VRX - Valeant Pharmaceuticals International Inc.

[original mungerville]

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

 

I have no position in Valeant, but I would just like to point out a possible cognitive bias here.

 

You probably believe it is a good business because the concept makes sense to you. The company buys other companies/products that are not being utilized to their full potential and restructures them in a way that gushes cash flow. You verify that it is a good business because the numbers and/or the explanations from management confirm that it is.

 

If management is lying about the numbers, then you have to consider that it is, in fact, not a good business at all -- so your underlying assumption might be wrong.

 

Let's put it another way. You think that someone that has a good business on their hands has no real incentive (outside of personal derangement) to tinker with the numbers. And you're probably right. You should, however, consider the possibility that it looks like a good business because someone has tinkered with the numbers.

 

If by good business one means having substantial organic growth long-term, then I cannot be positive VRX is a good business. But my main thesis is not substantial organic growth, I am perfectly fine with zero real organic growth and this may differentiate me from several other bulls. (note: Ackman, I believe, also had the same view last year - ie that Valeant's organic growth may be low to mid single digits; the Salix acquisition may help that growth now but my point is I don't think Ackman is/was relying on crazy organic growth either). My thesis is they can get 25% IRRs on acquisition with a good chunk of that (10%) just coming from tax. Of course IRRs include forward looking estimates of revenue growth related to the acquirees product portfolio, etc and this is where I am looking forward to AZ_Value's analysis to prove the IRRs/forecasts are total BS (or far lower than 25%). That would change my view/thesis on VRX as an investment/good business.

[rpadebet]

if organic growth is only half of what it is touted to be, given the debt levels, given the stock comp, given the current low tax rate, given the growth in revenues attributable to price increases, IMO the fair value is below 140 for this.

 

This is false. Fair value would be that low if the IRR on acquisition was materially below 25%. You just don't need greater than 10% organic growth to support a 15x 2016 multiple to owner earnings.

 

 

I think I agree with you that the place they add value is providing a global platform for new products. That is worth something. Everything else seems like shuffling where, how or when you pay.

 

140$ stock is only 25b less in EV or about 25% down from here. Say EV is 80b. Sales estimates for 2016 are around 13b, so EV/sales would be 6x at least. Their EBITDA margin is around 50%, so that implies a EV/EBITDA of 12x.

 

I think even 12x is at the upper edge of fair for only a 10% grower with high debt, when taxes and interest rates are probably at their lowest.

 

At their debt levels you need to adjust your average multiples lower for the extra financial risk introduced. And as you mentioned in your previous post 25% IRR is based on certain revenue assumptions, cost assumptions, tax rate assumptions. I for one don't believe 5% tax rate is sustainable, even VRX management has said in their calls that long term it could be 10-15%.

[TonyG]

Isn't a 12x multiple a little low for this business since Allergan just sold their GENERIC business for roughly 17.5x? Also, why isn't anyone saying anything about Allergan as they have been way more acquisitive than Valeant?

[original mungerville]

if organic growth is only half of what it is touted to be, given the debt levels, given the stock comp, given the current low tax rate, given the growth in revenues attributable to price increases, IMO the fair value is below 140 for this.

 

This is false. Fair value would be that low if the IRR on acquisition was materially below 25%. You just don't need greater than 10% organic growth to support a 15x 2016 multiple to owner earnings.

 

 

I think I agree with you that the place they add value is providing a global platform for new products. That is worth something. Everything else seems like shuffling where, how or when you pay.

 

140$ stock is only 25b less in EV or about 25% down from here. Say EV is 80b. Sales estimates for 2016 are around 13b, so EV/sales would be 6x at least. Their EBITDA margin is around 50%, so that implies a EV/EBITDA of 12x.

 

I think even 12x is at the upper edge of fair for only a 10% grower with high debt, when taxes and interest rates are probably at their lowest.

 

At their debt levels you need to adjust your average multiples lower for the extra financial risk introduced. And as you mentioned in your previous post 25% IRR is based on certain revenue assumptions, cost assumptions, tax rate assumptions. I for one don't believe 5% tax rate is sustainable, even VRX management has said in their calls that long term it could be 10-15%.

 

Its not a "10% grower" - that's the point. Organic growth can be zero and VRX can be a 25% grower if the multiple stays the same and the company takes only its retained owner earnings every year and deploys those at 25% IRR. So if a company has $4 dollars in earnings, takes all of that and invests it in a acquisition that produces $1 earnings every year with zero growth, then the next year, that same company now has $5 in earnings, rinse and repeat. No need for more debt. No organic growth and can grow at 25% through acquisitions.

 

Owner earnings for 2016 should be north of $16 per share which puts the current p/e at less than 15x. IF this thing does indeed get an IRR of 25% and acquisitions, then its a steal from a valuation perspective.

[original mungerville]

if organic growth is only half of what it is touted to be, given the debt levels, given the stock comp, given the current low tax rate, given the growth in revenues attributable to price increases, IMO the fair value is below 140 for this.

 

This is false. Fair value would be that low if the IRR on acquisition was materially below 25%. You just don't need greater than 10% organic growth to support a 15x 2016 multiple to owner earnings.

 

 

I think I agree with you that the place they add value is providing a global platform for new products. That is worth something. Everything else seems like shuffling where, how or when you pay.

 

140$ stock is only 25b less in EV or about 25% down from here. Say EV is 80b. Sales estimates for 2016 are around 13b, so EV/sales would be 6x at least. Their EBITDA margin is around 50%, so that implies a EV/EBITDA of 12x.

 

I think even 12x is at the upper edge of fair for only a 10% grower with high debt, when taxes and interest rates are probably at their lowest.

 

At their debt levels you need to adjust your average multiples lower for the extra financial risk introduced. And as you mentioned in your previous post 25% IRR is based on certain revenue assumptions, cost assumptions, tax rate assumptions. I for one don't believe 5% tax rate is sustainable, even VRX management has said in their calls that long term it could be 10-15%.

 

Half my close friends are in big pharma; I have sat around late at night listening to what goes on and having quite a few drinks. Just from those conversations, I know for certain there is tons of fat to cut. Furthermore, there has been quite a bit of historical evidence that R&D ROIs have been very low for decades now. So I don't think its just shuffling. Its more like 3G levering up and doing a number on Heinz, its not just shuffling. Its got more debt that Heinz, however, Heinz doesn't have a huge R&D budget that is unproductive and can be easily slashed. Either you are for slashing early stage R&D at a big company or you are against (believing high ROI discoveries are usually made by small dedicated nimble teams). I am for, that's what got me interested. And then throw in Pearson, additional fat in middle management that can be cut, a very low tax rate where the headquarters is not in the US (ie its in Canada) which means if the US changes their tax policy, its harder to capture Valeant - and I am in.

[KCLarkin]

I don't believe so. If you add amortization expense, you have to subtract some other estimate for maintenance capex. No business sustains revenues by itself without additional expenses.

 

If B&L has organic growth, they don't have to buy another eye-care company in 10 years to maintain revenue. So you can't assume that amortization is a real economic expense. Of course if you have a drug that is headed for a patent cliff, that amortization would be a real expense.

[rpadebet]

I don't believe so. If you add amortization expense, you have to subtract some other estimate for maintenance capex. No business sustains revenues by itself without additional expenses.

 

If B&L has organic growth, they don't have to buy another eye-care company in 10 years to maintain revenue. So you can't assume that amortization is a real economic expense. Of course if you have a drug that is headed for a patent cliff, that amortization would be a real expense.

 

Why ? Can't there be a competitor for b&l? Don't they have to constantly make small innovations and market to stay ahead of competitors? That is maintenance cap ex right? VRX may not invest in that r&d directly much, but will have to buy small competitors to stay ahead of larger competitors no?

 

If there is growth and b&l does nothing to its products, just sell the same stuff, quickly the competition will be interested if they can find a better product. B&l can lose its brand, it's goodwill with doctors etc. those would also cost money to replace.

 

I don't know of any business with no maintenance cap ex. Let's not get stuck up with accounting differentiation of depreciation and amortization.

 

[rpadebet]

if organic growth is only half of what it is touted to be, given the debt levels, given the stock comp, given the current low tax rate, given the growth in revenues attributable to price increases, IMO the fair value is below 140 for this.

 

This is false. Fair value would be that low if the IRR on acquisition was materially below 25%. You just don't need greater than 10% organic growth to support a 15x 2016 multiple to owner earnings.

 

 

I think I agree with you that the place they add value is providing a global platform for new products. That is worth something. Everything else seems like shuffling where, how or when you pay.

 

140$ stock is only 25b less in EV or about 25% down from here. Say EV is 80b. Sales estimates for 2016 are around 13b, so EV/sales would be 6x at least. Their EBITDA margin is around 50%, so that implies a EV/EBITDA of 12x.

 

I think even 12x is at the upper edge of fair for only a 10% grower with high debt, when taxes and interest rates are probably at their lowest.

 

At their debt levels you need to adjust your average multiples lower for the extra financial risk introduced. And as you mentioned in your previous post 25% IRR is based on certain revenue assumptions, cost assumptions, tax rate assumptions. I for one don't believe 5% tax rate is sustainable, even VRX management has said in their calls that long term it could be 10-15%.

 

Half my close friends are in big pharma; I have sat around late at night listening to what goes on and having quite a few drinks. Just from those conversations, I know for certain there is tons of fat to cut. Furthermore, there has been quite a bit of historical evidence that R&D ROIs have been very low for decades now. So I don't think its just shuffling. Its more like 3G levering up and doing a number on Heinz, its not just shuffling. Its got more debt that Heinz, however, Heinz doesn't have a huge R&D budget that is unproductive and can be easily slashed. Either you are for slashing early stage R&D at a big company or you are against (believing high ROI discoveries are usually made by small dedicated nimble teams). I am for, that's what got me interested. And then throw in Pearson, additional fat in middle management that can be cut, a very low tax rate where the headquarters is not in the US (ie its in Canada) which means if the US changes their tax policy, its harder to capture Valeant - and I am in.

 

The story definitely makes sense. It was my biggest position all year for that reason. The business model just seems like the rational thing to do. In theory it is supposed to work. In practice, maybe it worked, who knows...do you have the disclosures to prove it one way or another?

 

25% irr is also nice if it's true. Honestly aren't we just relying on management word here? Can it be proved?

 

[rpadebet]

How would you explain the way average growth is calculated? The thesis is basically pearson is very smart, maybe an outsider and a straight shooter right? How does it make sense to calculate growth averages that way then?

 

If 1% of my portfolio did 100% in a year and 99% was flat, did I grow my portfolio by 50%? This is either disingenuous or plain deceptive.

 

Pearson is clearly a smart guy, so it is hard for me to buy the argument that he is dumb about this particular thing or is trying to oversell or that's the way things are done. This guys claim to fame is he wanted to change how things are done in Pharma right?

 

I am not VRX bull.

 

However, sometimes smart people do dumb things in overselling. Like the Google driverless car TED talk where the guy had a facepalm slide trying to persuade the audience that driverless car has to make decisions 5000 times a second while the forward-collision-avoidance system has to make a decision once a month or something. That was completely false. Why did he do it? Not really a fraud. I guess he tried to oversell... It's tough to not exaggerate stupidly sometimes. The question for investors to decide is whether this is systemic and whether it crosses a threshold beyond which you don't want to deal with the company involved.

 

The most important thing Enron taught us , I hope, is that we all need to "Ask Why" - their slogan.

 

If VRX is a great business, then why oversell or sell so aggressively to investors? Shouldn't the numbers speak for themselves?

 

[rb]

No matter what else is going on with VRX, I do not understand this idea that they can do deals at a 25% IRR indefinitely.

 

1. 25% is a huge amount. To get 25% in this environment, especially when paying a control premium is a herculean task. And you're not talking about an opportunistic deal here and there, but a continuous stream.

2. The people that are selling aren't really a bunch of idiots.

3. Why could there be no competition to this model that drives down returns? It looks like VRX is basically a publicly traded P/E fund. Those guys are targeting 12% returns. Why wouldn't they (or someone else) get in on the action and drive down.

4. Given Valeant's size you will need big deals going forward to move the needle. I don't think there's any way you get 25% out of those unless you believe #2 is wrong.

 

I'm not going to weigh in on whether this is a fraud or not, the company's valuation isn't worth that kind of analysis. There are definitely easier things out there. All I'm saying is that some of the assumptions about the model that are being thrown around are really out there.

 

Given the valuation of the company and the lofty assumptions involved I think it is the shareholder's duty to look at it with a thorough and skeptical approach - it is your money and your property that's at stake. However it seems that the opposite is happening.

[rb]

The most important thing Enron taught us , I hope, is that we all need to "Ask Why" - their slogan.

I always thought that slogan was so smart and insightful.... and so ironic in the end.

[giofranchi]

Rpadebet,

First you say that VRX is your largest investment... Then you say fair value is $140...

This isn't really serious, is it?... Come on!

 

By the way, as far as valuation is concerned, you won't do any better than what Ackman did on this company. Valuation is really the last worry of mine!

 

Cheers,

 

Gio

[ZenaidaMacroura]

No matter what else is going on with VRX, I do not understand this idea that they can do deals at a 25% IRR indefinitely.

 

1. 25% is a huge amount. To get 25% in this environment, especially when paying a control premium is a herculean task. And you're not talking about an opportunistic deal here and there, but a continuous stream.

2. The people that are selling aren't really a bunch of idiots.

3. Why could there be no competition to this model that drives down returns? It looks like VRX is basically a publicly traded P/E fund. Those guys are targeting 12% returns. Why wouldn't they (or someone else) get in on the action and drive down.

4. Given Valeant's size you will need big deals going forward to move the needle. I don't think there's any way you get 25% out of those unless you believe #2 is wrong.

 

I'm not going to weigh in on whether this is a fraud or not, the company's valuation isn't worth that kind of analysis. There are definitely easier things out there. All I'm saying is that some of the assumptions about the model that are being thrown around are really out there.

 

Given the valuation of the company and the lofty assumptions involved I think it is the shareholder's duty to look at it with a thorough and skeptical approach - it is your money and your property that's at stake. However it seems that the opposite is happening.

I think it's just the PE firm target return (12-15%) plus the tax advantage, plus the ability to leverage a global distribution channel, plus overlap with regards to Administrative and in certain cases sales force.

 

 

[Happy]

The shorts claimed that Valeant needs to keep up the acquisitions to hide continuing costs in their restructuring expenses and that there is no organic growth. Pearson said that if they stop acquiring their numbers would actually get better and Cash EPS would converge towards GAAP (but that it would be inopportunistic to not make lucrative deals for a while just to prove that). But when the Allergan acquisition failed and the business performed exactly like Pearson said it would and that short thesis was proven wrong as the restructuring expenses did go down significantly and the numbers did get better and there was significant organic growth, to me the business model has been proven enough to be very confident.

AZ_Value raises some points of interest, but nothing serious enough that questions the conclusion I just stated. Let's see what else he found out.

[Happy]

1. 25% is a huge amount. To get 25% in this environment, especially when paying a control premium is a herculean task. And you're not talking about an opportunistic deal here and there, but a continuous stream.

2. The people that are selling aren't really a bunch of idiots.

3. Why could there be no competition to this model that drives down returns? It looks like VRX is basically a publicly traded P/E fund. Those guys are targeting 12% returns. Why wouldn't they (or someone else) get in on the action and drive down.

4. Given Valeant's size you will need big deals going forward to move the needle. I don't think there's any way you get 25% out of those unless you believe #2 is wrong.

 

1. 25% is a lot easier than normal when you have a big tax advantage, interest rates are ultra-low and your business model takes out a lot of unnecessary costs.

2. I certainly wouldn't call them a bunch of idiots. But it seems the other executives are stuck in the old pharma mindset and Pearson's model works much better.

3. As you can see on this thread and elsewhere, Pearson's business model is highly controversial. That probably is very good because if it were totally obvious I guess a lot more would start copying his model. Over time the industry slowly may move in that direction, but it's hard to overcome a decade-long mindset.

4. The pharma industry is amazingly huge, like $3 trillion in private market values and $3 trillion in public ones and Pearson said that isn't even the entire universe he could play in. So there should be enough attractive opportunities to buy for a long, long time.

 

It all comes down to the business model (and Pearson). There is a huge difference in value you can put on this company depending on how strongly you believe in it.

[rb]

I think it's just the PE firm target return (12-15%) plus the tax advantage, plus the ability to leverage a global distribution channel, plus overlap with regards to Administrative and in certain cases sales force.

Why would VRX have a tax advantage over PE funds? Are the PE guys shy about setting up shop in a tax friendly jurisdiction? Also Valeant isn't the only one with a distribution channel. Pharmas always buy successful smaller cos with successful R&Ds in order to leverage their distribution channels so I don't see how that's so much of a differentiator.

 

Now the VRX guys are pretty shrewd but to assume that they can do 25% IRR deals as far as the eye can see seems wildly optimistic.

[rpadebet]

Rpadebet,

First you say that VRX is your largest investment... Then you say fair value is $140...

This isn't really serious, is it?... Come on!

 

By the way, as far as valuation is concerned, you won't do any better than what Ackman did on this company. Valuation is really the last worry of mine!

 

Cheers,

 

Gio

 

Gio,

Maybe I wasn't clear. My 140$ value is if organic growth is suspect. I wouldn't trust IRR claims too if that's the case. As Rb pointed out 25% IRR in this environment needs a leap of faith to accept at face value.

 

If you believe organic growth and/or sustainable 25% IRR on deals, then 240-300+ are all cheap :) 240 doesn't need Herculean assumptions with leverage like this. And if someone can compound at 25% forever , then you pay them what they are asking for ;)

[rpadebet]

No matter what else is going on with VRX, I do not understand this idea that they can do deals at a 25% IRR indefinitely.

 

1. 25% is a huge amount. To get 25% in this environment, especially when paying a control premium is a herculean task. And you're not talking about an opportunistic deal here and there, but a continuous stream.

2. The people that are selling aren't really a bunch of idiots.

3. Why could there be no competition to this model that drives down returns? It looks like VRX is basically a publicly traded P/E fund. Those guys are targeting 12% returns. Why wouldn't they (or someone else) get in on the action and drive down.

4. Given Valeant's size you will need big deals going forward to move the needle. I don't think there's any way you get 25% out of those unless you believe #2 is wrong.

 

I'm not going to weigh in on whether this is a fraud or not, the company's valuation isn't worth that kind of analysis. There are definitely easier things out there. All I'm saying is that some of the assumptions about the model that are being thrown around are really out there.

 

Given the valuation of the company and the lofty assumptions involved I think it is the shareholder's duty to look at it with a thorough and skeptical approach - it is your money and your property that's at stake. However it seems that the opposite is happening.

 

+1

My thinking exactly. Lots of other fish in the sea. Maybe we will have more if this correction goes on.

No point getting emotionally attached to this business at these prices, you can always get back in if its not a fraud and they are indeed doing 25% IRRs:). I won't quibble much about whether the multiple is 10-15 or 20-25 then.

 

[rpadebet]

Rpadebet,

First you say that VRX is your largest investment... Then you say fair value is $140...

This isn't really serious, is it?... Come on!

 

By the way, as far as valuation is concerned, you won't do any better than what Ackman did on this company. Valuation is really the last worry of mine!

 

Cheers,

 

Gio

 

Gio,

Ackman is much smarter than me and better at this, I give you that. No arguments.

 

Yesterday in one of the other threads I read a quote by one of cobf members - investing is much more than counting, any idiot can count. :)

 

Think about how true that statement is. Your valuation model can be great, but your judgement might be wrong. It took me a while as an engineer and person who loves spreadsheets to figure out investing needs other skills too!!

[giofranchi]

Rpadebet,

First you say that VRX is your largest investment... Then you say fair value is $140...

This isn't really serious, is it?... Come on!

 

By the way, as far as valuation is concerned, you won't do any better than what Ackman did on this company. Valuation is really the last worry of mine!

 

Cheers,

 

Gio

 

Gio,

Ackman is much smarter than me and better at this, I give you that. No arguments.

 

Yesterday in one of the other threads I read a quote by one of cobf members - investing is much more than counting, any idiot can count. :)

 

Think about how true that statement is. Your valuation model can be great, but your judgement might be wrong. It took me a while as an engineer and person who loves spreadsheets to figure out investing needs other skills too!!

 

And that's exactly why I have started the poll!

 

I repeat: imo those focusing on valuation are missing the forest for the tree...

 

Cheers,

 

Gio

[original mungerville]

No matter what else is going on with VRX, I do not understand this idea that they can do deals at a 25% IRR indefinitely.

 

1. 25% is a huge amount. To get 25% in this environment, especially when paying a control premium is a herculean task. And you're not talking about an opportunistic deal here and there, but a continuous stream.

2. The people that are selling aren't really a bunch of idiots.

3. Why could there be no competition to this model that drives down returns? It looks like VRX is basically a publicly traded P/E fund. Those guys are targeting 12% returns. Why wouldn't they (or someone else) get in on the action and drive down.

4. Given Valeant's size you will need big deals going forward to move the needle. I don't think there's any way you get 25% out of those unless you believe #2 is wrong.

 

I'm not going to weigh in on whether this is a fraud or not, the company's valuation isn't worth that kind of analysis. There are definitely easier things out there. All I'm saying is that some of the assumptions about the model that are being thrown around are really out there.

 

Given the valuation of the company and the lofty assumptions involved I think it is the shareholder's duty to look at it with a thorough and skeptical approach - it is your money and your property that's at stake. However it seems that the opposite is happening.

I think it's just the PE firm target return (12-15%) plus the tax advantage, plus the ability to leverage a global distribution channel, plus overlap with regards to Administrative and in certain cases sales force.

 

Gutting the shit out of R&D - which is what they do - can really improve margins - beyond any control premium. Now they also may cut a little too much, who knows, but they then often expand the sales force and run the product through their global distribution which targets higher growth markets. Let's say I call all that a wash, I'll throw out some ball park guestimates of what could make up a 25% IRR on deals with what remains:

 

1. 5% IRR for cutting excessive middle management fat and zero cost budget ideology - I guarantee that is there in most corporations let alone Pharma;

2. 10% IRR related to the underlying intrinsic value of the acquiree based on the value of the stock relative to earnings prior to Valeant paying for a control premium;

3. 10% IRR related to tax benefit alone.

 

Do these "pull them out of my ass" guestimates sound unreasonable? Some say #3. is unsustainable long-term. But on new acquisitions, if #3 lasts just 3 years, given compounding effects, and a 25% IRR, the purchase price is repaid. Then let us even say you take that out in years 4 and beyond and assume 15% returns not 25% returns. My assumption in all this is zero real organic growth for the acquiree.

 

Throw that into a spreadsheet and tell me what this is worth, its north of 13x 2016 owner earnings, I know that much.

 

 

 

[rb]

I repeat: imo those focusing on valuation are missing the forest for the tree...

 

Cheers,

 

Gio

I saw that you said that. But what do you mean? That price doesn't matter?

[rb]

Gutting the shit out of R&D - which is what they do - can really improve margins - beyond any control premium. Now they also may cut a little too much, who knows, but they then often expand the sales force and run the product through their global distribution which targets higher growth markets. Let's say I call all that a wash, I'll throw out some ball park guestimates of what could make up a 25% IRR on deals with what remains:

 

1. 5% IRR for cutting excessive middle management fat and zero cost budget ideology - I guarantee that is there in most corporations let alone Pharma;

2. 10% IRR related to the underlying intrinsic value of the acquiree based on the value of the stock relative to earnings prior to Valeant paying for a control premium;

3. 10% IRR related to tax benefit alone.

 

Do these "pull them out of my ass" guestimates sound unreasonable? Some say #3. is unsustainable long-term. But on new acquisitions, if #3 lasts just 3 years, given compounding effects, and a 25% IRR, the purchase price is repaid. Then let us even say you take that out in years 4 and beyond and assume 15% returns not 25% returns. My assumption in all this is zero real organic growth for the acquiree.

 

Throw that into a spreadsheet and tell me what this is worth, its north of 13x 2016 owner earnings, I know that much.

I'm not debating that they can do the things you say. What I'm saying that there's not really anything in there that PE firm X cannot do. If or when the PE firms start getting involved in these deals and drive up the prices you won't really get those types of IRRs. I don't think these PE guys will just sit back and won't get involved in such lucrative deals.

[original mungerville]

Gutting the shit out of R&D - which is what they do - can really improve margins - beyond any control premium. Now they also may cut a little too much, who knows, but they then often expand the sales force and run the product through their global distribution which targets higher growth markets. Let's say I call all that a wash, I'll throw out some ball park guestimates of what could make up a 25% IRR on deals with what remains:

 

1. 5% IRR for cutting excessive middle management fat and zero cost budget ideology - I guarantee that is there in most corporations let alone Pharma;

2. 10% IRR related to the underlying intrinsic value of the acquiree based on the value of the stock relative to earnings prior to Valeant paying for a control premium;

3. 10% IRR related to tax benefit alone.

 

Do these "pull them out of my ass" guestimates sound unreasonable? Some say #3. is unsustainable long-term. But on new acquisitions, if #3 lasts just 3 years, given compounding effects, and a 25% IRR, the purchase price is repaid. Then let us even say you take that out in years 4 and beyond and assume 15% returns not 25% returns. My assumption in all this is zero real organic growth for the acquiree.

 

Throw that into a spreadsheet and tell me what this is worth, its north of 13x 2016 owner earnings, I know that much.

I'm not debating that they can do the things you say. What I'm saying that there's not really anything in there that PE firm X cannot do. If or when the PE firms start getting involved in these deals and drive up the prices you won't really get those types of IRRs. I don't think these PE guys will just sit back and won't get involved in such lucrative deals.

 

PE firms need to have a pharma platform already domiciled in a low-tax jurisdiction and even with that, they can not do an inversion of a US-based company right now.

 

Also PE firms don't have the existing distribution Valeant has. At a market cap around $100 billion, Valeant is playing at a different scale relative to PE firms now.

 

Finally, most PE firms do not have Valeant management's pharma knowledge/experience including an institutionalized acquisition intergration model.

 

Explain to me how a PE firm can do the above.

[rpadebet]

Not just PE  firms, mr.market is no dummy either. Before the control premium is paid, what makes you think mr.market wouldnt have baked these acquisition assumptions into his price on the targets. After all the strategy is no secret any more...