VRX - Valeant Pharmaceuticals International Inc.

[original mungerville]

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...

 

I agree, this could be a fair point.

[TonyG]

Regarding that Citron tweet, not taking anything away from the work that Andrew Left does, but how can people take this new piece of "research" on Monday seriously when everyone admits that he was initially wrong calling this company Enron and his first paper on Valeant is false?

[ERICOPOLY]

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.

 

I did.. 

 

I fear there is going to be another hidden special investment vehicle where they decided that disclosure was unnecessary due to it's relative size according to GAAP.  That seems to be the standard by which they hang their business practices and their duty to keep their shareholders informed as to what kind of business they own, so why would it be unlikely to hear them once again saying they had no obligation to disclose it? 

 

What's the point of doing research and reading the 10-Ks when you suspect these guys will hide anything they're not required to disclose?  We've caught them once already and it's been dirty.  These are very driven and creative people -- how do they spend their time?

 

This isn't like BAC where it's just a boring lending business.  VRX is using a lot of creativity to wring value out of things, and their creativity seems to know only one boundary -- what they are legally required to disclose and whether or not they can contain fallout from sleeze within a separate legal entity like Philidor.

 

Once and I've had enough even if there's potentially no legal liability on this one.

 

I hope my greed doesn't overcome my suspicions again.  Glad I have my locked up money with Sanjeev and Mohnish.

 

[ERICOPOLY]

Regarding that Citron tweet, not taking anything away from the work that Andrew Left does, but how can people take this new piece of "research" on Monday seriously when everyone admits that he was initially wrong calling this company Enron and his first paper on Valeant is false?

 

He found a hidden undisclosed pile of shit.  But technically, yes, his suspicions of what it was for were wrong.  He thought it was a channel stuffing thing and it wasn't.  But it didn't smell good and that's why it was hidden.

 

So has he dug up another hidden thing that technically he'll be wrong about?  And do you want to find out what it is this time?

[Guest Grey512]

Citron was just lucky. VRX turned out to be a good short but not for the reason Citron claimed.

 

I was short at various prices and admit that I too was lucky; my original reason for shorting was that I (in a nutshell) just thought that VRX was too levered and trading at too high a multiple of FCF. The Hillary/Shkreli noise helped but I would have shorted even without that (probably).

 

Still trying to think through what the right action is at the current price, keeping in mind what we know (and know that we don't know). Buy, sell, or the too-hard pile.

 

Bought ENDP and AGN in the noise. Keeping AGN (again, luck). Sold ENDP.

[original mungerville]

I hedged my position today, until end next week. Want to see what Citron comes up with on Monday.

 

If the stock moves up or down a lot, I gain. If it stays neutral next week, I lose a bit.

 

The big risks are 1) if its proven Pearson understood the details of the Philidor situation, and 2) if there is more of these types of situations out there which Citron is claiming they will reveal Monday. (If these are not proven, remaining risks are that other subsequent investigations uncover Philidor type issues.)

 

I don't think the risk of any of these is that high however Citron is claiming they will divulge one of them on Monday - so I figure I'll wait and see. Worst case, I lose a little upside if the stock moves up a lot Monday.

[ERICOPOLY]

I don't think Andrew Left was just lucky.

 

I think no matter what you're going to make money on the short side disclosing something that management has been hiding from the company owners. 

 

For those of you that gut this out, he has done you a service and not just because you might have got more shares at a lower price.  He's caught the deception early on before it grew to be far more costly for you.  Second, management might behave much better after this experience going forward.

[Picasso]

There was an interview with Pearson back in May where he went over the things they did for long-term shareholders and not managing earnings quarter to quarter.  But that is exactly what is going on here.  Whether it's the guidance they constantly have to give out/affirm or what Bagehot has pointed out to in the form of channel stuffing, or buying up Marathon to juice up short-term cash earnings, or the gain from the Pershing AGN investment being booked into operating income.  The reality doesn't match up to what he says even though he sounds really down to earth and convincing. 

 

If you listened to the Ackman call, that guy is completely trapped.  There is a fairly good chance he never sees his cost basis in VRX again and he's too emotionally involved to sell out.  He gave a pep rally to VRX employees for Pete's sake.  That's not a sign of a stock approaching capitulation or being undervalued.  And we haven't even seen any big holders sell out yet, but we know they can't buy anymore.  The two exits at Sequoia might pave the way for a material reduction in their sizing as clients begin to put additional pressure on their managers.

 

I laughed at Ackman mentioning that Sequoia has a full time Valeant analyst who does nothing but travel around and research the company.  Berkowitz did the same thing with Sears.  Do you really think a guy is going to uncover anything negative a company he covers which is his only job?  It'd put him out on the street.

 

There's still a lot of downward momentum here.  I think anyone taking a big position has some David Tepper sized brass balls.  Maybe take a long walk outside and evaluate whether this is the best use of your capital.  There's always the chance of a bad beat.

 

https://www.youtube.com/watch?v=aR52zv1GqBY

[berkshiremystery]

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?

 

They are all heavily concentrated at this,... and sure they are currently down, but I assume that the majority of them isn't selling,... they will hold on. Of course it will take some time to lift the fog. Not days, but months, til a year. I'm currently still just looking at this situation. I'm going real life eating, nothing done today. Beware,... Halloween is just around the corner.  ;)

[Guest Grey512]

One other thought: I think it is unproductive for this board to focus on Citron and Andrew Left. John Hempton at Bronte is attacking the main issues and asking questions in a more lucid, more detailed fashion. Hempton's line of questioning is harder to parry and harder to get comfortable with (if you are long VRX). Hempton was early in realizing that the real story here is potential for payor / insurance fraud (or at least blowback); this at the time when Citron was focused on accounting fraud and mis-spelling Philidor.

 

The mere fact that Ackman / VRX are making reference to Citron but fail to acknowledge Hempton and Hempton's questions is a little... disquieting. Could be an innocent reason for that (e.g. Ackman / VRX are still trawling through Hempton's frequent, long posts with massive word counts). But I am a bit of a skeptic and a miser. I think Ackman and VRX know full well that Hempton is harder to debate on the substance of the issues. Ignore and deflect.

[original mungerville]

I don't think Andrew Left was just lucky.

 

I think no matter what you're going to make money on the short side disclosing something that management has been hiding from the company owners. 

 

For those of you that gut this out, he has done you a service and not just because you might have got more shares at a lower price.  He's caught the deception early on before it grew to be far more costly for you.  Second, management might behave much better after this experience going forward.

 

By the way, Eric's point here is very important. Its one that I have held (Ackman as well): Management will behave much better after this experience going forward. Problem is if there are so many more cockroaches out there already (and which are uncovered), management won't get that chance in future.

 

Basically, if we were wrong on Pearson and being able to trust him, we made a big mistake. If we were generally right, the stock is great value here.

[longlake95]

per CNBC....seems odd that Ackman & Co. didn't know till recently that VRX had an option to buy Philador - kinda material considering Philador's important relationships with the CVS's of the world and the $100M they gave to Philador. Hmmm makes you wonder...doesn't pass the smell test.

 

 

[AzCactus]

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?

 

They are all heavily concentrated at this,... and sure they are currently down, but I assume that the majority of them isn't selling,... they will hold on. Of course it will take some time to lift the fog. Not days, but months, til a year. I'm currently still just looking at this situation. I'm going real life eating, nothing done today. Beware,... Halloween is just around the corner.  ;)

 

Correct me if I'm wrong but other than Ackman I believe the majority of "they" well known value investors (Simpson, Greenberg, Ubben) are actually still up on their position overall--obviously up a lot less than they were two months ago. 

[Guest Grey512]

If you listened to the Ackman call, that guy is completely trapped.

https://www.youtube.com/watch?v=aR52zv1GqBY

 

Both Ackman and Sequoia.

 

Non-zero probability of redemptions at the Sequoia Fund and Pershing Square.  ------> Selling pressure at VRX ------> VRX stock price far from hitting bottom (yet).

[original mungerville]

There was an interview with Pearson back in May where he went over the things they did for long-term shareholders and not managing earnings quarter to quarter.  But that is exactly what is going on here.  Whether it's the guidance they constantly have to give out/affirm or what Bagehot has pointed out to in the form of channel stuffing, or buying up Marathon to juice up short-term cash earnings, or the gain from the Pershing AGN investment being booked into operating income.  The reality doesn't match up to what he says even though he sounds really down to earth and convincing. 

 

If you listened to the Ackman call, that guy is completely trapped.  There is a fairly good chance he never sees his cost basis in VRX again and he's too emotionally involved to sell out.  He gave a pep rally to VRX employees for Pete's sake.  That's not a sign of a stock approaching capitulation or being undervalued.  And we haven't even seen any big holders sell out yet, but we know they can't buy anymore.  The two exits at Sequoia might pave the way for a material reduction in their sizing as clients begin to put additional pressure on their managers.

 

I laughed at Ackman mentioning that Sequoia has a full time Valeant analyst who does nothing but travel around and research the company.  Berkowitz did the same thing with Sears.  Do you really think a guy is going to uncover anything negative a company he covers which is his only job?  It'd put him out on the street.

 

There's still a lot of downward momentum here.  I think anyone taking a big position has some David Tepper sized brass balls.  Maybe take a long walk outside and evaluate whether this is the best use of your capital.  There's always the chance of a bad beat.

 

https://www.youtube.com/watch?v=aR52zv1GqBY

 

Not sure Marathon is a great example, or booking AGN profits into operating income. For the latter, they had to pay investment banking fees, etc, etc, which I assume came out of operating income because the deal did not close. Maybe I am wrong on that?

[original mungerville]

One other thought: I think it is unproductive for this board to focus on Citron and Andrew Left. John Hempton at Bronte is attacking the main issues and asking questions in a more lucid, more detailed fashion. Hempton's line of questioning is harder to parry and harder to get comfortable with (if you are long VRX). Hempton was early in realizing that the real story here is potential for payor / insurance fraud (or at least blowback); this at the time when Citron was focused on accounting fraud and mis-spelling Philidor.

 

The mere fact that Ackman / VRX are making reference to Citron but fail to acknowledge Hempton and Hempton's questions is a little... disquieting. Could be an innocent reason for that (e.g. Ackman / VRX are still trawling through Hempton's frequent, long posts with massive word counts). But I am a bit of a skeptic and a miser. I think Ackman and VRX know full well that Hempton is harder to debate on the substance of the issues. Ignore and deflect.

 

Ackman acknowledged Hempton's work on this is helpful but he said he disagrees with his general conclusions.

[Guest Grey512]

They are all heavily concentrated at this,... and sure they are currently down, but I assume that the majority of them isn't selling,... they will hold on.

 

Let's imagine (for a sec) that you are a PM at Sequoia, or you are Bill Ackman. You staked A LOT on VRX. Your entire reputation, your livelihood, the reputation of your firm, the pay of your employees (not to mention the capital and trust of your LPs) are riding on VRX. Psychologically, what is the easier path:

1) dig in your heels, get on your soapbox & defend (justify) your position in VRX?

Or

2) re-assess, acknowledge that the position is a lot more risky than you thought and you know a lot less about VRX than you initially believed, and sell (at least a portion of) your long position?

 

Also, institutional investors originally went long VRX not just because of the oft-quoted reasons (great capital allocator, great CEO, better mouse-trap, etc). Psychological biases such as greed (fear of missing out on getting in on a stock that's flying like a rocketship) and a desire to be "part of the club" (applies to HFs who invested in VRX later) do not suddenly disappear just because you become an institutional investor and make it to the big leagues.

[KCLarkin]

One other thought: I think it is unproductive for this board to focus on Citron and Andrew Left. John Hempton at Bronte is attacking the main issues and asking questions in a more lucid, more detailed fashion. Hempton's line of questioning is harder to parry and harder to get comfortable with (if you are long VRX). Hempton was early in realizing that the real story here is potential for payor / insurance fraud (or at least blowback); this at the time when Citron was focused on accounting fraud and mis-spelling Philidor.

 

The mere fact that Ackman / VRX are making reference to Citron but fail to acknowledge Hempton and Hempton's questions is a little... disquieting. Could be an innocent reason for that (e.g. Ackman / VRX are still trawling through Hempton's frequent, long posts with massive word counts). But I am a bit of a skeptic and a miser. I think Ackman and VRX know full well that Hempton is harder to debate on the substance of the issues. Ignore and defl ect.

 

If you listened to the end of Ackman's call, you would have heard him personally call out the good work of Hempton. This despite their animosity.

 

He said he liked Hempton's work but respectfully disagreed with his conclusions.

 

And last I checked, it was Andrew Left on all the financial news shows and newspapers spouting unsupported allegations. Hempton was quietly and fairly exploring the issues on his blog. I think he has generally served the longs well by helping uncover the facts.

 

One exception I take with Hempton, IIRC, he is trying to claim this is mail fraud. I doubt that is the road the DOJ takes.

 

---

Actually, Ackman even discussed AZ. Said he hadn't read that blog post and deferred to someone else on his team.

[original mungerville]

If you listened to the Ackman call, that guy is completely trapped.

https://www.youtube.com/watch?v=aR52zv1GqBY

 

Both Ackman and Sequoia.

 

Non-zero probability of redemptions at the Sequoia Fund and Pershing Square.  ------> Selling pressure at VRX ------> VRX stock price far from hitting bottom (yet).

 

No way unless more allegations come out which are likely true / or partially correct at least. Sequoia let two directors resign instead of reducing a position that was more than double the market value of the current position, so they aren't going to sell due to external pressures. Same for Ackman.

[original mungerville]

per CNBC....seems odd that Ackman & Co. didn't know till recently that VRX had an option to buy Philador - kinda material considering Philador's important relationships with the CVS's of the world and the $100M they gave to Philador. Hmmm makes you wonder...doesn't pass the smell test.

 

No, not odd - it was only $100M.

[ERICOPOLY]

Sequoia wrote a letter to sooth their shareholders and defended Philidor against the channel stuffing claims.  So they felt a need to tell their fundholders that Sequoia does not invest in any capital allocators that engage in criminal activity.

 

They are going to have to write a similar letter now explaining how the laws (most likely) broken at Philidor were just small and it's okay because we'll still get rich long term anyway even though we can't really trust these guys anymore the way we did when we took a position sizing reminiscent to our long term successful Berkshire Hathaway investment?  Man I love run-on sentences when I'm not getting graded on it!

 

So they will have to sell out a big chunk at the very least.  They don't have Buffett and Munger here running their new investment vehicle.  They've told their fundholders that they think Pearson is basically honest.  That opinion will now be out the window I think.

[tylerdurden]

I don't have any short/long positions and will not have any time soon. I agree with the folks who throw this to "too hard" pile.

 

A couple of random observations:

 

- To me, thinking that philidor issue will not have any business model implications would be a little bit naïve. Politicians, regulators, competitors, collaborators (pbms) etc. every actor will have extremely high sensitivity on anything related to VRX going forward. That would have some business/financial impact...

- Company Management's trustworthiness is highly questionable just because of the payment structure for Philidor alone.

- Citron guy is a little bit interesting person for sure and his research was definitely coming conclusions (enron like etc.) too easily with somewhat stupid arguments too (both managements' McKinsey backgrounds etc.!) but we have to admit he is the one who opened the Pandora's box unlike all the super famous, star hedge funds, wall street analysts etc. etc. so some credit is due to this guy and I'd be really curious to see what he comes up with on Monday.

- I am a little bit frustrated with a Bill Ackman, a guy who wanna be like Warren Buffett. I think this incident showed me actually how hard it is to over perform him not only in terms of pure returns perspective but also in terms of moral issues etc. I don't want to say this philidor mess is as bad as the salomon scandal as of now but still I'd have expected Ackman to be a little bit more critical in terms of the management. I guess after exposing yourself this much with 20% of your capital you need lots of courage to be really true to yourself and your investors.

[Guest Grey512]

 

If you listened to the end of Ackman's call, you would have heard him personally call out the good work of Hempton. This despite their animosity.

 

He said he liked Hempton's work but respectfully disagreed with his conclusions.

 

 

That's fair; I meant the ratio of air-time allocated to Citron Citron Citron vs Hempton, particularly by VRX and some other shareholders that have come out in force in the past 2 weeks to publicly declare their support for VRX and their scorn for Citron.

 

It also (IMO) behooves Ackman to go through Hempton's points in greater detail. Not to mention to read AZ's post personally, not allocate an analyst to do that (this is a 30% position for Pershing!).

[Picasso]

$2.3 billion in operating cash flows, including $397.5 million of cash proceeds representing the return on our investment in PS Fund 1

from the appreciation in the Allergan share price and our right to 15% of the net profits realized by Pershing Square on the sale of

Allergan shares. Refer to note 23 to the 2014 Financial Statements for additional information; and

 

So real CFFO was $1.9 billion in 2014.  Not sure how it makes sense to put it in CFFO unless they were going to do this with Ackman every year.  You don't want to pay 15x for that non-operating gain, that's like $6 billion of market value.

 

And Marathon has the impact of improving cash EPS massively in the short-term.  It dies off and again doesn't make a lot of sense to give it an overall multiple.

 

Anyway my point is they do a lot of things that appear to be attempts to "make the numbers."

[Guest Grey512]

If you listened to the Ackman call, that guy is completely trapped.

https://www.youtube.com/watch?v=aR52zv1GqBY

 

Both Ackman and Sequoia.

 

Non-zero probability of redemptions at the Sequoia Fund and Pershing Square.  ------> Selling pressure at VRX ------> VRX stock price far from hitting bottom (yet).

 

No way unless more allegations come out which are likely true / or partially correct at least. Sequoia let two directors resign instead of reducing a position that was more than double the market value of the current position, so they aren't going to sell due to external pressures. Same for Ackman.

 

I fully get that. What I mean is that Ackman & Sequoia may not get a choice. Redemptions are redemptions (nothwithstanding Ackman's PSH permanent vehicle, most of his capital is not permanent).