VRX - Valeant Pharmaceuticals International Inc.

[rb]

Buy, I'm sure I'm going to regret getting involved in this, but here I go.

 

There's clearly some people who are totally comfortable with Valeant and who love it. That's great. But there are other like say Gio that clearly are not 100% comfortable. Gio, I'm not trying to pick on you here, I just think that you've expressed your thought most clearly.

 

Now for those who aren't fully comfortable, VRX has had a fantastic run up to this point and you've all made a lot of money. It's also pretty reasonable to think that the performance of the stock going forward will not be as good as in the past. If you're in that situation wouldn't it be prudent to take some money off the table and enjoy your past gains?

 

Also in regards to the stamp of approval of Sequoia et all - they're not infallible. In the case of Sequoia, in the past years the were full of praise for the RR CEO for his whole tenure. Then at the end of last year they do a full 180 and basically say that he's a complete idiot and they'd need activists to step in. Either their judgment was faulty or they're trying to do a Buffett in their letters - praise the managements in which they're invested.

[rb]

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.

The funny part is that some of the people here that make these sort of assumptions about VRX debt on the BRK board argue that the float should be accounted for at face value.

[Valueguy134]

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.

 

Agreed, it's why I keep bringing up debt.  If you truly believe they have durable products (which I am skeptical about), and can really grow the acquisitions organically, then the refinancing is not a problem (less markets crash).  But the case here is the durability is questionable (drugs come off patent, devices get replaced with new technology...) and the growth, well let's just say you need to make some huge leaps of faith. So refinancing is something we have to think about.  After all, the $30.8B is really only backstopped by good will and about a billion in cash. Probably sell IP, but what could that be worth then. So, if you can't make big enough acquisitions, or fast paced tuck-ins to keep the party going then that debt is going to become an issue quickly, given VRX's cashflow.

[Liberty]

Remember there won't be any R&D, so why value on peak cash flow, when it goes to generics after?

 

Why do you say there won't be any R&D when you know it's factually wrong? Why do you keep writing as if Valeant has a portfolio that is at risk of having significant impact from generics competition when it clearly isn't?

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg233794/#msg233794

 

"People look at our R&D and say, that's a small percentage. But remember, big portions of our business like OTC/branded generics don't require much R&D. We probably spend 7-8% on R&D when you adjust it. It's low for some, but not as low as some."

 

New product launches coming out of the R&D pipeline are helping them grow organically at double digit, and they've guided more of that for the coming years. This isn't a run-off portfolio of products.

 

http://i.imgur.com/4QLdd5l.jpg

[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.

 

Agreed, it's why I keep bringing up debt.  If you truly believe they have durable products (which I am skeptical about), and can really grow the acquisitions organically, then the refinancing is not a problem (less markets crash).  But the case here is the durability is questionable (drugs come off patent, devices get replaced with new technology...) and the growth, well let's just say you need to make some huge leaps of faith. So refinancing is something we have to think about.  After all, the $30.8B is really only backstopped by good will and about a billion in cash. Probably sell IP, but what could that be worth then. So, if you can't make big enough acquisitions, or fast paced tuck-ins to keep the party going then that debt is going to become an issue quickly, given VRX's cashflow.

 

To be fair to VRX, their debt has better maturity profile than others. So this party can go on for a while.

 

You hit the nail on the head with organic growth being a necessity. That is why I feel Liberty's argument about durability of these products is the key here. If the products are indeed durable, then this is like a consumer products company. Refinancing debt shouldn't be a problem. You can even afford to pay a high multiple to the cashflows.

 

But if the products are more like a regular pharma product where there is growth to peak and then taper/cliff, the multiples need to be very low. Refinancing debt will be an issue absent a very favorable acquisition environment.

 

Maybe a product by product analysis is best here. I am sure some of BOL's products are durable. We should not confuse durables with generics or off patent products which are still producing revenue. The type of durables which make the bull case are the ones which continue growing organically (5% ish) without much change to the product itself like Coca Cola, Heinz, Tylenol etc. i wouldn't include all branded drugs in "durable" category.  These areas are small , so open for a newer brand to establish itself. It wont cost that much to have a competitive brand.

 

 

[Bagehot]

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.

 

Agreed, it's why I keep bringing up debt.  If you truly believe they have durable products (which I am skeptical about), and can really grow the acquisitions organically, then the refinancing is not a problem (less markets crash).  But the case here is the durability is questionable (drugs come off patent, devices get replaced with new technology...) and the growth, well let's just say you need to make some huge leaps of faith. So refinancing is something we have to think about.  After all, the $30.8B is really only backstopped by good will and about a billion in cash. Probably sell IP, but what could that be worth then. So, if you can't make big enough acquisitions, or fast paced tuck-ins to keep the party going then that debt is going to become an issue quickly, given VRX's cashflow.

 

Next year (first fully normalized year for Salix) management estimates VRX will do >$7.5B of EBITDA. (They said $7.5B before Xifaxan was approved for IBS-D). They have $30B net debt out at an ~5.5% interest rate, so their interest burden will be $1.65B. CapEx will likely be somewhere in the $350M range, although it could be lower. So we'll have $2B of Interest and CapEx. Taxes should be ~$300M ($7.5B-$1.65B)*(5%). So all in, we've got $7.5B-$1.65B (interest)-$350M (capex)-$300M (taxes)-$600M (completely arbitrary working capital adjustment-3 year average has been $430M use) which gives you about $4.6B of free cash. Assuming EBITDA never grows from 2016 base (base VRX has been showing double digit organic growth for the past 6 quarters and has no major patent cliffs in the next three years and I've already linked Salix's management projections once today) then you can pay off all the debt in a little over 6 years if you so desired, which is why VRX debt trades inside its rating.

[Liberty]

That is why I feel Liberty's argument about durability of these products is the key here. If the products are indeed durable, then this is like a consumer products company. Refinancing debt shouldn't be a problem. You can even afford to pay a high multiple to the cashflows.

 

It *is* the whole key to the model. Ackman understood this, and he highlighted it when he first tried to explain the company's model, and he no doubt put extra emphasis on verifying this when he had insider access for 4 months:

 

http://i.imgur.com/jfdEq0c.png

 

http://i.imgur.com/RUTGGOI.png

 

http://i.imgur.com/Nz5yNvr.png

 

http://i.imgur.com/ejNZTwE.png

 

Now I know that the people who only care about spreadsheets will discount all this because these are - gasp - slides. But what matters is the information and the understanding of the company that they can bring (I was in VRX before Ackman, btw, so this only helped confirm what I already thought). If the assets are mostly durable, and they are growing, this is very different from another company where almost everything is facing patent cliffs and R&D can't replace value as fast as it erodes. Very different.

 

I mean, do we think that Valeant is lying about it's overall rate of organic growth? Forget about the presentations where they break out each acquisition. Just the overall organic growth. That's a fairly simply math, right? Just break out what was owned for longer than 1 year. If they aren't lying about that, then the assets are growing quite fast and are not facing significant patent cliffs, and this was confirmed during the year when they didn't make any major acquisitions. And if they are lying about overall organic growth, why are the audited revenue and cashflow numbers going up so fast? Where's all that money coming from if the businesses aren't growing. We know how big the acquisitions are...

 

And it isn't just Ackman. ValueAct has been on the board since the start and hand-picked Ackman, and the board is involved in all acquisitions and in tracking all past acquisitions. You don't think ValueAct would raise questions about fishy numbers with all the money they have on the line?

 

Some problems are best solved at the micro level, and some are best solved at the macro level. I think trying to go micro on Valeant is making a lot of very smart people spin their wheels because they simply don't have the information they would need to create a model that makes sense. It's like trying to reverse engineer a complex piece of software without the source code, and many things could be explained 15 different ways but you can't know which one is the right one. But if we look at it on a more macro level, we can make a judgement based on probabilistic thinking; there are people who have access to the 'source code', and these people have put billions on the line as well as their careers and reputations. A Goldman Sachs partner joined, the head of McKinsey's global pharma M&A - no doubt one of the world experts in the field - has looked at it and recently joined as CFO. ValueAct hand-picked the CEO and has been on the board with access to everything for years, Ackman - a man with a great reputation for finding complex frauds like MBIA - has had insider access, etc. Then when you look at the market structure and strategy, does it make sense? It certainly does to me. Then you try to get to know the people involved, listen to dozens of hours of presentations and calls to figure out how they are thinking, etc. I might not end up with a 30,000-cell spreadsheet at the end of the day, but I think I have a basis to make a judgement, just like with DHR or CSU or BRK.

[rpadebet]

Agree with you there liberty.

 

Now can we agree that the multiple the business as a whole deserves is some sort of revenue weighted average multiple of each of the products?

 

Some deserve a 20 multiple, some only 4-6. Most fall in between don't you think?

 

Now compare that against the multiple vrx is trading at, do you think it's cheap?

[Valueguy134]

Remember there won't be any R&D, so why value on peak cash flow, when it goes to generics after?

 

Why do you say there won't be any R&D when you know it's factually wrong? Why do you keep writing as if Valeant has a portfolio that is at risk of having significant impact from generics competition when it clearly isn't?

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg233794/#msg233794

 

"People look at our R&D and say, that's a small percentage. But remember, big portions of our business like OTC/branded generics don't require much R&D. We probably spend 7-8% on R&D when you adjust it. It's low for some, but not as low as some."

 

New product launches coming out of the R&D pipeline are helping them grow organically at double digit, and they've guided more of that for the coming years. This isn't a run-off portfolio of products.

 

http://i.imgur.com/4QLdd5l.jpg

 

Maybe I'm reading it wrong, but in this slide, it looks like the generic impact pretty much wipes out the sales each year a drug comes off patents. Buy hey why not let me show you only a 2% impact, because lets compare apples and oranges (A single product vs. the whole).

[rpadebet]

I admit I didn't do too much of deep dive product work here, because at the price I bought it wasn't necessary.

 

So here is my dumbed down model. Lets say products in each durability category produce similarly equal revenue/profits. Let us say their durability rating ranges from 5x to 20x. On average I thought they would aggregate to a 12-13x product. Get your EBIT estimate for next year, apply this multiple, subtract the debt, divide by the shares and tell me the price you get.

 

To justify current price, I think you need to prove it is a 16-18x durability company. Which means most of the products producing the profits are very highly durable? Do you think that is the case?

 

When I bought this, the multiple was 10-12. All I needed was good organic growth and I was then sure debt wasn't a problem. We got good growth, I was not sure it was sustainble organic growth but I could wait. Then we got multiple expansion. It looked silly near 18-20x but organic growth could still surprise, so I held.

 

Then AZ_value showed how the organic growth is calculated. I had to leave...

[Liberty]

Agree with you there liberty.

 

Now can we agree that the multiple the business as a whole deserves is some sort of revenue weighted average multiple of each of the products?

 

Some deserve a 20 multiple, some only 4-6. Most fall in between don't you think?

 

Now compare that against the multiple vrx is trading at, do you think it's cheap?

 

I think it's cheap. Once Salix normalizes, it's trading under 15x cash EPS even if they stop making acquisitions, but I don't think they will. I think that's a low multiple for the  quality of the assets, the management, the runway in front of them, and the kind of per-share growth they've shown. And I think people focus too much on the market cap and not enough on all the ways of creating per-share value that are available. If they ever become too big, to a point where it's hard to move the needle, I think they'll do divestitures, spin-offs, etc, and keep things going longer than most people expect. They are not empire buildings, but rather try very hard to optimize per-share value.

 

It was certainly cheaper at $100, though.

 

The debt doesn't worry me too much because the assets are durable and growing, and it's smart to take advantage of historically low interest rates rather than dilute when you are undervalued. I think they'll probably find someone to merge with at some point, delever all at once, create a ton of value with synergies, and have a reloaded gun. Could happen very quickly.

 

With some patience, at some point the right elephant will come along; good assets, fat structure, CEO who cares more about the golden parachute than anything else (kind of like how Comcast and CHTR went after TWC when it was clear that management was ready to sail in the sunset with the cash).

 

In the meantime, they are deploying capital at a good clip. A billion here, a billion there... Soon it adds up to real money.

[Valueguy134]

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.

 

Agreed, it's why I keep bringing up debt.  If you truly believe they have durable products (which I am skeptical about), and can really grow the acquisitions organically, then the refinancing is not a problem (less markets crash).  But the case here is the durability is questionable (drugs come off patent, devices get replaced with new technology...) and the growth, well let's just say you need to make some huge leaps of faith. So refinancing is something we have to think about.  After all, the $30.8B is really only backstopped by good will and about a billion in cash. Probably sell IP, but what could that be worth then. So, if you can't make big enough acquisitions, or fast paced tuck-ins to keep the party going then that debt is going to become an issue quickly, given VRX's cashflow.

 

Next year (first fully normalized year for Salix) management estimates VRX will do >$7.5B of EBITDA. (They said $7.5B before Xifaxan was approved for IBS-D). They have $30B net debt out at an ~5.5% interest rate, so their interest burden will be $1.65B. CapEx will likely be somewhere in the $350M range, although it could be lower. So we'll have $2B of Interest and CapEx. Taxes should be ~$300M ($7.5B-$1.65B)*(5%). So all in, we've got $7.5B-$1.65B (interest)-$350M (capex)-$300M (taxes)-$600M (completely arbitrary working capital adjustment-3 year average has been $430M use) which gives you about $4.6B of free cash. Assuming EBITDA never grows from 2016 base (base VRX has been showing double digit organic growth for the past 6 quarters and has no major patent cliffs in the next three years and I've already linked Salix's management projections once today) then you can pay off all the debt in a little over 6 years if you so desired, which is why VRX debt trades inside its rating.

 

They did $4.3B in LTM EBITDA. Will Salix+Xifaxan really give them $3.2B in EBITDA, a 10x multiple in year 1?

[Liberty]

Maybe I'm reading it wrong, but in this slide, it looks like the generic impact pretty much wipes out the sales each year a drug comes off patents. Buy hey why not let me show you only a 2% impact, because lets compare apples and oranges (A single product vs. the whole).

 

They model it pretty conservatively, sometimes it's better, sometimes it's worse.

 

But I don't understand what your complaint is. If they have 100 products (to pick a number) which generate $100 a year, and patent cliffs make them lose $2 a year in revenue, that's what the patent cliff impact is for the portfolio.

 

The reason why it's only 2% for Valeant is because most of their portfolio isn't facing patent cliffs and they don't rely on big blockbusters but rather a large number of smaller products, as per the link in my post. It's things where there's not generics competition, or it's already off patent, or it's dispensed by doctors and patients just take what is given, whatever.

 

At other companies, you might have a year when 20% of your revenues go off patent and you have to scramble to replace that revenue, etc. A lot less predictable. And some other companies might have the majority of their revenue coming from things that are patent protected and in areas where there is generics competition (big blockbusters, easy to make drugs, etc). Very different position to be in.

[Liberty]

They did $4.3B in LTM EBITDA. Will Salix+Xifaxan really give them $3.2B in EBITDA, a 10x multiple in year 1?

 

At the AGM they said: "Expected EBITDA >$7.5B in 2016, Commitment to reduce leverage to < 4x by 2H of 2016"

[Valueguy134]

Maybe I'm reading it wrong, but in this slide, it looks like the generic impact pretty much wipes out the sales each year a drug comes off patents. Buy hey why not let me show you only a 2% impact, because lets compare apples and oranges (A single product vs. the whole).

 

They model it pretty conservatively, sometimes it's better, sometimes it's worse.

 

But I don't understand what your complaint is. If they have 100 products (to pick a number) which generate $100 a year, and patent cliffs make them lose $2 a year in revenue, that's what the patent cliff impact is for the portfolio.

 

The reason why it's only 2% for Valeant is because most of their portfolio isn't facing patent cliffs and they don't rely on big blockbusters but rather a large number of smaller products, as per the link in my post. It's things where there's not generics competition, or it's already off patent, or it's dispensed by doctors and patients just take what is given, whatever.

 

At other companies, you might have a year when 20% of your revenues go off patent and you have to scramble to replace that revenue, etc. A lot less predictable. And some other companies might have the majority of their revenue coming from things that are patent protected and in areas where there is generics competition (big blockbusters, easy to make drugs, etc). Very different position to be in.

You told me they have durable products.  Durable products don't drop off a cliff in 5-10 years, and you just proved it to me. VRX can't stop acquiring, they struggle to throw enough cash off to pay down debt, and once they achieve that hurdle, then bam the cliff hits you, as you so elegantly showed. So yes it could be only 2% of revenues now, but it adds up pretty quick once the acquisitions slow down. Oh how M&A can hide so many problems.

[rpadebet]

 

I think it's cheap. Once Salix normalizes, it's trading under 15x cash EPS even if they stop making acquisitions, but I don't think they will. And I think people focus too much on the market cap and not enough on all the ways of creating per-share value that are available. If they ever become too big, to a point where it's hard to move the needle, I think they'll do divestitures, spin-offs, etc, and keep things going longer than most people expect.

 

It was certainly cheaper at $100, though.

 

The debt doesn't worry me too much because the assets are durable and growing, and it's smart to take advantage of historically low interest rates rather than dilute when you are undervalued. I think they'll probably find someone to merge with at some point, delever all at once, create a ton of value with synergies, and have a reloaded gun. Could happen very quickly.

 

With some patience, at some point the right elephant will come along; good assets, fat structure, CEO who cares more about the golden parachute than anything else (kind of like how Comcast and CHTR went after TWC when it was clear that management was ready to sail in the sunset with the cash).

 

In the meantime, they are deploying capital at a good clip. A billion here, a billion there... Soon it adds up to real money.

 

Ha ha Liberty, lets not base our investment on Santa Claus coming to town! I know he exists, so good for you if it does happen.

 

Also I dont think Cash EPS is a good number to use. they have stock expense added in there, common that is a real expense. If you want to use Cash EPS, then 80% of cash EPS is a decent approximation for FCF to Equity IMO.

 

Use EBITs and EVs. With debt where it is Cash EPS multiples will look low than they actually are. You probably remember the Cash EPS multiple at 100 :) it was not that long ago. Acquisitions since then didnt change the company that much fundamentally unless you assume Salix was purchased for a song.

 

 

Bagehot,

There are many reasons why their debt trades where it trades and how it is rated. I won't get into it, but i can tell ratings agencies can be convinced easily by ex-Goldman and ex-McKinsey guys :) especially when all the bankers here are drooling over getting an opportunity to sell VRX debt.

 

Let me take your calcs. 7.5B EBITDA you say. I will take it. 4.6B free cash you say, I don't like FCF to equity here, so can we agree about 6B Cash flow to entire firm ?

 

EV is approximately 110B today , so close to 18x? I don't think that is cheap. Maybe expensive depending on your view on durability of products.

 

If they were only selling Tylenol, I would probably pay 20x if you twist my arm

[Liberty]

You told me they have durable products.  Durable products don't drop off a cliff in 5-10 years, and you just proved it to me. VRX can't stop acquiring, they struggle to throw enough cash off to pay down debt, and once they achieve that hurdle, then bam the cliff hits you, as you so elegantly showed. So yes it could be only 2% of revenues now, but it adds up pretty quick once the acquisitions slow down. Oh how M&A can hide so many problems.

 

That's ridiculous. If you had followed the link here, you'd have seen that they had about 85% of durable products last year. That has changed somewhat since because of acquisitions:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg233794/#msg233794

 

Yes, they lost 2% of revenue to patent cliffs. And they grew organically double digits. The organic growth includes the revenue lost to patents, btw. Not too bad, eh?

 

That a drug goes off patent isn't a bad thing, all that matters is the return that you have made on your initial investment in that drug. In fact, Valeant sometimes buys products that are about to go off-patent from other companies because others want to hide them because declining revenues don't look good; Valeant pays little and gets very good returns on these tail products. In the past they had more of them, which kept the organic growth from the durable part of the portfolio hidden, but lately they have fewer.

[Valueguy134]

You told me they have durable products.  Durable products don't drop off a cliff in 5-10 years, and you just proved it to me. VRX can't stop acquiring, they struggle to throw enough cash off to pay down debt, and once they achieve that hurdle, then bam the cliff hits you, as you so elegantly showed. So yes it could be only 2% of revenues now, but it adds up pretty quick once the acquisitions slow down. Oh how M&A can hide so many problems.

 

That's ridiculous. If you had followed the link here, you'd have seen that they had about 85% of durable products last year. That has changed somewhat since because of acquisitions:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg233794/#msg233794

 

Yes, they lost 2% of revenue to patent cliffs. And they grew organically double digits. The organic growth includes the revenue lost to patents, btw. Not too bad, eh?

Take a step back and ask yourself.  Does a durable product go pretty much to zero in 10 years or less? The returns are garbage, they need absurd growth, and then add back a bunch of cash they spent, and then forget about the debt.  Why don't you lend me $100, and I'll give you back $10 and some monopoly money.

[Liberty]

 

I think it's cheap. Once Salix normalizes, it's trading under 15x cash EPS even if they stop making acquisitions, but I don't think they will. And I think people focus too much on the market cap and not enough on all the ways of creating per-share value that are available. If they ever become too big, to a point where it's hard to move the needle, I think they'll do divestitures, spin-offs, etc, and keep things going longer than most people expect.

 

It was certainly cheaper at $100, though.

 

The debt doesn't worry me too much because the assets are durable and growing, and it's smart to take advantage of historically low interest rates rather than dilute when you are undervalued. I think they'll probably find someone to merge with at some point, delever all at once, create a ton of value with synergies, and have a reloaded gun. Could happen very quickly.

 

With some patience, at some point the right elephant will come along; good assets, fat structure, CEO who cares more about the golden parachute than anything else (kind of like how Comcast and CHTR went after TWC when it was clear that management was ready to sail in the sunset with the cash).

 

In the meantime, they are deploying capital at a good clip. A billion here, a billion there... Soon it adds up to real money.

 

Ha ha Liberty, lets not base our investment on Santa Claus coming to town! I know he exists, so good for you if it does happen.

 

Also I dont think Cash EPS is a good number to use. they have stock expense added in there, common that is a real expense. If you want to use Cash EPS, then 80% of cash EPS is a decent approximation for FCF to Equity IMO.

 

Use EBITs and EVs. With debt where it is Cash EPS multiples will look low than they actually are. You probably remember the Cash EPS multiple at 100 :) it was not that long ago. Acquisitions since then didnt change the company that much fundamentally unless you assume Salix was purchased for a song.

 

Even if that elephant doesn't happen I think things will be fine, but this is part of the upside that many people seem to forget about :)

 

I'm comfortable with the debt. They'll probably keep it around 3-4x over time, it's a good tax shield. It looks artificially high right now because of Salix inventory issues.

 

And I'm comfortable with the adjusted cash EPS, among other metrics. It's a decent proxy to track growth in the earning power of the assets. I'm not saying it can be taken to the bank directly, but it works.

[Liberty]

Take a step back and ask yourself.  Does a durable product go pretty much to zero in 10 years or less?

 

Ok, I'm going to say the same thing I just said, but I'm going to attempt to be even clearer: Valeant was about 85% durable products. That means that there is 15% that is facing some form of patent cliff or other. The 2% of revenue that is projected to be at risk in the coming years comes from that 15%. The other 85% is durable, thus the value does not "pretty much go to zero in 10 years or less". The overall portfolio (15% + 85%) is growing organically at double-digits including those patent cliffs, so they're not a problem. Some products go off patent, and some new products come out of the pipeline (Jublia, RetinA Micro). The cycle of life.

 

Clearer?

[Valueguy134]

Take a step back and ask yourself.  Does a durable product go pretty much to zero in 10 years or less?

 

Ok, I'm going to say the same thing I just said, but I'm going to attempt to be even clearer: Valeant was about 85% durable products. That means that there is 15% that is facing some form of patent cliff or other. The 2% of revenue that is projected to be at risk in the coming years comes from that 15%. The other 85% is durable, thus the value doesn't not pretty much go to zero in 10 years or less. The overall portfolio (15% + 85%) is growing organically at double-digits including those patent cliffs, so they're not a problem.

 

Clearer?

So we roll forward 5 years, no acquisitions, that 15% of the portfolio is now wiped out. And the remainder looks to be in a pretty precarious position. Tell me again how these products are durable 5 years out. Oh right, Pearson told me. 

[LC]

I just read AZ Value's second installment. I have to say in my opinion it was compelling for two reasons:

 

 

1) The $85MM cash difference from Sanitis which was proven (in my mind) conclusively by cross-checking with Sanitis audited statements. I understand the amount is immaterial but the practice of deception is certainly not immaterial.

 

2) The $4B cash difference between total reported cash generated from acquisitions vs. cash from operations.

 

Either way I see only one explaination: "Cash" is more like "adjusted cash" and management is being intentionally sneaky when reporting performance to investors. How can I, as an investor who depends on management for information, stand for this and invest alongside them?

 

I see a good proof that management is misreporting $4B in cash and an almost certain proof that management has misreported cash in the past?

 

Gio, you spoke of trust. How do you reconcile this?

[ccplz]

2) The $4B cash difference between total reported cash generated from acquisitions vs. cash from operations.

 

Either way I see only one explaination: "Cash" is more like "adjusted cash" and management is being intentionally sneaky when reporting performance to investors. How can I, as an investor who depends on management for information, stand for this and invest alongside them?

 

I see a good proof that management is misreporting $4B in cash and an almost certain proof that management has misreported cash in the past?

 

This is a good question.

[Liberty]

So we roll forward 5 years, no acquisitions, that 15% of the portfolio is now wiped out. And the remainder looks to be in a pretty precarious position. Tell me again how these products are durable 5 years out. Oh right, Pearson told me.

 

So that's what happened in the past 5 years, right? Oh, maybe not..

 

Did you miss the part about organic growth? They are growing at double-digits. In 5 years, they'll get more revenue from the current assets, not less.

 

Please explain to me how their portfolio - which grew same store sales organically 19% last quarter and above 15% TTM - is in a precarious position?

[Valueguy134]

So we roll forward 5 years, no acquisitions, that 15% of the portfolio is now wiped out. And the remainder looks to be in a pretty precarious position. Tell me again how these products are durable 5 years out. Oh right, Pearson told me.

 

So that's what happened in the past 5 years, right? Oh, maybe not..

 

Did you miss the part about organic growth? They are growing at double-digits. In 5 years, they'll get more revenue from the current assets, not less.

 

Please explain to me how their portfolio - which grew same store sales organically 19% last quarter and above 15% TTM - is in a precarious position?

I did a calc a couple of posts back using growth for Salix (and put quite the multiplier on EBITDA achieved in year 1). You pulled out a chart that says a drug sales gets wiped out once it goes generic. What I did was show you what kind of growth rates you need to be able to pay down the debt associated with the drugs by maturity, which is pretty far out.  My growth rate was multiples of what you just told me. So once I pay down debt I'm nearing the horizon, and net I haven't really made any money. By this point 7-8 years out, how much value did I get out of Salix? i'll save you the hassle of going back. I used a 40% growth rate, starting EBITDA $700 million (2-3x what Salix made last year). So now that I have your chart i can safely say you answered your own question on growth and the value VRX brings with it's acquisitions.