jay21 Posted October 20, 2015 Share Posted October 20, 2015 What are potential scenarios, probabilities, and outcomes? Business as usual - $250 and growing Insignificant fines - $225 and growing Imposed monitor, sustained legal costs, no future acquistions - $100? $50? What are people thinking? I have a tough time knowing what regulators can do. I think Lawsky and bank settlements might burn a little too deep in people's minds here (availability bias, cat on a hot stove, etc). Just trying to brain storm. Link to comment Share on other sites More sharing options...
KCLarkin Posted October 20, 2015 Share Posted October 20, 2015 What are potential scenarios, probabilities, and outcomes? ... What are people thinking? I have a tough time knowing what regulators can do. I think Lawsky and bank settlements might burn a little too deep in people's minds here (availability bias, cat on a hot stove, etc). Just trying to brain storm. Given the debt, you have to assign a non-zero probability of a total loss. Most other scenarios are good in my opinion. The regulatory risk is probably overstated. There are numerous pharma companies with major legal issues that haven't seen a major impact to IV (see DaVita as one example I am familiar with). Legislative risk is a black swan. I doubt Clinton will be able to get much through congress but the results could be fatal. Link to comment Share on other sites More sharing options...
Liberty Posted October 21, 2015 Share Posted October 21, 2015 Legislative risk is a black swan. I doubt Clinton will be able to get much through congress but the results could be fatal. Can you elaborate a bit here on what you're thinking of? Fatal how? Something that shoots the whole industry in the head somehow? Hard to single out VRX, especially since they have a lot of cash pay stuff. If VRX divests the part of the portfolio that takes the big price increases, do you think the rest of the assets could be affected that much (international that has flat pricing and rest of US that has pricing relatively close to rest of industry)? Link to comment Share on other sites More sharing options...
original mungerville Posted October 21, 2015 Share Posted October 21, 2015 I find these WSJ article headlines hilarious: "Valeant, Under Pressure About Price Increases, Plans Changes" "Why Valeant’s Growth Is Under Pressure Concerns over Valeant’s strategy shift weigh on the stock’s valuation" Other than a spin-off of a small part of their biz reliant on price increases (which BTW seems like a good idea given the change in the environment), I see zero, nothing in terms of a strategy shift. At 5x debt to EBITDA or whatever they are at now, should it be news that they will focus on debt paydown for the next few quarters? No. That was baked in the cake after Salix and subsequent acquisitions. Everyone is acting like this is some big shift in strategy when its not. Quite weird actually. For the continuing business, organic growth is going to be huge in 2016 and 2017. Also Debt to EBITDA will not come down only from debt paydown, it will come down from EBITDA increases. So the current debt to EBITDA multiple will be reduced as we migrate through 2016 towards the end-2016 debt to pro-forma 2017 EBITDA multiple. Link to comment Share on other sites More sharing options...
Picasso Posted October 21, 2015 Share Posted October 21, 2015 Pearson himself said they are changing to adapt to the current environment: What has changed is that our portfolio is shifted over time to newer and higher growth products making pricing a small part of our growth looking forward. Given the evolution of our product mix coupled with the recent events, it is likely that we will pursue fewer, if any, transactions that are focused on these price products. Now let me shift to some modifications to our strategy. First, our neuro/other portfolio which is depended on price will represent approximately 10% of our revenues in 2016 and will continue to shrink as a percentage of the company. We have and are seriously considering splitting off or selling this piece of our business. and Second, due to our increasing success in internal R&D especially in the areas of dermatology, contact lens, surgical and OTC products, internal R&D will become more of a focus. Third, if our stock price remains at current levels, share repurchases will be seriously considered. My final note would be that we always believe -- we've always believe that any company's strategy must be agile and flexible in order to navigate in an ever changing world. During my 23 years at McKinsey, we found companies that were successful over long periods of time have one thing in common. They were willing to move in and out of geographic and business areas over time and they have modified to change their strategy as the environment change. We plan to be one of the companies. Pearson says he can count on one hand the number of Marathon type deals. So not a big part of the change in the literal sense on the word. But... I think this is like a really small investor who gets to do things like odd-lot tender offers, pick out mispriced bonds trading off exchanges, or flip a single family residence, which all gives you better performance. But at a certain size you can't do that anymore. Valeant is at that size, but mostly from a government scrutiny perspective. I bet they can keep making a ton of profits with that approach, it's just not a smart thing to make the rest of their portfolio guilty by association. Link to comment Share on other sites More sharing options...
KCLarkin Posted October 21, 2015 Share Posted October 21, 2015 Can you elaborate a bit here on what you're thinking of? Fatal how? Something that shoots the whole industry in the head somehow? Hard to single out VRX, especially since they have a lot of cash pay stuff. Yes, something that would devastate the whole industry. Say closing inversion tax loophole, mandating 10% R&D spend, killing specialty pharmacy, and regulating drug prices. Black swan. I think the chances of any meaningful legislation are miniscule. Link to comment Share on other sites More sharing options...
original mungerville Posted October 21, 2015 Share Posted October 21, 2015 Pearson himself said they are changing to adapt to the current environment: What has changed is that our portfolio is shifted over time to newer and higher growth products making pricing a small part of our growth looking forward. Given the evolution of our product mix coupled with the recent events, it is likely that we will pursue fewer, if any, transactions that are focused on these price products. Now let me shift to some modifications to our strategy. First, our neuro/other portfolio which is depended on price will represent approximately 10% of our revenues in 2016 and will continue to shrink as a percentage of the company. We have and are seriously considering splitting off or selling this piece of our business. and Second, due to our increasing success in internal R&D especially in the areas of dermatology, contact lens, surgical and OTC products, internal R&D will become more of a focus. Third, if our stock price remains at current levels, share repurchases will be seriously considered. My final note would be that we always believe -- we've always believe that any company's strategy must be agile and flexible in order to navigate in an ever changing world. During my 23 years at McKinsey, we found companies that were successful over long periods of time have one thing in common. They were willing to move in and out of geographic and business areas over time and they have modified to change their strategy as the environment change. We plan to be one of the companies. Pearson says he can count on one hand the number of Marathon type deals. So not a big part of the change in the literal sense on the word. But... I think this is like a really small investor who gets to do things like odd-lot tender offers, pick out mispriced bonds trading off exchanges, or flip a single family residence, which all gives you better performance. But at a certain size you can't do that anymore. Valeant is at that size, but mostly from a government scrutiny perspective. I bet they can keep making a ton of profits with that approach, it's just not a smart thing to make the rest of their portfolio guilty by association. Exactly, after the Salix deal (ie big time organic growth was baked into the $14 billion they paid for it) and taking out the 10% of their biz reliant on price increases - nothing has changed. Link to comment Share on other sites More sharing options...
Picasso Posted October 21, 2015 Share Posted October 21, 2015 A lot has changed. They can't do any big deals until their stock improves. They can't/won't issue anymore debt. They can't smooth over cash EPS by doing Marathon type deals. They have the government looking into their hidden/not-well-disclosed specialty pharma business Philidor. They are increasing R&D spend. There are probably other things I'm missing. The stock isn't down nearly half from the 52-week high because nothing has changed. I'm all for inefficient markets, but you can't just say this is business as usual. Link to comment Share on other sites More sharing options...
Liberty Posted October 21, 2015 Share Posted October 21, 2015 I think you two are talking past each other. I believe that OM was saying that if you read the media, they make it sound like the whole VRX model was buying stuff and jacking up prices, and that since this won't happen as much anymore, the whole thing is broken. OM is saying that this was only a small part of their business, and that the rest is mostly intact, so it's not the big change of strategy that the media makes it sound like, even if it is a tweak to the strategy (refocusing on the areas where you think you'll do best going forward is smart, sticking to exactly what you've been doing after the facts on the ground change isn't). I think what hurts the most with all this is that they might have done a big merger with stock in the relatively near future, and now that's pushed back for an indefinite period. But they had other periods during which they didn't do big deals (ie. when they were trying to get Allergan) and they managed to create quite a bit of value during that time, so we might see more of that for a while, just growing the EBITDA organically and allocating FCF to whatever's best (tuck-ins, buybacks, debt paydown). In a way, it's strenghtening the foundation (better balance sheet, longer track record of organic growth and extra disclosure), unless there's one of those black swans outside of the company's control. Link to comment Share on other sites More sharing options...
Picasso Posted October 21, 2015 Share Posted October 21, 2015 If you read through the WSJ articles, they haven't alluded to the price increases becoming an issue to the non-neuro/other. Valeant CEO Michael Pearson also said the company is going to focus on paying down its debt rather than on its aggressive deal-making, though it will keep looking for acquisitions, and that Valeant would look at shedding its business selling neurological drugs, which has depended on price increases. “Given the evolution of our product mix, coupled with the recent events, it is likely that we will pursue fewer, if any, transactions that are focused on mispriced products,” Mr. Pearson said, referring to the company’s practice of buying drugs it believes are undervalued and raising their prices. Plus you have several analysts coming out and downgrading the stock because of this strategy shift. Some might take their strategy change as confirmation they were doing something wrong, and others might take it as pragmatism. It just depends on how you view this whole story. Link to comment Share on other sites More sharing options...
original mungerville Posted October 21, 2015 Share Posted October 21, 2015 I think you two are talking past each other. I believe that OM was saying that if you read the media, they make it sound like the whole VRX model was buying stuff and jacking up prices, and that since this won't happen as much anymore, the whole thing is broken. OM is saying that this was only a small part of their business, and that the rest is mostly intact, so it's not the big change of strategy that the media makes it sound like, even if it is a tweak to the strategy (refocusing on the areas where you think you'll do best going forward is smart, sticking to exactly what you've been doing after the facts on the ground change isn't). I think what hurts the most with all this is that they might have done a big merger with stock in the relatively near future, and now that's pushed back for an indefinite period. But they had other periods during which they didn't do big deals (ie. when they were trying to get Allergan) and they managed to create quite a bit of value during that time, so we might see more of that for a while, just growing the EBITDA organically and allocating FCF to whatever's best (tuck-ins, buybacks, debt paydown). In a way, it's strenghtening the foundation (better balance sheet, longer track record of organic growth and extra disclosure), unless there's one of those black swans outside of the company's control. Right. And in my projection model, I did not include a huge merger of equals using stock (that would be nirvana / icing on the cake). So the fact they can't use their stock right now is not big news for me, it just takes that nirvana scenario off the table which I wasn't factoring in at this point anyway. Link to comment Share on other sites More sharing options...
original mungerville Posted October 21, 2015 Share Posted October 21, 2015 A lot has changed. They can't do any big deals until their stock improves. They can't/won't issue anymore debt. They can't smooth over cash EPS by doing Marathon type deals. They have the government looking into their hidden/not-well-disclosed specialty pharma business Philidor. They are increasing R&D spend. There are probably other things I'm missing. The stock isn't down nearly half from the 52-week high because nothing has changed. I'm all for inefficient markets, but you can't just say this is business as usual. No, not much has changed in the last 2 months, just the media's view and pricing risk for 10% of their biz - that's it. Only the first point you make has changed. They can't do any big deals until their stock improves. Agree (and in general I don't want them to issue shares anyway - other than say for an Allergan-type deal) They can't/won't issue anymore debt. This statement is only true in the immediate future and, in any case, was baked into the cake very early this year when they announced Salix for $14billion (and if that wasn't enough they closed a bunch of smaller deals after that too like Sprout, etc). They can't smooth over cash EPS by doing Marathon type deals. This is part of the 10% of the biz which I said was pretty much teh only thing that changed. Also, of the 150 deals Valeant has done, less than 5 deals were primarily based on pricing increases (as per Pearson on the analyst call). Not much need to smooth over given the important organic growth now which was not present just one year ago. They have the government looking into their hidden/not-well-disclosed specialty pharma business Philidor. Whatever - sounds like more fear-mongering, maybe we can get AZ to write that one up for us too. In any case on the call, they said something like that is only 10% of US biz sales. They are increasing R&D spend. Yes, from doing a very very small fraction of what competitors spend to a small fraction - mainly on account of them have higher quality businesses under their umbrella (with R&D opportunities) now relative to a few year ago. Also, it seems to me that their R&D returns have been huge in the past. Why should we assume that they will not get great returns even when investing a little more (not least because the overall company has also grown larger). Other than the 10%, and the media hype, and the fact US government may at some point clamp down on the whole industry, so far, this looks like business as usual to me. Yes, business as usual. Mr Market just isn't as excited about the industry and especially Valeant relative to before. I mean really, I can't see the big reason why the stock is down so much. Certainly when you have huge amounts of debt, the stock will move more. So stock is down more than 40% but I don't think business value has gone down by more than 10% due to the political / media / legal issues of the past 6 weeks. Link to comment Share on other sites More sharing options...
original mungerville Posted October 21, 2015 Share Posted October 21, 2015 If you read through the WSJ articles, they haven't alluded to the price increases becoming an issue to the non-neuro/other. Valeant CEO Michael Pearson also said the company is going to focus on paying down its debt rather than on its aggressive deal-making, though it will keep looking for acquisitions, and that Valeant would look at shedding its business selling neurological drugs, which has depended on price increases. “Given the evolution of our product mix, coupled with the recent events, it is likely that we will pursue fewer, if any, transactions that are focused on mispriced products,” Mr. Pearson said, referring to the company’s practice of buying drugs it believes are undervalued and raising their prices. Plus you have several analysts coming out and downgrading the stock because of this strategy shift. Some might take their strategy change as confirmation they were doing something wrong, and others might take it as pragmatism. It just depends on how you view this whole story. Yes, exactly. And the headlines focus on some big strategy shift. There is no strategy shift other than for the 10% of biz they may try to sell or spin-off. Yes, you could rightly argue that they now feel they were doing something wrong and therefore want to sell that business. So what? Link to comment Share on other sites More sharing options...
original mungerville Posted October 21, 2015 Share Posted October 21, 2015 Actually Picasso, you are the guy who said you are thinking of the biz as two separate businesses: one good and one bad. Which I thought was excellent and I was actually going to call their IR department to suggest they present things as such. When I heard that they actually are not only thinking about things that way, but that they want to sell the bad business outright as a first option, after thinking of you, my second thought is that is a great move. Anyway, nothing else has changed - other than them implementing your idea. Which is good if you ask me. Link to comment Share on other sites More sharing options...
Guest Schwab711 Posted October 21, 2015 Share Posted October 21, 2015 Two months ago we were arguing how durable VRX revenue was and now VRX itself no longer believes that to be the case. How is that not a major change? EM rev is -15% QTD and -12% YTD. Everything other than US patent-protected drugs is flat. VRX itself validated the use of "Cash EPS" because of their durable rev mix. Does anyone have a VRX valuation that doesn't use a multiple of "Cash EPS"? Link to comment Share on other sites More sharing options...
Picasso Posted October 21, 2015 Share Posted October 21, 2015 We are actually starting to see some analysts approach this from SOTP as well. I attached a screenshot from a JPM report. I'd like to maybe see a SOTP on the enterprise value versus the market cap. There are other stock like CXRX now trading for 3.5x cash EPS, so I'm not sure using SOTP on a levered cash EPS is going to put a floor on the stock price. They seem to put core earnings at $13, which means the stock might be trading around 11x and we get the neuro stuff for free. By the way, the only reason why I say things have changed is because there is some thesis drift going on here. Sort of like bad news is still good and good news is great. It's easy to get burned on an investment that way (I sure have in the past) and I think it's always a good idea to know when key changes have occurred. Maybe you're right and not a lot has changed but I'm a bit more cautious. Link to comment Share on other sites More sharing options...
original mungerville Posted October 21, 2015 Share Posted October 21, 2015 Two months ago we were arguing how durable VRX revenue was and now VRX itself no longer believes that to be the case. How is that not a major change? EM rev is -15% QTD and -12% YTD. Everything other than US patent-protected drugs is flat. VRX itself validated the use of "Cash EPS" because of their durable rev mix. Does anyone have a VRX valuation that doesn't use a multiple of "Cash EPS"? Schwab, Nobody here argued that the near-end-of-life products they bought and jacked up prices on were durable. On the EM stuff - I have no idea what you are talking about. Link to comment Share on other sites More sharing options...
original mungerville Posted October 21, 2015 Share Posted October 21, 2015 We are actually starting to see some analysts approach this from SOTP as well. I attached a screenshot from a JPM report. I'd like to maybe see a SOTP on the enterprise value versus the market cap. There are other stock like CXRX now trading for 3.5x cash EPS, so I'm not sure using SOTP on a levered cash EPS is going to put a floor on the stock price. They seem to put core earnings at $13, which means the stock might be trading around 11x and we get the neuro stuff for free. By the way, the only reason why I say things have changed is because there is some thesis drift going on here. Sort of like bad news is still good and good news is great. It's easy to get burned on an investment that way (I sure have in the past) and I think it's always a good idea to know when key changes have occurred. Maybe you're right and not a lot has changed but I'm a bit more cautious. I thought my 10% decline in biz value was cautious. You also have to look at all the positives and not let the media hype make you too bearish: Salix is going gangbusters, other US is strong, they did great internationally given f/x headwinds, and I have a feeling Sprout is going to work out well for them over time. Salix added debt to the point that they were going to be in paydown mode, it added organic volume growth such that EBITDA growth wiill continue at a nice clip with only tuck-in acquisitions, and it increased the outlook for R&D spend. All old news, the shift was already happening. Link to comment Share on other sites More sharing options...
giofranchi Posted October 21, 2015 Author Share Posted October 21, 2015 I am buying more at the opening today. I don’t have yet the same number of shares I had before I sold half, but I am getting close. I am still leaving some room to average down, because I think there is more downside for the stock here: if public sentiment continues to deteriorate, also the SEC might decide to look into VRX… That of course would be another meaningful leg down for the stock, and I would buy more. Now that VRX discloses organic growth due to volume alone, and given the fact it is well above 5%, I am even more comfortable with their adjustments to GAAP Net Earnings to arrive at Cash EPS. Selling at 12.5x 2015 Cash EPS, VRX is trading like a shrinking business… certainly not like a business which has just experienced its most profitable quarter to date (based on its GAAP Operating Cash Flow of $737 million). Of course, the above is true if you trust their numbers… I am far from a good analyst and I cannot prove their numbers are not inflated, like many analysts have suggested. I have followed Pearson closely for some years now, tried to read everything he had to say, and I have always found him a very rational manager, who has articulated and successfully implemented a very rational business strategy, and who has put himself at the same level of any other minority shareholder. In other words, a good track record, a good strategy, and a good behavior. That’s basically all I am looking for, and when I find it, I trust what management is saying. 44 people on this board believe instead that VRX is a fraud: I am well aware that, if they are right, I am throwing good money after bad… We will see! Cheers, Gio Link to comment Share on other sites More sharing options...
giofranchi Posted October 21, 2015 Author Share Posted October 21, 2015 VRX itself validated the use of "Cash EPS" because of their durable rev mix. Does anyone have a VRX valuation that doesn't use a multiple of "Cash EPS"? Schwab, The question we must answer imo is the following: are VRX “finite-lived intangible assets” taken as a whole decreasing in value, or are they increasing in value? If they are decreasing, I agree with you. If they are increasing, I don’t see what’s wrong with their adjustments to get Cash EPS. And, as I have said, given their organic growth due to volume only, assuming they won’t be able to raise prices anymore, it is hard to argue their “finite-lived intangible assets” are not increasing in value. Anyway, like many have said, VRX’s low stock price and high debt might prevent it from doing large deals for some time… We already see GAAP Operating Cash Flow of $737 million during the last quarter that is closing the gap with Adjusted Operating Cash Flow ($865 million). During the next year, if there won’t be any major acquisition, we will probably see also GAAP Net Earnings per Share closing the gap with Cash EPS. We had already seen that trend during the Allergan saga, and we should see it again now. Cheers, Gio Link to comment Share on other sites More sharing options...
Happy Posted October 21, 2015 Share Posted October 21, 2015 I read several times that Valeant relies on a high stock price to do deals and that a low stock price hurts them. I actually think that even though a low or even very low stockprice might be painful as a shareholder in the short-term, they might actually create more value for shareholders when the stock trades at a very low level for an extended period of time. They do these acquisitions because their business is throwing off a lot of cash flow that they want to reinvest at high rates. As long as the stock trades low enough, they can achieve similar returns by buying back exactly the amount of stock that keeps their leverage at the wanted amount without adding on any execution risk (they don't need to integrate anything or could misjudge a new business) and it also doesn't even get harder to move the needle in the future (If they make a big merger of equals, I worry that they suddenly are so big that it will be much harder to grow at high rates going forward) because you are just reducing the share count and not expanding the business base. One great thing about continuing massive buybacks is that every buyback of significantly undervalued stock creates good value per share, which itself makes all buybacks an even better investment, creating a kind of virtuous circle. At some point the numbers per share become so good that the market just has to assign a higher value (or the shareholders earn ridiculous returns on every new buyback). That said, it is unfortunate that this situation happens when they are so extended with the debt from the Salix deal that they just can't buy back that much stock right now. But I am saying that if the stock price remained so cheap for a long time, it wouldn't be bad for Valeant's strategy and probably would even reduce risk. And Pearson is very opportunistic. Just because something was the best strategy for the past environment doesn't mean it is the best strategy in another. The one "drawback" I see to repurchases is that they buy an already very efficiently run business while they can take out costs and significantly improve other businesses that they buy. That's why the stock price has to be low enough for it to make sense. Link to comment Share on other sites More sharing options...
giofranchi Posted October 21, 2015 Author Share Posted October 21, 2015 I read several times that Valeant relies on a high stock price to do deals and that a low stock price hurts them. I actually think that even though a low or even very low stockprice might be painful as a shareholder in the short-term, they might actually create more value for shareholders when the stock trades at a very low level for an extended period of time. They do these acquisitions because their business is throwing off a lot of cash flow that they want to reinvest at high rates. As long as the stock trades low enough, they can achieve similar returns by buying back exactly the amount of stock that keeps their leverage at the wanted amount without adding on any execution risk (they don't need to integrate anything or could misjudge a new business) and it also doesn't even get harder to move the needle in the future (If they make a big merger of equals, I worry that they suddenly are so big that it will be much harder to grow at high rates going forward) because you are just reducing the share count and not expanding the business base. One great thing about continuing massive buybacks is that every buyback of significantly undervalued stock creates good value per share, which itself makes all buybacks an even better investment, creating a kind of virtuous circle. At some point the numbers per share become so good that the market just has to assign a higher value (or the shareholders earn ridiculous returns on every new buyback). That said, it is unfortunate that this situation happens when they are so extended with the debt from the Salix deal that they just can't buy back that much stock right now. But I am saying that if the stock price remained so cheap for a long time, it wouldn't be bad for Valeant's strategy and probably would even reduce risk. And Pearson is very opportunistic. Just because something was the best strategy for the past environment doesn't mean it is the best strategy in another. The one "drawback" I see to repurchases is that they buy an already very efficiently run business while they can take out costs and significantly improve other businesses that they buy. That's why the stock price has to be low enough for it to make sense. +1 Cheers, Gio Link to comment Share on other sites More sharing options...
original mungerville Posted October 21, 2015 Share Posted October 21, 2015 Yes, I totally agree as well. I don't want share buybacks, unless the stock is extremely low. I want them to deploy capital at minimum 20% returns (optimally 25%). We may be nearing or at that point now. Link to comment Share on other sites More sharing options...
rpadebet Posted October 21, 2015 Share Posted October 21, 2015 I think the stock at current levels is fairly valued. It is still not a screaming buy though! I have always felt that their Cash EPS number overstates their "true EPS" by about 20-25% because of stock comp, amortization, restructuring charges etc. amortization and restructuring charges are just R&D expenses by a different name, so they should not be added back. Stock comp is obviously a expense. At this level of debt and organic growth, I would think 15x true eps is a fair price to pay in the long run for this business.$140ish is what I felt this was worth since last year. $240-$260 was just Mr. Market being ridiculously optimistic. I am waiting to see the political drama play some more as i think there is still a lot of "news value" for the politicians to squeeze out from this. 15%-20% or so of further drop from here and I might be enticed enough to be long again. I tend to agree with the longs that the neuro business they are planning to get rid off, isn't big enough to move the needle for them so getting rid of that is not all that bad. I don't think the stock dropped because of that. I think regulatory risk (including its effects on taxation and pricing) is a bigger risk going forward. For me to be long, I would need some clarity on that or margin of safety absent that clarity. Link to comment Share on other sites More sharing options...
rpadebet Posted October 21, 2015 Share Posted October 21, 2015 Wrote just too soon...bottom following out now...I guess I got my margin of safety faster than I anticipated ;) Link to comment Share on other sites More sharing options...
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