VRX - Valeant Pharmaceuticals International Inc.

[Yours Truly]

This board has come a long way.  It was only a week ago that everyone was discussing fraud, accounting scandal, shady business practices and MP's reputation.  It is now back to more rational topics such as valuation and durability of its business. :)

[original mungerville]

Valeant isn't Coke for sure, and its earnings are not as durable. But it isn't big pharma either, its product set is more durable.

 

The right answer is somewhere in between, and the multiples on both of those book-ends are quite high.

 

 

[original mungerville]

This board has come a long way.  It was only a week ago that everyone was discussing fraud, accounting scandal, shady business practices and MP's reputation.  It is now back to more rational topics such as valuation and durability of its business. :)

 

No accounting scandal. We longs knew that, others wanted to believe Citron. But it is not a waste of time to discuss shady business and reputation, as with the reality of the shorts yelling fraud, the former can have a significant impact on the stock multiple for a few months to a few years. It was not a waste of time in my view (other than the posts from posters who seem paid by someone to post).

[giofranchi]

Cleveland Clinic announces top 10 list of breakthrough technologies for 2016

 

8. First-ever treatment for HSDD: Treatment for Hypoactive Sexual Desire Disorder has been a hot topic this year, being referred to as the “female Viagra.” Although it’s nothing like Viagra, as it is addressing chemical function in the brain with a pill taking daily, it is still a step forward in addressing sexual experience for women. As Dr. Holly Thacker with Women’s Health Institute explained, women can actually drink socially with the pill, so that shouldn’t necessarily be one of the more prominent criticisms of Flibanserin – although, it has thus far.

 

http://medcitynews.com/2015/10/cleveland-clinic-announces-top-10-list-of-breakthrough-technologies-for-2016/

 

Cheers,

 

Gio

[krazeenyc]

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.

 

The R&D spend by Big Pharma that is considered to be a bad investment is exactly why big Pharma has generally enjoyed a slap on the wrist when they've been naughty.

 

If the spotlight on Valeant gets brighter and politicians, AGs, etc. are emboldened -- I don't think they will enjoy the same protection that Big Pharma receives.  For what it's worth, sometimes good, legal, strong, tactical business practices can be borderline unethical.  I don't feel great about how the government will respond to Valeant's shrewd but possibly unethical business strategies. Valeant's business practices may play well to a value investing crowd, but I don't think it will be smiled upon by the public or congress.

[ERICOPOLY]

It plays really well in the hands of a Hillary Clinton or Bernie Sanders.

 

But how much would the penalty be for Philidor practices where the option/owner relationship dates back one year?  I mean, let's get creative and say they have to settle accusations for 2x or 3x the "ill-gotten" profits from the Philidor channel, and then terminate that relationship?

 

Okay, is that anywhere remotely close to the decline in market cap?

 

What happened is first that kind of political risk stuff was discounted in the stock, and then the stock took on a whole new fraud/Enron discount that hasn't been lifted.  IMO that's why the discount makes no sense in relation to the political/settlement risk.

[krazeenyc]

It plays really well in the hands of a Hillary Clinton or Bernie Sanders.

 

But how much would the penalty be for Philidor practices where the option/owner relationship dates back one year?  I mean, let's get creative and say they have to settle accusations for 2x or 3x the "ill-gotten" profits from the Philidor channel, and then terminate that relationship?

 

Okay, is that anywhere remotely close to the decline in market cap?

 

What happened is first that kind of political risk stuff was discounted in the stock, and then the stock took on a whole new fraud/Enron discount that hasn't been lifted.  IMO that's why the discount makes no sense in relation to the political/settlement risk.

 

Of course the Philidor problem on its own is small potatoes - I agree. If I had to guess VRX probably presses a lot of edges that maybe considered "unethical".  I think even Sequoia is acknowledging this and basically saying maybe it's better to not press every edge to squeeze out every penny of profit. Being a BAC shareholder, you should know the punishment doesn't always fit the crime. I'm sure the Ocwen shareholders feel the same thing.

 

Look i'm not even saying it will happen -- I'm just saying I think there is a larger tail risk (due to politics) regarding this company than most bulls are willing acknowledge.

 

I agree with your last statement about the 2 separate declines in the stock. If I thought I could buy it, and simply wait a few months to let the "fraud' allegations pass and ride that recovery I would.  I personally think the bright lights will continue to shine on Valeant (you're going into an election year), and I don't think that it's good for the business.

[ERICOPOLY]

It plays really well in the hands of a Hillary Clinton or Bernie Sanders.

 

But how much would the penalty be for Philidor practices where the option/owner relationship dates back one year?  I mean, let's get creative and say they have to settle accusations for 2x or 3x the "ill-gotten" profits from the Philidor channel, and then terminate that relationship?

 

Okay, is that anywhere remotely close to the decline in market cap?

 

What happened is first that kind of political risk stuff was discounted in the stock, and then the stock took on a whole new fraud/Enron discount that hasn't been lifted.  IMO that's why the discount makes no sense in relation to the political/settlement risk.

 

Of course the Philidor problem on its own is small potatoes - I agree. If I had to guess VRX probably presses a lot of edges that maybe considered "unethical".  I think even Sequoia is acknowledging this and basically saying maybe it's better to not press every edge to squeeze out every penny of profit. Being a BAC shareholder, you should know the punishment doesn't always fit the crime. I'm sure the Ocwen shareholders feel the same thing.

 

Look i'm not even saying it will happen -- I'm just saying I think there is a larger tail risk (due to politics) regarding this company than most bulls are willing acknowledge.

 

I agree with your last statement about the 2 separate declines in the stock. If I thought I could buy it, and simply wait a few months to let the "fraud' allegations pass and ride that recovery I would.  I personally think the bright lights will continue to shine on Valeant (you're going into an election year), and I don't think that it's good for the business.

 

I just remember that buying BAC at a heavy discount didn't treat me poorly despite several more years of "unexpectedly" large lawsuits.  I mean, really punishingly unprecedented $17 billion settlement sized crap.  It was just on and on and on.  Result is that the stock was already more than a double before the $17billion number came out and the gains didn't go away with the settlement.  The discount just dwarfed even the gargantuan fines.

[ERICOPOLY]

But anyways, IMO that was because BAC's discount at $5 had more to do with Euro implosion fears than it did with legal liability.

 

I think similarly the current discount in VRX has more to do with the Enron story than with settlements over aggressive drug pricing and tactics of Philidor.

[cmlber]

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.

 

The R&D spend by Big Pharma that is considered to be a bad investment is exactly why big Pharma has generally enjoyed a slap on the wrist when they've been naughty.

 

If the spotlight on Valeant gets brighter and politicians, AGs, etc. are emboldened -- I don't think they will enjoy the same protection that Big Pharma receives.  For what it's worth, sometimes good, legal, strong, tactical business practices can be borderline unethical.  I don't feel great about how the government will respond to Valeant's shrewd but possibly unethical business strategies. Valeant's business practices may play well to a value investing crowd, but I don't think it will be smiled upon by the public or congress.

 

Markets have a tendency to sell first, think later.  It is very difficult to get anything done in Congress, let alone attack a specific company or industry (that has significant lobbying power) for being capitalists.

 

The same thing happened in the 92-93.  Clinton was publicly criticizing pharma companies for their high prices, pharma stocks dropped 40-50%, then basically nothing happened (despite Democrats controlling both the house and senate) and later Warren Buffett said he had “blown it” by not buying pharma stocks and that he would “do it in a second” if given a chance to buy a basket of pharmaceuticals at a “below-market” multiple.

 

The drop from $250 to $150 was the 1993 drop all over again, the drop from $150 to $90 was the false allegations of Citron.  Given that those are clearly false, it'll trade back to that $150 range soon and probably take a little longer for the political fear to go away and get back in the $200s.

[merkhet]

But anyways, IMO that was because BAC's discount at $5 had more to do with Euro implosion fears than it did with legal liability.

 

I think similarly the current discount in VRX has more to do with the Enron story than with settlements over aggressive drug pricing and tactics of Philidor.

 

Seems a little different to me.

 

At the time, Bank of America was trading at around a 40% normalized earnings yield while Valeant seems to be trading at a 10% free cash flow yield to 2016 numbers (based on Sequoia's math). You'd have to be significantly more sure of Valeant's business model surviving than Bank of America's business model surviving to get a similar return, IMHO.

 

But, then again, it might not be an apples to apples comparison since I don't have a good sense of what a "normalized earnings yield" would be for Valeant. May not even make sense as a concept given the possibility of growth...

[krazeenyc]

It plays really well in the hands of a Hillary Clinton or Bernie Sanders.

 

But how much would the penalty be for Philidor practices where the option/owner relationship dates back one year?  I mean, let's get creative and say they have to settle accusations for 2x or 3x the "ill-gotten" profits from the Philidor channel, and then terminate that relationship?

 

Okay, is that anywhere remotely close to the decline in market cap?

 

What happened is first that kind of political risk stuff was discounted in the stock, and then the stock took on a whole new fraud/Enron discount that hasn't been lifted.  IMO that's why the discount makes no sense in relation to the political/settlement risk.

 

Of course the Philidor problem on its own is small potatoes - I agree. If I had to guess VRX probably presses a lot of edges that maybe considered "unethical".  I think even Sequoia is acknowledging this and basically saying maybe it's better to not press every edge to squeeze out every penny of profit. Being a BAC shareholder, you should know the punishment doesn't always fit the crime. I'm sure the Ocwen shareholders feel the same thing.

 

Look i'm not even saying it will happen -- I'm just saying I think there is a larger tail risk (due to politics) regarding this company than most bulls are willing acknowledge.

 

I agree with your last statement about the 2 separate declines in the stock. If I thought I could buy it, and simply wait a few months to let the "fraud' allegations pass and ride that recovery I would.  I personally think the bright lights will continue to shine on Valeant (you're going into an election year), and I don't think that it's good for the business.

 

I just remember that buying BAC at a heavy discount didn't treat me poorly despite several more years of "unexpectedly" large lawsuits.  I mean, really punishingly unprecedented $17 billion settlement sized crap.  It was just on and on and on.  Result is that the stock was already more than a double before the $17billion number came out and the gains didn't go away with the settlement.  The discount just dwarfed even the gargantuan fines.

 

Clearly buying BAC was an excellent choice (I did the same -- although I sold earlier at around 11). I'm just saying look how much BAC has had to pay in fines over the last few years -- did those punishments fit the crime?

[Liberty]

Here's a thought experiment. I'm not advising this, but I think it's interesting.

 

If VRX was to sell either B&L or Salix in the near future and got a good price (auction, multiple bidders, strategics get involved, etc), I think they could wipe more than half of their debt, if not more than 2/3 of it.

 

B&L is performing much better than when they bought it, the fat has been cut, and they have some new launches (Ultra, biotrue) that should keep growing fast for years and a nice pipeline. They've been regaining market share. I'd be surprised if they got less than twice what they paid for it, if not more.

 

Salix was depressed at the time because of the scandal and uncertainty. But selling it with a clean bill of health, with Xifaxan IBS-D approved and growing at high double-digits and other fast growing drugs and a nice pipeline, with some fat trimmed. Wouldn't be surprised if they got significantly more than they paid, especially to a strategic who wants to establish a GI platform or already has one and would have synergies and remove a competitor..

 

So they'd lose one of the big therapeutic platforms, and that would shrink the company a fair bit, but you'd have a lot of stuff left over and relatively little debt.

 

Obviously I think they should keep growing these assets and use them as platforms for tuck-ins and other deals, but I know that management considers everything for sale, so if some day they get an offer like the one that TEVA made to AGN for the generics, they'll probably take it.

[krazeenyc]

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.

 

The R&D spend by Big Pharma that is considered to be a bad investment is exactly why big Pharma has generally enjoyed a slap on the wrist when they've been naughty.

 

If the spotlight on Valeant gets brighter and politicians, AGs, etc. are emboldened -- I don't think they will enjoy the same protection that Big Pharma receives.  For what it's worth, sometimes good, legal, strong, tactical business practices can be borderline unethical.  I don't feel great about how the government will respond to Valeant's shrewd but possibly unethical business strategies. Valeant's business practices may play well to a value investing crowd, but I don't think it will be smiled upon by the public or congress.

 

Markets have a tendency to sell first, think later.  It is very difficult to get anything done in Congress, let alone attack a specific company or industry (that has significant lobbying power) for being capitalists.

 

The same thing happened in the 92-93.  Clinton was publicly criticizing pharma companies for their high prices, pharma stocks dropped 40-50%, then basically nothing happened (despite Democrats controlling both the house and senate) and later Warren Buffett said he had “blown it” by not buying pharma stocks and that he would “do it in a second” if given a chance to buy a basket of pharmaceuticals at a “below-market” multiple.

 

The drop from $250 to $150 was the 1993 drop all over again, the drop from $150 to $90 was the false allegations of Citron.  Given that those are clearly false, it'll trade back to that $150 range soon and probably take a little longer for the political fear to go away and get back in the $200s.

 

My opinion is that Big Pharma is heavily protected by their place in society.  Big Pharma is a necessary "evil". You can't shut them down and stop developing new medicines.  Society doesn't need Valeant.

[original mungerville]

It plays really well in the hands of a Hillary Clinton or Bernie Sanders.

 

But how much would the penalty be for Philidor practices where the option/owner relationship dates back one year?  I mean, let's get creative and say they have to settle accusations for 2x or 3x the "ill-gotten" profits from the Philidor channel, and then terminate that relationship?

 

Okay, is that anywhere remotely close to the decline in market cap?

 

What happened is first that kind of political risk stuff was discounted in the stock, and then the stock took on a whole new fraud/Enron discount that hasn't been lifted.  IMO that's why the discount makes no sense in relation to the political/settlement risk.

 

I'll be surprised if total fines exceed $500 million and my tail-event cap is $1 billion (my expectation, if they are found guilty, is low 100 millions). This is exactly my logic (posted somewhere in this long thread previously!): the Philidor channel has not been a material channel for more than a year which, you would think, would cap the fine - if there even is one. First they have to prove Valeant has legal control over Philidor and its network (and the R&O suit is a great example of why that is not the case).

[ERICOPOLY]

But anyways, IMO that was because BAC's discount at $5 had more to do with Euro implosion fears than it did with legal liability.

 

I think similarly the current discount in VRX has more to do with the Enron story than with settlements over aggressive drug pricing and tactics of Philidor.

 

Seems a little different to me.

 

At the time, Bank of America was trading at around a 40% normalized earnings yield while Valeant seems to be trading at a 10% free cash flow yield to 2016 numbers (based on Sequoia's math). You'd have to be significantly more sure of Valeant's business model surviving than Bank of America's business model surviving to get a similar return, IMHO.

 

But, then again, it might not be an apples to apples comparison since I don't have a good sense of what a "normalized earnings yield" would be for Valeant. May not even make sense as a concept given the possibility of growth...

 

But BAC doesn't have a snowball's chance in hell at reinvesting earnings at a 20% clip.  All BAC becomes after revaluation is like a 10% payout machine.  It's deceptively cheaper than VRX when just comparing the two based on earnings yield.

 

Here is the last paragraph of Sequoia's most recent writing, which suggests more like a 15% yield that is growing at a high rate:

 

We note a few things in closing. The company has a robust pipeline of new products and has said that it will not need significant price increases over the next three years to achieve double-digit earnings growth. In 2016, we believe Valeant should grow earnings by at least 30%, generate free cash flow in excess of $4 billion and have the liquidity to pay down some of its bonds before their scheduled maturities. At a recent price of $110, Valeant trades for about seven times the consensus estimate of 2016 cash earnings, which does not strike us as a rational price for a company with a diverse collection of product lines and strong earnings growth. 

 

[ERICOPOLY]

It plays really well in the hands of a Hillary Clinton or Bernie Sanders.

 

But how much would the penalty be for Philidor practices where the option/owner relationship dates back one year?  I mean, let's get creative and say they have to settle accusations for 2x or 3x the "ill-gotten" profits from the Philidor channel, and then terminate that relationship?

 

Okay, is that anywhere remotely close to the decline in market cap?

 

What happened is first that kind of political risk stuff was discounted in the stock, and then the stock took on a whole new fraud/Enron discount that hasn't been lifted.  IMO that's why the discount makes no sense in relation to the political/settlement risk.

 

I'll be surprised if total fines exceed $500 million and my tail-event cap is $1 billion (my expectation, if they are found guilty, is low 100 millions). This is exactly my logic (posted somewhere in this long thread previously!): the Philidor channel has not been a material channel for more than a year which, you would think, would cap the fine - if there even is one. First they have to prove Valeant has legal control over Philidor and its network (and the R&O suit is a great example of why that is not the case).

 

You are correct of course -- why do they need lawyers to get R&O to pay them if R&O is just an arm of Valeant that allows them to backdoor into California without a license? 

[ERICOPOLY]

Or expressed differently... BAC is $17 today versus $5 four years ago.  We've made 3.4x in four years.

 

VRX if priced at 15x is a double from here (priced at 7x 2016), and it can't generate 50% increase in earnings over the following 3 years by organic growth (10%+) as well as shrewd allocation of incoming cash?

 

So it's better than BAC.

[merkhet]

But anyways, IMO that was because BAC's discount at $5 had more to do with Euro implosion fears than it did with legal liability.

 

I think similarly the current discount in VRX has more to do with the Enron story than with settlements over aggressive drug pricing and tactics of Philidor.

 

Seems a little different to me.

 

At the time, Bank of America was trading at around a 40% normalized earnings yield while Valeant seems to be trading at a 10% free cash flow yield to 2016 numbers (based on Sequoia's math). You'd have to be significantly more sure of Valeant's business model surviving than Bank of America's business model surviving to get a similar return, IMHO.

 

But, then again, it might not be an apples to apples comparison since I don't have a good sense of what a "normalized earnings yield" would be for Valeant. May not even make sense as a concept given the possibility of growth...

 

But BAC doesn't have a snowball's chance in hell at reinvesting earnings at a 20% clip.  All BAC becomes after revaluation is like a 10% payout machine.  It's deceptively cheaper than VRX when just comparing the two based on earnings yield.

 

Here is the last paragraph of Sequoia's most recent writing, which suggests more like a 15% yield that is growing at a high rate:

 

We note a few things in closing. The company has a robust pipeline of new products and has said that it will not need significant price increases over the next three years to achieve double-digit earnings growth. In 2016, we believe Valeant should grow earnings by at least 30%, generate free cash flow in excess of $4 billion and have the liquidity to pay down some of its bonds before their scheduled maturities. At a recent price of $110, Valeant trades for about seven times the consensus estimate of 2016 cash earnings, which does not strike us as a rational price for a company with a diverse collection of product lines and strong earnings growth. 

 

Right, and that's why I mentioned that it's probably not an apples to apples comparison because of VRX's growth possibilities. I haven't quite figured out myself if those growth possibilities are reflexive or pro-cyclical by nature -- for instance, does a low stock price negate the ability for the type of growth people are expecting? Can they use cash/debt to continue their acquisitions engine? etc.

 

The sentence before the one you highlighted indicates that Valeant will have FCF of $4 billion, so a 10% FCF yield, versus the sentence you highlighted indicating a 15% cash earnings yield. Now, I don't want to re-open that can of worms (25% of this thread is likely about people going back and forth between FCF and cash earnings discrepancies) but I think someone established previously that cash earnings=EBITA.

 

Disclaimer: I didn't read those previous comments very thoroughly, and my grasp on the difference between FCF and cash earnings is tenuous at best, so I could be wrong.

[original mungerville]

Exactly, this thing is at 7x growing 20% so I would not compare that to BAC growing at a lot lower clip.

 

Now Ericopoly, this is a good segway to a little sidebar discussion on buying the 2018 LEAPS vs the common. When I compare the premium on Valeant's LEAPS versus say BAC or whatever other LEAPS and figure out the implied interest rate on them (using the same methodology you use, so lets not get into that here), they a fuckin' expensive - clearly.

 

BUT, if I adjust for VRX annualized growth vs BAC annualized growth and THEN look at the net annual cost of the option on that basis, I think I get a little more comfortable with the VRX LEAPS.

 

First, do you see what I mean (without me getting more detailed)? Second, could this angle make sense from your perspective? Said otherwise, we both believe the multiple will get re-rated higher in due course, and so that is the big chunk of the bet, so the high growth in EPS here with no dividend makes holding VRX LEAPS potentially cheaper than BAC - on a net basis.

 

Follow?

[shalab]

WSJ modeled VRX more like TEVA which was flat for the past five years ( with dividends ). Their target was about mid 150 s.

 

Don't see an immediate catalyst to get a high multiple on this one - actually, the stock price can move lower if California or some other state joins the investigation

[ERICOPOLY]

Exactly, this thing is at 7x growing 20% so I would not compare that to BAC growing at a lot lower clip.

 

Now Ericopoly, this is a good segway to a little sidebar discussion on buying the 2018 LEAPS vs the common. When I compare the premium on Valeant's LEAPS versus say BAC or whatever other LEAPS and figure out the implied interest rate on them (using the same methodology you use, so lets not get into that here), they a fuckin' expensive - clearly.

 

BUT, if I adjust for VRX annualized growth vs BAC annualized growth and THEN look at the net annual cost of the option on that basis, I think I get a little more comfortable with the VRX LEAPS.

 

First, do you see what I mean (without me getting more detailed)? Second, could this angle make sense from your perspective? Said otherwise, we both believe the multiple will get re-rated higher in due course, and so that is the big chunk of the bet, so the high growth in EPS here with no dividend either makes holding VRX LEAPS potentially cheaper than BAC - on a net basis.

 

Follow?

 

Yes I see what you mean.  The higher expected return in VRX compensates for the cost -- probably better risk/reward in the VRX options if you started off owning neither one.

 

I'm just trying not to have to sell my BAC shares because then I'd have a big tax bill and I would have less to deploy in VRX.  So I decided to spend a relative pittance on the BAC puts to keep my tax liability working for me as an asset.  I expect BAC's returns to mostly just cover the cost of the puts.

 

I had to choose either the BAC or the VRX puts, or choose neither and pay the tax.  I chose the BAC puts.

[original mungerville]

Merket,

 

They don't need the stock as currency to get 20% growth. One could argue they need access to credit markets though - but forget making the argument that they need the stock as currency (other than for the final big merger which would be nirvana). I am pretty sure they can get 20% just buying in their stock. So at this price, they only need significantly reduced access to credit markets - which is probably where they are at currently (once the market headlines on this accounting fraud / Citron thing die down).

[Picasso]

The sentence before the one you highlighted indicates that Valeant will have FCF of $4 billion, so a 10% FCF yield, versus the sentence you highlighted indicating a 15% cash earnings yield. Now, I don't want to re-open that can of worms (25% of this thread is likely about people going back and forth between FCF and cash earnings discrepancies) but I think someone established previously that cash earnings=EBITA.

 

 

Cash generation in Valeant presentations to track deals is EBITA.  They track total pretax cash since they model deals as unlevered.  The cash EPS you keep hearing is really EBDA plus one time items.

 

Edit:  Actually the EBDA + one time costs is probably too confusing.  Just take GAAP net income and add back intangible expenses and restructuring expenses.  That's around 85% of the difference plus other small non-cash items.

[Guest wellmont]

Here's a thought experiment. I'm not advising this, but I think it's interesting.

 

If VRX was to sell either B&L or Salix in the near future and got a good price (auction, multiple bidders, strategics get involved, etc), I think they could wipe more than half of their debt, if not more than 2/3 of it.

 

B&L is performing much better than when they bought it, the fat has been cut, and they have some new launches (Ultra, biotrue) that should keep growing fast for years and a nice pipeline. They've been regaining market share. I'd be surprised if they got less than twice what they paid for it, if not more.

 

Salix was depressed at the time because of the scandal and uncertainty. But selling it with a clean bill of health, with Xifaxan IBS-D approved and growing at high double-digits and other fast growing drugs and a nice pipeline, with some fat trimmed. Wouldn't be surprised if they got significantly more than they paid, especially to a strategic who wants to establish a GI platform or already has one and would have synergies and remove a competitor..

 

So they'd lose one of the big therapeutic platforms, and that would shrink the company a fair bit, but you'd have a lot of stuff left over and relatively little debt.

 

Obviously I think they should keep growing these assets and use them as platforms for tuck-ins and other deals, but I know that management considers everything for sale, so if some day they get an offer like the one that TEVA made to AGN for the generics, they'll probably take it.

 

that would really send a bad message to markets --- things are so serious that we need to immediately take care of this in a way that we never would have considered before this. and their stated strategy is to sell more quality and durable products, so selling one or the other would be a setback and make what remains less desirable. selling either doesn't make sense to me. anyway,  I really don't see the debt as being all that dire. this is not a distressed equity yet. it still trades for close to $40b. it seems dire because we are right in the thick of the extreme negativity. but rationality has to be the order of the day. all they need to do is take acquisitions and buybacks off the table for a couple of years and start paying it off.  faster than they had planned to as their largest shareholder has advised. having said that I don't see this stock getting a multiple of over 10x "cash earnings" any time soon. so the shareholder base needs to make a transition from hot money, to managers that utilize time arbitrage. long slog ahead.