VRX - Valeant Pharmaceuticals International Inc.

[loganc]

Andy,

It makes no difference at all.

 

Enron?! Come on... You MUST think about business! First of all it is business! Than come SEC filings and all the rest!

 

I have read a lot about Enron... And I have never understood how they made money!!

 

This is the thing you should always think about: how does a business make money?

 

In my experience, if you figure that out, everything else follows.

 

Now I repeat: VRX imo has the best strategy in the best industry in the world. This century imo will be the century of biotech and its only weakness are R&D costs that too often are out of control.

 

That's why VRX makes lots of money.

 

As far as "character" is concerned, Pearson has always given me the impression of being very humble and dedicated to what he is doing. The exact opposite of the guys that ran Enron!

 

Cheers,

 

Gio

 

Gio,

 

I am sympathetic with your thinking.  However, I think it is best to wait for AZ_Value to finish his post before engaging in argument.  There has been a lot of noise that has entered this thread in response to AZ_Value's post.  That is understandable.  However, I think the most reasonable course of action is to wait for AZ_Value to finish his post and then try to engage in productive argument about this investment. 

 

Logan

 

Edit:  I also think it would be a good idea for AZ_Value to edit out some of the didactic portions of the post and send it directly to Pershing Square and ValueAct.  These entities have very large amounts of capital invested and I am sure they would want to be aware of any disconfirming data. 

[giofranchi]

Well over 15x owner earnings. Negative growth of 2%, or flat revenues, or 2% growth is nothing, IF they have an IRR on acquisitions north of 25%. AZ_Value has promised some interesting facts on the IRR estimates - let us see what he has.

 

The trouble is finding enough targets to move the needle for the company and they need access to cheap capital. Debt levels are now near the maximum possible, so growth via aquisitions will surely slow down. When you just look at reported operating cashflow - deprecation as owner earnings, it trades only at a 2-3% FCF yield which is pretty low for a pharma company, so at the current price i don`t think VRX is a good investment. But maybe when the momentum investors have no interest in this stock anymore and it trades 50% lower.

Looking at Salix, it looks a bit like they are reducing revenues in the year before the aquisition to post higher growth rates after the aquisition, but of course i have no evidence for that. I sold my position because of AZValue`s report after realizing that i know pretty much nothing about VRX and i was just chasing performance.

 

Let's suppose for a second that Pearson is an honest operator...

 

What are you worried about? That their multiple will contract, that their rate of growth will slow down drammaticaly, or both?

 

Personally, I don't see why their multiple should come down, nor why their rate of growth should slow down drammaticaly... Imo lots of opportunities still out there, in a market that's getting bigger and bigger every day.

 

It is like Vanderbilt, Carnegie, and Rockefeller: they positioned themselves in the best industry at the right time and their wealth followed!

 

Of course they also were very shrewd operators! But listen to Carnegie when he says his fortune was made most of all by the dynamics he was able to recognize and take advantage of!

 

Cheers,

 

Gio

[gfp]

Valeant nears deal for 'female Viagra' maker Sprout for $1 Billion, $500 million cash upfront

 

http://www.cnbc.com/2015/08/20/valeant-nears-deal-for-female-viagra-maker-sprout-wsj.html

[original mungerville]

Pearson saying he is expecting a couple/few 100 million in revenues, hopefully billions. Not planning to market direct to consumer yet (although when they are ready, Pearson said probably do so with commercials but with a generic product name rather than branded), want to "educate" pharmacists and physicians first.

 

Paid $1 billion, $500 million upfront and $500 early next year based on milestones. CEO of acquiree seems pretty capable, they are keeping her and her small 35 person team and their headquarters. This is like Coke buying a small branded local product with huge potential and running it through a larger domestic and global platform (except this is more complicated as there are medical concerns, etc).

 

I am no expert in pharma but sounds like revenues would only start flowing sometime in mid-to-late 2016. I am surprised how little Pearson paid for this. If it were to work, why would it not work big time? In my view, it seems worth a $1 billion gamble for sure. Normally Pearson is conservative about forecasting sales of a new drug being acquired - he is already saying a couple $100 million in revenues and "hopefully" over a billion. 

[Valueguy134]

http://www.ft.com/intl/cms/s/0/61cc0de6-461f-11e5-b3b2-1672f710807b.html#axzz3j4Tg8SGk

[Valueguy134]

I probably should provide some quotes from the article given the paywall.  But here is the Sprout story.

 

The group started testing the drug on women with hypoactive sexual desire disorder — a loss of libido that cannot be explained by relationship problems, mental health issues, medication or illness. The FDA refused to approve the drug to treat HSDD in 2009 because there was scant evidence it worked, however.

 

Two years later, Boehringer sold the global rights to Flibanserin to Sprout Pharmaceuticals, a private company founded by husband and wife team Cindy and Robert Whitehead, for the sole purpose of getting the drug approved. The terms of the deal were not disclosed.

Sprout too failed to get the green light in 2013. By measuring sexual desire using a different method, the company managed to show the drug had a small but statistically significant effect on the female libido, but the FDA was concerned about its safety.

 

I guess third time was the charm.

 

But some doctors are asking what prompted the FDA to change its stance, having turned down the drug twice before. Sprout did not present any new data on the drug’s effectiveness this time round, although it did submit further safety reports, some of which were described as dubious by experts.

For example, one such study looked at the interaction between Flibanserin and alcohol. It tested just 25 patients, 23 of whom were men, a fact that one doctor on the expert panel said was “inexplicable” given that the drug is being developed for women.

 

 

 

 

 

[fareastwarriors]

I probably should provide some quotes from the article given the paywall.  But here is the Sprout story.

 

The group started testing the drug on women with hypoactive sexual desire disorder — a loss of libido that cannot be explained by relationship problems, mental health issues, medication or illness. The FDA refused to approve the drug to treat HSDD in 2009 because there was scant evidence it worked, however.

 

Two years later, Boehringer sold the global rights to Flibanserin to Sprout Pharmaceuticals, a private company founded by husband and wife team Cindy and Robert Whitehead, for the sole purpose of getting the drug approved. The terms of the deal were not disclosed.

Sprout too failed to get the green light in 2013. By measuring sexual desire using a different method, the company managed to show the drug had a small but statistically significant effect on the female libido, but the FDA was concerned about its safety.

 

I guess third time was the charm.

 

But some doctors are asking what prompted the FDA to change its stance, having turned down the drug twice before. Sprout did not present any new data on the drug’s effectiveness this time round, although it did submit further safety reports, some of which were described as dubious by experts.

For example, one such study looked at the interaction between Flibanserin and alcohol. It tested just 25 patients, 23 of whom were men, a fact that one doctor on the expert panel said was “inexplicable” given that the drug is being developed for women.

 

Attached.

ft.pdf

[giofranchi]

Valeant nears deal for 'female Viagra' maker Sprout for $1 Billion, $500 million cash upfront

 

http://www.cnbc.com/2015/08/20/valeant-nears-deal-for-female-viagra-maker-sprout-wsj.html

 

Imo this is another example of how consistent they are with their strategy of buying assets just before they get approved. If you can do that consistently, it is not that you don't pay for R&D... Of course you do! You pay for R&D previosly made by someone else. What's great, instead, is that you pay ONLY FOR SUCCESSFUL R&D!

 

But of course you cannot find that on a 10-K... Therefore, it has no meaningful relevance!

 

Just curious: for all who know everything about BRK, does it add non-GAAP measures in its 10-Ks? Thank you!

 

Cheers,

 

Gio

[Valueguy134]

I probably should provide some quotes from the article given the paywall.  But here is the Sprout story.

 

The group started testing the drug on women with hypoactive sexual desire disorder — a loss of libido that cannot be explained by relationship problems, mental health issues, medication or illness. The FDA refused to approve the drug to treat HSDD in 2009 because there was scant evidence it worked, however.

 

Two years later, Boehringer sold the global rights to Flibanserin to Sprout Pharmaceuticals, a private company founded by husband and wife team Cindy and Robert Whitehead, for the sole purpose of getting the drug approved. The terms of the deal were not disclosed.

Sprout too failed to get the green light in 2013. By measuring sexual desire using a different method, the company managed to show the drug had a small but statistically significant effect on the female libido, but the FDA was concerned about its safety.

 

I guess third time was the charm.

 

But some doctors are asking what prompted the FDA to change its stance, having turned down the drug twice before. Sprout did not present any new data on the drug’s effectiveness this time round, although it did submit further safety reports, some of which were described as dubious by experts.

For example, one such study looked at the interaction between Flibanserin and alcohol. It tested just 25 patients, 23 of whom were men, a fact that one doctor on the expert panel said was “inexplicable” given that the drug is being developed for women.

 

Attached.

Did I miss read that article?

[LC]

Imo this is another example of how consistent they are with their strategy of buying assets just before they get approved. If you can do that consistently, it is not that you don't pay for R&D... Of course you do! You pay for R&D previosly made by someone else. What's great, instead, is that you pay ONLY FOR SUCCESSFUL R&D!

 

You're paying up for successful R&D. Valeant depends on its dealmaking to get this done. That's their entire business model. This is a company built through financing and M&A. Valeant is as much a financial company as a pharma company. So when claims are made that financial transparency is poor, it personally gives me pause. Opaqueness in the financial reporting is one of the first warnings signs of a finance company.

 

In the case of Sprout, the FT article suggests the R&D wasn't even successful. Rather a Sprout-funded media campaign was the major factor leading to approval. Just something else which gives me pause. (I also found it odd that a women's equality campaign champions a drug which apparently reacts poorly with oral contraceptives, but that is a side issue)

[Vish_ram]

Never underestimate the power of placebo effects. That alone is worth a lot.

[original mungerville]

So Valeant spends $1 billion today and market cap down over $5 billion. I would say much of that decline is due to overall stock market / pharma - say $3 billion of it; but I am guessing around $2 billion (certainly over $1 billion) of it relates to the female Viagra acquisition.

 

So apparently the rational market is saying they can lose more than the $1 billion they put in (despite that $1 billion being paid out in two $500 million tranches the second of which has milestones attached to it).

 

For Valeant bulls, any further declines will make this a cheap entry point (at least relative to the market). Note: I think the S&P may correct significantly here (or over next few months). 

[EliG]

Interview with Pearson and Sprout CEO

 

http://www.bnn.ca/Video/player.aspx?vid=684551

[Phaceliacapital]

Once again, Bill Ackman’s relationship with Valeant Pharmaceuticals International Inc.’s has been lucrative.

 

The hedge-fund manager personally invested in Sprout Pharmaceuticals Inc. months before it announced a sale to Valeant for $1 billion Thursday. Mr. Ackman owns slightly less than 1.5% of Sprout’s stock, confirmed a spokesperson for Mr. Ackman’s hedge fund Pershing Square Capital Management LP .

 

Mr. Ackman took part in the company’s latest round of fundraising, in which it raised roughly $60 million from investors, a person close to the deal said. At the time, investors valued Sprout at $500 million. Mr. Ackman and other investors in that round will earn a cash payout of roughly twice their initial investment — plus a share of Sprout’s profits based on the achievement of certain milestones.

 

The fundraising round came before the closely-held company had secured Food and Drug Administration approval to sell pink libido pills that will be sold under the brand name Addyi. These pills will be the first ones designed to boost sexual desire in women. The FDA approval came in earlier this week.

 

Valeant’s CEO Michael Pearson told the WSJ Thursday that Valeant wanted to make sure the FDA would approve Addyi before completing the deal.

 

Pershing Square, which owns nearly 6% of Valeant’s shares, did not invest in Sprout. The hedge fund invests solely in publicly-traded companies.

 

Last year  Mr. Ackman grabbed headlines when he teamed up with Valeant on an unsolicited — and ultimately unsuccessful – takeover of Botox-maker Allergan Inc. Allergan instead agreed to a takeover by rival Actavis PLC.

 

This time around, Mr. Ackman’s only involvement in the transaction was serving as a reference for Valeant and its CEO Michael Pearson, people familiar with the deal said. As Sprout’s management team was weighing potential offers, Mr. Ackman gave Mr. Pearson and Valeant’s team a “glowing reference,” one person said.

[giofranchi]

So Valeant spends $1 billion today and market cap down over $5 billion. I would say much of that decline is due to overall stock market / pharma - say $3 billion of it; but I am guessing around $2 billion (certainly over $1 billion) of it relates to the female Viagra acquisition.

 

So apparently the rational market is saying they can lose more than the $1 billion they put in (despite that $1 billion being paid out in two $500 million tranches the second of which has milestones attached to it).

 

For Valeant bulls, any further declines will make this a cheap entry point (at least relative to the market). Note: I think the S&P may correct significantly here (or over next few months).

 

Original mungerville,

I think the market is divided over a much more serious topic, the following: is VRX a fraud?

 

Everything else pales in comparison.

 

I don't know how to, but I would start a poll on the board titled "Is VRX a fraud?", and listen to what people have to say.

 

Cheers,

 

Gio

[giofranchi]

Here we go...

 

I have voted "No", simply because imo it is too good of a business to be a fraud. No need to lie, when you can make money, lots of money!, honestly instead! To lie would be like risking to lose what they need and already have for what they do not need at all (to borrow from Buffett).

 

But of course I cannot be sure... Who can, right? Therefore, I am listening to whatever people have to say on the subject.

 

Cheers,

 

Gio

[giofranchi]

Just to be clear: it the very first time somenone hints at the fact an investment of mine might be a fraud... I have never lost meaningful money before, but now I risk losing it, if VRX actually turns out to be a fraud.

 

Gio

[tombgrt]

VRX would be trading at half the current valuation if the market thought it could be a fraud. It's not so complicated; VRX is richly valued on past growth and has plenty of room on the downside in case we see a total stock market correction.

[giofranchi]

VRX would be trading at half the current valuation if the market thought it could be a fraud. It's not so complicated; VRX is richly valued on past growth and has plenty of room on the downside in case we see a total stock market correction.

 

Maybe...

 

But that doesn't bother me as much as the risk I have invested in a fraud!

 

If VRX is not making up its numbers, I see plenty of upside from here. Therefore, the risk I run, if current valuation is actually too high, might be VRX turns out to be dead money for a couple of years...

 

That's exactly the sort of risk I am comfortable with, because that's exactly the downside scenario I have always considered, and sometimes experienced, with all investments of mine. Let's say that's my CoC!

 

Instead, to deal with a fraud is definitely outside my CoC... And it is the reason why it worries me so much!

 

Cheers,

 

Gio

[Andy Dufresne]

Gio,

 

I do not think there is a need to panic - nobody is suggesting fraud at the moment as we simply do not know whether or not VRX fudged only their presentations (and even this is something we should consider only after AZ completes his writeup) or their SEC filings.

 

I agree that it is difficult to discover outright fraud for a publicly traded company (although it has happened before - think Enron, WorldCom, etc.). As I wrote to you last time, the business may be great, but there is always an incentive to make it look better and therefore the use of cheap tricks such as an average versus a weighted average is plausible.

 

If you wish to sleep easier, buy some puts to cover your position or exit - at the moment I cannot imagine you've lost money on it.

 

Andy

[giofranchi]

Gio,

 

I do not think there is a need to panic - nobody is suggesting fraud at the moment as we simply do not know whether or not VRX fudged only their presentations (and even this is something we should consider only after AZ completes his writeup) or their SEC filings.

 

I agree that it is difficult to discover outright fraud for a publicly traded company (although it has happened before - think Enron, WorldCom, etc.). As I wrote to you last time, the business may be great, but there is always an incentive to make it look better and therefore the use of cheap tricks such as an average versus a weighted average is plausible.

 

If you wish to sleep easier, buy some puts to cover your position or exit - at the moment I cannot imagine you've lost money on it.

 

Andy

 

Thank you, Andy!

 

But, as I have already said, I don't think it matters much... Imo either they are telling lies or they are not. Period.

Presentations, SEC filings... As far as I am concerned as a shareholder, they make very little difference.

 

Business is based on trust. In my experience the time you need to consul lawyer is the time business has already gone bad, and there is no money to be made anymore.

 

As far as your suggestion of selling is concerned, I don't think it is that easy as well... What if tomorrow someone hints at the fact TDG might be a fraud... The day after tomorrow someone else might hint that CSU is a fraud... And AGN, and PRGO, etc.

What would I do then? Sell everything and go living on a desert island?

 

Cheers,

 

Gio

[KCLarkin]

You are safe in CSU. Frauds don't try to talk down their stock price.

[vinod1]

Here we go...

 

I have voted "No", simply because imo it is too good of a business to be a fraud. No need to lie, when you can make money, lots of money!, honestly instead! To lie would be like risking to lose what they need and already have for what they do not need at all (to borrow from Buffett).

 

But of course I cannot be sure... Who can, right? Therefore, I am listening to whatever people have to say on the subject.

 

Cheers,

 

Gio

 

Gio,

 

I think you are right not to just rely on an investment being in good business or being led by an owner operator as a way to avoid fraud.

 

Bernie Ebbers at WorldCom is an owner operator with a huge stake in the business that is doing ok but he want on to commit fraud.

 

Ramalinga Raju at Satyam Computer Services also an owner operator in a great business committed fraud.

 

What both had in common was an extravagant lifestyle. Hardly a foolproof way, but perhaps looking at Pearson in depth might give you more comfort. I would think both Sequoia and Value Act would have done this part.

 

Vinod

 

[thepupil]

the bearish arguments I have heard do not argue that VRX is a fraud in the Worldcom (accounting scandal) or chinese (assets aren't there, management fleecing company) way. I've never heard a Valeant bear (and i've only spoken to a couple and read a few analyses) say "they are fudging the numbers" or something like that.

 

The bearish arguments I have heard revolve around

 

1) organic growth being inflated by unsustainable, manifold pricing increases. Stuff like the below. They argue that volume growth is flat to negative and pricing is prone to regulatory scrutiny and that the house of cards will collapse once the price increases go away.

http://www.wsj.com/articles/bernie-sanders-elijah-cummings-question-valeant-on-heart-drug-price-increases-1439574723

 

2) related to point 1. management raising cheap debt and expensive equity financing and being kind of the sophisticated investors promotional stock / bull market vehicle, using inflated earnings power to juice the reflexivity / accretion machine.

 

I have no position and have done no research, just relaying info that may be helpful.

 

Valeant was down 6% yesterday because it is a momo growth stock, all those sold off hard yesterday. I don't think it was a reaction to the $1B female viagra thing or AZ value's thing making the rounds or some kind of fraud thesis suddenly coming to fruition; people have been skeptical of valeant for years, there hasn't been anything new.

 

 

[rpadebet]

VRX is my biggest position. I bought into the bull thesis completely and it has been good for me this past year.

However, the az_value post and this Sprout acquisition is making me question my thesis.

 

At the core of the bull thesis, to be completely honest, is the trust placed by Value Act,Sequoia and Ackman in Pearson and VRX. If these investors were not there and everything else was same, how many of us would feel comfortable with VRX disclosures, financial leverage, acquisition spree etc.

 

Yes the business model makes sense. Avoiding wasteful R&D can save money theoretically, but they pay high prices for successful R&D, so part of the cost of wasteful R&D is baked into the prices of successful R&D purchased.

 

I wouldn't bet too much on the low Cash EPS multiple for the equity. That is not an indicator that only low growth is priced in. The correct measure is (Cash EPS+interest-tax benefit)/EV as a highly leveraged business can post a high Cash EPS relative to equity in a low interest rate environment and with below average tax rates. Also maintenance cap ex here takes the form of continuously buying "successful R&D", that needs to be subtracted as well to get to true FCF to firm.

 

The simple fact that no one has been able to argue the facts put forth by az_value and are just hoping ValueAct and other investors must have done their job is a big concern for me. Cloning is a good way to get ideas, but not an investment thesis in itself. The longs should either put in the work to provide a fact based counter point to issues raised by az_value or admit our laziness and close out the position, to save some money.

 

I think it is quite possible this could go ENRON way someday. Things ENRON did was also accepted in the financial world as kosher during those days until the public campaign against it started and public opinion changed to think of it as fraud. I can't say VRX is a fraud, I can only say, enough questions are now raised to be able to say "I don't know if its genuine".

 

I think I will reduce my exposure until further clarity on the numbers.