VRX - Valeant Pharmaceuticals International Inc.

[Phaceliacapital]

This tax rate issue makes no sense to me.

 

VRX operates all over the world in various tax jurisdictions that range from say 10% to 35%....yet magically VRX only has to pay only 5% because it has set up a sub in Bermuda that always for an ultra low tax rate on IP assets? Something doesn't add up.

 

I get that Canada might not tax repatriated earnings. But you still need to pay tax in other countries. So say you are US based with a 35% rate and you earn 50% of your income in Canada at the 27% rate. If repatriated, you are required to pay the difference 7% difference to US authorities, resulting in an effective tax rate of 35%....

 

Were the US to not tax repatriated earnings, your effective tax rate would be 31%.

 

$4.8B of 2013 revenue was from Developed markets. So I assume the US, EU and Canada predominately. I believe the US is around $2B. Developed markets have an average tax rate of at least 20%.

 

So I ask - how is it possible for VRX to funnel all developed market profits through some Bermuda corporation without paying the appropriate authorities? The money that leaves the US....is it not taxed at the US rate somehow?

 

It does not pass the straight face test, therefore I will look at VRX as if it will ultimately be taxed at its statutory rate, because the only logical way to have a 5% effective tax rate is to have a massive tax shield, and in this case the tax shield runs out once acquisitions stop.

 

I think most of their US earnings are shielded by debt?

[wbr]

This tax rate issue makes no sense to me.

 

VRX operates all over the world in various tax jurisdictions that range from say 10% to 35%....yet magically VRX only has to pay only 5% because it has set up a sub in Bermuda that always for an ultra low tax rate on IP assets? Something doesn't add up.

 

I get that Canada might not tax repatriated earnings. But you still need to pay tax in other countries. So say you are US based with a 35% rate and you earn 50% of your income in Canada at the 27% rate. If repatriated, you are required to pay the difference 7% difference to US authorities, resulting in an effective tax rate of 35%....

 

Were the US to not tax repatriated earnings, your effective tax rate would be 31%.

 

$4.8B of 2013 revenue was from Developed markets. So I assume the US, EU and Canada predominately. I believe the US is around $2B. Developed markets have an average tax rate of at least 20%.

 

So I ask - how is it possible for VRX to funnel all developed market profits through some Bermuda corporation without paying the appropriate authorities? The money that leaves the US....is it not taxed at the US rate somehow?

 

It does not pass the straight face test, therefore I will look at VRX as if it will ultimately be taxed at its statutory rate, because the only logical way to have a 5% effective tax rate is to have a massive tax shield, and in this case the tax shield runs out once acquisitions stop.

 

Tax shield certainly helps, but most of it is about the IP. To put it simple: They can put all the IP in the Bermudas company with the low tax rate and then all the other subsidiaries use the IP to sell the products, but they have to pay licencing fees to the Bermuda company for the right to use the IP so they end up earning nothing and channeling all the earnings to the Bermudas. For tech and pharma companies this is really easy to do, because IP is not bound to any location.

[Phaceliacapital]

"Easily a 200 stock, if the acquisition closes"

 

-Billy Ackman

[moody202]

"Easily a 200 stock, if the acquisition closes"

 

-Billy Ackman

 

Where did you see that?

[bmichaud]

Sorry everyone for all of the rambling - just was thinking out loud over the weekend.

 

wbr - That is by far the most straight forward explanation I have read on the IP issue. Actually, it is so simple that I now feel like an idiot for not conceptualizing that right off the bat!

 

gio - Thanks for the link! Very helpful. I was actually wondering where that disclosure was when I read the PDF presentation of 4Q13 earnings.

 

wellmont - ur right on the OCF. If you add back restructuring costs and legal settlements to GAAP OCF, then you get to $1.8B after working capital changes

 

 

[giofranchi]

Sorry everyone for all of the rambling - just was thinking out loud over the weekend.

 

wbr - That is by far the most straight forward explanation I have read on the IP issue. Actually, it is so simple that I now feel like an idiot for not conceptualizing that right off the bat!

 

gio - Thanks for the link! Very helpful. I was actually wondering where that disclosure was when I read the PDF presentation of 4Q13 earnings.

 

wellmont - ur right on the OCF. If you add back restructuring costs and legal settlements to GAAP OCF, then you get to $1.8B after working capital changes

 

All's Well That Ends Well

 

;D ;D ;D

 

Cheers,

 

Gio

[equitynyc]

http://basehitinvesting.com/great-investor-glenn-greenberg-discusses-his-investment-philosophy/

 

Article on Glenn Greenberg. I thought it was interesting that 30% of his portfolio is in Valeant. I wasn't familiar with him before reading this, but he apparently has a very good long-term track record (mid 20%s since the early 1980s).

 

Great link, thanks. One of my favorite investors.

[Phaceliacapital]

"Easily a 200 stock, if the acquisition closes"

 

-Billy Ackman

 

Where did you see that?

 

Mentioned in the BB interview. Around 26 minutes or something.

[AZ_Value]

Has anyone sanity checked the numbers that management is giving out? on a steady state run rate, I see roughly 8B$ with 27B$ in assets. The 8B$ in revenues are probably good for 2-2.B$ In EBIT, so that is an earnings yield of 7-8% (ballpark) for every dollar invested. It does not look like VRX buys their assets cheap enough to get a good ROI, even after all those adjustments and cash charges from acquisitions. If VRX is harvesting assets like some suspect, it is downright expensive.

 

Also, it is almost impossible to get a steady state picture because VRX is constantly acquiring assets.

 

This is a big point for me with VRX.

I am yet to see anyone offer a meaningful fact based "sanity check", as you call it, for the discipline in acquisitions that they claim to have. And to me, repeating management's talking points about 20% ROI etc doesn't do it.

What do you expect any management team to say? "At our company we don't care about paying too high a price and every now and then we overpay for M&As". The proof as always ends up being in the pudding and value is delivered operationally post acquisition not in pre acquisition models and it's tough to tell with Valeant.

 

Here's a totally unscientific sanity check:

If you just forget about the name Valeant for a second and think about the fact that they've done dozens of M&As in the few years since Pearson has been on board (I think they're close to 100 deals now or something like that) and then look at the deals to see that sellers varied from private equity firms to big guys in the industry like Sanofi and others selling assets to VRX, what is the realistic likelihood that all these deals were done on the cheap to yield 20% ROI? These are not dumb people they're buying from and we know that generally speaking in the history of corporate M&As overpaying is significantly more likely than the opposite. I guess one could just ask, are there really hundreds of companies or assets to be acquired "on the cheap" in the pharma industry? I can't say definitely but I have my doubts.

 

Coincidentally, my story intersects with VRX because I used to work for their biggest acquisition befor B&L (Medicis not to name it). Actually, Valeant wasn't even on my radar until I got a news alert for the MRX deal (I had already left to do my MBA by the time it happened). And as someone who used to run the numbers at MRX I can tell you that they overpayed for it. Not sure about the others but I have that very small sample size of 1.

I had never looked at B&L before but my understanding is that they have really good assets. But I'm fairly familiar with Allergan because 2 of MRX biggest drugs are in direct competition with Allergan's. Dysport is #2 to market leader Botox and Restylane/Perlane is #1 in dermal fillers and Allergan's Juvederm is #2, (you can hear Pearson in the presentation talk about the need to dispose of the Medicis assets if the deal goes through) and if the deal is allowed to happen I think it would imporve the financial health of VRX significantly like others have said.

 

VRX is a really interesting experiment I think, if the market keeps giving them enough rope there's a possibility for them to eventually fly a kite instead of hanging themselves with it although in my view both options are valid. So far I don't know which way it'll end up but I'm not comfortable owning it.

I'm yet to see all the operational prowess that is claimed because like Spekulatius said I don't know how to get a steady picture of this animal.

And I dismiss all the top line growth being touted. Since this experiment started in 2008, revenues have grown by about $5 billion, but I'm pretty sure many managers would tell you that if they were somehow allowed to take their debt from zero to $17B and double the share count without any consequences they could also deliver a $5B (I guess it's more like $7 or $8B with a full year of B&L) growth in top line numbers.

As far as I can tell not much has been delivered in ultimate value to shareholders until now (besides the share price increase of course), all the increase in BV has come from issuing shares and the retained earnings (where one would hope all the operational improvements and assets maximization would start showing up eventually) deficit has steadily increased to over $3B now.

 

I'm not a big fan of these guys broadcasting what I view as nonsensical goals like "we want to be a $150 billion market cap company by 2016" but I guess if the market continues to believe in them they can start acquiring good and well capitalized companies like Allergan and eventually get away with it.

 

 

[AZ_Value]

This tax rate issue makes no sense to me.

 

VRX operates all over the world in various tax jurisdictions that range from say 10% to 35%....yet magically VRX only has to pay only 5% because it has set up a sub in Bermuda that always for an ultra low tax rate on IP assets? Something doesn't add up.

 

I get that Canada might not tax repatriated earnings. But you still need to pay tax in other countries. So say you are US based with a 35% rate and you earn 50% of your income in Canada at the 27% rate. If repatriated, you are required to pay the difference 7% difference to US authorities, resulting in an effective tax rate of 35%....

 

Were the US to not tax repatriated earnings, your effective tax rate would be 31%.

 

$4.8B of 2013 revenue was from Developed markets. So I assume the US, EU and Canada predominately. I believe the US is around $2B. Developed markets have an average tax rate of at least 20%.

 

So I ask - how is it possible for VRX to funnel all developed market profits through some Bermuda corporation without paying the appropriate authorities? The money that leaves the US....is it not taxed at the US rate somehow?

 

It does not pass the straight face test, therefore I will look at VRX as if it will ultimately be taxed at its statutory rate, because the only logical way to have a 5% effective tax rate is to have a massive tax shield, and in this case the tax shield runs out once acquisitions stop.

 

Tax shield certainly helps, but most of it is about the IP. To put it simple: They can put all the IP in the Bermudas company with the low tax rate and then all the other subsidiaries use the IP to sell the products, but they have to pay licencing fees to the Bermuda company for the right to use the IP so they end up earning nothing and channeling all the earnings to the Bermudas. For tech and pharma companies this is really easy to do, because IP is not bound to any location.

 

wbr is correct here. It's a function of IP being placed in tax havens like Bermuda and then intercompany accounting where the lion share of profits are booked by the licensing IP companies domiciled in Bermuda via licensing agreements with commercial subs.

 

However I think a big part of it is Canada related also. When MRX was acquiring the US rights to Dysport (the Botox competitor), the same thing was attempted and a Bermuda entity was set up to hold the IP based on opinions from tax wizards at big 4 firms, but after running it by the IRS, they were quickly told that that stuff doesn't fly anymore in the US and the plan was dropped. If it was that easy you'd see all the US pharma companies doing it. I'm not sure how long VRX will get away with it, at the end of the day it is now essentially based in New Jersey where their headquarter is and where all executives live. But so far it looks like Canada revenue allows them to set it up that way.

 

 

 

[loganc]

Has anyone sanity checked the numbers that management is giving out? on a steady state run rate, I see roughly 8B$ with 27B$ in assets. The 8B$ in revenues are probably good for 2-2.B$ In EBIT, so that is an earnings yield of 7-8% (ballpark) for every dollar invested. It does not look like VRX buys their assets cheap enough to get a good ROI, even after all those adjustments and cash charges from acquisitions. If VRX is harvesting assets like some suspect, it is downright expensive.

 

Also, it is almost impossible to get a steady state picture because VRX is constantly acquiring assets.

 

This is a big point for me with VRX.

I am yet to see anyone offer a meaningful fact based "sanity check", as you call it, for the discipline in acquisitions that they claim to have. And to me, repeating management's talking points about 20% ROI etc doesn't do it.

What do you expect any management team to say? "At our company we don't care about paying too high a price and every now and then we overpay for M&As". The proof as always ends up being in the pudding and value is delivered operationally post acquisition not in pre acquisition models and it's tough to tell with Valeant.

 

Here's a totally unscientific sanity check:

If you just forget about the name Valeant for a second and think about the fact that they've done dozens of M&As in the few years since Pearson has been on board (I think they're close to 100 deals now or something like that) and then look at the deals to see that sellers varied from private equity firms to big guys in the industry like Sanofi and others selling assets to VRX, what is the realistic likelihood that all these deals were done on the cheap to yield 20% ROI? These are not dumb people they're buying from and we know that generally speaking in the history of corporate M&As overpaying is significantly more likely than the opposite. I guess one could just ask, are there really hundreds of companies or assets to be acquired "on the cheap" in the pharma industry? I can't say definitely but I have my doubts.

 

Coincidentally, my story intersects with VRX because I used to work for their biggest acquisition befor B&L (Medicis not to name it). Actually, Valeant wasn't even on my radar until I got a news alert for the MRX deal (I had already left to do my MBA by the time it happened). And as someone who used to run the numbers at MRX I can tell you that they overpayed for it. Not sure about the others but I have that very small sample size of 1.

I had never looked at B&L before but my understanding is that they have really good assets. But I'm fairly familiar with Allergan because 2 of MRX biggest drugs are in direct competition with Allergan's. Dysport is #2 to market leader Botox and Restylane/Perlane is #1 in dermal fillers and Allergan's Juvederm is #2, (you can hear Pearson in the presentation talk about the need to dispose of the Medicis assets if the deal goes through) and if the deal is allowed to happen I think it would imporve the financial health of VRX significantly like others have said.

 

VRX is a really interesting experiment I think, if the market keeps giving them enough rope there's a possibility for them to eventually fly a kite instead of hanging themselves with it although in my view both options are valid. So far I don't which way it'll end up but I'm not comfortable owning it.

Personally, I'm yet to see all the operational prowess that is claimed because like Spekulatius said I don't know how to get a steady picture of this animal.

And I dismiss all the top line growth being touted. Since this experiment started in 2008, revenues have grown by about $5 billion, but I'm pretty sure many managers would tell you that if they were somehow allowed to take their debt from zero to $17B and double the share count without any consequences they could also deliver a $5B (I guess it's more like $7 or $8B with a full year of B&L) growth in top line numbers.

As far as I can tell not much has been delivered in ultimate value to shareholders until now (besides the share price increase of course), all the increase in BV has come from issuing shares and the retained earnings (where one would hope all the operational improvements and assets maximization would start showing up eventually) deficit has steadily increased to over $3B now.

 

I'm not a big fan of these guys broadcasting what I view as nonsensical goals like "we want to be a $150 billion market cap company by 2016" but I guess if the market continues to believe in them they can start acquiring good and well capitalized companies like Allergan and eventually get away with it.

 

Thank you very much for posting. 

 

I just wonder if you think that VRX overpaid for Medicis when you consider their lean operating model.  Similarly, I think the AGN valuation looks expensive if one does not consider the VRX operating model. 

 

Now, the biggest question in my mind is whether or not you permanently impair these businesses when you slash SG&A and R&D.  I think the disclosure that VRX provides with respect to organic growth in the earnings release documents gives a fairly good indication that they are maintaining healthy growth on an organic basis.  However, I am still doing more research and don't have huge conviction at this point.

 

[Liberty]

sellers varied from private equity firms to big guys in the industry like Sanofi and others selling assets to VRX, what is the realistic likelihood that all these deals were done on the cheap to yield 20% ROI? These are not dumb people they're buying from and we know that generally speaking in the history of corporate M&As overpaying is significantly more likely than the opposite. I guess one could just ask, are there really hundreds of companies or assets to be acquired "on the cheap" in the pharma industry?

 

I don't think anyone has claimed that VRX was getting 20% IRRs on their acquisitions from the prices they pay alone (they're not a stock-picker, so to speak, finding 50-cent dollars everywhere). They rarely seem to massively underpay, actually. Most deals seem pretty fairly priced based on multiples (though they never overpay, have proven to walk away from deals when prices go up, and for most of their acquisitions, they were the only bidders). It's their different operational model and overall strategy that brings the ROIs up.

 

Look at Ackman's slide #97 to see how much of a difference the lower SGA, R&D and taxes make on the bottom line (and that's without the revenu synergies from their huge salesforce in fast-growing markets). Someone else buying the same businesses but operating them with the business-as-usual model wouldn't get that performance.

[txlaw]

Has anyone sanity checked the numbers that management is giving out? on a steady state run rate, I see roughly 8B$ with 27B$ in assets. The 8B$ in revenues are probably good for 2-2.B$ In EBIT, so that is an earnings yield of 7-8% (ballpark) for every dollar invested. It does not look like VRX buys their assets cheap enough to get a good ROI, even after all those adjustments and cash charges from acquisitions. If VRX is harvesting assets like some suspect, it is downright expensive.

 

Also, it is almost impossible to get a steady state picture because VRX is constantly acquiring assets.

 

This is a big point for me with VRX.

I am yet to see anyone offer a meaningful fact based "sanity check", as you call it, for the discipline in acquisitions that they claim to have. And to me, repeating management's talking points about 20% ROI etc doesn't do it.

What do you expect any management team to say? "At our company we don't care about paying too high a price and every now and then we overpay for M&As". The proof as always ends up being in the pudding and value is delivered operationally post acquisition not in pre acquisition models and it's tough to tell with Valeant.

 

Here's a totally unscientific sanity check:

If you just forget about the name Valeant for a second and think about the fact that they've done dozens of M&As in the few years since Pearson has been on board (I think they're close to 100 deals now or something like that) and then look at the deals to see that sellers varied from private equity firms to big guys in the industry like Sanofi and others selling assets to VRX, what is the realistic likelihood that all these deals were done on the cheap to yield 20% ROI? These are not dumb people they're buying from and we know that generally speaking in the history of corporate M&As overpaying is significantly more likely than the opposite. I guess one could just ask, are there really hundreds of companies or assets to be acquired "on the cheap" in the pharma industry? I can't say definitely but I have my doubts.

 

Coincidentally, my story intersects with VRX because I used to work for their biggest acquisition befor B&L (Medicis not to name it). Actually, Valeant wasn't even on my radar until I got a news alert for the MRX deal (I had already left to do my MBA by the time it happened). And as someone who used to run the numbers at MRX I can tell you that they overpayed for it. Not sure about the others but I have that very small sample size of 1.

I had never looked at B&L before but my understanding is that they have really good assets. But I'm fairly familiar with Allergan because 2 of MRX biggest drugs are in direct competition with Allergan's. Dysport is #2 to market leader Botox and Restylane/Perlane is #1 in dermal fillers and Allergan's Juvederm is #2, (you can hear Pearson in the presentation talk about the need to dispose of the Medicis assets if the deal goes through) and if the deal is allowed to happen I think it would imporve the financial health of VRX significantly like others have said.

 

VRX is a really interesting experiment I think, if the market keeps giving them enough rope there's a possibility for them to eventually fly a kite instead of hanging themselves with it although in my view both options are valid. So far I don't know which way it'll end up but I'm not comfortable owning it.

I'm yet to see all the operational prowess that is claimed because like Spekulatius said I don't know how to get a steady picture of this animal.

And I dismiss all the top line growth being touted. Since this experiment started in 2008, revenues have grown by about $5 billion, but I'm pretty sure many managers would tell you that if they were somehow allowed to take their debt from zero to $17B and double the share count without any consequences they could also deliver a $5B (I guess it's more like $7 or $8B with a full year of B&L) growth in top line numbers.

As far as I can tell not much has been delivered in ultimate value to shareholders until now (besides the share price increase of course), all the increase in BV has come from issuing shares and the retained earnings (where one would hope all the operational improvements and assets maximization would start showing up eventually) deficit has steadily increased to over $3B now.

 

I'm not a big fan of these guys broadcasting what I view as nonsensical goals like "we want to be a $150 billion market cap company by 2016" but I guess if the market continues to believe in them they can start acquiring good and well capitalized companies like Allergan and eventually get away with it.

 

Interesting take. 

[txlaw]

"Easily a 200 stock, if the acquisition closes"

 

-Billy Ackman

 

I was looking at the Ackman presentation again.

 

I have yet to do my own real number crunching -- I'm just doing some back of the envelop stuff right now.  It looks like Ackman is basing his 20X multiple for the "durable portfolio" on a greater than 70% gross margin?  If so, that seems pretty optimistic, no?  I mean, I can understand being able to substantially cut the fat in the SG&A and R&D lines, but why would Valeant be able to have such outstanding gross margins over the long run for the durable portfolio? 

[original mungerville]

sellers varied from private equity firms to big guys in the industry like Sanofi and others selling assets to VRX, what is the realistic likelihood that all these deals were done on the cheap to yield 20% ROI? These are not dumb people they're buying from and we know that generally speaking in the history of corporate M&As overpaying is significantly more likely than the opposite. I guess one could just ask, are there really hundreds of companies or assets to be acquired "on the cheap" in the pharma industry?

 

I don't think anyone has claimed that VRX was getting 20% IRRs on their acquisitions from the prices they pay alone (they're not a stock-picker, so to speak, finding 50-cent dollars everywhere). They rarely seem to massively underpay, actually. Most deals seem pretty fairly priced based on multiples (though they never overpay, have proven to walk away from deals when prices go up, and for most of their acquisitions, they were the only bidders). It's their different operational model and overall strategy that brings the ROIs up.

 

Look at Ackman's slide #97 to see how much of a difference the lower SGA, R&D and taxes make on the bottom line (and that's without the revenu synergies from their huge salesforce in fast-growing markets). Someone else buying the same businesses but operating them with the business-as-usual model wouldn't get that performance.

 

Bingo. This is not about tax or about Valeant paying below intrinsic value for acquirees. Its about them buying durable revenues and slashing the shit out of R&D and head office expense. I mean that's what Valeant is about. Its saying that the industry is wasting tons on R&D and overhead/mgmt and it does not need to. That is why they get 20% IRRs before the tax benefits. Its basically restructuring the industry, that is what Valeant is doing.

[original mungerville]

"Easily a 200 stock, if the acquisition closes"

 

-Billy Ackman

 

I was looking at the Ackman presentation again.

 

I have yet to do my own real number crunching -- I'm just doing some back of the envelop stuff right now.  It looks like Ackman is basing his 20X multiple for the "durable portfolio" on a greater than 70% gross margin?  If so, that seems pretty optimistic, no?  I mean, I can understand being able to substantially cut the fat in the SG&A and R&D lines, but why would Valeant be able to have such outstanding gross margins over the long run for the durable portfolio?

 

I think 20x is too high as Ackman presents it (ie on a limited growth basis) especially because Valeant has debt. I would say at most 16x - even that is high.

 

But you can get to a 16x-20x multiple by factoring in the double digit growth potential at Valeant. I don't mind 16x given the growth potential - ie they will do more acquisitions and will get mid-teens growth pretty easily I think.

[original mungerville]

Has anyone sanity checked the numbers that management is giving out? on a steady state run rate, I see roughly 8B$ with 27B$ in assets. The 8B$ in revenues are probably good for 2-2.B$ In EBIT, so that is an earnings yield of 7-8% (ballpark) for every dollar invested. It does not look like VRX buys their assets cheap enough to get a good ROI, even after all those adjustments and cash charges from acquisitions. If VRX is harvesting assets like some suspect, it is downright expensive.

 

Also, it is almost impossible to get a steady state picture because VRX is constantly acquiring assets.

 

This is a big point for me with VRX.

I am yet to see anyone offer a meaningful fact based "sanity check", as you call it, for the discipline in acquisitions that they claim to have. And to me, repeating management's talking points about 20% ROI etc doesn't do it.

What do you expect any management team to say? "At our company we don't care about paying too high a price and every now and then we overpay for M&As". The proof as always ends up being in the pudding and value is delivered operationally post acquisition not in pre acquisition models and it's tough to tell with Valeant.

 

Here's a totally unscientific sanity check:

If you just forget about the name Valeant for a second and think about the fact that they've done dozens of M&As in the few years since Pearson has been on board (I think they're close to 100 deals now or something like that) and then look at the deals to see that sellers varied from private equity firms to big guys in the industry like Sanofi and others selling assets to VRX, what is the realistic likelihood that all these deals were done on the cheap to yield 20% ROI? These are not dumb people they're buying from and we know that generally speaking in the history of corporate M&As overpaying is significantly more likely than the opposite. I guess one could just ask, are there really hundreds of companies or assets to be acquired "on the cheap" in the pharma industry? I can't say definitely but I have my doubts.

 

Coincidentally, my story intersects with VRX because I used to work for their biggest acquisition befor B&L (Medicis not to name it). Actually, Valeant wasn't even on my radar until I got a news alert for the MRX deal (I had already left to do my MBA by the time it happened). And as someone who used to run the numbers at MRX I can tell you that they overpayed for it. Not sure about the others but I have that very small sample size of 1.

I had never looked at B&L before but my understanding is that they have really good assets. But I'm fairly familiar with Allergan because 2 of MRX biggest drugs are in direct competition with Allergan's. Dysport is #2 to market leader Botox and Restylane/Perlane is #1 in dermal fillers and Allergan's Juvederm is #2, (you can hear Pearson in the presentation talk about the need to dispose of the Medicis assets if the deal goes through) and if the deal is allowed to happen I think it would imporve the financial health of VRX significantly like others have said.

 

VRX is a really interesting experiment I think, if the market keeps giving them enough rope there's a possibility for them to eventually fly a kite instead of hanging themselves with it although in my view both options are valid. So far I don't know which way it'll end up but I'm not comfortable owning it.

I'm yet to see all the operational prowess that is claimed because like Spekulatius said I don't know how to get a steady picture of this animal.

And I dismiss all the top line growth being touted. Since this experiment started in 2008, revenues have grown by about $5 billion, but I'm pretty sure many managers would tell you that if they were somehow allowed to take their debt from zero to $17B and double the share count without any consequences they could also deliver a $5B (I guess it's more like $7 or $8B with a full year of B&L) growth in top line numbers.

As far as I can tell not much has been delivered in ultimate value to shareholders until now (besides the share price increase of course), all the increase in BV has come from issuing shares and the retained earnings (where one would hope all the operational improvements and assets maximization would start showing up eventually) deficit has steadily increased to over $3B now.

 

I'm not a big fan of these guys broadcasting what I view as nonsensical goals like "we want to be a $150 billion market cap company by 2016" but I guess if the market continues to believe in them they can start acquiring good and well capitalized companies like Allergan and eventually get away with it.

 

Interesting take.

 

Not really. Valeant is creating value by slashing R&D and overhead of acquirees while focusing on durable revenues, NOT by paying some low multiple like Buffett. Then tax efficiency is an added bonus. $8 billion means what? $3-4 billion after tax? and with any growth, that $17 billion in debt is gone in 4 years if acquisitions are halted, then there is $4 billion in earnings AT for quite a number of years. Not bad from almost a standing start less than a decade ago. (Note: I am pulling all of these numbers out of my ass, but I hope you get the idea.)

 

But why would you halt acquisitions if your model is working that well? It took you the better part of a decade to get to $4, it will take you less to get to $8 billion AT.

 

Its like when Fairfax was looked at 10 years ago, the shorts said hey retained earnings are zero, debt is up, he hasn't made any money, he only makes money by issuing shares above book and buying them in below book.

 

Here you are saying retained earnings are in deficit, and debt is up, therefore it isn't producing any value to shareholders. If you are going to do that, also take the growing $4 billion AT and discount it to present value, that is the asset that has been produced by Valeant which is not sitting on its balance sheet. Then compare that to the $17 billion liability. The difference is value created thus far if they halted all acquisitions...and that value is positive. Further, they still have acquisition runway left so the stock price is higher than that difference. 

 

 

 

 

 

 

[moody202]

@txlaw - Only thing I would add is that acquisitions are important to mid teens EPS growth. If they were to stop acquiring new companies then organic growth rate is in 6-8% range.

[Spekulatius]

@txlaw - Only thing I would add is that acquisitions are important to mid teens EPS growth. If they were to stop acquiring new companies then organic growth rate is in 6-8% range.

 

How does a business that barely spends anything on R&D get 6-8% organic growth? JNJ has a great portfolio of durable products, but they don't get 6-8%. Pharma peers that spend 3x on R&D don't get it either typically. How do you know what the "organic" growth rate is anyways with VRX?

[giofranchi]

How does a business that barely spends anything on R&D get 6-8% organic growth? JNJ has a great portfolio of durable products, but they don't get 6-8%. Pharma peers that spend 3x on R&D don't get it either typically. How do you know what the "organic" growth rate is anyways with VRX?

 

I guess simply by getting 4-7% in most of their products, and 11-12% in aesthetics, and 10-13% in emerging markets.

 

Listen, you and I simply don’t know the so called Val-gan business as well as Mr. Pearson… Would you argue with that? I hope not.

Therefore, is Mr. Pearson a reliable manager? I mean: does he usually under-promise and over-deliver? My answer is: Yes! Yours, instead, might be: No!

 

Any answer you give to that question, I would keep it as simple as that! ;)

 

Gio

 

[PJM]

@txlaw - Only thing I would add is that acquisitions are important to mid teens EPS growth. If they were to stop acquiring new companies then organic growth rate is in 6-8% range.

 

How does a business that barely spends anything on R&D get 6-8% organic growth? JNJ has a great portfolio of durable products, but they don't get 6-8%. Pharma peers that spend 3x on R&D don't get it either typically. How do you know what the "organic" growth rate is anyways with VRX?

 

Interesting footnote in the ppt that organic "Growth rates for all periods are pro forma for acquisitions completed during the period but not for acquisitions completed in future periods (e.g. 2011 is not pro forma for 2013 acquisitions)". Can we really call that "organic growth"?

[moody202]

@txlaw - Only thing I would add is that acquisitions are important to mid teens EPS growth. If they were to stop acquiring new companies then organic growth rate is in 6-8% range.

 

How does a business that barely spends anything on R&D get 6-8% organic growth? JNJ has a great portfolio of durable products, but they don't get 6-8%. Pharma peers that spend 3x on R&D don't get it either typically. How do you know what the "organic" growth rate is anyways with VRX?

 

Interesting footnote in the ppt that organic "Growth rates for all periods are pro forma for acquisitions completed during the period but not for acquisitions completed in future periods (e.g. 2011 is not pro forma for 2013 acquisitions)". Can we really call that "organic growth"?

 

I guess there are lot of question here. How does a business that doesn't spend on R&D have 19 (if my memory serves me right) upcoming product launches? Clearly they must be doing doing something to bring this products to market.

 

@PJM -- I hear your concern that organic growth includes past acquisitions. However, how else would you report organic growth if you don't include past acquisitions? I believe the Ackman/Valeant presentation had few slides about expected growth rates in developed and developing world. To your point PJM, it will be interesting to see the growth rate of products that have been in Valeant portfolio more than 3 years to get a view of the normalized growth rates!

 

 

[original mungerville]

In terms of organic growth, I think Ackman gets to 6% while Pearson is at high single digits. I would go with say 5% to be conservative. (Aside: And my $17 debt, $8 revenue $4 billion earnings AT above with growth is probably too optimistic).

 

I agree, to get to 15-20% growth, they need acquisitions. What I find comforting, is at the current 15x multiple, they can grow at that rate, by acquiring companies equal in size to their earnings every year. Investing earnings at an IRR of 20% means those earnings will grow close to that rate on a compounded basis. Also acquisitions of this size should be doable.

 

So you are looking at a 15x multiple (for say 5% organic growth) of earnings, which can compound at around 20% not making huge assumptions...which means the 15x multiple should be sustainable for the next few years. Moreover, in this baseline model, debt stays the same but earnings are up 2x in 4 years (ie 20% compounded), so debt/EBITDA would fall in half - ie the baseline is deleveraging.

 

Now, that's the baseline. They could and likely will do something bigger sometime in those 4 years with a combination of debt/stock, so earnings are likely to grow faster unless they screw up an acquisition which is entirely possible.

 

While I think that if the Allergan acquisition goes through, this is a slam dunk - I find the Valeant story seems to be quite misunderstood. And the $17 billion in debt is a drag (and unless you have thought through the above baseline, the $17 billion would look like a huge drag) As soon as they drop the ball (which they may at some point), the stock will correct sharply. If the Allergan acquisition does not go through, maybe the stock would come down. Despite seeing the above value, I am debating cutting my stake down from my largest position (as of last week), to a regular position - and then increase it should the share price come down.

 

 

[Liberty]

How does a business that barely spends anything on R&D get 6-8% organic growth? JNJ has a great portfolio of durable products, but they don't get 6-8%. Pharma peers that spend 3x on R&D don't get it either typically. How do you know what the "organic" growth rate is anyways with VRX?

 

The real question is, how does a company that spends what Allergan spends on R&D have fewer product launches in its late stage pipeline and lower organic growth than Valeant?

 

If you do your DD on Valeant and learn how they operate, the answer is quite obvious: They focus their R&D only on what is economic and has been shown to work historically, they keep fixed costs lows, they don't spend on marketing that has bad ROI (advertising targeting the customer, selling to physicians in segments where you can't say anything else than what is on the label, etc) but they spend a ton on their salesforce where it makes a difference and focus on assets where relationships with doctors matter (ie. there are relatively few dermatologists recommending a zillion sales, so they target that bottleneck). They don't sell all products everywhere but focus each products on specific markets where the growth potential is best, regulation most favorable, and competition lowest, etc.

 

Basically, they're very rational about how they deploy their resources and their first test is always financial. Other companies aren't like that, so it's no surprise that they get very different results.

[hardcorevalue]

Allergan Exploring Sale to Sanofi, J&J

 

"Allergan Inc. has contacted companies including Sanofi and Johnson & Johnson to see if either would be interested in acquiring the Botox maker, said people with knowledge of the matter, as it explores its options after receiving an unsolicited $45.7 billion bid from Valeant Pharmaceuticals Inc."

 

http://www.bloomberg.com/news/2014-04-29/allergan-said-to-explore-sale-to-sanofi-j-j-instead-of-valeant.html

 

Speculation obviously.