VRX - Valeant Pharmaceuticals International Inc.

[rpadebet]

Cardboard,

You have just opened the pandora's box. I promise it will be entertaining if not anything else. There are a lot of layers to uncover to get to the core. It isn't an easy investment to analyze anyway.

 

At it's core, the long thesis is VRX adds value after purchasing by cutting R&D, duplicate corp overhead, tax expense and increases revenues by selling the products through their bigger sales force. The thesis rests on how much value they add immediately (cost cutting) and how much they add long term (organic growth).

 

In your valuation, you then also have to account for, whether they can continue making acquisitions at stated IRR's? How much more debt they will need to add? Is the debt going to be refinance able/service able ? or Are they going to stop making acquisitions? If so are they going to paydown the debt to deleverage. Will they have "actual cash" to pay down the debt?

 

Then you also have to determine the quality of the products. VRX claims they are unlike other pharma's because their products are more durable and that they are less dependent on patents. you will have to make a judgement of that durability and figure out a way to value this portfolio of products.

 

Or

 

you can trust ValueAct, Sequoia, Ackman and other hedge funds. Take the cash eps number they give every quarter. apply the market multiple to it. Adjust the price up for increased growth and optionality. You will probably be able to convince yourself of satisfactory returns going forward then.

 

People talk about cash EPS. Where is it?

 

check their famous investor presentations, they talk about cash eps a lot there.

 

You will also have to go through their press releases, conference call transcripts, Ackman's presentations, Allergan's claims, VRX counter claims and a whole host of other things to get comfortable. Along the way there is a good chance you could be "converted" to the long side as Pearson speaks plainly and directly. He cannot be accused of being a smooth/slick operator in the general sense of the term, but he definitely is charming to us value investors :)

 

Check Ackman's presentation if you want to be converted immediately. He puts it in very simple terms.

 

[Cardboard]

Honestly, I won't spend a minute of my time reading these presentations. If an investment is too complicated to be understood in 5 minutes then it is not worthwhile in my experience.

 

Of course, you should and I will dig deeper once I get interested into something but, this is simply too complex. And once something is complex, who is going to buy it? You need buyers for the price of a security to go up.

 

Looks like that there was a ton of buyers here on the way up but, if the price starts to go sideways or down for a while are they all going to keep the faith? What will happen once some other powerful people start voicing concerns.

 

Cardboard

[rpadebet]

Honestly, I won't spend a minute of my time reading these presentations. If an investment is too complicated to be understood in 5 minutes then it is not worthwhile in my experience.

 

Of course, you should and I will dig deeper once I get interested into something but, this is simply too complex. And once something is complex, who is going to buy it? You need buyers for the price of a security to go up.

 

Looks like that there was a ton of buyers here on the way up but, if the price starts to go sideways or down for a while are they all going to keep the faith? What will happen once some other powerful people start voicing concerns.

 

Cardboard

 

This is an ideal investment for two kinds of investors

1) People who are very confident that they are very very smart and can see and analyze things better than most others

2) People who trust others who they think belong to category 1)

 

For rest of us, it is either for education or entertainment.

[Guest Schwab711]

~$10.5b of the $11.4b in cumulative "Cash EPS" is from amortization and interest. Amortization is for patent protected products and it represents >61% (~$7b) of all "Cash EPS". This amortization will only increase in the coming quarters and will continue for the next 11 years. Much of the upside in Salix's products is already baked in to these charges and no one is discussing the fact that all returns from Salix will have to be generated from excess returns on the $7b in goodwill. The definition of "Cash Earnings" specifically excludes amortization. I don't know how longs are comfortable with them highlighting this misleading metric, but I'm sure this comment will be invisible to longs.

 

If you looked at VRX's cash taxes vs book taxes, you'd see that DTLs are being paid off in both quarters of 2015 (which leads me to believe that $6.2b liability will have to be paid). The tax rate in 2015 is 74.8% (67.8/90.7). I think the secret of VRX's success is they found a way to overstate their book profits while simultaneously convincing investors that the best measurement of their success is to add back amortization charges of finite-lived products back to cash earnings. If you look at PFE's balance sheet (since they have a similar business model), you'll see that their DTLs are easily explained by their large foreign cash holdings. VRX has $6.2b in DTLs vs $10b in tangible assets. Finally, you'll see that stock issuance is roughly equal to the total tangible assets. Everything points to the fact that VRX has negative, cumulative true cash earnings, since the Biovail merger. Even if they eventually make GAAP profit, I doubt longs will adjust for the higher cash taxes being paid (the effective cash tax rate has almost no chance of being in the single-digits). Pearson may be saying the right things but he is acting like a snake oil salesman.

 

Posting here is no longer productive. Good luck.

[Patmo]

~$10.5b of the $11.4b in cumulative "Cash EPS" is from amortization and interest. Amortization is for patent protected products and it represents >61% (~$7b) of all "Cash EPS". This amortization will only increase in the coming quarters and will continue for the next 11 years. Much of the upside in Salix's products is already baked in to these charges and no one is discussing the fact that all returns from Salix will have to be generated from excess returns on the $7b in goodwill. The definition of "Cash Earnings" specifically excludes amortization. I don't know how longs are comfortable with them highlighting this misleading metric, but I'm sure this comment will be invisible to longs.

 

If you looked at VRX's cash taxes vs book taxes, you'd see that DTLs are being paid off in both quarters of 2015 (which leads me to believe that $6.2b liability will have to be paid). The tax rate in 2015 is 74.8% (67.8/90.7). I think the secret of VRX's success is they found a way to overstate their book profits while simultaneously convincing investors that the best measurement of their success is to add back amortization charges of finite-lived products back to cash earnings. If you look at PFE's balance sheet (since they have a similar business model), you'll see that their DTLs are easily explained by their large foreign cash holdings. VRX has $6.2b in DTLs vs $10b in tangible assets. Finally, you'll see that stock issuance is roughly equal to the total tangible assets. Everything points to the fact that VRX has negative, cumulative true cash earnings, since the Biovail merger. Even if they eventually make GAAP profit, I doubt longs will adjust for the higher cash taxes being paid (the effective cash tax rate has almost no chance of being in the single-digits). Pearson may be saying the right things but he is acting like a snake oil salesman.

 

Posting here is no longer productive. Good luck.

 

Well I don't know, it might or might not have run its course, but this thread has been a fantastic learning tool on multiple fronts for me and I'm sure many others watching from the sidelines... Thanks for showing up

[rpadebet]

~$10.5b of the $11.4b in cumulative "Cash EPS" is from amortization and interest. Amortization is for patent protected products and it represents >61% (~$7b) of all "Cash EPS". This amortization will only increase in the coming quarters and will continue for the next 11 years. Much of the upside in Salix's products is already baked in to these charges and no one is discussing the fact that all returns from Salix will have to be generated from excess returns on the $7b in goodwill. The definition of "Cash Earnings" specifically excludes amortization. I don't know how longs are comfortable with them highlighting this misleading metric, but I'm sure this comment will be invisible to longs.

 

If you looked at VRX's cash taxes vs book taxes, you'd see that DTLs are being paid off in both quarters of 2015 (which leads me to believe that $6.2b liability will have to be paid). The tax rate in 2015 is 74.8% (67.8/90.7). I think the secret of VRX's success is they found a way to overstate their book profits while simultaneously convincing investors that the best measurement of their success is to add back amortization charges of finite-lived products back to cash earnings. If you look at PFE's balance sheet (since they have a similar business model), you'll see that their DTLs are easily explained by their large foreign cash holdings. VRX has $6.2b in DTLs vs $10b in tangible assets. Finally, you'll see that stock issuance is roughly equal to the total tangible assets. Everything points to the fact that VRX has negative, cumulative true cash earnings, since the Biovail merger. Even if they eventually make GAAP profit, I doubt longs will adjust for the higher cash taxes being paid (the effective cash tax rate has almost no chance of being in the single-digits). Pearson may be saying the right things but he is acting like a snake oil salesman.

 

Posting here is no longer productive. Good luck.

 

Take what Bagehot mentioned in his post about Salix and their management guidance before the acquisition. Salix management expected to generate 6b in EBITDA in 2024 and approximately 32b cumulative in next 9 years from their then pipeline excluding the IBD drug. So let us say VRX is able to deliver those goals, then add on the 500m or so synergies per year VRX has promised to do- another 4.5b. So total of 36.5b of EBITDA is going to be generated over next 9 years. Assume they will pay 10% tax rate along the way, they are basically generating "Cash" of 33b cumulative over 9 years from Salix ex-IBD drug. They have currently booked Salix ex-IBD at 11b (16b-5b for IBD).

 

There you go, 11b carrying value becomes 33b so another 3x . Only problem here is that if done perfectly as scripted, it will take 9 years. If this is being discounted by market for time value at a rate>0%, then market is also expecting out-performance by VRX over Salix management expectations+VRX promised synergies. Or maybe the IBD expected cash flow is more valuable than 5b.

 

I also don't know how much stock you can put in Salix management guidance 9-10 years out. Didn't they mess up the place? Can nothing go wrong in 9 years time? Where is conservatism anywhere here?

 

In the most optimistic scenario this stock looks like it is priced for perfection and don't see any margin of safety. I maybe wrong.

 

Schwab711 - if you are wondering about the "Cash" in 9 years, don't look for it in Balance Sheet, you most likely won't see it. Big portion of it will go towards interest payments and hopefully some for debt payments. Rest will go for other acquisitions.

[giofranchi]

~$10.5b of the $11.4b in cumulative "Cash EPS" is from amortization and interest. Amortization is for patent protected products and it represents >61% (~$7b) of all "Cash EPS". This amortization will only increase in the coming quarters and will continue for the next 11 years. Much of the upside in Salix's products is already baked in to these charges and no one is discussing the fact that all returns from Salix will have to be generated from excess returns on the $7b in goodwill. The definition of "Cash Earnings" specifically excludes amortization. I don't know how longs are comfortable with them highlighting this misleading metric, but I'm sure this comment will be invisible to longs.

 

If you looked at VRX's cash taxes vs book taxes, you'd see that DTLs are being paid off in both quarters of 2015 (which leads me to believe that $6.2b liability will have to be paid). The tax rate in 2015 is 74.8% (67.8/90.7). I think the secret of VRX's success is they found a way to overstate their book profits while simultaneously convincing investors that the best measurement of their success is to add back amortization charges of finite-lived products back to cash earnings. If you look at PFE's balance sheet (since they have a similar business model), you'll see that their DTLs are easily explained by their large foreign cash holdings. VRX has $6.2b in DTLs vs $10b in tangible assets. Finally, you'll see that stock issuance is roughly equal to the total tangible assets. Everything points to the fact that VRX has negative, cumulative true cash earnings, since the Biovail merger. Even if they eventually make GAAP profit, I doubt longs will adjust for the higher cash taxes being paid (the effective cash tax rate has almost no chance of being in the single-digits). Pearson may be saying the right things but he is acting like a snake oil salesman.

 

Posting here is no longer productive. Good luck.

 

As far as amortization of intangibles is concerned, I think I have answered you. You might not agree with my answer, but don't say longs don't think about it: we do, and amortization has already been discussed a lot during the Allergan saga.

 

Cheers,

 

Gio

[giofranchi]

Valeant And Progenics Announce FDA Acceptance Of NDA Submission For Oral RELISTOR

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-And-Progenics-Announce-FDA-Acceptance-Of-NDA-Submission-For-Oral-RELISTOR/default.aspx

 

 

Gio

[giofranchi]

Back To School Grades For 24 Pharma And Biotech Giants

 

http://www.forbes.com/sites/matthewherper/2015/09/08/back-to-school-grades-for-24-pharma-giants/

 

 

Gio

[original mungerville]

Dude, you are literally the last person on this board that I would describe as "wanting to hear dissenting views." (It might be a tie with one or two other new posters.) See below from a week ago.

 

Ah! Come on… That was just me teasing you a little bit, because you were arguing with OM about who among you had achieved the most prestigious university degrees! Nothing more…

 

Anyway, again free to think whatever you’d like! ;)

 

Cheers,

 

Gio

 

Actually, that was OM trying to shut people down because he "eats IRRs for breakfast" and "was an engineer w/ a graduate degree and a CFA." :)

 

See? There you go again. Not wanting to hear a dissenting view. ;)

 

No, that was me stating correctly that the use of IRRs in that much hyped analysis was flawed - that's all it was.

[merkhet]

No, that was me stating correctly that the use of IRRs in that much hyped analysis was flawed - that's all it was.

 

Why'd you edit the original message? I was looking forward to responding to that one. Belligerence is in my blood, and I'm happy to contribute to maintaining this dumpster fire for a little longer.

 

Let's see...

 

You said that people were calculating their IRRs incorrectly, that "everyone knows you put a terminal value in the last year of an IRR calculation" and that you eat IRRs for breakfast as an engineer. (So, not merely that people were incorrectly applying IRR to analyze the product, but rather actually calculating the damn thing incorrectly...)

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg233772/#msg233772

 

I responded that, as a math major, I'm pretty sure people calculated the IRRs correctly, and that it's just that you were saying that people need to count all the cash flows for an acquisition within a certain period and slap on a terminal value (and you were, incorrectly, calling that an IRR as opposed to a DCF) and that other people were literally using the mathematical definition of IRR.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg233835/#msg233835

 

You then responded sarcastically that you were glad I was a mathematician, but there are no participation awards in this game. And then you bragged that you had a graduate degree in Engineering/Operations Research and a CFA.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg233864/#msg233864

 

So then I responded by showing you the actual mathematical definition of IRR to show you that you and Picasso were, in fact, talking past one another and that I was happy to compare intellectual abilities with you since you decided to bring it up.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg233869/#msg233869

 

So... what part of my response to Gio was wrong again? :)

 

As a side note, this endless rehashing of things that can be easily fact-checked (and yet are not) is why this thread is so very, very long. :)

[original mungerville]

I edited the original to keep this conversation mature. Sorry to disappoint. 

[merkhet]

I edited the original to keep this conversation mature. Sorry to disappoint.

 

Eh, no worries. I'm sure we all need some editing now and then to sound mature.

[BraveChieftain]

Perhaps it would be interesting to do a poll to see if anyone has changed their mind on whether VRX is a good or bad business based on what has been discussed so far. If it's a small number, which I believe is possible, I feel like there will just be endless rambling for a long time.

[original mungerville]

I edited the original to keep this conversation mature. Sorry to disappoint.

 

Eh, no worries. I'm sure we all need some editing now and then to sound mature.

 

Too bad you don't edit.

[merkhet]

I edited the original to keep this conversation mature. Sorry to disappoint.

 

Eh, no worries. I'm sure we all need some editing now and then to sound mature.

 

Too bad you don't edit.

 

Some of us have less of a need than others. ;)

[merkhet]

Perhaps it would be interesting to do a poll to see if anyone has changed their mind on whether VRX is a good or bad business based on what has been discussed so far. If it's a small number, which I believe is possible, I feel like there will just be endless rambling for a long time.

 

I've shifted but only a little. I started off thinking that there was something rather off about the way that VRX was accounting for its acquisitions. Now, I have a better understanding of how they are accounting for their acquisitions, but I don't agree with their accounting choices.

 

For instance, if they're accounting for their payback using EBITDA + restructuring costs, I think they should say so rather than saying that it's a "cash" payback as that has some preconceived notions attached to it.

 

So, I've shifted, but it's a small shift.

[original mungerville]

I edited the original to keep this conversation mature. Sorry to disappoint.

 

Eh, no worries. I'm sure we all need some editing now and then to sound mature.

 

Too bad you don't edit.

 

Some of us have less of a need than others. ;)

 

If you need to have the last word because it makes you feel better I don't mind at all. Its the least I can do to help you.

[merkhet]

I edited the original to keep this conversation mature. Sorry to disappoint.

 

Eh, no worries. I'm sure we all need some editing now and then to sound mature.

 

Too bad you don't edit.

 

Some of us have less of a need than others. ;)

 

If you need to have the last word because it makes you feel better I don't mind at all. Its the least I can do to help you.

 

Thanks Pot. Love, Kettle. :)

[original mungerville]

You just can't stop.

[giofranchi]

For instance, if they're accounting for their payback using EBITDA + restructuring costs, I think they should say so rather than saying that it's a "cash" payback as that has some preconceived notions attached to it.

 

What I think is clear by now is they add interest payments back to operating cash flow to get to the amount of the cash really generated by their businesses, but they do not add back restructuring costs.

 

Again, these are the numbers:

 

CFFO 2009-2015: $6 billion

CFFI (sale of a business) 2009-2015: $1.4 billion

Interests paid 2010-2015: $3.4 billion

Total cash generated since 2008: $6 + $1.4 + $3.4 = $11 billion, which is roughly the cash they claim they have generated.

 

Purchase price 2008-2015 (cumulative): $35.7 billion

Restructuring charges 2010-2015 (cumulative): $1.8 billion

Total capital deployed since 2008: $35.7 + $1.8 = $37.5 billion, which is roughly the capital they claim they have deployed.

 

After all, interest payments are something the mother company (VRX) has to sustain, because it purchased those businesses with debt. Therefore, interest payments have nothing to do with the amount of cash generated by each subsidiary. I don’t see what they should have specified more clearly.

 

Cheers,

 

Gio

 

[merkhet]

You just can't stop.

 

 

But hey, "if you need to have the last word because it makes you feel better I don't mind at all. Its the least I can do to help you." Just for you, Pot. ;)

 

What I think is clear by now is they add interest payments back to operating cash flow to get to the amount of the cash really generated by their businesses, but they do not add back restructuring costs.

 

...

 

After all, interest payments are something the mother company (VRX) has to sustain, because it purchased those businesses with debt. Therefore, interest payments have nothing to do with the amount of cash generated by each subsidiary. I don’t see what they should have specified more clearly.

 

Ah, I think you're right on the fact that they don't add back restructuring costs when accounting for how they count their payback. (The difference between $11 billion and $11.4 billion is probably rounding errors.) My main issue is that "cash" has some preconceived notions to it, and EBITDA is a pretty standardized term -- so rather than call it a "cash" payback why not call it an "EBITDA" payback?

 

Note, I'm not saying that they're being purposefully disingenuous or anything on calling it a "cash" payback. I merely mean that things could have been clearer off the bat. This could just be one of those issues where there's just a communication problem.

[giofranchi]

(The difference between $11 billion and $11.4 billion is probably rounding errors.)

 

It is probably interest paid in 2008 and 2009.

 

Cheers,

 

Gio

 

[merkhet]

(The difference between $11 billion and $11.4 billion is probably rounding errors.)

 

It is probably interest paid in 2008 and 2009.

 

Cheers,

 

Gio

 

That might be it.

[original mungerville]

According to the below article, it looks like we can now add Kyle Bass to our hedge fund infested investment that is Valeant Pharmaceuticals. Its a small investment in the shares - who knows maybe he is short!...or maybe he has spent so much time looking at patents in the industry that he likes Valeant's approach. There is quite a list of prominent longs in the attached (not to mention Sequoia Fund, the largest shareholder; as well as Lou Simpson).

 

http://www.forbes.com/sites/johndobosz/2015/09/17/hedge-fund-superstars-stocking-up-on-valeant-pharmaceuticals/?utm_campaign=yahootix&partner=yahootix

 

Oh sorry, looks like Soros is in too.