VRX - Valeant Pharmaceuticals International Inc.

[ERICOPOLY]

Sure, patent law creates an artificial monopolistic situation. But we as a society created this law because we wanted to incentivize people to invent things. As a society, I guess we then felt that even though patents could lead to inefficient monopoly for limited time, the benefit of new inventions out weighs that as a whole.

 

I personally think our patent laws need revision. Especially with regards to drugs where minor changes in mixture, molecule or delivery is granted a new patent. I think full blown patents should be limited to true inventions. Minor modifications could probably be used to extend patent life for a year or two at a time if proven useful.

 

Again, I agree with you on the inefficiency this introduces at specific product level, but it is not because of inherent immorality of drug company but due to one size fits all regulations. The solution cannot be more regulations to control price increases.

 

I'm inclined to agree but I still say that you can't argue, in this instance, that prices rises are moral because they optimise resource allocation.  In many instances they are highly immoral because they do precisely the opposite.  And they are often (as you allowed) certainly bad business practice.

 

I think it depends on what you are raising prices on.  Let's say it's a drug that critical for the treatment of a child that is dying or suffering a terrible long term disease.  You raise the annual price of his treatment from 10,000 to 200,000, because you argue, that's what the market will bear.  His family's copay goes from 4,000 to 80,000 per year.  Now, look deep into the child's eyes and explain that what you are allowed to do by law has nothing to do with morality.

 

Keep in mind that the drug was developed by some company with a 10,000 price point in mind -- so presumably that was a price point that justified the R&D.  So I don't know how you could argue that capping further insane price hikes after a new investor buys the drug would deter R&D and drug development.  It would already be a fact that the drug was developed, R&D was done, with only 10,000 in mind.

[original mungerville]

Unless the whole thing is totally unsustainable (ie unless the problems at Philidor and Marathon permeate the whole business), I can't see how they don't report AT LEAST $13 per share in cash EPS (probably higher) along with positive organic revenue growth (even after shutting down Philidor, I see high single digit organic; after excluding Marathon still high single digit organic with a couple years of mid single digit).

So at $80, that's 6x earnings (unless its all complete bull shit which I would find surprising given the board).

 

Enterprise value of what now? $60 billion with EBITDA of at least $6 billion (probably higher) even with this shit storm - so 10x.

 

If market prices this off of EBITDA and starts to totally discredit cash EPS, Pearson, Valeant biz model, I guess it could go lower than this 10x...

 

Assets are worth more than they bought them for with their tax advantage - there is no question about that. And despite all the fat being cut, the tax advantage is a big merger synergy for another larger company if the board decides Pearson has to go and is open to selling.

 

 

[ni-co]

I bought some LEAPs today. Looks like a bimodal outcome is most likely. Either it's a fraud (and a zero) or a very cheap growth stock. VRX at $80 one year from now seems unlikely.

Is it a growth platform business that finds opp to acquire, cut cost etc; or a faked growth story in which they mainly use very aggressive/unsustainable sales tactics to boost sales after acquisition?

 

If there is any difference at all between our statements it doesn't change the case for a bimodal outcome.

[original mungerville]

At $60 per share, that would be Enterprise value of $50 billion or around 8x very conservative EBITDA of $6 billion, probably more like $7billion, so 7x.

 

I think that has to be the floor price. Should look at upside potential versus downside risk.

 

The whole company, not just Philidor, has to be a complete fraud for this thing to go lower than $60,70,80 per share longer-term, and not lower than 60s or 70s short-term.

 

Views?

[original mungerville]

Agree, I noted bimodal outcome last week - but more bimodal now especially as the stock tanks further now.

 

Eric, I assume you are out of this stock right now? Are you thinking LEAPS possibly at some point but want to see how things develop before taking a position?

 

 

[CorpRaider]

Can get some fat premiums if you got the stones to sell some puts.  Haha.

[rishig]

At $60 per share, that would be Enterprise value of $50 billion or around 8x very conservative EBITDA of $6 billion, probably more like $7billion, so 7x.

 

I think that has to be the floor price. Should look at upside potential versus downside risk.

 

The whole company, not just Philidor, has to be a complete fraud for this thing to go lower than $60,70,80 per share longer-term, and not lower than 60s or 70s short-term.

 

Views?

 

Reminds me of a few Buffett quotes:

 

"You see a cockroach in your kitchen; as the days go by, you meet his relatives"

"The stock market is a no-called-strike game. You don't have to swing at everything"

"Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you."

 

[ccplz]

On Ackman and Valeant: http://www.wsj.com/articles/activist-investor-bill-ackman-plays-defense-1446689963

[AzCactus]

At $60 per share, that would be Enterprise value of $50 billion or around 8x very conservative EBITDA of $6 billion, probably more like $7billion, so 7x.

 

I think that has to be the floor price. Should look at upside potential versus downside risk.

 

The whole company, not just Philidor, has to be a complete fraud for this thing to go lower than $60,70,80 per share longer-term, and not lower than 60s or 70s short-term.

 

Views?

 

Reminds me of a few Buffett quotes:

 

"You see a cockroach in your kitchen; as the days go by, you meet his relatives"

"The stock market is a no-called-strike game. You don't have to swing at everything"

"Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you."

 

I think this applies to Pearson potentially. 

[ERICOPOLY]

Agree, I noted bimodal outcome last week - but more bimodal now especially as the stock tanks further now.

 

Eric, I assume you are out of this stock right now? Are you thinking LEAPS possibly at some point but want to see how things develop before taking a position?

 

Yes, I am out of the stock still.

 

I think I should do something like that (call options) if I do something at all but I haven't. 

[arcube]

Valeant late on royalties to PDL Biopharma:

 

"Total revenues decreased by 24% and 11% respectively for the three and nine months ended September 30, 2015 when compared to the same periods in 2014. The decrease is primarily driven by the decrease in the Depomed royalty rights cash proceeds related to Valeant Pharmaceuticals sales of Glumetza, decreased interest revenues due to the early payoff of the AxoGen and Durata notes receivables, and decreased Actemra royalties as a result of the conclusion of the Actemra license agreement.

 

The decrease in the Depomed royalty rights proceeds in the quarter ended September 30, 2015 is the result of no royalty payments being made by Valeant during the quarter. While Valeant reported revenue for Glumetza of $53 million for the period ending September 30, 2015, it had not provided monthly reports or payments per its assumed contract during this period. In late October 2015, Valeant issued to us reports of net royalties of $16.9 million due and a cash payment of $18.9 million for the third quarter of 2015.

 

We have reflected this information in our quarter end fair value assessment. Another way to explain this is that these cash flows are included in or future cash flow projections and reflected in the present value of the Depomed assets. As a result of the continued uncertainty with inventory levels, the impact of gross to net reporting and the delays in reporting by Valeant we expect to exercise our royalty audit right for Glumetza in the near future."

 

http://seekingalpha.com/article/3647606-pdl-biopharmas-pdli-ceo-john-mclaughlin-on-q3-2015-results-earnings-call-transcript?part=single

 

This is what happens when you cut out all SG&A. Not everything is "fat".

 

Well put. Don't mess with the bone while removing fat.

[rishig]

At $60 per share, that would be Enterprise value of $50 billion or around 8x very conservative EBITDA of $6 billion, probably more like $7billion, so 7x.

 

I think that has to be the floor price. Should look at upside potential versus downside risk.

 

The whole company, not just Philidor, has to be a complete fraud for this thing to go lower than $60,70,80 per share longer-term, and not lower than 60s or 70s short-term.

 

Views?

 

Reminds me of a few Buffett quotes:

 

"You see a cockroach in your kitchen; as the days go by, you meet his relatives"

"The stock market is a no-called-strike game. You don't have to swing at everything"

"Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you."

 

I think this applies to Pearson potentially.

 

One signal to note is that Sharon Osberg who is in Buffett's inner circle was an independent director at Sequoia and she one of the two directors that quit. What are the chances she didn't consult Buffett before taking such a big step?

 

[LongHaul]

from the recent wall street journal article, it looks like ackman is still in it after questioning valeant.    wild that two of buffett's most admired investors, lou simpson & greg alexander were probably in this.  the company really does need to come out and say something at this point with price under $80.  if there were massive fraud, i think value act would have cut and run by now since there guys are on the board.

 

Actually, since they're on the board, it's significantly more difficult for ValueAct to just cut and run.

 

With boardmembers like ValueAct, why is this a company that gives quarterly EPS forecasts and has a reputation of half-truth powerpoint presentations?  I mean, doesn't ValueAct want things presented in a more straightforward way?  I'm not making any insinuations, but it should frustrate them just as much as the next guy and if you have a couple of seats on the board you've had ample opportunity to say to Pearson: "Enough of this bullshit, it's eroding investor confidence."

 

How does ValueAct track the performance of the individual acquisitions via the 10-K?  They must see AZ_Value's point, but for whatever reason things are the way they are.

 

Good point Eric.

I think ValueAct's job as board members was horrible.  Pearson and crew have been BSing with powerpoint, etc for a long time.

Maybe this reflects on the board members character that this behavior is tolerated.  Personally I would have either said stop the BS or I am leaving. 

 

I would not rely on anything Peasrson says including the powerpoint EPS projections.

 

I think VRX is worth less than $50

 

I also can't think of much Pearson has done that has truly been long term oriented. 

 

 

[rpadebet]

Revised analyst price targets (around $130 from this week itself) are making them look stupid at these price levels. Some of these poor souls held their nose and cut their targets 50%+ but maintained hold rating. they went from platform value to no-growth DCF's. They will probably have to move quickly to sum of the parts valuation + calls for Pearson to quit for this thing to eventually bottom out.

 

I am reminded of similar things happening (not the story, but analyst action) to FB, AAPL, NFLX in the recent past

[undervalued]

Yes, that's what it sounds like.

 

If true this doesn't sound good:

http://pdfsr.com/pdf/the-missing-piece

 

I can forgive anyone for ignoring that and ignoring what he had to say, but this is bizarre:

 

 

"Matching Grants for Share Purchases."

 

The executive is given matching shares when he buys stock with his own shares. 

 

So do I understand that correctly?  Like if you see an insider buy stock at $200, he is really only investing $100 of his own money?  That kind of shit (when insiders buy) makes a lot of people feel confident about the stock price.  Are they trying to pump up the stock or something?  Weird.

 

Not sure if it will be shown as an Open Market Purchase. That would be different than grant or matching grant?

 

Good point.  It's probably more like an employee stock purchase plan.

 

Somebody explained it to me in a personal message a few minutes ago.

 

It shows up as in insider direct buy as if he were just buying the same as you and I do on the open market:

http://www.sec.gov/Archives/edgar/data/885590/000088559015000051/xslF345X03/primary_doc.xml

 

Then after a period of time he gets his first Restricted Stock Unit vested:

http://www.sec.gov/Archives/edgar/data/885590/000088559015000060/xslF345X03/primary_doc.xml

 

So after the date of his first purchase, we'll just think "oh look an insider is buying" and maybe we'll feel more confident in the market price.  But he might effectively be risking only 50% of market value since he will ultimately have twice as many shares yet only pay for 1/2 of them.  But they don't all vest immediately.  It's just that he really doesn't have as much of his own skin in the game as it appears.

 

It's still a decent deal for him even if the shares are 70% overvalued.  He's effectively buying $1.70 for 85 cents of his own money.  So he has a lot of downside protection.

 

Do I understand it right?

 

This is the first time I've heard something like this. Is this a popular format insider purchase / RSU in other companies as well?

[LongHaul]

The other thing I heard (~3rd hand) was that after the DJ meeting someone asked Munger about Valeant.

Munger said something to the effect that it was pattern recognition and he has seen similar situations.

 

If I had to pick a number I would say less than 5% of serial acquirers create any long term value.  You are paying a premium, the seller has informational advantages, integration is a mess and distracting, etc.

They can look like they work for a long time - Tyco took awhile.

 

The historical landscape is littered with failed rollups.  The 90's had a ton of them. 

I think the pharma rollup strategy is still unproven.  I have serious doubts that Pearson can buy a ton of stuff, outbid everyone else and create a ton of value.  And then if it was all real - why screw around with Philidor, BS with powerpoint, etc.  Probably because it is not.

 

 

[sampr01]

Not to criticize anyone, but CoBF members are quoting buffet too much on every thread. How about Buffet's Geico increasing car insurance premiums for every renewal even though no change in driver history and how about their claims processing like 70% fault or 80 % fault ratio. It applies to everyone including buffet's companies too. I like buffet and his philanthropy, but he runs business like every other businessman 

[ERICOPOLY]

Not to criticize anyone, but CoBF members are quoting buffet too much on every thread. How about Buffet's Geico increasing car insurance premiums for every renewal even though no change in driver history and how about their claims processing like 70% fault or 80 % fault ratio. It applies to everyone including buffet's companies too. I like buffet and his philanthropy, but he runs business like every other businessman

 

I think there is some fairness to that comment, but you've really got a family over the barrel if they have a sick loved one and they have to choose between helping him and selling the house, or watching him suffer.  Even men on the front lines who've seen a lot of war can come across a situation and say :"wow, that's some really cold shit".

[Peregrine]

Not to criticize anyone, but CoBF members are quoting buffet too much on every thread. How about Buffet's Geico increasing car insurance premiums for every renewal even though no change in driver history and how about their claims processing like 70% fault or 80 % fault ratio. It applies to everyone including buffet's companies too. I like buffet and his philanthropy, but he runs business like every other businessman

 

Not sure this analogy makes sense. In most cases GEICO charges the lowest price on an otherwise commodity product. They don't exactly have pricing power. If their prices go up less than premium increases for the entire industry, they're still being competitive.

 

Valeant gains access to drugs with likely no viable substitutes and charges up the ass on them just because they can.

 

Would Buffett do the same if he were in Pearson's position? Highly doubtful - he has always stuck to his "front page" principle. As Charlie Munger says, such a price gouging practice is unsustainable as it draws extra scrutiny and public outrage that will ultimately necessitate change.

[Guest roark33]

Ok, a few random thoughts. 

 

The short case so far has been easily "beatable" for the following reasons:

 

1. Citron Fraud: well, it isn't fraud, in fact the lawsuit proves the exact opposite, that they were selling products and Reitz was getting paid.

 

2. Hempton: Focused mainly on insurance fraud.  If that's the case, cut out the tumor, pay a fine and move on.  This was the crux of Ackman's argument. 

 

 

Future Short case: The Philidor sales channel model is much more important to VRX than they are currently disclosing.  I can't really prove this yet, but I made lots of call to pharmacies and I encourage any of you to do the same.  Go visit a costco during the middle of the day.  I came away with the realization that very few, if any, of VRX's drugs move through this "normal" channel.  Their drugs don't move that way because of many hurdles:

 

1. Pharmacist suggest a generic.

2. Insurance pre-approval requires "dispense as written" so doctor must call doctor, delay, delay.

3. Most of VRX's drug have such a high sticker price that they aren't stocked.  (try to find jublia in stock at your local pharmacy, it isn't there).

 

So, the patient comes to pharmacy, they need to order Jublia, go back and forth with insurance, a week later they get the product in and the patient just doesn't come and pick it up. 

 

All of these hurdles combined are the reason for Philidor and its ilk.  Without them, I am having a hard time believing that VRXs products will sell anywhere near the numbers they are selling now.  That might not show up this Q, but it will in Q1.

 

VRX claims multiple times that Philidor is only 7% of sales, but I think Philidor may be fudging that and the network pharmacies are not being consolidated.  If I am wrong on how they are fudging it, I am probably still right on the underlying business channel problems.  I think VRX is playing fast and loose with the definition of specialty pharmacy and the amount of revenues that makes up, in the same way they were playing fast and loose with the idea that they don't "own" Philidor.  Anyway, my two cents.  I did this research when I was long the stock (I bought after the citron piece on Oct 21). I sold earlier this week, so there's my bias... Open to thoughts or suggestions.

 

 

[dbuch]

There have been rollups that work...Danaher, Roper, ITW, UTX. Not every rollup is an accounting fraud. You can achieve significant economies of scale in certain industries. I don't think being a serial acquirer necessarily means its a fraud but you should see cash flow follow. Danaher run by the Rales brothers is constantly buying up companies levering up to do so and then applying their DBS (lean system) to create synergies. They delever over the next few years and do it again.

[Happy]

Yes, that's what it sounds like.

 

If true this doesn't sound good:

http://pdfsr.com/pdf/the-missing-piece

 

I can forgive anyone for ignoring that and ignoring what he had to say, but this is bizarre:

 

 

"Matching Grants for Share Purchases."

 

The executive is given matching shares when he buys stock with his own shares. 

 

So do I understand that correctly?  Like if you see an insider buy stock at $200, he is really only investing $100 of his own money?  That kind of shit (when insiders buy) makes a lot of people feel confident about the stock price.  Are they trying to pump up the stock or something?  Weird.

 

Not sure if it will be shown as an Open Market Purchase. That would be different than grant or matching grant?

 

Good point.  It's probably more like an employee stock purchase plan.

 

Somebody explained it to me in a personal message a few minutes ago.

 

It shows up as in insider direct buy as if he were just buying the same as you and I do on the open market:

http://www.sec.gov/Archives/edgar/data/885590/000088559015000051/xslF345X03/primary_doc.xml

 

Then after a period of time he gets his first Restricted Stock Unit vested:

http://www.sec.gov/Archives/edgar/data/885590/000088559015000060/xslF345X03/primary_doc.xml

 

So after the date of his first purchase, we'll just think "oh look an insider is buying" and maybe we'll feel more confident in the market price.  But he might effectively be risking only 50% of market value since he will ultimately have twice as many shares yet only pay for 1/2 of them.  But they don't all vest immediately.  It's just that he really doesn't have as much of his own skin in the game as it appears.

 

It's still a decent deal for him even if the shares are 70% overvalued.  He's effectively buying $1.70 for 85 cents of his own money.  So he has a lot of downside protection.

 

Do I understand it right?

 

This is the first time I've heard something like this. Is this a popular format insider purchase / RSU in other companies as well?

 

My father worked as a manager for AXA and the company matched his stock purchases 11:1 with a cap. So he got $12 in AXA stock for every $1 he put in. The amounts were much smaller though. But I thought that was a very good deal :)

 

[rpadebet]

Not to criticize anyone, but CoBF members are quoting buffet too much on every thread. How about Buffet's Geico increasing car insurance premiums for every renewal even though no change in driver history and how about their claims processing like 70% fault or 80 % fault ratio. It applies to everyone including buffet's companies too. I like buffet and his philanthropy, but he runs business like every other businessman

 

I think there is some fairness to that comment, but you've really got a family over the barrel if they have a sick loved one and they have to choose between helping him and selling the house, or watching him suffer.  Even men on the front lines who've seen a lot of war can come across a situation and say :"wow, that's some really cold shit".

 

There are plenty of diseases currently where there is no known cure. In a free market system, however convoluted the money flow and however questionable the morality appears on the surface, there is potential hope that eventually a cure can be found. No other system offers that and in a price control scenario, we might not even know and miss what we didn't invent.

 

I am not talking abt a hypothetical child here, but my own, who suffers from multiple conditions currently incurable. I want to look him in the eye and say, this system offers us the best chance that eventually there will be something invented to make your life better than the current prognosis. It maybe pricey initially, like stents in heart surgery were, but eventually the system will make sure it is affordable.

 

Existence of cure however pricey, does more for humanity, than absence of cure in the long run. There are plenty of ways to pay for expensive cures, if they exist. While there maybe heart wrenching stories of children dying because the family couldn't afford the cure, there are plenty of children (multiples of the first scenario) who die each year because there is no known cure available at this time. I guess as a society we find it easier to rationalize the later.

 

I sincerely hope there is lot of excess money to be made for investors in this industry. That will ensure attraction for new money to fund new R&D and thus new cures.

 

I find it deeply immoral to muzzle potential future life saving inventions in order to save a few bucks now and make sure some hedge fund investors don't get rich.

[merkhet]

Wow, this thread increases post counts pretty quickly.

 

Just for clarification. My point about ValueAct not being able to cut and run is because they're on the board. They're insiders, so their buying and selling activity is somewhat restricted. If they found out something bad, I think they'd have to resign first (like Ackman did w/ JCP).

[ERICOPOLY]

Not to criticize anyone, but CoBF members are quoting buffet too much on every thread. How about Buffet's Geico increasing car insurance premiums for every renewal even though no change in driver history and how about their claims processing like 70% fault or 80 % fault ratio. It applies to everyone including buffet's companies too. I like buffet and his philanthropy, but he runs business like every other businessman

 

I think there is some fairness to that comment, but you've really got a family over the barrel if they have a sick loved one and they have to choose between helping him and selling the house, or watching him suffer.  Even men on the front lines who've seen a lot of war can come across a situation and say :"wow, that's some really cold shit".

 

There are plenty of diseases currently where there is no known cure. In a free market system, however convoluted the money flow and however questionable the morality appears on the surface, there is potential hope that eventually a cure can be found. No other system offers that and in a price control scenario, we might not even know and miss what we didn't invent.

 

I am not talking abt a hypothetical child here, but my own, who suffers from multiple conditions currently incurable. I want to look him in the eye and say, this system offers us the best chance that eventually there will be something invented to make your life better than the current prognosis. It maybe pricey initially, like stents in heart surgery were, but eventually the system will make sure it is affordable.

 

Existence of cure however pricey, does more for humanity, than absence of cure in the long run. There are plenty of ways to pay for expensive cures, if they exist. While there maybe heart wrenching stories of children dying because the family couldn't afford the cure, there are plenty of children (multiples of the first scenario) who die each year because there is no known cure available at this time. I guess as a society we find it easier to rationalize the later.

 

I sincerely hope there is lot of excess money to be made for investors in this industry. That will ensure attraction for new money to fund new R&D and thus new cures.

 

I find it deeply immoral to muzzle potential future life saving inventions in order to save a few bucks now and make sure some hedge fund investors don't get rich.

 

I agree that you don't want to dis-incentivize drug development.

 

But these are drugs that were developed already for a given price point.  The R&D was already deployed.  Therefore, the R&D happened and the drug was developed.

 

....

 

Then the drug was bought by VRX or whomever and the price skyrocketed overnight.

 

Let's say that the drug's price was capped at the level it was selling for before VRX bought it.  We know for certain that the drug development happened, and it was undeterred by that previously far-lower price point.

 

It could just be that the prior manufacturer had morals that led to "inefficient" pricing.  VRX is exploiting that inefficiency that exists in within the law yet outside of morality.

 

And it doesn't impact R&D to just leave pricing within the bounds of morality -- because after all, the drug was developed wasn't it?