VRX - Valeant Pharmaceuticals International Inc.

[wisdom]

I don't see the point of that link/picture? How is that related to VRX?

 

[Picasso]

I don't see the point of that link/picture? How is that related to VRX?

 

 

You're looking at Valeant's competitive advantage.

[rpadebet]

Can someone please explain the fraud perpetrated on R&O? Is it the allegation that Rietz's california license was being used without his permission on prescriptions ?

 

I am unable to figure this out. VRX contracted Philidor to sell their drugs. Phillidor subcontracted R&O to sell in California due to them being denied a license to sell there. Phillidor purchases option to buy R&O. They believe they own the pharmacy. Rietz also knows this, but feels his contract limits him to dispensing drugs in California alone. R&O uses the relationship to direct prescriptions they sourced through other network pharmacies or sourced directly themselves, to dispense via R&O. (This could be because of simple logistics or because R&O could get the payors to pay the highest price for their drugs). R&O suddenly sees a deluge of prescriptions from everywhere with their license numbers on it. Rietz is now apparently scared of losing his license.

 

I would think - if Phillidor was using R&O license to sell in states he wasn't licensed in, then that is a problem. If they were dispensing drugs through R&O name in other states apart from California where he was licensed, then what is the problem? If they were putting R&O license number on California prescriptions which directly came to Philidor, then again, what is the issue?

 

On the other hand if phillidor was using the same prescription with multiple license numbers to get payors to pay multiple times for the same drug, then that would be insurance fraud. Is there evidence of that?

 

I don't see the illegality in using a subcontractors license number (which you practically own now) to direct prescriptions (which you sourced elsewhere) to be dispensed from and reimbursed. What is actually wrong or unethical about this?

 

 

Consider this - if Rietz is actually complaining about this deluge of sales being made on his license number, and wants to be compensated for this "privilege" his license number is affording Philidor, then that is a valid business argument. But that is not fraud. It is a collections dispute as Pearson said.

 

 

 

[scorpioncapital]

If this trades at 10b market cap you are speculating on almost certain bankruptcy for equity holders. In other words, buying at $100 vs $3 are , in my  mind, exactly equivalent.

 

People say things like this a lot and it is wrong 100% of the time.

 

My thinking is that it won't get to $3. If it does, and you buy you just put $3 in the slot machine.

At $100 the company is still precarious but the outcome you are betting on is very similar, that equity holders will get something when the inevitable organization comes.

In either case, I chose a mid-point of $45 via very short-term options. The long term thus becomes somewhat less important. But it really does feel like a crap shoot even doing this.

I've always admired Buffett for potentially giving up money in some beaten down stock that could very well recover simply on the principle of knowing what to stay away from. I guess he has greed, but applied in certain directions. His greed muscle for virtually anything cheap seems to be diminished and that sounds about right to avoid possible surprises. Abundance is the philosophy, there is always money to be made somewhere, sometimes more, sometimes less.

[Picasso]

Can someone please explain the fraud perpetrated on R&O? Is it the allegation that Rietz's california license was being used without his permission on prescriptions ?

 

I am unable to figure this out. VRX contracted Philidor to sell their drugs. Phillidor subcontracted R&O to sell in California due to them being denied a license to sell there. Phillidor purchases option to buy R&O. They believe they own the pharmacy. Rietz also knows this, but feels his contract limits him to dispensing drugs in California alone. R&O uses the relationship to direct prescriptions they sourced through other network pharmacies or sourced directly themselves, to dispense via R&O. (This could be because of simple logistics or because R&O could get the payors to pay the highest price for their drugs). R&O suddenly sees a deluge of prescriptions from everywhere with their license numbers on it. Rietz is now apparently scared of losing his license.

 

I would think - if Phillidor was using R&O license to sell in states he wasn't licensed in, then that is a problem. If they were dispensing drugs through R&O name in other states apart from California where he was licensed, then what is the problem? If they were putting R&O license number on California prescriptions which directly came to Philidor, then again, what is the issue?

 

On the other hand if phillidor was using the same prescription with multiple license numbers to get payors to pay multiple times for the same drug, then that would be insurance fraud. Is there evidence of that?

 

I don't see the illegality in using a subcontractors license number (which you practically own now) to direct prescriptions (which you sourced elsewhere) to be dispensed from and reimbursed. What is actually wrong or unethical about this?

 

 

Consider this - if Rietz is actually complaining about this deluge of sales being made on his license number, and wants to be compensated for this "privilege" his license number is affording Philidor, then that is a valid business argument. But that is not fraud. It is a collections dispute as Pearson said.

 

You need a license even as a manager/administrator of another pharmacy.  Instead Philidor/Isolani had no license but dispensed the drugs anyway under R&O's license.  And apparently others as well.

 

There's also very strict rules for a pharmacist-in-charge (PIC) who needs to make sure everything is up to code and he/she signs off on the audits.  Instead Isolani was signing off in place of the PIC.  It was shortly after that the PBM's dropped Philidor for failing audit standards.  I'm guessing they saw Eric Rice's signature on the forms instead of the real PIC.

 

None of that was being disputed by the counter suits from Valeant.  It's weird.  Like they just ignore all those accusations and say "hey you guys have our money, give it."

[original mungerville]

The limited liability...

 

I raised the point because it incentivizes them TO NOT INVESTIGATE fraud allegations.

 

Stick fingers in ear and loudly say "LAH LAH LAH LAH LAH LAH LAH LAH LAH LAH".

 

Meanwhile keep Philador network doors open and continue to rake in the money, knowing that your ass if covered if there is fraud.

 

But if you investigate and find fraud, you have to shut down the Philador network.

 

So it's best to concoct a story that you think Reitz is a just a bad debt that needs to be collected on, because the other option means you might not hit your growth targets due to the risk of finding evidence of fraud.

 

So it's not necessarily that Pearson is likely guilty of knowing about a fraud and covering it up, but rather perhaps more likely that he'd use every tool in the shed to not investigate a fraud.

 

Yes, this seems to be the big trust/aggressiveness/illegality issue. Its the delay and inaction with respect to figuring out what was going on at Philidor (assuming they did not know what was going on already).  And only when this lawsuit becomes public do investigations start. You would think that timing should have been reversed.

[cmlber]

I'm down the street from the West Wilshire Pharmacy.  I should drive by and peer in the window to see what's up.  Eric aren't you close by as well?  I'll meet you down there for a cup of coffee at McCafe next door.

 

Check out this world class distribution facility, lol: https://www.google.com/maps/place/West+Wilshire+Pharmacy/@34.0635352,-118.3663159,3a,75y,347.11h,92.12t/data=!3m6!1e1!3m4!1sMEj8L4fqONsNnK1nz4m2Mw!2e0!7i13312!8i6656!4m2!3m1!1s0x0:0xc9e914713241498c!6m1!1e1

 

Anyway I think investors are missing the big deal about Philidor.  It isn't just the fraud.  Everyone thought they had a durable portfolio because despite cutting R&D and SG&A they had organic growth from both pricing and sales.  No one brought up the reason why that was: Philidor and alternative fulfillment.  Well guess what, the shorts got that side business killed whether there's fraud or not.  Now all of a sudden there's this "cash EPS' which adds back 100% of amortization and some of that cash EPS is now considered a return of capital.  You can no longer give a 15x multiple to all of cash EPS.  I haven't seen anyone try to figure out what's durable and what isn't now that Philidor is gone.  Or whether Valeant has used other methods to make their business appear more durable than it actually is.  Most bulls (including myself at one point) thought, "oh cool, these guys have sustainable cash flows on practically everything in their portfolio based on organic growth."  No one, not even Ackman, has said they made a mistake and the portfolio of assets are now less "durable."

 

Picasso, there was 15% organic growth ytd, specialty pharma is 7% of revenue, so even if that was all new there was still 8% organic growth.

 

Secondly, lets see what it would look like if Valeant just became a normal pharma company.  Big pharma companies who everybody thinks have sustainable earnings spend 15-20% on R&D.  So if you add $2 billion in R&D per year for Valeant so that it becomes one of the heaviest R&D spenders, and you take off the 7% specialty pharma sales from 2016 guidance, you'd still get $9/share cash EPS with above industry average R&D spend that Valeant would spend way more efficiently than big pharma companies. 

 

[original mungerville]

I'm down the street from the West Wilshire Pharmacy.  I should drive by and peer in the window to see what's up.  Eric aren't you close by as well?  I'll meet you down there for a cup of coffee at McCafe next door.

 

Check out this world class distribution facility, lol: https://www.google.com/maps/place/West+Wilshire+Pharmacy/@34.0635352,-118.3663159,3a,75y,347.11h,92.12t/data=!3m6!1e1!3m4!1sMEj8L4fqONsNnK1nz4m2Mw!2e0!7i13312!8i6656!4m2!3m1!1s0x0:0xc9e914713241498c!6m1!1e1

 

Anyway I think investors are missing the big deal about Philidor.  It isn't just the fraud.  Everyone thought they had a durable portfolio because despite cutting R&D and SG&A they had organic growth from both pricing and sales.  No one brought up the reason why that was: Philidor and alternative fulfillment.  Well guess what, the shorts got that side business killed whether there's fraud or not.  Now all of a sudden there's this "cash EPS' which adds back 100% of amortization and some of that cash EPS is now considered a return of capital.  You can no longer give a 15x multiple to all of cash EPS.  I haven't seen anyone try to figure out what's durable and what isn't now that Philidor is gone.  Or whether Valeant has used other methods to make their business appear more durable than it actually is.  Most bulls (including myself at one point) thought, "oh cool, these guys have sustainable cash flows on practically everything in their portfolio based on organic growth."  No one, not even Ackman, has said they made a mistake and the portfolio of assets are now less "durable."

 

 

Picasso, I took a stab at backing out Philidor earlier in the thread - decent organic growth remains. Still have to back out Marathon to see what I am left with. Another way to do this is when Ackman did his dd on the Allergan acquisition, that was effectively pre-Philidor (as volumes were minuscule then) and also pre-Marathon. I remember him coming out to mid single digit organic growth (whereas Pearson was claiming high single digit or something). So Ackman thought mid single digits pre-Salix, pre-Marathon, pre-Philidor (ie low volume back then).

 

But the wildcard is the rest of the biz - any other borderline illegal activity that is not sustainable and not reported OR did all the shit just happen at Philidor given the different legal structure there.

[Picasso]

cmlber,

 

What is your cash EPS estimate for 2016?  What percentage of cash EPS will equal free cash flow?  And what percentage of cash EPS is durable and non-durable?

 

And based on that, what do you think the business is worth when considering they have $30 billion of debt?  How much of a difference in valuation is there levered and unlevered?

[ERICOPOLY]

But this lie makes no sense.  Unless he has amnesia, he knows there are 75 emails showing he is lying.

 

That's why I'm not taking it as proof that he is lying -- it makes no sense. 

 

I'm looking for a plausible story.

 

Here is what we know:

 

Reitz' lawyer wrote a letter saying that he would stop paying because doing so further implicates himself in a widespread fraud.

 

That's why he stopped paying -- he told them in writing that he would stop paying.  And he told them why.

 

We've seen that letter written by his lawyer.  This is fact.

 

Then we have Valeant telling shareholders that they keep sending him a collection notice and he won't pay them.

 

He's already told you why he won't pay you.  Why don't you look into his claims instead of acting like an insane person trying to collect from a guy who doesn't want any part of your purported crime?

[Haasje]

Not long or short myself just posting an update from Weitz regarding $VRX for who is interested. 

 

https://weitzinvestments.com/about/content/announcements/interimupdate11.2.15.fs

[original mungerville]

I'm down the street from the West Wilshire Pharmacy.  I should drive by and peer in the window to see what's up.  Eric aren't you close by as well?  I'll meet you down there for a cup of coffee at McCafe next door.

 

Check out this world class distribution facility, lol: https://www.google.com/maps/place/West+Wilshire+Pharmacy/@34.0635352,-118.3663159,3a,75y,347.11h,92.12t/data=!3m6!1e1!3m4!1sMEj8L4fqONsNnK1nz4m2Mw!2e0!7i13312!8i6656!4m2!3m1!1s0x0:0xc9e914713241498c!6m1!1e1

 

Anyway I think investors are missing the big deal about Philidor.  It isn't just the fraud.  Everyone thought they had a durable portfolio because despite cutting R&D and SG&A they had organic growth from both pricing and sales.  No one brought up the reason why that was: Philidor and alternative fulfillment.  Well guess what, the shorts got that side business killed whether there's fraud or not.  Now all of a sudden there's this "cash EPS' which adds back 100% of amortization and some of that cash EPS is now considered a return of capital.  You can no longer give a 15x multiple to all of cash EPS.  I haven't seen anyone try to figure out what's durable and what isn't now that Philidor is gone.  Or whether Valeant has used other methods to make their business appear more durable than it actually is.  Most bulls (including myself at one point) thought, "oh cool, these guys have sustainable cash flows on practically everything in their portfolio based on organic growth."  No one, not even Ackman, has said they made a mistake and the portfolio of assets are now less "durable."

 

Picasso, there was 15% organic growth ytd, specialty pharma is 7% of revenue, so even if that was all new there was still 8% organic growth.

 

Secondly, lets see what it would look like if Valeant just became a normal pharma company.  Big pharma companies who everybody thinks have sustainable earnings spend 15-20% on R&D.  So if you add $2 billion in R&D per year for Valeant so that it becomes one of the heaviest R&D spenders, and you take off the 7% specialty pharma sales from 2016 guidance, you'd still get $9/share cash EPS with above industry average R&D spend that Valeant would spend way more efficiently than big pharma companies.

 

Except that you are wrong on your organic growth calculation - its too conservative. With specialty at 7% of revenue, we have to assume there was some revenue there last year as well, so the contribution of specialty to overally growth has to be less than 7% of revenue. So north of 8%, maybe 10% growth.

 

And then you have to back out Marathon growth from that which will bring those numbers down.

[ERICOPOLY]

Wally Weitz backs up the *dump* truck...

 

http://finance.yahoo.com/news/value-investor-wally-weitz-sells-203424264.html

 

 

[ourkid8]

• • Conservatively assuming all of Philidor’s sales were lost and not replaced through another channel, the stock is still inexpensive  (These numbers are via Ackman's presentation)
     
    
    • Eliminating Philidor’s earnings contribution would result in a reduction of Valeant’s “floor” 2016 EBITDA to ~$7.0bn, or ~$14 of Cash EPS(2)
      
    • At the Oct. 29 closing share price of $111.50, Valeant trades at ~8x this alternate estimate of 2016 Cash EPS

 

I'm down the street from the West Wilshire Pharmacy.  I should drive by and peer in the window to see what's up.  Eric aren't you close by as well?  I'll meet you down there for a cup of coffee at McCafe next door.

 

Check out this world class distribution facility, lol: https://www.google.com/maps/place/West+Wilshire+Pharmacy/@34.0635352,-118.3663159,3a,75y,347.11h,92.12t/data=!3m6!1e1!3m4!1sMEj8L4fqONsNnK1nz4m2Mw!2e0!7i13312!8i6656!4m2!3m1!1s0x0:0xc9e914713241498c!6m1!1e1

 

Anyway I think investors are missing the big deal about Philidor.  It isn't just the fraud.  Everyone thought they had a durable portfolio because despite cutting R&D and SG&A they had organic growth from both pricing and sales.  No one brought up the reason why that was: Philidor and alternative fulfillment.  Well guess what, the shorts got that side business killed whether there's fraud or not.  Now all of a sudden there's this "cash EPS' which adds back 100% of amortization and some of that cash EPS is now considered a return of capital.  You can no longer give a 15x multiple to all of cash EPS.  I haven't seen anyone try to figure out what's durable and what isn't now that Philidor is gone.  Or whether Valeant has used other methods to make their business appear more durable than it actually is.  Most bulls (including myself at one point) thought, "oh cool, these guys have sustainable cash flows on practically everything in their portfolio based on organic growth."  No one, not even Ackman, has said they made a mistake and the portfolio of assets are now less "durable."

 

Picasso, there was 15% organic growth ytd, specialty pharma is 7% of revenue, so even if that was all new there was still 8% organic growth.

 

Secondly, lets see what it would look like if Valeant just became a normal pharma company.  Big pharma companies who everybody thinks have sustainable earnings spend 15-20% on R&D.  So if you add $2 billion in R&D per year for Valeant so that it becomes one of the heaviest R&D spenders, and you take off the 7% specialty pharma sales from 2016 guidance, you'd still get $9/share cash EPS with above industry average R&D spend that Valeant would spend way more efficiently than big pharma companies.

 

Except that you are wrong on your organic growth calculation - its too conservative. With specialty at 7% of revenue, we have to assume there was some revenue there last year as well, so the contribution of specialty to overally growth has to be less than 7% of revenue. So north of 8%, maybe 10% growth.

 

And then you have to back out Marathon growth from that which will bring those numbers down.

[rishig]

• • Conservatively assuming all of Philidor’s sales were lost and not replaced through another channel, the stock is still inexpensive
     
    
    • Eliminating Philidor’s earnings contribution would result in a reduction of Valeant’s “floor” 2016 EBITDA to ~$7.0bn, or ~$14 of Cash EPS(2)
      
    • At the Oct. 29 closing share price of $111.50, Valeant trades at ~8x this alternate estimate of 2016 Cash EPS

 

I'm down the street from the West Wilshire Pharmacy.  I should drive by and peer in the window to see what's up.  Eric aren't you close by as well?  I'll meet you down there for a cup of coffee at McCafe next door.

 

Check out this world class distribution facility, lol: https://www.google.com/maps/place/West+Wilshire+Pharmacy/@34.0635352,-118.3663159,3a,75y,347.11h,92.12t/data=!3m6!1e1!3m4!1sMEj8L4fqONsNnK1nz4m2Mw!2e0!7i13312!8i6656!4m2!3m1!1s0x0:0xc9e914713241498c!6m1!1e1

 

Anyway I think investors are missing the big deal about Philidor.  It isn't just the fraud.  Everyone thought they had a durable portfolio because despite cutting R&D and SG&A they had organic growth from both pricing and sales.  No one brought up the reason why that was: Philidor and alternative fulfillment.  Well guess what, the shorts got that side business killed whether there's fraud or not.  Now all of a sudden there's this "cash EPS' which adds back 100% of amortization and some of that cash EPS is now considered a return of capital.  You can no longer give a 15x multiple to all of cash EPS.  I haven't seen anyone try to figure out what's durable and what isn't now that Philidor is gone.  Or whether Valeant has used other methods to make their business appear more durable than it actually is.  Most bulls (including myself at one point) thought, "oh cool, these guys have sustainable cash flows on practically everything in their portfolio based on organic growth."  No one, not even Ackman, has said they made a mistake and the portfolio of assets are now less "durable."

 

Picasso, there was 15% organic growth ytd, specialty pharma is 7% of revenue, so even if that was all new there was still 8% organic growth.

 

Secondly, lets see what it would look like if Valeant just became a normal pharma company.  Big pharma companies who everybody thinks have sustainable earnings spend 15-20% on R&D.  So if you add $2 billion in R&D per year for Valeant so that it becomes one of the heaviest R&D spenders, and you take off the 7% specialty pharma sales from 2016 guidance, you'd still get $9/share cash EPS with above industry average R&D spend that Valeant would spend way more efficiently than big pharma companies.

 

Except that you are wrong on your organic growth calculation - its too conservative. With specialty at 7% of revenue, we have to assume there was some revenue there last year as well, so the contribution of specialty to overally growth has to be less than 7% of revenue. So north of 8%, maybe 10% growth.

 

And then you have to back out Marathon growth from that which will bring those numbers down.

 

May be I am too old fashioned, but I would question Cash EPS. Ignoring amortization on acquisitions when the portfolio is not durable (i.e. Coke-like) makes no sense to me. The amortization cost is real - like a mine that has to replace depleting assets.

 

Putting a 8x terminal multiple assumes you are doing a DCF with an infinite life. Is that the right way to value assets with a finite life?

[ourkid8]

That is directly from Ackman's presentation and my numbers are very close.  Again, we are modeling based on numbers provided by management.  Unless they are BS'ing us and that's another story. 

 

• • Conservatively assuming all of Philidor’s sales were lost and not replaced through another channel, the stock is still inexpensive
     
    
    • Eliminating Philidor’s earnings contribution would result in a reduction of Valeant’s “floor” 2016 EBITDA to ~$7.0bn, or ~$14 of Cash EPS(2)
      
    • At the Oct. 29 closing share price of $111.50, Valeant trades at ~8x this alternate estimate of 2016 Cash EPS

 

I'm down the street from the West Wilshire Pharmacy.  I should drive by and peer in the window to see what's up.  Eric aren't you close by as well?  I'll meet you down there for a cup of coffee at McCafe next door.

 

Check out this world class distribution facility, lol: https://www.google.com/maps/place/West+Wilshire+Pharmacy/@34.0635352,-118.3663159,3a,75y,347.11h,92.12t/data=!3m6!1e1!3m4!1sMEj8L4fqONsNnK1nz4m2Mw!2e0!7i13312!8i6656!4m2!3m1!1s0x0:0xc9e914713241498c!6m1!1e1

 

Anyway I think investors are missing the big deal about Philidor.  It isn't just the fraud.  Everyone thought they had a durable portfolio because despite cutting R&D and SG&A they had organic growth from both pricing and sales.  No one brought up the reason why that was: Philidor and alternative fulfillment.  Well guess what, the shorts got that side business killed whether there's fraud or not.  Now all of a sudden there's this "cash EPS' which adds back 100% of amortization and some of that cash EPS is now considered a return of capital.  You can no longer give a 15x multiple to all of cash EPS.  I haven't seen anyone try to figure out what's durable and what isn't now that Philidor is gone.  Or whether Valeant has used other methods to make their business appear more durable than it actually is.  Most bulls (including myself at one point) thought, "oh cool, these guys have sustainable cash flows on practically everything in their portfolio based on organic growth."  No one, not even Ackman, has said they made a mistake and the portfolio of assets are now less "durable."

 

Picasso, there was 15% organic growth ytd, specialty pharma is 7% of revenue, so even if that was all new there was still 8% organic growth.

 

Secondly, lets see what it would look like if Valeant just became a normal pharma company.  Big pharma companies who everybody thinks have sustainable earnings spend 15-20% on R&D.  So if you add $2 billion in R&D per year for Valeant so that it becomes one of the heaviest R&D spenders, and you take off the 7% specialty pharma sales from 2016 guidance, you'd still get $9/share cash EPS with above industry average R&D spend that Valeant would spend way more efficiently than big pharma companies.

 

Except that you are wrong on your organic growth calculation - its too conservative. With specialty at 7% of revenue, we have to assume there was some revenue there last year as well, so the contribution of specialty to overally growth has to be less than 7% of revenue. So north of 8%, maybe 10% growth.

 

And then you have to back out Marathon growth from that which will bring those numbers down.

 

May be I am too old fashioned, but I would question Cash EPS. Ignoring amortization on acquisitions when the portfolio is not durable (i.e. Coke-like) makes no sense to me. The amortization cost is real - like a mine that has to replace depleting assets.

[Guest Schwab711]

I'm down the street from the West Wilshire Pharmacy.  I should drive by and peer in the window to see what's up.  Eric aren't you close by as well?  I'll meet you down there for a cup of coffee at McCafe next door.

 

Check out this world class distribution facility, lol: https://www.google.com/maps/place/West+Wilshire+Pharmacy/@34.0635352,-118.3663159,3a,75y,347.11h,92.12t/data=!3m6!1e1!3m4!1sMEj8L4fqONsNnK1nz4m2Mw!2e0!7i13312!8i6656!4m2!3m1!1s0x0:0xc9e914713241498c!6m1!1e1

 

Anyway I think investors are missing the big deal about Philidor.  It isn't just the fraud.  Everyone thought they had a durable portfolio because despite cutting R&D and SG&A they had organic growth from both pricing and sales.  No one brought up the reason why that was: Philidor and alternative fulfillment.  Well guess what, the shorts got that side business killed whether there's fraud or not.  Now all of a sudden there's this "cash EPS' which adds back 100% of amortization and some of that cash EPS is now considered a return of capital.  You can no longer give a 15x multiple to all of cash EPS.  I haven't seen anyone try to figure out what's durable and what isn't now that Philidor is gone.  Or whether Valeant has used other methods to make their business appear more durable than it actually is.  Most bulls (including myself at one point) thought, "oh cool, these guys have sustainable cash flows on practically everything in their portfolio based on organic growth."  No one, not even Ackman, has said they made a mistake and the portfolio of assets are now less "durable."

 

Picasso, there was 15% organic growth ytd, specialty pharma is 7% of revenue, so even if that was all new there was still 8% organic growth.

 

Secondly, lets see what it would look like if Valeant just became a normal pharma company.  Big pharma companies who everybody thinks have sustainable earnings spend 15-20% on R&D.  So if you add $2 billion in R&D per year for Valeant so that it becomes one of the heaviest R&D spenders, and you take off the 7% specialty pharma sales from 2016 guidance, you'd still get $9/share cash EPS with above industry average R&D spend that Valeant would spend way more efficiently than big pharma companies.

 

Except that you are wrong on your organic growth calculation - its too conservative. With specialty at 7% of revenue, we have to assume there was some revenue there last year as well, so the contribution of specialty to overally growth has to be less than 7% of revenue. So north of 8%, maybe 10% growth.

 

And then you have to back out Marathon growth from that which will bring those numbers down.

 

There's a huge difference between realized organic growth and VRX "organic growth". What is the realized organic growth? Of that realized organic growth rate, how much of it is due to acquisitions made a few years ago that just released products in 2015?

 

In my opinion, "organic growth" has been well planned to fit the story. Xifaxan (IBS-D) will see a huge DTC marketing blitz at the end of this year and early next year. They only have exclusivity until 2017 but still decided to wait 5-6 months after approval before starting their DTC campaign. It seems like they wanted to use Xifaxan for organic growth since acquisitions would have been difficult even before the stock/bond price drops.

[rishig]

That is directly from Ackman's presentation and my numbers are very close.  Again, we are modeling based on numbers provided by management.  Unless they are BS'ing us and that's another story. 

 

• • Conservatively assuming all of Philidor’s sales were lost and not replaced through another channel, the stock is still inexpensive
     
    
    • Eliminating Philidor’s earnings contribution would result in a reduction of Valeant’s “floor” 2016 EBITDA to ~$7.0bn, or ~$14 of Cash EPS(2)
      
    • At the Oct. 29 closing share price of $111.50, Valeant trades at ~8x this alternate estimate of 2016 Cash EPS

 

I'm down the street from the West Wilshire Pharmacy.  I should drive by and peer in the window to see what's up.  Eric aren't you close by as well?  I'll meet you down there for a cup of coffee at McCafe next door.

 

Check out this world class distribution facility, lol: https://www.google.com/maps/place/West+Wilshire+Pharmacy/@34.0635352,-118.3663159,3a,75y,347.11h,92.12t/data=!3m6!1e1!3m4!1sMEj8L4fqONsNnK1nz4m2Mw!2e0!7i13312!8i6656!4m2!3m1!1s0x0:0xc9e914713241498c!6m1!1e1

 

Anyway I think investors are missing the big deal about Philidor.  It isn't just the fraud.  Everyone thought they had a durable portfolio because despite cutting R&D and SG&A they had organic growth from both pricing and sales.  No one brought up the reason why that was: Philidor and alternative fulfillment.  Well guess what, the shorts got that side business killed whether there's fraud or not.  Now all of a sudden there's this "cash EPS' which adds back 100% of amortization and some of that cash EPS is now considered a return of capital.  You can no longer give a 15x multiple to all of cash EPS.  I haven't seen anyone try to figure out what's durable and what isn't now that Philidor is gone.  Or whether Valeant has used other methods to make their business appear more durable than it actually is.  Most bulls (including myself at one point) thought, "oh cool, these guys have sustainable cash flows on practically everything in their portfolio based on organic growth."  No one, not even Ackman, has said they made a mistake and the portfolio of assets are now less "durable."

 

Picasso, there was 15% organic growth ytd, specialty pharma is 7% of revenue, so even if that was all new there was still 8% organic growth.

 

Secondly, lets see what it would look like if Valeant just became a normal pharma company.  Big pharma companies who everybody thinks have sustainable earnings spend 15-20% on R&D.  So if you add $2 billion in R&D per year for Valeant so that it becomes one of the heaviest R&D spenders, and you take off the 7% specialty pharma sales from 2016 guidance, you'd still get $9/share cash EPS with above industry average R&D spend that Valeant would spend way more efficiently than big pharma companies.

 

Except that you are wrong on your organic growth calculation - its too conservative. With specialty at 7% of revenue, we have to assume there was some revenue there last year as well, so the contribution of specialty to overally growth has to be less than 7% of revenue. So north of 8%, maybe 10% growth.

 

And then you have to back out Marathon growth from that which will bring those numbers down.

 

May be I am too old fashioned, but I would question Cash EPS. Ignoring amortization on acquisitions when the portfolio is not durable (i.e. Coke-like) makes no sense to me. The amortization cost is real - like a mine that has to replace depleting assets.

 

The Cash EPS number is correct. I am not questioning whether the actual number is wrong. I am questioning if it reflects economic reality. It isn't the truth just because it is in a power point presentation (management's, Ackman's, .. ). We need to able to rationally understand why it is the reflects reality. May be it does, but can we explain it?

 

So back to the question - why is Cash EPS that ignores all amortization a reality for an asset with a finite life. I would never do that if I owned a mine. Why is it okay here? Is the portfolio truly durable with an infinite life?

[Guest Schwab711]

That is directly from Ackman's presentation and my numbers are very close.  Again, we are modeling based on numbers provided by management.  Unless they are BS'ing us and that's another story. 

 

 

They have a fairly long and frequent history of providing BS numbers in presentations. I think this whole thread blew up because folks fact-checked management and came up with different numbers/conclusions.

[ERICOPOLY]

The reason why I don't dismiss Reitz over this superficial "lie" is that the man is a licensed pharmacist in California at age 64.  I think it's worth hearing what he has to say.

 

Who fed you this story about him "lying" over 60+ emails from Valeant?  Did you fact check that with Reitz or are you accepting Valeants show trial of Reitz?

 

How the fuck could Reitz have known for sure that Valeant was consolidated with Philador given that the relationship was held through a secret option relationship?  So when he says he's never heard of Valeant after getting so many emails from them, doesn't it seem more likely that he is quoted out of context in order to be made to look like a liar so you guys would gobble it down hook, line and sinker?

 

Maybe Reitz was really saying "i don't understand what Valeant's ties are to Philidor which is where the checks normally go"

 

I'd like to hear Reitz side of the story rather than hear the interpretation of it from Valeant -- i don't need the show-trial version of what Reitz meant -- i need to hear Reitz rebuttal.

 

Is this how things are done in Canada?

[feynmanresearch]

That is directly from Ackman's presentation and my numbers are very close.  Again, we are modeling based on numbers provided by management.  Unless they are BS'ing us and that's another story. 

 

• • Conservatively assuming all of Philidor’s sales were lost and not replaced through another channel, the stock is still inexpensive
     
    
    • Eliminating Philidor’s earnings contribution would result in a reduction of Valeant’s “floor” 2016 EBITDA to ~$7.0bn, or ~$14 of Cash EPS(2)
      
    • At the Oct. 29 closing share price of $111.50, Valeant trades at ~8x this alternate estimate of 2016 Cash EPS

 

I'm down the street from the West Wilshire Pharmacy.  I should drive by and peer in the window to see what's up.  Eric aren't you close by as well?  I'll meet you down there for a cup of coffee at McCafe next door.

 

Check out this world class distribution facility, lol: https://www.google.com/maps/place/West+Wilshire+Pharmacy/@34.0635352,-118.3663159,3a,75y,347.11h,92.12t/data=!3m6!1e1!3m4!1sMEj8L4fqONsNnK1nz4m2Mw!2e0!7i13312!8i6656!4m2!3m1!1s0x0:0xc9e914713241498c!6m1!1e1

 

Anyway I think investors are missing the big deal about Philidor.  It isn't just the fraud.  Everyone thought they had a durable portfolio because despite cutting R&D and SG&A they had organic growth from both pricing and sales.  No one brought up the reason why that was: Philidor and alternative fulfillment.  Well guess what, the shorts got that side business killed whether there's fraud or not.  Now all of a sudden there's this "cash EPS' which adds back 100% of amortization and some of that cash EPS is now considered a return of capital.  You can no longer give a 15x multiple to all of cash EPS.  I haven't seen anyone try to figure out what's durable and what isn't now that Philidor is gone.  Or whether Valeant has used other methods to make their business appear more durable than it actually is.  Most bulls (including myself at one point) thought, "oh cool, these guys have sustainable cash flows on practically everything in their portfolio based on organic growth."  No one, not even Ackman, has said they made a mistake and the portfolio of assets are now less "durable."

 

Picasso, there was 15% organic growth ytd, specialty pharma is 7% of revenue, so even if that was all new there was still 8% organic growth.

 

Secondly, lets see what it would look like if Valeant just became a normal pharma company.  Big pharma companies who everybody thinks have sustainable earnings spend 15-20% on R&D.  So if you add $2 billion in R&D per year for Valeant so that it becomes one of the heaviest R&D spenders, and you take off the 7% specialty pharma sales from 2016 guidance, you'd still get $9/share cash EPS with above industry average R&D spend that Valeant would spend way more efficiently than big pharma companies.

 

Except that you are wrong on your organic growth calculation - its too conservative. With specialty at 7% of revenue, we have to assume there was some revenue there last year as well, so the contribution of specialty to overally growth has to be less than 7% of revenue. So north of 8%, maybe 10% growth.

 

And then you have to back out Marathon growth from that which will bring those numbers down.

 

May be I am too old fashioned, but I would question Cash EPS. Ignoring amortization on acquisitions when the portfolio is not durable (i.e. Coke-like) makes no sense to me. The amortization cost is real - like a mine that has to replace depleting assets.

 

The Cash EPS number is correct. I am not questioning whether the actual number is wrong. I am questioning if it reflects economic reality. It isn't the truth just because it is in a power point presentation (management's, Ackman's, .. ). We need to able to rationally understand why it is the reflects reality. May be it does, but can we explain it?

 

So back to the question - why is Cash EPS that ignores all amortization a reality for an asset with a finite life. I would never do that if I owned a mine. Why is it okay here? Is the portfolio truly durable with an infinite life?

Agreed with this. Why should amortization be ignored?

[gary17]

i just have a general question about businesses models involving inorganic growth by acquisitions - the VRX and the likes---

 

Would you consider the acquisition cost part of the 'capital expenditure' in the owner's earning ?  I am wondering if companies like these need to keep making acquisitions ---- is the acquisition cost part of the business model and therefore should be a capital expenditure    Or that's completely wrong ?

 

In my mind if I just buy a business and don't spend any money on it; that's not really a capital expenditure.

 

But if I spend money on it to make the business better or maintain its competitive position, then that's a capital expenditure.

 

 

Thanks

 

[rb]

The reason why I don't dismiss Reitz over this superficial "lie" is that the man is a licensed pharmacist in California at age 64.  I think it's worth hearing what he has to say.

 

Who fed you this story about him "lying" over 60+ emails from Valeant?  Did you fact check that with Reitz or are you accepting Valeants show trial of Reitz?

 

How the fuck could Reitz have known for sure that Valeant was consolidated with Philador given that the relationship was held through a secret option relationship?  So when he says he's never heard of Valeant after getting so many emails from them, doesn't it seem more likely that he is quoted out of context in order to be made to look like a liar so you guys would gobble it down hook, line and sinker?

 

Maybe Reitz was really saying "i don't understand what Valeant's ties are to Philidor which is where the checks normally go"

 

I'd like to hear Reitz side of the story rather than hear the interpretation of it from Valeant -- i don't need the show-trial version of what Reitz meant -- i need to hear Reitz rebuttal.

 

Is this how things are done in Canada?

That's not how things are done in Canada. And let's leave Canada out of it. Valeant is an American pharma with a Canadian address of convenience. The CEO is not even at headquarters. His office is in New Jersey. I'm frankly getting annoyed from reading all the newspapers talking about Canada's Valeant.

[ZenaidaMacroura]

i just have a general question about businesses models involving inorganic growth by acquisitions - the VRX and the likes---

 

Would you consider the acquisition cost part of the 'capital expenditure' in the owner's earning ?  I am wondering if companies like these need to keep making acquisitions ---- is the acquisition cost part of the business model and therefore should be a capital expenditure    Or that's completely wrong ?

 

In my mind if I just buy a business and don't spend any money on it; that's not really a capital expenditure.

 

But if I spend money on it to make the business better or maintain its competitive position, then that's a capital expenditure.

 

 

Thanks

For certain companies that acquire strategically -it can be argued that they are making the acquisition in lieu of R&D/or to maintain a level of operating performance/bolster the competitive position of their existing offerings.  These acquisitions are usually considered capex.

 

What you said:

In my mind if I just buy a business and don't spend any money on it; that's not really a capital expenditure.

 

Is true so long as the returns generated by the business can be maintained without having to spend capex.  Or more specific to VRX, whether the income stream from acquired businesses are "durable."  If they are not durable then they are melting ice cubes and to some extent VRX has to keep buying these ice cubes to report the type of performance shareholders are use to (and adding back acquisition related costs is disingenuous and not an accurate proxy for the true economic benefit of ownership (you can't actually take the money out of the business without impairing future results).

[scorpioncapital]

i just have a general question about businesses models involving inorganic growth by acquisitions - the VRX and the likes---

 

Would you consider the acquisition cost part of the 'capital expenditure' in the owner's earning ?  I am wondering if companies like these need to keep making acquisitions ---- is the acquisition cost part of the business model and therefore should be a capital expenditure    Or that's completely wrong ?

 

In my mind if I just buy a business and don't spend any money on it; that's not really a capital expenditure.

 

But if I spend money on it to make the business better or maintain its competitive position, then that's a capital expenditure.

 

 

Thanks

 

I just do it simply like this: Valeant debt $30 billion. Common stock $10 billion

Interest payments? $2 billion-ish?

EBITDA 2016 claimed: 7.5 billion

Taxes minimal, capex - half a billion-ish maybe more now?

Let's say 4.5 to 5 billion.

10% yield.

 

Here's the rub - virtually every stock in the space I've seen has virtually identical return - some with more or less debt. Endo, Horizon, Depomed, all of them, same return.

 

Now let's take two other stocks unrelated, IBM and PSX. Both 10-11% yield with money being returned via buybacks and dividends so you get it back on a steady schedule.

 

No doubt a 10% yield is not bad for non-growing, possibly reverse-growing businesses.

So since all investment is comparative analysis, one must ask: Why bother with a highly controversial firm with high debt when it yields the same as virtually all the others in the space and several other large caps in other fields?