VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

This I am sure I had explained quite well in my previous posts about VRX: what made me watch VRX from the sidelines for a while was my inability to judge how already existing businesses were doing.

I don't think that is the case anymore.

 

Cheers,

 

Gio

 

[Liberty]

I don't want to misrepresent what you said, but you mentioned wanting to see "at least a year" of debt repayment and organic growth a few times and then made many posts about not being comfortable with the debt in the "7th inning" of this macro environment and all that. You can follow the discussion from here:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg212121/#msg212121

 

Hey, it's fine to change your mind. I do it often :)

[giofranchi]

I don't want to misrepresent what you said, but you mentioned wanting to see "at least a year" of debt repayment and organic growth a few times and then made many posts about not being comfortable with the debt in the "7th inning" of this macro environment and all that.

 

Hey, it's fine to change your mind. I do it often :)

 

No, no! Debt is still a concern of mine!

And that’s the reason why I won’t make VRX a position much larger than 10% of my firm’s portfolio.

Imo with debt above 4xEBITDA Pearson must not make any major mistake, in order for VRX to keep going along smoothly (regardless of the macro environment!).

And of course I can never be sure Pearson won’t commit a major mistake…

 

But there is a difference between watching from the sidelines and a 10% position! ;)

 

Cheers,

 

Gio

 

[original mungerville]

original mungerville,

basically I don’t see meaningful flaws in Ackman’s assumptions. Do you?

 

Cheers,

 

Gio

 

I just think something is off (ie its too conservative a stock price going out to 2020) - I think its his assumed return on capital on acquisitions. I will look at it again more closely and report to the board.

[original mungerville]

Actually, I have found Ackman’s valuation so convincing that I have just doubled my investment in VRX, and increased my investment in PSH. ;)

 

Gio

 

Yes, its convincing for sure, its maybe even too conservative looking out to numbers in 2020. I would have expected a stock price north of $600 by then...

[Liberty]

Ackman's whole point is to be conservative and to show that despite cutting some assumptions in half and not giving any credit to pipeline stuff, it's still doing well.

[original mungerville]

Ackman's whole point is to be conservative and to show that despite cutting some assumptions in half and not giving any credit to pipeline stuff, it's still doing well.

 

Yes, I agree - this is the method/bias in presenting - make conservative assumptions, etc.

 

 

[giofranchi]

Ackman's whole point is to be conservative and to show that despite cutting some assumptions in half and not giving any credit to pipeline stuff, it's still doing well.

 

Yes, I agree - this is the method/bias in presenting - make conservative assumptions, etc.

 

 

 

And that's why I have found it to be so convincing! ;)

 

Gio

[giofranchi]

Imo with debt above 4xEBITDA Pearson must not make any major mistake, in order for VRX to keep going along smoothly (regardless of the macro environment!).

 

Most debt crises don’t begin because somebody or some country got into too much debt, because when they were lent the money they had either the income or the asset values to justify the lending. The problem emerges when income levels fall or asset values fall and debt burdens rise relative to those.

--Andrew Carnegie

 

 

Gio

[gfp]

Ackman was asked about Charlie Munger's comments on Valeant on today's Pershing Square conference call and mentioned that he had had a chance to ask Charlie about his comments on VRX.  Charlie said basically that he did not know Mike Pearson personally and has heard very good things about him from people he respects.  But "Call me old fashioned" I don't like companies with low tax rates that use a lot of leverage and do a large amount of acquisitions quickly... "Call me old fashioned."

 

Ackman responded "well we will call Mr. Munger old fashioned"  Called Munger's criticism "fair" and said where it is not fair is that Valeant is not at all like ITT. (the conglomerate Mr. Munger made the unflattering comparison with)  ITT had a high priced stock and did a lot of acquisitions of businesses that had little to no strategic fit with each other and it was eventually broken up.  Valeant is not a random assemblage..  they are very strategic in what they go after.

[merkhet]

That was a good clarification of that comment.

[Liberty]

Ackman was asked about Charlie Munger's comments on Valeant on today's Pershing Square conference call and mentioned that he had had a chance to ask Charlie about his comments on VRX.  Charlie said basically that he did not know Mike Pearson personally and has heard very good things about him from people he respects.  But "Call me old fashioned" I don't like companies with low tax rates that use a lot of leverage and do a large amount of acquisitions quickly... "Call me old fashioned."

 

Ackman responded "well we will call Mr. Munger old fashioned"  Called Munger's criticism "fair" and said where it is not fair is that Valeant is not at all like ITT. (the conglomerate Mr. Munger made the unflattering comparison with)  ITT had a high priced stock and did a lot of acquisitions of businesses that had little to no strategic fit with each other and it was eventually broken up.  Valeant is not a random assemblage..  they are very strategic in what they go after.

 

Thanks. So basically, those of us who said that Munger wasn't very familiar with the situation and just said that based on surface level pattern recognition were right.

[Liberty]

Nice presentation at the AGM:

 

http://ir.valeant.com/files/doc_presentations/2015/AGM-2015-Final_v001_g2962l.pdf

[giofranchi]

Valeant Pharmaceuticals - A Global Acquirer That Could Be The Next Berkshire Hathaway

 

http://seekingalpha.com/article/3195106-valeant-pharmaceuticals-a-global-acquirer-that-could-be-the-next-berkshire-hathaway?auth_param=7i5hb:1almd1v:c21cd12e6146b48414a75209e69337c9&uprof=25

 

Of course, nothing new...

 

Cheers,

 

Gio

[loganc]

As an aside, it seems like (from the Pershing Square call) Howard Schiller may have left due to CEO aspirations.  Obviously, Pearson is the entrenched CEO of this company and will not be leaving any time soon (hopefully). 

[Phaceliacapital]

As an aside, it seems like (from the Pershing Square call) Howard Schiller may have left due to CEO aspirations.  Obviously, Pearson is the entrenched CEO of this company and will not be leaving any time soon (hopefully).

 

A repeat of Endo's CEO? (Can't remember his name, Silva?)

[giofranchi]

A repeat of Endo's CEO? (Can't remember his name, Silva?)

 

In the Q1 2015 conference call Shiller has talked about a private company.

 

Gio

 

[Liberty]

http://www.reuters.com/article/2015/05/20/us-amounpharmaceuticalco-m-a-valeant-pha-idUSKBN0O519P20150520

 

Valeant Said to Be in Talks to Acquire Egyptian Drugmaker Amoun

[giofranchi]

http://www.reuters.com/article/2015/05/20/us-amounpharmaceuticalco-m-a-valeant-pha-idUSKBN0O519P20150520

 

Valeant Said to Be in Talks to Acquire Egyptian Drugmaker Amoun

 

Veterinary?... Ackman?... Zoetis?... We will see! ;)

 

Cheers,

 

Gio

[Liberty]

http://www.reuters.com/article/2015/05/20/us-amounpharmaceuticalco-m-a-valeant-pha-idUSKBN0O519P20150520

 

Valeant Said to Be in Talks to Acquire Egyptian Drugmaker Amoun

 

Veterinary?... Ackman?... Zoetis?... We will see! ;)

 

Cheers,

 

Gio

 

Pearson previously commented that he thought Zoetis was too expensive, but we'll see, maybe there's a way to make it work eventually and he's just playing it close to the vest.

[giofranchi]

Pearson previously commented that he thought Zoetis was too expensive, but we'll see, maybe there's a way to make it work eventually and he's just playing it close to the vest.

 

Too expensive?... And why is Ackman still holding it?!... Let’s hope he figures out some way to create more value… Another collaboration with Pearson could certainly be very useful!

But you are right: we will just wait and see. :)

 

Gio

 

[loganc]

 

Too expensive?... And why is Ackman still holding it?!... Let’s hope he figures out some way to create more value… Another collaboration with Pearson could certainly be very useful!

But you are right: we will just wait and see. :)

 

Gio

 

Ackman mentioned on the call that there was some amount of M&A premium in ZTS.  Regardless, I don't think I would want to dilute my VRX equity to do a deal for ZTS at this point.  Would you really want to see a deal done for ZTS at this point in time where it is almost certain that a large portion of the consideration would  be VRX stock?   

[Liberty]

Ackman mentioned on the call that there was some amount of M&A premium in ZTS.  Regardless, I don't think I would want to dilute my VRX equity to do a deal for ZTS at this point.  Would you really want to see a deal done for ZTS at this point in time where it is almost certain that a large portion of the consideration would  be VRX stock? 

 

It's hard to say. There are many moving parts and thing I don't know. IMO the bottom line on any equity issuance is getting at least as much, or more, value than you are giving out. So maybe if VRX valuation multiple keeps going up at a certain point it makes sense, or maybe if Pearson and his team see a lot of value that could be unlocked at ZTS (big synergies to effectively significantly reduce the price, growth opportunities, good new platform to do lots of bolt-ons, etc), maybe it would make sense. I'm not knowledgeable enough about ZTS and its niche to know how much the company is really worth, so that makes it hard to judge. It seems expensive if I just look at the multiples of earnings and FCF, but I have low conviction on that belief because there could be a lot of fat to be cut or significant tailwinds on the horizon.

 

In any case, it would certainly be less painful to issue equity around 230+ than it would've around 110 less than a year ago...

[Happy]

Ackman mentioned on the call that there was some amount of M&A premium in ZTS.  Regardless, I don't think I would want to dilute my VRX equity to do a deal for ZTS at this point.  Would you really want to see a deal done for ZTS at this point in time where it is almost certain that a large portion of the consideration would  be VRX stock? 

I wouldn't like that either, at all. When Buffett said at this annual meeting that it basically always was a mistake to issue BRK stock, it reminded me of Valeant and how much they would have paid already to issue so much stock for Allergan. Maybe the upside was so huge that it would have been transformational anyways, but the cost certainly would have been huge and keep compounding. If the quality of your business is this high and your business is continually undervalued because the market fails to factor in value-creation from future acquisitions, you should be extremely reluctant to issue stock. And to do a deal with only stock, the deal you get would have to be a tremendous bargain (including the synergies). It seems far safer and better to patiently pay down debt and then do another deal when you can pay for most of it with debt. I would add equity only if I need to stretch so much that paying all of it in debt is just too risky.

 

[giofranchi]

Would you really want to see a deal done for ZTS at this point in time where it is almost certain that a large portion of the consideration would  be VRX stock? 

 

I am not saying: do it now!... Just keep in mind that's a clear opportunity that might be exploited at the right time: one of your largest shareholders (Ackman) clearly believes in VRX business model, and also happens to be one of the largest shareholders of ZTS... The stuff good deals are made of, isn't it? ;)

 

Gio