VRX - Valeant Pharmaceuticals International Inc.

[ourkid8]

Unfortunately the top investors really cannot buy more due to position sizing, this is as of the last reporting however their percentages must have drop considerably.   

 

Glenn Greenberg - Brave Warrior Advisors: 36.57% of portfolio (next largest: 9.54%)

Robert Goldfarb, David Poppe - Sequoia:  34.16% of portfolio (next largest: 9.92%)

Bill Ackman - Pershing Square Capital Management: 29.95% of portfolio (next largest: 19.46%)

Jeffrey Ubben - ValueAct Capital: 17.54% of portfolio (17.50%)

 

There is a major difference between "is not" and "is not in a position to buy more". It's a regret of position sizing.

[roughlyright]

Interesting comment from Harris

 

http://adventuresincapitalism.com/post/2015/11/08/Who-Says-You-Cant-Buy-Love.aspx

[Alpaca]

Interesting comment from Harris

 

http://adventuresincapitalism.com/post/2015/11/08/Who-Says-You-Cant-Buy-Love.aspx

 

This article captures the Crux of the situation.  Regardless of their billing and accounting controversies, why in the world were they so overvalued? Someone named "lu_hawk" posted some excellent points about this within the first few dozen pages of this thread. 

 

I still don't see any value at $85. Valeant has lost their acquisition engine which was the core of their entire strategy.  They are probably limited on further drug price increases due to public awareness and public and governmental backlash.  It seems like their only hope would be R&D, but they have gutted R&D at all the companies they purchased ... they would literally have to become the opposite of what they are now.

[Guest Grey512]

This is worth somewhere between $0 and $80 per share, IMO. Which probably means that with all the uncertainty and potential for technical selling by HFs getting redemptions, a good entry point to go long is somewhere below $40..

 

Will reevaluate post call, but that's how I see things for now.

 

The boost today from the call announcement and Ackman's proclamation that he wants to buy more is weird and weak, IMO.

[Hielko]

I think the point of that article is that the value of the acquisition engine was never that high to begin with.

[jay21]

This is worth somewhere between $0 and $80 per share, IMO. Which probably means that with all the uncertainty and potential for technical selling by HFs getting redemptions, a good entry point to go long is somewhere below $40..

 

Will reevaluate post call, but that's how I see things for now.

 

The boost today from the call announcement and Ackman's proclamation that he wants to buy more is weird and weak, IMO.

 

How are you arriving there? Thanks

[ni-co]

I think the point of that article is that the value of the acquisition engine was never that high to begin with.

 

+1

 

I must say: I have a bad feeling about this.

[Guest Grey512]

This is worth somewhere between $0 and $80 per share, IMO. Which probably means that with all the uncertainty and potential for technical selling by HFs getting redemptions, a good entry point to go long is somewhere below $40..

 

Will reevaluate post call, but that's how I see things for now.

 

The boost today from the call announcement and Ackman's proclamation that he wants to buy more is weird and weak, IMO.

 

How are you arriving there? Thanks

 

1. $2.45b LTM OCF. Let's ignore any maintenance capex on that and let's say that is pure unlevered cash flow in 2016. Next:

 

2. Generously assume that the $15b of acquisition cash capex in this past year will yield additional 15% annual unlevered OCF. So that's roughly $2.3b of additional unlevered cash flow in 2016.

 

3. Add the two things together and I get about $4.8b unlevered FCF in 2016 in total. Let's round that up to $5b. Then let's pretend this is like a mid-cycle Pfizer/Microsoft and therefore stick a 9% FCF/EV yield on that. That gets me to roughly an EV of $56b. Subtract $30b of net debt and this becomes $26 market cap.

 

Result = about $80 a share.

 

Never mind that I'm

- putting a single digit unlevered percentage yield on a business facing this kind of uncertainty (and a finite product/patent life) is probably generous, at least in current times

- ignoring possibility of fines and a variety of other investigations and how they will impact the cash balance and price growth

- ignoring any maintenance capex on existing operating cash flows

- ignoring that new acquisitions are now kaput til 2017, most likely

- ignoring that the company might start pushing against covenants in 2 yrs unless it starts getting some meaningful and consistent organic growth and execute perfectly against the Street's old consensus.

 

That's why the fair price is somewhere between zero and $80, IMO.

[Picasso]

I told myself not to comment on VRX anymore, but let's be real here.  Fair value on the stock based on 2014 cash flows is probably not how you want to approach this situation.  There's some big one-time items in there, just like there is for 2015 as well.  And then just consider the following:

 

1) No asset manager, and I mean no one, wants to have this on their books.  Especially not the ones that are down YTD. 

2) Management has been awful at handling even the most basic of duties.

3) Existing longs have told you they are unable to buy more shares.

4) There's a ton of nominal debt here even though they have the ability to easily service it.  Cash EPS might not be real long term for equity holders, but it is for bond holders.  Either way you're seeing big swings in equity value with minimal shifts in enterprise value.

5) The most ardent bull told the press he thought the CEO should be canned and contemplated selling out.

6) Almost no short interest to prop up the stock.

7) Biggest shareholders still think cash EPS is an indicator of economic reality.  Still no capitulation from big longs who assume it's business as usual.

 

Picking a fair value on this stock is like pissing your price target on the wall during a category 4 hurricane.  Big investors are trapped and market forces are driving the price more than fundamentals.  Normally that's a reason to go long but there's still a stupidly long list of red flags for a $58 billion business.  Anyone long is basically flying blind without any idea if they're heading straight for a mountain or to the promised land.  Does anyone have any evidence this isn't a completely binary situation with the risk of permanent loss?

[Guest Grey512]

Dont disagree with anything you are saying, Picasso. All good points.

Which is why I include 0 in the fair value range for the equity.

 

A week ago I said something like "anyone considering going long here needs to get their head checked". Still true, at $85.

[Spekulatius]

This is worth somewhere between $0 and $80 per share, IMO. Which probably means that with all the uncertainty and potential for technical selling by HFs getting redemptions, a good entry point to go long is somewhere below $40..

 

Will reevaluate post call, but that's how I see things for now.

 

The boost today from the call announcement and Ackman's proclamation that he wants to buy more is weird and weak, IMO.

 

I agree with your valuation. Saying you want to buy more in a public forum is contradictory in itself. If you want to buy more, you do it, you don't talk about. Fact is that he is already choking on what he has, as do most other institutional stockholders who own this. Buying more in this situation would be suicidal if it does not work out. Not many natural buyers left for a stock like this.

[ni-co]

This is worth somewhere between $0 and $80 per share, IMO. Which probably means that with all the uncertainty and potential for technical selling by HFs getting redemptions, a good entry point to go long is somewhere below $40..

 

Will reevaluate post call, but that's how I see things for now.

 

The boost today from the call announcement and Ackman's proclamation that he wants to buy more is weird and weak, IMO.

 

I agree with your valuation. Saying you want to buy more in a public forum is contradictory in itself. If you want to buy more, you do it, you don't talk about. Fact is that he is already choking on what he has, as do most other institutional stockholders who own this. Buying more in this situation would be suicidal if it does not work out. Not many natural buyers left for a stock like this.

 

Like Picasso said, the elephant in the room is that you can't trust this management with their numbers. Every attempt to value VRX has to take into consideration that the underlying numbers aren't reliable. You can do the most beautiful DCF model but in the end it's garbage in, garbage out.

 

Ackman seems to think that his knee-jerk reactions are somehow increasing the confidence in VRX or in Pershing Square while in reality it has the complete opposite effect. What he should have done is keeping quiet, sitting down, taking in the new information that he missed the first time when he did his due diligence and all the while trying to be aware of his own confirmation bias.

 

Ackman looks very bad here. When you have a 10 or 20 billion hedge fund and invest into 10 ideas one would think that an insane amount of research went into those ideas. Here, either he didn't do the research, he did it sloppily, or he did know about things like Philidor and invested in spite of knowing about it. None of those scenarios makes him look good.

 

When you look at their careful construction for legally not owning but economically totally owning Philidor you can't do that away as a publicity problem. One may argue that management answering questions with "We think it's legal" is a publicity problem (though I think that it's a people problem). Creating this construct certainly isn't. By the way, when this construct was totally legal shouldn't VRX's management be sued for giving up this option and thereby squandering the $100m or so they invested into Philidor? How many totally legal Philidors are there yet to be found in this company? We don't know because Philidor has shown that this management is utterly dishonest.

 

With regard to Icahn's position (discussion several pages back):

.

[MrB]

I'm just looking for a place to post this quote. I picked it up from an exchange between Ackman and Andrew Beal (Texas Banker).

 

 

"Don't get sucked into this idea that because you have cash to invest, you must buy something. I made most of my money on the deals that I did not do." - Andrew Beal

 

http://www.dallasnews.com/business/columnists/cheryl-hall/20101102-Money-talks-but-money-minds-5711.ece

 

[ourkid8]

Has everyone dialed into the call and ready?  :)

[original mungerville]

I'm on the call.

[ZenaidaMacroura]

I'm on the call.

Ditto

[ourkid8]

MP feels good about the controls - financials, compliance and legal.  There are no other arrangements like Philidor.  The Q4' hit is mainly around dermatology and to a lesser extent RX and the rest of the business is growing. 

[Picasso]

Hmm.  So when the stock was at $160 Pearson said they were seriously considering stock repurchases and he thought it was the single best investment out there.  Now that it's half of $160 he's not able to repurchase stock?  Maybe he thinks it will trade down to $40 and he can buy 2x as much. 

 

He must be waiting for the Jos. A Bank clearance sale.  Buy one share, get three shares free! 

[jay21]

Hmm.  So when the stock was at $160 Pearson said they were seriously considering stock repurchases and he thought it was the single best investment out there.  Now that it's half of $160 he's not able to repurchase stock?  Maybe he thinks it will trade down to $40 and he can buy 2x as much. 

 

He must be waiting for the Jos. A Bank clearance sale.  Buy one share, get three shares free!

 

Clearly focused on debt repayment. Expect TL repayments starting next year imo.

[ZenaidaMacroura]

Hmm.  So when the stock was at $160 Pearson said they were seriously considering stock repurchases and he thought it was the single best investment out there.  Now that it's half of $160 he's not able to repurchase stock?  Maybe he thinks it will trade down to $40 and he can buy 2x as much. 

 

He must be waiting for the Jos. A Bank clearance sale.  Buy one share, get three shares free!

Wouldn't be surprised if the larger holders have his ear on this one.  Ackman seemed to imply as much yesterday.

[ourkid8]

Sequoia said exactly the same:

 

"All enduring businesses

must strive to earn and maintain a good reputation. Because of its large indebtedness and need to

tap the capital markets to make acquisitions Valeant in particular needs the confidence of the

credit market to execute its business model. The company has no large debt maturities over the

next two years, and we believe it intends to pay down scheduled maturities through 2018 out of

cash flows. We’d like Valeant to consider paying down more of its debt early and adopting a

conservative capital structure that insulates it from the possibility of long-term tightness in the

credit markets. "

 

Hmm.  So when the stock was at $160 Pearson said they were seriously considering stock repurchases and he thought it was the single best investment out there.  Now that it's half of $160 he's not able to repurchase stock?  Maybe he thinks it will trade down to $40 and he can buy 2x as much. 

 

He must be waiting for the Jos. A Bank clearance sale.  Buy one share, get three shares free!

Wouldn't be surprised if the larger holders have his ear on this one.  Ackman seemed to imply as much yesterday.

[Picasso]

I thought Sequoia said Valeant will earn $16 of cash EPS?  Didn't they just guide for $7.5 billion of EBITA?  Isn't their portfolio supposed to be durable?  Minimal capex, taxes, and interest (they did lock in less than 6% after all on $30 billion) which should leave a ton of excess cash flow? 

 

So I guess when Valeant shares are at $40 and no one is able to buy shares, including Valeant, Sequoia is going to be a happy camper.  News flash:  debt repayment is a priority if that cash EPS isn't real.  And to be honest, it's not going to matter much if they pay down debt and the cash EPS isn't real.  The stock will be near worthless in that situation anyways.

 

Sequoia should have sold in the $200's if they thought debt was an issue.  But they didn't and now they have a problem with it.  You can't say the stock is inexpensive on one hand and then tell the company to use their cash repurchasing securities that cost then less than 6% to issue.  Unless you also think Salix was a mistake and will not earn an adequate return over their funding costs.  But then why didn't Sequoia sell back then?

 

And Pearson comes off as promotional for talking up the stock last quarter ("there's no better buy than one share of Valeant") when it was 2x as expensive.  Now he's just told the world he's just as backed into a corner as some of these large shareholders.  It's sort of funny to me because they seem to simply make the situation worse for each other.  Sequoia won't let them take advantage of the low share price and Pershing is getting Pearson margin called for mentioning he considered dumping the whole stake and wanted to replace Pearson.  Classic.

 

By the way, does anyone really think debt is the issue here?  The issue is the business.  No one should care about the debt unless you think the business is seriously impaired. 

 

If there's anything to be learned from this, do your own homework.  These large funds are a joke if I ever saw one.

 

end rant.

[LongHaul]

Here are my photos and notes on Orbit, which is a sister pharmacy of Philidor and Valeant consolidates Philidor. 

Location number one was I believe purchased/controlled by Philidor and then the location was moved.

I'll let you judge if these are facades.

 

11/6/2015

ORBIT visits

 

Orbit #1 Original location

Address 3330 Hillcroft St. Houston, TX 77057

• Bad area

• Bad signage

• Windows tinted very black– almost could not see inside.

• Talked to 3 tenants.  They all said they “never saw any customers go in or out”.

• Moved out about 1 month ago 2 of them told me.

• Seemed like Orbit did not want customers in this location.

• Heard minimal customers there for 2 years.

 

Hmmm - why would Philidor buy this pharmacy?

[Picasso]

Looks legit. Maybe they can spin off Orbit. It's their competitive advantage after all.

[LongHaul]

Orbit #2 (new location)

 

Address 1306 FM 1092 Missouri City, Texas

• Location was in an industrial/office building, deeply set back ~100-200yrds with no signage on it that Orbit was leasing space. Other tenants had signage displayed.

• About 15 people worked there

• Moved in ~ 1 month ago

• 11/6/2015 1st day workers did not show up for work in awhile

• All office workers.  One guy did not think there was pharmacy in there.  Drop off/ Pickup signs inside just had offices in them.  All offices and office workers.  He did not see any RX going out.

• 3 people I talked to said no customers were ever in there.

• 2 told me they did not even know even know there was a pharmacy there.

• Seemed like Orbit did not want customers in this location.

• What were office workers doing?