VRX - Valeant Pharmaceuticals International Inc.

[loganc]

However this is a single acquisition, Medicis, and the main products of that company Valeant are selling to Nestle. I would like to do this more generally but as a later post shows that becomes increasingly more difficult after the Medicis merger because the one-off charges are not sufficiently broken out by acquisition.

 

This will be interesting to see.  VRX has provided detailed disclosure about the restructuring expenses taken for the various acquisitions in the 8K earnings filings.   

 

Edit: So, the implication here is bullshit - the "one-off" charges have been provided in the 8-K earning statements.  Plus, Hempton's argument about about the "massive" increase in share count is obviously bullshit. 

 

If one wants to think about an "Agenda", look no further than Hempton's short.  He recently stated the following on twitter - "Still think $HLF ends with Pershing Square's maggot infested carcass swinging in the breeze waiting for the prime broker to cut it down."

 

[giofranchi]

Look at something like DHR where we have the benefit of hindsight to show that they are really good at doing deals and integrating and cutting costs in businesses.

 

That’s basically why I am out: because it is the toughest business judgment among my firm’s stock investments.

I needed some capital… therefore, VRX is the one I sold…

 

But, I think it is extremely dangerous to collect 1 or 2 years of data, and to judge the effectiveness of their business model on the “quantitative picture” they portray… way too short term to rely on that… you would need 1 or 2 decades to rely on numerical data…

 

The question imo remains the same: does Mr. Pearson’s business model make sense? Will it work over the long term? Will it be successful in cutting unnecessary and wasteful R&D costs? If it manages to be successful, when will competition become too fierce?

 

Those are qualitative questions, and imo you cannot provide quantitative answers yet!

 

By the way… what the bears and the bulls have in common about VRX is the following expression: “we'll get to see how it plays out”… sentence that would have no meaning at all, if the numbers were already clear enough! And, of course, if the numbers were already clear enough, no opportunity (bull case) nor threat (bear case) would exist today! ;)

 

Gio

 

[lu_hawk]

To conclude my posts in this thread:

 

Maybe you think I am wrong on my assessment.  And maybe I am wrong.  But I believe it's important to know where to place the burden of proof.  Valeant has many things in common with other roll-ups that have blown up in the past.  And maybe those superficial similarities are just that--superficial.  But you have a company that has been on an m&a spree, and even if you believe that they have been doing smart things, you still can't objectively and independently come to the conclusion that it's been a success.  Not enough time has gone by. 

 

The only response to my opinions expressed on this thread has been statements made by the management of VRX.  Statements where the management of VRX is saying that the roll-up has been a success.  Everything else says it's way too early to know if it's been a success, because objectively, all that has happened is they have bought a bunch of companies with debt, and it's too early to know whether they can even pay back the debt, let alone be worth another $40bn on top of the debt.

 

And in light of all this: is it really correct to trust management's rosy statements until they are proven wrong?  I think that in a case like this, the ONLY rational thing is to place the burden of proof on the other side, to not trust what they are saying until you can independently verify that the deals have been a success.

 

If you feel that you can already prove the roll-up has been successful, then I'd like to see how you can come to that proof.  That is one thing I was seeking when I started posting here.  But statements from management can have no real role in the proof.  It has to be objective evidence at this point. 

[giofranchi]

And in light of all this: is it really correct to trust management's rosy statements until they are proven wrong?  I think that in a case like this, the ONLY rational thing is to place the burden of proof on the other side, to not trust what they are saying until you can independently verify that the deals have been a success.

 

Unfortunately business doesn’t work that way… at least in my experience! Once some business proposition can be objectively verified, the opportunity is gone forever! Of course, that’s only my experience… but how could it be different?!

 

Mr. Buffett is the best at judging business propositions… before they become obvious to anyone else! You and I are no Buffetts but, if we want to be entrepreneurs, there is little doubt we also must find good business propositions, before they get discovered by other people as well.

 

And there is no other way that I know of except thinking about the rationale behind a business proposition, and then examining how its execution is carried out. Having read all the VRX conference transcripts of the last 3 years, I can say I have found practically nothing that makes little sense. And I judge Mr. Pearson’s hands capable enough to carry out his strategy effectively.

 

As far as debt is concerned, the result is obvious: if the business proposition is sound, it will magnify good results; if the business proposition is flawed, it will magnify bad results.

 

We will see! ;)

 

Gio

 

[giofranchi]

Ah! By the way… Standard Oil must have been the very first “roll-up”!! And Mr. Rockefeller the very first “serial acquirer”!!

 

And no matter how successful it had become over time... some people remained skeptical about Standard Oil until the end!

 

;)

 

Gio

 

[CorpRaider]

Greenblatt is/was short, I observed this fact this via the value investors digest interview linked on the brooklyn investor blog post re: gotham's mutual funds.

[lu_hawk]

Ah! By the way… Standard Oil must have been the very first “roll-up”!! And Mr. Rockefeller the very first “serial acquirer”!!

 

And no matter how successful it had become over time... some people remained skeptical about Standard Oil until the end!

 

;)

 

Gio

 

Come on....

 

Along the same lines as your Standard Oil argument, you should also put all your money into lottery tickets because we have all seen news stories about the people that hit it big.

 

Possible does not mean probable.  It just means there is more than zero chance.

 

For every one Standard Oil, there are how many Tycos and Worldcoms?  That's a more apt comparison here.

[Guest wellmont]

However this is a single acquisition, Medicis, and the main products of that company Valeant are selling to Nestle. I would like to do this more generally but as a later post shows that becomes increasingly more difficult after the Medicis merger because the one-off charges are not sufficiently broken out by acquisition.

 

This will be interesting to see.  VRX has provided detailed disclosure about the restructuring expenses taken for the various acquisitions in the 8K earnings filings.   

 

Edit: So, the implication here is bullshit - the "one-off" charges have been provided in the 8-K earning statements.  Plus, Hempton's argument about about the "massive" increase in share count is obviously bullshit. 

 

If one wants to think about an "Agenda", look no further than Hempton's short.  He recently stated the following on twitter - "Still think $HLF ends with Pershing Square's maggot infested carcass swinging in the breeze waiting for the prime broker to cut it down."

 

I think bronte has let emotions (real hate for ackman) enter the picture. so his most vocal long is HLF and his most vocal short is VRX? lol.

[bmichaud]

Better yet Wellmont, they are probably less than 2% positions for him....an even bigger LOL HAHAHHAA

[Guest wellmont]

yep. he's on record as having tons of shorts, I think 1% positions is the norm. And he basically looks for frauds. btw vrx plays the role of a good hedge against a long book of r2k type of stocks, so even if his thesis is wrong it still could be a good short. It's widely owned by "hot" money, and it has what academics like to call higher beta than the indexes. It's also highly leveraged. All good things for a down market. So if you run a long short book (and you dislike BA) this is a natural for a 1% position. Also writing about one of the most controversial and discussed stocks in the world can't be bad for blog traffic.

[giofranchi]

For every one Standard Oil, there are how many Tycos and Worldcoms?  That's a more apt comparison here.

 

Well… Mr. Ackman said a good roll-up is Berkshire… what’s the difference if I say that the first good roll-up might have been Standard Oil?!

 

Of course, my point is not that roll-ups are good businesses! My point is just that it depends! There simply is no getting around the fact you must make a business judgment… or, if that business judgment is too difficult for you, simply admit that you don’t know!

 

I find the Standard Oil example interesting also because as a roll-up it actually created more value for its owners, when it was finally broken up, than when it was built through many and very frequent acquisitions.

I also find interesting that fact Mr. Rockefeller had always been willing to pay-up for what he called “strategic assets”… this of course doesn’t mean overpaying for them! Something I have heard Mr. Pearson repeating many times!

 

I find this thing interesting: if you study the principles Mr. Rockefeller followed while building Standard Oil, and if you read what Mr. Pearson says in conference calls, you’ll end up recognizing a lot of similitudes!

 

Why would you overlook this?! ;)

 

Gio

 

[giofranchi]

Kraft Foods (recently renamed Mondelēz International) was a very early example of a rollup, in the dairy industry. Waste Management was the most notable rollup made during the 70's and 80's. Waste Management's acquisition of 133 small-time haulers quickly became the largest waste disposal company in the United States. The characteristics that can make a rollup attractive are where either there are many small players in fragmented markets or where technology can play an essential role in revitalizing industries with small margins but technology can impact growth and profits. AutoNation was also a successful rollup effort in the car dealership space spearheaded by Wayne Huizenga, founder of Waste Management.

--Wikipedia

 

 

Gio

[wbr]

I think bronte has let emotions (real hate for ackman) enter the picture. so his most vocal long is HLF and his most vocal short is VRX? lol.

 

I didnt know Bronte before, so I started to look whether he is someone who has been right in the past when he publicly calls a company a fraud. And then I realized he is long HLF and my first thought was: "Why is he going after VRX now and not at any point in the last 18 months? Could it be possible that he is going after Ackman and not after VRX?"

 

It would make sense though, apparently shorts like to look for leverage and acquisitions so you would assume he had VRX on his radar before Ackman's involvement. And suddenly weeks after the AGN announcement he comes out with a thesis. I assume he started looking at the 10Ks as soon as he saw Bill.

[ZenaidaMacroura]

I think bronte has let emotions (real hate for ackman) enter the picture. so his most vocal long is HLF and his most vocal short is VRX? lol.

 

I didnt know Bronte before, so I started to look whether he is someone who has been right in the past when he publicly calls a company a fraud. And then I realized he is long HLF and my first thought was: "Why is he going after VRX now and not at any point in the last 18 months? Could it be possible that he is going after Ackman and not after VRX?"

 

It would make sense though, apparently shorts like to look for leverage and acquisitions so you would assume he had VRX on his radar before Ackman's involvement. And suddenly weeks after the AGN announcement he comes out with a thesis. I assume he started looking at the 10Ks as soon as he saw Bill.

 

I think he's like me- he just follows ackman looking for action.  Ackman always moves a stock (which is not to say he is always right).

[topofeaturellc]

Kraft Foods (recently renamed Mondelēz International) was a very early example of a rollup, in the dairy industry. Waste Management was the most notable rollup made during the 70's and 80's. Waste Management's acquisition of 133 small-time haulers quickly became the largest waste disposal company in the United States. The characteristics that can make a rollup attractive are where either there are many small players in fragmented markets or where technology can play an essential role in revitalizing industries with small margins but technology can impact growth and profits. AutoNation was also a successful rollup effort in the car dealership space spearheaded by Wayne Huizenga, founder of Waste Management.

--Wikipedia

 

Gio

 

Waste Management had a massive accounting scandal of exactly the sort that Hempton et al are accusing VRX's management of perpetrating.

 

Standard Oil was a monopoly. Rockefeller used his market power to force people to sell assets to him at less than a market price.  We basically owe Anti-trust regulation in the United States to his (and a few others) actions.

[giofranchi]

Standard Oil was a monopoly. Rockefeller used his market power to force people to sell assets to him at less than a market price.  We basically owe Anti-trust regulation in the United States to his (and a few others) actions.

 

Yeah! At the end of course it had become a monopoly… But no business is a monopoly at the beginning… ;) And Mr. Rockefeller, while building Standard Oil, had been willing many times to pay up for strategic assets… The image of a monopolist forcing people to sell assets below market prices is at least partially false!

 

Gio

[lu_hawk]

For every one Standard Oil, there are how many Tycos and Worldcoms?  That's a more apt comparison here.

 

Well… Mr. Ackman said a good roll-up is Berkshire… what’s the difference if I say that the first good roll-up might have been Standard Oil?!

 

Of course, my point is not that roll-ups are good businesses! My point is just that it depends! There simply is no getting around the fact you must make a business judgment… or, if that business judgment is too difficult for you, simply admit that you don’t know!

 

I find the Standard Oil example interesting also because as a roll-up it actually created more value for its owners, when it was finally broken up, than when it was built through many and very frequent acquisitions.

I also find interesting that fact Mr. Rockefeller had always been willing to pay-up for what he called “strategic assets”… this of course doesn’t mean overpaying for them! Something I have heard Mr. Pearson repeating many times!

 

I find this thing interesting: if you study the principles Mr. Rockefeller followed while building Standard Oil, and if you read what Mr. Pearson says in conference calls, you’ll end up recognizing a lot of similitudes!

 

Why would you overlook this?! ;)

 

Gio

 

I don't overlook this.

 

At what point in Berkshire's history was it a highly leveraged, junk rated company?  At what point in Berkshire's history did it own a collection of declining assets? 

 

It's just outright delusional for you to take a few of the most successful acquisiton driven companies  in history and say that those companies have something to do with Valeant.  Now that you don't own the stock, you may be able to start thinking a little more clearly on this.

 

If you believe Berkshire has something to do with Valeant, then by logical extension, the Powerball winner on the news has to something to do with YOU.  Go buy your tickets now.

 

 

[giofranchi]

Now that you don't own the stock, you may be able to start thinking a little more clearly on this.

 

I don’t believe the way I think about a business I have studied and followed should change much, whether I own its stock or not… I don’t work that way… It has never happened to me…

The way I think about VRX is the result of having read many many questions about its business model, having heard the answers, and having thought about both questions and answers. This is basically how I form my own ideas about any business…

Let me ask you: have you done this work with VRX?

 

We have already talked extensively enough about both debt and declining assets… no need to repeat the same ideas another time! ;)

 

If you believe Berkshire has something to do with Valeant, then by logical extension, the Powerball winner on the news has to something to do with YOU.  Go buy your tickets now.

 

Sorry, but I don’t understand what you mean! ;D

 

Gio

 

[Liberty]

Valeant Pharmaceuticals To Hold Conference Call On Tuesday, June 17, 2014 To Correct Recent Misrepresentations

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2014/Valeant-Pharmaceuticals-To-Hold-Conference-Call-On-Tuesday-June-17-2014-To-Correct-Recent-Misrepresentations/default.aspx

[lu_hawk]

Sorry, but I don’t understand what you mean! ;D

 

Your logic of comparing  Valeant to Berkshire and Standard Oil is faulty.  It would be no different if you saw a random guy who told you he was going to be the next great NBA player.  And you looked, and you saw that he was 5' 4" and couldn't dribble a basketball, and you told him you didn't think it would be possible.  And he responds, "But look at Michael Jordan and Lebron James!" 

 

And similarly, when assessing your chances of winning the lottery, you'd look at the a person who DID win the lottery, and say that the fact that he won means that you have a pretty good chance of winning if you go out and buy a ticket. 

 

You are picking out the two of the most successful companies in history, and using them as a yardstick to determine whether it is plausible that Valeant's roll-up is as successful as Pearson says it is.  This is no different than my basketball or lottery examples.  And then you ask me why "I overlook this?"  And to me, this indicates some serious bias on your part.  You don't own the stock anymore, so your bias may abate over time. 

 

 

[lu_hawk]

The way I think about VRX is the result of having read many many questions about its business model, having heard the answers, and having thought about both questions and answers. This is basically how I form my own ideas about any business…

Let me ask you: have you done this work with VRX?

 

Gio,

 

Yes I have done this work, but I have chosen to use numbers in my analysis, rather than the superlatives offered by management. 

 

If you read the 10-K and look at the numbers, you will see doozies like this:

 

Under "Changes in Revenue":

 

incremental product sales revenue of $271.2 million in 2013, related to growth from the existing business, excluding the declines in Developed Markets described below. In the Developed Markets segment, the revenue increase was driven primarily by price, while volume was the main driver of growth in the Emerging Markets segment.

 

....

 

decrease in product sales in the Developed Markets segment of $293.9 million, in the aggregate, in 2013, primarily related to a decline in sales of the Zovirax® franchise, Retin-A Micro®, BenzaClin® and Cesamet® due to the impact of generic competition;

 

In other words, our revenue from existing business went up by $271mm, if you exclude the $293mm decrease (of course!).  They even go so far as to list the reasons that revenue from existing products increased in Developed Markets, and then a few lines down they tell you that it actually decreased!  These are not trustworthy people.  And yet the entire investment thesis in VRX is trusting what management says. 

 

 

They did something similar in 2012, when they had 4 segments, but the overall number would still have been positive.  They reported a $287mm increase from existing products, excluding decreases totaling $171mm (i.e., a net increase of $116mm). They "excluded" the decrease in the US Neurology segment which saw sales decline 28% due to products that went generic, and they "excluded" the decrease in the Canada and Australia segment which saw sales decline by more than half (54%) due to a product that went generic.

 

-54% and -28% are ugly numbers, and would go against the idea of "durability" that the company talks about.  So the next year, they reduced the segments from 4 to 2, which allowed them to lump more things together, in a way where you would not be able to see huge % declines in certain products.

 

And then in 2013, sales growth from existing business went negative, but again, they presented it as an increase, even though revenue from existing businesses decreased.

 

All of this is extremely misleading at best.  Why anyone would place their faith in the statements of management who would actually say "our revenues increased (but they actually decreased)," is beyond me. 

 

But management is able to get away with this because everyone focuses on what management SAYS, rather than looking at the numbers to get some real data.

 

 

 

 

 

 

[coc]

This has been interesting. I'm a non-partisan observer; I believe the "too hard" basket was invented with situations like these in mind.

 

With that said, it is interesting to study and learn from -- as I'm sure most of you would agree. I'm enjoying reading all of your analyses. (On both sides.)

 

Here's a question I have for those of you positive on Valeant. How do the economics of the deal for Allergan make sense unless VRX stock is considerably overvalued? (Perhaps we all admit it is overvalued -- if so, that raises other issues I think.)

 

Here's how I see it: Let's assume Allergan has something like $7.2 billion in sales this coming year -- growth of 15% over last reported FY. And let us assume that Valeant can achieve a 50% pre-tax profit margin without harming Allergan's business. Lastly, let's assume they can hang on to a long term tax rate of 10%. In that scenario, Allergan should have after-tax profits of $3.25 billion - or a 45% net profit margin, and just shy of a 100% return on tangible assets employed. (There go my saliva glands.)

 

Against a purchase price of $52 billion, that gives me an after-tax yield of about 6.25%, even if I give Valeant the benefit of the doubt as operators. Is this a wonderful deal for Valeant shareholders? It's hard for me to see it as so, unless there is enormous organic growth in that $3.25 billion of net profit, which can be achieved without reinvesting a whole lot more capital. (If that is a possibility, I'm all ears.)

 

So perhaps it is the intelligent use of leverage that would make this deal attractive then. Let's say they were to borrow ~40% of the purchase price, or $22 billion, at a 6% interest rate. That's $1.3 billion or thereabouts in interest expense. So the fully levered return to Valeant would be $2.1 billion against $30 billion in equity, or 6.5% per year, which would improve a little bit every year as the debt got paid down. (Which would take something like 8 years.) Again, not the sort of deal that blows your hair back.

 

Of course, in the real world, Valeant wants to give away $30 bilion of stock, rather than use cash for its equity in the deal. (Understandably so -- few companies have that kind of cash lying around.)

 

So if the fundamental cash/cash returns are that weak, I have to arrive at the conclusion that VRX is either: A. Overpaying; B. Admitting the $30 billion in stock they're giving to Allergan shareholders is worth a lot less than $30 billion; C. They feel they can achieve net profit margins in the 75% range; or D. There is a huge amount of automatic growth to come for Allergan as a part of Valeant, which will ultimately justify the deal -- perhaps billions in synergies, etc.

 

Not being an expert at all in either of these companies, can someone explain what the most logical rationale might be? I mean that in a genuine sense -- VRX has a heck of a shareholder list, all of whom are a lot smarter than myself. (As are are most of you.)

 

Thanks!

[lu_hawk]

As I said in my prior post, the 10-K states unequivocally (albeit in a bizarre and misleading way) that organic growth in Developed Markets in 2013 was negative.  Likewise for Q4, both for Developed Markets overall and for the U.S.  Let's compare those FACTS, with certain things that management has SAID:

 

From the FY 2013 Earnings Release:

 

9% organic growth (same store sales) for the Developed Markets segment, excluding the impact from certain generic products

 

OK, not technically a lie, because they do say it excludes certain generic products.  But the tone is clearly misleading and trumpets an INCREASE, when there was in fact a decrease.  And excluding generics is kind of like an investment manager saying "Results were great! (excluding certain trades that turned overall results into a loss)."

 

Moving on to the Q4 conference call:

 

Excluding the aforementioned products, our U.S. business exhibited outstanding same-store sales organic growth of 14% [in q4], driven by many of our dermatology prescription brands, our aesthetic, consumer and oral health portfolios and certain neurology products. Our rest-of-world Developed Markets, which included Canada and Australia, delivered same-store sales organic growth rate of 12% in the quarter.

 

Again, not technically misleading, because it is "excluding the aforementioned products."  But for Pearson to say there was OUTSTANDING same-store sales organic growth of 14%, when US organic growth was actually -3% isn't trust-inspiring, at least to someone like me who believes certain traditional GAAP concepts like "revenue" and traditional ethical concepts like "integrity" are important.

 

 

Valeant may not technically be lying, but at the least, they paint a very misleading picture.  And yet, on this board, the main rebuttal to any point I have raised has been a quote from management.  I think they've shown pretty clearly that they can't be trusted.

 

 

[Liberty]

http://www.vpsevent.com/may-webcast/

 

Anyone who wants to understand the growth-or-not of Valeant should watch this video from about 21:30 minutes to about 34 minutes (it's faster than reading a 10K, so no excuses, and quickly scanning the presentation slides doesn't give you the same depth of info). Early in those times in the video they explain how they buy drugs at the end of their lives that nobody else wants for 1-1.2x sales and milk them for cash for a few years very profitably (established products so almost no promotion needed, so very low costs). At around 32 minutes they explain the biovail transaction where they got the big declining assets that are masking organic growth lately, and how they're using it as a cash cow, what are the cash on cash returns of that transaction so far, and how it was very valuable because that's how they got their tax structure. Before that they look at their 3 earliest acquisitions and look at the same products over the whole period until 2013 (so many years) and show the CAGR in revenue for those very same products they bought at the start since then, as well as what they got out of those pipelines (Dow has been particularly productive).

 

At 2 hour 29 minutes the CFO discusses the acquisition model, along with the declining tail drugs they buy that mask organic growth, and talks about the returns on all their acquisitions so far.

 

I encourage you to watch the whole thing, as well as the April presentation, but at least watching between 21-34 mins on the May presentation should explain how it doesn't make sense to mash everything together when you look at organic growth.

[lu_hawk]

Ok, so the GAAP accounting that shows huge losses is not applicable to a company as special as Valeant and masks their true enormous profitability.

 

And now, their declining organic sales also can't accurately portray a company as special as Valeant, and masks their true organic growth!This is definitely one I haven't heard before.

 

When 2012 sales were down by more than half in one segment and more than a quarter in another segment, that was really just an anomaly of traditional revenue models that can't accurately portray Valeant?  Sales actually grew?

 

And when they went from 4 segments to 2, this wasn't to hide the imploding sales, it was just to allow those of us with an IQ below 350 to have a better chance at understanding?

 

Ok, got it.  Seems reasonable to me.

 

And none of this speaks to the more fundamental point: Valeant management has been intentionally misleading, while  being sure to never say anything that is technically a lie. 

 

Saying that sales grew and then saying a few lines down that they actually declined is misleading.  This presentation in no way addresses that.  It's more of "Pearson says Valeant is good, and I believe him."

 

Can anybody tell me that Valeant has not been very misleading in the instances that I quoted in my prior post? Whether or not Pearson says the drugs are profitable has nothing to do with that question.