Liberty

Definitely true that maps (and music) are viewed as table stakes by all the big players. I think we're seeing "payments" being added to that as well now. It is counterintuitive, but important to note, that one of the major missions of Apple Maps is actually keeping Google Maps on the iOS platform, and produced at a high level. Apple suffered enormously when OSX got sub-par versions of important software franchises (Office, all games) and I'd say they would probably prefer a world where Google continues to pour a lot of effort into Google Maps for iOS, rather than a world where Apple Maps pushes all other solutions off the platform, suddenly providing a switching rationale for users. I agree. That's also why apps like Photos and Notes can't be too complete of a solution for all users. As much as people talk about Apple being intergrated, the low-value parts of the ecosystem (software, hardware components) are all very modular. (...at least maybe that explains why Numbers doesn't have the XIRR function. It's almost too big of an exclusion to attribute to incompetence or neglect, although that's probably why.) The parallel between OS X and iOS works differently, IMO. The reason why Mac OS (and later OS X) didn't have all the important software that Windows had was because there wasn't much money to be made on it. It had a small market share, and the most valuable users at the time - businesses - were on Windows. Why spend the resources to develop a Mac version if you are a software developer? Today, iOS has a large market share, and the section of the market that it has is almost the whole profitable end of the market. Google and Microsoft and others will keep developing for iOS because they make more money there than on other platforms. Similarly, startups tend to develop for iOS first and sometimes iOS-only because if they want their business to take off, they need to be in front of people who are ready to pay for products and services, and also because with limited resources, it's less expensive to develop for iOS (you can target the latest version with all the newest features, rather than target a fragmented market where, if you develop for the very latest features, most of your users won't have access).

Valeant's ideas don't work because they are original trade secrets that nobody thought of before. Pearson even said so himself when asked by analysts about what keeps others from just copying their model ("nothing"). It works because of the execution and because it's hard, uncomfortable work that most are not willing to do, or even consider. That's also why there aren't tons of other people who do what Buffett or Malone or Singleton did despite these models of high returns being available for all to see. It's like value investing, good capital allocation, whatever. If it works and it's not a secret, why doesn't everybody just do it, right? Back to the efficient market theory for ideas. Other pharma CEOs most definitely aren't idiots, but that's not the bar for great value creation that accretes to shareholders. Same for CEOs in most industries, for that matter.

I am skeptical that you can maintain the quality of your portfolio and pipeline by cutting expenses to the bone ('doing more with [much] less'), but Valeant is free to prove me wrong. Cutting to the bone? No, I don't think so either. But I don't think that's what Valeant is doing. They are just spending differently. They cut the R&D that gets below a certain estimate ROI and keep the rest, try to be more efficient with that spending too (using spare capacity at external labs, doing zero-based budgeting rather than just spending a % of revenue every year), and then they do tuck ins to add products to their portfolio. So when they buy a small south-korean contact lens company and plug it into B&L's worldwide distribution, that might get them a better ROI than if they had spent the R&D dollars in-house to develop a new contact lens. Most CEOs in the industry have come up inside big pharmas and they only knew one way to do things all their lives. Pearson worked closely with the industry, but from a different vantage position, and that seems to have given him a different view of how to maximize returns (focus on certain geographic markets, on certain therapeutic areas, keep a certain kind of R&D, focus more on M&A and sales, get a low tax rate, operate very lean, keep things very un-bureaucratic and decentralized with good incentives for local managers so they feel ownership, operate with a low-margin mentality even if in a high-margin industry, etc). You can dislike the strategy, but there's more to it than "cut R&D to the bone and hope things grow faster".

Nice, the efficient market theory for ideas. "If it was really a good idea, don't you think someone else would already have done it?"

Gio, saying things like "if they're telling the truth then X" is tautological, it's not the best argument. Rather, what I'd like to see is someone actually convince me that they're not performing the way they claim. All I'm seeing so far is accusations of the type Allergan and Hempton did, which are based on estimates and other proxy numbers that when the company takes the time to refute, turn out to be wrong or missing something. I don't have answers to all of AZ Value's questions, but as I pointed out, raising questions is not enough. We have to assume massive incompetence from the part of a whole lots of top people who are basically black belts at analyzing businesses and good corporate governance if, with board access and billions on the line, they can't do a better job than an anonymous blogger. So far I haven't been convinced, and I find the other side much more convincing, but maybe something will come up tomorrow, you never know, which is why I keep looking.

Pot meet kettle. Believe what you want. I value Hempton's opinion way more than yours.

If you think VRX is dumber about acquisitions and drug potential than anyone with a cursory understanding of this drug, sure... Or maybe they know better than you and are good at this stuff. No need to get personal liberty... It's just an investment I accept i am only spouting what I read elsewhere. Thought it was funny that with the drug female libido could increase chances of having sex from 0.5-1 time a month. I am sure you hand your guy the Coors lite once a month you can have half the sex anyway. I used the word 'you', but it wasn't meant to be personnal in any way other than addressing what you said. No other subtext. I think people are way too quick to label deals good or bad based on little info. Same thing happened with Provenge. Maybe the deal will turn out to be bad, but I think at this point, with this track record, we should at least give them the benefit of the doubt that they know what they're doing.

If you think VRX is dumber about acquisitions and drug potential than anyone with a cursory understanding of this drug, sure... Or maybe they know better than you and are good at this stuff.

All right, I'm not going to be sucked in repeating all kinds of stuff that I said 5 times earlier in this thread now that VRX is back in the spotlight and all kinds of new people are joining the fray, but I'll say that I don't think anyone ever said that Valeant doesn't have significant patent protected products. Just that patents cliffs for the near future are very small, that a lot of their stuff is in areas of lesser generics competition and where it's easier to do reformulation and extension work, etc. They also have a very diversified portfolio of products compared to many other pharmas, which reduces the impact of losing any single product (ie. don't have a couple billion-dollar blockbusters on which everything depends). A lot of smaller products also add up to a lot of revenue when you put them together (lots of OTC, branded generics, etc), even if not in the top 5. A 70-80bn company who's biggest product is 148m (which they just acquired) isn't too dependent on any one thing... And btw, Jublia was internally developed and recently launched (if I remember correctly, it was mentioned somewhere that the cost of developing it was something like 50m). No R&D, yea....

Because it matters tremendously. When writing about something as complex as a company, there are thousands of things that you can write about, include and omit. You can describe certain people a certain way or another, etc. I highly discounted Hempton's analysis because he was clearly foaming at the mouth, trying to get Ackman. That impacts his judgement. I'm not discounting AZ Value's post because I don't know who he is and what his motivations are, but the questions about those are totally fair. This isn't a mathematical theorem or a physics equation where all the information is contained within the work. This is more like a journalist writing a feature piece about someone or an event. The end result can be totally different depending on who writes it. No, but that's not what this says. All it says is: "When we acquire something - forget about size for a minute - on average is does CAGR X". It tells you something about whether they typically create value when buying something. Now how much dollar value was created will depend on the size of each acquisition, but as I said, if what you want to know are dollar amounts, these can be found in the regular financials. How the company is doing is the cumulative performance of all its acquisitions, right? Certainly not the base tiny company that Pearson took over in 2008... Dollar-weighting it on that slide would have been fine, but it would have said something completely different. For example, if you have an acquisition with a big tail product that is declining in revenue, but you are still making good money on it because you paid little for it, that decline will hide all the good performance of your other decisions. I don't think there's a perfect metric to put at the bottom of that slide. They're all flawed. Best to look at it line by line anyway, and to try to understand why each line looks like it does (declining revenue don't always mean value destruction -- as I said, depends how much you paid for that big tail product). I think they would probably have done better than that on Allergan, and that was bigger than the size of the whole company at the time. I don't know, but I think they have a good track record of both being opportunistic and walking away when the deal stops being good. And if acquisitions become hard for a certain period, they have other levers to pull (they've modelled a debt paydown scenario, and it looks pretty good. Could also do buybacks depending on stock price). I think some organic growth over the cycle is a must, but I don't think that's a problem so far. They've beaten my organic growth expectations lately and some of their new products are having very successful launches. What are you talking about? They just tried to buy Allergan, then they bought Salix, and deployed a few more billions in smaller deals. Hiatus? VRX management's self interest is for the company to do well for the very long-term, so I'm holding that as a positive. If they have a short-term bump but things crumble over time, they'll lose more than anyone because they can't get out - even Ackman, Greenberg, and the Sequoia folks don't have as much of their net worth in VRX as Pearson does.

Schwab, 2015 slide has a footnote saying that this excludes the B&L generics, which are now reported with Valeant generics. I think that's probably the difference. I know this is another thing that makes it harder to compare, but the company can't keep acquired companies the same forever, over time they incorporate them ever more tightly into the mothership and this makes comparisons with the original independent companies harder and harder.

So I finally had time to read your novella, AZ. Thanks again for taking the time to write it down and publish it, I appreciate it. I can't really say that you've changed my mind about Valeant, but it was an interesting read. A few things: Investing is a probabilistic activity. You'll never have perfect information and perfect understanding. Nobody here really knows everything going on in all the corners of Berkshire or Markel. You have to make judgement calls based on various factors, and what you wrote is now one more input in my mental model of the situation, so that's great. But I think that most of what you did is: 1) Point out what was already obvious, which is that Valeant is a very complex situation and that, like with the Malone companies or Berkshire, you can't truly understand everything that is going on just by reading the 10Ks. It's simply not possible. 2) Like Hempton and Allergan when they were attacking VRX, I think you've found nuggets here and there that look somewhat bad, but where true understanding probably can't be had without hearing the company's explanation of why things are like that. When that happened in the past, when VRX replied to accusations by Hempton and Allergan, I found that their explanations made a lot of sense. But if they had never replied, I probably wouldn't have answers to these questions because business is complex and messy and there are countless rules (steps this up, step this down, account for that part of inventory, what's in the contract with these people, currencies, taxes, etc) and it's fairly easy to find discrepancies, especially when you compare apples and oranges (ie. numbers from a 10K to a third party sources, or approximations and extrapolations which might not take into account some seasonal or one-time effects, or comparing documents across jurisdictions, etc). Maybe I'm the only one who thinks that using the average of CAGRs on the "how are acquisitions doing" slide is one of many perfectly valid ways to go. Obviously if you want to know the overall financial results, you need to look at the dollar-weighted number, but that's what the financials do. If you want to track how well you are deploying capital in M&A, then it's a valid approach to look at the average CAGR. Smaller acquisitions contribute fewer dollars, but you also put less capital into them; the question is, was the capital well deployed? If you dollar-weight it, why not just look at B&L and Salix and forget about the rest, right? They could have included both and that would have been even better, but the financials elsewhere already tell you how the overall revenues have been growing... You also point out that organic growth in 2013 was lower than that average CAGR that they use. I don't think that's a gotcha. If you look at any of the presentations for that year, or just the Q4 2013 presentation for example, you'll see that they break down organic growth and that year was fairly flat. They don't try to hide it; if they did, they wouldn't have a slide (#4) showing organic growth being 0% for FY2013 here: http://ir.valeant.com/files/doc_presentations/2014/4Q13%20Presentation%20Final.pdf (though that's kind of Ackman's point about one part of the business being tail products and the other growing; when you combine both, you get a misleading number, even if they get good IRRs on the declining tail products. That's why they can be happy about certain businesses with negative numbers, as Pearson sometimes mentions on calls) Back to probabilistic decision making: Pearson was head of global pharma at McKinsey and worked there for decades, getting insides dozens if not hundreds of companies. He was hand-picked by Mason Morfit and Jeff Ubben of ValueAct, who are on the board and have kept the company a huge part of their portfolio. Also owning a huge position are Sequoia, Glenn Greenberg, Lou Simpson, and John Paulson. Bill Ackman and his pharma consultant, Bill Doyle, have had insider access to the company for months before the Allergan deal. I know that some here try to hand-wave that as being irrelevant, and will point out to other situations in the past when great investors were fooled, but I still think it means something, and great investors who were fooled in the past usually didn't have this level of influence and insider access. I think that if Pearson was playing games, he wouldn't give insider access to Bill Ackman and Doyle, people who know the business and/or are experts at uncovering complex frauds. The VRX board is very involved in acquisitions, and the ValueAct people are some of the top people in the business; you think they wouldn't be able to do a better job than you with insider access? They don't rely on investor presentations and 10Ks, they have the raw data. It would also be hard to get a Goldman Sachs partner to leave GS and become your CFO (and he's now staying on the board, and Pearson has said that he's one of two hand-picked successors for the CEO job) and then have the head of pharma M&A at McKinsey to become the next CFO if this was just some fraud playing games with the numbers. These people have analyzed Valeant and bet their careers and a big part of their net worth on it. I think there's a higher chance that all those people are collectively right about their analysis of the value creation at Valeant than you are about it, AZ, no offence. I knew Allergan's attacks were driven mostly by ego and self-preservation, and that Hempton has a personal vendetta against Ackman. But you are a mystery to me in this equation, since I don't know you. I have to wonder if as an ex-employee of Medicis, the company that Valeant uses as an example of an acquisition that they did badly by cutting too much, maybe you have personal feelings about it? Maybe friends of yours were affected? Then again, maybe not, but it's a real possibility, right? If that were the case, you are obviously smart enough not to mention it so as not to weaken your thesis, so maybe I'll never know. All I know is that your thesis also requires a certain amount of faith in your work and calculations and even-handednesss, just like Ackman's or Ubben's. Maybe they're all wrong and you're right, time will tell. But if Pearson is basically a con-man trying to fool people, he's not doing a great job on the face of it because he's not exactly liked. Before the Allergan saga, he had almost never been on TV. He always seems annoyed to be speaking in public, looks unpolished and uncharismatic. When asked about it, he'll give his opinion about whether the stock is undervalued or not, but I don't think he's particularly trying to talk up his stock. He has cut his own base salary to $1, he can't sell most of his stock for years after he retires, and he has bought a fair amount of it with his own money when he joined. The company is running very lean and isn't a comfortable place to work for people looking for luxury, which isn't usually the way that people who are in it for the money and self-aggrandizement do it. And if you are being dishonest, you usually give a cushy life to people inside the company so that they are loyal to you and not tempted to be whistleblowers. Those who point to the way that bonus compensation scales up to very high IRRs as a red flag should find out the explanation from Mason Morfit from a few years ago about why they designed it like that. The thinking is that at many other companies, you get more up to a certain point, which might be 15% or 20%, and after that you've hit a ceiling. If you have an exceptional manager that could do more, this gives them the incentive to sandbag things and only hit the max and keep some firepower in reserve for the next year. In short, it actually slows down growth. But if things keep scaling up, you prevent that, and as long as you have other mechanisms to ensure long-term thinking (such as stock that is restricted even years after retirement, to ensure selection of a good successor and a sustainable business), you get the best of both worlds and properly aligned incentives. One last point: Comparing revenues from various acquisitions and products over years sometimes makes sense, and sometimes it doesn't. Valeant is not optimizing for revenue, it's optimizing for cash on cash returns. So if they get out of a certain market or product because it doesn't give them good enough returns, that might look bad on next year's revenue comparison, yet it would be value-creating. They made a conscious decisions over time to not go or get out of certain markets, like Western Europe. If they hadn't you can be sure that they revenue for certain products/acquisitions would be higher, but that would be a sub-optimal use of capital. I also think many people are wrong about VRX's model. They don't have zero R&D, and they don't have much revenue facing patent cliffs (2-3% of revenue/year for the next many years). They have introduced many new products from their own internal R&D, some of which are now some of their top products (Jublia, some of the new B&L lenses) after a pretty short time. Zero-based-budgeting, targeted R&D is different than no R&D, and certainly different from the traditionally wasteful "let's spend X% of revenue on R&D". While the concept of the "durable" product might get some flak, some things *are* more durable than others in the pharma world (ie. skin creams and contact lenses aren't nearly as under attack be generics, and Valeant sells many branded generics that are already out of patent protection), and Valeant puts a heavy emphasis on that, so that much of their portfolio isn't comparable to the portfolio of many other pharma companies with products that have revenues that are much more front-loaded. Anyway, looking forward to the other parts of this novella serial!

They use data from various other sources depending on the country, but that's not the same as having a fully-featured Maps app at all.

Hey AZ, I just want to point out that I haven't had a chance to read your piece yet. You caught me in one of the rare times of the year when I can't do much more than glance at a few articles each day, so the novella is on the list for later. Cheers! :)

Oooo, maybe it will be as successful as their last secret car related project... Apple Maps! :-) Sarcasm aside, Apple Maps has something like 70% market share on iOS and is becoming quite good. You understand why it wasn't good at first, right? Buildings maps is very long and very labor intensive, and the more users you have, the better your maps get because you get their usage patterns via GPS and their bug reports. When Google asked Apple for stuff that Apple didnt want to give at a contract renewal (the rumor is to include more ads and to give Google more user data), Apple was forced to develop its own maps in a very short period of time. They didn't have the usage data, the bug reports, and didn't have time to send people on vans and whatnot all around the world and in every corner of the US to make sure everything was right and fixing all bugs. At that point Google had been building its Maps for years and years and had millions of users. So no doubt Google Maps were quite a bit better then, and still are better (this type of things is Google core competence, and it isn't for Apple). Yet Apple Maps is now good enough for most users and so Google has lost its former monopoly on iOS because it tried to get more out of Apple. I think the loser here is Google, even if Apple had a year or two of bad PR from it...

http://waitbutwhy.com/2015/08/how-and-why-spacex-will-colonize-mars.html

Intriguing: http://www.theguardian.com/technology/2015/aug/14/apple-self-driving-car-project-titan-sooner-than-expected

Thanks AZ. I've been asking you for this for a long time, so I appreciate you taking the time to write it all down and publish it.

Some perspective on the yuan: http://scottgrannis.blogspot.com/2015/08/chinas-currency-move-not-big-deal.html

I guess I don't have your ability to predict commodity prices. It's not clear to me at all that this can't last for an extended period of time. It's very possible to think up a narrative for why these prices are low, but I can also think one for why prices could stay at these levels or go even lower for years. The gold people have been predicting a bounce in short order since 2011. The natural gas people for a few years too...

But would that different company be making much more money if oil stays low? Would they pay much of a premium, and what will PWE go for if things keep getting worse for 6 months?

Nice pick so far, Scott. Outside of my circle, so I'm only watching with popcorn, but doing very well so far. :)

The thing with commodity cycles is that they sometimes last 6 months, and they sometimes last 15 years...

Thanks for sharing, Viking and cubsfan. Very good real-world example of the ecosystem stickiness effect.