fall over time, etc). The current crop of questions about the company, I believe, come from lack of information (there can be a dozen benign explanation for each question that I've seen raised). I've seen no smoking guns. Does anyone here believe that Ackman and ValueAct (at least) have not modelled the past acquisitions and looked at the company's numbers? The main difference with the bloggers here is that when these guys have a question, they can get it answered easily. If they had found problems or couldn't get good answers from management, do you think they would keep their many billions of capital invested? If VRX at this point is just a combination of all the acquisitions they did, why are the audited revenue and cashflow numbers going up so fast if the underlying acquisitions aren't doing well like some pretend? (and btw, some people forget to adjust for working capital changes -- the company is growing fast and launching new products) But how can you invest if you don't have all the information and can't reconcile everything, you ask? Well, I also own Constellation Software and I have even less information about each acquisition they do, and I certainly don't know everything that Malone is doing... At some point when you've been ingesting tons of info about a company and thinking a lot about it, you need to make a judgement. What I know about Valeant makes me trust them and their model. That could change tomorrow, it's not blind faith. But if you can't invest in anything where you have an un-answered question, you probably can't invest in much that is bigger than a lemonade stand. I mean, people here have no problem investing in Bank of America or JP Morgan...

Are you kidding?

I like how the journalist thinks that losing money this year and being the most important car company in the world down the road are somehow mutually exclusive. Tesla is building the biggest battery factory on Earth (which will significantly slash its battery costs), ramping up production at about 50%/year, working on two unreleased models (Model X, Model 3 -- but they also said they want to do a F150-like electric pickup truck down the road), building a worldwide network of superchargers and company-owned stores, writing software for self-driving cars (and possibly a robot-car Uber-like service down the road), launching Tesla Energy which sells stationary battery storage to consumers and utilities, and working on who knows what other secret projects. If they weren't losing money, I'd be surprised. Cut all that investment in future growth, and things would look financially different now (better), but they would also look different (worse) in 5-10 years... In any case, it depends how you define "important", but Tesla is arguably already the most important car company in the world when it comes to technology and products (nobody else that I can think of has captured everyone's attention and influences the direction of the whole industry down the road).

I'd guess Buffett too. 4.5 billion is a bit big for T&T, and Buffett had a position in it before (that he swapped for some assets for Lubrizol), so that sounds like him.

More stuff that I think some of the newbies to VRX might find interesting: http://i.imgur.com/6lPkNxu.jpg http://i.imgur.com/fvnEHd0.jpg http://i.imgur.com/2MC268x.jpg http://i.imgur.com/2qW6TrN.jpg

Rather than just look at what the shorts said, maybe you should also look at the rebuttals by the company? The medicis severance costs were explained. The majority of the whole costs went to pay the golden parachutes of the Medicis executives based on contracts that the Medicis board had negociated with them prior, and Valeant honored those contracts. As I said earlier, Pearson's model is closer to Malone's than most. I suspect that people who don't like Valeant also don't like Malone, and that's fine. Different strokes. Edit: Here. There's more detail in the transcript if you need it. The CEO of Medicis alone got almost 23m, and 37 other people got over 60 million: http://i.imgur.com/aRdcyFR.jpg http://i.imgur.com/utQgYyL.jpg btw, Medicis is the company that VRX has given in example multiple time when they talk about things they learned and doing it wrong. There they cut the salesforce too much (I guess they mostly wanted to keep the assets and use their existing derm operation to sell them). Now they keep salesforces and usually expand them, and as we've seen with B&L, it seems to be working quite well. They didn't cut as much as Medicis in the past, and havne't after (unless they just want the assets). And they've said that the B&L team they inherited from private equity wasn't that great, so they replaced many people too...

It's the Apple model. If they can stay differentiated and desirable enough to a certain segment of the market, they can retain a lot of the value despite falling battery prices. But if they aren't much better/different than anything else, they'll have to compete on price and the margins won't rise much. It's harder to do with cars than with pocket computers, but it's doable. If in 5 years a Model S is better than any $60,000-100,000 car on the market, they can charge 60-100k for it even if the battery costs them $8000 at that point rather than $30,000-40,000 now or whatever. Commodities are priced on production costs. Differentiated products are priced on the value they deliver and what the market will bear.

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. Great post. +1 We're seriously looking at a pharma company on the basis of tangible equity and book value now? Man, don't look at other pharmas.. I hear Zoetis is selling for 20x book... Certainly don't look at software either. CSU is selling for 40x book, and that's not even tangible! IBM, one of Berkshire's biggest holdings, is still over 10x book despite the recent fall in stock price. Heck, Moody's, one of Buffett's favorite business models and long-term holdings, has negative equity! Personally, with the right kind of business, I love asset-light models. It's a big plus, not a detriment...

Malone basically popularized the use of EBITDA. He's also a big fan of complex structures as long as they optimize value creation, he never cared for how things look in GAAP, he's a big fan of the use of generous leverage when he thinks the assets support it, he did hundreds of deals in a very short period of time, and he's a big proponent of being very lean with anything that doesn't directly create value or doesn't have a good ROI. Pearson's model is certainly closer to Malone's model than Buffett, no doubt about it. btw, Berkshire owns a bunch of stock of many Malone businesses. Certainly Todd and Ted's doing, but these guys have Buffett's and Munger's blessing and full support. There are exceptions to every rule; some people use EBITDA to hide, some use it because it's a more useful metric to track than GAAP for some businesses (as long as you keep in mind what it is and don't delude yourself that it means FCF). The 3G guys - Buffett's buddies - are also similar in many ways to Pearson and Malone. Very acquisitive, very focused on core value creation and cutting fat, comfortable with debt with the right assets, etc.

http://clarkstreetvalue.blogspot.ca/2015/08/lilac-group-liberty-globals-new-tracker.html

Evidence of durability comes from the past 7 years where that part of the portfolio grew. I've already said what I think about the non-weighted CAGRs somewhere else. It says one thing, weighted says a different thing. Both are useful but flawed. What matters is they gave the line data and not just the overall. As for the rest, welcome to investing. You know everything that's going on in every corner of Danaher or Liberty Media or Berkshire or IBM or Constellation Software? Or even more boring stocks like WFC, MA, JNJ, GE? VRX actually provides a lot of disclosure compared to some of those. You'll never have all the data. You have to make judgements based on incomplete data. Correct insights matter more than spreadsheets. Or maybe you don't invest until you have board-level raw data? What's in your portfolio? All easy-to-understand, right?

Look, it's not my fault if you don't understand the difference between a product at risk of patent cliff and one that isn't. I don't mean to post the same thing again and again either, but you keep repeating that stuff about Valeant assets being worthless in a few years or whatever, so I'm trying to make it clear. As for AZ's work, I'm sure it was hard to put together, but I trust it less than management and other investors with billions on the line and inside access. All he's done is raise questions to which he doesn't really have the answers to because he doesn't have access to the actual facts of how things were structured. I'm starting to wish he would just get in touch with IR and get to the bottom of the Sanitas acquisition so we can stop hearing about it. This is just more of what Allergan and Hempton served us a few months ago. If you want more, you can go back and re-read those. The wheels were supposed to fall off when they lapped B&L because they had no major acquisition in a year; instead, GAAP climbed up toward the adjusted numbers... Organic growth was supposed to fall because of lack of re-investment; instead, it kept going up because outputs matter more than inputs. Etc. But even Allergan didn't claim that VRX's didn't have lots of durable assets...

So that's what happened in the past 5 years, right? Oh, maybe not.. Did you miss the part about organic growth? They are growing at double-digits. In 5 years, they'll get more revenue from the current assets, not less. Please explain to me how their portfolio - which grew same store sales organically 19% last quarter and above 15% TTM - is in a precarious position? I did a calc a couple of posts back using growth for Salix (and put quite the multiplier on EBITDA achieved in year 1). You pulled out a chart that says a drug sales gets wiped out once it goes generic. What I did was show you what kind of growth rates you need to be able to pay down the debt associated with the drugs by maturity, which is pretty far out. My growth rate was multiples of what you just told me. So once I pay down debt I'm nearing the horizon, and net I haven't really made any money. By this point 7-8 years out, how much value did I get out of Salix? i'll save you the hassle of going back. I used a 40% growth rate, starting EBITDA $700 million (2-3x what Salix made last year). So now that I have your chart i can safely say you answered your own question on growth and the value VRX brings with it's acquisitions. Ok, I can't repeat it for a 5th time, at some point it just gets pointless, but only small portion of the assets are facing patent cliffs. Salix is growing extremely fast (previous management's inventory shenanigans notwistanding, but I like it since it allowed VRX to buy more cheaply), and with the new IBS-D, it'll grow faster. Salix also has things in the pipeline... Anyway, if you believe your work, I suggest you short Valeant. The revenue is going "poof" within a few years according to you, right? Safe bet. I believe my work, and I own it.

So that's what happened in the past 5 years, right? Oh, maybe not.. Did you miss the part about organic growth? They are growing at double-digits. In 5 years, they'll get more revenue from the current assets, not less. Please explain to me how their portfolio - which grew same store sales organically 19% last quarter and above 15% TTM - is in a precarious position?