ERICOPOLY Posted October 30, 2015 Share Posted October 30, 2015 Is volume discounting a possibility? Like if there is growth for a new expensive product and volumes are going up, the discount to WAC would be higher? Maybe I'm reaching, but looking to see if there is more than one possible reason. Do you think there are other possibilities? There was that memo to employees about how the strategy is volume over pricing or something like that. Do I remember wrong? Link to comment Share on other sites More sharing options...
original mungerville Posted October 30, 2015 Share Posted October 30, 2015 I increased my position today. Link to comment Share on other sites More sharing options...
lessthaniv Posted October 30, 2015 Share Posted October 30, 2015 on the Ackman slide deck he references specialty pharma in aggregate is 7.2% of Revenue. Phillidor is 5.9% of the total. Link to comment Share on other sites More sharing options...
original mungerville Posted October 30, 2015 Share Posted October 30, 2015 Those numbers were more or less disclosed but good reminder. Link to comment Share on other sites More sharing options...
tylerdurden Posted October 30, 2015 Share Posted October 30, 2015 So I can go along with the premise that VRX possibly won't be penalized very harshly for their mistakes here. Personally I think the variety of outcomes is pretty wide in terms of fines, punishments, pushback from insurers etc. But... for people to take Valeant management at its word that they were unaware of the activities at Phillador weren't Kosher is absolutely laughable. The only reason to structure the acquisition in that manner -- pay 100% in cash and have an option to buy for $0 is that you want to legally protect yourself from something you know is wrong. I mean, seriously. +1 I think Bill Ackman tried to answer this issue at the call. Couldn't hear all the details but his argument was VRX didn't know the pharmacy business as much, especially from a regulatory issues standpoint and didn't have the resources to allocate for that purpose so they structured the deal this way bcs of that. I think he is just admitting your point in a much more company friendly way of course... Link to comment Share on other sites More sharing options...
original mungerville Posted October 30, 2015 Share Posted October 30, 2015 New key info: Ackman talked to Howard Shiller (former CFO and current board member) on why they structured philidor transaction the way they did: - channel was original a test, started working well - philidor biz was growing quite substantially - philidor wanted to expand with other pharma manufacturers - Valeant wanted philidor to focus on Valeant products, also thought it would hurt service - Valeant wanted to pay for exclusivity, philidor wanted lots of $$ for that - price for exclusivity started to converge with price to buy the whole biz - Valeant did not understand the speciality pharma biz with licenses in over 40 states and could not get good legal advice on a deal - they understood their biz well, but did not feel comfortable buying Philidor outright - as such, structured the option to purchase deal (rather than buy Philidor outright) Also, Ackman in Q&A just said would need approval in 45 states if they were to buy philidor outright, so easier to set-up option to buy with 133 million payout for performance. Link to comment Share on other sites More sharing options...
tylerdurden Posted October 30, 2015 Share Posted October 30, 2015 New key info: Ackman talked to Howard Shiller (former CFO and current board member) on why they structured philidor transaction the way they did: - channel was original a test, started working well - philidor biz was growing quite substantially - philidor wanted to expand with other pharma manufacturers - Valeant wanted philidor to focus on Valeant products, also thought it would hurt service - Valeant wanted to pay for exclusivity, philidor wanted lots of $$ for that - price for exclusivity started to converge with price to buy the whole biz - Valeant did not understand the speciality pharma biz with licenses in over 40 states and could not get good legal advice on a deal - they understood their biz well, but did not feel comfortable buying Philidor outright - as such, structured the option to purchase deal (rather than buy Philidor outright) Also, Ackman in Q&A just said would need approval in 45 states if they were to buy philidor outright, so easier to set-up option to buy with 133 million payout for performance. I think that's his best guess. Not all the things he is saying are facts obviously. He is giving lots of his best guesses in terms of the VRX's motives etc. He doesn't have all the facts obviously even if he had contacts w/ the company... Link to comment Share on other sites More sharing options...
AzCactus Posted October 30, 2015 Share Posted October 30, 2015 So I'm a casual observer for now and will stay that way indefinitely. Further, while someone else buying stock is never a substitute for thinking on your own and doing your own research, I find the following very interesting: 1. If you take the combined investment records of Bill Ackman, Lou Simpson, Glenn Greenberg, Sequoia and Jeffrey Ubben you would have a record that is FAR above average. 2. Combined these guys own ~15% of the company---although this may well have changed since their most recent 13f filing. 3. VRX averaged out to be about a 25% holding of entire portfolio as of 6/30. This has obviously dropped unless they have been adding aggressively. So whats the point? While it is a possible that these five investors with extraordinary long term track records are wrong, the probability does not appear too high. I just found this interesting. Link to comment Share on other sites More sharing options...
Ham Hockers Posted October 30, 2015 Share Posted October 30, 2015 So I'm a casual observer for now and will stay that way indefinitely. Further, while someone else buying stock is never a substitute for thinking on your own and doing your own research, I find the following very interesting: 1. If you take the combined investment records of Bill Ackman, Lou Simpson, Glenn Greenberg, Sequoia and Jeffrey Ubben you would have a record that is FAR above average. 2. Combined these guys own ~15% of the company---although this may well have changed since their most recent 13f filing. 3. VRX averaged out to be about a 25% holding of entire portfolio as of 6/30. This has obviously dropped unless they have been adding aggressively. So whats the point? While it is a possible that these five investors with extraordinary long term track records are wrong, the probability does not appear too high. I just found this interesting. I'm not sure that's how probability works Link to comment Share on other sites More sharing options...
AzCactus Posted October 30, 2015 Share Posted October 30, 2015 Ham---care to give me an example where five investors with track records like these guys and holdings (on a % basis) so large have all been wrong about the same stock ? Link to comment Share on other sites More sharing options...
Bagehot Posted October 30, 2015 Share Posted October 30, 2015 They get to buy their inventory at a lower price. Gross to net went from 32% last Q to 41% this Q. That's a very large move in one quarter, especially for a business that is as diversified as VRX. Salix went from decreasing gross to net last Q (ie being sold at a smaller than 32% discount to WAC) to increasing gross to net this Q. It is quite fishy and another in a fairly long line of instances where Mike Pearon's words on the earnings call deviate from the language in SEC documents. So, you are getting quite bearish. Reading your previous posts, I was under the impression you thought there was no fraud at VRX. Maybe I interpreted them the wrong way… And if it is so, simply forget my question! Instead, if my impression was right, what made you change your mind? Q3 results and the trend gross to net you don’t like? Thank you! Gio I don't think there is any fraud, nothing Enron-like anyway. I do think that based on the large increase in gross to net, the business model seemed to be under pressure last Q and that is before Valeant was under the spotlight by every PBM in the free world. Sequentially, gross sales increased 18%, while actual realized revenue (net sales...the GAAP revenue VRX reports) increased 2%. To me that looks a lot like the Red Queen running harder and harder to stay in the same place. My view is that the stock probably has 40-60% upside if there are no other shoes to drop. Lets say they get dinged 10% on next year's $16 EPS from all of this (and assuming that everyone is going to continue accepting "Cash EPS" given that Adjusted CFFO has diverged further away from Cash EPS since Shiller left, looks like it will be close to 80% than the stated goal of 90% for 2015), then you've got ~$14.50. 10-11x this is $145-$160. 10-11x is probably on the high end for a highly leveraged HC co with multiple ongoing investigations, but if there's really nothing wrong and VRX doesn't miss a beat, then it is too low. Then I think there is always the possibility that there are other things like Philidor that haven't been disclosed. I hate slippery slope arguments, but when management is essentially saying "trust me" and they've shown that they are somewhat difficult to trust, it's just hard for me to get comfortable. Long story short: this one went in the "too hard" pile for me when faced with subpoenas and the fact that I couldn't get coherent answers on the R&O suit (among numerous other things over the >2 years owned) from management. I think management has been very creative in sustaining sales growth in their "durable off patent portfolio" and I now have significantly lower confidence in that piece of the business to be sustainable over time. Salix/B+L will be fine, but if the rest of the business is materially impaired, then the current price is too high--here's a good exercise: lets say Salix and B+L are now worth 2x what VRX paid, or ~$24B*2=$48B-$30B of debt=$18B/350 shs=$51/sh. Those two businesses are ~45% of next year's revenue. What's the other 55% of the business worth? Hope this is helpful color on my thought process, and good luck! Link to comment Share on other sites More sharing options...
merkhet Posted October 30, 2015 Share Posted October 30, 2015 I'm sure that's perfectly clear to an adult, but I don't grasp what you are saying. Also, pretend that I know what you are saying and that I agree it's fishy. How does this benefit Pearson? How does he personally cash in on this sort of thing? The police when they suspect foul play start thinking if somebody has a motive. What is Pearson's? Well, one way that could work is that by pulling forward demand to current quarters and showing higher short-term growth, you can increase the value of the acquisition currency (i.e. the stock). This could allow for you to make more acquisitions and/or get a better deal for your acquisitions than you otherwise would have gotten -- thereby leaving you better off than had you not done it. Ham---care to give me an example where five investors with track records like these guys and holdings (on a % basis) so large have all been wrong about the same stock ? I think the implication is that the probabilities are not necessarily independent. While we would like to think that everyone came to their investment decision on Valeant completely on their own, it's possible that the investors were subtly affected by the fact that there were other very smart people in this investment. Link to comment Share on other sites More sharing options...
Ham Hockers Posted October 30, 2015 Share Posted October 30, 2015 Ham---care to give me an example where five investors with track records like these guys and holdings (on a % basis) so large have all been wrong about the same stock ? I think the implication is that the probabilities are not necessarily independent. While we would like to think that everyone came to their investment decision on Valeant completely on their own, it's possible that the investors were subtly affected by the fact that there were other very smart people in this investment. Yes, this. But also, even if they did all their work independently, if one of them is wrong, ALL of them are wrong. This is not a situation where coming up tails 5 times in a row is more unlikely than flipping tails once. Link to comment Share on other sites More sharing options...
lessthaniv Posted October 30, 2015 Share Posted October 30, 2015 http://i728.photobucket.com/albums/ww289/MikeNCathy/valeant_zpskuhf2scx.png Link to comment Share on other sites More sharing options...
Bagehot Posted October 30, 2015 Share Posted October 30, 2015 Regarding the Salix channel-stuffing accusation... You are Pearson and you can't sell your shares. But there are rewards if it can be proven that an acquisition is working out well within a year right? The channel-stuffing can't be done through a consolidated entity like Philidor, so they would have to be getting third-party entities to agree to buy the product, correct? So if those third parties can't unload the huge new inventory on the customer, it merely robs from the next quarter's demand for Salix products. So what is the incentive for Pearson to run the company on a quarterly channel-stuffing basis -- and again doesn't he need a complicit third-party that agrees to buy a lot of inventory exactly when it suits Pearson's quarterly numbers? What do the third party pharmacies get out of it by helping out with the quarterly pumping? They get to buy their inventory at a lower price. Gross to net went from 32% last Q to 41% this Q. That's a very large move in one quarter, especially for a business that is as diversified as VRX. Salix went from decreasing gross to net last Q (ie being sold at a smaller than 32% discount to WAC) to increasing gross to net this Q. It is quite fishy and another in a fairly long line of instances where Mike Pearon's words on the earnings call deviate from the language in SEC documents. I'm sure that's perfectly clear to an adult, but I don't grasp what you are saying. Also, pretend that I know what you are saying and that I agree it's fishy. How does this benefit Pearson? How does he personally cash in on this sort of thing? The police when they suspect foul play start thinking if somebody has a motive. What is Pearson's? Eric, my apologies, I edited my original post to include thoughts on that probably as you were posting this. Here's what I said: Pearson may not get anything from it. One thing that the 2008 crisis taught me (and I've heard Alan Greenspan say this too) is that economic actors don't always act rationally. It made no sense from a long-term economic wellbeing perspective for any of the banks to gorge on CDOs. But they did. It made no sense for Rajat Gupta to tip off Rajaratnam. But he did. Etc, etc, etc. Or Pearson may have thought his equity was overvalued at >$200 and since his compensation is at this point entirely dependent on the stock price he was hoping to paper over a bad quarter and make it up in the future. Jensen wrote a good paper on this, "The Agency Costs of Overvalued Equity" about 10 years ago. To be clear, I don't think Valeant is a fraud, I owned the stock for over two years. However over time, based on my analysis of SEC docs, management statements, and my conversations with the company, I've come to believe that management plays very close to the line in multiple respects and they often give, at best, evasive answers that if you squint could be viewed as dishonest. So I ultimately decided there are better ways to make money than with a management team I don't fully trust, that is currently in receipt of three subpoenas, that appears to have known that Philidor was going to be very very aggressive and so came up with a cute structure to garner economic exposure without legal obligation, etc, etc, etc. Link to comment Share on other sites More sharing options...
tylerdurden Posted October 30, 2015 Share Posted October 30, 2015 Did you guys see this? Definitely need more popcorn... $VRX has a better chance of going to 0 than $HLF EVER will. Citron to update full story on Monday. Dirtier than anyone has reported!! — Citron Research (@CitronResearch) October 30, 2015 Link to comment Share on other sites More sharing options...
giofranchi Posted October 30, 2015 Author Share Posted October 30, 2015 Hope this is helpful color on my thought process, and good luck! Yes! Very clear! Thank you. Gio Link to comment Share on other sites More sharing options...
berkshiremystery Posted October 30, 2015 Share Posted October 30, 2015 Bill Ackman is comparing VRX to the Amex scandal in 1960s in order to "show" the value in VRX today. Bring it all Bill! I haven't eating anything today, yet,... but don't make me hungry with your Amex scandal remarks. Valeant might look like a delicious lunch,... :P But I assume a buyer should eat slowly. I'm still only looking at this lunch plate. :) Link to comment Share on other sites More sharing options...
feynmanresearch Posted October 30, 2015 Share Posted October 30, 2015 It looks like the market isn't buying whatever Bill is trying to sell Link to comment Share on other sites More sharing options...
rishig Posted October 30, 2015 Share Posted October 30, 2015 Bill Ackman is comparing VRX to the Amex scandal in 1960s in order to "show" the value in VRX today. Bring it all Bill! I haven't eating anything today, yet,... but don't make me hungry with your Amex scandal remarks. Valeant might look like a delicious lunch,... :P But I assume a buyer should eat slowly. I'm still only looking at this lunch plate :) All the usual buyers that would take a position at times like these are not going to act. All of them already have a very large position. In the short term, the stock price is a voting machine, and the voters that would vote for Valeant as long are staying home. In my opinion, its prudent to keep a small position, keeping room to average down. Link to comment Share on other sites More sharing options...
feynmanresearch Posted October 30, 2015 Share Posted October 30, 2015 Bill Ackman is comparing VRX to the Amex scandal in 1960s in order to "show" the value in VRX today. Bring it all Bill! I haven't eating anything today, yet,... but don't make me hungry with your Amex scandal remarks. Valeant might look like a delicious lunch,... :P But I assume a buyer should eat slowly. I'm still only looking at this lunch plate :) All the usual buyers that would take a position at times like these are not going to act. All of them already have a very large position. In the short term, the stock price is a voting machine, and the voters that would vote for Valeant as long are staying home. In my opinion, its prudent to keep a small position, keeping room to average down. You mean their position has been slowly decimated and they are afraid of doubling down? Link to comment Share on other sites More sharing options...
ERICOPOLY Posted October 30, 2015 Share Posted October 30, 2015 However over time, based on my analysis of SEC docs, management statements, and my conversations with the company, I've come to believe that management plays very close to the line in multiple respects and they often give, at best, evasive answers that if you squint could be viewed as dishonest. So I ultimately decided there are better ways to make money than with a management team I don't fully trust, that is currently in receipt of three subpoenas, that appears to have known that Philidor was going to be very very aggressive and so came up with a cute structure to garner economic exposure without legal obligation, etc, etc, etc. Can't argue with that. I have a hard time trusting them after this -- they look like they knew exactly what was going on yet they didn't put it on the slides they made for people like you and me. They thought they would grow revenue a bit faster via Philidor and hide how they did it because they didn't want the stock to put a multiple on their sleezy method. Philidor is going to leave an ugly scar on their hands. I'm nervous at what we'd see if they rolled up their sleeves. Link to comment Share on other sites More sharing options...
plato1976 Posted October 30, 2015 Share Posted October 30, 2015 I am not sure if those financial analogy is relevant here, b/c as far as I know the executives of those financial companies pocketed huge amount of money from annual bonus etc by doing so and leave the loss to US tax payers. VRX is a different story, esp. considering how the CEO's pay is structured Regarding the Salix channel-stuffing accusation... You are Pearson and you can't sell your shares. But there are rewards if it can be proven that an acquisition is working out well within a year right? The channel-stuffing can't be done through a consolidated entity like Philidor, so they would have to be getting third-party entities to agree to buy the product, correct? So if those third parties can't unload the huge new inventory on the customer, it merely robs from the next quarter's demand for Salix products. So what is the incentive for Pearson to run the company on a quarterly channel-stuffing basis -- and again doesn't he need a complicit third-party that agrees to buy a lot of inventory exactly when it suits Pearson's quarterly numbers? What do the third party pharmacies get out of it by helping out with the quarterly pumping? They get to buy their inventory at a lower price. Gross to net went from 32% last Q to 41% this Q. That's a very large move in one quarter, especially for a business that is as diversified as VRX. Salix went from decreasing gross to net last Q (ie being sold at a smaller than 32% discount to WAC) to increasing gross to net this Q. It is quite fishy and another in a fairly long line of instances where Mike Pearon's words on the earnings call deviate from the language in SEC documents. I'm sure that's perfectly clear to an adult, but I don't grasp what you are saying. Also, pretend that I know what you are saying and that I agree it's fishy. How does this benefit Pearson? How does he personally cash in on this sort of thing? The police when they suspect foul play start thinking if somebody has a motive. What is Pearson's? Eric, my apologies, I edited my original post to include thoughts on that probably as you were posting this. Here's what I said: Pearson may not get anything from it. One thing that the 2008 crisis taught me (and I've heard Alan Greenspan say this too) is that economic actors don't always act rationally. It made no sense from a long-term economic wellbeing perspective for any of the banks to gorge on CDOs. But they did. It made no sense for Rajat Gupta to tip off Rajaratnam. But he did. Etc, etc, etc. Or Pearson may have thought his equity was overvalued at >$200 and since his compensation is at this point entirely dependent on the stock price he was hoping to paper over a bad quarter and make it up in the future. Jensen wrote a good paper on this, "The Agency Costs of Overvalued Equity" about 10 years ago. To be clear, I don't think Valeant is a fraud, I owned the stock for over two years. However over time, based on my analysis of SEC docs, management statements, and my conversations with the company, I've come to believe that management plays very close to the line in multiple respects and they often give, at best, evasive answers that if you squint could be viewed as dishonest. So I ultimately decided there are better ways to make money than with a management team I don't fully trust, that is currently in receipt of three subpoenas, that appears to have known that Philidor was going to be very very aggressive and so came up with a cute structure to garner economic exposure without legal obligation, etc, etc, etc. Link to comment Share on other sites More sharing options...
feynmanresearch Posted October 30, 2015 Share Posted October 30, 2015 However over time, based on my analysis of SEC docs, management statements, and my conversations with the company, I've come to believe that management plays very close to the line in multiple respects and they often give, at best, evasive answers that if you squint could be viewed as dishonest. So I ultimately decided there are better ways to make money than with a management team I don't fully trust, that is currently in receipt of three subpoenas, that appears to have known that Philidor was going to be very very aggressive and so came up with a cute structure to garner economic exposure without legal obligation, etc, etc, etc. Can't argue with that. I have a hard time trusting them after this -- they look like they knew exactly what was going on yet they didn't put it on the slides they made for people like you and me. They thought they would grow revenue a bit faster via Philidor and hide how they did it because they didn't want the stock to put a multiple on their sleezy method. Philidor is going to leave an ugly scar on their hands. I'm nervous at what we'd see if they rolled up their sleeves. Bingo Link to comment Share on other sites More sharing options...
plato1976 Posted October 30, 2015 Share Posted October 30, 2015 Eric did you sell out your positions? However over time, based on my analysis of SEC docs, management statements, and my conversations with the company, I've come to believe that management plays very close to the line in multiple respects and they often give, at best, evasive answers that if you squint could be viewed as dishonest. So I ultimately decided there are better ways to make money than with a management team I don't fully trust, that is currently in receipt of three subpoenas, that appears to have known that Philidor was going to be very very aggressive and so came up with a cute structure to garner economic exposure without legal obligation, etc, etc, etc. Can't argue with that. I have a hard time trusting them after this -- they look like they knew exactly what was going on yet they didn't put it on the slides they made for people like you and me. They thought they would grow revenue a bit faster via Philidor and hide how they did it because they didn't want the stock to put a multiple on their sleezy method. Philidor is going to leave an ugly scar on their hands. I'm nervous at what we'd see if they rolled up their sleeves. Link to comment Share on other sites More sharing options...
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