VRX - Valeant Pharmaceuticals International Inc.

[AZ_Value]

Any idea if they have any drug(s) they could have significantly raised prices on immediately? If so, not impossible...

 

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.

 

KC, I saw the IP transfer and you're right their system is based around setting up holding companies to own the IP, that's how tax savings happen anyways because that probably gets set up in their most favorable tax jurisdiction. But that will just be transfer pricing intercompany stuff that gets eliminated at the parent level when consolidating.

 

But it's really not affecting how we look at Sanitas, the business, and how it is presented to us.

 

Just take a step back and forget than I'm critical of VRX and you have to disprove everything I say and just look at the business itself.

 

The four quarters prior to acquisition, That's Q3 2010 thru Q2 2011. No IP transfer, none of that. Just Sanitas.

 

Revenue was $133M - Gross Profit was $77M - Cash from ops was $ 33M

 

After acquisition - Thats Q3 2011 thru Q2 2012

 

Revenue was $130M - Gross Profit was $80M - Cash from ops was $11M (this is mostly due to Q3 2011 where there's a big $13M cash burn which makes sense. That's when the deal is happening so you'll have all kind of expenses, legal, integration etc.)

 

KC, this is the same business you're looking at before and after.

 

Only way your point makes sense is if somehow by magic the minute after they're acquired by VRX, Sanitas became so special that they could send up to the parent company all their IP that generated $130M in revenue the year before and STILL manage to keep $130M for themselves.

 

Surely that's not the claim you're making, is it?

 

In Europe they can't. In the US they use (and abuse that). But not in Europe. Sanitas is a European company.

This is a big point with VRX that we'll make sure to discuss.

[KCLarkin]

I went back and looked at the Sanitas earnings from 2010, just to get rid of any divestitures and complicated accounting that happened when they were acquired

 

Ross here is the summary:

- Sanitas is immaterial and we simply don't have enough detail. Was there a price increase? Was Valeant able to use Sanitas tax losses? Was Valeant able to pump existing drugs through Sanitas sales reps? Was Sanitas able to pump existing drugs through Valeant sales reps.

- Using historical cash flow for Salix is just wrong, if you believe the projections provided by Salix management (or VRX or analysts). Bagehot has posted clear evidence that 20% IRR is in fact plausible.

- If you use operating cash flow + interest + taxes + restructuring, I think you will find the numbers for the whole company are in the ballpark (I only looked at 2014).

 

[Valueguy134]

I went back and looked at the Sanitas earnings from 2010, just to get rid of any divestitures and complicated accounting that happened when they were acquired

 

Ross here is the summary:

- Sanitas is immaterial and we simply don't have enough detail. Was there a price increase? Was Valeant able to use Sanitas tax losses? Was Valeant able to pump existing drugs through Sanitas sales reps? Was Sanitas able to pump existing drugs through Valeant sales reps.

- Using historical cash flow for Salix is just wrong, if you believe the projections provided by Salix management (or VRX or analysts). Bagehot has posted clear evidence that 20% IRR is in fact plausible.

- If you use operating cash flow + interest + taxes + restructuring, I think you will find the numbers for the whole company are in the ballpark (I only looked at 2014).

Man I like this, next time I need to go to the bank, I'll just tell them to add my expenses back to my income, and deposit that amount in.  If you're going to say cash in a statement, then one must assume it's cash. I don't recall seeing adjusted cash balance.

[ScottHall]

I went back and looked at the Sanitas earnings from 2010, just to get rid of any divestitures and complicated accounting that happened when they were acquired

 

Ross here is the summary:

- Sanitas is immaterial and we simply don't have enough detail. Was there a price increase? Was Valeant able to use Sanitas tax losses? Was Valeant able to pump existing drugs through Sanitas sales reps? Was Sanitas able to pump existing drugs through Valeant sales reps.

- Using historical cash flow for Salix is just wrong, if you believe the projections provided by Salix management (or VRX or analysts). Bagehot has posted clear evidence that 20% IRR is in fact plausible.

- If you use operating cash flow + interest + taxes + restructuring, I think you will find the numbers for the whole company are in the ballpark (I only looked at 2014).

Man I like this, next time I need to go to the bank, I'll just tell them to add my expenses back to my income, and deposit that amount in.  If you're going to say cash in a statement, then one must assume it's cash. I don't recall seeing adjusted cash balance.

 

I always make sure to have my adjusted cash balance written down just in case of emergencies. In my case, the only difference is the extra $400 I'd have if I wasn't too lazy to fire up TurboTax and have the Feds send me my refund.

[KCLarkin]

Only way your point makes sense is if somehow by magic the minute after they're acquired by VRX, Sanitas became so special that they could send up to the parent company all their IP that generated $130M in revenue the year before and STILL manage to keep $130M for themselves.

 

Surely that's not the claim you're making, is it?

 

We just don't know. Now that the IP is in Valeant IPM, we would need to see Valeant IPM financials to trace. Even then, Valeant IPM is likely licensing IP to other subs. We don't have any evidence to claim this slide is wrong (or right).

 

The most obvious explanation is that they are using EBITA as a proxy for cash. If so, EBITA would be approx $100 million higher than cash flow due to the negative goodwill with the asset transfer. This is my thesis. This would be misleading but immaterial given the size of the Sanitas.

 

 

[Bagehot]

It seems like nobody here and done their due diligence on Valeant. We've got OM, Gio, Liberty, and Writster saying we trust management. This is a bet on people, not numbers.

 

The conversation devolved into a spat about AZ's IRR calcs not taking terminal value into account. I don't think he was doing a super detailed IRR calc... Come on guys, he just assumed flat cash flow over 10 years. He was just demonstrating what management repeats over and over again about their focus on 5-6 year pay back.

 

I went back and looked at the Sanitas earnings from 2010, just to get rid of any divestitures and complicated accounting that happened when they were acquired:

 

It seems like the asset transfer is making it difficult to reconcile the post merger cash generated since close in the Valeant power point. Maybe we can just take a look at 2010 CF from ops:

 

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

 

Cash from Operation in 2010 was 63M LTL. In Q3 2012 USD (2.75 LTL : USD) this is $22.9M. Valeant uses 5 Qs of from Q3 11 to Q3 12. So lets give them a 5.7M bump to compare AZ values Q3'11 to Q3'12 CF from Ops of 14.8M to the 2010 CF from ops + an extra normalized quarter of ~$28.6M.

 

Bagehot says IR directs investors to use EBITA when calculating return.

 

EBITA for 2010 was:

 

108.2M LTL or $39.3M USD

 

Add in another 25% for the missing Q4 2011 and its up to $49M EBITA for 5 quarters ended Q4 2010.

 

Now they also have $57.5M USD worth of selling and distribution, R&D, Administrative, and regulatory expenses for 5 Quarters ended Q4 of 2010.

 

I have no idea how much of this 57.5M Valeant would be able to reduce. Maybe 50%?

 

So now we are up to 68.05M for the 5 Qs ended Q4'10. This is EBITA - 50% of non cost of sales Expenses.

 

This sounds a lot better than AZ's scenario, but I still have a really hard time believing:

 

Valeant could "organically" grow sales the instant they took the portfolio turning 49M in EBITA 20% to 59M

 

decrease costs by 70% to get to a 99M in cash generated.

 

The B&L and Salix examples of 20% IRR are a nice thought experiment too. Valeant might have a good business model but their "Deal Model" looks very suspect.   

 

Valueguy did the same thing for Salix. AZ did the same thing for the whole company. All we are asking for is how do you make the numbers add up? 1+1 doesn't equal 2 in this situation.

 

It is quite apparent that VRX isn't using operations CF for their 5-6 year payback period. We can't reconcile the number with EBITA either, so what metric are they using when showing they are on track for a 5-6 year payback?

 

I don't own any VRX and I never have, but in order for me to invest in something I at least have to understand how to measure its success. I am genuinely interested in VRX if some one can demonstrate how they get their money back from an acquisition in 5-6 years.

 

 

 

I'm not sure why you are having a hard time reconciling to EBITA? I was too lazy to go all the way back to 2008, but from 2011-YTD 2015 (ie excluding the first 3 years of Pearson's tenure), they have generated $12.2B of EBITA, and they are guiding to approximately $10.5B more over the next 18 months. Of that $10.5B, I think it is fair to conservatively state that $1.5B will come from Salix. In actuality it will probably be less, but just to be safe lets assume that. So that means excluding whatever happened in 2008-2010, and the Salix acquisition (since it just closed), VRX has deployed ~$24B of capital which has/will generate EBITA of $21.2B from 2011-2016E (and presumably those assets won't all turn into pumpkins on 12/31/16, esp since ~1/3 of that $24B is B+L which I think everyone can agree largely owns "durable" products). This is an oversimplification, it ignores the base business, for example, but the base business pre Biovail had something like ~$500M of EBITDA, so it doesn't really impact the analysis that much.

[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.

 

I've spoken with IR about this, management uses an Adjusted Present Value approach to valuing deals. They use EBITA as a proxy for unlevered FCF for their cash-on-cash returns calc. As a practical matter, it is impossible to track true CFFO for acquisitions once integrated. In VRX's case, true depreciation (ie excluding intangibles amortization) approximates capex and in any event is not a meaningful driver. Taxes are, obviously, minimal and taken into account. Since this is an unlevered calculation, Interest is not included, they are calculating the return before the impact of financing. The only real quibble is how they adjust for changes in working capital, something I didn't really get what I would qualify as a great answer to. I think most of the discrepancies you noted are driven by this methodological difference, they aren't doing a levered DCF, they are doing an APV which is before interest (the theory being that one values the free cash flow to the enterprise, which is independent of financing, obviously, and then subtracts the value of the debt to arrive at equity value). The only impact debt has to equity value in such a calculation is to increase it by the value of the debt tax shield, and decrease it by the probabilistic costs of financial distress.

 

Not sure if this helps, but given their methodology,a better proxy to compare the cash flows they are presenting in the deal table is really EBITDA and not Cash From Operations.

 

This post is very important and I'm gonna take my time and write a post to address a lot of stuff... I guess I'm gonna have to throw my whole series stuff out of the window because I'll have to show you guys quite a few things along the way.

 

Before I start drafting the post I just wanted to say that all you guys seriously need people like Bagehot around, little things like making sure that the company explains stuff to you rather than going with what they say is what keeps people out of trouble in my humble opinion. I think I posted on page 190 or 195 of this thread. Just look at the discussion about IRRs going on now and compare it to the one going on on the previous 190+ pages. People were just content with repeating numbers they're told mostly.

[Ross812]

I went back and looked at the Sanitas earnings from 2010, just to get rid of any divestitures and complicated accounting that happened when they were acquired

 

Ross here is the summary:

- Sanitas is immaterial and we simply don't have enough detail. Was there a price increase? Was Valeant able to use Sanitas tax losses? Was Valeant able to pump existing drugs through Sanitas sales reps? Was Sanitas able to pump existing drugs through Valeant sales reps.

- Using historical cash flow for Salix is just wrong, if you believe the projections provided by Salix management (or VRX or analysts). Bagehot has posted clear evidence that 20% IRR is in fact plausible.

 

 

Ok, this is what I'm looking for:

 

- If you use operating cash flow + interest + taxes + restructuring, I think you will find the numbers for the whole company are in the ballpark (I only looked at 2014).

 

So I am trying to understand why they use this number for their cash payback calculations.

 

I'm trying to model it as a real estate transaction because its easy to frame:

 

I buy a home for 100k

I put 10k into fixing it up

I have a mortgage on it at 4% for 30 years - 3.2k in interest

I pay 2% tax on it per year so 2k

amort - 3.9k (110k over 28 years)

 

How do I target a payback in 5 years?

 

I rent for 22k/yr - tax rate is 20% so 4k

 

My CF is 22k - 4k (income tax) - 2k (property tax) - 3.2k (interest) - 3.9k (amort)

so my cash flow is - 8.9K payback is  12 years...

 

So we are saying VRX ads back taxes, interest, restructuring cost (I thought they said they added this to the purchase price!), and I'll assume amort is added back in too. So VRX says this house is generating 22k per year.

 

5 year payback is on track. Check!

 

How do you get comfortable with this? Am I off base in the way I am looking at this?

[AZ_Value]

By the way, just a quick question because I'm still working through the many posts (Seriously some of you just take the day off from this thread, it'll do you some good)

 

Did I read somewhere that you guys are reconciling the differences by adding back restructuring costs? The interest and free cash to the firm I'll address. But can someone, Bagehot, tell me why for restructuring costs? Or maybe I'll read an explanation as I read everything in detail. Because that certainly was cash that was spent and they say that they consider it in calculating their returns.

[mvalue]

If you are modeling 5-6 years for payback their answer might be that they don't think they'll have any material cash investment expenditures needed relative to amortization expense to obtain/maintain the predicted cash flows

 

I went back and looked at the Sanitas earnings from 2010, just to get rid of any divestitures and complicated accounting that happened when they were acquired

 

Ross here is the summary:

- Sanitas is immaterial and we simply don't have enough detail. Was there a price increase? Was Valeant able to use Sanitas tax losses? Was Valeant able to pump existing drugs through Sanitas sales reps? Was Sanitas able to pump existing drugs through Valeant sales reps.

- Using historical cash flow for Salix is just wrong, if you believe the projections provided by Salix management (or VRX or analysts). Bagehot has posted clear evidence that 20% IRR is in fact plausible.

 

 

Ok, this is what I'm looking for:

 

- If you use operating cash flow + interest + taxes + restructuring, I think you will find the numbers for the whole company are in the ballpark (I only looked at 2014).

 

So I am trying to understand why they use this number for their cash payback calculations.

 

I'm trying to model it as a real estate transaction because its easy to frame:

 

I buy a home for 100k

I put 10k into fixing it up

I have a mortgage on it at 4% for 30 years - 3.2k in interest

I pay 2% tax on it per year so 2k

amort - 3.9k (110k over 28 years)

 

How do I target a payback in 5 years?

 

I rent for 22k/yr - tax rate is 20% so 4k

 

My CF is 22k - 4k (income tax) - 2k (property tax) - 3.2k (interest) - 3.9k (amort)

so my cash flow is - 8.9K payback is  12 years...

 

So we are saying VRX ads back taxes, interest, restructuring cost (I thought they said they added this to the purchase price!), and I'll assume amort is added back in too. So VRX says this house is generating 22k per year.

 

5 year payback is on track. Check!

 

How do you get comfortable with this? Am I off base in the way I am looking at this?

[Bagehot]

By the way, just a quick question because I'm still working through the many posts (Seriously some of you just take the day off from this thread, it'll do you some good)

 

Did I read somewhere that you guys are reconciling the differences by adding back restructuring costs? The interest and free cash to the firm I'll address. But can someone, Bagehot, tell me why for restructuring costs? Or maybe I'll read an explanation as I read everything in detail. Because that certainly was cash that was spent and they say that they consider it in calculating their returns.

 

You didn't read that from me, but management takes the initial restructuring charges and capitalizes them in the purchase price to calculate cash-on-cash returns. Incidentally, Bob Goldfarb talked about this some at Sequoia's investor day. So, for B+L (this is off the top of my head, so I'm not sure if I'll have these numbers exactly right), they paid ~$8B and incurred something like $500M of restructuring. So rather than running a DCF that starts with an $8B outflow and then year 1 cashflow is reduced by $500M, they start with an $8.5B outflow and year 1 cashflow is presented before restructuring costs. From my perspective, it's hard to quibble with this too much, as capitalizing the restructuring upfront is more conservative (the $500M outflow doesn't get diluted by a PV factor). And in any event, it doesn't change the numbers very much. There could be an open question as to whether or not management is manipulating this via "cookie jar" accounting, but if you track their restructuring charges in the Ks and Qs, they generally do a good job of knocking the material ones out in the first year after an acquisition.

[KCLarkin]

I'm trying to model it as a real estate transaction because its easy to frame:

 

I buy a home for 100k

I put 10k into fixing it up

I have a mortgage on it at 4% for 30 years - 3.2k in interest

I pay 2% tax on it per year so 2k

amort - 3.9k (110k over 28 years)

 

How do I target a payback in 5 years?

 

I rent for 22k/yr - tax rate is 20% so 4k

 

My CF is 22k - 4k (income tax) - 2k (property tax) - 3.2k (interest) - 3.9k (amort)

so my cash flow is - 8.9K payback is  12 years...

 

So we are saying VRX ads back taxes, interest, restructuring cost (I thought they said they added this to the purchase price!), and I'll assume amort is added back in too. So VRX says this house is generating 22k per year.

 

5 year payback is on track. Check!

 

How do you get comfortable with this? Am I off base in the way I am looking at this?

 

Let's assume you put $0 down (you didn't specify) and the mortgage is non-recourse. The only capital you put in is $10k. Let's also say the amortization is not a real expense (land lasts forever and the house is super-durable). After 1 year, I can take $13k cash out. Payback period is less than 1 year.

[AZ_Value]

By the way, just a quick question because I'm still working through the many posts (Seriously some of you just take the day off from this thread, it'll do you some good)

 

Did I read somewhere that you guys are reconciling the differences by adding back restructuring costs? The interest and free cash to the firm I'll address. But can someone, Bagehot, tell me why for restructuring costs? Or maybe I'll read an explanation as I read everything in detail. Because that certainly was cash that was spent and they say that they consider it in calculating their returns.

 

You didn't read that from me, but management takes the initial restructuring charges and capitalizes them in the purchase price to calculate cash-on-cash returns. Incidentally, Bob Goldfarb talked about this some at Sequoia's investor day. So, for B+L (this is off the top of my head, so I'm not sure if I'll have these numbers exactly right), they paid ~$8B and incurred something like $500M of restructuring. So rather than running a DCF that starts with an $8B outflow and then year 1 cashflow is reduced by $500M, they start with an $8.5B outflow and year 1 cashflow is presented before restructuring costs. From my perspective, it's hard to quibble with this too much, as capitalizing the restructuring upfront is more conservative (the $500M outflow doesn't get diluted by a PV factor). And in any event, it doesn't change the numbers very much. There could be an open question as to whether or not management is manipulating this via "cookie jar" accounting, but if you track their restructuring charges in the Ks and Qs, they generally do a good job of knocking the material ones out in the first year after an acquisition.

 

Okay. I'll keep reading everything and I'll see what's being said and where I read it. Restructuring charges  we'll talk about anyways with Cash Earnings and all as I have to give you my thoughts on what you're using as proxy for cash flows.

Jeez. Should probably grab a beer if I'm gonna spend the day on CBF. Is there a panic button somewhere that would tell Sanjeev to issue a moratorium on this thread for a day or two? If not, one is needed.

 

PS: The costs of these deals in the table do not include restructuring charges.

 

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

[giofranchi]

I don't own any VRX and I never have, but in order for me to invest in something I at least have to understand how to measure its success. I am genuinely interested in VRX if some one can demonstrate how they get their money back from an acquisition in 5-6 years.

 

Ross,

if that is what you want, I think Bagehot has answered your need just a couple of posts before yours… Hasn’t he? He has shown you how you could reasonably arrive at a 20% IRR with Salix.

 

This being said, of course, you wanted a demonstration of what exactly? How an investment of theirs could pay itself back in 5-6 years? And what about the remaining 139 acquisitions? Do you really invest that way?

 

In other words, what does Bidvest discloses that Valeant doesn’t? You truly know the rate of return of any investment made by Mr. Joffe during the last 10 years? Not only! Do you truly know how to prove that those rate of returns are not made up by Mr. Joffe & Co.? Because that’s what we are talking about: we are not talking about business results here… We are talking about proving those results are real!

 

Cheers,

 

Gio

 

[merkhet]

If we're just going to be comparing intellectual dick size, I suspect that you will lose. I have two graduate degrees in law and business from two of the top universities in the country, and I can't recall ever scoring below the 98th or 99th percentile in much of anything.

 

I am sure you are a genius. But let me ask you: do you think even someone with your IQ and intellectual prowess could prove VRX is a fraud or that it isn’t, reading 10-Ks and listening to results reported by management?

 

If your answer is “yes”, I sincerely fear your genius is too detached from reality.

 

Cheers,

 

Gio

 

Why pose it as a question if you're not actually interested in the answer?

 

Your post basically translates to asking me the following. (Allow me some theatrics.)

 

Gio: Can you _______? If you answer yes, you are a pedophile. (A toucher of children, in case that doesn't Google Translate correctly for you, Gio.)

 

Me: Well, I certainly don't want to be a pedophile, so...

[Ross812]

I'm trying to model it as a real estate transaction because its easy to frame:

 

I buy a home for 100k

I put 10k into fixing it up

I have a mortgage on it at 4% for 30 years - 3.2k in interest

I pay 2% tax on it per year so 2k

amort - 3.9k (110k over 28 years)

 

How do I target a payback in 5 years?

 

I rent for 22k/yr - tax rate is 20% so 4k

 

My CF is 22k - 4k (income tax) - 2k (property tax) - 3.2k (interest) - 3.9k (amort)

so my cash flow is - 8.9K payback is  12 years...

 

So we are saying VRX ads back taxes, interest, restructuring cost (I thought they said they added this to the purchase price!), and I'll assume amort is added back in too. So VRX says this house is generating 22k per year.

 

5 year payback is on track. Check!

 

How do you get comfortable with this? Am I off base in the way I am looking at this?

 

Let's assume you put $0 down (you didn't specify) and the mortgage is non-recourse. The only capital you put in is $10k. Let's also say the amortization is not a real expense (land lasts forever and the house is super-durable). After 1 year, I can take $13k cash out. Payback period is less than 1 year.

 

Yeah I understand that line of thinking. So we just assume we never pay back the debt. We just keep pushing it out and reissuing it at 4%, right? So I take the 13k and buy another place, year 3 I buy two more, year 3 - 4 more. In year 4 I have 8 homes; generating 104k in CF a year and 880K in debt. Pay back is about 9 years.

 

VRX is doing this too except the only way to get to their 5 year payback calculation is to exclude taxes and interest expense.... So they are telling investors in their presentations - we are generating 22k per year. Am I off base here?

 

 

[merkhet]

I think I did. VRX uses an APV methodology for calculating NPV, so the correct comparison is really EBITDA, not CFFO.

 

Also, for all you guys, you can see lightly redacted actual boardroom presentations here:

 

http://www.hsgac.senate.gov/subcommittees/investigations/hearings/impact-of-the-us-tax-code-on-the-market-for-corporate-control-and-jobs

 

If you go to the "related files" pdf in the upper left hand corner, and scroll down to the exhibits pps 126-128, you can see the actual sensitivity analysis VRX showed in the boardroom for the Salix deal. You might also note that a couple of pages before that, Salix's internal management estimates called for ~$4B of EBITDA in 2020 as a standalone company without any VRX cost synergies and $6B by 2024. You might further note that they assume a 38% cash tax rate. If Salix management was right, then this will be an excellent deal. Even if you go the AZ Value approach and assume that the business is worthless, literally 0 cash flow or terminal value from 2025 onward, then VRX will still earn a ~10% IRR on these EBITDA numbers at a 5% cash tax rate and generate ~$31B of Unlevered Free Cash over the 10 year period. If you assume they can sell it at 1/1/2025 for 6x 2024 cash flow, then the IRR becomes 18%. At 8x, then it is ~20%. Etc.

 

That was very helpful, Bagehot. Even though AZ's analysis of paybacks didn't include Salix, it does provide a good data point on their deal model.

[giofranchi]

If we're just going to be comparing intellectual dick size, I suspect that you will lose. I have two graduate degrees in law and business from two of the top universities in the country, and I can't recall ever scoring below the 98th or 99th percentile in much of anything.

 

I am sure you are a genius. But let me ask you: do you think even someone with your IQ and intellectual prowess could prove VRX is a fraud or that it isn’t, reading 10-Ks and listening to results reported by management?

 

If your answer is “yes”, I sincerely fear your genius is too detached from reality.

 

Cheers,

 

Gio

 

Why pose it as a question if you're not actually interested in the answer?

 

Your post basically translates to asking me the following. (Allow me some theatrics.)

 

Gio: Can you _______? If you answer yes, you are a pedophile. (A toucher of children, in case that doesn't Google Translate correctly for you, Gio.)

 

Me: Well, I certainly don't want to be a pedophile, so...

 

;D ;D ;D

 

I was expecting a witty reply! ;)

 

Ok! Let me ask you: do you think even someone with your IQ and intellectual prowess could prove VRX is a fraud or that it isn’t, reading 10-Ks and listening to results reported by management?

 

Cheers,

 

Gio

[KCLarkin]

Yeah I understand that line of thinking. So we just assume we never pay back the debt. We just keep pushing it out and reissuing it at 4%, right? So I take the 13k and buy another place, year 3 I buy two more, year 3 - 4 more. In year 4 I have 8 homes; generating 104k in CF a year and 880K in debt. Pay back is about 9 years.

 

VRX is doing this too except the only way to get to their 5 year payback calculation is to exclude taxes and interest expense.... So they are telling investors in their presentations - we are generating 22k per year. Am I off base here?

 

Well, I personally care about ROE hence my example. But I think this is how they think:

 

Investment: $100k + 10k = $110k

Revenue: $22k

Interest: $0 (analysis is done independent of financing)

Expenses: $2k property tax

Income Tax: Let's ignore since it depends on how we finance this deal.

Amortization Not a real expense

 

My un-levered cash flow is: $22k - $2k = $20k

My IRR is just under 20%

My payback is 5.5 years.

 

Sounds like a great investment. Now do we finance this with equity or debt?

 

[Ross812]

FWIW:

 

VRX bought Sanitas for 10.06 EUR per share on 31.106M Shares on 19 August 2011. The exchange that day was 1.43xx USD to EUR so they payed: $447M-$448M for Sanitas.

 

Their "Deal Model" states they capitalize restructuring expenses but in their investor presentations they report the cost of Sanitas as $448M.

 

It seems like they are not capitalizing the restructuring costs in this instance.

 

 

[merkhet]

;D ;D ;D

 

I was expecting a witty reply! ;)

 

Ok! Let me ask you: do you think even someone with your IQ and intellectual prowess could prove VRX is a fraud or that it isn’t, reading 10-Ks and listening to results reported by management?

 

Cheers,

 

Gio

 

Happy I didn't disappoint. ;)

 

My answer is that with enough digging (probably more than just 10-Ks and management presentations), anyone (including me) could get to a point where they feel comfortable enough to exercise their judgement on whether VRX is a fraud or not.

 

As for conclusively proving one way or another? Also, probably. I suppose it depends on how much effort you're willing to expend and how far off the beaten path you're willing to go to find evidence.

 

Btw, in an effort to extricate me from either of the tribes, I haven't a clue if VRX is a fraud or not right now. I just like the digging process.

[rpadebet]

FWIW:

 

VRX bought Sanitas for 10.06 EUR per share on 31.106M Shares on 19 August 2011. The exchange that day was 1.43xx USD to EUR so they payed: $447M-$448M for Sanitas.

 

Their "Deal Model" states they capitalize restructuring expenses but in their investor presentations they report the cost of Sanitas as $448M.

 

It seems like they are not capitalizing the restructuring costs in this instance.

 

They maybe capitalizing all deal expenses for their analysis, but they are probably not allowed to do that entirely in their actual accounting on their K's and Q's.

 

Your point about their numbers on their presentations, well I guess their lean HQ model has its side affects too. Frankly the numbers on their presentations are all over the place. I guess the kindest way to look at it is to not take those presentations too seriously.

[rpadebet]

;D ;D ;D

 

I was expecting a witty reply! ;)

 

Ok! Let me ask you: do you think even someone with your IQ and intellectual prowess could prove VRX is a fraud or that it isn’t, reading 10-Ks and listening to results reported by management?

 

Cheers,

 

Gio

 

Happy I didn't disappoint. ;)

 

My answer is that with enough digging (probably more than just 10-Ks and management presentations), anyone (including me) could get to a point where they feel comfortable enough to exercise their judgement on whether VRX is a fraud or not.

 

As for conclusively proving one way or another? Also, probably. I suppose it depends on how much effort you're willing to expend and how far off the beaten path you're willing to go to find evidence.

 

Btw, in an effort to extricate me from either of the tribes, I haven't a clue if VRX is a fraud or not right now. I just like the digging process.

 

I can't tell whether it is a fraud either. Given management's personal wealth in it, I have a feeling it is not. Why would they want to ruin all that by committing fraud? But then it didn't make sense to me when Enron guys did it either. People can be strange that way.

 

Anyway, it takes a lot of hard analysis to prove something is a fraud. I am in the camp, "Why bother". I can't short. I am forced to be long only :-[. Even if I could short, the maximum you could make is 100% of your capital risked.With the debt structure here, it is spring loaded, so in the short term if I short and I am wrong, i could have my ass handed to me. Better to risk my capital elsewhere where the upside is >100%. All dollars are green - someone on this board told me this when I was foolishly thinking about shorting Tesla a couple of years ago.

[Valueguy134]

Good lord. I feel like people on both sides of this thread have lost their shit. From the Megamind movie...

 

 

Btw, as a former math major (Is that bona fides enough to make a comment on IRRs? I was discrete and not continuous focused, if that matters. Also, I prefer a protein shake to IRRs for breakfast, if that also matters.), I'd like to step in to the IRR discussion with three things to point out:

 

(1) Dan Kahan of Yale Law had a fantastically good piece of research on how ideology motivates people's mathematical abilities (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2319992) indicating that two people might see the exact same information and yet interpret things completely differently.

 

(2) Both OM & Picasso were talking completely past one another (ergo my posting of Megamind). You're both technically correct, but I suspect that your reasonings were colored the moment the two of you decided that you were on opposite sides of this debate. IRRs are heavily weighted towards the beginning few years, so OM was basically saying that if they could decrease costs immediately and/or increase sales immediately and maintain this amount w/ a not-substantial-drop once it hits the patent cliff, then they can make their IRRs. Picasso (& AZ) was saying that if they start from a lower base and ease into the decrease of costs and/or increase of sales, then the amount of compounding for the cash flows has to be large in order for the IRRs to work out as promised. See? Like I said before, you're both pretty.

 

(3) I've seen people on this thread confuse IRRs for CAGRs, and they are not the same. If you invest $100 in year 0 and then collect 10 years of $20 payments that you stick in a bank yielding you 0% and then sell the company again in year 10 for $200 (0% growth seems like a 10x-er), then your CAGR is not 20% -- it's 15%. Similarly, if your cash flows are high in the first 10 years but lower in the years after that, you can achieve a high IRR but have a low CAGR because of the lack of value on the back end. (Imagine going from $20 in years 1-10 to $10 from years 11 and beyond -- that drops your CAGR to 11%.) Incidentally, in a situation like the latter one, you'd require the cash flows you take out in the first decade to be reinvested in something to provide you with a CAGR that matches your IRR. (Someone check my logic on this -- it's late, and I'm in the Bahamas and sometimes my brain doesn't work right on the beach.)

 

FWIW, unless I missed it, everyone has glommed onto the IRR discussion but no one has made an effort to reconcile the difference between $11 billion in claimed cash from acquisitions and the $6 billion in total cash flow from operations during that time. A quick glance at cash flow from investments (possible divestments) indicates that it does not account for the $4 billion of difference once you've accounted for the Medicis sales, but I'll readily admit again that I might have missed it.

 

http://3.bp.blogspot.com/-8FPz1xTTuVA/Vd0CIM1PqHI/AAAAAAAAAPA/aRqd3ZaPqa8/s1600/2014%2BCash%2BPayback%2BTable%2B2.JPG

 

Disclosure #1: No position in VRX either long, short, etc. I definitely have a long position in popcorn though.

 

Disclosure #2: I'm long Fannie Mae preferreds, so if you'd like to attack my credibility (from either side), that's probably the easiest way to do it. ;)

 

I think I did. VRX uses an APV methodology for calculating NPV, so the correct comparison is really EBITDA, not CFFO.

 

Also, for all you guys, you can see lightly redacted actual boardroom presentations here:

 

http://www.hsgac.senate.gov/subcommittees/investigations/hearings/impact-of-the-us-tax-code-on-the-market-for-corporate-control-and-jobs

 

If you go to the "related files" pdf in the upper left hand corner, and scroll down to the exhibits pps 126-128, you can see the actual sensitivity analysis VRX showed in the boardroom for the Salix deal. You might also note that a couple of pages before that, Salix's internal management estimates called for ~$4B of EBITDA in 2020 as a standalone company without any VRX cost synergies and $6B by 2024. You might further note that they assume a 38% cash tax rate. If Salix management was right, then this will be an excellent deal. Even if you go the AZ Value approach and assume that the business is worthless, literally 0 cash flow or terminal value from 2025 onward, then VRX will still earn a ~10% IRR on these EBITDA numbers at a 5% cash tax rate and generate ~$31B of Unlevered Free Cash over the 10 year period. If you assume they can sell it at 1/1/2025 for 6x 2024 cash flow, then the IRR becomes 18%. At 8x, then it is ~20%. Etc.

 

I'm really stepping out my element here. High level Salix is pretty much all drugs. Why would you put 6x on a cashflow 10 years out before it hits the patent cliff. Remember there won't be any R&D, so why value on peak cash flow, when it goes to generics after?

 

Also, if you look at my post before, I mentioned I used $700 million in my calculations year 1. That $700M is about 2-3 times EBITDA for Salix looking back pre acquisition.  So I plug that into my CAGR calculator to get some growth and I find that we should see 40% growth every year by 2020. Not bad after I put a multiple on my number in year one because I truly wanted to give VRX the benefit of the doubt on growth rates and synergy (I really just strip out SG&A completely). If we strip out my multiple it’s like 68% growth year after year. I’m just going to let that sink in. Now let’s use that 40% growth to do some calculations, it slows down after 2020 since you only get $6B by 2024, so we should lower the growth rate post 2020, but I won’t. It would take 7+ years to pay off the $10.5B in debt they took out, and I’m not even considering taxes, capex…. Then we start getting close to the generics horizon. Why do we alway forget the debt repayments in our calculations, surely that money didn't come from the tooth fairy.

[rpadebet]

The implicit assumption when you use EBITDA,EBITA,EBIT in your deal models like this, is that debt can be refinanced or asset sold to someone who can refinance. I have had some interactions with HY Research analysts to base that off. That is why I think what is going on in that market is a risk VRX holders need to pay close attention to.

 

If the shale producers start defaulting, I don't think that market is going to get pretty. Bankers can be your best friend when they want to make you that loan, but once you start needing that loan, things can be different.