VRX - Valeant Pharmaceuticals International Inc.

[merkhet]

To me it seems that valueact is rushing out. During second quarter they sold almost 1/4 of their VRX position. It's going to be interesting to see how much they own now.

 

I was told they sold down for valuation reasons. That and they weren't comfortable with its sizing in the portfolio.

[ni-co]

In case anyone missed the Ackman call:

 

 

I missed the Q&A part of it, somehow got disconnected and i was not able to listen rest of it.

 

Is there recording somewhere? They say their website that "Replay of the conference call and materials will be made available on this page shortly. Thank you for your patience."

https://www.pscmevents.com/october-conference/

 

but no link. was it so bad ???

"

 

Here is the replay:

https://www.pscmevents.com/conference-call-webcast/

[doughishere]

What percentage of sales for vrx is philidor?

 

What does vrx clear per year?

 

Has anyone died? Seriously, has wildlife died? 

[Max Alpha]

I haven't done a deep dive on VRX admittedly, but I would be surprised if the damage will be neatly ringfenced inside Philidor revenues, even if that is where the issue stems from.

 

If they are being dragged over the coals, odds are they are going to take their foot off the accelerator in any areas across the business where they might be pushing the envelope a bit.

 

Scrutiny on their business will increase from all stakeholders.

[doughishere]

The question remains. Operating in uncertainty is the universe we live in. Since the dawn of man it's always been that way. Deal with it.  i ask again....

 

What percentage of sales for vrx is philidor?

 

What does vrx clear per year?

 

Has anyone died? Seriously, has wildlife died? Are we under attack by space aliens? Fuck the money, What's the actual damage? No one can explain that to me.

 

I've purposely stayed away from the mix today. What is the actual legitimate cost?  And don't give me some bullshit answer.

 

 

And who was the intern that snaped a photo of CNBC? Do us all a favor turn that off. That's Single A baseball. This is COBF bare minimum this should be the majors.

 

 

And as to accounting rules: so many folks want to know the rules are out there in the "business world" and think that it's rocket science... It's not. Use your intuition as if you were an objective observer(like the money dosnt  matter) .....reason(a statement or fact that explains why something is the way it is, why someone does, thinks, or says something, or why someone behaves a certain way) is the course of action.

[ZenaidaMacroura]

^i've seen so many random numbers thrown around this thread i'm a bit bamboozled now.  Specialty pharmacy is 7-8% of sales of which "Philidor is the vast majority."  Are ackman's numbers to be trusted?  I've read from various sources that Philidor makes up 5.2-6.8% of rev.  Again having listened to managments call Monday and ackman's 4-hour marathon and (while being disconnected /reconnected every half hour) I'm sort of blurry. 

 

The sentiment in this thread has shifted -makes it easier to avoid confirmation bias.  That said I've read some very bad speculation in the last 20 or so pages.  I'm not really ruling anything out at present but it looks to me like the Philidor termination will only have a low single digit impact on sales growth going forward.  It's not even clear to me Pearson and co baked in the assumptions into guidance.

 

It's the extra scrutiny from pbm's, regs, and insurance co's that has the potential to hit hard. Philidor was just a happy bonus that turned into a lightning rod.

 

Edit: sales growth*

[ERICOPOLY]

Regarding Philidor. 

 

I'm willing to entertain the theory that there was a "boys will be boys" attitude at Valeant -- rather than just partnering with "girls" where they knew certain behaviors couldn't physically be possible based on their physical form, they stuck with the "boys" as partners because they were much more aggressive but they put up a firewall due to the greater than normal possibility that the boys might be tempted to just hold down a customer and rape them. 

 

In other words, they created an incentive structure that would make super-human sales results HIGHLY lucrative to Philador's employees/management/owners.  That kind of money has driven people throughout history to lie/cheat/steal and claw their way to the top, slash throats, kill or be killed, all that great stuff.  So if you were setting up really crazy lucrative compensation for a sales team, knowing that "boys will be boys" you'd be smart to isolate yourself from what you know these people could very well be tempted to do in order to get their hands on that huge performance driven bonus.

 

So one way to legally cut all kind of corners is to find somebody to partner with who looks like he'll cut every corner in the rule book just to make quota.  Set him up with extremely lucrative quota-driven bonuses, and put him in a separate legal entity then turn him loose!

[ERICOPOLY]

Maybe with a prior girlfriend you've had this experience...  you maybe have a female friend or classmate that you truly are not trying to seduce, but you share a cup of coffee with her or chat with her somewhere on campus.  You get spotted by a friend of your girlfriend and she tells your girlfriend.  It just so happens that you "had to study late that night" and this is the time when the conversation took place.

 

Your girlfriend if she's had any experience with perhaps a philandering partner beforehand, is going to get super pissed and hit the ceiling. 

 

Yet technically you know that you didn't do anything wrong and didn't intend to, you just wound up spotted in a situation where the dots can be connected by your girlfriend and it's going to take volumes of words to talk her off the cliff if she ever really truly buys your story.

 

Investors are sort of like that -- suspicious wives/girlfriends.  It's always going to be difficult to explain your secretive dealings when you are found out because merely by hiding them you look guilty of something.  And when there really is something the least bit dirty about them, it just might spiral into divorce.  Like what if there was already a rumor that you were sleeping with that girl in the hallway even if you weren't.  Or perhaps she had a loose reputation. 

 

[ourkid8]

Hahhah... great analogy.  However, how does Valeant move forward from here?

 

1.  Conclude their special investigation and announce there are no other specialty pharmas doing the same questionable practices

2.  Provide new guidance without philidor + repurchase debt and potentially a bit of stock

3.  Hit or exceed their numbers

 

Did I miss anything?

 

Maybe with a prior girlfriend you've had this experience...  you maybe have a female friend or classmate that you truly are not trying to seduce, but you share a cup of coffee with her or chat with her somewhere on campus.  You get spotted by a friend of your girlfriend and she tells your girlfriend.  It just so happens that you "had to study late that night" and this is the time when the conversation took place.

 

Your girlfriend if she's had any experience with perhaps a philandering partner beforehand, is going to get super pissed and hit the ceiling. 

 

Yet technically you know that you didn't do anything wrong and didn't intend to, you just wound up spotted in a situation where the dots can be connected by your girlfriend and it's going to take volumes of words to talk her off the cliff if she ever really truly buys your story.

 

Investors are sort of like that -- suspicious wives/girlfriends.  It's always going to be difficult to explain your secretive dealings when you are found out because merely by hiding them you look guilty of something.  And when there really is something the least bit dirty about them, it just might spiral into divorce.  Like what if there was already a rumor that you were sleeping with that girl in the hallway even if you weren't.  Or perhaps she had a loose reputation.

[cmlber]

OM, here is what I am talking about:

 

In 2012 gross sales (millions) were $4,068 with provisions of $779; net sales of $3,289 or 19% provisions to sales.

 

In 3Q 2015 gross sales were $4,666 with provisions of $1,918; net sales of $2,748 or 41% provisions to sales.

 

And look at their commentary under it:

 

The increase was driven primarily by product mix due to increased sales of products which carry higher

contractual rebates and co-pay assistance programs, including the impact of gross price increases where customers receive incremental rebates based on contractual

price increase limitations.  Specifically, the comparisons were impacted by (i) higher provisions for rebates, chargebacks, and returns, including managed care rebates for Jublia® and the co-pay assistance programs for launch products and other promoted products including

Jublia®, Onexton®, Retin-A Micro® Microsphere 0.08% (“RAM 0.08%”), and Solodyn®, as well as Salix products and (ii) higher rebate percentages for sales to

the U.S. government (including Wellbutrin XL®).

 

Does that sound like a durable portfolio with Philidor gone?  They're pushing more product through these different channels with bigger discounts to get more volume.  Now that Philidor is no longer driving that, I can't see how you won't get some bad numbers out of those fast growing drugs in that channel.  Suddenly amortization becomes a real cost in that scenario.  And that scenario was Valeant losing Philidor.  It's no wonder they didn't want to distance themselves from Philidor right off the bat.  They had to wait until they were forced to do it.

 

Is provisions to gross sales really relevant?  Isn't the gross sales number just a made up number to game the system in different ways?  If Valeant buys a drug making $10 at a gross price of $20, and realize that if they charge $30 they can discount the customer $10 copay so that the net price to Valeant is the same but volume goes up, you would expect provisions to gross sales to go up wouldn't you?  That's exactly what Philidor was.....

[cmlber]

 

 

Tombgrt,

 

I am glad we are amusing for you.

 

That said, I am not convinced Valeant mgmt did not know what was going on a Philidor. I would be surprised if it made it all the way to the c-suite though. We have all said that the bet has been on Pearson being honest. If we are wrong on that, we will be wrong on this investment. If middle management at Valeant is involved, I maintain fines will not be larger than .5 billion and definitely not more than $1B with my most likely scenario low 100 millions.

 

I know hard to quantify at this point but hard for me to believe the legal fine would be the only financial impact on VRX.

 

Only financial impact? No, 5% of sales are gone, a % of ongoing growth is gone. Furthermore, their debt is more expensive to issue, and 50 billion plus of market cap is gone. And that assumes there are no more cockroaches.

 

That's one way of looking at it.  On the other hand, they won't be doing any acquisitions soon anyways so don't need to tap the debt markets in the short term, so I'd frame it as their debt is now cheaper to repay.  They can deliver much more rapidly when their debt trades at a 10-15% discount to par.

 

There is $61 billion in enterprise value right now.  Let's say a fair multiple on whatever cash flow there is when this storm passes is 15x unlevered free cash flow.  I think a discount to the levered market multiple is fairly conservative for an industry that typically trades at a premium to the market on levered earnings.  So to make this valuation fair, you need $4 billion in free cash flow unlevered.  With the tax rate and low capex requirements, that means you need about $4.5 billion in EBITDA. That's a 40% discount to guidance. Philidor is 7% of sales and a lot of that will just get diverted to other channels.

 

Even if Pearson is found to be personally involved in Philidor, who cares at $90?

 

But I highly doubt there will be any smoking gun evidence that Pearson was involved.  A) because his incentives give him no reason to engage in fraud to boost short term results and B) because even if he was stupid enough  to do it you also need to believe he was stupid enough to commit fraud in a way that could be traced back to him.  We'll see on Monday.

 

 

Agree and good post. I have been thinking the same thing: at a certain price, none of this matters and I agree we may be near that price. I was just trying to demonstrate to the other poster that in no way do I think the fine is the only issue. In fact the fine is the only non-issue.

 

* I don't think it's conservative to use book taxes when cash taxes have ranged from 33% - 100%+ over the past 5 quarters. The factors that led to higher cash tax rates are still present.

* Specialty pharmacies represented 9% of sales during 3Q15. This seems like a more accurate estimate to use when adjusting future estimates or guidance.

* How can $4.5b EBITDA generate $4b in FCF when 2016 interest should be ~$1.7b? Guidance assumes USD is flat vs. EM currencies and a Fed rate hike would likely strengthen the USD in 2016.

 

That's a 40% discount to guidance.

 

I showed evidence a few weeks ago that it was very probable that VRX was making their numbers through unsustainable and untraceable methods. Now we know the exact methods of how they did it, which supports my theories presented over the past couple months. It also explains why I couldn't pinpoint the cause of the revenue gaps at the time. VRX has only met their guidance in each of the last 5 quarters due to Isuprel/Nitropress and/or Philidor, which is likely unsustainable moving forward. Morgan Stanley estimated that VRX would have missed by ~10% without Isuprel/Nitropress price increases. Current guidance no longer seems relevant.

 

The Philidor relationship likely began when VRX acquired Medicis (VRX raved about Medicis's "sales team"). The Philidor purchase was also presented to and approved by the board (and presumably senior management). I find it hard to believe that the board would approve VRX's deal structure and high price paid for Philidor (based on sales at the time) without knowledge of Philidor's true purpose. Jeff Ubben was on the board at the time of approval.

 

Almost every VRX investing narrative from 2 years ago seems out-of-date at this point ("durable" products, low tax rate, "organic growth", 20% IRR, and so on). All of VRX's orphan drugs will lose exclusivity by 2019 (Xifaxan in 2017/2018 and Jublia in 2019). Without much in-house R&D and the large debt load, VRX is vulnerable to competition from new compounds and novel treatments of ailments they treat. Intermediate to long-term cash flows may never be realized as currently projected. VRX also wrote-off 1/4th of their remaining IPR&D intangibles relating to the Salix acquisition in 3Q15. VRX doesn't seem very optimistic about their current pipeline.

 

I have no position in VRX.

 

Schwab, I didn't say there was 90% ebitda to fcf conversion, read the post again.  I said 90% ebitda to UNLEVERED free cash flow.  I think it's more conservative to value the business unlevered instead of valuing the business by applying a multiple to levered cash eps.  Hence why I said $4.5 billion ebitda would turn into $4 billion UNLEVERED free cash flow.  There is minimal capex or tax.

 

Where are you getting a 33% to 100% tax rate.  I don't think congress would be that concerned about inversions if that were the case lol

[LongHaul]

Here is what I have heard. 

 

1.  VRX bought Medicis that came with a copay assistance program.  They fired almost everyone at Medicis except people involved in the Copay program.

2. VRX then setup Philidor.  VRX had control.  Superhero name minimizing the appearance of that control.

Independent legally, etc but really under VRX control.

3. Philidor was run in an very unethical way.

 

I believe Pearson knew everything all along and condoned it because it helped him meet numbers.  I thought the call last Monday had them lying a few times.  90 pages to confuse people and some technical truths but really lies because they were not telling critical info.  Then a bunch of soft ball questions.

I still don't even know who owned Philidor.

 

I think the reason he didn't immediately cut Philidor last week was because he was in bed with them so deep.

 

Now what.  Cockroach theory - there is one big cockroach in the kitchen and his name is Mike Pearson.

In that kitchen there may be a 30-40% chance that he is cooking the books.  The books are so convoluted I can't say for sure but the FCF in the last 1 year and 9 months is substantially below the "Cash EPS".

Big A/R build, I cannot figure out accrued expenses last year.  Salix deal was done 4/1/15 so we cannot see 1Q of Salix. 

 

I think Pearson has been caught in a few lies - AZ Value highlighted SAnitas and the CAGR. 

 

Who the hell knows if screwing around with the accounting.  There was some chatter of VRX stuffing the sales channel in early 2015.

 

LTM FCF is about $1.9b.  Taking off $400m for Philidor leaves $1.5b.  Stripping out the Marathon products would leave even less.  You might have $1 billion or less in FCF so I think VRX is worth less than $12b, and a very levered one at that. 

 

 

 

 

 

 

 

 

 

[LongHaul]

Did Ackman really say he did not read AZ Value's blog?

If that is true then that tells us a lot. 

 

1.  He didn't do his work and probably doesn't know what he is talking about.

2.  He doesn't want important disconfirming information. 

[LongHaul]

Fascinating post about VRX channel stuffing!  Not sure if it is true.

 

http://www.cafepharma.com/boards/threads/fake-sales-at-vrx-too.586197/

[merkhet]

Has anyone else considered that the shorts might have been very strategic in their choice of timing?

 

If the price continues to stay this low through November, I suspect there will be some tax loss selling towards the end of the month from retail folks. This likely means that there will be continued downward pressure on the stock through the end of the year which will impact hedge fund quarterly reporting -- possibly triggering redemptions.

[blainehodder]

Anyone else thinking of just putting in a stop buy order 10-15% above current price? If it turns out the market decides it isn't guilty/liable for insurance fraud or Citron brings weak claims you can get in before it rockets much. If it continues plummeting then oh well. If all is well and good you can get in on a squeeze with plenty of upside left.

[Picasso]

The gross to net is important because it tells you how hard they have to push to get net sales. A lot of that was Philidor or other forms of discounting and copay assistance. It doesn't sound very durable/sustainable when you look at the trend.  It appears to me that provisions have gone up a lot more than what can be  explained from Philidor.

[lessthaniv]

OM, here is what I am talking about:

 

In 2012 gross sales (millions) were $4,068 with provisions of $779; net sales of $3,289 or 19% provisions to sales.

 

In 3Q 2015 gross sales were $4,666 with provisions of $1,918; net sales of $2,748 or 41% provisions to sales.

 

And look at their commentary under it:

 

The increase was driven primarily by product mix due to increased sales of products which carry higher

contractual rebates and co-pay assistance programs, including the impact of gross price increases where customers receive incremental rebates based on contractual

price increase limitations.  Specifically, the comparisons were impacted by (i) higher provisions for rebates, chargebacks, and returns, including managed care rebates for Jublia® and the co-pay assistance programs for launch products and other promoted products including

Jublia®, Onexton®, Retin-A Micro® Microsphere 0.08% (“RAM 0.08%”), and Solodyn®, as well as Salix products and (ii) higher rebate percentages for sales to

the U.S. government (including Wellbutrin XL®).

 

Does that sound like a durable portfolio with Philidor gone?  They're pushing more product through these different channels with bigger discounts to get more volume.  Now that Philidor is no longer driving that, I can't see how you won't get some bad numbers out of those fast growing drugs in that channel.  Suddenly amortization becomes a real cost in that scenario.  And that scenario was Valeant losing Philidor.  It's no wonder they didn't want to distance themselves from Philidor right off the bat.  They had to wait until they were forced to do it.

 

What percent of net went through Philidor in Q3? Schwab, not that I can trust his numbers, says 9% of income. Pearson says it is lower margin, so lets assume 12% of sales. So how can the other 88% of those numbers not be sustainable? This issue is not affecting the entirety of Valeant at this point although they could get a bit better PR going in a hurry.

 

By the way, Pearson said it was 7% for Q32015 not Schwab's 9%. And I think the Pearson number is 7% of revenues so even less in terms of profit (as they mentioned lower margins through this channel I believe). In any case, pick a number, and the rest of the sales don't go poof or anything right?

 

Neither do "all" the sales through Phillidor. Some drugs I  don't believe, compete with generics and will find there way to new distribution channels. If the number is say 7%, I don't think all that revenue is permanently lost.

[ERICOPOLY]

Original_Mungerville,

I know what you are saying about the binary outcome and the LEAPS.

 

The shareholders that ValueAct are gathering will be asking some really hard questions and will want a lot more disclosures.  They will be pushing for much better financial disclosures about how each of the acquisitions is doing.  Break out their performance independently.  And to fully disclose what's going on with the things that people are openly questioning as channel stuffing.  They really can't put the suspicions to rest without that. 

 

So, I don't think it's necessary to pay for the excessive volatility premium all the way out to 2018.  Too much money at risk if the stock rapidly breaks the wrong way.

 

I think it would be more prudent to go with shorter-term options as it's not like we'll be going all the way to 2018 before we get the real scoop.  Once we have the real scoop if it's a positive scoop the stock will take off again and that's when you can roll your shorter term stuff to the 2018 options.

 

 

[Range]

Has anyone else considered that the shorts might have been very strategic in their choice of timing?

 

If the price continues to stay this low through November, I suspect there will be some tax loss selling towards the end of the month from retail folks. This likely means that there will be continued downward pressure on the stock through the end of the year which will impact hedge fund quarterly reporting -- possibly triggering redemptions.

 

The timing could not have been any better for them.  Although, I don't think it was planned that way.  It's not like they've been sitting on the Phillidor thing for months.

 

I think one has to question the timing of the last Citron Research tweet.  The Tweet went out right as the PSH conference call was ending on the last day of the month.  I could be completely wrong with my speculation here but I think there is a chance that Andrew Left and company wanted to stick it to Ackman by crushing the stock when PSH has to report NAV).  John Hempton already questioned Ackman's NAV figure last month so we know he tracks it (and really hates Ackman).

 

If Citron really has a smoking gun, why not release it like 30 minutes before the market closes to create as much panic as possible before the Friday close?  It's not like he didn't have time to write a report before the close.  His previous one looks more undergrad level than professional and could not have taken more than an afternoon to write.

 

I'm just speculating here... could be 100% wrong.

 

Full disclosure:  No opinion/position on VRX, just enjoying the show.

[original mungerville]

Regarding Philidor. 

 

I'm willing to entertain the theory that there was a "boys will be boys" attitude at Valeant -- rather than just partnering with "girls" where they knew certain behaviors couldn't physically be possible based on their physical form, they stuck with the "boys" as partners because they were much more aggressive but they put up a firewall due to the greater than normal possibility that the boys might be tempted to just hold down a customer and rape them. 

 

In other words, they created an incentive structure that would make super-human sales results HIGHLY lucrative to Philador's employees/management/owners.  That kind of money has driven people throughout history to lie/cheat/steal and claw their way to the top, slash throats, kill or be killed, all that great stuff.  So if you were setting up really crazy lucrative compensation for a sales team, knowing that "boys will be boys" you'd be smart to isolate yourself from what you know these people could very well be tempted to do in order to get their hands on that huge performance driven bonus.

 

So one way to legally cut all kind of corners is to find somebody to partner with who looks like he'll cut every corner in the rule book just to make quota.  Set him up with extremely lucrative quota-driven bonuses, and put him in a separate legal entity then turn him loose!

 

I agree with this, but they won't do it going forward. They knew it was going to be very aggressive, but did not necessarily understand the extent of what would go on. That doesn't make it acceptable. Question is how many other places did this occur already? If its pretty isolated to Philidor, Pearson got lucky and learnt a good lesson relatively early on and Valeant will be better for it, after a long shit storm. Every investor, entrepreneur, athlete, etc etc learns a lesson from time to time that being too aggressive can backfire, that playing too close to the line and stepping over is a mistake. I'm not making excuses for these actions, just noting that this kind of crap can happen, even to people we consider to be generally good business people. A scorecard based on money can do weird things any competitive person. Its like living with a bunch of drug addicts and succumbing to taking a hit - once won't do any harm but if it becomes habitual its going to be a problem.

 

 

 

[ERICOPOLY]

Has anyone else considered that the shorts might have been very strategic in their choice of timing?

 

If the price continues to stay this low through November, I suspect there will be some tax loss selling towards the end of the month from retail folks. This likely means that there will be continued downward pressure on the stock through the end of the year which will impact hedge fund quarterly reporting -- possibly triggering redemptions.

 

The timing could not have been any better for them.  Although, I don't think it was planned that way.  It's not like they've been sitting on the Phillidor thing for months.

 

I think one has to question the timing of the last Citron Research tweet.  The Tweet went out right as the PSH conference call was ending on the last day of the month.  I could be completely wrong with my speculation here but I think there is a chance that Andrew Left and company wanted to stick it to Ackman by crushing the stock when PSH has to report NAV).  John Hempton already questioned Ackman's NAV figure last month so we know he tracks it (and really hates Ackman).

 

If Citron really has a smoking gun, why not release it like 30 minutes before the market closes to create as much panic as possible before the Friday close?  It's not like he didn't have time to write a report before the close.  His previous one looks more undergrad level than professional and could not have taken more than an afternoon to write.

 

I'm just speculating here... could be 100% wrong.

 

Full disclosure:  No opinion/position on VRX, just enjoying the show.

 

That's a fair speculation.  However on the theory that Andreft Left might have been fed some damning internal company document or testimonial, he might not have had it long enough to process it.  Might simply be a case of needing more time depending on when he got the information into his hands (if he really has any).  If he's got absolutely nothing though, literally nothing, the SEC is going to look harder at Left so he does have something to lose in light of how Valeant just last week asked the SEC to investigate Left.

[ERICOPOLY]

Just to quote from the AZ_Value blog:

 

Folks, for those of us who are users of financial statements, there is an extremely important concept that we all rely on to analyze companies. The concept in question is the sequential nature of financial disclosures, it is the reason why we constantly read disclosures in 10-Ks with sentences like:

 

    Company XYZ did such and such for a total of X amount and Y amount in 2013 and 2012 respectively.

 

And one would hope that the principle and accounting behind the sequential numbers disclosed stay consistent enough so that you can effectively operate a year over year comparison. Although we all probably take it for granted, I can guarantee you that, just like the air you breathe, the moment it’s taken away from you, you’re quickly reminded how crucial that concept is.

 

 

 

The reason why I quote that is to remind you of my analogy to the suspicious girlfriend.  When you get caught talking to pretty girls when you're supposed to be out studying, you are eroding trust.  Trust is crucially important.

 

It doesn't mean that they are necessarily doing anything will criminal intent, but they are just following a pattern that was laid out before by people who did have criminal intent.  People who look for frauds will be looking for these patterns.  So if you are actually honest and want people to respect you as such and you want an unquestionably clean reputation, you basically need to follow a pattern that doesn't fit a pattern that will raise suspicion.

 

And now there's just too much bad stuff coming out and these kind of patterns are getting scrutinized more heavily and rolled up into a narrative that there is just too many dots connected that individually you might talk yourself out of, but all of them put together and your credibility is just really hard to defend.

 

So...

 

That's why I think we'll either:

a)  find out some really seriously bad news

or

b)  we'll get some really awesome disclosures surrounding the successive performance of each acquisition independently so that these honest people at Valeant can hang their heads high in the community again and be respected.

 

They will have to get those disclosures out super duper fast unless they just want a low stock price that hurts their ability to use it as currency for more acquisitions.

 

So I wouldn't go to 2018 with the LEAPS.

 

I agree with another poster's comment that the stock isn't this heavily beat up because of the threat of fines... it's because people are looking at these suspicious patterns and rolling them into a narrative.  You could look past some of them if you had rock-solid confidence in management's integrity, but after the Philidor thing you aren't at "rock solid" anymore.  You might not think they are definitely crooks, but it's just relatively harder to rule it out.

[original mungerville]

Let's break it out by segment.

 

B+L is no longer being disclosed for organic growth.  That's 14% sales we may not see growth in.  Otherwise why not just disclose it?

 

Salix is growing nicely still but it seems to be done at higher discounts as well.  Need to look into that further.

 

Emerging markets will be what they are.  Probably not that great in the near term.

 

But branded U.S. drugs are 43% of sales.  Look at slide 22 from the last earnings call.  41% growth with 17% from RX volume and 24% from price.  We only have 2014 annual data (it would be much more useful to get quarterly so we could see the effects of Philidor as it ramped up) but no matter.  Philidor would direct RX to their branded versus generic so we don't know if that's real RX volume.  And without Philidor directing various methods of reimbursement from insurance, pricing wouldn't be up as well.  So you're really throwing both drivers of organic growth out the window.

 

If you read through the Medicis conference calls you found that many of these branded generics in the typical channels like retail were not profitable at all.  These are mostly tier 3 and 4 drugs that pharmacies have no interest in helping sort out reimbursement. 

 

You're right that it's only 9% of sales versus that segment at 43% of total.  But that's where I'm starting to have trouble.  Valeant was suddenly able to drive price + volume right after the AGN deal fell through which coincided with the Philidor launch.  So either there is something we are missing (and key to the long thesis) or Valeant is lying about how much of revenue is being improved through these alternative channels.

 

Picasso,

 

 

I would not try to figure out volume vs price growth (we can't know the separate impact to those two variable anyway), and instead just focus on the hit to $ sales growth. Lets not pretend they don't have a pipeline, or that Jublia is not growing through other channels (however shitty it is with 15% effectiveness, its still been found to be better than Lamisil at 10% - understand none of these toe nail polishes work; its probably true Vics vapour rub works just as well, but studies show Jublia works a little better than others and there are no other options out there right now; you gotta apply the stuff once a day, not miss a day, for months to a year for the stuff to work, and only then you have a 10 to 15% chance of success; the only positive thing is that its not dangerous like some of the other shit pharmas peddle)

 

Lets say its 8% of 43%, or about 20% of that segment. Now, Ackman thinks half will remain (and several other people believe that not all that 8% will go away). Lets assume they lose 3/4 of it because Philidor really juiced the shit out of things and only 1/4 is legit. So we are talking about a hit of 15% to that segment's sales in the last quarter.

 

In terms of growth though, that 15% is a cumulative hit because Philidor had sales last year. Lets say 5% (ie 1/3rd) of that 15% in sales going away now was in place last year.

 

So sales resets one-time to 15% lower now (in that segment) and $growth resets to 10% lower year-over-year (in that segment).

 

So, if you agree this logic is sound, you say look at slide 22; from there it seems organic growth in that segment has been somewhere between 20-40% in the last year. This means after a 15% reset lower in sales this year, we have residual organic growth of 10-30% (ie 20-40 minus 10% hit to annual growth). To be conservative, lets assume 15% residual annual growth (which implies former growth of 25%; ie not close to the upper bound of 40%).

 

So basically, the 15% reset down in sales in that segment means they are losing one year of growth in that segment only (because residual annual growth is 15%). 

 

First, lets comment on whether the above methodology is sound. (Secondly, we can then refine the numbers because I am using very rough ones.)

 

 

[original mungerville]

Original_Mungerville,

I know what you are saying about the binary outcome and the LEAPS.

 

The shareholders that ValueAct are gathering will be asking some really hard questions and will want a lot more disclosures.  They will be pushing for much better financial disclosures about how each of the acquisitions is doing.  Break out their performance independently.  And to fully disclose what's going on with the things that people are openly questioning as channel stuffing.  They really can't put the suspicions to rest without that. 

 

So, I don't think it's necessary to pay for the excessive volatility premium all the way out to 2018.  Too much money at risk if the stock rapidly breaks the wrong way.

 

I think it would be more prudent to go with shorter-term options as it's not like we'll be going all the way to 2018 before we get the real scoop.  Once we have the real scoop if it's a positive scoop the stock will take off again and that's when you can roll your shorter term stuff to the 2018 options.

 

OK thks, interesting - I'll think about that. Let me know if you zone in on a maturity or any further thoughts on how to position.