VRX - Valeant Pharmaceuticals International Inc.

[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?

 

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.

 

Unfortunately, his rough way of calculating it inflates his analysis. Normally to prove a point in a rough manner, one would try to figure out a way to be conservative so as to persuade the other side towards his or her view. Surely you can agree with this?

[loganc]

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.

 

So, there is a large non-cash accounting gain from the transfer of the IP to the company Valeant IPM.  I do not believe that this accounting gain would have been counted towards the "cash generated" number in the slide deck.

 

If you look at Note 7 of the FY12 Sanitas AR, you will see a Licensing and patent cost of 62.8MM LTL that is included within the Selling and distribution expenses line in the income statement.  I believe that this cost would partially account for the disparity between the number reported in the slide deck and the Sanitas filings.

 

While I believe that there is likely a reasonable explanation for the disparity in the numbers, I agree that the $99MM number appears large relative to even the forecast revenue numbers.  I am going to keep digging and see what I can come up with.

[abitofvalue]

So I am sure this is a dumb question - Why are those who are skeptical of VRX spending so much time analyzing this company in so much detail? Just seems like an odd thing to spend your time on unless you are short.

 

Clearly the longs believe management and the story.  Not saying there shouldn't be discussion but at this point is there really any chance you are going to change people's mind with a pithy comment about management being untrustworthy?  I mean, I get AZ_Value / Longhaul etc who are digging in and trying to add new information but some of the heated comments from both sides just remind me of this  -

 

 

http://www.reformation21.org/Someone_Is_Wrong_On_The_Internet1.gif

 

No position in VRX except i too am long popcorn

[rb]

Unfortunately, his rough way of calculating it inflates his analysis. Normally to prove a point in a rough manner, one would try to figure out a way to be conservative so as to persuade the other side towards his or her view. Surely you can agree with this?

 

Ok, so anybody that criticizes Valeant must be conservative in their analysis in order to persuade others, but Valeant can be as liberal as they choose with their numbers? Why because their stock has gone up so much during the past couple of years?

 

There's people comparing Valeant to Berkshire? I think Buffett has been very detailed in his letters over the years about exactly how Berkshire makes their money and you see their profitability in the flood of cash coming into Berkshire. Not EBITDA, not IRRs, just tons of cash. Oh and the reason why Buffett gets more slack compared to Pearson is because he has a 50 year reputation of doing what he says and behaving ethically that's been tested through many cycles. Pearson has yet to live up to any of that.

[LongHaul]

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.

 

So, there is a large non-cash accounting gain from the transfer of the IP to the company Valeant IPM.  I do not believe that this accounting gain would have been counted towards the "cash generated" number in the slide deck.

 

If you look at Note 7 of the FY12 Sanitas AR, you will see a Licensing and patent cost of 62.8MM LTL that is included within the Selling and distribution expenses line in the income statement.  I believe that this cost would partially account for the disparity between the number reported in the slide deck and the Sanitas filings.

 

While I believe that there is likely a reasonable explanation for the disparity in the numbers, I agree that the $99MM number appears large relative to even the forecast revenue numbers.  I am going to keep digging and see what I can come up with.

 

Excellent Find loganc.  That would be ~$24m in 2012 or about $18m in the 1st 9 months of 2012.

Still not even close to the $99m. 

 

 

Abitofvalue: Very funny comic strip.  Sometimes its just a challenge and a learning experience. 

[loganc]

 

Excellent Find loganc.  That would be ~$24m in 2012 or about $18m in the 1st 9 months of 2012.

Still not even close to the $99m. 

 

Very funny comic.  Sometimes its just a challenge and a learning experience.

 

I don't really understand your comment about "funny comic."  I am trying to have a productive dialogue here.

[LongHaul]

Check this article out out:

 

Basically another confirmation of jacking up prices.  Note the alternative.  $50 per year. vs Valeant

trying to charge $50,000.  Think about the volume declines on that.  And according to the below article that was 27% of Salix Product sales.

 

 

PRICE FLASH! Glumetza therapy could now cost you $50,000 per year!

 

http://www.pharmacybenefitnews.com/#!PRICE-FLASH-Glumetza-therapy-could-now-cost-you-50000-per-year/c193z/558f31730cf2711ebbcebec5

 

 

 

The next largest product area for Salix is diabetes, specifically for Glumetza/Cycloset, which accounted for 27% of its product sales in 2014, or $308 million. Glumetza is a once-daily, extended-release formulation of metformin in 500 mg and 1000 mg dosage strengths that incorporates patented drug-delivery technology and is indicated as an adjunct to diet and exercise to improve glycemic control in adults with Type 2 diabetes. Currently, the company has four patents for the Glumetza 500 mg dose product, with expiration dates in 2016, 2020 and 2021.There are three patents for Glumetza 1000 mg dose product, with expiration dates in 2020 and 2025. There are also pending applications that, if issued, will provide further protection until 2025. In connection with settlement agreements entered into by Santarus, a first generic filer was granted the right to sell a generic version of Glumetza in February 2016 and two subsequent generic filers were granted the right to sell a generic version of Glumetza in August 2016. Under certain circumstances, however, Glumetza could face generic competition at an earlier date, according to Salix’s annual filing. Salix's other diabetes product, Cycloset (bromocriptine mesylate) tablets, is indicated as an adjunct to diet and exercise to improve glycemic control in adults with Type 2 diabetes mellitus;

 

http://connect.dcat.org/blogs/patricia-van-arnum/2015/04/06/valeants-acquisition-of-salix-the-implications-in-specialty-pharma#.VeEvCigViko

[LongHaul]

And the human side to all these sky high prices.  See the comments section.

 

http://pharmacychick.com/2015/07/07/dump-glumetza-and-hang-their-reps/

 

 

Perhaps this was talked about before but the CFO just left.  Let me repeat that:  The CFO just left.

He just give all the money and prestige and power up just like that.  In short seller land that is a huge red flag. 

[loganc]

And the human side to all these sky high prices.  See the comments section.

 

http://pharmacychick.com/2015/07/07/dump-glumetza-and-hang-their-reps/

 

 

Perhaps this was talked about before but the CFO just left.  Let me repeat that:  The CFO just left.

He just give all the money and prestige and power up just like that.  In short seller land that is a huge red flag.  Remember Jeff Skilling - also a Mckinsey grad who knew everything about business left in early 2001 right before everything blew up at Enron.  Hmm....

 

The former CFO is on the board of VRX and he hasn't sold any shares (as far as I know).

 

What is your fundamental bear thesis here?  Skilling's associations with McKinsey?  This is absurd.  Do you want to have a productive conversation or not?

 

Does VRX take price on certain drugs?  Yes.  This isn't some kind of massive revelation that you are providing here. 

 

Edit: Typos.

[giofranchi]

;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.

 

Ok, let me be as clear as I can about this topic:

 

Though I surely cannot know for ALL companies, I believe what you have just said is simply not true for the companies I am interested and I invest in.

 

Those companies grow faster than the other because they grow both organically and through acquisitions. This way they tend to become very complex entities to analyse... You don't have to analyse 1 business... But 140! Furthermore, once they have acquired all those businesses, the companies I invest in don't disclose in their 10-Ks the GAAP results for each businesses they own, but only the numbers for the whole company. The same is true for meaningful non-GAAP numbers through conference calls and presentations.

 

Now: I think almost nobody would have the TIME to "prove" how each single business of theirs are doing, but, even if you are 1 in a million, and you could find the time needed, you don't have the INFORMATION required to do so. At least if you are an outside investor, without access to insider information.

 

Why do I invest in such complicated companies then? Because imo they are the ones which will go on growing the most quickly! In other words, all others are lower quality imo.

Qualitative reasons why management could be trusted of course are not 100% certain... They will never be... But in my experience they have always worked so far and are very important... Why should otherwise Buffett put so much emphasis on "reputation"? Isn't reputation something intrinsically qualitative? Of course it is! If you don't believe what Buffett says, BRK is not a business in which you could invest.

 

Cheers,

 

Gio

[one-foot-hurdles]

Cooler heads on this thread came up with great insights into problems with aspects of the analysis in question.

 

Those who lost their minds about this blog should not be investing - at some point you will need to make tough rational decisions on a position. If some blog that clearly was an earnest attempt at analysis, flawed or not, made you this bonkers, you're in trouble.

 

Thanks mvalue, you've taken the words right out of my mouth.

What a circus this thread has turned out to be.

[Green King]

Cooler heads on this thread came up with great insights into problems with aspects of the analysis in question.

 

Those who lost their minds about this blog should not be investing - at some point you will need to make tough rational decisions on a position. If some blog that clearly was an earnest attempt at analysis, flawed or not, made you this bonkers, you're in trouble.

 

Thanks mvalue, you've taken the words right out of my mouth.

What a circus this thread has turned out to be.

 

+1 Also no position and long popcorn  :D

[writser]

Qualitative reasons why management could be trusted of course are not 100% certain... They will never be... But in my experience they have always worked so far and are very important... Why should otherwise Buffett put so much emphasis on "reputation"? Isn't reputation something intrinsically qualitative? Of course it is! If you don't believe what Buffett says, BRK is not a business in which you could invest.

 

I hate to get dragged down in this stupid thread but I feel a strong urge to post my thoughts: there is something wrong on the internet.

 

Gio: I am sure you know this but let me point out the difference between Berkshire and Valeant. Buffett has a 50-year track record. Berkshire is not very leveraged, generates loads of cash and has tons of liquid assets on its balance sheet. Buffett is guiding towards 10% growth in the foreseeable future. Pearson has a 7-year track record, Valeant has 40b in intangibles vs 6b in equity and 30b in debt and promises 20% CAGR on all its acquisitions. Berkshire is trading at 1.4x book, Valeant is trading at 12.6x book. We can't even compare price to tangible book because VRX doesn't have any tangible book value. Now, with regards to this "trust" thing you are talking about: suppose both Buffett and Pearson are way too optimistic about their own companies. Let's say Berkshire makes a small loss over the next decade, and Valeant only manages to grow by 5% annually over the next decade. Guess which stock would do better? And which scenario do you think is more likely? That the guy with a 50-year track record predicting 10% growth is too optimistic or that the guy with a 7-year track record predicting 20% growth is too optimistic?

 

The fault that I think you are making is that you frame the 'trust problem' as if it is a multiple choice question: either you trust management (in that case Valeant is the better buy) or they are fraudsters (in that case both Berkshire and Valeant are worthless). I, on the other hand, think this is a 'fifty shades of grey' problem. I agree with you that it is almost impossible to state with certainty whether a company is completely honest, a total fraud or something in between. However, I think there are some heuristics that I can apply to get an indication of a) how likely it is that there are some rats in the kitchen and b) what will happen if we find some rats in the kitchen. All these heuristics point towards BRK as a safer and more believable company. That does not mean that I think that Valeant is the next Enron but it means that I think it is more likely something bad will happen at Valeant. And, if something bad happens, the consequences are probably harsher for Valeant. Which means, in turn, that I require more certainty before concluding Valeant is a good investment than I would require for Berkshire.

 

I almost deleted this entire post because I wanted to rephrase it but I'll leave it here and write a second post later. I'm going to enjoy the sun. I think I need a break because this pointless thread is devouring this forum up to a point where I want to stab myself and now I am even contributing to it.

[merkhet]

Unfortunately, his rough way of calculating it inflates his analysis. Normally to prove a point in a rough manner, one would try to figure out a way to be conservative so as to persuade the other side towards his or her view. Surely you can agree with this?

 

Yes. That I can agree on. I would have preferred a little more discussion of the reasoning behind using ten years. (AZ did explain that in the thread later, though.) I would have also liked a longer exposition, but I think that's just the retired lawyer in me talking...

[merkhet]

So I am sure this is a dumb question - Why are those who are skeptical of VRX spending so much time analyzing this company in so much detail? Just seems like an odd thing to spend your time on unless you are short.

 

Some mixture of tribalism and natural (mostly) male rituals of dominance.

 

On my part, I like digging into companies like this because it's good practice for my accounting skills. Practice is useful even ifs don't have a position either way.

 

As a side note, I think there is a dangerous current brewing on this board about people saying "why are you spending time on this if you are neither long nor short." It popped up on the Biglari thread too.

 

The implication that people should be ignoring things unless they are invested one way or another is a terrible way to make decisions and/or conduct a board.

[merkhet]

 

Ok, let me be as clear as I can about this topic:

 

Though I surely cannot know for ALL companies, I believe what you have just said is simply not true for the companies I am interested and I invest in.

 

Those companies grow faster than the other because they grow both organically and through acquisitions. This way they tend to become very complex entities to analyse... You don't have to analyse 1 business... But 140! Furthermore, once they have acquired all those businesses, the companies I invest in don't disclose in their 10-Ks the GAAP results for each businesses they own, but only the numbers for the whole company. The same is true for meaningful non-GAAP numbers through conference calls and presentations.

 

Now: I think almost nobody would have the TIME to "prove" how each single business of theirs are doing, but, even if you are 1 in a million, and you could find the time needed, you don't have the INFORMATION required to do so. At least if you are an outside investor, without access to insider information.

 

Why do I invest in such complicated companies then? Because imo they are the ones which will go on growing the most quickly! In other words, all others are lower quality imo.

Qualitative reasons why management could be trusted of course are not 100% certain... They will never be... But in my experience they have always worked so far and are very important... Why should otherwise Buffett put so much emphasis on "reputation"? Isn't reputation something intrinsically qualitative? Of course it is! If you don't believe what Buffett says, BRK is not a business in which you could invest.

 

Cheers,

 

Gio

 

What you are saying simply is not factually accurate -- especially about Berkshire.

 

Have you read through all 50 years of Berkshire shareholder letters and filings? I have. (Recently, actually.) And I can guarantee you that you could follow things year by year through reading his filings.

 

For a while, he even broke down the aggregate ROIC for each "industry" in which he was invested.

[rb]

I almost deleted this entire post because I wanted to rephrase it but I'll leave it here and write a second post later. I'm going to enjoy the sun. I think I need a break because this pointless thread is devouring this forum up to a point where I want to stab myself and now I am even contributing to it.

I don't think there's a need to rephrase. Your post is very well put.

[giofranchi]

Qualitative reasons why management could be trusted of course are not 100% certain... They will never be... But in my experience they have always worked so far and are very important... Why should otherwise Buffett put so much emphasis on "reputation"? Isn't reputation something intrinsically qualitative? Of course it is! If you don't believe what Buffett says, BRK is not a business in which you could invest.

 

I hate to get dragged down in this stupid thread but I feel a strong urge to post my thoughts: there is something wrong on the internet.

 

Gio: I am sure you know this but let me point out the difference between Berkshire and Valeant. Buffett has a 50-year track record. Berkshire is not very leveraged, generates loads of cash and has tons of liquid assets on its balance sheet. Buffett is guiding towards 10% growth in the foreseeable future. Pearson has a 7-year track record, Valeant has 40b in intangibles vs 6b in equity and 30b in debt and promises 20% CAGR on all its acquisitions. Berkshire is trading at 1.4x book, Valeant is trading at 12.6x book. We can't even compare price to tangible book because VRX doesn't have any tangible book value. Now, with regards to this "trust" thing you are talking about: suppose both Buffett and Pearson are way too optimistic about their own companies. Let's say Berkshire makes a small loss over the next decade, and Valeant only manages to grow by 5% annually over the next decade. Guess which stock would do better? And which scenario do you think is more likely? That the guy with a 50-year track record predicting 10% growth is too optimistic or that the guy with a 7-year track record predicting 20% growth is too optimistic?

 

The fault that I think you are making is that you frame the 'trust problem' as if it is a multiple choice question: either you trust management (in that case Valeant is the better buy) or they are fraudsters (in that case both Berkshire and Valeant are worthless). I, on the other hand, think this is a 'fifty shades of grey' problem. I agree with you that it is almost impossible to state with certainty whether a company is completely honest, a total fraud or something in between. However, I think there are some heuristics that I can apply to get an indication of a) how likely it is that there are some rats in the kitchen and b) what will happen if we find some rats in the kitchen. All these heuristics point towards BRK as a safer and more believable company. That does not mean that I think that Valeant is the next Enron but it means that I think it is more likely something bad will happen at Valeant. And, if something bad happens, the consequences are probably harsher for Valeant. Which means, in turn, that I require more certainty before concluding Valeant is a good investment than I would require for Berkshire.

 

I almost deleted this entire post because I wanted to rephrase it but I'll leave it here and write a second post later. I'm going to enjoy the sun. I think I need a break because this pointless thread is devouring this forum up to a point where I want to stab myself and now I am even contributing to it.

 

Of course, I agree.

But we are not talking about the future. We are talking about the past. We are talking about our abilities "to prove" beyond doubt from 10-Ks and conference calls (in the case of Valeant) or annual letters (in the case of Berkshire) that what Pearson is telling us about VRX's 140 businesses or what Buffett is telling us about BRK's 75 businesses is right beyond doubt.

And I think in both cases it is not possible with the information we have as outside shareholders.

 

Then, of course, I agree BRK is a much safer investment than VRX... But that's not what I was interested in and talking about!

 

Finally, I can surely understand why some of you cannot stand this thread any longer... But evidently some of us still find the discussion worthwhile... Won't you please just let us talk about what we find interesting and look elsewhere instead?

 

Thank you,

 

Gio

[giofranchi]

 

Ok, let me be as clear as I can about this topic:

 

Though I surely cannot know for ALL companies, I believe what you have just said is simply not true for the companies I am interested and I invest in.

 

Those companies grow faster than the other because they grow both organically and through acquisitions. This way they tend to become very complex entities to analyse... You don't have to analyse 1 business... But 140! Furthermore, once they have acquired all those businesses, the companies I invest in don't disclose in their 10-Ks the GAAP results for each businesses they own, but only the numbers for the whole company. The same is true for meaningful non-GAAP numbers through conference calls and presentations.

 

Now: I think almost nobody would have the TIME to "prove" how each single business of theirs are doing, but, even if you are 1 in a million, and you could find the time needed, you don't have the INFORMATION required to do so. At least if you are an outside investor, without access to insider information.

 

Why do I invest in such complicated companies then? Because imo they are the ones which will go on growing the most quickly! In other words, all others are lower quality imo.

Qualitative reasons why management could be trusted of course are not 100% certain... They will never be... But in my experience they have always worked so far and are very important... Why should otherwise Buffett put so much emphasis on "reputation"? Isn't reputation something intrinsically qualitative? Of course it is! If you don't believe what Buffett says, BRK is not a business in which you could invest.

 

Cheers,

 

Gio

 

What you are saying simply is not factually accurate -- especially about Berkshire.

 

Have you read through all 50 years of Berkshire shareholder letters and filings? I have. (Recently, actually.) And I can guarantee you that you could follow things year by year through reading his filings.

 

For a while, he even broke down the aggregate ROIC for each "industry" in which he was invested.

 

Well, I have! Maybe not recently, but I have in the past!

 

"By industry" doesn't mean for every single business, and ROIC numbers are of course something you have to trust and that you cannot prove, unless a whole 10-K is published for each single business...

 

In my experience it is simply a matter of "quantity": I experience serious difficulties to follow all the details of the three businesses I own... There are lots of people much brighter than me... And surely Buffett can follow every detail of BRK's 75 businesses, like I think Pearson can follow every detail of VRX's 140 businesses... But to comunicate to outside investors all that would be necessary to prove how all those businesses are truly performing?!... Really?!... I am not convinced!

 

Cheers,

 

Gio

[rb]

Of course, I agree.

But we are not talking about the future. We are talking about the past. We are talking about our abilities "to prove" beyond doubt from 10-Ks and conference calls (in the case of Valeant) or annual letters (in the case of Berkshire) that what Pearson is telling us about VRX's 140 businesses or what Buffett is telling us about BRK's 75 businesses is right beyond doubt.

And I think in both cases it is not possible with the information we have as outside shareholders.

 

Then, of course, I agree BRK is a much safer investment than VRX... But that's not what I was interested in and talking about!

 

Finally, I can surely understand why some of you cannot stand this thread any longer... But evidently some of us still find the discussion worthwhile... Won't you please just let us talk about what we find interesting and look elsewhere instead?

 

Thank you,

 

Gio

I keep seeing this idea that nobody can understand what's going on at Berkshire or prove that the financials are true. As someone who's read all the BRK ARs. I feel that I know what's going on and how the business is performing and I can show that the financials are true. I also think that anyone with a good understanding of accounting and finance can understand them with a reasonable amount of work. If anyone has any questions about BRK financials please post them in a BRK thread and I'll be glad to help.

 

Gio, you do know that a lot of BRK businesses file financials separately.

[jay21]

I've always looked at VRX skeptically and never really got interested in the company. AZ Value's posts were the first time I started doing some digging beyond reading BBG articles and tweets.

 

I have to say, I am leaning towards initiating a long. I've spent some time thinking about how they generate high teen IRRs and you can explain a lot by changing the tax structure and eliminating wasteful R&D. Deliotte published reports showing R&D returns are around 5%. That's huge destruction of value. Those two points alone can count for a substantial part of their acquisition outperformance.

 

Next step is getting more familiar with the actual products and organic growth.

[original mungerville]

Unfortunately, his rough way of calculating it inflates his analysis. Normally to prove a point in a rough manner, one would try to figure out a way to be conservative so as to persuade the other side towards his or her view. Surely you can agree with this?

 

Yes. That I can agree on. I would have preferred a little more discussion of the reasoning behind using ten years. (AZ did explain that in the thread later, though.) I would have also liked a longer exposition, but I think that's just the retired lawyer in me talking...

 

OK, great that was my only point all along: there is too much irony in AZ inflating his analysis in order to demonstrate that Valeant has inflated their numbers. 

 

 

[giofranchi]

Of course, I agree.

But we are not talking about the future. We are talking about the past. We are talking about our abilities "to prove" beyond doubt from 10-Ks and conference calls (in the case of Valeant) or annual letters (in the case of Berkshire) that what Pearson is telling us about VRX's 140 businesses or what Buffett is telling us about BRK's 75 businesses is right beyond doubt.

And I think in both cases it is not possible with the information we have as outside shareholders.

 

Then, of course, I agree BRK is a much safer investment than VRX... But that's not what I was interested in and talking about!

 

Finally, I can surely understand why some of you cannot stand this thread any longer... But evidently some of us still find the discussion worthwhile... Won't you please just let us talk about what we find interesting and look elsewhere instead?

 

Thank you,

 

Gio

I keep seeing this idea that nobody can understand what's going on at Berkshire or prove that the financials are true. As someone who's read all the BRK ARs. I feel that I know what's going on and how the business is performing and I can show that the financials are true. I also think that anyone with a good understanding of accounting and finance can understand them with a reasonable amount of work. If anyone has any questions about BRK financials please post them in a BRK thread and I'll be glad to help.

 

Gio, you do know that a lot of BRK businesses file financials separately.

 

Well, for those businesses which report financials separately of course it is different! But that's not the point! BRK was just an example... Maybe not the best one! Think instead of CSU, TDG, Malone's companies, to give examples of some other companies I am investing in and therefore I have been following closer recently than BRK... Or think about big banks! Come on! Buffett himself said he didn't understand BAC balance sheet so well, and he invested because BAC "was not going away"... By the way, do you feel you understand BAC balance sheet better than Buffett? Because BAC is a very large investment for BRK... If you don't... Well, that's what I meant!

 

Cheers,

 

Gio

[Jurgis]

Qualitative reasons why management could be trusted of course are not 100% certain... They will never be... But in my experience they have always worked so far and are very important... Why should otherwise Buffett put so much emphasis on "reputation"? Isn't reputation something intrinsically qualitative? Of course it is! If you don't believe what Buffett says, BRK is not a business in which you could invest.

 

I hate to get dragged down in this stupid thread but I feel a strong urge to post my thoughts: there is something wrong on the internet.

 

Gio: I am sure you know this but let me point out the difference between Berkshire and Valeant. Buffett has a 50-year track record. Berkshire is not very leveraged, generates loads of cash and has tons of liquid assets on its balance sheet. Buffett is guiding towards 10% growth in the foreseeable future. Pearson has a 7-year track record, Valeant has 40b in intangibles vs 6b in equity and 30b in debt and promises 20% CAGR on all its acquisitions. Berkshire is trading at 1.4x book, Valeant is trading at 12.6x book. We can't even compare price to tangible book because VRX doesn't have any tangible book value. Now, with regards to this "trust" thing you are talking about: suppose both Buffett and Pearson are way too optimistic about their own companies. Let's say Berkshire makes a small loss over the next decade, and Valeant only manages to grow by 5% annually over the next decade. Guess which stock would do better? And which scenario do you think is more likely? That the guy with a 50-year track record predicting 10% growth is too optimistic or that the guy with a 7-year track record predicting 20% growth is too optimistic?

 

The fault that I think you are making is that you frame the 'trust problem' as if it is a multiple choice question: either you trust management (in that case Valeant is the better buy) or they are fraudsters (in that case both Berkshire and Valeant are worthless). I, on the other hand, think this is a 'fifty shades of grey' problem. I agree with you that it is almost impossible to state with certainty whether a company is completely honest, a total fraud or something in between. However, I think there are some heuristics that I can apply to get an indication of a) how likely it is that there are some rats in the kitchen and b) what will happen if we find some rats in the kitchen. All these heuristics point towards BRK as a safer and more believable company. That does not mean that I think that Valeant is the next Enron but it means that I think it is more likely something bad will happen at Valeant. And, if something bad happens, the consequences are probably harsher for Valeant. Which means, in turn, that I require more certainty before concluding Valeant is a good investment than I would require for Berkshire.

 

I almost deleted this entire post because I wanted to rephrase it but I'll leave it here and write a second post later. I'm going to enjoy the sun. I think I need a break because this pointless thread is devouring this forum up to a point where I want to stab myself and now I am even contributing to it.

 

Great post. +1

[Picasso]

Unfortunately, his rough way of calculating it inflates his analysis. Normally to prove a point in a rough manner, one would try to figure out a way to be conservative so as to persuade the other side towards his or her view. Surely you can agree with this?

 

Yes. That I can agree on. I would have preferred a little more discussion of the reasoning behind using ten years. (AZ did explain that in the thread later, though.) I would have also liked a longer exposition, but I think that's just the retired lawyer in me talking...

 

OK, great that was my only point all along: there is too much irony in AZ inflating his analysis in order to demonstrate that Valeant has inflated their numbers.

 

VRX management doesn't model out past year ten as part of their Deal Model. So what is your point again?