original mungerville Posted March 30, 2015 Share Posted March 30, 2015 I have reviewed a fair amount of the Salix deal information over the last couple of days to re-check my work on VRX and here are a few thoughts that I would like to share: (1) The numbers appear to me to indicate that the IBS-D indication for Xifaxan is not baked in to the 7.5B Adj EBITDA guidance number provided for 2016. As mentioned on the call, it appears that they believe that the market for the IBS-D indication is larger than the current Xifaxan market. Given the organic growth profile and current sales run rate (ex-inventory issues) of Xifaxan, the IBS-D indication should represent quite considerable upside. Further, there may be an additional pricing opportunity with the Salix portfolio, as I would imagine the run rate sales in the Q4 slide deck were conservative. Why would you want to advertise the optimistic case for Salix and invite other bids? (2) The leverage currently appears fairly high given that synergy numbers are baked into the 5.6x net debt leverage number, but the growth from Salix and the VRX base business should be pretty substantial over the next couple of years and the business should de-lever pretty quickly as stated by management. As stated, getting the IBS-D indication for Xifaxan and the potential pricing opportunity provides further upside to the de-levering time frame. (3) On a higher level, I think there is truth to some of the skeptical comments about the Salix deal relative to the traditional VRX acquisition targets. In other words, Xifaxan is a very large part of the value of Salix, so it doesn't appear that they are avoiding "blockbusters" in this particular case. That being said, I think this deal makes sense from the standpoint that it is very opportunistic. I don't think VRX would be doing this deal had the inventory issue not happened, since the price for the asset would likely have been too high given the growth profile. Happy to hear any comments. I agree with everything you said on all 3 points. On the last point, I would add that it looks like the price paid for Salix is relatively high, however they are expecting substantial growth from it in years to come. The optionality in 1) that you mention and the fact that they would not hype it or bake it into their numbers so as to dissuade other bidders is an interesting angle. We should explore this some more - maybe the odds of this option working out are very high (which would effectively negate my first point). Link to comment Share on other sites More sharing options...
Liberty Posted March 30, 2015 Share Posted March 30, 2015 Xifaxan is pretty big, but it's mostly big for Salix. It's about 50% of their revenues, but once integrated into Valeant, it would be a bit over 10% of total revenues. That's more manageable, especially as they keep adding new products, reducing the relative size of it over time. Link to comment Share on other sites More sharing options...
loganc Posted March 30, 2015 Share Posted March 30, 2015 Xifaxan is pretty big, but it's mostly big for Salix. It's about 50% of their revenues, but once integrated into Valeant, it would be a bit over 10% of total revenues. That's more manageable, especially as they keep adding new products, reducing the relative size of it over time. I think the 10% of total revenue number for Xifaxan is low (ex-inventory issue) if they are correct about the opportunity for the IBS-D indication. So, VRX says that Xifaxan will be doing a 900MM run rate in 2015 (ex-inventory issue). How much of the impact of the IBS-D indication is factored into this number? It seems to me that it would be minimal. First, the approval is not an absolute certainty, so it wouldn't be conservative to include a large contribution of IBS-D in the base case number. Plus, VRX would seem to have incentive to provide quite conservative numbers in the presentation so as not to invite other bids. I am inclined to believe that the 900MM number simply includes the impact of more rational pricing, since Salix had to take discounts to stuff the channel as mentioned on the call. So, Schiller mentioned on the call that they view the market opportunity for the IBS-D indication as larger than the current HE and traveler's diarrhea indications. While it is possible that they factored in some contribution to IBS-D approval into the 900MM and that some physicians are already serving IBS-D patients with "off label" Xifaxan prescriptions, it seems to me that the 900MM sales is going to increase very substantially if they are correct about the IBS-D market size. Getting to the percentage of total revenue really depends on your assumptions for the rest of Salix and the VRX base business, but I view Xifaxan as growing quite a bit faster than either one. That being said, it seems likely that the large contribution of Xifaxan to the sales of the pro forma company will be a relatively short term issue, due to business development activity. It doesn't seem like it would be a stretch for VRX to do another substantial deal in early 2017. Link to comment Share on other sites More sharing options...
Liberty Posted March 30, 2015 Share Posted March 30, 2015 I did not assume the new indication in my comment above. With it, it could be higher. As you said, the purchase was opportunistic. I don't think they look for big blockbusters, or will pour money down the rabbit hole trying to develop some, but if they can buy one at a decent price with nice optionality for growth, probably wise not to say 'no'... Link to comment Share on other sites More sharing options...
Liberty Posted April 1, 2015 Share Posted April 1, 2015 Valeant director Colleen Goggins has bought 500 shares (worth about $99k) on the open market at 198.12. Link to comment Share on other sites More sharing options...
gfp Posted April 1, 2015 Share Posted April 1, 2015 It could be a filing mistake, but the transaction code "A" instead of "P" indicates this is part of her compensation, not a voluntary open market purchase. "A" stands for award / grant. Some companies list awards with 0 cost basis, some list them with market price. If it was open market purchase, she will probably amend the filing to show transaction code P. Valeant director Colleen Goggins has bought 500 shares (worth about $99k) on the open market at 198.12. Link to comment Share on other sites More sharing options...
Liberty Posted April 1, 2015 Share Posted April 1, 2015 It could be a filing mistake, but the transaction code "A" instead of "P" indicates this is part of her compensation, not a voluntary open market purchase. "A" stands for award / grant. Some companies list awards with 0 cost basis, some list them with market price. If it was open market purchase, she will probably amend the filing to show transaction code P. Valeant director Colleen Goggins has bought 500 shares (worth about $99k) on the open market at 198.12. That's possible. I saw it here: https://www.canadianinsider.com/node/7?menu_tickersearch=VRX+%7C+Valeant+Pharmaceuticals Also, http://www.reuters.com/article/2015/04/01/us-salix-valeant-pharms-idUSKBN0MS4FF20150401 Link to comment Share on other sites More sharing options...
KCLarkin Posted April 2, 2015 Share Posted April 2, 2015 I finally listened to the Daily Journal meeting and Munger very clearly linked Valeant to "conglomerate accounting". He seems to suggest they are goosing earnings by adding low quality earnings. The bull case is attached (I think this is from Glenview's letter). I'm inclined to believe the Bull case. Especially when the top 3 investors are Sequioa, Valueact, and Ackman. The one thing that kept me from making this a major position is Pearson's incentive plan. Tying his PSU to stock price gives him a strong incentive to increase the stock price at all costs. I wouldn't be surprised if the accounting was a bit aggressive. Link to comment Share on other sites More sharing options...
loganc Posted April 3, 2015 Share Posted April 3, 2015 I finally listened to the Daily Journal meeting and Munger very clearly linked Valeant to "conglomerate accounting". He seems to suggest they are goosing earnings by adding low quality earnings. The bull case is attached (I think this is from Glenview's letter). I'm inclined to believe the Bull case. Especially when the top 3 investors are Sequioa, Valueact, and Ackman. The one thing that kept me from making this a major position is Pearson's incentive plan. Tying his PSU to stock price gives him a strong incentive to increase the stock price at all costs. I wouldn't be surprised if the accounting was a bit aggressive. I understand the concern about incentive for aggressive accounting, but it seems to me that the instances where nasty accounting tricks have been employed have been geared towards manipulating the GAAP income statement. It doesn't seem to me that VRX is particularly interested in GAAP earnings. Further, VRX doesn't add back non-cash compensation expense into their non-GAAP numbers which basically every company that reports "adjusted EBITDA," or some analogous metric, does. So, on that particular point, they are more conservative. Given the disclosure of the company, each analyst can determine for themselves what costs are truly non-recurring on a cash basis [1] and make their own determination about the valuation of the company. Going to the Munger comment at the DJCO meeting, I must say that it was quite striking to me. Obviously, I have much respect for Munger and have learned an enormous amount from him. Every book that I have read that was recommended by Munger has been great and the Cialdini book has been particularly valuable. All that being said and my utter respect for Munger being restated now, I don't think he has done sufficient work on Valeant. I have spent a lot of time doing diligence on this company and I am inclined to follow my own judgement at this point. [1] For anyone interested in an aside, I think reviewing the recent call for the HNZ-KRFT deal (@37:00 in the recording) should be interesting in illustrating the dichotomy between running a business on a cash basis and a GAAP EPS basis. The JPM analyst questioned whether it made sense to refinance the BRK preferred because the preferred dividends didn't flow through the income statement. Link to comment Share on other sites More sharing options...
original mungerville Posted April 3, 2015 Share Posted April 3, 2015 The JPM analyst questioned whether it made sense to refinance the BRK preferred because the preferred dividends didn't flow through the income statement. Ya, that was retarded. And I guess they pay this guy to do analysis? Link to comment Share on other sites More sharing options...
original mungerville Posted April 3, 2015 Share Posted April 3, 2015 Xifaxan is pretty big, but it's mostly big for Salix. It's about 50% of their revenues, but once integrated into Valeant, it would be a bit over 10% of total revenues. That's more manageable, especially as they keep adding new products, reducing the relative size of it over time. I think the 10% of total revenue number for Xifaxan is low (ex-inventory issue) if they are correct about the opportunity for the IBS-D indication. So, VRX says that Xifaxan will be doing a 900MM run rate in 2015 (ex-inventory issue). How much of the impact of the IBS-D indication is factored into this number? It seems to me that it would be minimal. First, the approval is not an absolute certainty, so it wouldn't be conservative to include a large contribution of IBS-D in the base case number. Plus, VRX would seem to have incentive to provide quite conservative numbers in the presentation so as not to invite other bids. I am inclined to believe that the 900MM number simply includes the impact of more rational pricing, since Salix had to take discounts to stuff the channel as mentioned on the call. So, Schiller mentioned on the call that they view the market opportunity for the IBS-D indication as larger than the current HE and traveler's diarrhea indications. While it is possible that they factored in some contribution to IBS-D approval into the 900MM and that some physicians are already serving IBS-D patients with "off label" Xifaxan prescriptions, it seems to me that the 900MM sales is going to increase very substantially if they are correct about the IBS-D market size. Getting to the percentage of total revenue really depends on your assumptions for the rest of Salix and the VRX base business, but I view Xifaxan as growing quite a bit faster than either one. That being said, it seems likely that the large contribution of Xifaxan to the sales of the pro forma company will be a relatively short term issue, due to business development activity. It doesn't seem like it would be a stretch for VRX to do another substantial deal in early 2017. They have a 900 million run rate for 2015, so any idea on the additional run-rate associated to the opportunity for the IBS-D indication - ie a broad range. Are we talking 200M, 500M, or 1 Billion? Link to comment Share on other sites More sharing options...
loganc Posted April 3, 2015 Share Posted April 3, 2015 They have a 900 million run rate for 2015, so any idea on the additional run-rate associated to the opportunity for the IBS-D indication - ie a broad range. Are we talking 200M, 500M, or 1 Billion? I wouldn't feel comfortable putting up numbers for the IBS-D indication as I really don't know. I think you have to use a range of outcomes and your range is probably reasonable, given the comments of management. Management seems to think that there is a large opportunity and that they would be looking to do DTC advertising (which can't happen until they get approval for the indication), which has worked well for Jublia. In terms of the probability of getting approval, I think they would be able to get a pretty good idea from the dialogue with FDA during diligence. I would be surprised if they didn't get approval for the indication, but, if they didn't, the 2016 EBITDA guidance doesn't seem to include it. I think the valuation is still quite attractive on that basis. Obviously, I could be incredibly wrong. Link to comment Share on other sites More sharing options...
original mungerville Posted April 3, 2015 Share Posted April 3, 2015 Thanks. And May is the likely timing for the indication if I remember correctly - is that right? Link to comment Share on other sites More sharing options...
loganc Posted April 3, 2015 Share Posted April 3, 2015 Thanks. And May is the likely timing for the indication if I remember correctly - is that right? You are correct. The PDUFA date is May 27. Link to comment Share on other sites More sharing options...
kab60 Posted April 4, 2015 Share Posted April 4, 2015 I have no skin in this but stumbled across a quote from Jeffrey Ubben in The Art of Value Investing which I thought was interesting. Bulls and Bears can interpret it as they like: I've learned from experience to avoid acquisition-driven stories during the actual acquisition-growth phase - big problems always come of that. (Jeffrey Ubben, ValueAct Capital) Not sure when he said that. Link to comment Share on other sites More sharing options...
original mungerville Posted April 4, 2015 Share Posted April 4, 2015 I have no skin in this but stumbled across a quote from Jeffrey Ubben in The Art of Value Investing which I thought was interesting. Bulls and Bears can interpret it as they like: I've learned from experience to avoid acquisition-driven stories during the actual acquisition-growth phase - big problems always come of that. (Jeffrey Ubben, ValueAct Capital) Not sure when he said that. I've learned the same thing. In Valeant's case however, the inherent risks are lower in my opinion as their 5% tax rate applied to acquisitions is a no-to-low risk attribute, cutting research is also pretty low risk, as is cutting middle management while keeping or increasing slightly the size of the sales force. These risks are, however, amplified by the high levels of debt currently. At this point, I like the risk-reward of the call LEAPS for a large position, or having the common as a smaller position - but only because of the debt levels as I believe the inherent risks to be lower relative to other acquisition-driven stories. Link to comment Share on other sites More sharing options...
loganc Posted April 5, 2015 Share Posted April 5, 2015 For any Valeant-experts, would anyone estimate what they believe cash flow (and/or earnings - but cash flow is really more interesting for these purposes) will be for the next year? (Obviously this will be the combined figure of Valeant with 8 months of post-Salix Valeant.) I'm just curious what those who study the company's best estimate of this is? Many thanks in advance. I assume you are talking about cash flow on a GAAP basis for FY15. My view is that the number presented in the initial 2015 guidance slide deck for "adjusted cash flow from operations" is probably about right for a few reasons: (1) The cash restructuring adjustments for the base VRX business should be quite small for 2015. (2) The acquisitions that have been announced (Dendreon, Salix, and Marathon) probably won't be accretive on a GAAP cash flow basis for 2015 due to the Salix inventory work down, incremental interest expense, and cash restructuring and integration costs. By my rough calculation the incremental EBITDA from these deals is almost exactly offset by my estimates for cash restructuring and the incremental interest expense for the rest of 2015. I would be interested to hear if others are thinking along the same lines. Link to comment Share on other sites More sharing options...
jwelborn93 Posted April 14, 2015 Share Posted April 14, 2015 In the proxy released April 9th, it's buried in the text that Pearson can now sell up to 3 million shares. "The 2015 Employment Agreement permits Mr. Pearson to sell 3,000,000 net shares without regard to the restrictions described above plus transfer an additional 1,000,000 net shares in charitable contributions" (pg. 44) Could be nothing--but it's definitely not a positive that this aspect of his compensation agreement has changed. Link to comment Share on other sites More sharing options...
giofranchi Posted April 24, 2015 Author Share Posted April 24, 2015 RELISTOR® Receives Positive CHMP Opinion in the EU for the Treatment of Opioid-Induced Constipation in Adults with Chronic Non-Cancer Pain http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/RELISTOR-Receives-Positive-CHMP-Opinion-in-the-EU-for-the-Treatment-of-Opioid-Induced-Constipation-in-Adults-with-Chronic-Non-Cancer-Pain/default.aspx Gio Link to comment Share on other sites More sharing options...
giofranchi Posted April 27, 2015 Author Share Posted April 27, 2015 Going to the Munger comment at the DJCO meeting, I must say that it was quite striking to me. Obviously, I have much respect for Munger and have learned an enormous amount from him. Every book that I have read that was recommended by Munger has been great and the Cialdini book has been particularly valuable. All that being said and my utter respect for Munger being restated now, I don't think he has done sufficient work on Valeant. I have spent a lot of time doing diligence on this company and I am inclined to follow my own judgement at this point. loganc, I agree with your statement. Yet, I wonder: if there were a man on earth who has finally mastered the incredibly difficult craft of NOT talking about things he has not done sufficient work on, I thought that man would have been Munger… Don’t you? So, what have we got here? Even Munger is still subject to this kind of mistakes? Do you think the right explanation might be just this simple and straightforward? Gio Link to comment Share on other sites More sharing options...
Liberty Posted April 27, 2015 Share Posted April 27, 2015 Going to the Munger comment at the DJCO meeting, I must say that it was quite striking to me. Obviously, I have much respect for Munger and have learned an enormous amount from him. Every book that I have read that was recommended by Munger has been great and the Cialdini book has been particularly valuable. All that being said and my utter respect for Munger being restated now, I don't think he has done sufficient work on Valeant. I have spent a lot of time doing diligence on this company and I am inclined to follow my own judgement at this point. loganc, I agree with your statement. Yet, I wonder: if there were a man on earth who has finally mastered the incredibly difficult craft of NOT talking about things he has not done sufficient work on, I thought that man would have been Munger… Don’t you? So, what have we got here? Even Munger is still subject to this kind of mistakes? Do you think the right explanation might be just this simple and straightforward? Gio Munger would be the first person to admit that he (and Buffett) still make mistakes. Sitting in a room, having dozens of people ask you questions for hours about things you didn't know you should research ahead of time, you're bound to get a few things wrong, IMO. Link to comment Share on other sites More sharing options...
giofranchi Posted April 27, 2015 Author Share Posted April 27, 2015 Munger would be the first person to admit that he (and Buffett) still make mistakes. Sitting in a room, having dozens of people ask you questions for hours about things you didn't know you should research ahead of time, you're bound to get a few things wrong, IMO. Basically I agree! :) Gio Link to comment Share on other sites More sharing options...
original mungerville Posted April 27, 2015 Share Posted April 27, 2015 Going to the Munger comment at the DJCO meeting, I must say that it was quite striking to me. Obviously, I have much respect for Munger and have learned an enormous amount from him. Every book that I have read that was recommended by Munger has been great and the Cialdini book has been particularly valuable. All that being said and my utter respect for Munger being restated now, I don't think he has done sufficient work on Valeant. I have spent a lot of time doing diligence on this company and I am inclined to follow my own judgement at this point. loganc, I agree with your statement. Yet, I wonder: if there were a man on earth who has finally mastered the incredibly difficult craft of NOT talking about things he has not done sufficient work on, I thought that man would have been Munger… Don’t you? So, what have we got here? Even Munger is still subject to this kind of mistakes? Do you think the right explanation might be just this simple and straightforward? Gio Yes. And if Munger was to do it in public, probably the DJCO annual meeting would be the place where many are there with their mouths wide open just waiting for every one of Munger's witty and sage comments. Link to comment Share on other sites More sharing options...
Liberty Posted April 27, 2015 Share Posted April 27, 2015 Yes. And if Munger was to do it in public, probably the DJCO annual meeting would be the place where many are there with their mouths wide open just waiting for every one of Munger's witty and sage comments. ...says the person with "Munger" in his forum alias ;) Link to comment Share on other sites More sharing options...
fareastwarriors Posted April 27, 2015 Share Posted April 27, 2015 Pharmaceutical Companies Buy Rivals’ Drugs, Then Jack Up the Prices List prices soar on Valeant’s heart medications and other firm’s drugs, driving up costs http://www.wsj.com/articles/pharmaceutical-companies-buy-rivals-drugs-then-jack-up-the-prices-1430096431 Link to comment Share on other sites More sharing options...
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