VRX - Valeant Pharmaceuticals International Inc.

[Bagehot]

Marathon pissed off a bunch of hospitals with their price raises.  These hospitals and some of their industry supply chain lobbying groups went to Sanders and Cummings.  The legislators went after a bunch of these pharmas, including Marathon.  Marathon hired a DC lobbyist who met with the various hospitals and healthcare supply chain groups, who told the lobbyist they were not going to back off.  Then Marathon sells non-strategic assets to VRX.  DC lobbyist for Marathon calls up hospitals and says we sold these products to VRX, please back off.  Somehow I don't think Mike Pearson did a whole lot of DD on the Sanders/Cummings investigations/hearings.  Either that or VRX is remarkably tone deaf to the issues surrounding pharma price increases.  See the Kaiser Family Foundation survey on Rx costs.

 

http://kff.org/health-costs/poll-finding/kaiser-health-tracking-poll-august-2015/

 

I think he did plenty of DD, at least as it relates to this issue. I mean you can Google "Bernie Sanders Marathon Pharma" and see a letter Sanders wrote Jeff Aronin last November questioning the price increases. So it isn't like this was some under cover secret that they'd have to look hard to find out about. Marathon actually hired a consultant who told them they could take even more price, which Marathon was scared to do. I say they were scared for two reasons. First, here's a line from their press release: "Marathon Pharmaceuticals no longer has any responsibility for availability, pricing or orders for any of the products included in this transaction." Second, Marathon structured the deal such that there are milestone payments tied directly to Isuprel and Nitropress sales.

 

In exchange for taking the heat, they sold to VRX at a very attractive price to VRX ($286M plus earnout). To put that in perspective, in the 4.5 months VRX has owned the Marathon assets as of 6/30, Isuprel and Nitropress alone have generated $247M of sales. I'd assume VRX is earning something like a 60% contribution margin on these drugs (prob higher), so without even considering the other 7 drugs they acquired, those two will fully pay back the deal in less than a year. It may turn out to be a bad deal if there is a ton of blowback, but the whole reason the deal was so attractive in the first place is because there was hair on it.

[original mungerville]

Two informative / thoughtful posts Bagehot - thanks.

[giofranchi]

Bausch + Lomb and Nicox Announce FDA Acceptance of New Drug Application for Novel Glaucoma Candidate VESNEO™ (latanoprostene bunod)

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Bausch--Lomb-and-Nicox-Announce-FDA-Acceptance-of-New-Drug-Application-for-Novel-Glaucoma-Candidate-VESNEO-latanoprostene-bunod/default.aspx

 

Cheers,

 

Gio

[giofranchi]

Drugmakers' shares fall on plan to tackle "outrageous" price gouging in US

 

http://www.firstwordpharma.com/node/1316744#axzz3mSYfe6lI

 

Cheers,

 

Gio

[giofranchi]

Clinton, Sanders offer competing visions of health care

 

http://fortune.com/2015/09/22/clinton-sanders-offer-competing-visions-of-health-care/?xid=soc_socialflow_twitter_FORTUNE

 

Cheers,

 

Gio

[giofranchi]

Hillary Clinton’s Plan for Lowering Prescription Drug Costs

 

https://www.hillaryclinton.com/p/briefing/factsheets/2015/09/21/hillary-clinton-plan-for-lowering-prescription-drug-costs/

 

Cheers,

 

Gio

[giofranchi]

Hedge Fund Bro Says He'll Cut Inflated Drug Price So He’ll Only Turn a “Small Profit”

 

http://www.slate.com/blogs/the_slatest/2015/09/22/martin_shkreli_will_reportedly_cut_daraprim_price_after_criticism.html

 

Cheers,

 

Gio

[giofranchi]

A generic pill's price just went up $700. Why doesn’t another company create a competitor?

 

http://www.vox.com/2015/9/22/9373557/daraprim-competitor-turing

 

Cheers,

 

Gio

[giofranchi]

How the Government Could Punish That Hedge Fund Bro Who Wanted to Raise a Drug's Price 5000%

 

http://www.slate.com/blogs/moneybox/2015/09/23/martin_shkreli_and_daraprim_how_the_government_could_stop_his_drug_price.html

 

Cheers,

 

Gio

[giofranchi]

I have just bought some more.

 

Cheers,

 

Gio

[original mungerville]

Good purchase - stock has been battered down for no reason. I love the recent acquisitions, (cash) earnings and "organic" growth are going to be substantial in 2016.

[hswoon]

Bulls: How comfortable are you all with the current deal model using IRR as a measure of performance? And how does IRR translate to an increase in cash...?

 

Just curious as to your opinions...

 

 

[giofranchi]

Bulls: How comfortable are you all with the current deal model using IRR as a measure of performance? And how does IRR translate to an increase in cash...?

 

Just curious as to your opinions...

 

As I have already said, my idea is their IRR goal is nothing but the goal that each small/medium sized business they buy should generate enough cash in 5-6 years to cover its cost (for large businesses the timeframe might be longer), before any interest paid by the mother company on its debt.

If they succeed, they are growing profitably. Therefore, Cash EPS should keep growing handsomely.

If, instead, they do not succeed, I’ll admit I was wrong.

 

Cheers,

 

Gio

 

[giofranchi]

ViewPoints: Will increased competition challenge the so-called "price gougers"

 

http://www.firstwordpharma.com/footer/benefits?tsid=17#axzz3mf2JbY9V

 

Cheers,

 

Gio

[giofranchi]

Pharma & Biotech Half-Year Review 2015

 

In attachment.

 

Cheers,

 

Gio

epv-hy-ph-2015.pdf

[Picasso]

Anyone have any thoughts on why VRX has been trading like death lately?  Getting fairly close to Ackman's cost basis.

 

It seems to me like the market is refocusing on the growth from volume versus price increases.  I believe this was a contention of the AGN battle where they assumed the majority of organic growth came from unsustainable price increases.  I haven't seen enough disclosure here unless someone else can point to a filing somewhere with the information.

[giofranchi]

Anyone have any thoughts on why VRX has been trading like death lately?  Getting fairly close to Ackman's cost basis.

 

It seems to me like the market is refocusing on the growth from volume versus price increases.  I believe this was a contention of the AGN battle where they assumed the majority of organic growth came from unsustainable price increases.  I haven't seen enough disclosure here unless someone else can point to a filing somewhere with the information.

 

During Q2 2015 conference call Pearson said that organic growth was driven 50% by volume and 50% by price.

If I am not wrong, the day before Mrs. Clinton made her comment VRX was trading around $240, then it nose-dived…

 

Cheers,

 

Gio

 

[Bagehot]

Anyone have any thoughts on why VRX has been trading like death lately?  Getting fairly close to Ackman's cost basis.

 

It seems to me like the market is refocusing on the growth from volume versus price increases.  I believe this was a contention of the AGN battle where they assumed the majority of organic growth came from unsustainable price increases.  I haven't seen enough disclosure here unless someone else can point to a filing somewhere with the information.

 

Clinton tweet. Seriously. There are some vocal shorts, too, who have gotten steamrolled and feel that MNK being a sham means VRX is vulnerable as well.

 

Volume/price are ~50/50. You can read the MD&A in the Q where they disclose that sales are driven mostly by price in the developed world (~80% of sales) and by volume in EM (price was actually negative in EM segment last Q). That is likely to shift more towards volume in coming years as the product mix shifts away from "tail" assets in the US (volumes higher in derm/eye last Q and lower in neuro/generic/other which is the holding tank for tail assets) and growth is driven by products like Jublia, Xifaxan, B+L Ultra, etc. It's important to note that the large price increases that most people talk about (Isuprel and Nitropress, the two Marathon products) are not included in organic growth since VRX hasn't owned them for a year. Virtually all of the "extreme pricing" at VRX occurs in one of two situations: 1) newly acquired products that management believes were mispriced (eg the Marathon assets and a few small assets that came with SLXP); and 2) drugs that are nearing a patent cliff (eg Glumetza) in which VRX does what every other pharma co does by trying to milk the last bit of cash out of the franchise. Glumetza price is up 50% and volumes down 25% over the last month. It will go to 0 in January, I believe, so that is an "eye watering" price increase to use Pyott's terminology, but not one that is driving long-term sales growth.

 

I posted some earlier thoughts on Clinton's proposals. Assuming she gets elected and then could ever get them through Congress (historically drug pricing proposals have been a hard sell bc pharma only makes up ~10% of all HC spend so there isn't much leverage there to "bend the cost curve"), the impact to VRX would be small, as US govt reimbursement is ~15% of sales and lower than that of profitability. '16E Cash EPS is something like $16-$17, so even if you make the excessively draconian assumption that the whole 15% goes away AND that it is at corp average profitability, VRX cash EPS would be ~$14 next year, implying a 14.5x PE.

[Picasso]

Surprised to finally see the market catch up to MNK/QCOR acquisition.

 

Is there a way to track volume and price on developed world sales?  I realize a lot of this has to come from management commentary but perhaps there is a way to get a better idea of how the market can value the company.

 

I think if you have healthy volume increases with price increases, then the outlook is probably fine for a while.  Excluding the tail assets that will obviously see volume declines with price increases (like Glumetza). 

 

I'm sort of confused why VRX doesn't breakdown the company in two parts: core and non-core.  It would be nice to compare volume + price on the core business and figure out what kind of leverage or cash EPS you can give that business, then add up some discounted value of cash flows on the non-core business.  As a percentage the non-core isn't a lot but it gets lumped into the rest of the results and it makes me feel like management purposefully includes them to make it really hard to understand the business.  It all comes through into their cash EPS in the end but you have a hard time figuring out the quality of that cash generation.

 

Bagehot, do you think that cash EPS is the proper way to value this business over long periods of time?  Is there anything about that valuation method which makes you think it is overstating the long-term earnings power of the business?  I have a few worries about cash EPS (even though a lot of other pharma's use a similar metric) but was curious to your take since you have a good handle on the business.

[Liberty]

Anyone have any thoughts on why VRX has been trading like death lately?  Getting fairly close to Ackman's cost basis.

 

It seems to me like the market is refocusing on the growth from volume versus price increases.  I believe this was a contention of the AGN battle where they assumed the majority of organic growth came from unsustainable price increases.  I haven't seen enough disclosure here unless someone else can point to a filing somewhere with the information.

 

Clinton tweet. Seriously. There are some vocal shorts, too, who have gotten steamrolled and feel that MNK being a sham means VRX is vulnerable as well.

 

Volume/price are ~50/50. You can read the MD&A in the Q where they disclose that sales are driven mostly by price in the developed world (~80% of sales) and by volume in EM (price was actually negative in EM segment last Q). That is likely to shift more towards volume in coming years as the product mix shifts away from "tail" assets in the US (volumes higher in derm/eye last Q and lower in neuro/generic/other which is the holding tank for tail assets) and growth is driven by products like Jublia, Xifaxan, B+L Ultra, etc. It's important to note that the large price increases that most people talk about (Isuprel and Nitropress, the two Marathon products) are not included in organic growth since VRX hasn't owned them for a year. Virtually all of the "extreme pricing" at VRX occurs in one of two situations: 1) newly acquired products that management believes were mispriced (eg the Marathon assets and a few small assets that came with SLXP); and 2) drugs that are nearing a patent cliff (eg Glumetza) in which VRX does what every other pharma co does by trying to milk the last bit of cash out of the franchise. Glumetza price is up 50% and volumes down 25% over the last month. It will go to 0 in January, I believe, so that is an "eye watering" price increase to use Pyott's terminology, but not one that is driving long-term sales growth.

 

I posted some earlier thoughts on Clinton's proposals. Assuming she gets elected and then could ever get them through Congress (historically drug pricing proposals have been a hard sell bc pharma only makes up ~10% of all HC spend so there isn't much leverage there to "bend the cost curve"), the impact to VRX would be small, as US govt reimbursement is ~15% of sales and lower than that of profitability. '16E Cash EPS is something like $16-$17, so even if you make the excessively draconian assumption that the whole 15% goes away AND that it is at corp average profitability, VRX cash EPS would be ~$14 next year, implying a 14.5x PE.

 

Exactly. Many pharmas like to get rid of their tail products before they go generic so they aren't the ones taking the price increases, but VRX has historically picked up alot of these products (can get good prices since others don't want them), so they are showing more price increases. But it's still a small part of their business (they've mentioned that pricing is about flat outside the US and about 5% in the US).

 

From the last Q transcript:

 

Q: Thanks. So, with the recent 500% price increase on Glumetza in mind, can you talk about the extent to which you envision more pricing power not just for other products acquired by the Salix transaction, but maybe just your assets broadly speaking in the U.S. How should we think about that? Thank you.

 

Mike Pearson - Chairman and CEO

So, I think most pharma companies that I’m aware of is a product that is in the last stages of their life like Glumetza, we are going to lose Glumetza more than six months after price increases are taken at the end and so that was just consistent with what most companies do. And our view of pricing across most of our portfolio we do not take price outside the U.S. there is like fuel price, I think David as we get more and more into segments like contact lenses and consumer products and other devices, we are not able to take price. So, we are opportunistic when it comes to price but our base strategy is how do we grow organically through volume which is I think this quarter we once again exhibited our ability to do so. Next question

[original mungerville]

Quite a nice dip in the stock now - down 20% in 5 days.

[tombgrt]

Well it is a hedge fund darling at the moment, it happens!

[Bagehot]

Surprised to finally see the market catch up to MNK/QCOR acquisition.

 

Is there a way to track volume and price on developed world sales?  I realize a lot of this has to come from management commentary but perhaps there is a way to get a better idea of how the market can value the company.

 

I think if you have healthy volume increases with price increases, then the outlook is probably fine for a while.  Excluding the tail assets that will obviously see volume declines with price increases (like Glumetza). 

 

I'm sort of confused why VRX doesn't breakdown the company in two parts: core and non-core.  It would be nice to compare volume + price on the core business and figure out what kind of leverage or cash EPS you can give that business, then add up some discounted value of cash flows on the non-core business.  As a percentage the non-core isn't a lot but it gets lumped into the rest of the results and it makes me feel like management purposefully includes them to make it really hard to understand the business.  It all comes through into their cash EPS in the end but you have a hard time figuring out the quality of that cash generation.

 

Bagehot, do you think that cash EPS is the proper way to value this business over long periods of time?  Is there anything about that valuation method which makes you think it is overstating the long-term earnings power of the business?  I have a few worries about cash EPS (even though a lot of other pharma's use a similar metric) but was curious to your take since you have a good handle on the business.

 

I don't think Cash EPS is perfect, but it is probably a better measure than anything else. For virtually all the B+L portfolio it makes sense. For Salix it probably does, too. Xifaxan doesn't lose patent protection until 2029, I believe, so that's pretty durable. I mean, I don't think you could predict where a lot of P&G's products are going to be in 2029, and they trade at 19x fwd eps.

 

Where it gets tricky is things like the Marathon deal. They paid $286M for the Marathon assets in February and will probably be fully paid back by the end of this year. Clearly that is a great deal, but it isn't so clear that slapping a multiple on the (admittedly small) cash earnings coming from Marathon is the most reasonable way to look at it. So the ideal way in my view is to view VRX as partly a "runoff" portfolio and partly a typical pharma biz. They do a decent job of highlighting the major genericizations they have on the horizon (~$1B from 2015-2019) v a revenue base of ~$13.5B in 2016.

 

Since the runoff piece is so small, I'm ok with viewing the whole thing on a Cash EPS basis. The other thing is that much of the runoff portfolio are these "tail asset" deals in which management is earning very high IRRs, so they aren't really your typical "melting ice cube" type investments (like Yellow Pages or something). Also, they have numerous pipeline "shots on goal" that, if all approved, could be many multiples of that $1B (relistor, vesneo, emerade, etc). SLXP's management (credibility issues, I know) estimated at their Investor Day last July that their pipeline had ~$8B of peak sales.

 

So anyway, the small size of the known genericizations and the numerous shots they have for large drugs in the pipeline make me relatively comfortable valuing it on Cash EPS. The most important thing I can point you to re: VRX in the last four days is "the day they red-dogged motorola" by Adam Smith. That day, incidentally, was 49 years ago Sunday!

[original mungerville]

Well it is a hedge fund darling at the moment, it happens!

 

Its great, hopefully it goes down another 20%.

[Picasso]

Thanks Bagehot, I think you've been more helpful across your several posts than the 100 pages of thread on this topic so far.  I'm still trying to wrap my arms around this investment (it keeps sucking me back in) so understanding the right way to value this company is important.

 

Something I have thought about.... how much value is there for Pfizer (or whoever) to buy Valeant?  Isn't Valeant big enough to create a Tim Horton's/Burger King type combo in the pharma space for a large bloated company willing to create a ton of shareholder value?  If I was Pearson, I'd be pretty nervous once I left if there was a lot of debt, a bad acquisition of size, employees pushing accounting limits to hit their numbers, etc.  Seems like the best exit plan is to eventually setup for some sale down the line.  I haven't seen anyone mention this, but it makes a lot of sense to me.

 

I also get your point that the run off portfolio within VRX is probably inconsequential to looking at cash EPS.  But do you have any concerns with competition R&D spend versus VRX R&D which can impair the assets?  I'm fairly certain that Alcon under Novartis will have a large R&D budget and even if B+L moves 2 steps forward, Alcon might be moving ahead 4 steps.  It might be a durable category, but I am not yet convinced that you can compete over the long-term with Novartis by allocating very little to R&D.  If you take cash EPS for something close to the earnings left for equity holders, you have to get very comfortable with the durability no matter what.

 

I say this having just read a recent Procter and Gamble annual report.  Something as simple as Tide or Pampers still require a lot of R&D spend.  If P&G isn't spending it, they'll be sitting on relatively impaired assets over time no matter what.  Is 2% as a percentage of sales really enough for Valeant?  When I adjust for divestitures at P&G they spend around 3% of sales on R&D.  I'd like to think that Valeant would require something more than P&G just because of the difference in business qualities.  P&G has the shelve space, brand, decades of marketing spend.  Doctors or patients are going to use what is the most effective drug or treatment and there isn't the kind of marketing spend/brand attached to Valeant to make people pay up for an inferior product. 

 

Maybe I'm thinking about this wrong, but that thinking has sort of left me leery with the cash EPS.  All the intangibles they amortize may very well end up as some expense so giving their cash EPS a 30% discount might not be a bad thing to do.  And I'd assume that by the time (or if) we see deterioration, the market won't like the story and you won't get a P&G multiple on that either.