VRX - Valeant Pharmaceuticals International Inc.

[ERICOPOLY]

Yes, the weird structure, the rapid growth, could have made him paranoid.  Then he looks on the internet and finds AZ_Value's blog and asks a lawyer about it.  The lawyer is like... of course you need a lawyer!

 

Picasso's version is a lot funnier.

 

'Tis a pity though that Philador was dropped like a stone by all it's partners and now has to close down. Now what were they concerned about in their audits or was that just bullshit because it sounds better than saying "we're dropping Philador because of the ravings of a short seller".

[ZenaidaMacroura]

Which brings me to the next possibility:

 

Maybe Kaufman and Reitz met at the Camarillo outlet malls during the summer (hear me out).  Their wives were shopping at the Banana Republic Outlet and they were waiting on the bench outside.  Perhaps Kaufman started a conversation by complaining about how his ex-wife spent so much (all Century City lawyers have ex-wives) and now they're stuck driving a couple hours out to shop at the outlet.  Women, am I right?  Reitz laughs and says Kaufman should be happy, he sold his business for $350k last year and it's doing around $300 million of sales this year.  Kaufman's radar goes off and begins his probe into what Reitz does for a living....

 

Fast forward and the relationship between Reitz and Kaufman builds.  As Kaufman learns about some of the strange layers behind R&O's main customer, he starts asking questions like "are you sure they are fully licensed?" and "how do you know they aren't defrauding the insurance companies?"  and then "you do know you're on the hook for fraud if they're faking these orders right?"

 

Suddenly tension between Reitz and Philidor escalates.  Kaufman says its time for Reitz to protect himself after a long, honest and hard working career.  Hold the checks and funds until we get down to the bottom of this.

 

.........

 

Meanwhile on the other side of the continent:

 

William Ackman:  Who the fuck is this R&O guy and why the hell do we care?

 

..........

 

Somewhere at Valeant Headquarters as Pearson walks into his office and hands his coat to the secretary:

 

Michael Pearson:  Hey Alice, why's everyone so quiet this morning?  I heard someone mention something about Citron..... Maybe they're making margarita's to celebrate closing the Amnoun acquisition without inviting me.... Holy god, mother of all abominations what the f*&$ just happened to our stock?

 

...........

 

And then all hell breaks lose.

 

It's possible.

Haha that was entertaining

[Picasso]

All we really know about the PBM's and audits was this:

 

Valeant's stock recovered throughout the week than sank on the CVS and Express Scripts news. CVS, late on Thursday, said its Caremark program was dropping Philidor. CVS took the step following an audit of Philidor, citing "noncompliance" with its provider agreement, the company said.

 

And that Eric Rice was not the PIC, but signing off as PIC.  We haven't seen evidence of this, just accusations.

[ERICOPOLY]

I'm less stressed about the R&O suit after all of this.  It wasn't until I considered the angle that Reitz is looking at a deceptive looking structure where it's not worth taking the chance.  He really has a lot to lose and with other people shipping his license around and signing off on things, even if legal, that's something that's beyond his control and not transparent to him.  So it's a perfectly understandable response.  Actually, Left's Enron response was reasonable as well when you consider that he lives for finding that kind of thing and here was a company that chose to hide something from investors and a lot had already been written about deceptive disclosures.

 

 

[giofranchi]

I'm less stressed about the R&O suit after all of this.  It wasn't until I considered the angle that Reitz is looking at a deceptive looking structure where it's not worth taking the chance.  He really has a lot to lose and with other people shipping his license around and signing off on things, even if legal, that's something that's beyond his control and not transparent to him.  So it's a perfectly understandable response.  Actually, Left's Enron response was reasonable as well when you consider that he lives for finding that kind of thing and here was a company that chose to hide something from investors and a lot had already been written about deceptive disclosures.

 

So Eric,

Could you please summarize your current view about VRX?

This thread has become so difficult to follow, and lots of people on this board, me included, hold your view in very high regard.

Thank you very much for your time,

 

Gio

 

[ERICOPOLY]

I'm less stressed about the R&O suit after all of this.  It wasn't until I considered the angle that Reitz is looking at a deceptive looking structure where it's not worth taking the chance.  He really has a lot to lose and with other people shipping his license around and signing off on things, even if legal, that's something that's beyond his control and not transparent to him.  So it's a perfectly understandable response.  Actually, Left's Enron response was reasonable as well when you consider that he lives for finding that kind of thing and here was a company that chose to hide something from investors and a lot had already been written about deceptive disclosures.

 

So Eric,

Could you please summarize your current view about VRX?

This thread has become so difficult to follow, and lots of people on this board, me included, hold your view in very high regard.

Thank you very much for your time,

 

Gio

 

I don't know what to make of the situation as a whole. 

 

I'm less certain though that there is anything much to the R&O case after reasoning that one right through to the end.  I feel more secure about it for having done that, rather than just leaving it as something taken on face value from Pearson (who I wasn't going to question on it before he glossed over it in a presentation).  It was a presentation to defend against fraud, and here was a case that was alleging widespread fraud by an insider and he called it a "standard thing" (so without knowing much more than that it of course made me question everything).

 

I do understand women a lot better now!

 

[giofranchi]

I do understand women a lot better now!

 

Ahah!! ;)

 

Thank you,

 

Gio

[AzCactus]

http://finance.yahoo.com/news/icahn-nods-valeant-interest-pushes-233355132.html

[ERICOPOLY]

http://finance.yahoo.com/news/icahn-nods-valeant-interest-pushes-233355132.html

 

Pearson was questioned about tax inversion and I liked his response.  He said it's more likely that the US eventually changes, rather than expecting the whole rest of the entire world to change over to the US system.

[lessthaniv]

Icahn going long .... How predictable.

[valueyoda]

Actually, it seems that Carl was short if you listen closely to the NY Times Conference.

[original mungerville]

I'm less stressed about the R&O suit after all of this.  It wasn't until I considered the angle that Reitz is looking at a deceptive looking structure where it's not worth taking the chance.  He really has a lot to lose and with other people shipping his license around and signing off on things, even if legal, that's something that's beyond his control and not transparent to him.  So it's a perfectly understandable response.  Actually, Left's Enron response was reasonable as well when you consider that he lives for finding that kind of thing and here was a company that chose to hide something from investors and a lot had already been written about deceptive disclosures.

 

So Eric,

Could you please summarize your current view about VRX?

This thread has become so difficult to follow, and lots of people on this board, me included, hold your view in very high regard.

Thank you very much for your time,

 

Gio

 

I don't know what to make of the situation as a whole. 

 

I'm less certain though that there is anything much to the R&O case after reasoning that one right through to the end.  I feel more secure about it for having done that, rather than just leaving it as something taken on face value from Pearson (who I wasn't going to question on it before he glossed over it in a presentation).  It was a presentation to defend against fraud, and here was a case that was alleging widespread fraud by an insider and he called it a "standard thing" (so without knowing much more than that it of course made me question everything).

 

I do understand women a lot better now!

 

That is also my summary. I don't know where we are at at this point, Valeant presentation looked pretty bad and it was their response which caused me concern along with PBM's cutting off ties. Valeant still could be very dirty, or all the dirt could be with Philidor, or we may actually find out Philidor was just a bit dirty. I think odds are someone was at least a bit dirty and maybe a lot dirty.

 

 

 

 

 

 

[original mungerville]

Actually, it seems that Carl was short if you listen closely to the NY Times Conference.

 

I would guess short. Or options both ways or something along those lines.

[Picasso]

Icahn basically said that Valeant was expensive because the amortization isn't counted as an expense. So I doubt he's long and perhaps short.

[lessthaniv]

fair enough. just not surprised to hear his name.

[ERICOPOLY]

This is probably the time when fund managers who impulsively bought the dip are now getting out before their fundholders ever learn of their rash decision to buy.  Why defend a 1% controversial position when that 1% can't move the needle anyway?  No reward for them to stick around for the grilling and disdain.

[rb]

It's not just Claire McCaskill anymore.

 

http://www.reuters.com/article/2015/11/04/us-usa-congress-drugprices-idUSKCN0ST1S220151104

[Picasso]

I mentioned this earlier, welcome to the party!

 

Anyone adding at this price? The noise seems to have died down for now... Thank god!

 

Icahn going long .... How predictable.

 

Just my opinion, but I don't think the current price factors in potential risks.  Whether deserved or not, Valeant has attracted a lot of attention from reporters, congress, doctors, hospitals, pharmacy benefit managers, etc.  You can see different reporters asking for information from people posting on the CafePharma message boards for example.  We really don't know what might be coming out in the near future.

 

Even Glenn Greenberg said this is going to be a long process and he's unable to buy more shares.  Ackman can't buy anymore, Sequoia can't buy anymore.  In fact, Sequoia may end up being a seller to a certain extent.

 

You haven't seen capitulation from any big Valeant supporters yet.  Most sell side estimates are still very high for 2016.  Some started using a DCF or brought down the multiple on cash EPS.  But there's still some denial about cash EPS.

 

Think about this: Valeant bonds are trading around 80 with 6% coupons.  That means in three years the net cost basis on someone buying a Valeant bond will be $62.  Valeant spent about $40 billion of acquisitions meaning those acquisitions would only be worth $18 billion in order for those bonds to produce losses.  Compare that to the $62 billion enterprise value on the entire company today.  That's a big gap.

 

So I don't see how the stock goes up without some kind of "reset."  I'm waiting for some other bomb(s) to drop before getting back in.  It's tempting to buy after such a sharp decline but I think the story has changed quite a bit from when it was $200+.  In hindsight I was wrong for thinking it bottomed at $160 (on price gouging concerns) and $100 (on Enron allegations).  There's a lot of other market forces going on here besides losing some revenue from Philidor, etc. 

[handycap5]

 

Think about this: Valeant bonds are trading around 80 with 6% coupons.  That means in three years the net cost basis on someone buying a Valeant bond will be $62.  Valeant spent about $40 billion of acquisitions meaning those acquisitions would only be worth $18 billion in order for those bonds to produce losses.  Compare that to the $62 billion enterprise value on the entire company today.  That's a big gap.

 

 

picasso, can you expand on this a little more? i think you are making an important point, but i don't fully understand it yet...

[Picasso]

If you buy the stock you are assuming no earnings impairment which could lower the value of the business below the debt + equity value at the current price. That's like $62 billion, or it was before the stock started falling in price again.

 

But the bonds are trading at 80% of face value and earn 6% of face value a year. You're only going to lose owning those bonds if the equity is fully wiped out and the sum total of everything Valeant acquired is worth half of what they purchased it for. At least if we're looking out a few years to collect a few coupons. That's a pretty bad situation that no equity holder is thinking will happen.

 

I think the bonds are just mispriced rather than saying the equity is worthless.  If or when the cost of capital goes down for Valeant then that gap will change. But a large discount to face for Valeant bonds is strange because they have a ton of cash earnings coverage in the short term which is more important to the bond holders than equity holders. Amortization may be a cost for equity holders in the long term, but to the bond holders thats real cash to cover interest and principal. Also Valeant doesn't pay a lot of capex or taxes so the debt burden isn't as high as people think.

 

But regardless of which market is right (bonds or stock) that is a really large gap to fill. The bonds are getting close to a price where it's nearly impossible to lose over then years. Not really the case for the equity. Does that make sense?

 

tldr; bondholders dont like the risk of Valeant here, equity holders still think theres a ton of excess earnings

[wisdom]

http://finance.yahoo.com/news/exclusive-u-insurer-caught-odd-172514385.html

 

Philidor had been refectedf by one insurer in fall of 2014. Timeline can be important.

[wisdom]

I believe MP is doing the right thing by getting down to fixing the issues and working on growing the company. Results should speak for themselves in the long run.

[rpadebet]

If you buy the stock you are assuming no earnings impairment which could lower the value of the business below the debt + equity value at the current price. That's like $62 billion, or it was before the stock started falling in price again.

 

But the bonds are trading at 80% of face value and earn 6% of face value a year. You're only going to lose owning those bonds if the equity is fully wiped out and the sum total of everything Valeant acquired is worth half of what they purchased it for. At least if we're looking out a few years to collect a few coupons. That's a pretty bad situation that no equity holder is thinking will happen.

 

I think the bonds are just mispriced rather than saying the equity is worthless.  If or when the cost of capital goes down for Valeant then that gap will change. But a large discount to face for Valeant bonds is strange because they have a ton of cash earnings coverage in the short term which is more important to the bond holders than equity holders. Amortization may be a cost for equity holders in the long term, but to the bond holders thats real cash to cover interest and principal. Also Valeant doesn't pay a lot of capex or taxes so the debt burden isn't as high as people think.

 

But regardless of which market is right (bonds or stock) that is a really large gap to fill. The bonds are getting close to a price where it's nearly impossible to lose over then years. Not really the case for the equity. Does that make sense?

 

tldr; bondholders dont like the risk of Valeant here, equity holders still think theres a ton of excess earnings

 

Picasso,

I get your point, however i think you are viewing this short term. Yes there is going to be lot of scrutiny and media/regulator attention for few months. It may even impact revenues, earnings in the next year or two. This is a news cycle which will pass once they find something else to focus their attention on.

 

Look past all this smoke and confusion that exists now. There are real assets here. They paid 40b for it. They made some improvements. They have their tax rate as an asset. Their products are small individually and diversified. Current management doesn't have to run it, these assets will have value in somebody else's hands too.

 

Few month ago, investors here were saying how 40b invested by VRX is suddenly worth 3x that amount, because of all these assets/capabilities VRX possessed. Now the market is saying it is worth only 1.5x of what they paid. To me 1.2-1.5x makes more sense in a decently efficient market.

 

In 2-3 of years as you noted their cashflow will enable them to pay off 20%-30% of current debt. Equity portion of firm value is going to go up by similar amount.

 

I am not predicting the price won't go down even more, but I think it is decent value here with lots of free optionality.

[Guest Grey512]

rpadebet, in your view, what is a fair market cap for VRX?

[Picasso]

rpadebet,

 

I don't disagree with you, I just wanted to highlight how the glass-half-empty bondholders and glass-half-full stockholders view the situation.  I usually pass on stocks where the bondholders are not buying the stockholders optimism.  If we can get 9% risk-free in the bonds, what kind of risk are we taking on in the equity to get similar returns?  I would say return per unit of risk is a lot better in the bonds than the stock.

 

The question is what the long-term real cash flows left for equity holders look like for the next ten plus years.  We're paying $30 billion for it today, what's the sum total of those excess cash flows in perpetuity?  I think that's the struggle with getting new investors in this stock.  There's a lot of variability there depending on what gets uncovered over the next few months.  I think there's some really good assets here (the tax asset, B+L, Salix) but I'm waiting for that equity optimism to roll off.  Despite the share price decline there are a lot of optimists in the stock clinging to $14-16 of cash EPS next year.

 

I just think the market conditions are not right to be long the equity yet.  I don't feel like stomaching 50% downside in something where there's $30 billion of bondholders ahead of me.  I've been wrong on this before and I might be wrong again.