VRX - Valeant Pharmaceuticals International Inc.

[ccplz]

Why do people keep comparing Pearson to Buffett and Malone?

 

He is not Buffett or Malone.

 

Oh..BTW:

 

"It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it.

 

We won't buy into companies where someone's talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don't, I suspect you'll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft -- they'll never use EBITDA in their annual report.

 

People who use EBITDA are either trying to con you or they're conning themselves. Telecoms, for example, spend every dime that's coming in. Interest and taxes are real costs."

 

 

"There’s a natural tendency for CEOs to want to become bigger by spending other people’s money. The deal is already done by the time the board knows about it. The investment banker comes in and I’ve never seen a banker say, “This is a dumb idea.”

 

When a significant deal comes along, it’s a chance for the board to weigh in and discuss the economics of what’s going on. But the CEO doesn’t bring a deal unless he wants it done and so he stacks the deck.

 

I think big deals, on average in America, are contrary to shareholders’ interest."

 

 

 

[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.

 

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

 

I'm the Easter Bunny.

[jay21]

AZ - based on your modelling what type of IRRs are the public markets expecting from VRX's acquisition targets as standalone public companies? If they are publicly traded then you know the price. If you use your model, what type of IRRs or cash flow streams are to be expected?

 

Hopefully, that was clear. Thanks.

[LongHaul]

 

 

 

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.

 

Sometime there are different pieces of the puzzle that one off would not bring alarm, but when you find a whole bunch of red flags then that is cause for extra concern.  Perhaps price increase is not a revelation but perhaps the fundamental long term effect should be. 

[Liberty]

Why do people keep comparing Pearson to Buffett and Malone?

 

He is not Buffett or Malone.

 

Oh..BTW:

 

"It amazes me how widespread the use of EBITDA has become. People try to dress up financial statements with it.

 

We won't buy into companies where someone's talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don't, I suspect you'll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft -- they'll never use EBITDA in their annual report.

 

People who use EBITDA are either trying to con you or they're conning themselves. Telecoms, for example, spend every dime that's coming in. Interest and taxes are real costs."

 

 

"There’s a natural tendency for CEOs to want to become bigger by spending other people’s money. The deal is already done by the time the board knows about it. The investment banker comes in and I’ve never seen a banker say, “This is a dumb idea.”

 

When a significant deal comes along, it’s a chance for the board to weigh in and discuss the economics of what’s going on. But the CEO doesn’t bring a deal unless he wants it done and so he stacks the deck.

 

I think big deals, on average in America, are contrary to shareholders’ interest."

 

Malone basically popularized the use of EBITDA.

 

He's also a big fan of complex structures as long as they optimize value creation, he never cared for how things look in GAAP, he's a big fan of the use of generous leverage when he thinks the assets support it, he did hundreds of deals in a very short period of time, and he's a big proponent of being very lean with anything that doesn't directly create value or doesn't have a good ROI.

 

Pearson's model is certainly closer to Malone's model than Buffett, no doubt about it.

 

btw, Berkshire owns a bunch of stock of many Malone businesses. Certainly Todd and Ted's doing, but these guys have Buffett's and Munger's blessing and full support. There are exceptions to every rule; some people use EBITDA to hide, some use it because it's a more useful metric to track than GAAP for some businesses (as long as you keep in mind what it is and don't delude yourself that it means FCF).

 

The 3G guys - Buffett's buddies - are also similar in many ways to Pearson and Malone. Very acquisitive, very focused on core value creation and cutting fat, comfortable with debt with the right assets, etc.

[Liberty]

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

 

We're seriously looking at a pharma company on the basis of tangible equity and book value now? Man, don't look at other pharmas.. I hear Zoetis is selling for 20x book...  Certainly don't look at software either. CSU is selling for 40x book, and that's not even tangible! IBM, one of Berkshire's biggest holdings, is still over 10x book despite the recent fall in stock price.

 

Heck, Moody's, one of Buffett's favorite business models and long-term holdings, has negative equity!

 

Personally, with the right kind of business, I love asset-light models. It's a big plus, not a detriment...

[kevin4u2]

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...

 

I don't have a bone to pick here either.  What I will say is that AZvalue's previous piece on FFH was factually flawed and I pointed that out to him and he has failed to reply.  He incorrectly concluded that FFH had underperformed BRK over 5, 10, 15, 20 and 25 year time periods.  The truth is he excluded dividends from his book value calculations.  Ironically, many people on this forum agreed with him and bashed FFH on the basis of the comparison to BRK.  http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/good-blog-post-on-ffh/  Calculated correctly, FFH outperforms BRK in every time period, except 5 years... Oops.  (not to mention this issues with US gov't debt in the article)

 

Back to watching the mudslinging from the sidelines.   

[giofranchi]

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...

 

I don't have a bone to pick here either.  What I will say is that AZvalue's previous piece on FFH was factually flawed and I pointed that out to him and he has failed to reply.  He incorrectly concluded that FFH had underperformed BRK over 5, 10, 15, 20 and 25 year time periods.  The truth is he excluded dividends from his book value calculations.  Ironically, many people on this forum agreed with him and bashed FFH on the basis of the comparison to BRK.  http://www.cornerofberkshireandfairfax.ca/forum/fairfax-financial/good-blog-post-on-ffh/  Calculated correctly, FFH outperforms BRK in every time period, except 5 years... Oops.  (not to mention this issues with US gov't debt in the article)

 

Back to watching the mudslinging from the sidelines. 

 

Well, surely I wasn't among the ones who agreed with him! At around the same time he posted his analysis about FFH I started a thread titled "Is it the right time to buy FFH again?", suggesting that it clearly was!... FFH's stock price then increased 40% in a matter of months...

 

Cheers,

 

Gio

[giofranchi]

Excellent post LongHaul!

 

Are you serious, or only joking?!

 

He did nothing but repeating again what has been already said many times on this thread just some months ago... Also repeating what AZ_Value said about Sanitas... Which by the way made me grin...!!

 

Come on, guys! When people so much sophisticated lie, they do so convincingly! Won't you agree? $99 million instead of $15 million... Please, believe an Italian guy as long as lies are concerned!

 

True scoundrels don't tell lies as stupid as that one!

 

Cheers,

 

Gio

[Guest Schwab711]

Excellent post LongHaul!

 

Are you serious, or only joking?!

 

He did nothing but repeating again what has been already said many times on this thread just some months ago... Also repeating what AZ_Value said about Sanitas... Which by the way made me grin...!!

 

Come on, guys! When people so much sophisticated lie, they do so convincingly! Won't you agree? $99 million instead of $15 million... Please, believe an Italian guy as long as lies are concerned!

 

True scoundrels don't tell lies as stupid as that one!

 

Cheers,

 

Gio

 

Trust, but verify. He at least gave me something to verify. Relatively, that is an excellent post these days.

[LongHaul]

I read over VRX 10-K last night.  I also looked at Bronte Capital's posts.  And a bunch of others stuff on VRX. 

 

I do think VRX did a great job with Cerave.  I think it is a great product and it has likely grown a lot in the last 5 yrs.  They also seem to cut a lot of fat from companies.  Of course how much is fat vs. muscle remains to be seen.

 

Other red flags:

 

1. Huge acquisition charges.  Within those are severance. Per laid off employee I get severance of $150k for the Medicis deal and $200k (Edit 8/31/15 - seems like most of Medicis was for big executives severance) for the Salix deal for each employee let go.  I think a more realistic severance would be $20k per employee based on avge tenure and salary of comps.

2. A/R sucked up $574m in 2014 on the cash flow statement.  Assess this one carefully at your own investing peril.

3. There are many, many others. 

 

 

Basically where I come out on this – there are way, way, way too many signs that point to VRX destroying businesses rather than creating any type of sustainable long term value.  You don’t create value by jacking up prices and gutting an organization of productive employees (muscle).  I would love to compete against VRX.  They would just give me market share and send good employees over.  They are my ideal competitor. 

 

It is an interesting thing that the underlying assumption of Valeant’s way of operating is that others are stupid.  The old mgmt teams and employees are stupid and not worth keeping, much of the long term marketing and investment is stupid, the prices for drugs, etc were stupidly low before VRX.  R&D and innovation is stupid.  Maybe it just the opposite.   

 

Good luck to all those that are long.  I am not short – too risky.  I predict VRX will come crashing down at some point.  Timing is impossible though.  There is much I don’t understand about VRX.  Some of it is all but impossible because of the deals, and moving parts.   

 

I like simplicity a lot.  There is no value in complexity.

 

Edit:  8/31/2015:  See Liberty's post with large severance for top execs at Medicis.  Clearly a lot of the severance is for top execs.

[Liberty]

Rather than just look at what the shorts said, maybe you should also look at the rebuttals by the company? The medicis severance costs were explained. The majority of the whole costs went to pay the golden parachutes of the Medicis executives based on contracts that the Medicis board had negociated with them prior, and Valeant honored those contracts.

 

I like simplicity a lot.  There is no value in complexity.

 

As I said earlier, Pearson's model is closer to Malone's than most. I suspect that people who don't like Valeant also don't like Malone, and that's fine. Different strokes.

 

Edit: Here. There's more detail in the transcript if you need it. The CEO of Medicis alone got almost 23m, and 37 other people got over 60 million:

 

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

 

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

 

btw, Medicis is the company that VRX has given in example multiple time when they talk about things they learned and doing it wrong. There they cut the salesforce too much (I guess they mostly wanted to keep the assets and use their existing derm operation to sell them). Now they keep salesforces and usually expand them, and as we've seen with B&L, it seems to be working quite well. They didn't cut as much as Medicis in the past, and havne't after (unless they just want the assets). And they've said that the B&L team they inherited from private equity wasn't that great,  so they replaced many people too...

[Liberty]

More stuff that I think some of the newbies to VRX might find interesting:

 

http://i.imgur.com/6lPkNxu.jpg

 

http://i.imgur.com/fvnEHd0.jpg

 

http://i.imgur.com/2MC268x.jpg

 

http://i.imgur.com/2qW6TrN.jpg

[giofranchi]

I would love to compete against VRX.  They would just give me market share and send good employees over.  They are my ideal competitor. 

 

I cannot really believe this… Look, I was talking yesterday to the CEO of the largest cement company in Italy, who has recently sold to a German company. And he told me this: “I never had the strength to fire all those unnecessary employees that destroyed the profitability of my company… Now I am sure those Germans will do so at last!”. Now, guess who’s the hardest competitor: the Italian or the German CEO?!

 

It is an interesting thing that the underlying assumption of Valeant’s way of operating is that others are stupid.  The old mgmt teams and employees are stupid and not worth keeping, much of the long term marketing and investment is stupid, the prices for drugs, etc were stupidly low before VRX.  R&D and innovation is stupid.  Maybe it just the opposite.   

 

This is completely misleading, and another proof of the fact you could read all the 10-Ks you want and still miss the most basic and important features of a business! It is because the pharma industry has been so successful and profitable in the past that VRX is able to do what it is doing! “Successful” and “profitable”, as far as I am concerned, are the opposite of “stupid”… Unnecessary costs and R&D investments that don’t lead to satisfactory financial returns are byproducts of a widespread “complacency” the pharma industry could afford because of its past successes and profitability.

 

There is much I don’t understand about VRX.  Some of it is all but impossible because of the deals, and moving parts.   

 

At last, one thing we can agree upon! And, believe me, AZ_Value has a very incomplete view of all the moving parts in VRX too! That’s why, as I have always repeated, a qualitative assessment of VRX’s management is so important: they are the only ones with full information about the company, and therefore you should muster enough confidence to trust what they say.

 

Cheers,

 

Gio

 

[giofranchi]

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

 

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

 

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

 

I couldn't agree more! ;)

 

Moreover, could you answer this simple question: how did Madoff make money?... Because this is the first thing I always try to understand: how does a business make money?!

 

I can answer in the case of VRX and others, while I couldn’t in the case of Madoff. Simple as that!

 

Cheers,

 

Gio

 

[writser]

Please allow me to continue my ramblings. i tried to ignore this thread for a while but, just like Tony Montana, I got pulled back in :) .

 

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

 

Frankly, I think the first question is: do you bet at all? You might feel the quote below is a platitude, but I think it is great advice:

 

To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.

 

I guess that's what fascinates me the most about this thread. Valeant is an overfollowed large-cap. There is huge controversy among investors about the sustainability of its results (just see the length of this thread). Charlie Munger called this a fraud on national television. There is no easily apparent margin of safety in the balance sheet or current earnings. The CEO is teared apart on glassdoor.com. Insiders are selling. Serial acquirers tend to underperform. Call me simplistic but within 10ms of looking at Valeant a few neurons in my brain start to fire up: "stay away from this!". That does not mean I think Valeant is a fraud - their story might check out. I don't even care. What I am certain about is that this is not a one-foot hurdle. I'm just as unlikely to go long as to go short.

 

The image this thread conjures up is of a couple of Sherlocks sitting in leather armchairs, smoking pipes, saying: "This company is elementary, Watson. This old fart Munger doesn't understand what he's talking about. I work at a software company but in my spare time I've been doing research on the internet. I know everything about Zovirax. I'm an expert on patents. Superficially this company looks extremely sketchy but I can safely ignore that because I have deduced everything there is to know here, Watson! The bears are simply not as smart as I am. This stock will earn me 20% per annum."

 

As a retail investor, how can you be so supremely confident in your analysis? Unlike Wellmont I don't think investing based on guts and conviction will yield outperformance. I try to remain skeptical about my own abilities to analyse a company as a retail investor. I especially try to remain skeptical when a lot of simple value investing heuristics are stacked against me. So, you are trying to convince me that this is the one of the few serial acquirers that doesn't blow up? That a $80b company will continue to grow by 20% per annum? That in this case 5x leverage is not dangerous? That in this case Charlie Munger is wrong? That in this case we can ignore glassdoor.com? That in this case it isn't a problem that the CFO resigned? That in this case the manager is truly exceptional? That in this case we can ignore insider selling? That in this case we can ignore that shares outstanding doubled in a decade? That in this case paying a gazillion times 2014 FCF is actually very cheap? That in this case we can ignore that management doesn't really break down how their subs perform? Guess what?

 

"Extraordinary claims require extraordinary evidence."

 

Given that, I really don't see how you can take a position in Valeant either way. Now all the bulls will undoubtedly parry me saying that I should do more research and that this post was way too superficial (and they have a point). But try to look at this in a probabilistic way. What is the base rate of companies with the characteristics mentioned above outperforming the market? How confident are you in your own analysis? If you combine these two metrics, do you think it is even worthwile to take a look at Valeant?

[giofranchi]

That in this case Charlie Munger is wrong?

 

Last time I checked Ackman talked about VRX with Munger and Munger admitted he only took a very superficial look at the company.

 

That in this case we can ignore insider selling?

 

Last time I checked insiders were buying not selling.

 

This being said, I like your post and imo it is by far the best bear case (or “stay away” case) I have heard so far. Meaning that's all bears really know about this company. Imo much more convincing than those numbers taken from presentations and 10-Ks of years ago!

 

Cheers,

 

Gio

 

[jay21]

writser - I like most of your posts but the above is littered with factual inaccuracies. The most offensive one being a misattribution of a quote from Michael Corleone to Tony Montana (granted some actor).

[writser]

writser - I like most of your posts but the above is littered with factual inaccuracies. The most offensive one being a misattribution of a quote from Michael Corleone to Tony Montana (granted some actor).

 

Auch. You are correct. That was horrible :o . With regards to the rest of the post: yes, I probably made some errors. Please forgive me. You understand this company way better than I do. I'm lazy. But even if half my heuristics are wrong the other half are enough for me to immediately discard this stock (which I think is what Munger did too). This is not a one-foot hurdle. Your analysis has to be spot on here. I prefer a more robust approach to investing. But if you are sure you are the exception to your peer group and you are sure Valeant is the exception to its peer group, by all means go all in.

[giofranchi]

That a $80b company will continue to grow by 20% per annum?

 

Well, I would be very surprised if 5 years from now VRX’s sales aren’t more than double what they are today. And that’s basically what I care about.

 

That in this case we can ignore that shares outstanding doubled in a decade?

 

Well, compared to the amount of acquisitions they have made, I think Pearson has issued very little shares! He has often said he wouldn’t do that because he knows what they are truly worth!

 

That in this case we can ignore that management doesn't really break down how their subs perform?

 

Could you name some companies that grow both organically and through acquisitions and which break down their subs performance much more extensively than VRX does? I would be greatly interested in getting to know those companies!

 

Cheers,

 

Gio

[Green King]

http://www.kshb.com/news/state/kansas/kansas-statistician-suing-the-state-to-obtain-election-records-says-voting-results-dont-add-up

[writser]

To make up for my horrible Tony Montana mistake I'll try to be constructive for once, and share another pharmaceutical company as an alternative for Valeant. As opposed to the 200-page dicussion on Valeant, nobody has even opened a thread about this. Here is is: http://www.beximcopharma.com/. Let me apply some of my overly simple heuristics.

 

+ This is not a controversial large cap. This is a $120m company that nobody outside of Bangladesh has ever heard of. There is not even a thread about it on CoBF. Consider my interest piqued.

+ Only tradable in Bangladesh and on the AIM market in London. Great. Hard to buy, more potential for mispricings.

+ Does it look cheap at first glance? Let's have a quick look on Morningstar and in their latest annual. Ok, this is trading at 0.5x book, 6.5x PE. Looks cheap!

+ How is the balance sheet? Looks like there are no intangibles, no debt. I like that.

+ Track record? At first glance: has been profitable for the last decade. During this period revenue quadrupled, earnings per share doubled, book value doubled.

- Capital allocation? Looks like they reinvest a lot of money in the business while they only earn 7% ROE. Not optimal but at least they also pay a cash dividend.

- Shares outstanding have increased. Looks like they pay a stock dividend. Hmmm. Potential problem.

- Insiders? No clue. Need more information.

+ Any random information? Looks like they just won FDA accreditation. Simple heuristic: makes it less likely this is a complete fraud.

 

My verdict after 5 minutes: looks cheap, warrants another look. I ended up buying it. The best thing about it? Last year it was 40% cheaper than it is now. Traded at 4x PE and 3x EV/EBIT and 0.3x book. Why would I even bother to read a Valeant annual when I can also investigate this opportunity? Why is the Valeant thread 200 pages but is there no thread about this name? My guess: it is much easier and feels much better to follow the crowd into an intellectual dick-measuring contest where you can prove you smart you are. I feel the same way. I enjoy being an armchair Sherlock in this thread but I haven't opened a thread on Beximco. Nevertheless, I  try not to let that influence my buying decisions.

[Liberty]

To make up for my horrible Tony Montana mistake I'll try to be constructive for once, and share another pharmaceutical company as an alternative for Valeant. As opposed to the 200-page dicussion on Valeant, nobody has even opened a thread about this. Here is is: http://www.beximcopharma.com/. Let me apply some of my overly simple heuristics.

 

+ This is not a controversial large cap. This is a $120m company that nobody outside of Bangladesh has ever heard of. There is not even a thread about it on CoBF. Consider my interest piqued.

+ Only tradable in Bangladesh and on the AIM market in London. Great. Hard to buy, more potential for mispricings.

+ Does it look cheap at first glance? Let's have a quick look on Morningstar and in their latest annual. Ok, this is trading at 0.5x book, 6.5x PE. Looks cheap!

+ How is the balance sheet? Looks like there are no intangibles, no debt. I like that.

+ Track record? At first glance: has been profitable for the last decade. They do pay out a cash dividend.

+ Any random information? Looks like they just won FDA accreditation. Simple heuristic: makes it less likely this is a complete fraud.

- Capital allocation? Looks like they reinvest a lot of money in the business while they only earn 7% ROE. Not optimal but at least they also pay a cash dividend.

- Shares outstanding have increased. Looks like they pay a stock dividend. Hmmm. Potential problem.

- Insiders? No clue. Need more information.

 

My verdict after 5 minutes: looks cheap, warrants another look. I ended up buying it. The best thing about it? Last year it was 40% cheaper than it is now. Traded at 4x PE and 3x EV/EBIT and 0.3x book. Why would I even bother to read a Valeant annual when I can also investigate this opportunity?

 

Are you kidding?

[Ross812]

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.

 

I think everyone needs to read LC's post a few times.  The "Deal Model" presented to investors and cited over and over:

 

http://1.bp.blogspot.com/-TYkPtmYZZf0/VdygEANZeHI/AAAAAAAAALs/ckl7kb5RwII/s640/1st%2BIRR%2Bslide.JPG

 

How do you reconcile "The acquisition and restructure costs are modeled as additional purchase price" with slides showing  acquisition and restructuring costs added back in to satisfy their own performance hurtle?

 

I'm not sure what you call this...

 

Most business owners could show fantastic returns on investment if you added back in taxes + interest expense + restructuring expense.

 

To continue my property analogy using the Valeant model:

 

I cold buy a rental property for 100k

renovate it for 10k

finance it at 4%

pay 2% property tax

pay 20% income tax

then rent it for 20k/yr

 

I generate 10K in OCF off this 110K outlay. That is what my financials will say at least.

 

For my investors, I will make a power point presentation showing I spent 100K and generated 30K cash since I closed last year

[10K OCF + 4k interest expense + 6K taxes + 10K renovation (restructuring costs)]

 

Am I way off base here?

 

 

[giofranchi]

Am I way off base here?

 

I don’t know Ross, I think we should ask Pearson how they calculate IRR, if it is so controversial… personally I don’t care much…

Becuse I believe 5 years from now VRX’s revenues will be more than double what they are today. Cash EPS will have grown faster than revenues. Debt / EBITDA will be lower than it is today.

If they lie about their “Deal Model”, how is it possible that overall results will be that good? Probably, you don’t think they will be that good… Or do you think they are telling lies about overall results too?

 

Cheers,

 

Gio