VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

3) They clearly spent >$5b on R&D this year.

 

???

 

Where did you get that number?

Last time I checked VRX was going to spend around $375 million in R&D for 2015...

 

Cheers,

 

Gio

[Cardboard]

Roll-ups always end up with a flat or significantly down share price from their peak growth rate. That happens typically when they run out of debt capacity or over-priced currency (their stock) or decent acquisition to make or by making a big acquisition mistake.

 

Down would be the Tyco example in the early 2000's.

 

Flat would be the Fairfax example or still flat after over 15 years.

 

The question then seems to be the honesty of managers and where we are vs their peak growth rate.

 

Even without trying to assess where they are in their growth phase, personally, I have a hard time with Valeant for the following reasons:

 

1- It is pretty hard to assume that everybody except themselves in the pharma industry are simply dumb and spend R&D for no purpose. They too also have the power to make acquisitions. You may have an edge but, how big is it?

 

2- Biovail. This company has a checkered past and was a roll-up too with a relatively similar model. Valeant looks to me like a Biovail on steroids. I recall vividly the truck accident preventing Biovail from making their quarter! You could also never figure out true free cash flow because there was always acquisitions being made. This company is a big foundation of Valeant.

 

3- If you are not spending on R&D, then you are forced to make acquisitions. These are pricey and it cannot be any clearer than by looking at the current level of the XBI. Pharma is no longer the unloved dog of the early 2000's. Everyone thinks about demographics and all that. So if you pay top dollar for other companies, you have to find very clever ways to make them more profitable AND you have to assume that sellers are always dumb.

 

4- Finally, if you are not spending on R&D and companies/products being produced were under-sold, you have to spend on advertising and distribution. Cutting costs won't make a brand grow. It may increase margins but, seems illogical that alone it will provide a good return on capital on their acquisition cost.

 

So in summary, I would be careful here. This is already a pretty large company by market cap. How many profitable niches is there in the pharma world?

 

Cardboard

[Guest Schwab711]

Not sure I follow? GAAP requires them to write up the intangibles and IPR&D, it isn't like management has any choice in the matter, and GAAP accounting has zero impact on tax accounting. A deferred tax liability means your current GAAP income is higher than your tax income, so VRX booking a $3.75B DTL would actually be the opposite of what you are arguing, it means that they are actually paying lower cash taxes than book taxes today.

 

DTL => future cash taxes > book taxes.

 

There is quite a bit of discretion with regards to intangibles/IPR&D and goodwill. Adding back amortization is misleading because those costs will never be recouped and the associated cash flows will cease around the same time as when intangibles is fully written off.

 

They claimed that >$5b in assets from the Salix acquisition were IPR&D (thus, they spent $5b on R&D - you can make your own assumptions about how often they will need to replace these assets). $5b/15yrs still doubles the current R&D annual expenditure (plus additional R&D to continue work on Salix products).

[Guest Schwab711]

Let's look at the simplest of all observations. They spent ~$40b on 140 acquisitions. Almost 50% of that money was spent in 2015. Assuming all the other acquisitions have already doubled in value (not likely), they are worth roughly $60b. They have roughly $30b net debt. It is hard to argue that the equity is worth much more than $30b or $85.50. What does the other $50b in equity represent?

[rpadebet]

You are missing his point bout earnings growth from taxes. They are doubling the EBIT of the company through synergies and then getting a better tax rate.

 

Unlevered Company pre VRX:

 

Revenue: 100

EBIT: 25

Taxes at 40%:10

Earnings: 15

 

Unlevered Company post VRX:

 

Revenue: 100

EBIT: 50

Taxes at 10%:5

Earnings: 45

 

A triple in earnings on a double in EBIT. unlevered.

 

If you guys think VRX is buying 33c dollars and not just the 50c dollars I thought they did AND you guys think they can keep doing this, then 3x capital deployed is a fair price to pay.

 

With regards to B&L, they bought it from a private equity guy not a pharma operator, so obviously there was a lot of operational synergies to gain.

 

Going forward if you think they can keep doing this, then each acquisition they make should increase their market value by

(Acquisition Price+ Restructuring costs)x 3 - additional debt incurred.

 

I think going forward,

1)Acquisition price will increase given everyone knows this strategy and VRX is now playing in the major leagues in terms of deal size

2) Operational synergies will come down given they are most likely buying from operators who are doing some of the R&D cost cutting themselves

3) Tax rate spread between VRX and targets will converge as most of the targets have also lowered their tax rates

 

If 1),2) and 3) occur the only way they can get the same bang for their equity buck is if they finance their acquisitions with even more leverage. This is assuming cost of financing remains the same, of course if rates go up then you lever up even more.

 

[giofranchi]

Let's look at the simplest of all observations. They spent ~$40b on 140 acquisitions. Almost 50% of that money was spent in 2015. Assuming all the other acquisitions have already doubled in value (not likely), they are worth roughly $60b. They have roughly $30b net debt. It is hard to argue that the equity is worth much more than $30b or $85.50. What does the other $50b in equity represent?

 

I don't understand… isn’t it the same question I have tried to answer just a few posts ago? ???

 

Gio

[rpadebet]

Actually I kinda cheated and picked a real VRX acquisition (Bausch & Lomb) as my example, they had <20% EBIT margins when they were acquired (~$600M on ~$3.3B of sales). VRX took out $900M of costs bringing the margins to ~45%, and are in the process of launching the new Ultra contact lens, for which they have ordered 6 lines at an estimated $150M of sales per line. Layering that incremental revenue in, not to mention the revenue growth since Bausch has been acquired, I think comfortably brings you to somewhere in the 50s from an operating margin perspective.

 

Yeah! That is a very useful example! Thanks!

 

Cheers,

 

Gio

 

Yes and the best example.

 

We bought Salix for 16b, so that must be worth 48b on VRX books. Let us ignore that their  revenues were just over a billion in 2014. Sprout should also be worth 3b now.

 

I have absolutely no arguments to offer if you think VRX can do and did 3X, pretty much instantly on all acquisitions in the past and in the future. If you doubt they can do this even a little bit, you shouldn't be paying the current price.

[giofranchi]

I think going forward,

1)Acquisition price will increase given everyone knows this strategy and VRX is now playing in the major leagues in terms of deal size

2) Operational synergies will come down given they are most likely buying from operators who are doing some of the R&D cost cutting themselves

3) Tax rate spread between VRX and targets will converge as most of the targets have also lowered their tax rates

 

If 1),2) and 3) occur the only way they can get the same bang for their equity buck is if they finance their acquisitions with even more leverage. This is assuming cost of financing remains the same, of course if rates go up then you lever up even more.

 

Fortunately, we don’t need the same bang for their buck! Even assuming a significant contraction in the multiple VRX is selling for today, it might turn out to be a decent investment.

If it is not a fraud, of course! ;)

 

Cheers,

 

Gio

 

[rpadebet]

Let's look at the simplest of all observations. They spent ~$40b on 140 acquisitions. Almost 50% of that money was spent in 2015. Assuming all the other acquisitions have already doubled in value (not likely), they are worth roughly $60b. They have roughly $30b net debt. It is hard to argue that the equity is worth much more than $30b or $85.50. What does the other $50b in equity represent?

 

Dude, the bull argument is that all of it tripled not just doubled!! I can't argue with that.

[Ross812]

Gio and rpadebet,

 

I took these numbers from AZ's spreadsheet:

 

http://3.bp.blogspot.com/-8FPz1xTTuVA/Vd0CIM1PqHI/AAAAAAAAAPA/aRqd3ZaPqa8/s640/2014%2BCash%2BPayback%2BTable%2B2.JPG

 

Here is what I came up with by subtracting yearly restructuring costs out of cash generated and instead adding it to the purchase price. I was conservative when calculating IRR since the deal close and assumed all deals closed in Q4 of the year they reported on the spreadsheet:

 

 

Ross,

Sorry I don’t understand: have you added interest payments back? Have you considered the cash from the sale of the portfolio of aesthetic drugs in 2014?

 

Thank you,

 

Gio

 

Gio, this was using VRX's own numbers from their Q2'15 presentation. Their numbers are OCF + Tax + Interest + Restructuring cost.

 

All I did was add the restructuring cost back in because their presentations, sequoia, and yourself said this is how they calculate IRR.

 

I think adding in the 1.4B from the Nestle deal is fair, but where did the skin care drug portfolio come from? 

[Guest Schwab711]

Let's look at the simplest of all observations. They spent ~$40b on 140 acquisitions. Almost 50% of that money was spent in 2015. Assuming all the other acquisitions have already doubled in value (not likely), they are worth roughly $60b. They have roughly $30b net debt. It is hard to argue that the equity is worth much more than $30b or $85.50. What does the other $50b in equity represent?

 

Dude, the bull argument is that all of it tripled not just doubled!! I can't argue with that.

 

Agreed. 3x prior acquisitions still leaves VRX overvalued by $30b equity! They have 2 years to pile up cash before the 5 years of refinancing dependence. That is a major risk in the face of rising rates.

 

I don't even know how you can cut anything from Salix. Everything is about potential of future products with them. Salix is not even benefiting from VRX's competitive advantage.

[rpadebet]

I think going forward,

1)Acquisition price will increase given everyone knows this strategy and VRX is now playing in the major leagues in terms of deal size

2) Operational synergies will come down given they are most likely buying from operators who are doing some of the R&D cost cutting themselves

3) Tax rate spread between VRX and targets will converge as most of the targets have also lowered their tax rates

 

If 1),2) and 3) occur the only way they can get the same bang for their equity buck is if they finance their acquisitions with even more leverage. This is assuming cost of financing remains the same, of course if rates go up then you lever up even more.

 

Fortunately, we don’t need the same bang for their buck! Even assuming a significant contraction in the multiple VRX is selling for today, it might turn out to be a decent investment.

If it is not a fraud, of course! ;)

 

Cheers,

 

Gio

 

Gio, Gio, Gio - I can't tell if it is a fraud or not. Way above my pay grade and IQ level to analyze and prove that. ;). You can see from my posts, I am not a precise numbers guy. I like rough calcs and like to see a big margin of safety there because I am not precise in my numbers.

 

Let me write down some rough numbers again below to show how decent this investment can turn out in the most bullish scenario

 

They have until now deployed about 37b capital with 30b debt right?

Let us assume they have done the 3x as current price is fair, so MV= 37*3-30=80b

 

Let us assume in future they will deploy another 37 bill, get the same synergies (operational, revenue and tax) at the same debt levels.

so MV becomes (37+37)*3 - (30+30) = 160b

 

So you are going to double your money from here, but a satisfactory result depends on how fast they deploy their next 37b. Will it be buying something like Allergan or a bunch of things like Sprout? Can you do 3x on all scenarios?

[Bagehot]

Not sure I follow? GAAP requires them to write up the intangibles and IPR&D, it isn't like management has any choice in the matter, and GAAP accounting has zero impact on tax accounting. A deferred tax liability means your current GAAP income is higher than your tax income, so VRX booking a $3.75B DTL would actually be the opposite of what you are arguing, it means that they are actually paying lower cash taxes than book taxes today.

 

DTL => future cash taxes > book taxes.

 

There is quite a bit of discretion with regards to intangibles/IPR&D and goodwill. Adding back amortization is misleading because those costs will never be recouped and the associated cash flows will cease around the same time as when intangibles is fully written off.

 

They claimed that >$5b in assets from the Salix acquisition were IPR&D (thus, they spent $5b on R&D - you can make your own assumptions about how often they will need to replace these assets). $5b/15yrs still doubles the current R&D annual expenditure (plus additional R&D to continue work on Salix products).

 

That's a purely mechanical calculation: tax rate*(FV-basis). Since it was a stock purchase, there is a carryover basis in the legacy Salix assets. Since most all of Salix's products were internally developed, legacy Salix probably had a very low tax basis, arbitrarily we'll say $500M. So you get something like ($13.1B-$500M)*~30%=$3.75B. That's just baked in to purchase accounting. Now VRX will likely do things to minimize taxes over time, like migrate IP offshore and lever up whatever remains in the US, so it is highly unlikely they will pay much of that $3.75B. Long story short, this means nothing in terms of actual taxes VRX will have to pay one day, it's purely an artifact of purchase accounting.

 

On the IPR&D for the Salix acquisition, almost all of it ($4.8B) was related to Xifaxan IBS-D, which received approval less than two months after the deal closed and has been reclassified into identifiable intangibles-product brands. Further, that's the best estimate of the fair value of the cash flows related to IBS-D over its entire life, not what Salix had spent.

[giofranchi]

I have absolutely no arguments to offer if you think VRX can do and did 3X, pretty much instantly on all acquisitions in the past and in the future. If you doubt they can do this even a little bit, you shouldn't be paying the current price.

 

I have invested in JNJ, ABT, and NVS for a long time before getting interested in VRX, and the market has always priced them assigning a multiple to the cash they generated. The measure used by VRX is Cash EPS.

 

I think we have seen they don’t lie about the cash they generate. If the adjustments they make to get to Cash EPS are not flawed, and I don’t think they are because during the Allergan saga they have talked extensively about those adjustments, you should ask yourself: is their multiple too high?

 

If the answer is no, you should reconcile your thesis with the multiple of Cash EPS they are selling for. Probably, the only answer is they are actually doing a great job! ;)

 

Cheers,

 

Gio

[Guest Schwab711]

Not sure I follow? GAAP requires them to write up the intangibles and IPR&D, it isn't like management has any choice in the matter, and GAAP accounting has zero impact on tax accounting. A deferred tax liability means your current GAAP income is higher than your tax income, so VRX booking a $3.75B DTL would actually be the opposite of what you are arguing, it means that they are actually paying lower cash taxes than book taxes today.

 

DTL => future cash taxes > book taxes.

 

There is quite a bit of discretion with regards to intangibles/IPR&D and goodwill. Adding back amortization is misleading because those costs will never be recouped and the associated cash flows will cease around the same time as when intangibles is fully written off.

 

They claimed that >$5b in assets from the Salix acquisition were IPR&D (thus, they spent $5b on R&D - you can make your own assumptions about how often they will need to replace these assets). $5b/15yrs still doubles the current R&D annual expenditure (plus additional R&D to continue work on Salix products).

 

That's a purely mechanical calculation: tax rate*(FV-basis). Since it was a stock purchase, there is a carryover basis in the legacy Salix assets. Since most all of Salix's products were internally developed, legacy Salix probably had a very low tax basis, arbitrarily we'll say $500M. So you get something like ($13.1B-$500M)*~30%=$3.75B. That's just baked in to purchase accounting. Now VRX will likely do things to minimize taxes over time, like migrate IP offshore and lever up whatever remains in the US, so it is highly unlikely they will pay much of that $3.75B. Long story short, this means nothing in terms of actual taxes VRX will have to pay one day, it's purely an artifact of purchase accounting.

 

On the IPR&D for the Salix acquisition, almost all of it ($4.8B) was related to Xifaxan IBS-D, which received approval less than two months after the deal closed and has been reclassified into identifiable intangibles-product brands. Further, that's the best estimate of the fair value of the cash flows related to IBS-D over its entire life, not what Salix had spent.

 

Thanks for the explanation. How does the selling of IP from a US company not trigger a large one-time gain that would be taxable? That's a loaded question. I don't mean to imply that it must. I'm just genuinely curious how they plan to do this when the majority of future rev/profit will come from the US. I thought they couldn't transfer Salix IP offshore because it would cause them to re-domicile?

 

Also, I agree that it was written up to the FV. So how does VRX plan to earn returns? Is it all reliant on the other 8 not yet approved drugs earning returns on goodwill?

[Guest Schwab711]

Not sure I follow? GAAP requires them to write up the intangibles and IPR&D, it isn't like management has any choice in the matter, and GAAP accounting has zero impact on tax accounting. A deferred tax liability means your current GAAP income is higher than your tax income, so VRX booking a $3.75B DTL would actually be the opposite of what you are arguing, it means that they are actually paying lower cash taxes than book taxes today.

 

DTL => future cash taxes > book taxes.

 

There is quite a bit of discretion with regards to intangibles/IPR&D and goodwill. Adding back amortization is misleading because those costs will never be recouped and the associated cash flows will cease around the same time as when intangibles is fully written off.

 

They claimed that >$5b in assets from the Salix acquisition were IPR&D (thus, they spent $5b on R&D - you can make your own assumptions about how often they will need to replace these assets). $5b/15yrs still doubles the current R&D annual expenditure (plus additional R&D to continue work on Salix products).

 

That's a purely mechanical calculation: tax rate*(FV-basis). Since it was a stock purchase, there is a carryover basis in the legacy Salix assets. Since most all of Salix's products were internally developed, legacy Salix probably had a very low tax basis, arbitrarily we'll say $500M. So you get something like ($13.1B-$500M)*~30%=$3.75B. That's just baked in to purchase accounting. Now VRX will likely do things to minimize taxes over time, like migrate IP offshore and lever up whatever remains in the US, so it is highly unlikely they will pay much of that $3.75B. Long story short, this means nothing in terms of actual taxes VRX will have to pay one day, it's purely an artifact of purchase accounting.

 

On the IPR&D for the Salix acquisition, almost all of it ($4.8B) was related to Xifaxan IBS-D, which received approval less than two months after the deal closed and has been reclassified into identifiable intangibles-product brands. Further, that's the best estimate of the fair value of the cash flows related to IBS-D over its entire life, not what Salix had spent.

 

Edit: Updated schedule to calculate goodwill correctly.

Here's my schedule

[Bagehot]

Not sure I follow? GAAP requires them to write up the intangibles and IPR&D, it isn't like management has any choice in the matter, and GAAP accounting has zero impact on tax accounting. A deferred tax liability means your current GAAP income is higher than your tax income, so VRX booking a $3.75B DTL would actually be the opposite of what you are arguing, it means that they are actually paying lower cash taxes than book taxes today.

 

DTL => future cash taxes > book taxes.

 

There is quite a bit of discretion with regards to intangibles/IPR&D and goodwill. Adding back amortization is misleading because those costs will never be recouped and the associated cash flows will cease around the same time as when intangibles is fully written off.

 

They claimed that >$5b in assets from the Salix acquisition were IPR&D (thus, they spent $5b on R&D - you can make your own assumptions about how often they will need to replace these assets). $5b/15yrs still doubles the current R&D annual expenditure (plus additional R&D to continue work on Salix products).

 

That's a purely mechanical calculation: tax rate*(FV-basis). Since it was a stock purchase, there is a carryover basis in the legacy Salix assets. Since most all of Salix's products were internally developed, legacy Salix probably had a very low tax basis, arbitrarily we'll say $500M. So you get something like ($13.1B-$500M)*~30%=$3.75B. That's just baked in to purchase accounting. Now VRX will likely do things to minimize taxes over time, like migrate IP offshore and lever up whatever remains in the US, so it is highly unlikely they will pay much of that $3.75B. Long story short, this means nothing in terms of actual taxes VRX will have to pay one day, it's purely an artifact of purchase accounting.

 

On the IPR&D for the Salix acquisition, almost all of it ($4.8B) was related to Xifaxan IBS-D, which received approval less than two months after the deal closed and has been reclassified into identifiable intangibles-product brands. Further, that's the best estimate of the fair value of the cash flows related to IBS-D over its entire life, not what Salix had spent.

 

Thanks for the explanation. How does the selling of IP from a US company not trigger a large one-time gain that would be taxable? That's a loaded question. I don't mean to imply that it must. I'm just genuinely curious how they plan to do this when the majority of future rev/profit will come from the US. I thought they couldn't transfer Salix IP offshore because it would cause them to re-domicile?

 

Also, I agree that it was written up to the FV. So how does VRX plan to earn returns? Is it all reliant on the other 8 not yet approved drugs earning returns on goodwill?

 

So here's what I know about IP migration:

1) It is sort of like Family Limited Partnerships and the IRS, you can do a fair amount of hand-waving and apply some large discounts to the value of the IP being transferred (more on this below)

2) VRX has some legacy tax attributes that it often uses to soak up the one-time tax cost of migrating

3) Even if you have to pay a one-time tax, it often makes sense from an ROI perspective, especially when the annual delta is 30-35%

4) Whatever is left in the US can be levered up to shield taxable income

 

Some combination of the above is how VRX (and everyone else that does it) accomplishes it.

 

As for how they plan to earn returns, keep in mind that GAAP accounting is not the deal model. Salix will have cash revenue sales of ~$1.9B in 2015 before including IBS-D. Fully-synergized, they will earn something like $1.1B in EBITA. So lets say they got the IBS-D number exactly right, it's going to be worth $5B in present value. So they paid $16B less $5B=$11B, or 10x EBIT for a business that has a couple other ~$1B+ annual products in the pipeline and has no major genericizations until, I believe, 2028. Xifaxan was growing 15%+ even before IBS-D approval. Salix Management's internal projections (which I've linked before) called for EBITDA of $3.7B (before, obviously, VRX's $500M of synergies) in 2020, and almost $6B in 2024. If that's even close to correct, this deal will be a homerun for VRX, especially when you consider that Salix was going to be paying cash taxes of ~40% and VRX will be paying much lower.

 

So to circle back to point 1 above, if VRX can migrate the IP today on a valuation based on an artificially depressed EBITDA base of something like $500M (more like 2x that normalizing for SLXP's inventory issues) AND deliver on SLXP's management case (that is deliver something like $32B of cumulative EBITDA over the next 9 years) even if they have to take an upfront hit, it will still be hugely value accretive over the life of the investment.

[rpadebet]

I would like to share a personal anecdote on how VRX creates these synergies. They don't just raise prices, there are other mechanisms which achieve a similar effect on the numbers. I knew about this since Jan of this year and in no way shape or form this impacted my decision to invest in or sell VRX. My buy and sell decisions are purely based on valuations. If it was around the 140-150 area or organic growth was better, I would have held.

 

This is regarding the B&L transaction and their contact lens business.

 

My one year old son is a customer, as due to some abnormalities at birth in his eyes, he is required to wear contact lenses everyday throughout his life. It is hard but he and we are getting used to it. These lenses typically last 3-6 months or so. You could get them at the optometrists office in a small vial @200$ each or so. It used to be that you could return the vials unopened within 90 days and 30 days if opened until last year. This was useful because we could order lenses before we needed them as a replacement or backup and keep it unopened if we didnt need to use it. If we opened and the prescription changed or the lens quality was bad/unsatisfactory we could replace it.

 

This year, the optometrist told us that we could only return unopened vials now within 15-30 days and they wouldn't take back opened ones as the B&L policy had changed. This immediately increased our cost because we couldn't keep backups (as you can imagine backups are necessary for a infant/toddler as they lose their lens all the time). If eye prescription changed we needed to pay full for the new ones even if the lens was less than a month old. We needed to invest in a pair of glasses and get him used to it just in case we needed a backup.

 

The lens quality too started deteriorating quickly, as it would now start becoming opaque within a month or so instead of lasting 3-6 months. I don't know if the quality change was intentional or real but it is a personal observation of mine. Honestly, it could also be because of the solution used to clean or my son growing up and doing more with his eyes :).

 

Now we are considering buying him weekly disposable lenses which don't require cleaning (no buying contact lens solution) and are much cheaper. The Optometrist suggested this and felt, it was a much safer and convenient alternative.

 

Accountants can see how these things juice up revenues and earnings/cash in the short term, but business analysts can estimate the long term negative impact on the business.

 

Anyway, I got interested in VRX when i was introduced to B&L lenses last year and saw the durability factor. I bought a chunk of stock when i thought it was cheap last year. Luckily in spite of the hidden price increases, my Pnl on VRX from the previous year pays for my son's supply of lenses at least until he can pay for it himself. So I am not complaining personally about the business model ;).

 

But I think people who are betting on product durability and thinking cost cutting/synergies are an unmitigated good need to rethink their beliefs. Squeezing cash out of the supply chain has same effect as raising prices on consumers. R&D cutting has real life impacts as in the quality/durability of the lenses. Competition is always just a few steps away as can be seen with the substitutes available.

 

Not making an ethical argument here. What VRX did, I would probably do as well if I ran the business and didn't think through beyond the short term financial benefit. This is just a food for thought on the long term business impact.

[giofranchi]

Let's look at the simplest of all observations. They spent ~$40b on 140 acquisitions. Almost 50% of that money was spent in 2015. Assuming all the other acquisitions have already doubled in value (not likely), they are worth roughly $60b. They have roughly $30b net debt. It is hard to argue that the equity is worth much more than $30b or $85.50. What does the other $50b in equity represent?

 

Dude, the bull argument is that all of it tripled not just doubled!! I can't argue with that.

 

Agreed. 3x prior acquisitions still leaves VRX overvalued by $30b equity! They have 2 years to pile up cash before the 5 years of refinancing dependence. That is a major risk in the face of rising rates.

 

I don't even know how you can cut anything from Salix. Everything is about potential of future products with them. Salix is not even benefiting from VRX's competitive advantage.

 

You go on trying to value VRX based on its balance sheet... Imo 5 years from now revenues will have more than doubled, and Cash EPS will have grown faster, and the market will still be assigning a certain multiple to VRX's Cash EPS... Choose the multiple you prefer, and see which rate of return you get!

 

Maybe that's why Ackman has invested billions at a price slightly lower than today's price, and VRX itself has repurchased shares at a price higher than today's price during Q2!

 

Cheers,

 

Gio

[rpadebet]

Gio,

Cash eps has stock comp in it. Remove that. Apply a market multiple based on your estimate of average durability of the products. You will get a similar value to balance sheet value.

 

You are assuming cash eps growth will continue to get a satisfactory return. That depends on the other things we discussed before here.

 

Cash eps is a good proxy for knowing how the business is doing. It shouldn't be used unadjusted for valuing the company.

[Guest Schwab711]

Let's look at the simplest of all observations. They spent ~$40b on 140 acquisitions. Almost 50% of that money was spent in 2015. Assuming all the other acquisitions have already doubled in value (not likely), they are worth roughly $60b. They have roughly $30b net debt. It is hard to argue that the equity is worth much more than $30b or $85.50. What does the other $50b in equity represent?

 

Dude, the bull argument is that all of it tripled not just doubled!! I can't argue with that.

 

Agreed. 3x prior acquisitions still leaves VRX overvalued by $30b equity! They have 2 years to pile up cash before the 5 years of refinancing dependence. That is a major risk in the face of rising rates.

 

I don't even know how you can cut anything from Salix. Everything is about potential of future products with them. Salix is not even benefiting from VRX's competitive advantage.

 

You go on trying to value VRX based on its balance sheet... Imo 5 years from now revenues will have more than doubled, and Cash EPS will have grown faster, and the market will still be assigning a certain multiple to VRX's Cash EPS... Choose the multiple you prefer, and see which rate of return you get!

 

Maybe that's why Ackman has invested billions at a price slightly lower than today's price, and VRX itself has repurchased shares at a price higher than today's price during Q2!

 

Cheers,

 

Gio

 

I think the BS is overstating the value of their assets so I thought I was being generous...

 

How are you comfortable with VRX using "Cash EPS" to define their adj-EBITDA when Reuters defines "cash earnings" as the following?

 

A fairly loose term that refers to items in a company's profit and loss account which describe receipts or payments made in cash. It typically excludes items like depreciation and amortization which are non-cash charges.

http://glossary.reuters.com/index.php?title=Cash_earnings

 

Beyond the above nit picking, how are you comfortable with adding amortization of intangibles to "Cash EPS"? That is my concern. Revenues better grow in a hurry if VRX ever wants to generate real fed notes since Salix completely changed the durable product argument (though I will absolutely agree that Salix's patents are almost all 10+ years from expiration). Can we agree that "true" R&D is significantly higher than reported R&D? Future book R&D will also have to increase at a high rate because they need to complete research on Salix's 8 other products (which is the main method of generating returns on the acquisition in my mind).

 

Why can't we use adj-GAAP #s to evaluate VRX (which would consider the amortization a real cost)?

 

I absolutely agree there is a lot to like at VRX. I've slowly changed my view as I've learned more. However, if their "Cash EPS" was truly cash generated, then where is all the cash!?

[Cardboard]

"Maybe that's why Ackman has invested billions at a price slightly lower than today's price, and VRX itself has repurchased shares at a price higher than today's price during Q2!"

 

JC Penney, Herbalife, Target... Anymore examples needed of Ackman necessary to prove that he is not flawless.

 

Buying back shares by companies at higher prices than today is synonymous with the vast majority of corporate buybacks.

 

Cardboard

 

[Picasso]

Ah yes, Ackman.  Lest we forget his JCP "20 bagger."

 

http://www.businessinsider.com/cnbc-trainwreck-interview-with-bill-ackman-2012-11

1:09: Ackman passes out these "little pins" that Ron Johnson is using instead of the traditional coupons and promotions.  Customers can take these pins and punch a number into their phone to find out if they win a "cute little prize" such as a trip to Disney World or a $500 gift card. How does he know it works? Ackman says he was buying a banana in the CNBC cafeteria and Andrea (she does make up at CNBC) asked about the pin and if she could have one and how she could get more of them. 

 

I was reading through the P&G annual report (since Ackman compared VRX products to P&G) and just started laughing.  There is no way you can say VRX products are as durable as Tide or Pampers.  It's just laughable considering P&G still spends a considerable amount of R&D on their products despite producing 50% returns on tangible capital.  P&G doesn't have anything going off patent so to make a comparison like that is silly.

 

I don't think you can take Ackman too seriously when he gets emotionally invested in a stock. 

 

Edit: Okay now that I think about it, I notice that Ackman attempts to sell an idea that sounds good in theory but just doesn't make any sense.

 

JCP was supposed to create these new "boutiques" that gathered higher sales per sq ft.  As they moved up from 20% to 80% of retail space, Ackman is trying to make the point that total sales would climb to match those more productive spaces.  But all that was really happening were sales being redirected to certain areas to make it seem like you could create a more productive retail space.  But sales would plummet in other areas because you're just shifting around where sales are being made, as evidenced by an overall plummet in SSS. 

 

But we get pitched the "new JCP inside old JCP, an exciting new entity being funded by the cash flows of the old dying entity; you have to value the two separately!"  I mean you really can't make this up.

 

This kind of misdirection can take different forms.  Not saying it's the case with VRX, but again you have to be careful with any claims that Ackman tries to make.  He is very good at making something very smelly sound relatively appetizing.

[rpadebet]

That's a nice way of saying Ackman is promotional  :)

 

Being promotional is one of the tools in his toolkit as an activist investor. He chooses to be promotional about some ideas and not others. Always try to figure out why when he is promotional. Usually it is when he needs others to buy-in into those ideas to get to his sell price quickly. That has an impact on his IRRs.

 

Why else do you think he would make such detailed presentations of his research ideas? Charity?

[Picasso]

He's not just promotional, he makes ridiculous claims.  How about when he said stocks with 20% ROE's trade for 2x book, so his closed-end fund should trade for 2x book? 

 

I think he has presentations to grow the brand attached to his approach.  There's also ego involved, which is very rich in Ackman's case.

 

Not to go off topic from VRX, but I mention it because "Ackman invested $4 billion at the current price" doesn't really give me a pass on digging into the claims deeper.  I just notice a pattern with these story stocks in that you have vague somewhat dubious claims backed up by one or two data points.  R&D is too low?  Look at Jublia!  Proof of durable products?  Look at the small 6% of revenue tied to patents over the next five years!  Every concern can be easily disputed by one or two data points from a company slide deck. 

 

But like others have mentioned, VRX isn't the only debt fueled roll up that uses aggressive assumptions or non-GAAP accounting.  It just happens to be the one with the most attention because of the investors involved.