VRX - Valeant Pharmaceuticals International Inc.

[Picasso]

There is no terminal value on IRR calculations.

 

Oh and by the way, $16 dollars a year from a $100 dollar investment over ten years isn't a 16% IRR.  It's more like 9%.

 

Go back to school my friend.

 

Are you kidding me?  Why would there be a terminal value on the IRR calculation?  IRR is the cash return from a cash outlaw today.  You don't get to claim the cash inflow of the value of the business in ten years or whatever.  Now if you want to say what the cash flows will look like in years 10-30 and beyond, then that is a different story.  But the formula itself will give little value to those long-term figures. 

 

Here: http://www.calkoo.com/?lang=3&page=26

 

Plug in your your $100 and $16 flat per year and see where the IRR sits.  It's going to help you rethink your thesis a bit.

[original mungerville]

There is no terminal value on IRR calculations.

 

Oh and by the way, $16 dollars a year from a $100 dollar investment over ten years isn't a 16% IRR.  It's more like 9%.

 

Go back to school my friend.

 

Are you kidding me?  Why would there be a terminal value on the IRR calculation?  IRR is the cash return from a cash outlaw today.  You don't get to claim the cash inflow of the value of the business in ten years or whatever.  Now if you want to say what the cash flows will look like in years 10-30 and beyond, then that is a different story.  But the formula itself will give little value to those long-term figures. 

 

Here: http://www.calkoo.com/?lang=3&page=26

 

Plug in your your $100 and $16 dollars flat per year and see where the IRR sits.  It's going to help you rethink your thesis a bit.

 

If you need to know, there is a terminal value because most jokers who do an IRR assume you make the cash flow in year 10, and then on New Year's Eve you sell the business which would make sense because your cash flows from Year 11 and on are ZERO. Selling the business means you have to net present value it or put a number to what it is worth - which usually includes a discounting. Alternatively, you assume much longer term cash flows than 10 years or the 15 years in your little link.

 

Don't think every little calculator on the Internet can make up for not understanding Finance 101.

[rb]

There is no terminal value on IRR calculations.

 

Oh and by the way, $16 dollars a year from a $100 dollar investment over ten years isn't a 16% IRR.  It's more like 9%.

 

Picasso - you clearly don't understand IRR calcs. There's no such thing as a 10 year IRR. Just IRR which includes all cash generated from an investment.

 

Can we look this thread for a few days until everyone cools off please?

+1 It's like Donald Trump on Twitter. lol

[Guest wellmont]

Again nothing you guys have started involve numbers.  It's still a story guised under "platform value" and "qualitative business qualities."  The most wellmost said to this was cash EPS but has he even spent any time saying why we should use cash eps on the equity versus maybe cash eps + interest expense into the enterprise value?

 

That's all fine and dandy but that doesn't sound like sound value investing to me.

 

no my contention is the "numbers" being focused on here are the wrong thing to focus on. They do not amount to an investment case. This analysis is filled with numbers. Lots and lots of them. Does that, by definition, mean its an analysis that gets to the crux of whether this is a good investment or not? I will ask again. Does anybody here have the conviction to make a substantial short bet on VRX based on this analysis? that's a simple question.

 

Plenty of folks have made lots and lots of money by simply betting on the right People. People in Omaha did this. I have met some people who did this. They never needed to crack a 10K. If they had it might have Dissuaded them, so they were smart not to.  Carol Loomis made a massive bet on Berkshire Hathaway after having lunch with Buffett once. And this was before anybody knew who he was. Do you think she peppered him with questions about how he accounted for some acquisition he made 3 years ago? Buffett once Advised his shareholders that if Tom Murphy ever started another company "buy the stock". he did not say do weeks of research on it's m & a accounting, and then buy the stock.

 

you think people here have not studied this company simply because they can't produce a deep dive into what they did 3 years ago with a small acquisition. that would be misguided. There is a substantial body of knowledge and due diligence that exists in the public domain on this company for anybody who cares to understand it more.

 

There is a book called "you can be a stock market genius". I am not a genius so I read the book. Many times. In this book he states to his audience, which was intended for novice investors, that you can have very good investment results without having to do deep dives that takes weeks of research into 10ks.

[original mungerville]

Ya, but you do need to understand what a payback is or payback period is, or how to calculate a return on investment like an IRR or something.

 

And I got excited here because for people who don't know how to go through a 10k in detail or have a full understanding of accounting, etc - and who are trying to invest their hard-earned money, people who come on here trying to pretend they do that stuff, and then throw in bogus IRR calculations and payback periods can really mess up those former people. To me, that is just not virtuous and so call me old-fashioned, but that does not sit well with me.

[Liberty]

Can everyone calm down and take some of the side discussions to private messages please? Thank you.

[Valueguy134]

And most importantly AZ never even said the company or asset is worthless in ten years.  He's just saying what kind of crazy numbers you need to get there. 

 

He even shows you the crazy numbers in year ten which doesn't look bankrupt to me.

 

More importantly it highlights how vague "20% IRR and 5/6 year payback" is.  20% over what time frame, a year?  Then you get your capital back over 5/6 years?  You can get your capital back in 5/6 years and still end up with very low IRR's.  That is sort of misdirection in terms of what their guidelines for financial returns are.

 

What are you talking about? What do you think is the "Year 11" number in AZ's calculation. I'll give you a hint: its "zero". And Year 12? Guess...its zero. Its zero, the business produces good money until year 10 and then produces ZERO thereafter. Now that's a patent cliff!!!

 

So they spend a ton of money, and I mean a ton, cause if you weigh the $38 billion of debt they used to make purchases in dollar bills, I guarantee its over a ton. You can't come and say that they will make their money in the later years,  interest just doesn't work like that. With interest being 1/8th of your revenue, you need cash now, you can't wait for the growth fairy to pop up in year 10 cause the debt will crush you. If you don't have explosive growth in the early years, I have a hard time seeing how it will explode in 10-15 years, especially with that patent expiring. Plus once you start going past 10-15 years, the value of the dollar drops significantly, with time value of money and all.

 

Interest is 1/8 of the revenue, right. What is EBITDA over revenue? What is that ratio? Then put the two together, and tell me what the ratio of EBITDA to interest is. After that, let's have a conversation.

So it sounds like you haven't done the math, but I'll do you a favour and give it to you on an LTM basis.

 

7.38x Net debt/EBITDA

3.58 Ebitda/Interest

 

Also, the magical thing about VRX, if you don't mention the amount you spend on CAPEX and acquisitions, you actually get that growth for free.

 

Great, now as AZ_Value said, they always "magically" make their numbers and they have given 2016 projections not including IBD, so do that again on a forward TM basis including your best guess of the IBD impact, and we can get started on our conversation.

 

Like I said, I only glance at the numbers, I don't dive in. But it's clear you have done your due diligence.  Pass it along, I'd love the information.

 

So to help along, they just bought Salix with limited EBITDA / revenue recognition issues - where they are expecting significant synergies which will increase EBITDA and they are also expecting to work through the inventory/revenue recognition in 2015 (PLUS the IBD confirmation which opens up a whole new business but forget even that for now). Why would you include ALL the debt they used to buy Salix when almost none (ie only a quarter or so of the limited effectively pre-merger Salix EBITDA is included) of the 12 month EBITDA is included? And then you give me these ratios to start a conversation? They are as bad as starting the conversation with 1/8th of revenues.

 

Wow, I thought we were trying to be diligent here like AZ_Value says we ought to be - God bless him.

 

Lol why can't you give me a single number to show me what you think the performance will look like.  You have done the due diligence, is a rough calc not even handy? Stop telling me what management has fed you, cause everyone keeps repeating it, what have you looked at, cause it sure does not sound like you looked at anything else other than call transcripts.

 

 

[original mungerville]

Let's start by taking the Salix debt off of your debt total...and determine the implied interest which I would assume would be 30/38ths or less of the interest expense number in your ratios.

[jschembs]

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.

 

Source please.

 

 

 

TIA

 

The Sanitas financials that people were supposed to have read right?

 

As at 30 December 2011 Jelfa S.A. transferred all its intangible assets, related to the medicines licenses, which in total

amounted to LTL 20,042 thousand as contribution in kind to 36.56% of the associate company Valeant IPM sp. z o.o.

The Group value of the transferred intangible assets is equal to LTL 19,576 thousand (Note 9). In addition to this,

Jelfa S.A. transferred cash in amount of LTL 210 thousand, LTL 59 thousand of trade receivables and LTL 124 thousand

of trade payables. Total Group cost to this associate company amounts to LTL 19,721 thousand.

As at 31 December 2011, 100% of Valeant IPM sp. z o.o. total assets fair value amounted to LTL 1,337,105 thousand,

total liabilities fair value amounted to LTL 4,763 thousand, while 2011 revenues were LTL 65,115 thousand and 2011

profit was equal to LTL 948 thousand.

The fair value of Valeant IPM sp. z o.o. net assets, attributable for the Group, amounted to LTL 487,104 thousand and

exceeded the cost of the Group to this associated entity by LTL 467,383 thousand, which was recognized in the Group

profit or loss as negative goodwill on the associate entity acquisition, respectively.

 

http://www.nasdaqomxbaltic.com/upload/reports/san/2011_q4_en_ltl_con_ias.pdf

 

Not a VRX expert at all. Lmk if this is the wrong disclosure.  Also look at the cash flow from operations. Very different from CapIQ.

 

Those are in LTL, his figures are in USD (approximately 3:1 right now).

[Liberty]

48 hours later and now I'm agreeing with Liberty!

 

First part, completely agree! There are dozens of examples you can find of pharmaceutical companies who continue earning their rev/profit post-patent expiration. There's a reason I didn't continue my patent-expiration concerns past the top-5 (though I probably could have continued through the top-10 or so). It's tough to make a case that some of these medicines will see generic competition when you consider the cost of manufacturing vs the future profits with competition. This is pretty similar to the Buffett quote about what it would cost to compete with Coca-Cola.

 

The majority of the patent-expiration I mentioned earlier is at least 10 years out and most expire between 2028-2032. I really think it is worth other folks' time to map out all the products from each acquisition and the associated patents or other relevant characteristics. As Liberty mentioned, this is an extremely complicated company. That doesn't mean it's good or bad, but investors should at least understand that many dozens of hours of work are required to have a basic understanding of the return mechanics. Any one sentence summary of VRX is likely going to be wrong.

 

I really enjoyed AZ's work because the points brought up are quite interesting if the work were complete, but I think it's is premature to claim fraud or anything of the sort. One should really have a rigorous and comprehensive case prior to any accusations. The onus is definitely on the investor when going in the negative direction and I have yet to see any work that makes a strong case.

 

Finally, I don't think following the cash from acquisitions is going to provide sufficient proof one way or the other with regards to fraud. As Liberty mentioned, a lot of these exact same claims could be made with regards to Berkshire. I do think the onus is on us, as investors, to reconcile the gaps cited by AZ towards the end of his 2nd post before making any acquisitions. Proof of fraud should be clear and complete. Ultimately, I think the true value of VRX is going to be determined by how they account as opposed to what they have reported. In my opinion, the single biggest value component of VRX has thus far gone unmentioned (I know that sounds cryptic and I normally wouldn't make such a comment before I finished my work on the topic, but it seems strange that there is so much concern over AZ's work without this data point even being mentioned!). I really don't think AZ's content from today should be much of a surprise considering I mentioned the 2Q15 cash payback slide 2 days ago without any response. Sanitas is the perfect example of more work is necessary to have a complete view of this, ultimately trivial, transaction (citations for how asset acquisition accounting differs from equity acquisition accounting should probably be made - I think that will at least partially reconcile the gap for Sanitas). A lot of the necessary details to value VRX are available, it's just spread out over many filings.

 

Thanks for taking the time to dig in, I think you're doing very good work and I appreciate some of the private messages we've exchanged. I hope you'll keep sharing your thoughts.

[original mungerville]

Sorry, take out $14.5 billion in debt off of your 38 billion so 23.5/38 ths of your interest expense as well.

 

"The companies said the deal had an enterprise value of $14.5 billion, which would include Salix's debt and any cash on hand. Valeant will pay $158.00 a share, valuing the all-cash transaction at about $10.1 billion."

 

http://www.reuters.com/article/2015/02/23/us-valeantpharms-salixpharms-idUSKBN0LQ0V420150223

 

[Hielko]

Plenty of folks have made lots and lots of money by simply betting on the right People. People in Omaha did this. I have met some people who did this. They never needed to crack a 10K. If they had it might have Dissuaded them, so they were smart not to.  Carol Loomis made a massive bet on Berkshire Hathaway after having lunch with Buffett once.

There are also people who invested in Madoff after one lunch. Ok, I admit I'm just making that up: but it is probably true. Most people who invest in someone based on trust are just lucky if they get it right. Most people who invested in Buffett would probably have invested in Madoff if they would have had that opportunity instead. Luckily there are more honest people than total frauds, so usually that means it's going to work out. But no alpha is added unless you are extremely good at reading people.

Are you kidding me?  Why would there be a terminal value on the IRR calculation?  IRR is the cash return from a cash outlaw today.  You don't get to claim the cash inflow of the value of the business in ten years or whatever.  Now if you want to say what the cash flows will look like in years 10-30 and beyond, then that is a different story.  But the formula itself will give little value to those long-term figures.

Sorry Picasso, but you are totally wrong. IRR numbers without taking into account a terminal value are pretty useless. What if we do a 1 year IRR calc? To make a 20% IRR the business needs to generate 120% of the purchase price in cash flows the first year? I'm in the skeptical about VRX camp, but those IRR numbers are wrong.

[Guest wellmont]

There are also people who invested in Madoff after one lunch. Ok, I admit I'm just making that up: but it is probably true. Most people who invest in someone based on trust are just lucky if they get it right. Most people who invested in Buffett would probably have invested in Madoff if they would have had that opportunity instead. Luckily there are more honest people than total frauds, so usually that means it's going to work out. But no alpha is added unless you are extremely good at reading people.

 

I am pretty sure she could have invested with madoff, but passed. I am pretty sure lots of people who bet on buffett and sequoia passed on madoff. investing is about judgement. judgement about facts, situations, people. that's all it comes down to. do you invest with this person, or that person? do you bet on this report from an anonymous blogger, hempton, chanos, and the other bears, or do you bet on pearson valueact sequx and ackman, and your own due diligence and gut? it's a decision right? do you bet on the arcane analysis of a small merger from 3 years ago? or do you bet on the accumulated record of cash earnings growth shown in the 10ks over several years? lots and lots of little decisions adding up to a big one. do you bet money on it? that's what it comes down to. Conviction.

 

I am not predicting who will be right. but everyone can make that bet. investing is about judgement. that's all it's about.

[Valueguy134]

Sorry, take out $14.5 billion in debt off of your 38 billion so 23.5/38 ths of your interest expense as well.

 

"The companies said the deal had an enterprise value of $14.5 billion, which would include Salix's debt and any cash on hand. Valeant will pay $158.00 a share, valuing the all-cash transaction at about $10.1 billion."

 

http://www.reuters.com/article/2015/02/23/us-valeantpharms-salixpharms-idUSKBN0LQ0V420150223

 

so I took the debt value as of Q2/15.....the article is as of Feb 2015 with the deal closing shortly after. Why would my debt number be wrong? Also, before you point out the numbers don't match, it's because I'm looking at it in CAD, but then again my earnings are also Cad, so net, the ratios are the same.

[Liberty]

Some info from last year just to put things in perspective for those who haven't looked at the overall portfolio of products and what makes some products more "durable" than others:

 

http://i.imgur.com/NBay6fU.jpg

 

http://i.imgur.com/KPCSaL7.jpg

 

http://i.imgur.com/RmZYuZT.jpg

 

http://i.imgur.com/C3myuTW.jpg

 

http://i.imgur.com/aA5CUtm.jpg

 

Since then with Salix they've become a bit more concentrated in the top products, but they've added a new therapeutic area where they have a leadership position, which is diversifying, and the Salix products will probably keep growing faster than the average legacy Valeant products for a while.

[Picasso]

My point is that IRR is determined by how much cash you get back from your investment. Valeant would have to sell the business to get that final cash inflow to determine what the return is. You can't just add the value without knowing what the cash flows in years 10+ look like, and the time value of money especially when you're looking at 20% returns isn't going to assign much value to it today. So it's not going to move the needle on the IRR.

 

The terminal value is only meaningful if you're looking at it as a cash inflow at some point. And we aren't even getting into what the long-term cash flows of these acquisitions might look like. Like I said, I want to know what time frame VRX is looking to achieve these returns over. I suppose it can vary but it relies on constant deal making and suckers on the way out as well as coming in when doing acquisitions and divestitures.

[Liberty]

There are also people who invested in Madoff after one lunch. Ok, I admit I'm just making that up: but it is probably true. Most people who invest in someone based on trust are just lucky if they get it right. Most people who invested in Buffett would probably have invested in Madoff if they would have had that opportunity instead. Luckily there are more honest people than total frauds, so usually that means it's going to work out. But no alpha is added unless you are extremely good at reading people.

 

This is very true, which is why when you invest in a company that is a good part the brainchild of a capital allocator, you need to understand their strategy, why it works, and how they think.  You need to become really comfortable with them. Judging people is a skill that not everyone has. I don't think the people here who have come to trust Pearson and his strategy have done so after "one lunch". Same for Malone or Nick Howley or Mark Leonard, or Buffett.

 

No one here understands everything that's going on with the acquisitions at Constellation Software, I can guarantee you that. The only reason why Constellation doesn't have the bears that Valeant does is probably because they disclose even less about their acquisitions and they don't have a media narrative, so they fly under the radar and there isn't much for people to sink their teeth in. I could write similar things about how people don't really understand what's going on in various divisions of JNJ, MA, and IBM either, you get my point.

 

Yet should the company be ignored just because one cannot build a tidy spreadsheet model where everything adds up? That's where investing being a probabilistic thing comes in. You can sometimes miss the forest for the trees.

[Hielko]

I am pretty sure she could have invested with madoff but passed. I am pretty sure lots of people who bet on buffett and sequoia passed on madoff. investing is about judgement. judgement about facts, situations, people. that's all it comes down to. do you invest with this person, or that person? do you bet on this report from an anonymous blogger, hempton, chanos, and the other bears, or do you bet on pearson valueact sequx and ackman, and your own due diligence and gut? it's a decision right? do you bet on the arcane analysis of a small merger from 3 years ago? or do you bet on the accumulated record of cash earnings growth shown 10ks over several years? lots and lots of little decisions adding up to a big one. do you bet money on it? I am not predicting who will be right. but everyone can make that bet. investing is about judgement. that's all it's about.

Investing is about judgement, but what I'm saying is that most people's judgement is terrible. And fwiw that's not only when people bet on someone they trust, but also when they bet based on some other analysis. But with every successful fund manager / company there are stories about early investors who invested based on trust and made a killing. Not necessarily because they had great insight, but because every company has these kind of investors. So the companies that become very successful have them too. So my point in that an example of someone who invested in Buffett based on trust isn't telling you anything.

[Hielko]

My point is that IRR is determined by how much cash you get back from your investment. Valeant would have to sell the business to get that final cash inflow to determine what the return is. You can't just add the value without knowing what the cash flows in years 10+ look like, and the time value of money especially when you're looking at 20% returns isn't going to assign much value to it today. So it's not going to move the needle on the IRR.

 

The terminal value is only meaningful if you're looking at it as a cash inflow at some point. And we aren't even getting into what the long-term cash flows of these acquisitions might look like. Like I said, I want to know what time frame VRX is looking to achieve these returns over. I suppose it can vary but it relies on constant deal making and suckers on the way out as well as coming in when doing acquisitions and divestitures.

There are multiple approaches to do it right, you could for example model cash flows indefinitely far in the future or assign some terminal value at some point in time based on an expected valuation ratio or something else. I don't know what VRX's model is, but assuming that there is zero value after 10 years is certainly not it. No one assumes that a business has zero value after 10 years. So it's a totally pointless exercise to show what kind of unrealistic high growth you need to get a 20% IRR when there is no terminal value. Because there is.

[Guest wellmont]

I am pretty sure she could have invested with madoff but passed. I am pretty sure lots of people who bet on buffett and sequoia passed on madoff. investing is about judgement. judgement about facts, situations, people. that's all it comes down to. do you invest with this person, or that person? do you bet on this report from an anonymous blogger, hempton, chanos, and the other bears, or do you bet on pearson valueact sequx and ackman, and your own due diligence and gut? it's a decision right? do you bet on the arcane analysis of a small merger from 3 years ago? or do you bet on the accumulated record of cash earnings growth shown 10ks over several years? lots and lots of little decisions adding up to a big one. do you bet money on it? I am not predicting who will be right. but everyone can make that bet. investing is about judgement. that's all it's about.

Investing is about judgement, but what I'm saying is that most people's judgement is terrible. And fwiw that's not only when people bet on someone they trust, but also when they bet based on some other analysis. But with every successful fund manager / company there are stories about early investors who invested based on trust and made a killing. Not necessarily because they had great insight, but because every company has these kind of investors. So the companies that become very successful have them too. So my point in that an example of someone who invested in Buffett based on trust isn't telling you anything.

 

no not everybody can do it. but even less, far less, can make any sense at all of that analysis. zero. and even if they do, it's still trust right? you're trusting that analysis, that he didn't mess up somewhere, that he doesn't have his own "bias" that colored his report. Or are you going to spend a month tearing through the 10ks too? Is that a good use of time?

 

If you go that route, you have to make sure you are interpreting things correctly in your own mind. You might misunderstand a key detail. And here's the thing. even if you do that much work on a company, hours and hours of work, you can still screw up (or not) and still get killed in a stock. I mean Hempton spent weeks constructing an elaborate bear case on Valent and got absolutely crushed. What if you trusted those blog posts? Enron had many analysts tearing through the 10ks. But they didn't use good judgement and didn't focus on what mattered, they didn't judge the people well, they didn't understand incentives. If you do tons and tons of work and decide not to invest or god forbid short it, and the stock soars without you on board, that's a mistake no?

 

All investing is trust based. All of it is probabilistic based. You can't get around that. If you invest, if you take risk, you have to trust Somebody. Place your bets.

[original mungerville]

Sorry, take out $14.5 billion in debt off of your 38 billion so 23.5/38 ths of your interest expense as well.

 

"The companies said the deal had an enterprise value of $14.5 billion, which would include Salix's debt and any cash on hand. Valeant will pay $158.00 a share, valuing the all-cash transaction at about $10.1 billion."

 

http://www.reuters.com/article/2015/02/23/us-valeantpharms-salixpharms-idUSKBN0LQ0V420150223

 

so I took the debt value as of Q2/15.....the article is as of Feb 2015 with the deal closing shortly after. Why would my debt number be wrong? Also, before you point out the numbers don't match, it's because I'm looking at it in CAD, but then again my earnings are also Cad, so net, the ratios are the same.

 

Well if you took the value as of Q2 2015, with a December 31 year-end, would that not be debt as at June 30th 2015 which would include debt to finance an acquisition closing shortly after February 2015?

[Guest Schwab711]

Sorry, take out $14.5 billion in debt off of your 38 billion so 23.5/38 ths of your interest expense as well.

 

"The companies said the deal had an enterprise value of $14.5 billion, which would include Salix's debt and any cash on hand. Valeant will pay $158.00 a share, valuing the all-cash transaction at about $10.1 billion."

 

http://www.reuters.com/article/2015/02/23/us-valeantpharms-salixpharms-idUSKBN0LQ0V420150223

 

so I took the debt value as of Q2/15.....the article is as of Feb 2015 with the deal closing shortly after. Why would my debt number be wrong? Also, before you point out the numbers don't match, it's because I'm looking at it in CAD, but then again my earnings are also Cad, so net, the ratios are the same.

 

Salix closed on Apr 1st, 2015 for $173/share. A 2nd tender was agreed upon on Mar 16th, 2015, which canceled the Feb tender offer. The deal came to $15.8b EV. This thread is losing all of it's value at this rate.

 

Final deal notice from Valeant's website:

http://www.valeant.com/Portals/25/PDF/Salix%20FAQs.pdf

 

Valeant's tender notice:

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-And-Salix-Agree-On-Amended-Terms-To-Merger-Agreement/default.aspx

[Liberty]

Now that we're on the topic of probabilities, here's what my mental model of the situation is telling me.

 

I think it's much more likely that AZ Value is coming to the conclusions that he's coming to because of his imperfect information about the situation. I believe that if he could sit down with Pearson and the CFO and ask them questions, they would go "the reason for this is X, and the reason for that is Y, and here, let me show you our deal models and the formula we use to compute our IRRs" and that would probably clear up 99.9% of it. I'm sure there are lots of complexities with IP transfers and merging existing businesses into acquired ones, international rules, DTLs, accounting choices on one way to account for things vs another, etc.

 

I think it's a lot less likely that AZ has pierced through a veil of deception where the company is basically lying about the performance of its businesses, which would either mean that the revenue and cashflow numbers in the 10K are lies, because they are just an aggregate of the performance of all acquisitions thus far, or that they are true and they are getting these kinds of numbers with much lower performance than reported in the underlying businesses, which would be impressive in itself but doesn't really make sense. Because let's not sugarcoat it, if the businesses are really performing one way but the management is saying something else that isn't just an honest mistake, that's lying.

[original mungerville]

My point is that IRR is determined by how much cash you get back from your investment. Valeant would have to sell the business to get that final cash inflow to determine what the return is. You can't just add the value without knowing what the cash flows in years 10+ look like, and the time value of money especially when you're looking at 20% returns isn't going to assign much value to it today. So it's not going to move the needle on the IRR.

 

The terminal value is only meaningful if you're looking at it as a cash inflow at some point. And we aren't even getting into what the long-term cash flows of these acquisitions might look like. Like I said, I want to know what time frame VRX is looking to achieve these returns over. I suppose it can vary but it relies on constant deal making and suckers on the way out as well as coming in when doing acquisitions and divestitures.

 

No, the terminal value at year 10 will make a huge difference in the IRR calculation. Don't you see the problem? AZ is assuming that Valeant will get zero cash flows in every year after Year 10 from every acquisition it makes. This means either the business suddenly disappears OR Valeant sold the business. Because I don't believe in magic, Valeant would have to sell the business under AZ's IRR model, and if Valeant sells the business, it will get one big cash payment for that at the end of Year 10.

 

If they don't sell it, and you don't believe in magic, then take AZ's numbers and extend them to include a flat but inflation adjusted yearly cash flow stream from Year 11 to say Year 30, assume the business disappears at that point and then run the IRR again. The result will be materially different.

 

 

 

 

[Picasso]

My point is that IRR is determined by how much cash you get back from your investment. Valeant would have to sell the business to get that final cash inflow to determine what the return is. You can't just add the value without knowing what the cash flows in years 10+ look like, and the time value of money especially when you're looking at 20% returns isn't going to assign much value to it today. So it's not going to move the needle on the IRR.

 

The terminal value is only meaningful if you're looking at it as a cash inflow at some point. And we aren't even getting into what the long-term cash flows of these acquisitions might look like. Like I said, I want to know what time frame VRX is looking to achieve these returns over. I suppose it can vary but it relies on constant deal making and suckers on the way out as well as coming in when doing acquisitions and divestitures.

 

No, the terminal value at year 10 will make a huge difference in the IRR calculation. Don't you see the problem? AZ is assuming that Valeant will get zero cash flows in every year after Year 10 from every acquisition it makes. This means either the business suddenly disappears OR Valeant sold the business. Because I don't believe in magic, Valeant would have to sell the business under AZ's IRR model, and if Valeant sells the business, it will get one big cash payment for that at the end of Year 10.

 

If they don't sell it, and you don't believe in magic, then take AZ's numbers and extend them to include a flat but inflation adjusted yearly cash flow stream from Year 11 to say Year 30, assume the business disappears at that point and then run the IRR again. The result will be materially different.

 

Have you run this calculation?  The result is not materially different, maybe 1 or 2%.  When I get a chance I'll break it out assuming you don't want to.