VRX - Valeant Pharmaceuticals International Inc.

[Liberty]

I think VRX could divest the 10% of their business that relies more on pricing (tail products, orphan drugs, legacy stuff), do GDP increases on the US part, and be flat in rest of world and they'd still do great.

 

Heck, Pearson could go donate the rights to the Marathon drugs to St-Jude's hospital on live TV tonight and it wouldn't affect IV of the whole business much.

 

Politicians do politics, especially when elections approach. But the simple fact is:

 

Products come from -> R&D.

 

Valeant has lots of products. Valeant is thus either directly or indirectly funding lots of R&D.

 

There's too much "not invented here" syndrome in big pharma. VRX is just tweaking its risk-reward profile by developing some stuff in-house and buying other stuff from others. When it buys a contact lens company in south-korea and then plugs the products into the worldwide B&L distribution network, is that worse than developing a new contact lens in-house?

 

The argument that they buy assets and then milk them as cash cows isn't credible, as their pipeline is strong (their second biggest product was launched barely a year ago, they said they're continuing almost all of the Salix R&D) and organic growth is very strong. The argument that they are on a treadmill of acquisition to hide deteriorating fundamentals was proven wrong when they didn't acquire anything big for a year and the one-time charges proved to be one-time and fell, the synergies proved to be real, GAAP numbers rose to meet the adjusted numbers, debt was paid down, and organic growth accelerated.

 

Naysayers also said that the acquisition of Dendreon showed that Valeant had lost its mind, that it was a terrible deal for a terrible company, etc. Yet in a very short period of time, VRX has made Dendreon profitable, increased margins by thousands of basis points and says they are headed much higher, they've already finished restructuring, and sales there have been growing 18% YoY. Not bad for a terrible deal...

[Guest Schwab711]

As Gio and others pointed out, I can't believe generics have so much in pricing power. I agree with OM that any legislative action is likely to take at least 2-3 years. VRX is going to shine or burn out because of VRX.

 

@Gio: The reason I bring up liquidity is because amortization is smooth and debt maturity is choppy. Starting in 2018, debt > amort. They need to earn GAAP profits or refi, simple as that. If the stock/bond prices fall, then refi is going to become trickier. EBITDA is expected to jump to $7.5B, but $1.5-2b of the $3.3b increase will come from IDA. That's not a lot of wiggle-room and they are going to refi at some point by 2020 (because debt > amort by such a large amount). Interest rate risk, refi risk, and operational risk. That's all I'm saying. I didn't assume a strong generics business in my estimates. That could certainly make it easier to refi if bankers want a piece of it.

 

I also think tax rates will be higher in the future and we'll get to find out if they have to pay DTLs when SLXP start to profit (I don't know how they can transfer the IP to Barbados without triggering a major tax event). Taxes would be a good thing though since at least we'd have GAAP income.

 

 

Last thing, how can they release a slide like this? I would not be writing all this if they had $11.8b in cumulative net income! Did they just change "Cash EPS" to "Net Income"?!? Seriously, what did I miss. How is this legal...

[Guest Schwab711]

Bronte put another article on Valeant out which basically says that the prices of Salix are being raised

 

Saw that. I'm sure he's aware that Salix was massively discounting to reduce inventory after its scandal, and that this depressed revenue temporarily. In the most recent Q transcript, Glenn Greenberg asks about Salix's Q4 run-rate and Pearson confirms that it should be ~600m, and that it's fair to annualize that. With Xifaxan growing over 30% YoY thanks to the IBS-D indication, and possibly accelerating further into the next year because of DTC ads, you easily get to the 20% figure that Hempton pretends to find high (I don't think I've seen anyone complain about Salix price increases since Valeant bought them...). Salix also has higher margins than the VRX average, so the impact on the bottom line should be proportionally higher.

 

From what I can tell, the 90% of VRX's portfolio that isn't tail assets and such doesn't seem to have that much pricing power. More than inflation, but nothing out of the ordinary compared to what the healthcare sector as a whole has been taking lately.

 

I lied, I actually perused Hempton/brogalboy's post - couldn't help myself, but what a complete waste of time... as expected, I should have know better...

 

This is typical Hempton shit and Liberty your counter-arguments are of course completely logical. He pretends they did not get the IBS-D indication, assumes a reduced Salix revenue base from a prior year, tries to make himself sound credible, and then says hey, if they are going to get to $2 billion plus in 2016 like Pearson says they will, it all has to be price increases!?!

 

Then he spews stuff about their audit person!

 

Now, after this prior credibility-starved drivel he puts out as "analysis" on Salix, why the hell should anyone spend time investigating his audit person allegations?

 

It read like he literally spent 30 minutes thinking, writing, and editing this. The piece was a huge waste of time to read.

[Bagehot]

Bronte put another article on Valeant out which basically says that the prices of Salix are being raised

 

Saw that. I'm sure he's aware that Salix was massively discounting to reduce inventory after its scandal, and that this depressed revenue temporarily. In the most recent Q transcript, Glenn Greenberg asks about Salix's Q4 run-rate and Pearson confirms that it should be ~600m, and that it's fair to annualize that. With Xifaxan growing over 30% YoY thanks to the IBS-D indication, and possibly accelerating further into the next year because of DTC ads, you easily get to the 20% figure that Hempton pretends to find high (I don't think I've seen anyone complain about Salix price increases since Valeant bought them...). Salix also has higher margins than the VRX average, so the impact on the bottom line should be proportionally higher.

 

From what I can tell, the 90% of VRX's portfolio that isn't tail assets and such doesn't seem to have that much pricing power. More than inflation, but nothing out of the ordinary compared to what the healthcare sector as a whole has been taking lately.

 

I lied, I actually perused Hempton/brogalboy's post - couldn't help myself, but what a complete waste of time... as expected, I should have know better...

 

This is typical Hempton shit and Liberty your counter-arguments are of course completely logical. He pretends they did not get the IBS-D indication, assumes a reduced Salix revenue base from a prior year, tries to make himself sound credible, and then says hey, if they are going to get to $2 billion plus in 2016 like Pearson says they will, it all has to be price increases!?!

 

Then he spews stuff about their audit person!

 

Now, after this prior credibility-starved drivel he puts out as "analysis" on Salix, why the hell should anyone spend time investigating his audit person allegations?

 

If anyone wasn't convinced that Hempton is suffering from confirmation bias re:VRX after his last post prior to this one, I'm not sure what I can say. He has a narrative and he's going to fit the facts to support, regardless of how poor the analysis.

 

http://brontecapital.blogspot.com/2014/10/valeant-part-xiii-channeling-jeff.html

 

I read the court docs relating to Norma Provencio yesterday. She was not ever charged or even close to being charged. The "evidence" Hempton cites is the guy that went to jail trying to point the finger at anyone but himself. BTW, the guy has a website, which is entertaining:

 

http://www.freemitchellstein.com/

 

The guy seems legit...

 

[Guest Schwab711]

For those who insist on VRX's party line that only a small portion of its portfolio is subject to price increases: http://valeantpricing.com/

 

Where do they say how much of the portfolio those repesent?

 

http://www.valuewalk.com/2015/09/why-a-congressional-subpoena-to-valeant-about-price-gouging-on-drugs-should-be-granted/

 

First breakdown I've seen. Wellbutrin XL quarterly rev is down 50% since their purchase in 2009. They have increased the price by 381% since 1Q13. So Wellbutrin XL volumes are down 85%?

 

It's nice to have another list of products to research though.

[Liberty]

For those who insist on VRX's party line that only a small portion of its portfolio is subject to price increases: http://valeantpricing.com/

 

Where do they say how much of the portfolio those repesent?

 

http://www.valuewalk.com/2015/09/why-a-congressional-subpoena-to-valeant-about-price-gouging-on-drugs-should-be-granted/

 

First breakdown I've seen. Wellbutrin XL quarterly rev is down 50% since their purchase in 2009. They have increased the price by 381% since 1Q13. So Wellbutrin XL volumes are down 85%?

 

It's nice to have another list of products to research though.

 

This is just the citron thing that was posted previously republished on another site. Wellbutrin XL is a tail product that went generic, that's a cases where the company has been clear about pricing playing a big role. There's a generic version, this isn't exactly some orphan drug.

[Guest Schwab711]

For those who insist on VRX's party line that only a small portion of its portfolio is subject to price increases: http://valeantpricing.com/

 

Where do they say how much of the portfolio those repesent?

 

http://www.valuewalk.com/2015/09/why-a-congressional-subpoena-to-valeant-about-price-gouging-on-drugs-should-be-granted/

 

First breakdown I've seen. Wellbutrin XL quarterly rev is down 50% since their purchase in 2009. They have increased the price by 381% since 1Q13. So Wellbutrin XL volumes are down 85%?

 

It's nice to have another list of products to research though.

 

This is just the citron thing that was posted previously republished on another site. Wellbutrin XL is a tail product that went generic, that's a cases where the company has been clear about pricing playing a big role. There's a generic version, this isn't exactly some orphan drug.

 

I almost never read Citron which is probably how I missed it. Do you know of any other lists of their products not on top-20?

 

Generics for Wellbutrin XL became available is 2006. This isn't a tail product. This was supposed to be their largest "durable" (off-patent branded drug).

 

http://www.drugs.com/availability/generic-wellbutrin-xl.html

[Liberty]

Wellbutrin seems to be lasting because the generics are not bioequivalent:

 

http://www.fda.gov/Drugs/DrugSafety/PostmarketDrugSafetyInformationforPatientsandProviders/ucm322161.htm

 

Memory's hazy on the details, but I think newer generics might be more of a threat, which is causing the problems. Not sure, been a while since I looked at that one.

 

They paid 510m for the rights in 2009:

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2009/Biovail-Announces-Acquisition-of-US-Rights-to-Wellbutrin-XLR/default.aspx

 

And just in the past 4 quarters, revenue from it seem to have been close to 300m. I'd say that since 2009 they did pretty well with it, but I don't think it's durable in the same way that many of their other products are.

 

Btw, be wary of lists that show percentage increases without dollar amounts:

 

[Liberty]

We've mentioned a bit earlier in this thread that management is guiding for 7.5bn in EBITDA in 2016 (saying they will "comfortably" deliver it). I was curious about what kind of scenario this was based on, so digged a bit and this is mentioned in a the Q1 Q&A:

 

Question: Hi. Thanks for taking my questions. The first I had was with respect to the $7.5 billion EBITDA. I’m just curious if you could talk more about if you include anything in there for tuck-ins and/or pipeline in that number, is that upside?

 

Mike Pearson - Chairman and CEO

Yes. Now, there’s nothing assumed in the $7.5 billion in terms of acquisitions.

 

Howard Schiller - CFO

We did assume debt paydown.

 

Mike Pearson - Chairman and CEO

Yes. The full debt paydown case [ph], it probably won’t happen. We probably will do some acquisitions which means we’re getting better. But it’s the most conservative case.

 

Howard Schiller - CFO

Because the debt paydown doesn’t impact EBITDA. It’s just reducing interesting expense and helping increases net income obviously.

 

So they seem very confident that they'll do at least 7.5bn, and that assumes zero tuck-ins or acquisitions (they've already done some since), just paying down debt (which doesn't help EBITDA, obviously).

 

That 7.5bn doesn't just assume no acquisitions at all, it also assumes nothing new from the pipeline except one small product:

 

Question: And then just quickly, just on the $7.5 billion, are you including anything for pipeline? I know you have a lot of potential new product approvals next year.

 

Mike Pearson - Chairman and CEO

No. No, we assume nothing. That’s why we feel very comfortable in terms of the $7.5 billion because there’s a lot of things that will happen. In that respect, there’s one product that we do have a built-in [ph], Luminesse, which we know will get approved, correct?

 

Howard Schiller - CFO

Yes. Eye whitening product.

 

Mike Pearson - Chairman and CEO

That’s right. It’s small [ph] and --

 

Howard Schiller - CFO

And now it’s consistent again. We have highlighted that over the summer and the fall as the only pipeline product to be included.

 

Wouldn't be surprised if the actual EBITDA number for 2016 was significantly higher.

[original mungerville]

Am I right to think that that would not include the IBS-D for Salix either.

 

(Note: I guess they run a "full debt paydown scenario" which assumes no tuck-ins or acquisitions and all other cash flow goes to paying down the debt say throughout 2015 and 2016, which doesn't directly impact EBITDA, but indirectly reduces the "I" because there is less debt outstanding. So I guess they run that scenario to give their estimates which is one reason they keep beating estimates. Because some other logical acquisition comes along and they don't actually pay down the debt, meanwhile the earnings yield on the price paid for the acquisition is less than the interest yield of their debt and so its accretive to EBITDA. Also the acquisition might be partially funded with equity which has no interest attached to it. So accretive relative to their EBITDA estimates. This is what Pearson's words/grunts mean I believe - in not so many words though!)

[Liberty]

Another interesting tidbit from that same call: CFO had announced he was leaving (well, staying on the board) and analyst asked him about things that he learned and that he thinks investors might not understand about the company. Here's his answer:

 

"I think, one, because deals get headlines, I think there’s a little bit of a misconception that we spend all of our time running around doing deals where it’s pretty much the opposite. We spend most of our time running around trying to squeeze as much growth out of our existing collection of assets as possible. And related to that, I think is the value of our diversified business model because very few of our products are well-known to the broader world. I think it’s harder to have an appreciation for the growth potential, which gets into the issue of terminal value which I think is underappreciated.

 

The second area I’d say is the whole area of R&D. And maybe we’re a little bit to blame, though I think we got tagged with not believing in R&D which couldn’t be the farthest from the truth. And we have recognized, like any technology company, that innovation is the lifeblood. It’s just how we go about doing it, the risk-reward, and our openness and willingness to acknowledge that we may not be the right people to develop everything we need to grow our business.

 

So our willingness to go to third parties for licensing technology, get it through acquisitions. I’m hoping that the world, they look at our R&D pipeline last year, this year, next year and the year after and say, the model really does work. Combination of internal development, acquisitions, in-licensing is going to work. But I think that’s work in progress.

 

And I think lastly, emerging markets, because their strategy is so much different, having a local company in an emerging market versus most pharma companies that take their U.S. products and export them and actually end up serving a very small percentage of the population. We're a local company serving really the local person on the street. So it’s much more of a long term macroeconomic play on GDP growth and healthcare spend, which we can argue year to year... But over time, I think we’d all agree that the emerging markets we're in, there’s going to be tremendous growth in GDP and tremendous growth in healthcare spend, it just won’t be straight lined [ph]."

[Guest Schwab711]

IBS-D = Xifaxan, which is already their #1 product. Its definitely included in 2Q15 guidance.

[Guest Schwab711]

I think you've posted these quotes. Details of 2014 guidance was way off and most likely required price increases (as I've shown logic behind), which aren't sustainable. The majority of 16' EBITDA increase will be due to increases in amort + interest. I'd be surprised if GAAP NI is >$1b and it'll probably be closer to $500m, assuming their estimates prove true. Why should we even trust 2016 guidance though?

[giofranchi]

VRX directly? I would say very low. Remember, there are Republicans not just Democrats - and its hard to legislate business models. Also, look what happened in banking in the US after the financial crisis. That was a much more acute / public relations type nightmare than this pharma thing, and Goldman's biz model did not get taken apart, neither did those of the other major banks. Why should we expect something more here? And why only directly focused on VRX? I would say very low.

 

Ok, thank you! Government intervention is something that I really have no clue how to judge… And probably I just got too impressed by how the market received the news…

 

On the other hand, do you know of any other big pharma company which has received a subpoena? I don’t…

 

You remember I have always been concerned about a very high debt load, don’t you? First I thought a very high debt load leaves little room for error… Then I realized Pearson is certainly not a generalist, instead he concentrates on a sector he knows very well, and in which he has been working for decades… Therefore, I thought the chances to commit a major mistake were very small.

Now, though, this government intervention threat that I don’t know how to think about…

 

I hope you agree with me that, when you make use of lots of debt, any threat to your cash flow producing abilities is something that shouldn’t be lightly dismissed.

 

Cheers,

 

Gio

 

[giofranchi]

@Gio: The reason I bring up liquidity is because amortization is smooth and debt maturity is choppy. Starting in 2018, debt > amort. They need to earn GAAP profits or refi, simple as that. If the stock/bond prices fall, then refi is going to become trickier. EBITDA is expected to jump to $7.5B, but $1.5-2b of the $3.3b increase will come from IDA. That's not a lot of wiggle-room and they are going to refi at some point by 2020 (because debt > amort by such a large amount). Interest rate risk, refi risk, and operational risk. That's all I'm saying. I didn't assume a strong generics business in my estimates. That could certainly make it easier to refi if bankers want a piece of it.

 

First of all, as someone has already pointed out, they have been able to make very profitable use of a lot of debt even when interest rates were much higher than today. Why then would they encounter refi problems? The way I look at it is like an insurance company that, after years of profitable underwriting in a hard market, starts to pay 2-3% its float in a soft market… If they manage to invest that float at 10-12%, will they ever experience serious problems? I don’t think so.

 

Second, VRX has already shown that, if forced to, they can stop buying other companies and GAAP EPS start to close the gap with Cash EPS very quickly! Therefore, yes: I don’t know what will happen in 2020, but I am confident enough that, if necessary, they will be able to post meaningful Net Earnings.

 

My only concern remains government intervention… But, as OM has pointed out, I am probably magnifying it very much, simply because I don’t really know how to judge it.

 

Cheers,

 

Gio 

 

[original mungerville]

I think you've posted these quotes. Details of 2014 guidance was way off and most likely required price increases (as I've shown logic behind), which aren't sustainable. The majority of 16' EBITDA increase will be due to increases in amort + interest. I'd be surprised if GAAP NI is >$1b and it'll probably be closer to $500m, assuming their estimates prove true. Why should we even trust 2016 guidance though?

 

Right.

 

How many times has their guidance disappointed over the years?

 

Emerging market currencies and others relative to $US are down substantially - that could affect guidance negatively. I don't think much else will - maybe they will reduce pricing on some small part of the portfolio but given the $7.5 was probably conservative, they will probably still hit that. Clearly we should trust guidance because in the past it has been too conservative. Doesn't mean its always going to be that way but odds are you are very wrong (again, unless the currencies keep coming down which in my view is actually likely here in the next year, and also the macro economic environment globally just tanking, which I also think is a good possibility).

 

But you know, on a constant currency basis and assuming the global economy doesn't completely tank (which are pure macro concerns), I think you are way way off thinking their guidance will disappoint.

[original mungerville]

VRX directly? I would say very low. Remember, there are Republicans not just Democrats - and its hard to legislate business models. Also, look what happened in banking in the US after the financial crisis. That was a much more acute / public relations type nightmare than this pharma thing, and Goldman's biz model did not get taken apart, neither did those of the other major banks. Why should we expect something more here? And why only directly focused on VRX? I would say very low.

 

Ok, thank you! Government intervention is something that I really have no clue how to judge… And probably I just got too impressed by how the market received the news…

 

On the other hand, do you know of any other big pharma company which has received a subpoena? I don’t…

 

You remember I have always been concerned about a very high debt load, don’t you? First I thought a very high debt load leaves little room for error… Then I realized Pearson is certainly not a generalist, instead he concentrates on a sector he knows very well, and in which he has been working for decades… Therefore, I thought the chances to commit a major mistake were very small.

Now, though, this government intervention threat that I don’t know how to think about…

 

I hope you agree with me that, when you make use of lots of debt, any threat to your cash flow producing abilities is something that shouldn’t be lightly dismissed.

 

Cheers,

 

Gio

 

Oh ya me too, never liked the high debt load. In general, taking on debt usually means you are betting heavily that the future will be like the present/past - which does not always turn out to be the case. Because of this dynamic, I don't think the stock would have dropped as much if they did not have the levels of debt that they have. The debt is why I bought the call LEAPS rather than the common - synthetically they effectively provide me with the stock and an imbedded put option. There is an additional cost to that, however in this case, they have come in handy (at least thus far).

 

Now on the other side: mitigating these debt concerns somewhat, they target short pay-back periods, debt was extremely cheap when they incurred it (and is/will get more expensive going forward) and so arguably made more sense than using equity, they bought things with short-term "hair" on them to help reduce the price paid/payback periods. All of this together translates into $7.5 billion in EBITDA a year - and this over 2-3 years (I'll assume zero growth here) - is a lot of cash compared to their debt levels ($15 - $22 billion).

 

Meanwhile, we have competitors betting a lot of cash NOW on R&D that could/might only pay off far far down the road in the future. One could argue that this is maybe like the other side of the same coin: spend now for a very distant pay-off. Valeant instead does not use revenues for as much research but chooses to instead use its current cash flows and takes on debt now to buy cash flow streams which are pretty certain in the near term.

 

I like the Valeant model better myself however clearly a Valeant with less debt is less risky than a Valeant with lots of debt - and if and when they ever have less debt, or I reduce my position to something small, I might shift to the common stock.

[Liberty]

IBS-D = Xifaxan, which is already their #1 product. Its definitely included in 2Q15 guidance.

 

IBS-D is a new indication for Xifaxan. Before getting approval for it, I'm pretty sure that they didn't include it in their models (they included Xifaxan, but not for the IBS-D indication).

 

For some of the impact of IBS-D, we can look at the last Q:

 

http://i.imgur.com/9oEkM4e.png

 

Growth about doubled when they got approved for it.

[Liberty]

I think you've posted these quotes. Details of 2014 guidance was way off and most likely required price increases (as I've shown logic behind), which aren't sustainable. The majority of 16' EBITDA increase will be due to increases in amort + interest. I'd be surprised if GAAP NI is >$1b and it'll probably be closer to $500m, assuming their estimates prove true. Why should we even trust 2016 guidance though?

 

Why do you care about GAAP? They are reinvesting what they make in restructuring their acquisitions, which they get a huge return on and avoid taxes with by not showing a GAAP profit. And they've shown these are truly one-time costs when they lapped B&L (they just keep acquiring new things, so there are new one-time costs). If you have good places to reinvest the money, why would you show a GAAP profit? In less than a year of owning Salix they are already getting close to 530m in synergies, and how much did that cost them? I'd rather they spend the money in severance pay for the duplicative back-office and to consolidate manufacturing at the B&L plants or whatever than show a GAAP profit and miss out on those recurring cost savings and pay taxes on that GAAP profit... Real value creation trumps the optics for wall street, IMO.

 

Unlike what you said before, they don't need to show GAAP profits to refinance their debt. Malone has almost never had any GAAP profits anywhere, and as long as he has the EBITDA earning power, his lenders are fine with it. If they want to pay down debt, they can just slow down on those types of investments (acquisitions, restructuring) and the money will pile up to be used for that, as they've shown last year.

 

If you want to see GAAP profits, don't look at businesses that have more than enough reinvestment opportunities for all that they generate.

[original mungerville]

Exactly what I remember. This is probably why not only did they not include the new indication in the 7.5 EBTIDA but they did not even talk about it as potentially helping EBITDA at that point because it wasn't even approved.

 

This is a great example of why, Schwab, they hit or exceed their estimates - they leave a lot of stuff out to be conservative with their estimates, get it?

[giofranchi]

Liberty,

though I believe I already know the answer, I would like to know what you think about the “government intervention” threat. Do you think it is just noise? No real risks to VRX’s cash flow?

 

Thank you!

 

Cheers,

 

Gio

 

[Liberty]

Liberty,

though I believe I already know the answer, I would like to know what you think about the “government intervention” threat. Do you think it is just noise? No real risks to VRX’s cash flow?

 

Thank you!

 

Cheers,

 

Gio

 

I replied this morning to your private message on Twitter.

[giofranchi]

I replied this morning to your private message on Twitter.

 

Ah! Ok! I've seen it just now!

 

Thank you,

 

Gio

[giofranchi]

Drug Price Demagoguery Could Hurt Patients

 

http://www.forbes.com/sites/matthewherper/2015/09/30/drug-price-demagoguery-could-hurt-patients/?utm_campaign=forbeshealth&utm_source=TWITTER&utm_medium=social&utm_channel=Business&linkId=17484999

 

Cheers,

 

Gio

[Guest Schwab711]

Exactly what I remember. This is probably why not only did they not include the new indication in the 7.5 EBTIDA but they did not even talk about it as potentially helping EBITDA at that point because it wasn't even approved.

 

This is a great example of why, Schwab, they hit or exceed their estimates - they leave a lot of stuff out to be conservative with their estimates, get it?

 

It was approved during 2Q15 (as Liberty's slide shows). They already stated approved Salix products are included in guidance. Why wouldn't it be included in guidance?