VRX - Valeant Pharmaceuticals International Inc.

[CorpRaider]

I think you have a pretty accurate recollection.  Hell, some of the spin-offs are still out there and are showing up in portfolios tracked on dataroma (TEL, COV).  Its not like it was enron or worldcom.

[Guest wellmont]

 

It's been a while, but as I remember Tyco - it seems like they were a pretty good collection of businesses that generated a lot of cash, etc.

The rollups seemed to work.

 

I thought the major issue with Tyco is that the CEO was a pig and basically rob the company for all his houses/toys, etc

while he acquired these great businesses.

 

correct, tyco was looted. tyco became

 

tyco international $20b

te connectivity $25b

adt $3.5b

covidien  $33b

[constructive]

In addition to the unauthorized compensation that Kozlowski went to jail for, Tyco also had to restate hundreds of millions of income because of sketchy merger accounting. And the high flying stock fell 80% in 6 weeks.

[original mungerville]

I watched the whole almost 4-hour long presentation. I encourage those who want to understand the company better to do so, there's a lot of good stuff in there.

 

You watched today's four hour presentation? I can't find a web link - do you have one?

 

Linked from the investor presentations page. This should work:

 

http://www.vpsevent.com

 

Thanks.

[Spekulatius]

 

It's been a while, but as I remember Tyco - it seems like they were a pretty good collection of businesses that generated a lot of cash, etc.

The rollups seemed to work.

 

I thought the major issue with Tyco is that the CEO was a pig and basically rob the company for all his houses/toys, etc

while he acquired these great businesses.

 

correct, tyco was looted. tyco became

 

tyco international $20b

te connectivity $25b

adt $3.5b

covidien  $33b

 

Tyco stock went from more than 100$ to 7$ at the low. The problem was not the looting persay, which may have been to the order of 200M$ or so, which is not significant for a company with 35B$ in revenue. The problem was that Tyco had Billion $ in charges, some where for Goodwill (noncash), other were real restatements for accounting misrepresentations.

 

The accounting irregularities caused a chain reaction where TYCO lost access to the commercial paper market and had difficulty accessing credit markets (ratings tumbled too of course) and this was very precarious for the then TYC owned CIT sub.

 

Many feared bankruptcy but the new management stabilized the company and later spun off the various parts (CIT, COV, TEL, TYC, ADT etc).

 

FWIW, TYC was considered heavily indebted then, but their debt load was only ~1/3 of their revenues or ~2.5 x EBITDA back then - compared to VRX now this looks extremely conservative.

[giofranchi]

Tyco stock went from more than 100$ to 7$ at the low. The problem was not the looting persay, which may have been to the order of 200M$ or so, which is not significant for a company with 35B$ in revenue.

 

It is not the amount of looting that matters… it is the looting per se… because it tells you a lot about the people you were dealing with in Tyco. From that everything else follows.

The same thing is true for leverage: I agree that leverage in the wrong hands might be extremely dangerous… in the right hands, instead, it might turn out to be a useful tool.

When you invest in a business for the long term, you must judge the people you are partnering with, their motives and skills. There is no getting around this simple truth.

Therefore, do you think Mr. Pearson is a good and reliable entrepreneur or you basically don’t trust him?

 

Gio

 

[loganc]

Tyco stock went from more than 100$ to 7$ at the low. The problem was not the looting persay, which may have been to the order of 200M$ or so, which is not significant for a company with 35B$ in revenue. The problem was that Tyco had Billion $ in charges, some where for Goodwill (noncash), other were real restatements for accounting misrepresentations.

 

The accounting irregularities caused a chain reaction where TYCO lost access to the commercial paper market and hD difficulty accessing credit markets (ratings tumbled too if course) and this was very precarious for the then TYC owned CIT sub.

 

Many feared bankruptcy but the new management stabilized the company and later spun off the various parts (CIT, COV, TEL, TYC, ADT etc).

 

FWIW, TYC was considered heavily indebted then, but their debt load was only ~1/3 of their revenues or ~2.5 x EBITDA back then - compared to VRX now this looks extremely conservative.

 

And how is the access to commercial paper relevant to VRX? 

 

It seems to me that the bear argument is degenerating into ad hominem type analogies.

 

Let me ask you this:  why does AGN have to spend 16% of revenue on R&D to maintain the growth of the company?  Is it just because that is the status quo?

 

 

 

 

 

 

[Liberty]

- Cash of $72.00 per share and 0.83 Shares of Valeant stock

- Contingent Value Right for DARPin of up to $25.00 per Share in Value

- Pershing Square agrees to forego all cash and accept 100% of its consideration in Valeant stock using an exchange ratio determined based on yesterday's closing stock prices of AGN and VRX

- Pershing Square will receive $20.75 per share less consideration than other AGN shareholders, providing substantially more value and cash for other AGN stockholders

- Proposal contingent on good faith negotiations

- Conference Call and webcast to discuss proposal on Monday, June 2, 2014 at 8:00 am ET

 

LAVAL, Quebec, May 30, 2014 /PRNewswire/ -- Valeant Pharmaceuticals International, Inc. ("Valeant") (NYSE: VRX) (TSX: VRX) today announced that it is making an offer for Allergan, Inc. (NYSE: AGN) under which each Allergan share would be exchanged for $72.00 in cash and 0.83 shares of Valeant common stock, based on the fully diluted number of Allergan shares outstanding.  This offer is subject to prompt good faith negotiation of a merger agreement between Valeant and Allergan.  Shareholders will continue to be able to elect cash and/or Valeant stock, subject to proration.  Pershing Square, Allergan's largest shareholder with a 9.7% stake, has agreed to elect only stock consideration in the transaction and exchange their Allergan shares for Valeant shares at a 1.22659 exchange ratio, based on yesterday's closing stock prices of Allergan and Valeant, and receive no cash consideration.

 

Bill Ackman, CEO of Pershing Square said:  "Early this morning, I called Mike and offered to give up $600 million of value to the other Allergan shareholders and exchange our shares for Valeant stock if Valeant were prepared to increase its offer to the other Allergan shareholders.    We believe that our gesture to the other Allergan owners makes an extraordinarily strong statement about our belief in the long-term value of this highly strategic business combination.  We are delighted that Valeant has agreed to step up for the benefit of all Allergan shareholders.  We look forward to the Allergan board immediately entering into negotiations with Valeant and finalizing this transaction."

 

J. Michael Pearson, Chairman and CEO of Valeant stated:  "We believe our revised offer provides enormous value to both Valeant and Allergan shareholders.  We strongly believe that applying Valeant's operating philosophy, strategy, and financial discipline to a broader set of durable assets will continue to create substantial returns for shareholders over the short, intermediate, and long term. We are very committed to getting this deal done, and are now modifying our offer with the assistance of Pershing Square to increase the economics for all Allergan shareholders."

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2014/Valeant-And-Pershing-Square-Make-Revised-Offer-For-Allergan-Contingent-On-Good-Faith-Negotiations/default.aspx

[Spekulatius]

Tyco stock went from more than 100$ to 7$ at the low. The problem was not the looting persay, which may have been to the order of 200M$ or so, which is not significant for a company with 35B$ in revenue.

 

It is not the amount of looting that matters… it is the looting per se… because it tells you a lot about the people you were dealing with in Tyco. From that everything else follows.

The same thing is true for leverage: I agree that leverage in the wrong hands might be extremely dangerous… in the right hands, instead, it might turn out to be a useful tool.

When you invest in a business for the long term, you must judge the people you are partnering with, their motives and skills. There is no getting around this simple truth.

Therefore, do you think Mr. Pearson is a good and reliable entrepreneur or you basically don’t trust him?

 

Gio

 

The discovery of looting started Tyco's downward spiral, but the looting itself was not substantial enough to endanger the company, it was the lack of trust due yo all these discoveries.

 

Pearson is no Kozlowski and I don't think he would loot VRX. I think VRX GAAP earnings and balance sheet is correct, I just believe that the many adjustments that VRX does and their interpretation of economic earnings is misleading, not because I can fingerpoint , where they are wrong, but because they are not plausible to me. So, in that, I don't trust him.

 

It looks like VRX bumped up their bid for Allergan quite a bit and I think they will get a deal done. I think they should offer Allergan's shareholder a choice of cash or stock, instead of the cash heavy deal - that would probably seal the deal.

 

Those that like VRX, can take stock, those that don't, take the the cash. Seems simple to me and that is what Buffet has done buying Burlington Northern, but I think VRX may not be able to do that, because debt load of the combined company could be too high, in case most Allergan shareholders take the cash.

[original mungerville]

I'm not an expert, but it looks like this new offer could/should get the deal done.

 

It may be time to invert and average up on VRX (ie rather than the more typical averaging down).

[giofranchi]

The discovery of looting started Tyco's downward spiral, but the looting itself was not substantial enough to endanger the company, it was the lack of trust due yo all these discoveries.

 

Pearson is no Kozlowski and I don't think he would loot VRX. I think VRX GAAP earnings and balance sheet is correct, I just believe that the many adjustments that VRX does and their interpretation of economic earnings is misleading, not because I can fingerpoint , where they are wrong, but because they are not plausible to me. So, in that, I don't trust him.

 

It looks like VRX bumped up their bid for Allergan quite a bit and I think they will get a deal done. I think they should offer Allergan's shareholder a choice of cash or stock, instead of the cash heavy deal - that would probably seal the deal.

 

Those that like VRX, can take stock, those that don't, take the the cash. Seems simple to me and that is what Buffet has done buying Burlington Northern, but I think VRX may not be able to do that, because debt load of the combined company could be too high, in case most Allergan shareholders take the cash.

 

Well, I respect your view and also thank you for expressing your doubts very clearly and in a way that is easy to understand.

 

After reading the transcripts of all the conference calls of the last three years, I have come to appreciate very much how Mr. Pearson reasons and talks about VRX strategy and about business in general. Over and over again I have found what I look for in an owner/manager I want to partner with. Therefore, I have an hard time sharing your mistrust born out of accounting adjustments, though, as I have said, I certainly understand it.

 

Gio

 

[original mungerville]

I really like Pearson as well.

[Liberty]

Slide deck for the revised offer:

 

http://ir.valeant.com/files/doc_presentations/2014/6.02.14%20Final%20Improved%20Offer%20Deck%20Final3.pdf

[fareastwarriors]

In Valeant’s Bid for Allergan, an Opaque Business Model Is Revealed

 

 

 

http://dealbook.nytimes.com/2014/06/04/in-valeants-bid-for-allergan-an-opaque-business-model-is-revealed/?_php=true&_type=blogs&module=BlogPost-Title&version=Blog%20Main&contentCollection=The%20Trade&action=Click&pgtype=Blogs&region=Body&_r=0

[Liberty]

In Valeant’s Bid for Allergan, an Opaque Business Model Is Revealed

 

 

 

http://dealbook.nytimes.com/2014/06/04/in-valeants-bid-for-allergan-an-opaque-business-model-is-revealed/?_php=true&_type=blogs&module=BlogPost-Title&version=Blog%20Main&contentCollection=The%20Trade&action=Click&pgtype=Blogs&region=Body&_r=0

 

What a hatchet job.

 

1) If Valeant doesn't develop drugs, why does it have more product launches than Allergan over the next few years? One more case of measuring inputs rather than outputs. What's the difference between buying someone else's drug and making your own? Either way, it gets made and the people who developed it get paid.. If the industry finds out that the current model doesn't work anymore, a new model will emerge. Maybe more of the R&D will be offloaded to more productive startups and small biotechs, whatever. But the journalist seems to think that there can't be no alternative to the current model.

 

2) He makes it seem like Valeant is doing something shady. Well, Canada has a different tax system than the US (territorial), and Valeant's US operations don't pay much tax because they have interest expense there (which will be the same for all companies until interest expense stops being deductible).

 

3) Points out Allergan's presentation on Valeant, but not Valeant's rebuttal of the many factual errors that it contained, or how they showed that AGN makes the same adjustments, etc.

 

etc.

[bmichaud]

Gio,

 

Nice work over on Seeking Alpha. This "Uncommon Profit Investor" article was embarrassingly off base. Wow.

[AZ_Value]

Gio et al.,

 

Others have clarified this but I keep seeing it being repeated, maybe you misspoke and can clarify but to be crystal clear about this: Goodwill doesn't get amortized.

 

Goodwill (like all intangibles actually) gets tested for impairment on a regular basis. The test is really just an analysis of the estimated cash flows related to the asset discounted back to today and then compared to the carrying value of the asset and when it's less an impairment charge is taken.

 

Unlike goodwill however, other intangibles that have a finite life are amortized - this would be for example amortizing the patent on Zovirax. That is the amortization that is being discussed.

And to put it simply, adding this cost back as to try to represent the true economic reality of the company is nuts. Just like depreciation on aging machinery or other assets is a real cost, this cost is very very real.

Just wanted to point this out as I see you engaging in accounting rebuttals with other folks with facts that are wrong.

[bmichaud]

AZ,

 

If 85% of VRX's business is durable, then the annual R&D budget takes care of any required annual replacement, no?

 

Then the 15% patent business is treated as a run off stream. Hence why Ackman came up with the two-part SOTP analysis where he valued the run off at 6X cash flow, and the core at 20X.

 

My guess is VRX management does not work very hard to replace any lost sales from the run off segment. Once the acquisition machine stops, then the Core ultimately takes over by virtue of its positive growth and run-off's negative growth.

 

If VRX's pro forma organic ex generic numbers are to be believed, my guess is a lot of the "growth spending" is buried in income statement versus the capex line for most companies. Sales, marketing, R&D etc...

[AZ_Value]

AZ,

 

If 85% of VRX's business is durable, then the annual R&D budget takes care of any required annual replacement, no?

 

Then the 15% patent business is treated as a run off stream. Hence why Ackman came up with the two-part SOTP analysis where he valued the run off at 6X cash flow, and the core at 20X.

 

My guess is VRX management does not work very hard to replace any lost sales from the run off segment. Once the acquisition machine stops, then the Core ultimately takes over by virtue of its positive growth and run-off's negative growth.

 

If VRX's pro forma organic ex generic numbers are to be believed, my guess is a lot of the "growth spending" is buried in income statement versus the capex line for most companies. Sales, marketing, R&D etc...

 

Bmichaud,

 

That is a very good story and one that makes sense which is what makes it even more dangerous because that's all it is: a story.

 

I've asked this before and I am yet to see someone take me up on it: Can someone please show me how this is true? How are VRX drugs/products durable and not subject to patent cliffs? Any metric to share with us maybe? And as you probably know, a slide in a presentation generated to drive a transaction or management talking points is not sufficient.

 

If we were discussing J&J a person would give an answer that includes say: BandAid - Babycare - Listerine - Tylenol etc... Or if it was P&G, the answer would presumably include names like: Tide - Pantene - Old Spice - Duracell -  Pampers and many more. See, very easy.

 

Similarly a good answer for VRX would name, say VRX' top 10 or 20 of their drugs and then show us how they fit that profile. You will very quickly find that people aren't able to do that, actually they can't even name those drugs.

 

If you'll bear with me, I was working on a post to flush out my thoughts but got caught up with other opportunities that took up all my time but I'll get back to it. VRX is no holding of mine so it had to take a backseat, wouldn't own it and would be crazy to short it given how the market loves the name.

However I see many of my Corner friends here evidently stepping way out of their circle of competence and telling stories to justify it, which is how it usually happens, so I will chime in if you'll bear with me for a bit.

 

 

 

[loganc]

Gio et al.,

 

Others have clarified this but I keep seeing it being repeated, maybe you misspoke and can clarify but to be crystal clear about this: Goodwill doesn't get amortized.

 

Goodwill (like all intangibles actually) gets tested for impairment on a regular basis. The test is really just an analysis of the estimated cash flows related to the asset discounted back to today and then compared to the carrying value of the asset and when it's less an impairment charge is taken.

 

Unlike goodwill however, other intangibles that have a finite life are amortized - this would be for example amortizing the patent on Zovirax. That is the amortization that is being discussed.

And to put it simply, adding this cost back as to try to represent the true economic reality of the company is nuts. Just like depreciation on aging machinery or other assets is a real cost, this cost is very very real.

Just wanted to point this out as I see you engaging in accounting rebuttals with other folks with facts that are wrong.

 

Have you ever tried to calculate the return on the Zovirax acquisition? 

 

Let me give you a few data points: 

 

(1) $300MM was paid for the right to distribute Zovirax in US & Canada.  Deal closed in February of 2011.

 

(2) The sales numbers disclosed by VRX for Zovirax are as follows (MM):

-TTM Prior to Close - $169.5 (VRX 2Q13 Presentation)

-2011E - $195    (VRX 3Q11 Presentation indicates 22% growth in Zovirax / Xerese; I use 15% growth from the TTM number above)

-2012E - $258.9  (VRX 3Q12 Presentation)

-2013E - $164.3  (VRX 2Q13 Presentation)

-2014E - $115    (Assume 2014 sales decline 30%)

 

Note that the gross margin on Zovirax would be astronomical (90%+).  I confirmed this with my father who is a pharmacist and part of his business involves making his own formulations (i.e. compounding pharmacy).  Also, it should be noted that the decline in Zovirax is one of the primary reasons why the "organic growth" numbers have looked weak recently.  It should also be noted that while Zovirax sales are in decline, I do not believe the sales in 2015 and beyond will be exactly zero.

 

Is anyone going to try to suggest to me, assuming the numbers aren't completely incorrect, that this was not a successful deal?  They paid less than 2x TTM sales for Zovirax and Zovirax will have generated on the order of $700MM of sales through 2014.  I understand the arguments about the nature of the intangible amortization, but I feel that these points are largely academic in the event that VRX achieves their target rates of return on the acquisitions.

 

My question for the bears is:  where are all of these bad deals that VRX has done?     

 

[lu_hawk]

Gio et al.,

 

Others have clarified this but I keep seeing it being repeated, maybe you misspoke and can clarify but to be crystal clear about this: Goodwill doesn't get amortized.

 

Goodwill (like all intangibles actually) gets tested for impairment on a regular basis. The test is really just an analysis of the estimated cash flows related to the asset discounted back to today and then compared to the carrying value of the asset and when it's less an impairment charge is taken.

 

Unlike goodwill however, other intangibles that have a finite life are amortized - this would be for example amortizing the patent on Zovirax. That is the amortization that is being discussed.

And to put it simply, adding this cost back as to try to represent the true economic reality of the company is nuts. Just like depreciation on aging machinery or other assets is a real cost, this cost is very very real.

Just wanted to point this out as I see you engaging in accounting rebuttals with other folks with facts that are wrong.

 

Have you ever tried to calculate the return on the Zovirax acquisition? 

 

Let me give you a few data points: 

 

(1) $300MM was paid for the right to distribute Zovirax in US & Canada.  Deal closed in February of 2011.

 

(2) The sales numbers disclosed by VRX for Zovirax are as follows (MM):

-TTM Prior to Close - $169.5 (VRX 2Q13 Presentation)

-2011E - $195    (VRX 3Q11 Presentation indicates 22% growth in Zovirax / Xerese; I use 15% growth from the TTM number above)

-2012E - $258.9  (VRX 3Q12 Presentation)

-2013E - $164.3  (VRX 2Q13 Presentation)

-2014E - $115    (Assume 2014 sales decline 30%)

 

Note that the gross margin on Zovirax would be astronomical (90%+).  I confirmed this with my father who is a pharmacist and part of his business involves making his own formulations (i.e. compounding pharmacy).  Also, it should be noted that the decline in Zovirax is one of the primary reasons why the "organic growth" numbers have looked weak recently.  It should also be noted that while Zovirax sales are in decline, I do not believe the sales in 2015 and beyond will be exactly zero.

 

Is anyone going to try to suggest to me, assuming the numbers aren't completely incorrect, that this was not a successful deal?  They paid less than 2x TTM sales for Zovirax and Zovirax will have generated on the order of $700MM of sales through 2014.  I understand the arguments about the nature of the intangible amortization, but I feel that these points are largely academic in the event that VRX achieves their target rates of return on the acquisitions.

 

My question for the bears is:  where are all of these bad deals that VRX has done?   

 

You are engaging in a logical fallacy here by attacking a straw man.

 

AZ_Value stated that intangibles with a finite life are amortized under GAAP (using the Zovirax patent as an example of such an intangible), and that this type of amortization expense is a real cost.

 

You responded by showing numbers relating to the Zovirax deal, and stating that the deal was clearly a good deal.  And then you challenged "bears" to show where all the bad deals are.

 

Whether or not the Zovirax deal was a good one has no bearing on whether the amortization of the Zovirax patent is a real cost.  They are two separate things, hence the straw man.  To say that the strength of the Zovirax deal has any bearing on whether the patent amortization is a real cost would be like saying that you don't need to deduct the cost of employee wages, as long as those employees are good workers.

 

 

 

I think someone could fill at least a few chapters of a book on investor psychology just be reading the VRX message thread.

 

 

[loganc]

Whether or not the Zovirax deal was a good one has no bearing on whether the amortization of the Zovirax patent is a real cost.  They are two separate things, hence the straw man.  To say that the strength of the Zovirax deal has any bearing on whether the patent amortization is a real cost would be like saying that you don't need to deduct the cost of employee wages, as long as those employees are good workers.

 

This is complete nonsense.  It is obvious that for the purposes of computing the cash on cash return for the Zovirax deal that the patent intangible amortization is not a real cost.  Where in the real world does Pearson pay someone the cash for Zovirax patent intangible amortization? 

[lu_hawk]

Whether or not the Zovirax deal was a good one has no bearing on whether the amortization of the Zovirax patent is a real cost.  They are two separate things, hence the straw man.  To say that the strength of the Zovirax deal has any bearing on whether the patent amortization is a real cost would be like saying that you don't need to deduct the cost of employee wages, as long as those employees are good workers.

 

This is complete nonsense.  It is obvious that for the purposes of computing the cash on cash return for the Zovirax deal that the patent intangible amortization is not a real cost.  Where in the real world does Pearson pay someone the cash for Zovirax patent intangible amortization?

 

Just like depreciation of tangible assets is not a real cost, right?  Because you don't have to pay someone cash when you incur the depreciation expense.  "Complete nonsense" indeed.

 

As to "where in the real world" Pearson pays cash for the amortization, I believe the acquisitions the company makes are paid for with cash.  I can be mistaken on that though.  The company may receive the patents as gifts from well-wishing competitors.

[vinod1]

Bmichaud,

 

That is a very good story and one that makes sense which is what makes it even more dangerous because that's all it is: a story.

 

I've asked this before and I am yet to see someone take me up on it: Can someone please show me how this is true? How are VRX drugs/products durable and not subject to patent cliffs? Any metric to share with us maybe? And as you probably know, a slide in a presentation generated to drive a transaction or management talking points is not sufficient.

 

If we were discussing J&J a person would give an answer that includes say: BandAid - Babycare - Listerine - Tylenol etc... Or if it was P&G, the answer would presumably include names like: Tide - Pantene - Old Spice - Duracell -  Pampers and many more. See, very easy.

 

Similarly a good answer for VRX would name, say VRX' top 10 or 20 of their drugs and then show us how they fit that profile. You will very quickly find that people aren't able to do that, actually they can't even name those drugs.

 

If you'll bear with me, I was working on a post to flush out my thoughts but got caught up with other opportunities that took up all my time but I'll get back to it. VRX is no holding of mine so it had to take a backseat, wouldn't own it and would be crazy to short it given how the market loves the name.

However I see many of my Corner friends here evidently stepping way out of their circle of competence and telling stories to justify it, which is how it usually happens, so I will chime in if you'll bear with me for a bit.

 

+1

 

Completely agree with you. A portion of the Valeant product line would have a limited life span and that part needs to be amortized. As an approximation I am adjusting the cash earnings down by about 10%.

 

Vinod

[AZ_Value]

Whether or not the Zovirax deal was a good one has no bearing on whether the amortization of the Zovirax patent is a real cost.  They are two separate things, hence the straw man.  To say that the strength of the Zovirax deal has any bearing on whether the patent amortization is a real cost would be like saying that you don't need to deduct the cost of employee wages, as long as those employees are good workers.

 

This is complete nonsense.  It is obvious that for the purposes of computing the cash on cash return for the Zovirax deal that the patent intangible amortization is not a real cost.  Where in the real world does Pearson pay someone the cash for Zovirax patent intangible amortization?

 

Logan, you're mixing two things and introducing something that wasn't being discussed really (but that I'll be glad to address later because it's not unimportant).

 

Let me try and simplify what is bothersome in the GAAP adjustment world first that was being discussed:

 

In an oversimplified world where frictional expenses that come with an acquisition are ignored, when VRX acquires a company cash goes out and is replaced by other assets on the balance sheet; a company here or there might come with a plant and other stuff but mostly for VRX, it has been intangibles (patents etc. + goodwill on top). But there was no expense recorded here, assets were capitalized and put on the balance sheet as to reflect the nature and economic life of a long term asset, all is good with everybody here.

 

After that, those assets generate income for you and you'll record that on the income statement and to reflect that you're using them and that they will generate less and less of that income in the future (which they will) you amortize them by recording an expense on the income statement gradually.

In VRX case they then tell you that no, in our world every instance of amortization needs to be added back because it's non cash. I like to call that "the long term asset cash amnesia" because they're conveniently forgetting that cash was actually paid out originally to acquire the asset no? Why can't people just forget about the terms depreciation and amortization and call it "slow recognition of the cash that you paid upfront", would that help them not get confused? Because for VRX, it seems like for them no expense will ever be recorded in their mind since it will always be added back.

If you're going to dismiss depreciation and amortization, just take the whole expense on day 1 on your income statement then as if you were buying office supplies to be used up by the end of the week, which would also be silly. Either way, don't pretend that no expense will ever have to match the income from your assets.

 

Now, I can see where you're coming from, you're bringing up measures of performance which is not what the discussion was about. By talking cash on cash returns etc. for instance you take into account the price paid out which is fine but a different topic than the "buy and pretend you didn't" GAAP adjustment approach I describe above.

 

 

 

You are engaging in a logical fallacy here by attacking a straw man.

 

AZ_Value stated that intangibles with a finite life are amortized under GAAP (using the Zovirax patent as an example of such an intangible), and that this type of amortization expense is a real cost.

 

You responded by showing numbers relating to the Zovirax deal, and stating that the deal was clearly a good deal.  And then you challenged "bears" to show where all the bad deals are.

 

Whether or not the Zovirax deal was a good one has no bearing on whether the amortization of the Zovirax patent is a real cost.  They are two separate things, hence the straw man.  To say that the strength of the Zovirax deal has any bearing on whether the patent amortization is a real cost would be like saying that you don't need to deduct the cost of employee wages, as long as those employees are good workers.

 

 

 

I think someone could fill at least a few chapters of a book on investor psychology just be reading the VRX message thread.

 

 

 

Thanks lu_hawk, I actually doubted myself for a sec and had to go back to my post to make sure whether or not I had discussed the performance of Zovirax when I was merely giving an example of an intangible with a finite life.