VRX - Valeant Pharmaceuticals International Inc.

[ZenaidaMacroura]

Well if history is any guide with the HLF saga the stock will go down when Ackman gives his pitch.  I'm pretty sure Ackman is going to push for a seat on the board or something.  After he's done smashing his Bloomberg terminal.  You can't do this to Baby Buffett!

 

Honestly, I should have just gone long popcorn stocks.  This whole thing has become ridiculous....

 

http://images.forbes.com/media/2015/05/05/0505_forbes-cover-global-2000-ackman-052515_1000x1307.jpg

He was short HLF though.  It's funny Ackman's smoking gun comment did nothing while Citrons precipitated a huge spill (may not have been the report that caused the drop just milking the comparison).  Who would have thought Andrew Left influence VRX's mammoth market cap more so than Ackman could move little HLF.

 

That said I was joking with another forum member a few days ago that since Ackman wants so badly to model Buffett he should deliver the "Lose a shred of reputation for the firm, and I will be ruthless.”  quote, displacing Pearson as CEO and Chairmen. 

 

I was joking at the time but i think the probability has increased to 1% or so  :D

[rishig]

Sum of parts, it is worth some discount to what they paid for these large acquisitions. Total spent on acquisitions is roughly $40 billion. Market cap seems to be going in the direction where it is at discount to this number.

 

ummmm... if you think it is worth less than total spent on acquisitions, you should be massively short, not long. They have $30B of debt. It's at a $62B EV and still implies value creation. 

 

No position, but felt the need to point out the apparent inconsistency.

 

I said in worst case they would sell all the pieces, and yes, in that case it would be worth 1/4th of what it is today. Thanks for pointing that out - it was unclear in my original comment. Hence, I have a very small position.

 

Why is it only worth 2.5x 2016 FCF?

 

Question - if Valeant paid $40 billion for acquiring all these companies - what makes us think that the old owners sold these assets for anything less than fair value based on the economics they derived from these assets ? Now let's say the worst case outcome is that the economics of these assets revert back to what they were like in the hands of the old owners. In that case, the fair price of the asset in the hands of Valeant is also $40b. Subtract $30B for debt, and that's what you get.

 

Now, I don't think that the assets are worth in the hands of Valeant the same as in the hands of the old owners. I am just saying that's the worst case. Valeant's SG&A is the lowest in the industry. R&D is low. Taxes are low. So, one of the levers they can pull - price hikes - is gone. Another lever of volume growth is gone and it may decline from this high base. SG&A, R&D, and tax savings will most likely stay. And I think they will stay even if Pearson gets thrown out (if - don't know how likely that is).

[ourkid8]

Let's not go crazy here, price hikes are not gone however EXTREME price hikes are.  If you start slowly hiking the price over numerous years, you will fly under the radar. 

[rishig]

Let's not go crazy here, price hikes are not gone however EXTREME price hikes are.  If you start slowly hiking the price over numerous years, you will fly under the radar.

 

Fly under radar? There are quite clearly on the radar of the two PBMs - the entity that is paying for all the drugs on behalf of the private insurers. It's too late to be under the radar.

[Picasso]

They were outbid on Salix by Endo so there's probably some demand for that even though Allergan passed on it.  Their offer for Actavis ended up worth a heck of a lot today (AGN).  B+L is probably worth around $20 billion if someone used the same cost and tax structure.

 

The thing is, Valeant earns a heck of a lot more cash relative to another business with the same asset.  It's worth a lot more to VRX shareholders because of the levered cash returns on the lowest cost and tax structure.  So it's not a simple they paid X so it's worth at least X to someone else.

[rishig]

Let's not go crazy here, price hikes are not gone however EXTREME price hikes are.  If you start slowly hiking the price over numerous years, you will fly under the radar.

 

Fly under radar? There are quite clearly on the radar of the two PBMs - the entity that is paying for all the drugs on behalf of the private insurers. It's too late to be under the radar.

 

Remember, once you have upset the PBMs, they can replace your drug with an alternate one that is at a lower price point (through formulary changes). You don't get a second chance. What % of Valeant's generic drugs rely on reimbursement from private insurer. What % of these have no alternate? That is the % where Valeant can slowly hike prices. The rest - they can't do much.

 

[rishig]

They were outbid on Salix by Endo so there's probably some demand for that even though Allergan passed on it.  Their offer for Actavis ended up worth a heck of a lot today (AGN).  B+L is probably worth around $20 billion if someone used the same cost and tax structure.

 

The thing is, Valeant earns a heck of a lot more cash relative to another business with the same asset.  It's worth a lot more to VRX shareholders because of the levered cash returns on the lowest cost and tax structure.  So it's not a simple they paid X so it's worth at least X to someone else.

 

That is quite close to what I said. In the hands of VRX, these assets are worth more.

 

I was just pointing out if all hell breaks lose - what happens.

[ERICOPOLY]

Let me ask a stupid question:  why does any of that matter?  Under what reality would they consider breaking it all up and selling it back to their original owners when it's worth so much more to keep it together?

 

They're not going to avoid fines/settlements by breaking up.

 

[sswan11]

Pershing Square Capital Management, L.P.

 

Conference Call on Investment in Valeant Pharmaceuticals International, Inc.

Event Date: Friday, October 30, 2015

Event Time: 9:00am EDT; 13:00 GMT

 

US Toll-Free Participant Event Plus Dial-In Number: (844) 489-4527

Participant International Dial-In Number: (925) 418-7826

Conference ID 69916104

 

Questions for the call should be emailed to ir@persq.com.

 

Following the call, a replay of the event will be available by audio webcast until Friday, November 13, 2015 at midnight EST/Saturday, November 14, 2015 at 5:00am GMT.

[rishig]

Let me ask a stupid question:  why does any of that matter?  Under what reality would they consider breaking it all up and selling it back to their original owners when it's worth so much more to keep it together?

 

They're not going to avoid fines/settlements by breaking up.

 

They wouldn't. I feel good that ValueAct is still on the board. Remember I am long.

[cmlber]

The rest of the business is iffy and might reset to a much lower base without Philidor. For example, last Q Jublia was 40% of total US organic sales growth and 50% of sales went through Philidor. What is the true demand for Jublia without Philidor jamming the insurers? I don't know.

 

What is being talked about in the reports tonight shouldn't effect Jublia demand at all in the long run.  There is no generic for the product, so Philidor employees wouldn't have any reason to alter those scripts, the doctor gave the patient a prescription for Jublia so it cannot be substituted. 

 

Jublia is 25% of Philidor sales. 

[ERICOPOLY]

Forget exactly where, but I'm pretty sure I read that in management's 10%+ organic growth forecast for the rest of the decade they said it didn't rely that much on price increases.

 

I think the price increases were just one-time things where they felt like a product was underpriced at the time of acquisition.

 

So if there are no more acquisitions, there are no more huge price increases.  And if there are still acquisitions, there still may not be more huge price increases.  The didn't do it on every single acquisition, it's just that on certain occasions they did.

 

Like Buffett at Berkshire with See's Candies -- he and Munger saw that the owners were underpricing the product.  They could see a lot more revenue post-acquisition when they immediately raised prices.

 

But that's not his playbook with every acquisition that Berkshire made.

[sswan11]

Turning to the first concern about our business model, the majority of our portfolio will continue to deliver strong volume-based organic growth and is not dependent on price increases.

 

https://www.morningstar.com/news/benzinga/BenzBZW_5868511/update-valeant-chair-ceo-pearson-issues-letter-to-employees-brings-up-recent-decline-in-stock-price.print.html

[Picasso]

What do you guys think the probability is that some pissed off Philidor employees are making stuff up about using other pharmacy ID's and changing prescriptions?

 

If you read that Bloomberg article it's really just anecdotes.  The WSJ one actually had a printed copy of a manual that didn't really have anything that bad.

 

The PBM's saying Philidor didn't pass the audits is a bit strange.  Wouldn't that be obvious before? Isn't that the point of an audit?  it's not like they audited them yesterday.

 

Nevermind, Bloomberg says they have a document: 

 

An undated Philidor document obtained by Bloomberg provides a step-by-step guide on how to proceed when a prescription for Valeant dermatological creams and gels including Retin-A Micro and Vanos is rejected. Similar instructions for changing the DAW indication are supplied for patients who are paying in cash.

 

Actually the R&O lawsuit alleged Philidor using other pharmacy ID's.  I guess this would be another indication of that.

[ATLValue]

 

Like Buffett at Berkshire with See's Candies -- he and Munger saw that the owners were underpricing the product.  They could see a lot more revenue post-acquisition when they immediately raised prices.

 

 

Lol, did you really just compare VRX's price increases to expensive chocolate candy... this thread has reached a new low!

[feynmanresearch]

 

Like Buffett at Berkshire with See's Candies -- he and Munger saw that the owners were underpricing the product.  They could see a lot more revenue post-acquisition when they immediately raised prices.

 

 

Lol, did you really just compare VRX's price increases to expensive chocolate candy... this thread has reached a new low!

+1

[ERICOPOLY]

 

Like Buffett at Berkshire with See's Candies -- he and Munger saw that the owners were underpricing the product.  They could see a lot more revenue post-acquisition when they immediately raised prices.

 

 

Lol, did you really just compare VRX's price increases to expensive chocolate candy... this thread has reached a new low!

 

http://www.cookingwithcolor.com/chocolate/choc_drugs.htm

 

Chocolate contains small quantities of anandamide, an endogenous cannabinoid found in the brain.

 

Buffett was just preying on menopausal women who cannot do without their medication.

 

EPICATECHIN (FLAVENOID) --Flavonoids are naturally-occurring compounds found in plant-based foods that have been shown to have a number of health-benefiting properties including anti-inflammatory, anti-allergic, and anti-cancer activity.

 

Valeant jacked up the price of heart medication.  So did Buffett:

 

Dark chocolate is full of the flavonoids epicatechin and gallic acid, which are antioxidants that help protect blood vessels, promote cardiac health, and prevent cancer. It also has been effectively demonstrated to counteract mild hypertension.

[ourkid8]

For now and the optics of raising prices hundreds/thousands of percent is terrible yet NOT illegal.  I believe the senator was looking for all products in which they increased the price greater then 100%.  Now what VRX needs to ensure nothing is raised over 100%/year to stay under the radar ongoing. (Right now they have a serious PR issue)  I can guarantee you, management launched a full audit across the organization for additional cockroaches that can come up and they will be rectified.  At the end of all of this, we will have a stronger cleaner company however there will be short term pain. 

 

We all know there will be fines but like original mungerville mentioned and based on past fines, they should not be greater then $1B.(even if we tripple it)  Look at the marketcap which has been destroyed? It's crazy...

 

Let's not go crazy here, price hikes are not gone however EXTREME price hikes are.  If you start slowly hiking the price over numerous years, you will fly under the radar.

 

Fly under radar? There are quite clearly on the radar of the two PBMs - the entity that is paying for all the drugs on behalf of the private insurers. It's too late to be under the radar.

[ERICOPOLY]

So taking an abrupt cut to revenue with Philidor being dropped by CVS, etc...

 

They need to forget about buying back shares and instead retire debt pronto right?  I mean, they just got a lot more leveraged by the disappearing revenue, even if it's just mostly temporary (until they set up new relationships with third party specialty pharmacies where they can restore a % of their prior revenue).

 

Buybacks are just returning cash to shareholders when there is no better use for cash in the business.  It would seem that doesn't fit the current situation.  It isn't time to boost leverage by returning cash.  It's more likely a better time to reduce leverage by either holding the cash to stay liquid or pay down debt so the debt isn't so visible.

[cmlber]

For now and the optics of raising prices hundreds/thousands of percent is terrible yet NOT illegal.  I believe the senator was looking for all products in which they increased the price greater then 100%.  Now what VRX needs to ensure nothing is raised over 100%/year to stay under the radar ongoing. (Right now they have a serious PR issue)  I can guarantee you, management launched a full audit across the organization for additional cockroaches that can come up and they will be rectified.  At the end of all of this, we will have a stronger cleaner company however there will be short term pain. 

 

We all know there will be fines but like original mungerville mentioned and based on past fines, we should not be greater then $1B.(even if we tripple it)  Look at the marketcap which has been destroyed? It's crazy...

 

Let's not go crazy here, price hikes are not gone however EXTREME price hikes are.  If you start slowly hiking the price over numerous years, you will fly under the radar.

 

Fly under radar? There are quite clearly on the radar of the two PBMs - the entity that is paying for all the drugs on behalf of the private insurers. It's too late to be under the radar.

 

I don't even think it's clear that there will be any fines, even immaterial fines. 

 

First, it's unclear anything illegal was done.  Even the WSJ article saying Philidor employees were instructed to change prescriptions is unclear.  If the manual said "If a prescription does not say 'dispense as written', call the prescribing doctor and ask if they intended for the patient to receive the Valeant drug, if so, add 'dispense as written' to the prescription" there would be nothing wrong with altering the prescriptions in these cases.  It makes complete sense that this would be a step in the manual.  Crazier things have happened, but I have a hard time believing Philidor (with Valeant's blessing) had a written manual instructing employees to break the law. 

 

Second, even if Philidor did something illegal, Valeant has an excellent defense in the option structure.  The only way to pierce that would be for there to be hard evidence that Valeant employees engaged in fraud on behalf of Philidor.

 

[ourkid8]

I agree, Sequoia essentially told management they want them to reduce debt so that will be their #1 priority.  I still believe they can repurchase a small amount of stock at the same time especially at these prices however their priority should be reducing debt. 

 

" 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. " - Sequoia

 

So taking an abrupt cut to revenue with Philidor being dropped by CVS, etc...

 

They need to forget about buying back shares and instead retire debt pronto right?  I mean, they just got a lot more leveraged by the disappearing revenue, even if it's just mostly temporary (until they set up new relationships with third party specialty pharmacies where they can restore a % of their prior revenue).

 

Buybacks are just returning cash to shareholders when there is no better use for cash in the business.  It would seem that doesn't fit the current situation.  It isn't time to boost leverage by returning cash.  It's more likely a better time to reduce leverage by either holding the cash to stay liquid or pay down debt so the debt isn't so visible.

[ERICOPOLY]

So I'm going to adjust my model such that in the first year or two the EPS growth can't be as high as it was over the last year (even after adjusting for losing Philidor), because they are going to be allocating their incoming cash into relatively low return debt instead of high return acquisitions.

 

Sort of like how BAC made money for a while just to support their existence (retaining income capital to hit the new SIFI guidelines).

 

Or we could record a special one-time charge to next quarter's income in recognition that past reported income wasn't what it looked like due to needing to pay down the debt that supported those income levels.  That seems really popular.

 

It's kind of like they will be reporting earnings for a bit that aren't really earnings because those earnings can't be distributed. 

 

So that's worth a discount of some sort -- surely we're already there in spades though.

[ourkid8]

Eric, don't forget to also adjust your model to address compliance concerns as well which will also eat into FCF.  (Internal/external audits, remediation activities etc...)  They are costly however will ensure we have a stronger and sustainable company for the long term.  We definitely will not have any M&A for the next 6 months at a minimum.  (It would be an added bonus for them to slowly repurchase a small amount of stock at the current price which will provide a similar return such as a M&A however unlikely) 

 

So I'm going to adjust my model such that in the first year or two the growth can't be as high as it was over the last year, because they are going to be allocating their incoming cash into relatively low return debt.

[loganc]

With the $100 million option to buy Philador, there is an indemnification clause. If I remember correctly, the maximum Valeant is liable for is $25 or $35 million. Can anyone validate this from the presentation?

 

Philidor Said to Modify Prescriptions to Boost Valeant Sales

 

http://www.bloomberg.com/news/articles/2015-10-29/philidor-said-to-modify-prescriptions-to-boost-valeant-sales

 

What would happen to Valeant if Philidor is found guilty? Can Philidor take down Valeant?

 

Been gone from this thread for two weeks and a couple hundred pages, but the question in my view is not how much the legal liability might be for Philidor (and anyway, it's likely that if this stuff rises to the level of a criminal charge whatever veil VRX thinks it has will be pierced), the question is how much VRX can grow without Philidor. B+L/Salix/Consumer are good assets. The rest of the business is iffy and might reset to a much lower base without Philidor. For example, last Q Jublia was 40% of total US organic sales growth and 50% of sales went through Philidor. What is the true demand for Jublia without Philidor jamming the insurers? I don't know. It also looks for all the world like VRX stuffed the channel with Salix to make their 3Q numbers (check their $300M salix sales estimate on the 2Q call v actual salix sales of $450M in 3Q combined with Xifaxan scripts growing at only 15% sequentially and then go read the gross:net disclosure in the 10Q MD&A--as an aside it's hard for me not to see how exploding gross:nets are not indicative of a broader issue in the business, but that's not the real point here). At any rate, the risk runs much deeper than the size of the fine in my view.

 

Thanks for posting.

 

For what it is worth, I think it is a good idea to review Bagehot's posts about VRX, if you have or want to make an investment in VRX.  I believe Bagehot has made some of the highest quality posts since I have followed the thread.

 

It is unfortunate that his/her post has been buried because of all of the breaking news and subsequent chatter.

 

Good luck to all.

[CONeal]

So taking an abrupt cut to revenue with Philidor being dropped by CVS, etc...

 

 

I feel people should be paying more attention to this part.  I'm wondering how much it will cut and if a good chunk of it never comes back.  Let me explain.

 

As quoted from someone else the PBM's account for 53% of the US market.  If I read it correctly CVS is looking into 3 other pharmacies related to either Philidor or VRX.  If VRX figured out a way to get branded drugs pushed through where generics are available I can see where CVS starts looking at VRX drugs in the future more closely before filling.  Not only due to the increased scrutiny they are already under but generally company plans that you have to fill the generic version first if available otherwise the patient will be paying out of pocket.  If Philidor found a way around this (which from an outsiders view they may have) the will cut into their volume.

 

The Express Scripts statement is the one that has me raising my eyebrow a little more as they are looking into moving their pharmacy from a network to bringing it in house (the model Medco used, 2 distribution centers to take care of all Mail order scripts). Doing it this way Express Scripts will buy drugs in bulk and get very large discounts for the size the are buying.  If a generic is available they will push the generic hard bc the discounts to them makes it very profitable.  Since everything is in house, they have far greater control of what is distributed and will look for the profit margins first.  Drug companies use to get squeezed with this model bc if you remove a PBM as one of your suppliers their is a noticeable difference in revenues.  Now normally real speciality drugs with no alternative is not going to have an effect price wise. 

 

The reason I am bringing this up is a bulk of VRX drugs really "speciality drug".  I can see the PBM's squeezing them on price going forward if Philidor was used to help protect the drug price to 1 degree or another. 

 

Then again I maybe off my rocker.  But right now their is so much hand waving going on it's hard to see and get a feel for how PBM's and insurers are going to react to all this.  With them looking deep into the process with VRX they may find ways to save money intentially or not.