VRX - Valeant Pharmaceuticals International Inc.

[original mungerville]

And if you can't explain that, and did not debate my previous numbers, then this valuation discussion is over.

 

I guess we can turn our attention to whether its a fraud!

[original mungerville]

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...

 

Oh, look - I completely agree with you here. But what did Pearson do lately:

 

- tried Allergan which according to him and Ackman had huge/exceptional operational synergies with Valeant, which would have overwhelmed acquisition premiums built into the market price a priori;

 

- that didn't work, so he bought Salix which was undergoing a scam of their own and needed to sell and so the price did not have that premium in it a priori and they only paid a control premium which my numbers already accounted for;

 

Prior to those last two acquisitions, Mr. Market did not have huge merger premiums built into pharma prices, although we can not say that is the case today.

 

So Pearson and I agree with you completely on that point.

 

We are done here now, right? You have to agree with the above logic at this point, no?

[rb]

And if you can't explain that, and did not debate my previous numbers, then this valuation discussion is over.

 

We are done here now, right?

 

I'm sorry, but who exactly made you the moderator of the VRX thread?

[original mungerville]

Just to be more clear, the above points relate to big acquisitions not tuck-ins. I expect tuck-ins from Pearson going forward, unless we get a stock market dislocation in which case he might do something bigger if he has the dry powder.

 

I would agree with you that tuck-ins now even may have merger premiums built in at this point. But on the other hand, you need to remember that a tuck-in by definition usually has huge synergies because the acquirer has huge distribution relative to the acquiree - so, like the Allergan attempt, the synergies would outweigh the merger premium which exists prior to control premium.

 

And my thesis has always been they don't need to do huge deals, just need to deploy owner earnings into various tuck-ins throughout the year at a 25% IRR.

 

Clear and very plausible, no?

[original mungerville]

And if you can't explain that, and did not debate my previous numbers, then this valuation discussion is over.

 

We are done here now, right?

 

I'm sorry, but who exactly made you the moderator of the VRX thread?

 

Nobody, apologize for that I just thought we had narrowed the discussion down. This is a good discussion, you are asking the right questions and helping me think through this.

[rpadebet]

Yes mungerville no arguments about walking away from allergan being rational or Salix potentially being a good deal.

If mr. Market can adjust, do you still think they can do 25% IRR now sustainably?

 

Gio,

By polling aren't you relying on a voting machine and not a weighing machine? Polling is a poor substitute for judgement. But you see the poll results now as well. How many are confident VRX is not a fraud? Is it worth risking your $$ in such a business when plenty of substitutes are or could be available?

[rpadebet]

Btw, I am not saying it's a fraud. I don't know. That is a different analysis and if I were sure it was a fraud, I would short.

 

With the questions raised I don't feel the need to risk my $$ here. Fortunately, I don't have to explain my decision to Pearson  :), that is my edge over valueact and ackman isn't it?

[rpadebet]

Sorry for multiple posts, but I do think the discussion here is good after a long time :)

 

Regarding tuck ins vs big deals, let's for a moment roll with your $16 cash eps assumption next year. That means, Pearson and co have to deploy $5b+ @25% IRR in 2017 right? And it has to be in pharma space unlike brk which can do anywhere.

 

Sprout got you 1b, 4b to go. Sprout is a leap as some had suggested, so if they fail, you need to do more than 30% IRR elsewhere.

 

Imagine how many tuck ins you need for 5b. If you call $250 mill as tuck in , you need 20 of those. :). And next year many more... Does that sound possible? Year after year at higher and higher sizes? Getting 2 -4 good tuck in a year maybe possible, but counting on mr.market not to adjust at those sizes in those quantities is a bold assumption.

[rpadebet]

Everyone also papered over the fact that the CFO resigned. We took management at its word that he is leaving to do something else.

 

From what I have heard from my conversations with analysts, this guy was the chief deal maker given his background in banking.

 

He is on the board, so Ian not suggesting he is jumping ship or it indicates fraud. To me it indicates the deals drying up. Unless something big comes up, it could be quiet for a while. The gamble with sprout also indicates that low lying fruits are already picked.

[giofranchi]

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?

 

It doesn't matter simply because, if what they are reporting in their quarterly releases and conference calls is true, VRX is cheap today!

If they truly are able to get the results they talk about, opportunities out there abound, and they will be able to go on growing for at least the next 5 years.

 

Therefore, the question shareholders must answer is the following: are VRX's power point presentations reliable? Do they report business results that are true? Or, like AZ_Value has said, do they belong to the garbage can?

 

Cheers,

 

Gio

[giofranchi]

Yes mungerville no arguments about walking away from allergan being rational or Salix potentially being a good deal.

If mr. Market can adjust, do you still think they can do 25% IRR now sustainably?

 

Gio,

By polling aren't you relying on a voting machine and not a weighing machine? Polling is a poor substitute for judgement. But you see the poll results now as well. How many are confident VRX is not a fraud? Is it worth risking your $$ in such a business when plenty of substitutes are or could be available?

 

To this I have already answered: I run a very concentrated portfolio exactly because I think there are very few substitutes to the companies I have chosen! And I cannot sell simply because someone I have never met, nor talked to, who has never proven to me what he has accomplished in business and why his judgement should be relied upon, suggests that an investment of mine might be a fraud...

 

Instead, I have started a poll to shift the attention of the VRX thread on this topic: how much can shareholders rely on VRX management? Are they telling lies, or are they trustworthy? Because imo that's all AZ_Value has achieved with is post: to raise the doubt about VRX quarterly results as they are reported to shareholders.

 

I don't really care about the results of the poll... I care about the discussion instead!

 

And for what I have heard till now, I think on Monday I am buying more!

 

Cheers,

 

Gio

[cobafdek]

Side anecdote, for what it's worth, on the Sprout's drug:  on a physician-only message forum, Addyi is being overwhelmingly panned.  Typical comment:  "serving a woman a Coors Light will work just as well."  Valeant is throwing a billion down the drain.

[Guest Schwab711]

In the 2Q15 slide on BOL (Bausch & Lomb), VRX reports Y/Y% growth across the board in every segment with an average of 8% (same AZ_Value problem here). However, 2Q14 presentation states that rev for BOL was $891m vs $836m in 2Q15. That means that BOL experienced -6.2% growth Y/Y, according to their reported figures, not +8%. VRX has been highlighting 8%-12% growth for BOL even though the overall CAGR since 2012 is just 1% (from 2013 S-1 for BOL) and VRX must have purchased BOL when they had a revenue decline in 2013, or the growth since acquisition number wouldn't make sense.

 

I posted the screenshot of the 2Q15 BOL slide. Where they state Y/Y%, they actually mean Q/Q% (?!). YTD% doesn't seem to be relevant to anything verifiable since 1Q14 BOL results were not reported in their presentation. It is extremely unlikely YTD% is accurate, at least in the way most people would define a "YTD%" headline in the context VRX used.

 

http://ir.valeant.com/files/doc_presentations/2015/Q22015-Earnings-Deck-Final-August-11-Revised-(1).pdf

http://ir.valeant.com/files/doc_presentations/2014/2Q14%20Presentation%20Draft%20Final2.pdf

http://ir.valeant.com/files/doc_presentations/2014/1Q14%20Presentation%20Final2.pdf

 

One more that I couldn't follow:

 

4Q14 presentation discusses organic growth on the 1st slide (p.4). VRX grew rev from $2.064b (2013) to $2.280b (2014), which is a 10.5% increase (reported as 10%). However, they mention that negative FX effects caused rev to be lower by -$42m, which would have given them a 16% organic growth. However, it would take at least $104m drop from FX to bring growth up to 15.5% (the lowest possible number that can round to 16%, which was report). Using their -$42m number, "organic growth ex-currency changes" is just 12.5%.

 

A point of confusion I have is on p.7, which is another BOL slide (see 2nd pic attached). What the hell does "2014" mean!? They have a column for Y/Y%, so I'm confused what this is intending to show. I'm also fairly confident that the growth since acquisition column can only be total return and not CAGR or average (given the 2013 S-1). This assumes that BOL had a rough 18 months between S-1 and acquisition even though VRX paid a lofty multiple for generally commoditized healthcare-related products.

 

*As a side note, VRX constantly changes the type of growth measured within the same slides and presentations (as exampled by AZ_Value and above), which makes it extremely difficult to interpret what they mean for a given data point.

 

http://ir.valeant.com/files/doc_presentations/2015/20154QPDF_v001_q218yv.pdf

 

 

Finally, how the hell did Addyi (Sprout Pharmaceuticals) get approved!? It's not worth a huge write-up, but the data seems to suggest that this barely has an effect and the most significant results were seen in men (which is a completely different hypothesis/study). There's an interesting argument to be made that the FDA only approved this because of pressure from women's groups.

 

Also, it's pretty obvious that R&D costs will be slashed for acquisitions like Sprout since most of the R&D costs are no longer necessary. VRX is not innovative in this way and I think they may be painting themselves into a corner by focusing their business model on such an extreme view. It's not like the other major pharmas increase R&D after a compound is approved. Of course it sounds logical, but that's only because every major biotech has already been doing this for decades! Nearly every major pharma invests heavily in late phase-3 or recently approved compounds just like VRX (I thought this was called "reloading the pipeline" or something).

 

It's worth noting that the majority of GILD's market value is currently being supported by a future approval of TAF, which is a combination of multiple compounds they already patented. It's only because of continued R&D that GILD still has any value above cash and 2-3 years of future cash flow (~40%-50% of the current market value).

 

NOTE: A DCF valuation model being discounted at 10% will still have non-trivial cash flows contributing to PV up until year 56. If you are only going to receive 10-15 years of cash flows instead of an infinite number, then a discounted cash flow model doesn't make sense, as it will overstate the value of the entity. (Also note, this is likely why Buffett prefers cash flows that he can predict for long periods. Most analysts use DCF models that imply infinite, increasing cash flows; even when it doesn't make any sense to assume so). One should only choose a specific valuation model because it is the best method based on the characteristics on the entity's future cash flows.

[Liberty]

So I finally had time to read your novella, AZ. Thanks again for taking the time to write it down and publish it, I appreciate it.

 

I can't really say that you've changed my mind about Valeant, but it was an interesting read. A few things:

 

Investing is a probabilistic activity. You'll never have perfect information and perfect understanding. Nobody here really knows everything going on in all the corners of Berkshire or Markel. You have to make judgement calls based on various factors, and what you wrote is now one more input in my mental model of the situation, so that's great.

 

But I think that most of what you did is: 1) Point out what was already obvious, which is that Valeant is a very complex situation and that, like with the Malone companies or Berkshire, you can't truly understand everything that is going on just by reading the 10Ks. It's simply not possible. 2) Like Hempton and Allergan when they were attacking VRX, I think you've found nuggets here and there that look somewhat bad, but where true understanding probably can't be had without hearing the company's explanation of why things are like that. When that happened in the past, when VRX replied to accusations by Hempton and Allergan, I found that their explanations made a lot of sense. But if they had never replied, I probably wouldn't have answers to these questions because business is complex and messy and there are countless rules (steps this up, step this down, account for that part of inventory, what's in the contract with these people, currencies, taxes, etc) and it's fairly easy to find discrepancies, especially when you compare apples and oranges (ie. numbers from a 10K to a third party sources, or approximations and extrapolations which might not take into account some seasonal or one-time effects, or comparing documents across jurisdictions, etc).

 

Maybe I'm the only one who thinks that using the average of CAGRs on the "how are acquisitions doing" slide is one of many perfectly valid ways to go. Obviously if you want to know the overall financial results, you need to look at the dollar-weighted number, but that's what the financials do. If you want to track how well you are deploying capital in M&A, then it's a valid approach to look at the average CAGR. Smaller acquisitions contribute fewer dollars, but you also put less capital into them; the question is, was the capital well deployed? If you dollar-weight it, why not just look at B&L and Salix and forget about the rest, right? They could have included both and that would have been even better, but the financials elsewhere already tell you how the overall revenues have been growing...

 

You also point out that organic growth in 2013 was lower than that average CAGR that they use. I don't think that's a gotcha. If you look at any of the presentations for that year, or just the Q4 2013 presentation for example, you'll see that they break down organic growth and that year was fairly flat. They don't try to hide it; if they did, they wouldn't have a slide (#4) showing organic growth being 0% for FY2013 here: http://ir.valeant.com/files/doc_presentations/2014/4Q13%20Presentation%20Final.pdf

 

(though that's kind of Ackman's point about one part of the business being tail products and the other growing; when you combine both, you get a misleading number, even if they get good IRRs on the declining tail products. That's why they can be happy about certain businesses with negative numbers, as Pearson sometimes mentions on calls)

 

Back to probabilistic decision making: Pearson was head of global pharma at McKinsey and worked there for decades, getting insides dozens if not hundreds of companies. He was hand-picked by Mason Morfit and Jeff Ubben of ValueAct, who are on the board and have kept the company a huge part of their portfolio. Also owning a huge position are Sequoia, Glenn Greenberg, Lou Simpson, and John Paulson. Bill Ackman and his pharma consultant, Bill Doyle, have had insider access to the company for months before the Allergan deal. I know that some here try to hand-wave that as being irrelevant, and will point out to other situations in the past when great investors were fooled, but I still think it means something, and great investors who were fooled in the past usually didn't have this level of influence and insider access. I think that if Pearson was playing games, he wouldn't give insider access to Bill Ackman and Doyle, people who know the business and/or are experts at uncovering complex frauds. The VRX board is very involved in acquisitions, and the ValueAct people are some of the top people in the business; you think they wouldn't be able to do a better job than you with insider access? They don't rely on investor presentations and 10Ks, they have the raw data. It would also be hard to get a Goldman Sachs partner to leave GS and become your CFO (and he's now staying on the board, and Pearson has said that he's one of two hand-picked successors for the CEO job) and then have the head of pharma M&A at McKinsey to become the next CFO if this was just some fraud playing games with the numbers.  These people have analyzed Valeant and bet their careers and a big part of their net worth on it.

 

I think there's a higher chance that all those people are collectively right about their analysis of the value creation at Valeant than you are about it, AZ, no offence. I knew Allergan's attacks were driven mostly by ego and self-preservation, and that Hempton has a personal vendetta against Ackman. But you are a mystery to me in this equation, since I don't know you. I have to wonder if as an ex-employee of Medicis, the company that Valeant uses as an example of an acquisition that they did badly by cutting too much, maybe you have personal feelings about it? Maybe friends of yours were affected? Then again, maybe not, but it's a real possibility, right? If that were the case, you are obviously smart enough not to mention it so as not to weaken your thesis, so maybe I'll never know. All I know is that your thesis also requires a certain amount of faith in your work and calculations and even-handednesss, just like Ackman's or Ubben's. Maybe they're all wrong and you're right, time will tell.

 

But if Pearson is basically a con-man trying to fool people, he's not doing a great job on the face of it because he's not exactly liked. Before the Allergan saga, he had almost never been on TV. He always seems annoyed to be speaking in public, looks unpolished and uncharismatic. When asked about it, he'll give his opinion about whether the stock is undervalued or not, but I don't think he's particularly trying to talk up his stock. He has cut his own base salary to $1, he can't sell most of his stock for years after he retires, and he has bought a fair amount of it with his own money when he joined. The company is running very lean and isn't a comfortable place to work for people looking for luxury, which isn't usually the way that people who are in it for the money and self-aggrandizement do it. And if you are being dishonest, you usually give a cushy life to people inside the company so that they are loyal to you and not tempted to be whistleblowers.

 

Those who point to the way that bonus compensation scales up to very high IRRs as a red flag should find out the explanation from Mason Morfit from a few years ago about why they designed it like that. The thinking is that at many other companies, you get more up to a certain point, which might be 15% or 20%, and after that you've hit a ceiling. If you have an exceptional manager that could do more, this gives them the incentive to sandbag things and only hit the max and keep some firepower in reserve for the next year. In short, it actually slows down growth. But if things keep scaling up, you prevent that, and as long as you have other mechanisms to ensure long-term thinking (such as stock that is restricted even years after retirement, to ensure selection of a good successor and a sustainable business), you get the best of both worlds and properly aligned incentives.

 

One last point: Comparing revenues from various acquisitions and products over years sometimes makes sense, and sometimes it doesn't. Valeant is not optimizing for revenue, it's optimizing for cash on cash returns. So if they get out of a certain market or product because it doesn't give them good enough returns, that might look bad on next year's revenue comparison, yet it would be value-creating. They made a conscious decisions over time to not go or get out of certain markets, like Western Europe. If they hadn't you can be sure that they revenue for certain products/acquisitions would be higher, but that would be a sub-optimal use of capital.

 

I also think many people are wrong about VRX's model. They don't have zero R&D, and they don't have much revenue facing patent cliffs (2-3% of revenue/year for the next many years). They have introduced many new products from their own internal R&D, some of which are now some of their top products (Jublia, some of the new B&L lenses) after a pretty short time. Zero-based-budgeting, targeted R&D is different than no R&D, and certainly different from the traditionally wasteful "let's spend X% of revenue on R&D". While the concept of the "durable" product might get some flak, some things *are* more durable than others in the pharma world (ie. skin creams and contact lenses aren't nearly as under attack be generics, and Valeant sells many branded generics that are already out of patent protection), and Valeant puts a heavy emphasis on that, so that much of their portfolio isn't comparable to the portfolio of many other pharma companies with products that have revenues that are much more front-loaded.

 

Anyway, looking forward to the other parts of this novella serial!

[Liberty]

Schwab, 2015 slide has a footnote saying that this excludes the B&L generics, which are now reported with Valeant generics. I think that's probably the difference. I know this is another thing that makes it harder to compare, but the company can't keep acquired companies the same forever, over time they incorporate them ever more tightly into the mothership and this makes comparisons with the original independent companies harder and harder.

[Picasso]

In the 2Q15 slide on BOL (Bausch & Lomb), VRX reports Y/Y% growth across the board in every segment with an average of 8% (same AZ_Value problem here). However, 2Q14 presentation states that rev for BOL was $891m vs $836m in 2Q15. That means that BOL experienced -6.2% growth Y/Y, according to their reported figures, not +8%. VRX has been highlighting 8%-12% growth for BOL even though the overall CAGR since 2012 is just 1% (from 2013 S-1 for BOL) and VRX must have purchased BOL when they had a revenue decline in 2013, or the growth since acquisition number wouldn't make sense.

 

I posted the screenshot of the 2Q15 BOL slide. Where they state Y/Y%, they actually mean Q/Q% (?!). YTD% doesn't seem to be relevant to anything verifiable since 1Q14 BOL results were not reported in their presentation. It is extremely unlikely YTD% is accurate, at least in the way most people would define a "YTD%" headline in the context VRX used.

 

http://ir.valeant.com/files/doc_presentations/2015/Q22015-Earnings-Deck-Final-August-11-Revised-(1).pdf

http://ir.valeant.com/files/doc_presentations/2014/2Q14%20Presentation%20Draft%20Final2.pdf

http://ir.valeant.com/files/doc_presentations/2014/1Q14%20Presentation%20Final2.pdf

 

One more that I couldn't follow:

 

4Q14 presentation discusses organic growth on the 1st slide (p.4). VRX grew rev from $2.064b (2013) to $2.280b (2014), which is a 10.5% increase (reported as 10%). However, they mention that negative FX effects caused rev to be lower by -$42m, which would have given them a 16% organic growth. However, it would take at least $104m drop from FX to bring growth up to 15.5% (the lowest possible number that can round to 16%, which was report). Using their -$42m number, "organic growth ex-currency changes" is just 12.5%.

 

A point of confusion I have is on p.7, which is another BOL slide (see 2nd pic attached). What the hell does "2014" mean!? They have a column for Y/Y%, so I'm confused what this is intending to show. I'm also fairly confident that the growth since acquisition column can only be total return and not CAGR or average (given the 2013 S-1). This assumes that BOL had a rough 18 months between S-1 and acquisition even though VRX paid a lofty multiple for generally commoditized healthcare-related products.

 

*As a side note, VRX constantly changes the type of growth measured within the same slides and presentations (as exampled by AZ_Value and above), which makes it extremely difficult to interpret what they mean for a given data point.

 

http://ir.valeant.com/files/doc_presentations/2015/20154QPDF_v001_q218yv.pdf

 

 

Finally, how the hell did Addyi (Sprout Pharmaceuticals) get approved!? It's not worth a huge write-up, but the data seems to suggest that this barely has an effect and the most significant results were seen in men (which is a completely different hypothesis/study). There's an interesting argument to be made that the FDA only approved this because of pressure from women's groups.

 

Also, it's pretty obvious that R&D costs will be slashed for acquisitions like Sprout since most of the R&D costs are no longer necessary. VRX is not innovative in this way and I think they may be painting themselves into a corner by focusing their business model on such an extreme view. It's not like the other major pharmas increase R&D after a compound is approved. Of course it sounds logical, but that's only because every major biotech has already been doing this for decades! Nearly every major pharma invests heavily in late phase-3 or recently approved compounds just like VRX (I thought this was called "reloading the pipeline" or something).

 

It's worth noting that the majority of GILD's market value is currently being supported by a future approval of TAF, which is a combination of multiple compounds they already patented. It's only because of continued R&D that GILD still has any value above cash and 2-3 years of future cash flow (~40%-50% of the current market value).

 

NOTE: A DCF valuation model being discounted at 10% will still have non-trivial cash flows contributing to PV up until year 56. If you are only going to receive 10-15 years of cash flows instead of an infinite number, then a discounted cash flow model doesn't make sense, as it will overstate the value of the entity. (Also note, this is likely why Buffett prefers cash flows that he can predict for long periods. Most analysts use DCF models that imply infinite, increasing cash flows; even when it doesn't make any sense to assume so). One should only choose a specific valuation model because it is the best method based on the characteristics on the entity's future cash flows.

 

Valeant excluded the generic business of B&L which is why you see the decrease.  Since that's not broken out separately but rather part of the generic category there is no real way of knowing how it has actually performed.

 

These slides are an absolute shit show in terms of trying to track acquisition performance.  Almost nothing is capital weighted and the YOY/YTD highlights are not useful at all.

[rpadebet]

Liberty,

Always appreciated the thought behind your posts, so thanks for joining in here now.

I have a few comments on your post,

 

1) why focus on the analyst vs the analysis? Hempton or allergans personal interests wouldn't matter as long as their analysis was right. They weren't convincing then to me. I don't know who the fuck az value is neither do I care to know his interest, but his analysis seems simple and clear.

 

2) could you please clarify again why averaging the way VRX does makes sense. So if I did one trade a year and got 100% returns but only 1% of capital was deployed each time, after few years can I claim I am an investor who does 50% annually ?

 

3) do you think 25% IRR is easy on future acquisitions given the capital deployment they have to do?

 

4) if 25% IRR is hard to sustain, don't you agree high organic growth is needed to sustain this valuation?

 

Consider 3) and 4) , add the fact the deal maker has taken a hiatus, add the fact that sprout seems like a gamble, don't you think VRX management here is the one incentivized to show high organic growth. Magically that is where they are using this new method of averaging and reporting performance.

 

If you held hemptons and allergans self interest against them then, it is only fair you hold VRX management self interest against them too... Right?

[Guest Schwab711]

Schwab, 2015 slide has a footnote saying that this excludes the B&L generics, which are now reported with Valeant generics. I think that's probably the difference. I know this is another thing that makes it harder to compare, but the company can't keep acquired companies the same forever, over time they incorporate them ever more tightly into the mothership and this makes comparisons with the original independent companies harder and harder.

 

 

Ok, let's focus on the US since they did break out generics there. Would you agree with my original post now that you see BOL numbers for US broken out? You can calculate the necessary international generic growth required for the 2Q15 numbers to make sense and it's laughable. How do you get comfortable with this?

 

I also don't understand the "lack of reliance on expiring products" comment. The following are all reliant on patent protection:

#1 Xifaxan      $148m (6.5%)

#2 Jublia        $102m (4.5%)

#3 Provenge  $74m  (3.2%)

#5 Xenazine  $66m  (2.9%)

 

That's 4 of the top 5 global products reliant on patent protection accounting for 17.1% of total 2Q15 revenue. If you go through the top-20 products you'll see that the majority rely on patent protection.

 

Finally, why aren't folks adjusting 25% IRR projections for the stock dilution necessary for reaching that performance?

[Liberty]

Liberty,

Always appreciated the thought behind your posts, so thanks for joining in here now.

I have a few comments on your post,

 

1) why focus on the analyst vs the analysis? Hempton or allergans personal interests wouldn't matter as long as their analysis was right. They weren't convincing then to me. I don't know who the fuck az value is neither do I care to know his interest, but his analysis seems simple and clear.

 

Because it matters tremendously. When writing about something as complex as a company, there are thousands of things that you can write about, include and omit. You can describe certain people a certain way or another, etc. I highly discounted Hempton's analysis because he was clearly foaming at the mouth, trying to get Ackman. That impacts his judgement. I'm not discounting AZ Value's post because I don't know who he is and what his motivations are, but the questions about those are totally fair.

 

This isn't a mathematical theorem or a physics equation where all the information is contained within the work. This is more like a journalist writing a feature piece about someone or an event. The end result can be totally different depending on who writes it.

 

2) could you please clarify again why averaging the way VRX does makes sense. So if I did one trade a year and got 100% returns but only 1% of capital was deployed each time, after few years can I claim I am an investor who does 50% annually ?

 

No, but that's not what this says. All it says is: "When we acquire something - forget about size for a minute - on average is does CAGR X". It tells you something about whether they typically create value when buying something. Now how much dollar value was created will depend on the size of each acquisition, but as I said, if what you want to know are dollar amounts, these can be found in the regular financials. How the company is doing is the cumulative performance of all its acquisitions, right? Certainly not the base tiny company that Pearson took over in 2008...

 

Dollar-weighting it on that slide would have been fine, but it would have said something completely different. For example, if you have an acquisition with a big tail product that is declining in revenue, but you are still making good money on it because you paid little for it, that decline will hide all the good performance of your other decisions.

 

I don't think there's a perfect metric to put at the bottom of that slide. They're all flawed. Best to look at it line by line anyway, and to try to understand why each line looks like it does (declining revenue don't always mean value destruction -- as I said, depends how much you paid for that big tail product).

 

3) do you think 25% IRR is easy on future acquisitions given the capital deployment they have to do?

 

I think they would probably have done better than that on Allergan, and that was bigger than the size of the whole company at the time. I don't know, but I think they have a good track record of both being opportunistic and walking away when the deal stops being good. And if acquisitions become hard for a certain period, they have other levers to pull (they've modelled a debt paydown scenario, and it looks pretty good. Could also do buybacks depending on stock price).

 

4) if 25% IRR is hard to sustain, don't you agree high organic growth is needed to sustain this valuation?

 

I think some organic growth over the cycle is a must, but I don't think that's a problem so far. They've beaten my organic growth expectations lately and some of their new products are having very successful launches.

 

Consider 3) and 4) , add the fact the deal maker has taken a hiatus, add the fact that sprout seems like a gamble, don't you think VRX management here is the one incentivized to show high organic growth. Magically that is where they are using this new method of averaging and reporting performance.

 

What are you talking about? They just tried to buy Allergan, then they bought Salix, and deployed a few more billions in smaller deals. Hiatus?

 

If you held hemptons and allergans self interest against them then, it is only fair you hold VRX management self interest against them too... Right?

 

VRX management's self interest is for the company to do well for the very long-term, so I'm holding that as a positive. If they have a short-term bump but things crumble over time, they'll lose more than anyone because they can't get out - even Ackman, Greenberg, and the Sequoia folks don't have as much of their net worth in VRX as Pearson does.

[Liberty]

All right, I'm not going to be sucked in repeating all kinds of stuff that I said 5 times earlier in this thread now that VRX is back in the spotlight and all kinds of new people are joining the fray, but I'll say that I don't think anyone ever said that Valeant doesn't have significant patent protected products. Just that patents cliffs for the near future are very small, that a lot of their stuff is in areas of lesser generics competition and where it's easier to do reformulation and extension work, etc. They also have a very diversified portfolio of products compared to many other pharmas, which reduces the impact of losing any single product (ie. don't have a couple billion-dollar blockbusters on which everything depends). A lot of smaller products also add up to a lot of revenue when you put them together (lots of OTC, branded generics, etc), even if not in the top 5.

 

A 70-80bn company who's biggest product is 148m (which they just acquired) isn't too dependent on any one thing...

 

And btw, Jublia was internally developed and recently launched (if I remember correctly, it was mentioned somewhere that the cost of developing it was something like 50m). No R&D, yea....

[rpadebet]

So Addyi works slightly different than Viagra , it apparently targets neurotransmitters in the brain to try increase sexual desire....hmm

 

you think doctors and women would be willing to fuck with the brain chemistry to fuck once more a month..that's the documented libido effect?

 

And it causes unconsciousness taken with alcohol (wine)...

 

I am pretty sure people taking it would try it with a lot more things than alcohol...if Viagra use cases are any indicator...let's see the effects of this one :).

 

1 billion doesn't seem high wrt ev, but if you start getting lawsuits then ...

women's rights group cut both ways...

[Liberty]

So Addyi works slightly different than Viagra , it apparently targets neurotransmitters in the brain to try increase sexual desire....hmm

 

you think doctors and women would be willing to fuck with the brain chemistry to fuck once more a month..that's the documented libido effect?

 

And it causes unconsciousness taken with alcohol (wine)...

 

I am pretty sure people taking it would try it with a lot more things than alcohol...if Viagra use cases are any indicator...let's see the effects of this one :).

 

1 billion doesn't seem high wrt ev, but if you start getting lawsuits then ...

women's rights group cut both ways...

 

If you think VRX is dumber about acquisitions and drug potential than anyone with a cursory understanding of this drug, sure... Or maybe they know better than you and are good at this stuff.

[rpadebet]

So Addyi works slightly different than Viagra , it apparently targets neurotransmitters in the brain to try increase sexual desire....hmm

 

you think doctors and women would be willing to fuck with the brain chemistry to fuck once more a month..that's the documented libido effect?

 

And it causes unconsciousness taken with alcohol (wine)...

 

I am pretty sure people taking it would try it with a lot more things than alcohol...if Viagra use cases are any indicator...let's see the effects of this one :).

 

1 billion doesn't seem high wrt ev, but if you start getting lawsuits then ...

women's rights group cut both ways...

 

If you think VRX is dumber about acquisitions and drug potential than anyone with a cursory understanding of this drug, sure... Or maybe they know better than you and are good at this stuff.

 

No need to get personal liberty... It's just an investment

I accept i am only spouting what I read elsewhere. Thought it was funny that with the drug female libido could increase chances of having sex from 0.5-1 time a month.

 

I am sure you hand your guy the Coors lite once a month you can have half the sex anyway.

[original mungerville]

Look, I am not a big fan of big pharma and some of these crazy pills which are given and taken as a quick fix without attempting some other more natural method which could work just as well. I especially don't like depression drugs and probably not this Addyi which apparently works in a similar way in the brain. But hey, the FDA seems to think this is safe and on balance good for society. They are probably wrong in my view, but what am I going to do about it? Sell all my Valeant shares because an FDA approved drug they bought with 1% of their net worth I don't think helps society? 

 

So, this thing was borderline and just gets approved after a few prior attempts. Now because it just got approved, is that a positive in any way (ie does this mean competition will be less? ie will it be harder for competitors to get something approved?) or is it all negative.

 

Regardless, $1 billion seems like a cheap option. Sure there may be lawsuits at some point, but what if this thing sells like crazy? $1 billion could look like a steal. Last time I checked, sex sells.  :P :P :o :P :P

[Liberty]

So Addyi works slightly different than Viagra , it apparently targets neurotransmitters in the brain to try increase sexual desire....hmm

 

you think doctors and women would be willing to fuck with the brain chemistry to fuck once more a month..that's the documented libido effect?

 

And it causes unconsciousness taken with alcohol (wine)...

 

I am pretty sure people taking it would try it with a lot more things than alcohol...if Viagra use cases are any indicator...let's see the effects of this one :).

 

1 billion doesn't seem high wrt ev, but if you start getting lawsuits then ...

women's rights group cut both ways...

 

If you think VRX is dumber about acquisitions and drug potential than anyone with a cursory understanding of this drug, sure... Or maybe they know better than you and are good at this stuff.

 

No need to get personal liberty... It's just an investment

I accept i am only spouting what I read elsewhere. Thought it was funny that with the drug female libido could increase chances of having sex from 0.5-1 time a month.

 

I am sure you hand your guy the Coors lite once a month you can have half the sex anyway.

 

I used the word 'you', but it wasn't meant to be personnal in any way other than addressing what you said. No other subtext.

 

I think people are way too quick to label deals good or bad based on little info. Same thing happened with Provenge. Maybe the deal will turn out to be bad, but I think at this point, with this track record, we should at least give them the benefit of the doubt that they know what they're doing.