APG12 Posted October 28, 2015 Share Posted October 28, 2015 They should try to explain, in non-economic terms, what it means to get a low return on R&D investment. It means that the valuable time of extremely smart people is being directed towards the development of something which people do not value very much. It means that some of the most precious human effort is being wasted. This is completely incorrect explanation. R&D yields low return not because "valuable time of extremely smart people is being directed towards the development of something which people do not value very much" but because finding drugs that work and are safe is extremely difficult. It is possible to spend hundreds of millions of $ and tens/hundreds of person years on a promising direction that could yield a highly needed drug and yet have negative results. ::) I think you just like to argue. The drug isn't valued much compared to the value that was spent in the creation of it. Just what exactly do you think a bad return on investment means? Link to comment Share on other sites More sharing options...
Jurgis Posted October 28, 2015 Share Posted October 28, 2015 They should try to explain, in non-economic terms, what it means to get a low return on R&D investment. It means that the valuable time of extremely smart people is being directed towards the development of something which people do not value very much. It means that some of the most precious human effort is being wasted. This is completely incorrect explanation. R&D yields low return not because "valuable time of extremely smart people is being directed towards the development of something which people do not value very much" but because finding drugs that work and are safe is extremely difficult. It is possible to spend hundreds of millions of $ and tens/hundreds of person years on a promising direction that could yield a highly needed drug and yet have negative results. ::) I think you just like to argue. The drug isn't valued much compared to the value that was spent in the creation of it. Just what exactly do you think a bad return on investment means? You did not even bother to read what I wrote. Good luck Link to comment Share on other sites More sharing options...
valueyoda Posted October 28, 2015 Share Posted October 28, 2015 The entire pharma industry wouldn't work without significant R&D expenditures. It is a hard, uncertain long road to research a drug and bring it to market. However, it is wickedly smart from an investment perspective to be the leech within the industry that buys drugs or companies with almost completed drugs cheaply and avoid those R&D expenses. However, there can only be a few Valeants for it to work. In effect, investors and management of highly spending pharma and biotech companies are subsidizing the long term outsized returns earned by Valeant's shareholders. Link to comment Share on other sites More sharing options...
Picasso Posted October 28, 2015 Share Posted October 28, 2015 The entire pharma industry wouldn't work without significant R&D expenditures. It is a hard, uncertain long road to research a drug and bring it to market. However, it is wickedly smart from an investment perspective to be the leech within the industry that buys drugs or companies with almost completed drugs cheaply and avoid those R&D expenses. However, there can only be a few Valeants for it to work. In effect, investors and management of highly spending pharma and biotech companies are subsidizing the long term outsized returns earned by Valeant's shareholders. That's the Valeant advantage in a nutshell. I think you also have some element of monetizing some new drugs. A new biotech company might not be able to be the next Pfizer but they can sell the drug to someone like VRX and due to their cost advanatage, VRX can outbid another pharma and still get better returns. That capital can then be redployed by the seller in R&D if they wish. Link to comment Share on other sites More sharing options...
Liberty Posted October 28, 2015 Share Posted October 28, 2015 The entire pharma industry wouldn't work without significant R&D expenditures. It is a hard, uncertain long road to research a drug and bring it to market. However, it is wickedly smart from an investment perspective to be the leech within the industry that buys drugs or companies with almost completed drugs cheaply and avoid those R&D expenses. However, there can only be a few Valeants for it to work. In effect, investors and management of highly spending pharma and biotech companies are subsidizing the long term outsized returns earned by Valeant's shareholders. Are senior miners who buy assets from more nimble and efficient juniors leeches? ??? Who's talking about reducing R&D in the pharma industry? Pearson is just moving dollars around to where they are more effective, but if you follow those dollars, the termination point is R&D. It's the journalists who write that "valeant doesn't believe in R&D", but if you listen to the actual company's strategy, you'll find that's not what they're saying, they just don't have a "not invented here" hangup. When they buy Sprout or Dendreon or Salix, the money is to pay for the R&D that was done at those companies. What's the difference with spending it in an internal lab, except the risk/reward profile and the ability to pick assets that you think are undervalued? And to keep these companies growing in the future, what's the difference between allocating all capital into internal R&D and allocating some internally and some of it for other acquisitions? Not everyone has to be good at everything. Some can specialize at R&D and be really good and efficient at it, but not everyone has to have the same model. Others can be better at distribution and identifying good assets; their money is just as good and ends up in R&D in the end. In short: R&D <-> pharma assets When you buy assets, you pay for that R&D retroactively. Just like when you buy a house, you pay for the construction of that house. Another annoying thing is measuring R&D by inputs rather than outputs. This just encourages waste.If VRX contracts some of its R&D to an external lab that has overcapacity and costs a lot less than having a high fixed cost internal lab, the % of revenue spent on that project is lower even if the actual work being done is the same. So for optics, VRX is be penalized in that specific case because they got the same thing done more cheaply.. Link to comment Share on other sites More sharing options...
jay21 Posted October 28, 2015 Share Posted October 28, 2015 The entire pharma industry wouldn't work without significant R&D expenditures. It is a hard, uncertain long road to research a drug and bring it to market. However, it is wickedly smart from an investment perspective to be the leech within the industry that buys drugs or companies with almost completed drugs cheaply and avoid those R&D expenses. However, there can only be a few Valeants for it to work. In effect, investors and management of highly spending pharma and biotech companies are subsidizing the long term outsized returns earned by Valeant's shareholders. The industry can actually transition to a bifurcation between drug development and distribution. You have a VC type funding structure for higher risk drugs and a corporate structure like VRX for distribution. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 28, 2015 Share Posted October 28, 2015 So you could think of VRX as similar to the oil industry. They buy producing wells with good economics instead of drilling all over the places trying to find oil. They are criticized because people prefer wildcatters? Except better, because they are not in a price-taking industry where what they are drilling is suddenly cut in half but with high debt levels remaining (sound familiar?). Link to comment Share on other sites More sharing options...
jay21 Posted October 28, 2015 Share Posted October 28, 2015 So you could think of VRX as similar to the oil industry. They buy producing wells with good economics instead of drilling all over the places trying to find oil. They are criticized because people prefer wildcatters? They prefer integrated oil whose management teams all want to be the first company to discover oil on Mars. You cut out that last part and the business could be pretty solid. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 28, 2015 Share Posted October 28, 2015 You have become soft huh... Position size is about 25%. I don't do really crazy sizing anymore. The "problem" is that I don't have access to our RothIRA funds anymore. I can only invest what's in my taxable account. VRX anyhow is best suited to a taxable account. So no worries and isn't 25%+ enough if it triples in a couple of years? Okay, it's not enough but my hands are tied. Oh well! Link to comment Share on other sites More sharing options...
AzCactus Posted October 28, 2015 Share Posted October 28, 2015 You have become soft huh... Position size is about 25%. I don't do really crazy sizing anymore. The "problem" is that I don't have access to our RothIRA funds anymore. I can only invest what's in my taxable account. VRX anyhow is best suited to a taxable account. So no worries and isn't 25%+ enough if it triples in a couple of years? Okay, it's not enough but my hands are tied. Oh well! Eric---Did you build this entire position over the past week since the decline or have you been a long term holder? Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 28, 2015 Share Posted October 28, 2015 You have become soft huh... Position size is about 25%. I don't do really crazy sizing anymore. The "problem" is that I don't have access to our RothIRA funds anymore. I can only invest what's in my taxable account. VRX anyhow is best suited to a taxable account. So no worries and isn't 25%+ enough if it triples in a couple of years? Okay, it's not enough but my hands are tied. Oh well! Eric---Did you build this entire position over the past week since the decline or have you been a long term holder? I didn't buy any before this week. Link to comment Share on other sites More sharing options...
plato1976 Posted October 28, 2015 Share Posted October 28, 2015 Why it's best suited for a taxable account? You have become soft huh... Position size is about 25%. I don't do really crazy sizing anymore. The "problem" is that I don't have access to our RothIRA funds anymore. I can only invest what's in my taxable account. VRX anyhow is best suited to a taxable account. So no worries and isn't 25%+ enough if it triples in a couple of years? Okay, it's not enough but my hands are tied. Oh well! Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 28, 2015 Share Posted October 28, 2015 Why it's best suited for a taxable account? You have become soft huh... Position size is about 25%. I don't do really crazy sizing anymore. The "problem" is that I don't have access to our RothIRA funds anymore. I can only invest what's in my taxable account. VRX anyhow is best suited to a taxable account. So no worries and isn't 25%+ enough if it triples in a couple of years? Okay, it's not enough but my hands are tied. Oh well! Because it's not a cigar butt. It can keep growing at a high rate with management's capital allocation. Link to comment Share on other sites More sharing options...
Liberty Posted October 28, 2015 Share Posted October 28, 2015 More ruminations on VRX's model. Similar to stuff I've written earlier in the thread, but I don't think I quite put it this way before, and we have a lot of new readers these days... In the pharma industry, if you pull on the string long enough and go back to the source, all assets come from R&D. But there are different ways to get those assets, some of which are higher risk but higher reward, and some which are lower reward, but also lower risk... You can position yourself at different points in the value chain, even if ultimately the money all flows back to the same place. Traditional pharma places bigger bets earlier in the chain, which leads to a profile that is: Higher risk, higher reward. So if you are good and/or lucky, you can find a blockbuster and have huge upside. But if you are not too good and/or unlucky, you can pour a lot of money down the drain without much to show for it. Because of this high risk profile, you can't use much leverage because your future cashflows are not predictable enough. Valeant has decided to instead focus on just the R&D that they know they are good at (and they seem to be getting good returns there -- the pipeline is producing good stuff) and for the rest, buy a highly diversified portfolio of assets that aren't too susceptible to competition (drugs too small to be worth copying, already off patent, in categories where generics have a hard time (skin creams, contact lenses), where doctor recommendation matter, etc). When you buy rather than build, your potential upside is more limited (usually no surprise blockbusters), but your risk is also a lot lower because you know what you're getting and have more control over how you tailor it (certain therapeutic areas, certain countries, buying opportunistically assets that you find underpriced, etc). So they built a portfolio of assets that are lower reward by themselves, but lower risk too, and more predictable and durable in the aggregate. That's why they feel they can use leverage, which is enough to juice those lower returns into superior ones. Combine that with very lean operations in an industry that has a lot of fat (zero-based budgeting, decentralized model, etc), and a very good tax rate and you push those superior returns into even higher gear. Maybe time will show that this structure doesn't work, but it certainly sound like a valid experiment. Link to comment Share on other sites More sharing options...
Yours Truly Posted October 28, 2015 Share Posted October 28, 2015 Why is there no LEAPS available for this stock? Link to comment Share on other sites More sharing options...
plato1976 Posted October 28, 2015 Share Posted October 28, 2015 Why it's best suited for a taxable account? You have become soft huh... main concern is the business model, Is there any information to confirm that their overall drug sale prices are in line with other pharm and not excessive? Position size is about 25%. I don't do really crazy sizing anymore. The "problem" is that I don't have access to our RothIRA funds anymore. I can only invest what's in my taxable account. VRX anyhow is best suited to a taxable account. So no worries and isn't 25%+ enough if it triples in a couple of years? Okay, it's not enough but my hands are tied. Oh well! Because it's not a cigar butt. It can keep growing at a high rate with management's capital allocation. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 29, 2015 Share Posted October 29, 2015 Why is there no LEAPS available for this stock? They have 2018 options listed here, which is my go-to site for finding options -- just so convenient: http://finance.yahoo.com/q/op?s=VRX&data-ipsquote-timestamp=1516320000 Link to comment Share on other sites More sharing options...
KCLarkin Posted October 29, 2015 Share Posted October 29, 2015 Eric, you bought the common not LEAPs, right? Well,well. This looks interesting: http://www.wsj.com/articles/pfizer-allergan-considering-combining-1446079506 Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 29, 2015 Share Posted October 29, 2015 Eric, you bought the common not LEAPs, right? Well,well. This looks interesting: http://www.wsj.com/articles/pfizer-allergan-considering-combining-1446079506 Yes, because the VRX volatility isn't cheap. So I piled up a bunch of new debt in my portfolio margin account to buy VRX common, but I hedge out what other risk was there by purchasing more BAC puts. I only did that because the BAC puts are so much cheaper -- why pay for the more volatile one when I can pay for the less volatile one? Link to comment Share on other sites More sharing options...
KCLarkin Posted October 29, 2015 Share Posted October 29, 2015 Pharmacy’s Sales Tactics Disclosed http://www.wsj.com/articles/pharmacys-sales-tactics-disclosed-1446075817 Link to comment Share on other sites More sharing options...
rpadebet Posted October 29, 2015 Share Posted October 29, 2015 The entire pharma industry wouldn't work without significant R&D expenditures. It is a hard, uncertain long road to research a drug and bring it to market. However, it is wickedly smart from an investment perspective to be the leech within the industry that buys drugs or companies with almost completed drugs cheaply and avoid those R&D expenses. However, there can only be a few Valeants for it to work. In effect, investors and management of highly spending pharma and biotech companies are subsidizing the long term outsized returns earned by Valeant's shareholders. The industry can actually transition to a bifurcation between drug development and distribution. You have a VC type funding structure for higher risk drugs and a corporate structure like VRX for distribution. This discussion about VRX buying R&D, instead of spending on it through their income statement is one reason why at least a portion of the amortization of goodwill is a justifiable cost. I understand the opposite argument about writing down goodwill but never writing it up but adding all amortization back to calculate cash EPS is disingenuous as well. Adding full amortization back puts the direct R&D spenders at a disadvantage when it comes to earnings (unless you allow them also to add back their growth R&D expenses back to come up with their own cash eps.) VRX pays for R&D through interest, restructuring costs and amortization. Taken together all these costs could be higher than 15-20% other pharma's spend on R&D, but adjusting for outcomes (success rates), VRX's method could be better. (That is the bet the longs are making) The edge VRX promotes is - management is good at identifying good R&D, pay appropriate price for it and distribute it through their global platform efficiently, thus earning better tax adjusted returns. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 29, 2015 Share Posted October 29, 2015 This discussion about VRX buying R&D, instead of spending on it through their income statement is one reason why at least a portion of the amortization of goodwill is a justifiable cost. It's pointless and unnecessary. The stock can be priced on earnings, if the earnings decline because a drug's lifetime passes, then they decline. Falling earnings is very transparent. You can't hide earnings that are declining or growth that isn't appearing. Why would writing down a goodwill asset do anything other than just impair the visibility of the earnings? Then you have to back out the "one time" items in order to see what's really going on with the quarterly earnings. It's LESS transparent to have goodwill write-downs. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 29, 2015 Share Posted October 29, 2015 Suppose they never buy another drug and never develop another one. They just run-off the existing portfolio. And they don't make efforts to grow the share or pricing of existing drugs. Each year you see general decline as those drugs hit new competition or become less relevant. Earnings go down, down, down... That's not transparent enough? We need a bunch of lump-sum guesses from management (aka: goodwill writedowns) and somehow those future forecasts will be more accurate that just watching it all unfold in real time? Link to comment Share on other sites More sharing options...
original mungerville Posted October 29, 2015 Share Posted October 29, 2015 This goodwill/intangibles discussion is getting old. Why not read the Buffett quote posted earlier and some of Eric's responses to educate yourselves and then go start another thread on goodwill/intangibles? It seems to be more of a broad conceptual misunderstanding than a Valeant-specific issue. Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 29, 2015 Share Posted October 29, 2015 You can take control of the company for a day and in a special press release, writed-down the goodwill to zero. Be my guest, just be sure to leave the company immediately and return control to Pearson so he can keep on reporting earnings as they are. And your reign of earnings will be remembered as THE ONE where it was necessary to ignore the one-time item in order to see what the real earnings are. And that would accomplish... absolutely fucking nothing. It would make absolutely no difference whatsoever to their earnings power. Link to comment Share on other sites More sharing options...
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