VRX - Valeant Pharmaceuticals International Inc.

[KCLarkin]

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

 

I'm having the opposite reaction. I was pretty bearish before the second installment and planned to sell my small position (1.4%). After reading the discussion on this thread, I feel much more comfortable. I wouldn't buy at the current price but I am comfortable holding.

[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?

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.

 

Ok, I can't repeat it for a 5th time, at some point it just gets pointless, but only small portion of the assets are facing patent cliffs. Salix is growing extremely fast (previous management's inventory shenanigans notwistanding, but I like it since it allowed VRX to buy more cheaply), and with the new IBS-D, it'll grow faster. Salix also has things in the pipeline...

 

Anyway, if you believe your work, I suggest you short Valeant. The revenue is going "poof" within a few years according to you, right? Safe bet. I believe my work, and I own it.

[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.

 

Ok, I can't repeat it for a 5th time, at some point it just gets pointless, but only small portion of the assets are facing patent cliffs. Salix is growing extremely fast (previous management's inventory shenanigans notwistanding, but I like it since it allowed VRX to buy more cheaply), and with the new IBS-D, it'll grow faster.

 

Anyway, if you believe your work, I suggest you short Valeant. The revenue is going "poof" within a few years according to you, right? Safe bet. I believe my work, and I own it.

Look I don't want to keep posting the same things over and over, but it just seems that everyone here posts stuff management gives them.  Where is the due diligence, where are some of the numbers you looked at. AZ did the job pretty much everyone on this thread should have done in the first place.  He asked questions and then looked for the answer and saw that things don't align. So if you believe in your work, solid, but I have never seen much else other than slides, and Pearson this, Pearson that.

[Liberty]

Look, it's not my fault if you don't understand the difference between a product at risk of patent cliff and one that isn't. I don't mean to post the same thing again and again either, but you keep repeating that stuff about Valeant assets being worthless in a few years or whatever, so I'm trying to make it clear.

 

As for AZ's work, I'm sure it was hard to put together, but I trust it less than management and other investors with billions on the line and inside access. All he's done is raise questions to which he doesn't really have the answers to because he doesn't have access to the actual facts of how things were structured. I'm starting to wish he would just get in touch with IR and get to the bottom of the Sanitas acquisition so we can stop hearing about it. This is just more of what Allergan and Hempton served us a few months ago.

 

If you want more, you can go back and re-read those. The wheels were supposed to fall off when they lapped B&L because they had no major acquisition in a year; instead, GAAP climbed up toward the adjusted numbers... Organic growth was supposed to fall because of lack of re-investment; instead, it kept going up because outputs matter more than inputs. Etc.

 

But even Allergan didn't claim that VRX's didn't have lots of durable assets...

[LC]

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

 

I'm having the opposite reaction. I was pretty bearish before the second installment and planned to sell my small position (1.4%). After reading the discussion on this thread, I feel much more comfortable. I wouldn't buy at the current price but I am comfortable holding.

 

May I ask then, how do you feel about the apparent $4B "cash" discrepancy from management presentations vs. the audited statements?

[Picasso]

So far evidence of durability comes from a checkmark on Ackman's presentation and a couple slides from Valeant where they declare 85% of the products durable and indicate a total revenue loss of $780 million into 2019.  That is why it is so important to know how much they really pay and how much cash they are truly earning.  It's probably fine to buy the cigar butts if you get a proper return but can we at least calculate this ourselves?  It isn't about getting a ton of disclosures, it's just about getting an understanding of whether their guidance is realistic and achievable.  It probably wouldn't take a material amount of additional disclosures to obtain this.

 

So far we are relying on an investor known for exaggeration and management which has been shown to bend the truth using non-weighted CAGR's.  I'm no doctor and I'm thinking most investors on this board are not either, so it's a bit hard to know what is durable and what isn't.  If you can't prove it to be durable I guess the fallback position is the infallibility of Ackman, Ubben, and Sequoia.

[KCLarkin]

Ackman, Ubben, and Sequoia.

 

And Glenn Greenberg (37%) and Lou Simpson (11%).

[Liberty]

So far evidence of durability comes from a checkmark on Ackman's presentation and a couple slides from Valeant where they declare 85% of the products durable and indicate a total revenue loss of $780 million into 2019.  That is why it is so important to know how much they really pay and how much cash they are truly earning.  It's probably fine to buy the cigar butts if you get a proper return but can we at least calculate this ourselves?  It isn't about getting a ton of disclosures, it's just about getting an understanding of whether their guidance is realistic and achievable.  It probably wouldn't take a material amount of additional disclosures to obtain this.

 

So far we are relying on an investor known for exaggeration and management which has been shown to bend the truth using non-weighted CAGR's.  I'm no doctor and I'm thinking most investors on this board are not either, so it's a bit hard to know what is durable and what isn't.  If you can't prove it to be durable I guess the fallback position is the infallibility of Ackman, Ubben, and Sequoia.

 

Evidence of durability comes from the past 7 years where that part of the portfolio grew.

 

I've already said what I think about the non-weighted CAGRs somewhere else. It says one thing, weighted says a different thing. Both are useful but flawed. What matters is they gave the line data and not just the overall. As for the rest, welcome to investing. You know everything that's going on in every corner of Danaher or Liberty Media or Berkshire or IBM or Constellation Software? Or even more boring stocks like WFC, MA, JNJ, GE? VRX actually provides a lot of disclosure compared to some of those.

 

You'll never have all the data. You have to make judgements based on incomplete data. Correct insights matter more than spreadsheets.

 

Or maybe you don't invest until you have board-level raw data? What's in your portfolio? All easy-to-understand, right?

[KCLarkin]

May I ask then, how do you feel about the apparent $4B "cash" discrepancy from management presentations vs. the audited statements?

 

I don't see a discrepancy. I believe management is using EBITA or similar as a proxy for cash. AZ used operating cash flow.

[Valueguy134]

May I ask then, how do you feel about the apparent $4B "cash" discrepancy from management presentations vs. the audited statements?

 

I don't see a discrepancy. I believe management is using EBITA or similar as a proxy for cash. AZ used operating cash flow.

Why not call is EBITDA.  It's pretty hard to confuse cash.

[mvalue]

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

 

I'm having the opposite reaction. I was pretty bearish before the second installment and planned to sell my small position (1.4%). After reading the discussion on this thread, I feel much more comfortable. I wouldn't buy at the current price but I am comfortable holding.

 

Agree except no position - I was wowed by the writeup on first quick read, but after further review it's mostly questions for which there are plausible answers. As far as outright false figures, the Sanitas issue was the only smoking gun that impressed me. The IP transfer killed that in my mind - yes the claimed cash return figure is large compared to historical, but it's no longer clearly a lie (and I do think VRX as a rule probably cuts SG&A more drastically than one would typically assume with an acquisition model). It's just another question. The delta in OCF and cash returns from acquisitions seems to largely be about NPV methodology. It's murky but also plausible that the way they're doing it is logical.

 

No smoking gun, no big reveal, just many thousands of words to get to a few questions.

 

[KCLarkin]

Why not call is EBITDA.  It's pretty hard to confuse cash.

 

See my replies to Ross a few pages ago.

[Guest Schwab711]

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.

 

First, I appreciate you taking the time to write out a summary of Salix.

 

13/22 Salix products have expirations between 2028-2032. I'm almost positive they do not have a single drug that will expire before 2028 that is non-trivial. If you carry-out your analysis for another 5-6 years, with guidance from Salix, then it becomes clear VRX's 20% IRR hurdle, as they define it, is not unreasonable. Either way, I don't know why it's unreasonable to believe 40% CAGR for newly approved drugs with trivial starting denominators.

 

9/22 Salix products have an extremely high probability (likely 99% or higher) of approval, but are not currently approved (again, almost positive but I don't want to chase down the source when it wasn't my claim in the first place). These are not included, which lowers the necessary growth rate in your example. Combine these differences from your model and you can see how management could project a 20% IRR.

 

I also completely agree that using the words "cash payback" is extremely misleading when you actually mean "EBITDA without adjustment for restructuring costs on the acquisition price". The 2nd phrase is obviously less elegant.

 

I'm not saying the Salix presentation is perfect (nor do I have any opinion of it, at the moment). However, I think many are missing why AZ's work has value. He choose a specific topic, undertook a reasonable amount of secondary (scuttlebutt) research (though others have since found it to be incomplete, which is not bad nor unexpected for data that is aggregate from multiple sources with little organization/disclosure. The latter may also be reasonable considering the jurisdiction and size of the stand-alone), and applied the research and guidance, where it was relevant. It gave an extent informational base for others to work off of and fine-tune. Other posters have supplied similarly useful nuggets of information (I don't want to look-up who to individually recognize for helpful contributions). All I'm saying is it will be easier to reach a full conclusion if we all fully research each topic before posting incomplete "facts" that require additional posts for correction.

 

Also, as to the discussion of % of "durable" products. Again, I think all posts attempting to disprove management's (and Ackman's) guidance on this topic are worthless without a reasonably comprehensive breakdown of all non-trivial products acquired, grouped by acquisition. Really, we should also research each individual product to determine if generic competition is even likely at expiration (generic competition is really not that common outside of blockbusters). From memory, I believe patent-cliff revenue loss % is 0% from years 2021-2028, inclusive. There may be 1-2 years where there is a non-trivial projected revenue cliff. This supports what Liberty has been posting.

 

Finally, before I get beaten up for not providing an unconditional guarantee on the above facts, I want to clarify that it is exceedingly rare for me to ever write/say that I'm 100% sure/positive about literally anything. I don't care who the source is, what the topic is, or what the circumstances are. [Right or wrong,] I leave open the possibility that the "fact" I am presenting may not meet all necessary assumptions required to use it or some other technicality that results in both 1) the "fact" I presented is correct, and 2) the "fact" I presented as incorrect, based on the exact situation I used it in. This is the difference between a reasonable "proof" and a rigorous "proof". Old habits die hard.

 

If the above statement is unclear, maybe an example will help. One might say it never snows [in the Northeast US] in summer. We all assume this to be correct. However, in 1816 (the "year without a summer"), it freaking snowed in summer! Thus, my original statement is both a fact and, very rarely, not a fact. When I write "I'm almost positive", I mean "it never snows in summer"!

 

https://en.wikipedia.org/wiki/Year_Without_a_Summer

[LC]

The delta in OCF and cash returns from acquisitions seems to largely be about NPV methodology. It's murky but also plausible that the way they're doing it is logical.

 

 

I am not following, can you help me understand? How can some NPV calculation create cash returns without showing up on OCF? Does Valeant have some long term contracts they are taking the NPV of on their management slide? If so, why not disclose that? And why create the impression it is a "cash return" when there has been no cash inflow?

 

Edit: So, I just ran a quick calculation of 2009-to-date OCF + taxes + interest expense + restructuring expense. This "adjusted cash" figure (or whatever you want to call it) totals $11.45B, compared to $11.4B of "cash generated since deal close" from AZ Value's computed spreadsheet here: http://3.bp.blogspot.com/-8FPz1xTTuVA/Vd0CIM1PqHI/AAAAAAAAAPA/aRqd3ZaPqa8/s1600/2014%2BCash%2BPayback%2BTable%2B2.JPG

 

This brings up AZ Value's point as to why management is adding back these costs to compute deal performance. Or maybe internally they don't, but why present it to investors this way? It's definitely misleading but each investor must make that decision themselves I suppose.

[LongHaul]

I am neither short nor long.  I have been unable to understand Valeant so far and am highly skeptical.  A few points though:

 

Why would a management team make something simple, complex?  Whom would that advantage?  Why are certain key items left out of the 10-Q’s and 10-K’s?

 

I read AZValue’s piece and thought it brought up great concerns.

 

1.  I looked at Sanitas for myself after AZValue's writeup:

 

Valeant claims Sanitas cash generated from ~8/2011 thru 9/30/2012 of $99m in unlevered FCF from ~8/2011 thru 9/30/2012. 

I get USD of ~$25m reported unlevered FCF in 2012 (FYI - the interest expense in deducted from the financing section which is different from US GAAP where it comes out of CFFO.) .  An IP deal was done on 12/31/11 where it appears that Sanitas xferred IP in exchange for a Valeant entity ~$24m cash xferred out thru this for the full year 2012.  In fact EBIT at Sanitas before impairments went up substantially in 2012 vs 2011.  FCF in 2011 was lower. Ebit:  $25m + $18m (licensing) = $43m likely cash from acquisition thru 9/30/2012.  Still nowhere near the amount claimed by mgmt.

 

Revenue was ~$125m (USD) in each of 2011 and 2012.  Did VRX really have 79% after tax FCF margins on this deal?  Unlikely especially when GM's are ~64%. 

 

I can't get anywhere close to $99m in cash generated.  Seems like they just made it up.

 

Their presentation of Sanitas appears to be highly deceiving unless I am missing something.

 

2.    The CAGR in the presentation was non-weighted and showed 12% vs 6% weighted.  That is just unbelievable.  I have seen some blatant garbage but the presentation is just meant to deceive. 

 

 

3. I consistently read that Valeant goes in and guts companies employees.  Medicis had 790 employees prior to VRX and 40 after.  Bausch and Lomb went from ~4,100 to ~1,475 after VRX took them over.  Source Page 30 of the congressional report.

 

Here is a direct quote from Glassdoor on B&L takeover.

““Loved my time as Bausch, but Valeant is a parasite, so I pursued other opportunities (I was NOT laid off) ”

Former Employee - IT Manager in Rochester, NY

Doesn't Recommend

Negative Outlook

I worked at Bausch & Lomb full-time (More than 5 years)

Pros

Bausch + Lomb was innovative, forward looking, and valued quality people...this literally ended the day Valeant took over, so the great folks (there were many) have left, leaving those that don't want to leave for some reason, or can't leave for some reason.

Cons

Under Valeant, the company is following the business model that Valeant has for a few years now, which is to fire all support and innovative personnel, and hope those few left can keep the lights on long enough to suck the products dry, and the discard the company like yesterday's garbage. A shame to end Bausch + Lomb's 160 years of success and innovation with at the hands of such a destructive company as Valeant, but I'm doing my part to warn folks not to get involved.Show Less

Advice to Management

I have none - they are simply carrying out the genius (sarcasm) of Mike Pearson, who gets a big payout if he can keep the charade going until 2018. If you don't believe that, research his compensation agreement - you'll see everything, and all will be made clear. It's an awful organization and I only have it 1 star because I can't give it 0.”

 

So their model is to gut a company and grow it.  If you gut marketing, R&D investment and virtually all your employees, you are killing your long term revenue.  In the short run the products will sell and you will be fine but long run your revenues will decline.  I think many pharma companies have some fat but a lot of it is probably investment.

 

4. No breakout of pricing vs volumes that I can see.  There was a strange article how Valeant was involved in some obscene price increases I think in 2015.  And on one of the drugs it was after a private equity player had already jacked up prices.  I would not be surprised if this was where there organic growth was coming from.  Think of all the generic competition eyeing VRX products. 

 

5. Or perhaps they are doing what Tyco did.  Hide stuff in the quarter before the acquisition to make post deal look better.  Funny how VRX Salix deal happens to close on 4/1/15 so we can’t see the 1Q 2015 numbers.  Organic revenue growth could be pumped up .  This is from the Salix 10-K  which I found highly suspicious:

 

“However, our revenue might fluctuate from quarter to quarter due to factors other than changes in prescriptions written, such as our plan to reduce our wholesaler inventory levels of Xifaxan 550, Apriso and Uceris to approximately three months at or before the end of 2015 (which will result in revenues that are less than end-user demand), or potential increased buying by wholesalers in anticipation of a price increase or because of the introduction of new products. In the case of increased wholesaler buying in a”particular quarter, revenue could be less than anticipated in subsequent quarters as wholesalers’ increased inventory is consumed. “

 

6.  So many deals.  The historical landscape is littered with rollups and deal CEO’s whose companies have failed.  It is far easier to hide reality with a lot of deals.  A few examples:  Tyco, Waste Management, Sunbeam, the rollups of the 90’s and the Conglomerates of the 60’s.

 

 

My conclusion is that there are a lot of cockroaches in kitchen.  I really don’t give 2 poops that a lot of rich, prominent investment managers who supposedly to a lot of work and have great track records are in this.  Many were wrong on Waste Management and lots of others stocks. 

 

The other thing is that I can’t help but think the CEO is a slick Mckinsey type.  He was probably great at selling Mckinsey services. 

 

If I wanted to create a short term earnings story this is a great industry to be in.  Buy company, gut it, show good earnings, and repeat.  It keeps on going until falls apart. 

 

Ebit 8/31/15 to update for $18m licensing fee pd out. See LoganC post.

[Guest Schwab711]

Excellent post LongHaul!

[original mungerville]

Sometimes, the retired lawyer in me won't let me just let stuff go. Occasionally, I have to let him out to play. You said:

 

We weren't talking past each other. I said the IRR methodology in AZ's analysis was wrong and provided a numerical example of why it is wrong. Picasso said that was not the case. Its not pretty, its wrong - very wrong. Its inflating his analysis while he tries to prove Valeant has inflated their numbers.

 

The cash flow stuff in that analysis is a poor as the IRR methodology but since we take so long to agree that AZ can't do IRRs, why the hell would I want to drag myself through dissecting how messed up that cash flow analysis is?

 

I suspect that you were referencing this:

 

I have modified my comments to be more in line with this board's culture:

 

No AZ, its not "fine", your IRRs are not "fine". Nobody, I MEAN NOBODY, does an IRR calculation for a business and in year 10 essentially assumes it goes bankrupt. What the!?!? Just how stupid do you think we are?

 

 

 

NO, I was referencing an example I provided in a post which followed:

 

"Yes I ran it. If you take AZ_Value's 2nd B&L IRR calculation where he says the IRR is 17.66% stopping at year 10. If you extend his year 10 number to year 30 using 2% inflation compounded per year, the IRR is 24.7%.

 

24.7/17.66 = 1.4 which means based on this simple assumption, his IRR calculation is off by 40%. 40% is a big number.

 

(Another way to do it is to assume a multiple for the business generating 5160 in year 10, and assume you get a one time cash payment for that business in that year.)

 

Anyway, that's it for me on IRR 101."

 

My point being that AZ_Value's use of IRR is misleading (ie not correct) in this instance. I would suspect you can agree with that?

[KCLarkin]

LongHaul please try calculating Sanitas EBITA rather than cash flow.

[LongHaul]

KC,

Sanitas:  I get EBITA in 2012 of ~$22m USD.  I don't think it is relevant though as in their presentation they state "cash generated since close"  not EBITA.  Either way it is not even in the ballpark of $99m.

 

AZValue - I really appreciate you doing a lot of work on this.  I learned a lot from reading you analysis.

I think it really exposed some deceiving stuff mgmt is doing.  I was surprised stock was not down 20% on your post!

 

Also something else to ponder with VRX at $236: 

VRX Market cap:  $81b

LTM FCF              ~$2b  CFFO has been weak

 

Market Cap/ LTM FCF:  40.5x

 

 

 

[JoeDawg]

Not sure slick and Pearson should go in the same sentence.  Have you watched an interview?

[merkhet]

Sometimes, the retired lawyer in me won't let me just let stuff go. Occasionally, I have to let him out to play. You said:

 

We weren't talking past each other. I said the IRR methodology in AZ's analysis was wrong and provided a numerical example of why it is wrong. Picasso said that was not the case. Its not pretty, its wrong - very wrong. Its inflating his analysis while he tries to prove Valeant has inflated their numbers.

 

The cash flow stuff in that analysis is a poor as the IRR methodology but since we take so long to agree that AZ can't do IRRs, why the hell would I want to drag myself through dissecting how messed up that cash flow analysis is?

 

I suspect that you were referencing this:

 

I have modified my comments to be more in line with this board's culture:

 

No AZ, its not "fine", your IRRs are not "fine". Nobody, I MEAN NOBODY, does an IRR calculation for a business and in year 10 essentially assumes it goes bankrupt. What the!?!? Just how stupid do you think we are?

 

 

 

NO, I was referencing an example I provided in a post which followed:

 

"Yes I ran it. If you take AZ_Value's 2nd B&L IRR calculation where he says the IRR is 17.66% stopping at year 10. If you extend his year 10 number to year 30 using 2% inflation compounded per year, the IRR is 24.7%.

 

24.7/17.66 = 1.4 which means based on this simple assumption, his IRR calculation is off by 40%. 40% is a big number.

 

(Another way to do it is to assume a multiple for the business generating 5160 in year 10, and assume you get a one time cash payment for that business in that year.)

 

Anyway, that's it for me on IRR 101."

 

My point being that AZ_Value's use of IRR is misleading (ie not correct) in this instance. I would suspect you can agree with that?

 

So, my comment was that your issue w/ AZ was that his IRR stopped in year 10 rather than extending beyond it. Your response was that you were referencing a different post in which your issue w/ AZ was that his IRR stopped in year 10 rather than extending beyond it. I mean, okay. Sure.

 

And, no, I don't think AZ's use of IRR was misleading. In fact, AZ writes in his blog post that:

 

Anybody can play with these numbers as much as they want and build many scenarios.

 

Of course I'm not really showing anything new here, we all know that this is how time value of money and discounting works. The further out you push those cash flows, the more you will need them to be really really big to achieve a 20% IRR.

 

Did anyone actually think that AZ meant to say that these cash flows would actually drop to $0 in Year 11? Or did they, like me, think of the ten year IRR calculation as a rough model and/or a way to verify how Valeant was measuring IRRs?

 

FWIW, I modeled out the first B+L scenario to 30 years, and it takes about $1,900.00 to get a 20% IRR.

 

I then modeled out the second B+L scenario to 30 years, and you don't even have to model in 2% inflation to get to 24% IRRs because you're adding $103 billion in non-discounted cash flows to the model just by setting Year 11 through Year 30 at the same as Year 10. Another way to look at it is that you took $6.9 billion in cash flows discounted at 24% and added an additional $2.3 billion of cash flows discounted at 24% to it or roughly a 33% increase.

[KCLarkin]

LongHaul, what about the EBITA for the 2011 stub period?

[LongHaul]

Not sure about EBITA for 2011 stub but 2011 as a whole was less than 2012.

[KCLarkin]

Not sure about EBITA for 2011 stub but 2011 as a whole was less than 2012.

 

Net income in Q4 2011 was $127.5 M, so I am not sure that is true.

[LongHaul]

KC - this is attributable to 2011 in the Lithuanian FX.  Almost all of the income in 2011 from this Gain on contribution in 4Q 2011- see note below. 

 

"Gain on disposal of assets by contribution in investment in associate 1 - 332,882"

 

"The fair value of Valeant IPM sp. z o.o. net assets, attributable for the Group, amounted to LTL 487,105 thousand and exceeded the cost of the Group to this associated entity by LTL 332,882 thousand, which was recognized in the Group profit or loss as gain on disposal of assets by contribution in investment in associate, respectively, at the time of acquisition."