VRX - Valeant Pharmaceuticals International Inc.

[ERICOPOLY]

okay.  I see your FCF number.

 

Regarding BAC.  Instead of saying it was a 40% normalized earnings yield, let's frame it differently using our hindsight knowledge. 

 

Compared to what actually happened, was it similar to a 15% earnings yield that grew at a 20% clip for 4 years through reinvestment of all free cash generate?

 

A 15% yield on $5 stock is 75 cents.

 

75 cents growing at 20% a year for 4 years becomes $1.296 (not far from 2015 BAC numbers!).

 

The question is, did BAC make this much money roughly over the past 4 years in earnings, and is it earning $1.80 in 2016 after another 20% of growth?

 

year 1:  .75

year 2:  0.90

year 3: 1.08

year 4:  1.296

 

That would be a total of 4.02 per share in earnings for BAC over the past 4 years.  Now, a lot of complicated things have happened, such as higher capital requirements and capital generation being in excess of earnings due to the tax assets and such.

 

But I don't get the feeling that we currently have $4.02 per share of accumulated earnings that can be returned to BAC shareholders.  It mostly went into higher capital requirements that will support the forward looking earnings against which the market cap and share value is supported.

 

Similar to how VRX could take all of it's FCF and invest at 20% clip and not be able to both return it and support the new earnings at the same time.

 

So they are very much alike in valuation.

 

But then what we didn't talk about is how Pearson believes there is 10%+ organic growth for the rest of the decade in VRX... so I don't know.  Also that 20% was unlevered without use of debt.  I'm just saying it can be a lot more than 20% annual growth in earnings.

 

[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 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.

 

OK, thanks. I almost posted one to two weeks ago (I actually wrote it and was about to post and then did not) that this was about the time and price when Ericopoly would come in a buy big). I saw you coming man - maybe just a couple days before you started reading the start of the thread! Anyway, glad to have you on board. Was waiting to ask you this, so you think you agree that buying 2018 VRX LEAPS on the above basis is not completely wacked (clearly, I have to be right on the high EPS growth in order to assume the cost is reasonable whereas with BAC that assumption is not necessary; so my additional cost is really this assumption which I think holds, especially at this multiple due to the fact they can buy-in shares).

[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.

 

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.

 

I'm absolutely not saying they should do it (unless someone offers them a crazy multiple, and then you have to consider it). The thought experiment was just to put the debt in perspective and show how much value there is in the assets, most of which are now worth a lot more than what was paid for them originally. I always hear about how the company has so much debt, but in relation to the likely market value of the assets, it's not that much.

[KCLarkin]

Warner Chilcott Agrees to Plead Guilty to Felony Health Care Fraud Scheme and Pay $125 Million to Resolve Criminal Liability and False Claims Act Allegations

http://www.justice.gov/opa/pr/warner-chilcott-agrees-plead-guilty-felony-health-care-fraud-scheme-and-pay-125-million

 

Warner Chilcott is owned by Allergan. Several different allegations in here, but the most relevant to VRX:

 

In addition, the information alleges that from 2011 to 2013, Warner Chilcott employees knowingly and willfully submitted false, inaccurate, or misleading prior authorization requests and other coverage requests to federal health care programs for the osteoporosis medications Atelvia® and Actonel®.  The false, inaccurate and misleading information was provided to certain insurance companies in order to overcome formulary restrictions that favored less expensive osteoporosis drugs.  For instance, Warner Chilcott was aware that many insurers only paid for Atelvia® if a physician submitted an individualized request explaining why the patient could not be treated with less-expensive medications approved to treat the same conditions.  As detailed in the information, Warner Chilcott sales representatives filled out numerous prior authorizations for Atelvia®, using “canned” medical justifications which often were inconsistent with the patients’ medical conditions.  In some instances, according to the information, Warner Chilcott sales representatives submitted these prior authorizations directly to insurance companies, holding themselves out to be physicians.  In other cases, sales representatives coached physicians and staff about which medical justifications would result in an approved prior authorization, whether or not the justification was true for a particular patient.

 

This was listed third in the press release, so I assume the "kickbacks" and "speaker fees" were considered more damning. Hard to handicap whether Philidor's misdeeds are worth more or less than $125 million. The criminal charges against executives might be more material to the Valeant thesis.

[APG12]

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.

 

OK, thanks. I almost posted one to two weeks ago (I actually wrote it and was about to post and then did not) that this was about the time and price when Ericopoly would come in a buy big). I saw you coming man - maybe just a couple days before you started reading the start of the thread! Anyway, glad to have you on board. Was waiting to ask you this, so you think you agree that buying 2018 VRX LEAPS on the above basis is not completely wacked (clearly, I have to be right on the high EPS growth in order to assume the cost is reasonable whereas with BAC that assumption is not necessary; so my additional cost is really this assumption which I think holds, especially at this multiple due to the fact they can buy-in shares).

 

I'm no options master, but aren't you comparing the cost of the options to the common to figure out the implied interest rate? And doesn't that common get the same upside from earnings growth that the options get?

[flesh]

I didn't bother with waiting to get through the whole story.  My cost basis is $110.80.

 

Not surprised - I tried to print this thread and my 'print preview' crashed at 1200 pages ;)

 

I have the first 75% of the thread in a word doc with all the noise carved out...... its 55 pages if you would like it let me know.

[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.

 

OK, thanks. I almost posted one to two weeks ago (I actually wrote it and was about to post and then did not) that this was about the time and price when Ericopoly would come in a buy big). I saw you coming man - maybe just a couple days before you started reading the start of the thread! Anyway, glad to have you on board. Was waiting to ask you this, so you think you agree that buying 2018 VRX LEAPS on the above basis is not completely wacked (clearly, I have to be right on the high EPS growth in order to assume the cost is reasonable whereas with BAC that assumption is not necessary; so my additional cost is really this assumption which I think holds, especially at this multiple due to the fact they can buy-in shares).

 

I don't know.  Have to think about it.  I just feel a bit better with the common but a lower premium would change my mind.

 

[Liberty]

"*CVS TERMINATES PHILIDOR FROM CAREMARK PBM NETWORK, DJ SAYS"

[original mungerville]

I'm still thinking about it as well, I am not totally convinced. If you have chance to give it more thought, I would appreciate your view in due course.

[merkhet]

okay.  I see your FCF number.

 

Regarding BAC.  Instead of saying it was a 40% normalized earnings yield, let's frame it differently using our hindsight knowledge. 

 

Compared to what actually happened, was it similar to a 15% earnings yield that grew at a 20% clip for 4 years through reinvestment of all free cash generate?

 

...

 

So they are very much alike in valuation.

 

But then what we didn't talk about is how Pearson believes there is 10%+ organic growth for the rest of the decade in VRX... so I don't know.  Also that 20% was unlevered without use of debt.  I'm just saying it can be a lot more than 20% annual growth in earnings.

 

That's an interesting way to look at it. Thanks.

 

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.

 

Also helpful, thanks.

 

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).

 

Curious how you get to 20% growth. Is based on the 15% of 2016 cash earnings yield that grows at a double-digit rate due to double-digit revenue growth and operating leverage coming through?

[ERICOPOLY]

How can you get to 20% just from buying your stock?

 

Well they have 10% organic growth and you have a 10% FCF yield.

 

That's 20% if the 10% FCF is returned to shareholders and the stock advances 10% with the organic growth rate.

[kab60]

Maybe I missed this (?) but two Sequoia directors of the board resigned during the weekend - according to WSJ because of the large VRX position: http://www.wsj.com/articles/two-of-five-independent-directors-of-sequoia-fund-valeants-largest-shareholder-resign-1446141695

[mcmaaaaath]

I'd love to know what % of Valeant's sales flow through a pharmacy in which they had any: actual ownership, option to purchase, profit sharing agreement, ability to influence or appoint management, etc.

 

They went through this in detail on the call (not the ownership option but a breakdown of sales channels). You seem to assume all sales go through pharmacies, which is not true.

 

They were asked but were you really satsified with the answer? I thought it was BS. The question was-- of the 50% of your US business that is NOT sold to wholesalers, what % is specialty pharmacy and what % is physician dispensary?

 

Here was the answer:

 

- Tanya Carro>: Sure. So, part of that difference is going to be the non or ex-businesses that we have in the U.S.,

which would include consumer, that is sold mostly directly to retailers. Then you have the contact lens and surgical

business, which go through different distributors for the contact lenses. The dental business, which is going to answer

another one of your question, that's the majority of the difference between the 5.9% and the 7.2%. We have a program

there where the Arestin products goes through a specialty pharmacy, ESI. Then, the – yes, those are all of the major

other buckets

[valueyoda]

I think that it is now almost certain that Valeant will cut off Philidor now that CVS has stopped ordering through it. Ironically, it will also remove one of the biggest hangovers if Valeant moves to plan B.

[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.

 

I'm absolutely not saying they should do it (unless someone offers them a crazy multiple, and then you have to consider it). The thought experiment was just to put the debt in perspective and show how much value there is in the assets, most of which are now worth a lot more than what was paid for them originally. I always hear about how the company has so much debt, but in relation to the likely market value of the assets, it's not that much.

 

yeah i understood your point about debt and largely agree under normal circumstances. but consider that this would be an awful time for vrx to sell anything considering the uncertainty about so many things. would not get a fair price. it's probably why they stopped the spin off sale of bad co. this is something vrx is just going to have to gut out. debt is the primary concern, along with increased transparency, for most potential and current shareholders, and I expect vrx to come out publicly with a stronger statement about quicker pay down. the letter was a pointed message from largest shareholder to CEO. delever.

[APG12]

I'm still thinking about it as well, I am not totally convinced. If you have chance to give it more thought, I would appreciate your view in due course.

 

Did you see what I'm saying? I don't think the way you're looking at it makes sense. The interest expense of an option is the price you're paying to borrow a portion of the common stock. It doesn't matter what the common does- you still paid the interest expense. If earnings go up 20% a year, the common will participate just like the option will. You still paid the interest expense to borrow it.

[ERICOPOLY]

Why did a short sale restriction go into effect today at 12:39 as reported by my IB Trader Workstation?

[undervalued]

CVS Terminates Philidor, Valeant Partner Pharmacy, From Network

 

http://www.bloomberg.com/news/articles/2015-10-29/cvs-terminates-philidor-valeant-partner-pharmacy-from-network

[fareastwarriors]

Maybe I missed this (?) but two Sequoia directors of the board resigned during the weekend - according to WSJ because of the large VRX position: http://www.wsj.com/articles/two-of-five-independent-directors-of-sequoia-fund-valeants-largest-shareholder-resign-1446141695

 

Wow...

[ERICOPOLY]

I'm still thinking about it as well, I am not totally convinced. If you have chance to give it more thought, I would appreciate your view in due course.

 

Sorry, I was being lazy.

 

Okay, so I've already compared VRX with BAC, and concluded that VRX if anything looks better.  BAC at $5 was really just a 15% earnings yield that effectively grew earnings at 20% a year for 4 years and maybe 5.  VRX is looking like the same or better.

 

Incidentally, back when BAC was just a $5 stock, the at-the-money $5 strike 2014 BAC puts were going for $2 each, or 40% of at-the-money strike price.

 

2018 VRX puts today are also roughly 40% of at-the-money strike price.

 

Somebody who bought those at $2 could be rolling to today's $5 strike for just pennies.  So while it's expensive non-recourse leverage in year 1 and year 2, if the stock is really high in the future it will similarly be extremely cheap to continue to roll those $110 strike VRX puts along.

[tylerdurden]

Anyone knows whether these two Sequoia directors were somewhat related to the Valeant investment? Were they responsible from the fund's investment in the company or overseeing the investment? WSJ is implying that relationship but there is nothing obvious in the article....

[gr33ngi4nt]

CVS Terminates Philidor, Valeant Partner Pharmacy, From Network

 

http://www.bloomberg.com/news/articles/2015-10-29/cvs-terminates-philidor-valeant-partner-pharmacy-from-network

 

Got a Factset headline saying "Express Scripts (ESRX) in process of terminating Philidor from its network, looking at other pharmacies with Valeant relationship. - Tweet by @CNBCnow"

 

They articles also cite a statement from CVS. I can't find the actual statement on the company website or edgar. Anyone else find the actual press release?

[scorpioncapital]

Anyone knows whether these two Sequoia directors were somewhat related to the Valeant investment? Were they responsible from the fund's investment in the company or overseeing the investment? WSJ is implying that relationship but there is nothing obvious in the article....

 

Didn't the article say they resigned because they disagreed with the large position size of Valeant in the portfolio? That's what I read anyway...

 

 

[Guest roark33]

I think you have to assume that VRX will terminate its relationship with Philidor now.  With CVS and Caremark out, no reason to keep them around.  Write-off the 100m, maybe claw it back and move on...

[ourkid8]

Express Scripts is now dropping Philidor so we can definitely assume they won't be exercising their option to buy the company for $0. 

 

http://www.marketwatch.com/story/express-scripts-drops-philidor-follows-similar-move-by-cvs-2015-10-29?siteid=yhoof2

 

I think you have to assume that VRX will terminate its relationship with Philidor now.  With CVS and Caremark out, no reason to keep them around.  Write-off the 100m, maybe claw it back and move on...