VRX - Valeant Pharmaceuticals International Inc.

[Valueguy134]

Thought I'd drop a quote from Security Analysis, since we don't care about numbers and back a "solid" management team, the next Warren Buffet in fact.

 

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

 

Making a bet on management and having no value on what audited numbers say is speculation. Why don't we stop talking about investment and just start playing odds.

[Ross812]

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

 

I have no doubt they will double cash generated according to the "deal model" in 5 years. I don't know how the market will value "deal model" cash flows 5 years from now.

 

For someone who has mentioned how important good management is in thousands of posts, I'm surprised you gloss over how the company flat out lies when explaining their "deal model" vs demonstrating deal model performance.

 

 

[Sunrider]

Thanks for bringing this up!

 

Now I just need to find the time to dig into this to find out if it was a joke or not (not that I have time to dig into Valeant either)?

 

I also wanted to say thank you to AZ Value as I really appreciate people taking the time, effort and diligence to think/dig through facts to decipher what is going on. Whether he/she is ultimately right or not is irrelevant for me from that perspective. Each investor should decide for themselves whose analysis/story they buy into.

 

C.

 

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.

[ScottHall]

Thought I'd drop a quote from Security Analysis, since we don't care about numbers and back a "solid" management team, the next Warren Buffet in fact.

 

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

 

Making a bet on management and having no value on what audited numbers say is speculation. Why don't we stop talking about investment and just start playing odds.

 

My entire portfolio is speculative.

[Valueguy134]

Thought I'd drop a quote from Security Analysis, since we don't care about numbers and back a "solid" management team, the next Warren Buffet in fact.

 

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

 

Making a bet on management and having no value on what audited numbers say is speculation. Why don't we stop talking about investment and just start playing odds.

 

 

My entire portfolio is speculative.

 

See I on the other hand am all investment.  I got it all riding on RED.

[giofranchi]

For someone who has mentioned how important good management is in thousands of posts, I'm surprised you gloss over how the company flat out lies when explaining their "deal model" vs demonstrating deal model performance.

 

Ross,

Cash EPS have nothing to do with their “Deal Model”. The great majority of pharma companies which buy other companies (see AGN, PRGO, ENDP, etc.) report Adjusted EPS, and they make the same adjustments VRX makes to calculate Cash EPS. Let’s say I have verified overall results instead of their “deal model”, and I have not find anything unusual.

If you think I am glossing over their IRR calculation, it is simply because I basically think it is no more than guesswork… I don’t really think we have enough information to come to any meaningful conclusion. Until, that is, they provide us at least one detailed example of how their “deal model” actually works…

By the way, you may ask: why haven’t they already provided that detailed example? Again: has Mr. Joffe discussed in great detail one acquisition Bidvest has made in the past? It might be so, I don’t know… But I would say that is the exception rather than the rule!

 

Cheers,

 

Gio

 

[LongHaul]

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?

 

Excellent post Writser.  Very logical.

 

Liberty.  Thanks for correcting my mistake on the severance on Medicis.  That seems to explain a lot of it. Where did you find that presentation BTW because I looked but did not see anything on the VRX website or in the SEC filings?

[giofranchi]

The great majority of pharma companies which buy other companies (see AGN, PRGO, ENDP, etc.) report Adjusted EPS, and they make the same adjustments VRX makes to calculate Cash EPS. Let’s say I have verified overall results instead of their “deal model”, and I have not find anything unusual.

 

Ah! Of course it might be that AGN, PRGO, ENDP, etc. are all frauds… But, when JNJ or NVS make some acquisitions, they also adjust results the same way (at least they did, when I was investing in them). JNJ and NVS are not frauds, right? ;)

 

Cheers,

 

Gio

 

[Liberty]

Thought I'd drop a quote from Security Analysis, since we don't care about numbers and back a "solid" management team, the next Warren Buffet in fact.

 

“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.”

 

Making a bet on management and having no value on what audited numbers say is speculation. Why don't we stop talking about investment and just start playing odds.

 

This is a strawman, though. I don't put no value on the audited numbers, I just haven't seen anything that makes me question them yet. I see a bunch of questions that don't always have answers, but I saw a bunch of questions with Hempton and Allergan too, and they were satisfactorily answered.

 

VRX is one of the biggest pharma multinationals in the world which has been super heavily scrutinized in the past few years. Allergan even hired Goldman Sachs to attack Valeant, and Goldman had previously underwritten VRX equity so they were pretty familiar with it (lol). The very best that these teams of experts could find either didn't hold to a rebuttal from the company or was proven wrong by subsequent facts (wheels will fall off when they lap B&L, organic growth will fall over time, etc).

 

The current crop of questions about the company, I believe, come from lack of information (there can be a dozen benign explanation for each question that I've seen raised). I've seen no smoking guns.

 

Does anyone here believe that Ackman and ValueAct (at least) have not modelled the past acquisitions and looked at the company's numbers? The main difference with the bloggers here is that when these guys have a question, they can get it answered easily. If they had found problems or couldn't get good answers from management, do you think they would keep their many billions of capital invested? If VRX at this point is just a combination of all the acquisitions they did, why are the audited revenue and cashflow numbers going up so fast if the underlying acquisitions aren't doing well like some pretend? (and btw, some people forget to adjust for working capital changes -- the company is growing fast and launching new products)

 

But how can you invest if you don't have all the information and can't reconcile everything, you ask? Well, I also own Constellation Software and I have even less information about each acquisition they do, and I certainly don't know everything that Malone is doing...  At some point when you've been ingesting tons of info about a company and thinking a lot about it, you need to make a judgement. What I know about Valeant makes me trust them and their model. That could change tomorrow, it's not blind faith. But if you can't invest in anything where you have an un-answered question, you probably can't invest in much that is bigger than a lemonade stand. I mean, people here have no problem investing in Bank of America or JP Morgan...

[Liberty]

Liberty.  Thanks for correcting my mistake on the severance on Medicis.  That seems to explain a lot of it. Where did you find that presentation BTW because I looked but did not see anything on the VRX website or in the SEC filings?

 

There you go:

 

https://www.dropbox.com/s/6xpowdh8zxn9svm/2014-jun-17-VRX%20Rebuttal%20Deck%20Final2.pdf?dl=0

 

Here, have the audio recording too:

 

https://www.dropbox.com/s/vzsj6izy9zqdqdb/VRX-2014-jun-17-AGN-4th.m4a?dl=0

[giofranchi]

The great majority of pharma companies which buy other companies (see AGN, PRGO, ENDP, etc.) report Adjusted EPS, and they make the same adjustments VRX makes to calculate Cash EPS. Let’s say I have verified overall results instead of their “deal model”, and I have not find anything unusual.

 

Ah! Of course it might be that AGN, PRGO, ENDP, etc. are all frauds… But, when JNJ or NVS make some acquisitions, they also adjust results the same way (at least they did, when I was investing in them). JNJ and NVS are not frauds, right? ;)

 

Cheers,

 

Gio

 

Moreover, the way they adjust results to report Cash EPS was strongly accused and put to test by Allergan last year. VRX replied very clearly and convincingly! This is why I think they would most probably respond very convincingly about their "deal model" too.

 

Cheers,

 

Gio

[LongHaul]

I was just verifying what VRX put in their presentation.  Here is what I found.

 

Per VRX presentation on June 17, 2014 (which I could not find on VRX website) which seems to be a rebuttal of some shorts. 

 

"Severance (a) (b) $109.4 See Detail

 

(a) Per Valeant 10-Q dated March 31, 2014 note 3

(b) Information is provided in Quarterly Press Tables, Table #5"

 

 

 

The presentation references the Valeant 10-Q dated March 31, 2014 note 3.

There is no reference to these charges in Note 3, it is in Note 4.  If mgmt can’t reference the right Note in a 10-Q why would I trust them with an extremely complex set of books?

 

The $109.4m  in the presentation seems to foot with my calculations of cash outlays according to their severance and related benefits with Medicis. 

 

I also quote from Note 4: 

 

“Medicis Restructuring Costs

 

The following table summarizes the major components of the $109.2 million of restructuring costs,”

 

With regards to the $109.2m in restructuring costs I cannot reconcile them.

I get $109.7m of charges in the severance and related benefits column.  If someone else can reconcile them for me that would be very helpful.  I may be mistaken. But they also might be.

 

Here is the relevant info from Note 4:

 

“Medicis Acquisition-Related Cost-Rationalization and Integration Initiatives

The Company estimates that it will incur total costs of approximately $200 million in connection with these cost-rationalization and integration initiatives, which were substantially completed by the end of 2013. However, certain costs may still be incurred in 2014. Since the acquisition date, total costs of $182.7 million (including (i) $109.2 million of restructuring expenses, (ii) $32.2 million of acquisition-related costs, which excludes $24.2 million of acquisition-related costs recognized in the fourth quarter of 2012 related to royalties to be paid to Galderma S.A. on sales of Sculptra®, and (iii) $41.3 million of integration expenses) have been incurred through March 31, 2014. The estimated costs primarily include: employee termination costs payable to approximately 750 employees of the Company and Medicis who have been terminated as a result of the Medicis Acquisition; IPR&D termination costs related to the transfer to other parties of product-development programs that did not align with our research and development model; costs to consolidate or close facilities and relocate employees; and contract termination and lease cancellation costs. These estimates do not include a charge of $77.3 million recognized and paid in the fourth quarter of 2012 related to the acceleration of unvested stock options, restricted stock awards, and share appreciation rights for Medicis employees that was triggered by the change in control.

Medicis Restructuring Costs

The following table summarizes the major components of the $109.2 million of restructuring costs, plus the charge of $77.3 million described in the preceding paragraph, incurred in connection with the Medicis Acquisition since the acquisition date through March 31, 2014:

 

See table in 1Q 2014 10-Q.  (I tried to post but it came out unclear)

 

 

 

Feel free to point out where I am wrong on any of this as it would lead to getting closer to the truth.

 

[Ross812]

For someone who has mentioned how important good management is in thousands of posts, I'm surprised you gloss over how the company flat out lies when explaining their "deal model" vs demonstrating deal model performance.

 

Ross,

Cash EPS have nothing to do with their “Deal Model”. The great majority of pharma companies which buy other companies (see AGN, PRGO, ENDP, etc.) report Adjusted EPS, and they make the same adjustments VRX makes to calculate Cash EPS. Let’s say I have verified overall results instead of their “deal model”, and I have not find anything unusual.

If you think I am glossing over their IRR calculation, it is simply because I basically think it is no more than guesswork… I don’t really think we have enough information to come to any meaningful conclusion. Until, that is, they provide us at least one detailed example of how their “deal model” actually works…

By the way, you may ask: why haven’t they already provided that detailed example? Again: has Mr. Joffe discussed in great detail one acquisition Bidvest has made in the past? It might be so, I don’t know… But I would say that is the exception rather than the rule!

 

Cheers,

 

Gio

 

Gio,

 

You are just talking past me on this one. Saying your deal model is one thing (acquisition/restructuring costs added to purchase price), then reporting a number that has restructuring costs added into Cash Generated is a huge red flag in my opinion.

 

I am asking how you are comfortable with this. I have a lot of respect for Value Act and I would trust their analysis, but I don't understand how you can add restructuring costs back into your cash flow....

 

As for Bidvest. You are right, they don't provide a huge amount of detail for any given acquisition, but the numbers work out for the company as a whole. Their website gives an enormous amount of detail on how every operating segment of their business is performing.

 

One of my huge hangups with VRX is the way they operate in general. I guess there are two ways to do business. The Valeant model in which you gut the company you acquire and strive for ruthless efficiency, or the Berkshire/Bidvest model where you acquire good businesses and give them a competitive advantage i.e. Berkshire with capital or Bidvest with vertical integration. Think about VRX vs Berkshire or Bidvest in 20 years. If VRX stopped acquiring, their revenues would decline over the long term due to patent expiration and being out innovated.

 

What you have in VRX is a company that operates like a PE corporate raider. The model is good for investors, but destroys the companies they target. They don't produce anything, they don't innovate. They maximize current products and pay to develop the last few drugs in their pipeline and that's it. Hopefully they don't get too big and successful because that would literally be detrimental to our health. 

[jay21]

Ross - i thought a little bit about your last point. Even though its not fundamental to the investment thesis its something interesting to consider because obviously you wouldnt want medical R&D trending to zero. However, after a few minutes, I came to the conclusion that the VRX model might be appropriate.

 

The current pharma model is you have a lot of R&D that is unproductive and generates low returns in aggregate with big hits and lots of misses. This is more a VC type model. It probably makes more sense to have VC financing/models fund this type of R&D and have corporates fund more predictable R&D.

 

It's more about changing the entire industry and the way capital is allocated. The oversight might work so much better in VC than buried in a corporation as investors have much more insight into particular drugs in a VC financing. I think Porter even said that some of the corporates are outclassed by some VC backed biotechs where innovation is happening.

 

This idea probably deserves a more lucid explanation than the one I gave it but I think you get the jist.  It's could create a more efficient system and match the appropriate capital to the appropriate risk/return ratio.

[loganc]

@LongHaul:

 

(1) The point about error in footnote number is correct.  However, I think it may be important to recall that VRX was in the middle of fighting against a lot of allegations from AGN and were responding very quickly. 

 

(2) The Severance cost of $109.4MM refers to "cash paid" for severance.  It is consistent with the cash payments listed in the table under "Severance and Related Benefits" in the 10Q. 

 

(3) I believe the difference between the $109.2MM and your calculation is due to the fact that you should compute the sum in the "Total" column of the table.  When you do this computation, you will get a sum of "Costs incurred and/or charged to expense" of $186.5MM.  This is consistent with the sum of $109.2MM of restructuring costs plus $77.3MM of costs from accelerated vesting of share-based compensation.

[jay21]

@LongHaul:

 

(1) The point about error in footnote number is correct.  However, I think it may be important to recall that VRX was in the middle of fighting against a lot of allegations from AGN and were responding very quickly. 

 

(2) The Severance cost of $109.4MM refers to "cash paid" for severance.  It is consistent with the cash payments listed in the table under "Severance and Related Benefits" in the 10Q. 

 

(3) I believe the difference between the $109.2MM and your calculation is due to the fact that you should compute the sum in the "Total" column of the table.  When you do this computation, you will get a sum of "Costs incurred and/or charged to expense" of 186.5MM.  This is consistent with the sum of $109.2MM of restructuring costs plus $77.3MM of costs from accelerated vesting of share-based compensation.

 

TBH - i thought his post was parody but maybe not.

[loganc]

TBH - i thought his post was parody but maybe not.

 

At least he is actually looking at numbers and trying to do some real work, as opposed to repeating ridiculous canards like VRX doesn't do R&D and Munger called VRX a fraud on national television. 

[Liberty]

One of my huge hangups with VRX is the way they operate in general. I guess there are two ways to do business. The Valeant model in which you gut the company you acquire and strive for ruthless efficiency, or the Berkshire/Bidvest model where you acquire good businesses and give them a competitive advantage i.e. Berkshire with capital or Bidvest with vertical integration. Think about VRX vs Berkshire or Bidvest in 20 years. If VRX stopped acquiring, their revenues would decline over the long term due to patent expiration and being out innovated.

 

What you have in VRX is a company that operates like a PE corporate raider. The model is good for investors, but destroys the companies they target. They don't produce anything, they don't innovate. They maximize current products and pay to develop the last few drugs in their pipeline and that's it. Hopefully they don't get too big and successful because that would literally be detrimental to our health.

 

This is a fundamental misunderstanding of the model. Saying "if they stop acquiring..." misses the whole point. Acquiring is part of the point, but if they couldn't, capital would be redirected internally.

 

Most pharma companies have a huge bias toward internal development. Valeant is agnostic about where assets come from; some are developped internally, some are acquired, and some are licensed. As long as they meet certain financial criteria. This gives them a broader menu to pick from to select exactly the kind of assets that they want at the risk profile that they want (that's also why they focus on a lot of smaller products that don't interest most other big companies). It also helps that they are multinational but not truly global; they can focus on just certain geographies that grow faster or that have more bargains and ignore others, unlike most centralized pharmas that try to be truly global even if some areas are less attractive.

 

There's also the meme that VRX doesn't do R&D. As has already been pointed out, OTC and generics don't require much R&D, so if you normalize for that, they spend a decent amount on the rest of the business.

 

VRX doesn't spend a ton of money on R&D flyers with fingers crossed, hoping to find a blockbuster, they've looked at expected returns with that method today and it's not good enough, so instead they spend the development cash on more sure things and buy products outside the company and that makes things a lot more predictable. Since the pharma industry is quite fat (despite what the Allergan management claimed... Actavis ended up doing most of what VRX wanted to do), they can get nice synergies without cutting muscle (nobody's perfect but overall they seem to have a good track record); proof of that is in the organic growth in the segments that they've had for a long time and in the number of good things coming out of the pipeline. 3G and Capital Cities and Malone and most of the Berkshire companies understand how to operate very lean without cutting the wrong things, and I believe that VRX also does.

[ccplz]

they are the only ones with full information about the company, and therefore you should muster enough confidence to trust what they say.

 

Is this gio fellow for real?

[giofranchi]

they are the only ones with full information about the company, and therefore you should muster enough confidence to trust what they say.

 

Is this gio fellow for real?

 

 

Maybe I haven't expressed my thought clearly enough... I meant: either you can muster confidence enough in what they are saying or you can't... Just don't think you can "prove" anything about a company which has made 140 acquisitions so far... Because you simply can not. At least not with the amount of information they discolse.

 

Of course then you could believe whatever you'd like!

 

Cheers,

 

Gio

[giofranchi]

For someone who has mentioned how important good management is in thousands of posts, I'm surprised you gloss over how the company flat out lies when explaining their "deal model" vs demonstrating deal model performance.

 

Ross,

Cash EPS have nothing to do with their “Deal Model”. The great majority of pharma companies which buy other companies (see AGN, PRGO, ENDP, etc.) report Adjusted EPS, and they make the same adjustments VRX makes to calculate Cash EPS. Let’s say I have verified overall results instead of their “deal model”, and I have not find anything unusual.

If you think I am glossing over their IRR calculation, it is simply because I basically think it is no more than guesswork… I don’t really think we have enough information to come to any meaningful conclusion. Until, that is, they provide us at least one detailed example of how their “deal model” actually works…

By the way, you may ask: why haven’t they already provided that detailed example? Again: has Mr. Joffe discussed in great detail one acquisition Bidvest has made in the past? It might be so, I don’t know… But I would say that is the exception rather than the rule!

 

Cheers,

 

Gio

 

Gio,

 

You are just talking past me on this one. Saying your deal model is one thing (acquisition/restructuring costs added to purchase price), then reporting a number that has restructuring costs added into Cash Generated is a huge red flag in my opinion.

 

I am asking how you are comfortable with this. I have a lot of respect for Value Act and I would trust their analysis, but I don't understand how you can add restructuring costs back into your cash flow....

 

As for Bidvest. You are right, they don't provide a huge amount of detail for any given acquisition, but the numbers work out for the company as a whole. Their website gives an enormous amount of detail on how every operating segment of their business is performing.

 

One of my huge hangups with VRX is the way they operate in general. I guess there are two ways to do business. The Valeant model in which you gut the company you acquire and strive for ruthless efficiency, or the Berkshire/Bidvest model where you acquire good businesses and give them a competitive advantage i.e. Berkshire with capital or Bidvest with vertical integration. Think about VRX vs Berkshire or Bidvest in 20 years. If VRX stopped acquiring, their revenues would decline over the long term due to patent expiration and being out innovated.

 

What you have in VRX is a company that operates like a PE corporate raider. The model is good for investors, but destroys the companies they target. They don't produce anything, they don't innovate. They maximize current products and pay to develop the last few drugs in their pipeline and that's it. Hopefully they don't get too big and successful because that would literally be detrimental to our health.

 

Ross,

Have you read the Sequoia transcript?

They clearly say VRX adds resteucturing costs to the purchase cost... You think you have found an instance in which they didn't?... And what should that prove?... Without the right context, how could you judge? And what that should tell us about the remaining 139 acquisitions? Imo nothing.

The Sequoia guys have been following VRX for many years now... They have expressly said VRX does add restructuring costs to the purchase cost... A possible exception, which probably has an explanation we simply ignore, doesn't bother me much!

 

As far as VRX business model is concerned, I have no doubt about it, as I have already expressed many times before.

 

Cheers,

 

Gio

[Valueguy134]

One of my huge hangups with VRX is the way they operate in general. I guess there are two ways to do business. The Valeant model in which you gut the company you acquire and strive for ruthless efficiency, or the Berkshire/Bidvest model where you acquire good businesses and give them a competitive advantage i.e. Berkshire with capital or Bidvest with vertical integration. Think about VRX vs Berkshire or Bidvest in 20 years. If VRX stopped acquiring, their revenues would decline over the long term due to patent expiration and being out innovated.

 

What you have in VRX is a company that operates like a PE corporate raider. The model is good for investors, but destroys the companies they target. They don't produce anything, they don't innovate. They maximize current products and pay to develop the last few drugs in their pipeline and that's it. Hopefully they don't get too big and successful because that would literally be detrimental to our health.

 

This is a fundamental misunderstanding of the model. Saying "if they stop acquiring..." misses the whole point. Acquiring is part of the point, but if they couldn't, capital would be redirected internally.

 

Most pharma companies have a huge bias toward internal development. Valeant is agnostic about where assets come from; some are developped internally, some are acquired, and some are licensed. As long as they meet certain financial criteria. This gives them a broader menu to pick from to select exactly the kind of assets that they want at the risk profile that they want (that's also why they focus on a lot of smaller products that don't interest most other big companies). It also helps that they are multinational but not truly global; they can focus on just certain geographies that grow faster or that have more bargains and ignore others, unlike most centralized pharmas that try to be truly global even if some areas are less attractive.

 

There's also the meme that VRX doesn't do R&D. As has already been pointed out, OTC and generics don't require much R&D, so if you normalize for that, they spend a decent amount on the rest of the business.

 

VRX doesn't spend a ton of money on R&D flyers with fingers crossed, hoping to find a blockbuster, they've looked at expected returns with that method today and it's not good enough, so instead they spend the development cash on more sure things and buy products outside the company and that makes things a lot more predictable. Since the pharma industry is quite fat (despite what the Allergan management claimed... Actavis ended up doing most of what VRX wanted to do), they can get nice synergies without cutting muscle (nobody's perfect but overall they seem to have a good track record); proof of that is in the organic growth in the segments that they've had for a long time and in the number of good things coming out of the pipeline. 3G and Capital Cities and Malone and most of the Berkshire companies understand how to operate very lean without cutting the wrong things, and I believe that VRX also does.

 

What capital to relocate. They have a mountain of debt that needs to be paid back and need to achieve some pretty astronomical growth rates to pay it back before the cliff comes, because as you mentioned previously, sales are wiped out once a drug goes generic. I agree acquiring is the model, they need bigger deals (new debt to pay off the old debt) to keep it all going. One slip up on a large acquisition and it all comes crashing down.

 

Either way I am done with this thread. No matter what types of issues are brought up, everything seems to be rationalized of why it makes sense. There is no way to convince someone here, or to even get them to contemplate the other side of the argument (why should management's claims be somewhat reflected in the 10-k's, am I right?). We sit here and compare Pearson to Buffet, but I don't recall Buffet having any track record problems over the last 50 years, or being leveraged 6 to 1. Then we talk about how durable a product that essentially goes to zero in 10-15 years is and proceed to compare it to Heinz or Coke. The CFO leaving, it's all good, why be part of the next Berkshire and make a killing when you can be a Board member, or Ackman's involvement with Allergan and Sprout, completely fine since Ackman has our best interests at heart. Sense, there is none here.

[LongHaul]

I liked your writing Valueguy and agree. 

 

"No matter what types of issues are brought up, everything seems to be rationalized of why it makes sense. There is no way to convince someone here, or to even get them to contemplate the other side of the argument (why should management's claims be somewhat reflected in the 10-k's, am I right?). "

 

 

It is fascinating how red flags are just rationalized away.  I think staying calm and sticking to the facts helps being rational.  What a puzzle this VRX is?

 

 

 

[loganc]

 

It is fascinating how red flags are just rationalized away.  I think staying calm and sticking to the facts helps being rational.  What a puzzle this VRX is?

 

 

Are you referring to the issues that I addressed in my post?  Is the "red flag" making a mistake in referencing a footnote number incorrectly? 

 

Edit:

 

Are we all just confusing "red flag" with "risk factor"?  Obviously, the debt is a risk factor and the prospect of doing a series of poor acquisitions is a risk factor.  Doesn't every single investment opportunity have associated risk factors?  Ultimately, people have to make the judgement that risk factors are worth taking in making a particular investment.

[Liberty]

One of my huge hangups with VRX is the way they operate in general. I guess there are two ways to do business. The Valeant model in which you gut the company you acquire and strive for ruthless efficiency, or the Berkshire/Bidvest model where you acquire good businesses and give them a competitive advantage i.e. Berkshire with capital or Bidvest with vertical integration. Think about VRX vs Berkshire or Bidvest in 20 years. If VRX stopped acquiring, their revenues would decline over the long term due to patent expiration and being out innovated.

 

What you have in VRX is a company that operates like a PE corporate raider. The model is good for investors, but destroys the companies they target. They don't produce anything, they don't innovate. They maximize current products and pay to develop the last few drugs in their pipeline and that's it. Hopefully they don't get too big and successful because that would literally be detrimental to our health.

 

This is a fundamental misunderstanding of the model. Saying "if they stop acquiring..." misses the whole point. Acquiring is part of the point, but if they couldn't, capital would be redirected internally.

 

Most pharma companies have a huge bias toward internal development. Valeant is agnostic about where assets come from; some are developped internally, some are acquired, and some are licensed. As long as they meet certain financial criteria. This gives them a broader menu to pick from to select exactly the kind of assets that they want at the risk profile that they want (that's also why they focus on a lot of smaller products that don't interest most other big companies). It also helps that they are multinational but not truly global; they can focus on just certain geographies that grow faster or that have more bargains and ignore others, unlike most centralized pharmas that try to be truly global even if some areas are less attractive.

 

There's also the meme that VRX doesn't do R&D. As has already been pointed out, OTC and generics don't require much R&D, so if you normalize for that, they spend a decent amount on the rest of the business.

 

VRX doesn't spend a ton of money on R&D flyers with fingers crossed, hoping to find a blockbuster, they've looked at expected returns with that method today and it's not good enough, so instead they spend the development cash on more sure things and buy products outside the company and that makes things a lot more predictable. Since the pharma industry is quite fat (despite what the Allergan management claimed... Actavis ended up doing most of what VRX wanted to do), they can get nice synergies without cutting muscle (nobody's perfect but overall they seem to have a good track record); proof of that is in the organic growth in the segments that they've had for a long time and in the number of good things coming out of the pipeline. 3G and Capital Cities and Malone and most of the Berkshire companies understand how to operate very lean without cutting the wrong things, and I believe that VRX also does.

 

What capital to relocate. They have a mountain of debt that needs to be paid back and need to achieve some pretty astronomical growth rates to pay it back before the cliff comes, because as you mentioned previously, sales are wiped out once a drug goes generic. I agree acquiring is the model, they need bigger deals (new debt to pay off the old debt) to keep it all going. One slip up on a large acquisition and it all comes crashing down.

 

Either way I am done with this thread. No matter what types of issues are brought up, everything seems to be rationalized of why it makes sense. There is no way to convince someone here, or to even get them to contemplate the other side of the argument (why should management's claims be somewhat reflected in the 10-k's, am I right?). We sit here and compare Pearson to Buffet, but I don't recall Buffet having any track record problems over the last 50 years, or being leveraged 6 to 1. Then we talk about how durable a product that essentially goes to zero in 10-15 years is and proceed to compare it to Heinz or Coke. The CFO leaving, it's all good, why be part of the next Berkshire and make a killing when you can be a Board member, or Ackman's involvement with Allergan and Sprout, completely fine since Ackman has our best interests at heart. Sense, there is none here.

 

Pretty much everything you said is wrong, so I'm glad you're done with this thread.