VRX - Valeant Pharmaceuticals International Inc.

[KJP]

But if the assets Valeant is buying are finite-lived (as the scenario above suggests), doesn't it make sense to include some kind of capital charge, if what you're trying to do is estimate true free cash flow, owner earnings, or whatever you want to call it?     

 

No, it doesn't make sense to do that.

 

Similarly, it makes no sense to announce a big charge to Microsoft's present quarterly earnings simply because the Windows franchise has a finite life. 

 

You can't assume that they are going to develop another similarly fantastic Windows franchise to replace the current one simply because they did so decades ago with entirely different people in an entirely different competitive landscape.  They might try to acquire the next one, in which case today's free cash flow isn't really free cash flow by your argument.  So that means they have no earnings today?

 

I don't know what you mean by "free cash flow".  What I mean by that phrase is the cash I can put in my pocket today after spending (or reserving) the amounts necessary to maintain current profits. 

 

Let's take a shipping example.  If you buy one ship that lasts for 20 years and must then be scrapped, your "cash earnings" [or operating cash flow minus capital expenditures] are going to look great for a long time, but they're overstating the true economic returns because "cash earnings" include a return of capital, rather than simply a return on capital. 

 

If Valeant is essentially buying ships, i.e., finite-lived assets, then the same principle applies, though that doesn't necessarily mean that reported amortization is the right capital charge to use.  Put another way, if you were building a DCF with steady profits, the cash flow you're getting in year 1, year 2 and so forth shouldn't be the cash earnings number that Valeant reports if they're buying "ships."  Instead, it should be something lower.  If you think otherwise, then where is the capital coming from to replace the ships (drugs) that must be scrapped (go off patent or whatever)? 

 

On the other hand, if Valeant is really buying "Coke," rather than ships, then the principle doesn't apply, because the expenses needed to maintain and grow the Coke-like Valeant are marketing, distribution, R&D and so forth.  Assuming those expenses run through the income statement, they are already included in operating cash flow and there's no need to make another adjustment.

[merkhet]

One thing to keep in mind is that insurance companies are sophisticated players and probably have their own measures to deal with this, and some insurers might on their side be very aggressive with trying to reject (valid) claims. This is a case of two sophisticated players doing battle, not quite the same as if one side was sophisticated and the other wasn't.

 

That's sort of my point though, right? The insurance companies aren't rubes. So, is this a situation where:

 

(1) They didn't know this was happening, and now that they know, they're still okay with it.

(2) They didn't know this was happening, and now that they know, they're going to try and stop it.

(3) They did know that this was happening, and they are okay with it.

(4) They did know that this was happening, and they are now going to try and stop it.

[ERICOPOLY]

But if the assets Valeant is buying are finite-lived (as the scenario above suggests), doesn't it make sense to include some kind of capital charge, if what you're trying to do is estimate true free cash flow, owner earnings, or whatever you want to call it?     

 

No, it doesn't make sense to do that.

 

Similarly, it makes no sense to announce a big charge to Microsoft's present quarterly earnings simply because the Windows franchise has a finite life. 

 

You can't assume that they are going to develop another similarly fantastic Windows franchise to replace the current one simply because they did so decades ago with entirely different people in an entirely different competitive landscape.  They might try to acquire the next one, in which case today's free cash flow isn't really free cash flow by your argument.  So that means they have no earnings today?

 

I don't know what you mean by "free cash flow".  What I mean by that phrase is the cash I can put in my pocket today after spending (or reserving) the amounts necessary to maintain current profits. 

 

Let's take a shipping example.  If you buy one ship that lasts for 20 years and must then be scrapped, your "cash earnings" [or operating cash flow minus capital expenditures] are going to look great for a long time, but they're overstating the true economic returns because "cash earnings" include a return of capital, rather than simply a return on capital. 

 

If Valeant is essentially buying ships, i.e., finite-lived assets, then the same principle applies, though that doesn't necessarily mean that reported amortization is the right capital charge to use.  Put another way, if you were building a DCF with steady profits, the cash flow you're getting in year 1, year 2 and so forth shouldn't be the cash earnings number that Valeant reports if they're buying "ships."  Instead, it should be something lower.  If you think otherwise, then where is the capital coming from to replace the ships (drugs) that must be scrapped (go off patent or whatever)? 

 

On the other hand, if Valeant is really buying "Coke," rather than ships, then the principle doesn't apply, because the expenses needed to maintain and grow the Coke-like Valeant are marketing, distribution, R&D and so forth.  Assuming those expenses run through the income statement, they are already included in operating cash flow and there's no need to make another adjustment.

 

You can model future earnings from an asset over time making various assumptions of the life of the portfolio of assets.  There is no reason anyone needs to muddy current income to do such an exercise.  That's my point.

 

Investors don't look at Microsoft and assume it will forever generate income from Windows at current levels simply because they don't take impairment charges on the goodwill that we all know is there.  So why adopt a different system simply because the income stream was acquired?

[giofranchi]

On the other hand, if Valeant is really buying "Coke," rather than ships, then the principle doesn't apply, because the expenses needed to maintain and grow the Coke-like Valeant are marketing, distribution, R&D and so forth.  Assuming those expenses run through the income statement, they are already included in operating cash flow and there's no need to make another adjustment.

 

That's exactly what I have said, isn't it? And that's exactly what they are buying, as long as there is organic growth. The value of a ship doesn't go up, right?

 

Cheers,

 

Gio

[krazeenyc]

Sequoia letter on VRX situation:

 

http://www.sequoiafund.com/Letter%20to%20Clients%20and%20Shareholders.pdf  (thanks to Max0205 and MarAzul for forwarding to me)

 

We work hard to understand Valeant and its business model. Our belief has always been that

Pearson is honest and extremely driven. He does everything legally permissible to maximize

Valeant’s earnings. One lesson of recent events is that sometimes doing everything legally

permissible to maximize earnings does not create shareholder value. All enduring businesses

must strive to earn and maintain a good reputation. Because of its large indebtedness and need to

tap the capital markets to make acquisitions Valeant in particular needs the confidence of the

credit market to execute its business model. The company has no large debt maturities over the

next two years, and we believe it intends to pay down scheduled maturities through 2018 out of

cash flows. We’d like Valeant to consider paying down more of its debt early and adopting a

conservative capital structure that insulates it from the possibility of long-term tightness in the

credit markets.

 

We have been asked by clients and friends why we own such a company. In our view, Valeant is

an aggressively-managed business that may push boundaries, but operates within the law. When

ethical concerns arise, management tends to address them forthrightly, but in the moment. We

would stress the importance of taking a more systemic approach to managing business practices

with an eye on the company’s long-term corporate reputation. We believe the company will learn

from the current crisis the importance of reputation and transparency to all stakeholders,

especially the shareholders.

 

I have not done a deep dive on VRX, but I've looked at it here and there over the past couple years.  Based on what I've read and seen -- I would agree with Sequoia's analysis above.  Sometimes... it makes sense to not make every last dollar that's available on the table... even if you can.  My main worries that keep me on the sideline are:

 

1) Government intervention of some kind.  Valeant may not be breaking any laws -- but it seems as if they are ikely pushing ethical boundaries as hard as they can to maximize profit (rightly or wrongly).  Politicians and ambitious AGs can act aggressively. The tail risk is there IMO. 

 

2) VRX has created a lot of value in the past through acquisitions. They have grown so large that in order to create a lot of value through acquisitions in the future they will have to make increasingly large acquisitions. If their reputation is damaged (even if a lot of what they do is not unique) they may have an increasingly challenging time making large acquisitions.

 

 

[cmlber]

But if the assets Valeant is buying are finite-lived (as the scenario above suggests), doesn't it make sense to include some kind of capital charge, if what you're trying to do is estimate true free cash flow, owner earnings, or whatever you want to call it?     

 

No, it doesn't make sense to do that.

 

Similarly, it makes no sense to announce a big charge to Microsoft's present quarterly earnings simply because the Windows franchise has a finite life. 

 

You can't assume that they are going to develop another similarly fantastic Windows franchise to replace the current one simply because they did so decades ago with entirely different people in an entirely different competitive landscape.  They might try to acquire the next one, in which case today's free cash flow isn't really free cash flow by your argument.  So that means they have no earnings today?

 

I don't know what you mean by "free cash flow".  What I mean by that phrase is the cash I can put in my pocket today after spending (or reserving) the amounts necessary to maintain current profits. 

 

Let's take a shipping example.  If you buy one ship that lasts for 20 years and must then be scrapped, your "cash earnings" [or operating cash flow minus capital expenditures] are going to look great for a long time, but they're overstating the true economic returns because "cash earnings" include a return of capital, rather than simply a return on capital. 

 

If Valeant is essentially buying ships, i.e., finite-lived assets, then the same principle applies, though that doesn't necessarily mean that reported amortization is the right capital charge to use.  Put another way, if you were building a DCF with steady profits, the cash flow you're getting in year 1, year 2 and so forth shouldn't be the cash earnings number that Valeant reports if they're buying "ships."  Instead, it should be something lower.  If you think otherwise, then where is the capital coming from to replace the ships (drugs) that must be scrapped (go off patent or whatever)? 

 

On the other hand, if Valeant is really buying "Coke," rather than ships, then the principle doesn't apply, because the expenses needed to maintain and grow the Coke-like Valeant are marketing, distribution, R&D and so forth.  Assuming those expenses run through the income statement, they are already included in operating cash flow and there's no need to make another adjustment.

 

Is it that hard to account for this in the multiple you're willing to pay for cash earnings? 

 

You're also taking a leap in assuming VRX is closer to a 20 year ship than it is to Coke.  Bausch + Lomb is the pharmaceutical equivalent of Coke.

 

[jay21]

Anyone have color on Philidor using R&O to backdoor into California (allegedly)? Is that illegal? Is it fraudulent? Is my understanding correct?

[KJP]

       

 

This is completely valid BUT the accounting amortization provides absolutely no value in this approach.

 

 

You may be right.  I don't know enough about Valeant to have an informed opinion on how to estimate the capital charge.  I only commented because it's an issue that comes up a lot on this board in many different threads, from shippers to mining royalty companies.   

[KJP]

 

 

You can model future earnings from an asset over time making various assumptions of the life of the portfolio of assets.  There is no reason anyone needs to muddy current income to do such an exercise.  That's my point.

 

 

I agree that the best approach is to go right to what the assets will earn, if you have the information to do it.  From what little I know, that is what Valeant's management claims to be doing with its comparisons of actual results to the deal models.   

[ERICOPOLY]

My main worries that keep me on the sideline are:

 

1) Government intervention of some kind.  Valeant may not be breaking any laws -- but it seems as if they are ikely pushing ethical boundaries as hard as they can to maximize profit (rightly or wrongly).  Politicians and ambitious AGs can act aggressively. The tail risk is there IMO. 

 

2) VRX has created a lot of value in the past through acquisitions. They have grown so large that in order to create a lot of value through acquisitions in the future they will have to make increasingly large acquisitions. If their reputation is damaged (even if a lot of what they do is not unique) they may have an increasingly challenging time making large acquisitions.

 

I agree that #1 can cause some costs -- after holding BAC for 4 years I've got the US Government on automatic bill pay.

 

However #2 is mitigated by the current price.  You don't need an acquisition if the shares are at this level in order to compound at 15%+ rate.  You can simply retire shares with the earnings.  However that would go away if the share price rallied -- oh no! 

[KJP]

On the other hand, if Valeant is really buying "Coke," rather than ships, then the principle doesn't apply, because the expenses needed to maintain and grow the Coke-like Valeant are marketing, distribution, R&D and so forth.  Assuming those expenses run through the income statement, they are already included in operating cash flow and there's no need to make another adjustment.

 

That's exactly what I have said, isn't it? And that's exactly what they are buying, as long as there is organic growth. The value of a ship doesn't go up, right?

 

Cheers,

 

Gio

 

As far as I know, Valeant has some Coke and some ships, though they seem to be shifting more to Coke.  If you believe the internal R&D, investments in distribution and so forth that is already included in "cash earnings" are sufficient to keep real profits and the current level for a long time, then no additional capital charge is necessary.  I don't know enough about Valeant to have an opinion on that one way or the other.     

[original mungerville]

Not so positive video by accounting prof:

 

http://www.bnn.ca/Video/player.aspx?vid=736200

 

http://elitzu.blogspot.ca/2015/10/valeant.html

 

You know shorts pay profs to "research" companies they are short, right? You understand that? And the accounting prof even sends his little analysis to the SEC. Because he is a prof he is not conflicted goes the theory. Been there done that.

[KJP]

But if the assets Valeant is buying are finite-lived (as the scenario above suggests), doesn't it make sense to include some kind of capital charge, if what you're trying to do is estimate true free cash flow, owner earnings, or whatever you want to call it?     

 

No, it doesn't make sense to do that.

 

Similarly, it makes no sense to announce a big charge to Microsoft's present quarterly earnings simply because the Windows franchise has a finite life. 

 

You can't assume that they are going to develop another similarly fantastic Windows franchise to replace the current one simply because they did so decades ago with entirely different people in an entirely different competitive landscape.  They might try to acquire the next one, in which case today's free cash flow isn't really free cash flow by your argument.  So that means they have no earnings today?

 

I don't know what you mean by "free cash flow".  What I mean by that phrase is the cash I can put in my pocket today after spending (or reserving) the amounts necessary to maintain current profits. 

 

Let's take a shipping example.  If you buy one ship that lasts for 20 years and must then be scrapped, your "cash earnings" [or operating cash flow minus capital expenditures] are going to look great for a long time, but they're overstating the true economic returns because "cash earnings" include a return of capital, rather than simply a return on capital. 

 

If Valeant is essentially buying ships, i.e., finite-lived assets, then the same principle applies, though that doesn't necessarily mean that reported amortization is the right capital charge to use.  Put another way, if you were building a DCF with steady profits, the cash flow you're getting in year 1, year 2 and so forth shouldn't be the cash earnings number that Valeant reports if they're buying "ships."  Instead, it should be something lower.  If you think otherwise, then where is the capital coming from to replace the ships (drugs) that must be scrapped (go off patent or whatever)? 

 

On the other hand, if Valeant is really buying "Coke," rather than ships, then the principle doesn't apply, because the expenses needed to maintain and grow the Coke-like Valeant are marketing, distribution, R&D and so forth.  Assuming those expenses run through the income statement, they are already included in operating cash flow and there's no need to make another adjustment.

 

Is it that hard to account for this in the multiple you're willing to pay for cash earnings? 

 

You're also taking a leap in assuming VRX is closer to a 20 year ship than it is to Coke.  Bausch + Lomb is the pharmaceutical equivalent of Coke.

 

I'm not assuming anything about Valeant; I don't know one way or the other.  I commented because I'm interested in the theory of how to value companies that are like Valeant and value the discussion.

 

What's the method for adjusting the cash earnings multiple to deal with this issue?  I'm not saying there isn't one, I just don't know a simple way to do it. 

[KCLarkin]

1) Government intervention of some kind.  Valeant may not be breaking any laws -- but it seems as if they are ikely pushing ethical boundaries as hard as they can to maximize profit (rightly or wrongly).  Politicians and ambitious AGs can act aggressively. The tail risk is there IMO.

 

There is a very long history of pharmaceutical companies engaging in illegal activity and being caught. I'm not sure there is any correlation with future stock returns (other than as a buying opportunity). I linked earlier to an article about J&J where they were caught providing kickbacks and pushing off-label uses. And these off-label uses may have resulted in deaths and breast enlargement in boys. Last I checked, JNJ is alive and well.

 

In this case, a customer of Valeant, who Valeant may or may not be liable for, may or may not have engaged in illegal activity.

[original mungerville]

Eric, what you are saying is true but I think you know what the difference is. The earnings stream at VRX is not an growing earnings stream or a flat earnings stream. It is a declining earnings stream. That is important because unlike a conventional company whose goodwill is never impaired, it truly is an asset. The asset at VRX will decline just like it's earnings. That means the company must always make acquisitions to make up for the declining asset that is never expensed.

 

At the end of the day, a dollar of earnings at VRX is not a dollar of owner earnings. You cannot payout the VRX earnings to shareholders, it is not free cash flow, it must be retained to sustain the earnings power of the company.

 

Now, the biggest risk to VRX is a low stock price. That will make its acquisition currency less valuable. Image management is crucial for VRX.

 

Back to the sidelines.

 

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.

 

No, at this stock price, they have ample acquisition opportunities just buying in their own stock and paying down some debt. This low stock price helps with that acquisition scenario actually. Furthermore, I don't want them to issue stock to acquire, even at double this share price (unless there is an extremely attractive merger opportunity like Allergan was), I want them using cash and debt to buy tuck-ins and medium sized acquisitions.

[KCLarkin]

You know shorts pay profs to "research" companies they are short, right? You understand that? And the accounting prof even sends his little analysis to the SEC. Because he is a prof he is not conflicted goes the theory. Been there done that.

 

Harvard Professor's Blinkx Blog Post Benefited Short Sellers

http://www.newsmax.com/t/newsmax/article/551438

 

Edelman, 33, added this week that he had been paid for the work by two U.S. investors, which he still declined to identify.

 

 

[giofranchi]

Sequoia letter on VRX situation:

 

http://www.sequoiafund.com/Letter%20to%20Clients%20and%20Shareholders.pdf  (thanks to Max0205 and MarAzul for forwarding to me)

 

One lesson of recent events is that sometimes doing everything legally

permissible to maximize earnings does not create shareholder value. All enduring businesses

must strive to earn and maintain a good reputation.

 

That's exactly what I have been saying! ;)

 

Cheers,

 

Gio

[original mungerville]

But if the assets Valeant is buying are finite-lived (as the scenario above suggests), doesn't it make sense to include some kind of capital charge, if what you're trying to do is estimate true free cash flow, owner earnings, or whatever you want to call it?     

 

No, it doesn't make sense to do that.

 

Similarly, it makes no sense to announce a big charge to Microsoft's present quarterly earnings simply because the Windows franchise has a finite life. 

 

You can't assume that they are going to develop another similarly fantastic Windows franchise to replace the current one simply because they did so decades ago with entirely different people in an entirely different competitive landscape.  They might try to acquire the next one, in which case today's free cash flow isn't really free cash flow by your argument.  So that means they have no earnings today?

 

Apparently after 18 years, the average S&P 500 company is dead. So on this basis, the average company's earnings are finite. Its more important for other big pharma companies, miners, etc - and not so much for Valeant. And certainly not at this multiple!!

 

http://www.reuters.com/article/2012/02/13/idUS206536+13-Feb-2012+BW20120213

 

Lifespans of Top Companies Are Shrinking, According to New Innosight Study of S&P 500 Index

 

The lifespans of top U.S. companies are growing dramatically shorter, according to an Innosight study of the S&P 500 Index. The report, conducted by the innovation consulting firm Innosight, shows that the pace of technology change, global competitors, and pressure from startups are increasingly threatening some of the most iconic corporations.

 

According to the report, the 61-year tenure for the average firm in 1958 narrowed to 25 years in 1980—to 18 years in 2011. At the current churn rate, 75% of the S&P 500 will be replaced by 2027.

 

 

[Picasso]

What's the method for adjusting the cash earnings multiple to deal with this issue?  I'm not saying there isn't one, I just don't know a simple way to do it.

 

There's two parts to Valeant.  One is the durable business (give this your multiple) and the rest is better valued using discounted cash flow.  You account for the issue by separating the two.  Based on the current business mix, it's probably 80% durable and 20% DCF.  Or you can just blend a smaller multiple to make it easier I guess.

 

So the PFE/AGN potential deal at $400 would value AGN at 16x 2017 cash EPS.  The generic drug sale to TEVA probably paved the way for this to happen.  I know this is going to sound like someone with rosy colored glasses, but the debt burden at Valeant is a partial deterrent to a buyout during a market decline.  I'd rather own Valeant for a really long time than have someone buy them out for $200.

[blainehodder]

What's the method for adjusting the cash earnings multiple to deal with this issue?  I'm not saying there isn't one, I just don't know a simple way to do it.

 

There's two parts to Valeant.  One is the durable business (give this your multiple) and the rest is better valued using discounted cash flow.  You account for the issue by separating the two.  Based on the current business mix, it's probably 80% durable and 20% DCF.  Or you can just blend a smaller multiple to make it easier I guess.

 

So the PFE/AGN potential deal at $400 would value AGN at 16x 2017 cash EPS.  The generic drug sale to TEVA probably paved the way for this to happen.  I know this is going to sound like someone with rosy colored glasses, but the debt burden at Valeant is a partial deterrent to a buyout during a market decline.  I'd rather own Valeant for a really long time than have someone buy them out for $200.

 

I respectfully disagree.

 

a) multiple is shorthand for DCF

b) If someone bought Valeant for 200, I could always just buy that company after juicing a 100% return out of this.  Value inestors seem to always think short term gains are bad.  Speed of gains is a key component of long term returns. A one day double is ALWAYS better than a 5 yr grind to $300.

[ERICOPOLY]

What's the method for adjusting the cash earnings multiple to deal with this issue?  I'm not saying there isn't one, I just don't know a simple way to do it.

 

There's two parts to Valeant.  One is the durable business (give this your multiple) and the rest is better valued using discounted cash flow.  You account for the issue by separating the two.  Based on the current business mix, it's probably 80% durable and 20% DCF.  Or you can just blend a smaller multiple to make it easier I guess.

 

So the PFE/AGN potential deal at $400 would value AGN at 16x 2017 cash EPS.  The generic drug sale to TEVA probably paved the way for this to happen.  I know this is going to sound like someone with rosy colored glasses, but the debt burden at Valeant is a partial deterrent to a buyout during a market decline.  I'd rather own Valeant for a really long time than have someone buy them out for $200.

 

I respectfully disagree.

 

a) multiple is shorthand for DCF

b) If someone bought Valeant for 200, I could always just buy that company after juicing a 100% return out of this.  Value inestors seem to always think short term gains are bad.  Speed of gains is a key component of long term returns.

 

for b), he means that Pearson won't be running the new company and the capital allocation story falls apart.  So he'd rather just have a guy allocating capital at a high return for a decade than make a one-time pop and try to keep finding one-time pops.

[blainehodder]

What's the method for adjusting the cash earnings multiple to deal with this issue?  I'm not saying there isn't one, I just don't know a simple way to do it.

 

There's two parts to Valeant.  One is the durable business (give this your multiple) and the rest is better valued using discounted cash flow.  You account for the issue by separating the two.  Based on the current business mix, it's probably 80% durable and 20% DCF.  Or you can just blend a smaller multiple to make it easier I guess.

 

So the PFE/AGN potential deal at $400 would value AGN at 16x 2017 cash EPS.  The generic drug sale to TEVA probably paved the way for this to happen.  I know this is going to sound like someone with rosy colored glasses, but the debt burden at Valeant is a partial deterrent to a buyout during a market decline.  I'd rather own Valeant for a really long time than have someone buy them out for $200.

 

I respectfully disagree.

 

a) multiple is shorthand for DCF

b) If someone bought Valeant for 200, I could always just buy that company after juicing a 100% return out of this.  Value inestors seem to always think short term gains are bad.  Speed of gains is a key component of long term returns.

 

for b), he means that Pearson won't be running the new company and the capital allocation story falls apart.  So he'd rather just have a guy allocating capital at a high return for a decade than make a one-time pop and try to keep finding one-time pops.

 

Got it.  My thinking was that any acquirer would be crazy to not keep Pearson on.

[Picasso]

I respectfully disagree.

 

a) multiple is shorthand for DCF

b) If someone bought Valeant for 200, I could always just buy that company after juicing a 100% return out of this.  Value inestors seem to always think short term gains are bad.  Speed of gains is a key component of long term returns. a one day double is ALWAYS better than a 5 yr grind to $300.

 

Everything in investing including multiples are DCF exercises.  So what?  Pfizer is buying Allergan based on a multiple of earnings without directly calculating the cash flow.  The minority of the Valeant portfolio requires DCF because it's a clear cut and dry life.

 

I know people who quickly doubled their money in Apple or Berkshire and sold way too early.  If Valeant can generate high returns on capital for a long time then I want to hold it a long time.  What's so bad about that?

[Picasso]

for b), he means that Pearson won't be running the new company and the capital allocation story falls apart.  So he'd rather just have a guy allocating capital at a high return for a decade than make a one-time pop and try to keep finding one-time pops.

 

Or they pay cash and you're out of luck.  How many PCP shareholders are upset by the cash offer from Berkshire?  They intended to hold for a long time and they basically got cock blocked.

[Guest Schwab711]

Is it that hard to account for this in the multiple you're willing to pay for cash earnings? 

 

You're also taking a leap in assuming VRX is closer to a 20 year ship than it is to Coke.  Bausch + Lomb is the pharmaceutical equivalent of Coke.

 

First, I think using metaphors instead of discussing the situation directly is how the valuation got out of hand in the first place. These are medications, not Coca-Cola. No one cares which medication they take and, in general, physicians strive to prescribe the most efficient medication. Comparing Bausch & Lomb to Coca-Cola is far from accurate. B&L is #3 or #4 in contact sales (behind Alcon (Novartis) and JNJ). Alcon's revenue is greater than the entire acquisition price of B&L. Not very Coca-Cola-like.

 

All of Salix is a "20 year ship" (if that's what we're going to use). Same goes with Sprout and Amoun. A good portion of VRX's "durable" (Coca-Cola) revenue comes from EMs and generics. EM revenue is barely exceeding currency depreciation and I haven't seen anyone attempt to determine how it compares to actual inflation within these countries (inflation seems higher than currency depreciation and I think inflation is outpacing many of VRX's products). This doesn't sound like Coca-Cola to me. Generics in both the US and DMs are relatively flat (with periods of decline and growth). The recent growth was bolstered by Isuprel and Nitropress being included in the category (presumably). Without these additions, US generics would have declined, again.

 

I think this thread has come to realize that this is the big debate in deciding VRX's valuation. If you believe VRX's durable products are like JNJ then there is an argument to be made that VRX is reasonably priced. There is no right answer ahead of time.