Liberty

Ok, I'm going to say the same thing I just said, but I'm going to attempt to be even clearer: Valeant was about 85% durable products. That means that there is 15% that is facing some form of patent cliff or other. The 2% of revenue that is projected to be at risk in the coming years comes from that 15%. The other 85% is durable, thus the value does not "pretty much go to zero in 10 years or less". The overall portfolio (15% + 85%) is growing organically at double-digits including those patent cliffs, so they're not a problem. Some products go off patent, and some new products come out of the pipeline (Jublia, RetinA Micro). The cycle of life. Clearer?

Ha ha Liberty, lets not base our investment on Santa Claus coming to town! I know he exists, so good for you if it does happen. Also I dont think Cash EPS is a good number to use. they have stock expense added in there, common that is a real expense. If you want to use Cash EPS, then 80% of cash EPS is a decent approximation for FCF to Equity IMO. Use EBITs and EVs. With debt where it is Cash EPS multiples will look low than they actually are. You probably remember the Cash EPS multiple at 100 :) it was not that long ago. Acquisitions since then didnt change the company that much fundamentally unless you assume Salix was purchased for a song. Even if that elephant doesn't happen I think things will be fine, but this is part of the upside that many people seem to forget about :) I'm comfortable with the debt. They'll probably keep it around 3-4x over time, it's a good tax shield. It looks artificially high right now because of Salix inventory issues. And I'm comfortable with the adjusted cash EPS, among other metrics. It's a decent proxy to track growth in the earning power of the assets. I'm not saying it can be taken to the bank directly, but it works.

That's ridiculous. If you had followed the link here, you'd have seen that they had about 85% of durable products last year. That has changed somewhat since because of acquisitions: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg233794/#msg233794 Yes, they lost 2% of revenue to patent cliffs. And they grew organically double digits. The organic growth includes the revenue lost to patents, btw. Not too bad, eh? That a drug goes off patent isn't a bad thing, all that matters is the return that you have made on your initial investment in that drug. In fact, Valeant sometimes buys products that are about to go off-patent from other companies because others want to hide them because declining revenues don't look good; Valeant pays little and gets very good returns on these tail products. In the past they had more of them, which kept the organic growth from the durable part of the portfolio hidden, but lately they have fewer.

At the AGM they said: "Expected EBITDA >$7.5B in 2016, Commitment to reduce leverage to < 4x by 2H of 2016"

They model it pretty conservatively, sometimes it's better, sometimes it's worse. But I don't understand what your complaint is. If they have 100 products (to pick a number) which generate $100 a year, and patent cliffs make them lose $2 a year in revenue, that's what the patent cliff impact is for the portfolio. The reason why it's only 2% for Valeant is because most of their portfolio isn't facing patent cliffs and they don't rely on big blockbusters but rather a large number of smaller products, as per the link in my post. It's things where there's not generics competition, or it's already off patent, or it's dispensed by doctors and patients just take what is given, whatever. At other companies, you might have a year when 20% of your revenues go off patent and you have to scramble to replace that revenue, etc. A lot less predictable. And some other companies might have the majority of their revenue coming from things that are patent protected and in areas where there is generics competition (big blockbusters, easy to make drugs, etc). Very different position to be in.

I think it's cheap. Once Salix normalizes, it's trading under 15x cash EPS even if they stop making acquisitions, but I don't think they will. I think that's a low multiple for the quality of the assets, the management, the runway in front of them, and the kind of per-share growth they've shown. And I think people focus too much on the market cap and not enough on all the ways of creating per-share value that are available. If they ever become too big, to a point where it's hard to move the needle, I think they'll do divestitures, spin-offs, etc, and keep things going longer than most people expect. They are not empire buildings, but rather try very hard to optimize per-share value. It was certainly cheaper at $100, though. The debt doesn't worry me too much because the assets are durable and growing, and it's smart to take advantage of historically low interest rates rather than dilute when you are undervalued. I think they'll probably find someone to merge with at some point, delever all at once, create a ton of value with synergies, and have a reloaded gun. Could happen very quickly. With some patience, at some point the right elephant will come along; good assets, fat structure, CEO who cares more about the golden parachute than anything else (kind of like how Comcast and CHTR went after TWC when it was clear that management was ready to sail in the sunset with the cash). In the meantime, they are deploying capital at a good clip. A billion here, a billion there... Soon it adds up to real money.

It *is* the whole key to the model. Ackman understood this, and he highlighted it when he first tried to explain the company's model, and he no doubt put extra emphasis on verifying this when he had insider access for 4 months: http://i.imgur.com/jfdEq0c.png http://i.imgur.com/RUTGGOI.png http://i.imgur.com/Nz5yNvr.png http://i.imgur.com/ejNZTwE.png Now I know that the people who only care about spreadsheets will discount all this because these are - gasp - slides. But what matters is the information and the understanding of the company that they can bring (I was in VRX before Ackman, btw, so this only helped confirm what I already thought). If the assets are mostly durable, and they are growing, this is very different from another company where almost everything is facing patent cliffs and R&D can't replace value as fast as it erodes. Very different. I mean, do we think that Valeant is lying about it's overall rate of organic growth? Forget about the presentations where they break out each acquisition. Just the overall organic growth. That's a fairly simply math, right? Just break out what was owned for longer than 1 year. If they aren't lying about that, then the assets are growing quite fast and are not facing significant patent cliffs, and this was confirmed during the year when they didn't make any major acquisitions. And if they are lying about overall organic growth, why are the audited revenue and cashflow numbers going up so fast? Where's all that money coming from if the businesses aren't growing. We know how big the acquisitions are... And it isn't just Ackman. ValueAct has been on the board since the start and hand-picked Ackman, and the board is involved in all acquisitions and in tracking all past acquisitions. You don't think ValueAct would raise questions about fishy numbers with all the money they have on the line? Some problems are best solved at the micro level, and some are best solved at the macro level. I think trying to go micro on Valeant is making a lot of very smart people spin their wheels because they simply don't have the information they would need to create a model that makes sense. It's like trying to reverse engineer a complex piece of software without the source code, and many things could be explained 15 different ways but you can't know which one is the right one. But if we look at it on a more macro level, we can make a judgement based on probabilistic thinking; there are people who have access to the 'source code', and these people have put billions on the line as well as their careers and reputations. A Goldman Sachs partner joined, the head of McKinsey's global pharma M&A - no doubt one of the world experts in the field - has looked at it and recently joined as CFO. ValueAct hand-picked the CEO and has been on the board with access to everything for years, Ackman - a man with a great reputation for finding complex frauds like MBIA - has had insider access, etc. Then when you look at the market structure and strategy, does it make sense? It certainly does to me. Then you try to get to know the people involved, listen to dozens of hours of presentations and calls to figure out how they are thinking, etc. I might not end up with a 30,000-cell spreadsheet at the end of the day, but I think I have a basis to make a judgement, just like with DHR or CSU or BRK.

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

Your signature shows your portfolio, right? You understand all the numbers at American Express? Fairfax? Liberty Media (what's the IRR on the Braves? Are the Live Nation financials completely clear to you?)? Lancashire? Gilead? Who here can reconcile every line for ever division and acquisition at Danaher or Berkshire (let's not even talk about Berkshire a few decades ago when it was a bunch of cross-holdings with Blue Chip Stamps.. so messy the SEC pushed them to simplify and suspected fraud)? Anyone understands all the recent acquisitions at Mastercard? Anyone can untangle Google and every one of its investments, acquisitions, and side projects? If you think trusting management isn't a big part of investing, you are deluding yourself. Valeant was battle-tested in one of the most aggressive campaigns that I've seen. They came back with rebuttals to Allergan's and Hempton's attacks that satisfied me. Then their GAAP numbers even converged with adjusted. I believe that AZ is working really hard and probably has good intentions, but he has incomplete information, and I think the chances are much higher that things don't line up because he's missing pieces of the puzzle rather than because the company is defrauding the market (because that's what it would be if they claimed a certain business performance while it actually is something else). Would the world be a better place if all the pieces of the puzzle were out there and VRX published a phone book every quarter? Probably. But like other companies I've mentioned previously, we have to make a decision with the level of disclosure that we have. AZ, have you considered picking one or two questions that you really want answers to and contacting VRX IR?

Nice find, Bagehot.

I'm still waiting for a bear to address the fact that the products are durable and growing, which pretty much invalidates the rest of the bear thesis about the decline and threadmill and debt load wall (we also saw during the Allergan saga that when they stop making big acquisitions, the GAAP numbers rise to meet adjusted, and not the other way around). After that we're just arguing over whether they will get good returns on their investments or not, not whether we're facing some calamity... If the company's numbers are good enough for Sequoia, Lou Simpson, Bill Ackman, John Paulson, Glenn Greenberg, and Jeff Ubben, they are good enough for me. I'm humble enough to know where I stand in comparison to those guys and the resources that they have (including board access and raw numbers access for some).

so I took the debt value as of Q2/15.....the article is as of Feb 2015 with the deal closing shortly after. Why would my debt number be wrong? Also, before you point out the numbers don't match, it's because I'm looking at it in CAD, but then again my earnings are also Cad, so net, the ratios are the same. Well if you took the value as of Q2 2015, with a December 31 year-end, would that not be debt as at June 30th 2015 which would include debt to finance an acquisition closing shortly after February 2015? Unless they decide to pay down debt between now and December 2015, the number I gave you is what it stands at as of today. Cash on the books is only 995 USD,so call net debt like $29B USD. Looking at the Q, it doesn't look like they issued equity for the deal, and they sure don't make enough money to fund it off the books, so I'm sure that debt is here to stay for a while. Looking at the note, it looks like most of that debt is also due in about 8 years. All being equal it will probably be easy to refinance should the market remain call and you have the cash flows (which I'm sceptical about). The issue arises with, what if they don't grow fast enough, AZ's analysis shows they aren't, and I agree with him. No mater how you or Valeant calculates cash, debt is debt, that is hard money due, a bank isn't going to take your adjusted number as an excuse. So while it could be a 10 year growth story, one would hope that growth is very much front end loaded given what will happen after a patent cliff. Also remember AZ's simple IRR formula only looked at cash flow after interest payments, he didn't account for CAPEX or the debt repayments. Think about how much money you would have to generate in excess of the massive amount of debt repayments you have to meet that 20% IRR hurdle over the life of the drug, then when you are done the math, take a step back and see if that growth number makes sense and is VRX generating that much on the bottom line. You can add back all the restructuring charges and one-offs you want, cash will be what you have in the bank, not what you show on a slide All I'm getting at is, they are highly levered (approaching bank territory), and have products that truly only have a finite life of around 10 years. As long as you keep acquiring you can issue new debt to pay the old debt, but there will come a point in time where if your cash isn't coming to fruition, trouble will come swiftly. VRX needs big acquisitions to keep the party going. Product life isn't around 10 years. Look a bit earlier in the thread, I posted a breakdown of what is durable and why. And if the company's own audited numbers are more reliable than AZ's numbers, which I believe they are, they are showing strong organic growth which makes the debt load relative to the earning power fall over time. The whole argument that 'the assets are losing value but the debt is retaining its value so all they can do is borrow ever more to buy ever more declining products until they hit a wall' is incorrect. The assets are mostly durable, they are growing (now guided double digit based on current pipeline for at least 2 years, expected until 2020), and new acquisitions are adding value because they target good assets with inefficient management, buy into fast-growing therapeutic areas and geographies and optimize profitability with lean operations, targeted R&D, low tax, and the scale benefits of plugging products into a large existing salesforce. Anyone who doesn't believe that there's a lot of fat to cut in large, high-margin corporations, and that strategy and capital allocation can't be improved by superior management (or at least more shareholder-friendly management) at such companies (especially if you target the most inefficient ones with good assets) needs to get out in the real world more. I've worked at a startup that had lots of fat to cut...

Now that we're on the topic of probabilities, here's what my mental model of the situation is telling me. I think it's much more likely that AZ Value is coming to the conclusions that he's coming to because of his imperfect information about the situation. I believe that if he could sit down with Pearson and the CFO and ask them questions, they would go "the reason for this is X, and the reason for that is Y, and here, let me show you our deal models and the formula we use to compute our IRRs" and that would probably clear up 99.9% of it. I'm sure there are lots of complexities with IP transfers and merging existing businesses into acquired ones, international rules, DTLs, accounting choices on one way to account for things vs another, etc. I think it's a lot less likely that AZ has pierced through a veil of deception where the company is basically lying about the performance of its businesses, which would either mean that the revenue and cashflow numbers in the 10K are lies, because they are just an aggregate of the performance of all acquisitions thus far, or that they are true and they are getting these kinds of numbers with much lower performance than reported in the underlying businesses, which would be impressive in itself but doesn't really make sense. Because let's not sugarcoat it, if the businesses are really performing one way but the management is saying something else that isn't just an honest mistake, that's lying.

This is very true, which is why when you invest in a company that is a good part the brainchild of a capital allocator, you need to understand their strategy, why it works, and how they think. You need to become really comfortable with them. Judging people is a skill that not everyone has. I don't think the people here who have come to trust Pearson and his strategy have done so after "one lunch". Same for Malone or Nick Howley or Mark Leonard, or Buffett. No one here understands everything that's going on with the acquisitions at Constellation Software, I can guarantee you that. The only reason why Constellation doesn't have the bears that Valeant does is probably because they disclose even less about their acquisitions and they don't have a media narrative, so they fly under the radar and there isn't much for people to sink their teeth in. I could write similar things about how people don't really understand what's going on in various divisions of JNJ, MA, and IBM either, you get my point. Yet should the company be ignored just because one cannot build a tidy spreadsheet model where everything adds up? That's where investing being a probabilistic thing comes in. You can sometimes miss the forest for the trees.

Some info from last year just to put things in perspective for those who haven't looked at the overall portfolio of products and what makes some products more "durable" than others: http://i.imgur.com/NBay6fU.jpg http://i.imgur.com/KPCSaL7.jpg http://i.imgur.com/RmZYuZT.jpg http://i.imgur.com/C3myuTW.jpg http://i.imgur.com/aA5CUtm.jpg Since then with Salix they've become a bit more concentrated in the top products, but they've added a new therapeutic area where they have a leadership position, which is diversifying, and the Salix products will probably keep growing faster than the average legacy Valeant products for a while.

Thanks for taking the time to dig in, I think you're doing very good work and I appreciate some of the private messages we've exchanged. I hope you'll keep sharing your thoughts.

Can everyone calm down and take some of the side discussions to private messages please? Thank you.

Yeah, it's not like the Malone/3G/Capital Cities model could ever work in the pharma industry, right? That's just ridiculous! It's not like the past 7 years that they've been doing this really shows anything, right? Let's wait another 10, and wait for a few more handfuls of sophisticated big bulls and bears to dig deep in the company before we start to consider that maybe it's happening. You might have described Martin Franklin, though. Anyone who's an expert in consumer products, industrial chemicals, and packaged food must also be an expert in beans, right? Nothing like buying a durable business and comparing it to an industry where once you hit the patent cliff your pricing and volumes go out the window. In theory the VRX model is fantastic, find someone to sell you a company at 80 cents on the dollar, cut expenses down to the bone, rinse and repeat 100 times, and say you are making a killing doing it. However, you need to keep buying, you can't stop, because if you do the massive amount of debt will crush you once it catches up (interest is like 1/8th of revenues), and it will since VRX is not making as much money as they lead you to believe. Unlike VRX, 3G purchased a brand, a brand that has sold the same product for decades. It doesn't fall off a patent cliff, people will not stop eating ketchup, and people aren't going to be frugal and try to save 50 cents to buy a cheaper brand that tastes "different. So yes, stripping out the fat from Heinz makes sense, how much more could you possibly spend on R&D to improve your product, who else are you going to buy (you own the market). 3G saw an opportunity to make a lot of money in a stable business, and took advantage of it, however, they pick their spots, they know they won't find 100 businesses they can do this in an make a ridiculous amount of money. I think patent cliffs strike the imagination so much for big blockbusters that people don't realize that there isn't as much generic competition in all parts of the pharma industry. You think generics-makers are as interested by every small product out there? You think it's as easy to get a skin cream right as a pill? There are pros and cons to being in the pharma industry. Yes, patents are an issue. Valeant is quite good at mitigating that (lots of branded generics/OTC, stuff in therapeutic areas where generic competition is weak, where reformulation/extensions are easier (skin creams, for example), broad diversification, etc), as can be seen by the 2-3% of revenue that is facing patent risk per year over the foreseeable future. There are also benefits to being in the pharma industry, like gross margins in the 70-80s range, the ability to host IP in low-tax countries, etc. All things which I bet Heinz would love. Valeant doesn't have to find someone to sell them a business for a lot less than what it's worth, as has been clear for a long time. They just need to find a business with good assets and sub-optimal management. They fix the bad management part (cut fat, sometimes optimize salesforce, get out of bad markets, etc) and that makes the asset more valuable by itself, which is further augmented by the superior tax rate. If they can find something at a bargain price (like Salix because of the scandal), even better, but the model doesn't require them magically finding huge bargains. Decent prices are enough. Not that there aren't always some bargains somewhere around the world (they just bought a big company in the middle-east)... It's also annoying when people talk as if Valeant had zero reinvestment in the business, like it's just milking existing products waiting for them to die. They have had many very successful launches lately with more in the pipeline, and they are predicting double-digit organic growth for at least 2 years forward, saying they are confident they can sustain it to 2020 with 7 new products that have the potential to be billion-dollar in revenue (not all of them will work, but some probably will). Their generics business doesn't require much R&D, and the rest of their development has been very dollar-efficient (Jublia developed for 40m, now one of their biggest products). Unlike some here and many in the media and industry, I care more about the outputs of their R&D than the inputs... And sales also matters: They've grown many products from almost nothing to top products in a short period of time (ie. CeraVe), R&D isn't the only way to organic growth.

Yeah, it's not like the Malone/3G/Capital Cities model could ever work in the pharma industry, right? That's just ridiculous! It's not like the past 7 years that they've been doing this really shows anything, right? Let's wait another 10, and wait for a few more handfuls of sophisticated big bulls and bears to dig deep in the company before we start to consider that maybe it's happening. You might have described Martin Franklin, though. Anyone who's an expert in consumer products, industrial chemicals, and packaged food must also be an expert in beans, right? Why do you keep comparing Pearson to Malone and Buffett? He is not Malone or Buffett. Never said he was them. Just that he had a model with many of the same elements, and his ways of thinking are quite similar in many ways.

Yeah, it's not like the Malone/3G/Capital Cities model could ever work in the pharma industry, right? That's just ridiculous! It's not like the past 7 years that they've been doing this really shows anything, right? Let's wait another 10, and wait for a few more handfuls of sophisticated big bulls and bears to dig deep in the company before we start to consider that maybe it's happening. You might have described Martin Franklin, though. Anyone who's an expert in consumer products, industrial chemicals, and packaged food must also be an expert in beans, right?

Why doesn't John Malone do that? Why doesn't Buffett allow us to figure out what's going on at every small division, break out the IRR of every acquisition, and make it easy to understand every major reinsurance contract? Some stuff is just inherently complex, and some people will always want more disclosure than you provide. No company is perfect in that regard.

I haven't read the new installment yet, so I can't comment, but that's my main problem with all this. It feels like a blindfolded man feeling around an elephant and going "this is definitely a snake, this is definitely a tree trunk" (all I mean by this metaphor is: You don't have all the data you would need to see the whole). Taking numbers of of context (unknowingly), comparing apples with oranges, extrapolating stuff, not knowing what you don't know (impact of tax attributes, IP movements, restructuring charges, various possible accounting rules (especially international differences), the way certain deal models might be more front-loaded or back-loaded, etc). This is very similar to a lot of claims made by Hempton and Allergan, and when Valeant actually took the time to address them, there were good reasons for all the supposed discrepancies. Allergan waged an all-out war against Valeant. They hired no-expenses-spared consultants and bankers to dig deep and attack Valeant, and the best they came up with didn't stick. I doubt that trying to reconcile fragmentary numbers is going to tell much. And what this has been so far has been an accusation of fraud - businesses performing one way but Valeant saying they are performing another way - which the 10K overall revenue and cashflow numbers either prove or disprove. Since these numbers are the aggregate of all M&A, and since it is claimed that the acquired companies are actually performing much worse than claimed, then why are overall revenue and cash numbers what they are? Did Valeant lie about revenue and cash too?

Ha, they broke the Consumer Reports rating system 8) http://www.consumerreports.org/cro/cars/tesla-model-s-p85d-breaks-consumer-reports-ratings-system

I'm a tourist in autos, but I hear about the age of the fleet a lot. That is getting old, but do you guys take into account that modern care are more durable than cars from a few decades ago? I expect the age of the fleet to go down, but I wouldn't expect it to go down to what it was back when everything broke on your car past 5 years...