VRX - Valeant Pharmaceuticals International Inc.

[Guest Grey512]

does anyone know that price of credit default swap for its Valeant debt ?

 

TIA

 

280 on 5yrs, 330 on 10 yrs. I do not know much about CDS spreads so tough for me to say whether this is a 'good' or a 'bad' price.

 

The 2020 paper unsecured debentures with a 5.375% coupon are trading at a 4.915% yield. The yield says the debt market is voting that VRX is not a fraud.

[Green King]

does anyone know that price of credit default swap for its Valeant debt ?

 

TIA

 

No, but bonds are not investment grade. Although there seems to be good demand for them - in recent past I believe they traded at better yields than their ratings would have indicated.

Thanks

I was surprised by the credit rating given the people involved and the price of the stock.

[Green King]

does anyone know that price of credit default swap for its Valeant debt ?

 

TIA

 

280 on 5yrs, 330 on 10 yrs. I do not know much about CDS spreads so tough for me to say whether this is a 'good' or a 'bad' price.

 

The 2020 paper unsecured debentures with a 5.375% coupon are trading at a 4.915% yield. The yield says the debt market is voting that VRX is not a fraud.

 

Thanks for the help do you mind sharing were you got the pricing? I am new do this too, So based on the pricing the 5 years has a 1 in 30 year chance of default and the 10 years has a 1 in 35 years chance of default.

[Guest Schwab711]

CDS spread is the premium per year. Anything that revolves around probability of default (PD), which CDS does, is always an annual rate. You are able to equate the implied PD to an S&P rating (Moody's is not apples-to-apples) to compare how various markets are voting.

[original mungerville]

does anyone know that price of credit default swap for its Valeant debt ?

 

TIA

 

No, but bonds are not investment grade. Although there seems to be good demand for them - in recent past I believe they traded at better yields than their ratings would have indicated.

Thanks

I was surprised by the credit rating given the people involved and the price of the stock.

 

Well they have $30 billion in debt, do non-standard stuff, and make a ton of acquisitions which in the history of corporate America usually go wrong.

[Southpaw]

Hi guys, not sure if anyone posted this already today, but now you know why Valeant bought Sprout...from Ackman's Pershing Square Holdings Q2 letter. Whenever he has a laggard that is biotech or pharma  related he will just dump it into VRX:

 

"Certain Pershing Square employees including myself were pre-FDA approval investors in Sprout and

provided strong references to Sprout management on the quality and character of the Valeant

management team, which were helpful to Sprout as the outcome for Sprout shareholders and its

employees is heavily dependent on how the company and the drug is managed going forward."

[Liberty]

There was a question about VRX R&D at the Sequoia Fund investor day. The answer is pretty much the same one I gave earlier, but people probably listen more to the Sequoia guys than they do to me :)

 

Here it is:

 

Valeant does spend on R&D. I think the company is going to spend, adding Salix and the legacy Valeant businesses, about $300 million. We met with Mike a few weeks ago and he was telling us how with $300 million, you can get an awful lot done. Mike can get a lot done with very little. Jublia is a good example. Jublia is a toenail fungus drug that Valeant just launched last year. It spent $30 − $40 million developing that drug over the last few years, and it is probably going to do more than $300 million in sales this year.

 

Valeant has a number of other compounds in the pipeline, especially on the dermatology side. It bought Dow Pharmaceuticals early on in Mike’s reign at the company — he paid $285 million. Valeant has gotten Acanya out of it, which was a $70 − $80 million drug, and it is getting Jublia now. Valeant has six or seven drugs that it expects to launch over the next eighteen months. One of them, Vesneo, for glaucoma, management thinks could generate as much as $1 billion in sales globally. I think Mike said the company is going to spend less than $100 million on that program, in total. With an R&D budget of $300 million, Valeant can do quite a bit in terms of building its pipeline.

 

In terms of the pharmaceuticals and Valeant’s exposure to patents, one of the things the company has tried to do is go into areas where the company has durable products. Valeant has a lot of branded generic drugs overseas, which are off patent drugs. Valeant has contact lens solutions and OTC pharmaceuticals. It has CeraVe, which is a moisturizer. And Valeant has a lot of drugs that are not going off patent. The key in the pharma game is always, once you have the distribution, once you have a sales force in the ophthalmology space or in the dermatology space, how do you source innovation? You can do that through R&D or you can do that through buying things. Mike is making a big bet that it is cheaper sometimes to buy things, to source that innovation when you have the distribution. So it seems like that model is working. The business is growing right now pretty nicely.

Mike Pearson believed that he could build a large and successful pharmaceutical company without taking the risk of expensive R&D that most large, successful pharma and biotech companies had taken. He would instead do it by focusing on specialties that did not require these risks through lean R&D, zero-based budgeting, minimal taxation, and high returns from the get-go on numerous acquisitions. He would target companies of all sizes in product and geographic areas in which big companies did not compete and in which there was minimal reimbursement risk. By avoiding all of those other risks, he would be able to take some risk by leveraging his balance sheet to generate very rapid growth and high returns on total capital and spectacularly high returns on shareholders’ equity.

 

http://www.sequoiafund.com/Reports/Transcript15.pdf

[Guest wellmont]

sequioa said it will earn $38 a share next year. mistake?

[loganc]

sequioa said it will earn $38 a share next year. mistake?

 

I would say that is a mistake in the transcript.  Later in the letter there is a quote:

 

In terms of the opportunities, management has guided to earnings of about $11 a share this year and it has given a number for EBITDA that translates into about $16 a share of earnings for next year.

 

I assume they are computing the $16 from the 7.5B Adj. EBITDA guidance for 2016.  That guidance did not include the impact of the IBS-D indication, so that is probably a low estimate.

[Guest wellmont]

it's crazy the guy had the math correct. he said earnings went up 45 times in 7 years from .80. that's the strangest comment. thanks.

[Liberty]

it's crazy the guy had the math correct. he said earnings went up 45 times in 7 years from .80. that's the strangest comment. thanks.

 

Just guessing, but could this be an effect of the biovail reverse merger? Maybe this is based on the original Valeant stock?

[loganc]

it's crazy the guy had the math correct. he said earnings went up 45 times in 7 years from .80. that's the strangest comment. thanks.

 

Just guessing, but could this be an effect of the biovail reverse merger? Maybe this is based on the original Valeant stock?

 

I believe Liberty is correct here. 

 

The quote includes the idea of adjusting for the dividend paid prior to the Biovail merger.  I guess there is some question as to how one would adjust for that dividend in computing these EPS numbers, but it was probably not the best idea to include this commentary in answering the question.

 

 

 

 

[giofranchi]

Valeant (VRX)

On April 1, 2015, Valeant closed the acquisition of Salix, the largest acquisition in its history. Valeant has

rapidly integrated Salix. Highlights of the integration include the realization of $500 million of cost

synergies, the restructuring of Salix’s sales force, and an important FDA approval. Salix’s financial results

since the acquisition have substantially exceeded budget.

Valeant’s second quarter organic revenue growth was 19%, marking the fourth consecutive quarter of

greater than 15% organic growth. This quarter’s results benefited from the successful launch of several

new products, including a portfolio of dermatology products largely developed by Valeant scientists. The

company has materially increased full year sales and earnings guidance.

On its quarterly conference call, management presented a detailed review of its capital allocation track

record representing $40 billion of investments in more than 140 transactions. The results are impressive.

Management has generated an estimated 37% unlevered, after-tax annual rate of return on these

transactions. We believe that Valeant will continue to be able to make attractive acquisitions in light of the

extraordinarily large, fragmented and inefficient pharmaceutical industry.

On August 20, 2015, Valeant announced the acquisition of Sprout Pharmaceuticals, a company which

earlier last week received approval for a female sexual dysfunction drug. We believe that Sprout reflects

the opportunistic nature of Valeant’s business development program. Sprout’s Addyi drug offers the

potential for billions of dollars of future sales in treating a condition for which there are limited alternative

medical treatments. Valeant structured the transaction in a manner which moderates its downside risk in

the event that sales are below projections, while allowing the company to benefit materially if the drug is a

blockbuster. As part of the transaction, Valeant hired the Sprout management team including its superb

CEO Cindy Whitehead.

Certain Pershing Square employees including myself were pre-FDA approval investors in Sprout and

provided strong references to Sprout management on the quality and character of the Valeant

management team, which were helpful to Sprout as the outcome for Sprout shareholders and its

employees is heavily dependent on how the company and the drug is managed going forward. We

discuss Pershing Square’s personal trading policies in detail below.

On July 1, 2015, Valeant hired a new Chief Financial Officer, Rob Rosiello. Rob comes to Valeant

following a long career at McKinsey, where he led the firm’s M&A advisory practice. Former CFO Howard

Schiller leaves Valeant’s executive team after nearly four years of service. Howard will remain with

Valeant as a member of its board of directors and a major shareholder.

Despite a substantial increase from our purchase price earlier this year, we believe that Valeant shares

remain undervalued. We believe that the stock price does not reflect the quality of Valeant’s franchises

and future cash flows, and the business development, capital allocation and operating abilities of its

management team.

--PSH 2015 semi-annual report

 

 

Gio

[AZ_Value]

Hey folks,

 

So this thing has kicked up quite a shit storm. I assumed it would but not this magnitude to be honest, but it's OK. I'll deal with it.

 

Some of it has been quite interesting actually and some even entertaining, someone sent me a funny message saying that Ackman was surely going to send Wall Steet ninjas to kill me in my sleep.

I immediately thought of those Wall Street analysts in their expensive suits coming after me with nunchuks and katanas.

 

If one of you knows how to fight off ninjas, recommendations will be appreciated. Send everything you have, an old rusty musket? I'll take it. You do Tae bo? Please come help. Your kids take karate classes? Send them over. I absolutely have no idea how one fights ninjas.

 

 

About VRX, like I said in a previous post what interests me is the discussion afterwards because I can already see that some of the issues I was sure would come up are indeed creeping up, although I haven't really read this thread since I posted my first write-up, I'll wait to read it all at once and answer everything.

 

But I'll drop a few words... I gave you guys those Sanitas financials last week and told you they could be used to disprove many things Valeant just says then stepped back and waited, and now I just browsed through all the pages that followed and nothing. No one even tried to go and find out how you could use them.

 

All that's happened is that thing that happens on CBF so much where people just talk in a circle and repeat the same things over and over and over and over again... So much so that it becomes the truth, instead of spending their time trying to figure out how and why those things that are being said are true. Charlie Munger calls that "Pounding in what you're shouting out". And that's what happens a lot here unfortunately.

 

Take it from me guys, nothing will ever replace putting in work, there are no shortcuts. None. I learned it the hard way.

Certainly sitting down and listening to so many management presentations that you feel like you're an "expert" on something you really don't know much about is no way to go. But that happens a lot here because after listening to management talk, people then jump on CBF and repeat the same talking points and go to bed thinking they've done their due diligence without once trying to figure out if any of it is true. 

 

Since my first post, instead of trying to understand why some stuff slid by you, you rationalize them to yourselves... yeah I can really see how one should average growth rates to give a clear picture. Really? Or straight up attacking me. Yeah, he has an agenda. He's one of them. Jesus. You should see some of the emails I've gotten.

 

One post on here was actually pretty funny. It said something like "Yeah we'll see what AZ has to say about IRRs"

So let me get this straight, you have guys telling you that they 20-30% IRRs on everything they do without providing much in way of evidence and yet it's my job to prove or disprove it. What is the matter folks? Seriously... Excel has an IRR function. Just go and run numbers...

 

Anyways, that's fine. I can take on that challenge. Here enjoy: https://azvalue.blogspot.com/b/post-preview?token=O1n3cE8BAAA.uZFKDGWRKQQT3v5Al0W2ew.uyO5p5YAsBh03vonTY48CQ&postId=3493039863605893438&type=POST

 

I look forward to reading sometime in the future the fresh round of rationalization that'll take place on this one. Should be fun.

 

I'm not sure what's really happened in the last year that I've kind of been away from CBF but it seems like some folks like Kraven have been silenced and only people who talk about stories won't stop talking. It's gotten too easy to make money it seems.

 

So I'll dish out a brotherly advice to new members of the board, we've seen these things before. Stay away from those that only talk about stories while doing very little meaningful numbers and go look for something that Kraven had called his "Box metaphor" or something like that. It's things like that will make you a better investor and most importantly keep you safe. Not spending your days arguing among yourselves and just repeating the same stuff non-stop.

 

Please. Please. Please. Just be careful everybody. The easiest person to fool is yourself.

 

 

Remember to send help for ninjas

 

AZ

[Hielko]

Seems to me that all your IRR analysis is pretty flawed when you only look at the first 10 years. Especially when you model high growth the majority of the value will be far in the future. Otherwise good piece.

[AZ_Value]

Seems to me that all your IRR analysis is pretty flawed when you only look at the first 10 years. Especially when you model high growth the majority of the value will be far in the future. Otherwise good piece.

 

That's fine.  I tought about that.

 

What I want to see  is what numbers other people are using because IRR returns always seem to be instant when diacussing VRX. So I want to see what numbers they're using past 10 years, let's say over 20 for a company that cuts RD immediately. We'll talk about all of that with durability and stuff.

So people should take you up on your comment and lay out their own assumptions. Let's see for instance the growth assumptions you use if the majority of the cash will come in year 20 vs year 5 to achieve 20% IRR. Oh also square that with a payback period of 5 years.  That should be interesting.  I don't mind different assumptions, like I said. I just want to see them. That's all I want.

[giofranchi]

So I'll dish out a brotherly advice to new members of the board, we've seen these things before. Stay away from those that only talk about stories while doing very little meaningful numbers and go look for something that Kraven had called his "Box metaphor" or something like that. It's things like that will make you a better investor and most importantly keep you safe. Not spending your days arguing among yourselves and just repeating the same stuff non-stop.

 

Just as many smart people fail in the investment business as stupid ones. Intellectually active people are particularly attracted to elegant concepts, which can have the effect of distracting them from the simpler, more fundamental, truths.

--Peter Cundill

 

In my experience either you get the “simple, fundamental truths” about a business right, or you don’t. And it has very little to do with 10-Ks… I am not saying don’t read 10-K! I read lots of them, and enjoy doing so very much! There is no doubt they are very useful! But be careful not to let numbers overwhelm you… Businesses have always been founded and made grown upon new ideas, and it will always be so: first get those ideas right (even if someone calls them “stories” mockingly…), then go through the numbers as much as you like! ;)

 

Cheers,

 

Gio

 

 

[Picasso]

Jesus the responses to a decent bear case are unbelievable.  Now numbers aren't that important?

 

This makes me want to short the crap out of VRX.

[giofranchi]

Jesus the responses to a decent bear case are unbelievable.  Now numbers aren't that important?

 

If yours is supposed to be an answer to my latest post, I have never said that and you don’t pay attention.

 

Gio

 

[Green King]

Jesus the responses to a decent bear case are unbelievable.  Now numbers aren't that important?

 

This makes me want to short the crap out of VRX.

 

Be careful, i will not short something until i know it is going to drop on a catalyst. You don't want to end up in a poor house.

[Green King]

Jesus the responses to a decent bear case are unbelievable.  Now numbers aren't that important?

 

If yours is supposed to be an answer to my latest post, I have never said that and you don’t pay attention.

 

Gio

 

We get your point on what is important in a business is the generator. (IDEA) But you can't say your idea is working unless you show facts that support it. IE 10-Ks or other form of data. like a scientific investigation it has be proven beyond a reasonable doubt and testable by other within the margin of error.

[KCLarkin]

AZ, I see a major flaw in your analysis of Sanitas. You only look at the cash flow directly attributable to Sanitas. Sanitas transferred all of their IP and some other assets to Valeant IPM.

 

- Did Valeant IPM generate cash flow from these assets which don't appear on Sanitas' annual report?

- Did Valeant or it's subsidiaries increase cash flow because of this transaction? Remember, Valeant generates synergies on both sides when it makes an acquisition. There are usually major layoffs within Valeant after an acquisition.

- Was Valeant able to transfer any of the deferred tax assets to the parent? It doesn't look like it.

[Green King]

AZ, I see a major flaw in your analysis of Sanitas. You only look at the cash flow directly attributable to Sanitas. Sanitas transferred all of their IP and other assets to Valeant IPM.

 

- Did Valeant IPM generate cash flow from these assets which don't appear on Sanitas' annual report?

- Did Valeant or it's subsidiaries increase cash flow because of this transaction? Remember, Valeant generates synergies on both sides when it makes an acquisition. There are usually major layoffs within Valeant after an acquisition.

- Was Valeant able to transfer any of the deferred tax assets to the parent? It doesn't look like it.

 

Wouldn't that be stealing? since Valeant doesn't have 100% Control of the Business.

[giofranchi]

We get your point on what is important in a business is the generator. (IDEA) But you can't say your idea is working unless you show facts that support it. IE 10-Ks or other form of data. like a scientific investigation it has be proven beyond a reasonable doubt and testable by other within the margin of error.

 

So I guess you are saying “trust” has no place in business… Right? Usually, I try to spend lots of time valuing the quality of management precisely because I think that trust is important instead. Outside shareholders have access to information that are never 100% complete. As I have said, I would find it very difficult, if not utterly impossible, to reconcile all those non-GAAP results that VRX management presents to shareholders with their 10-Ks. I would say that insider information is required to do that successfully.

 

Let me ask you: if trust has no place in business, how would you explain the PCP acquisition by BRK? Buffett himself admitted that he had never followed PCP closely. Therefore, either the information he got in a very short time was enough for him, or he judged an idea brought by his two investment lieutenants good enough to deploy $35 billion… In either cases trust is involved.

 

Cheers,

 

Gio

 

PS

This being said, I am reading AZ_Value’s post very carefully, like I did with the previous one!

 

[KCLarkin]

Wouldn't that be stealing? since Valeant doesn't have 100% Control of the Business.

 

No because Sanitas received an equity stake in Valeant IPM in exchange for the assets.