VRX - Valeant Pharmaceuticals International Inc.

[100 Shares]

Anyone have a recording of the audio from today?

[blainehodder]

Anyone have a recording of the audio from today?

 

The number is on the Valeant website for the replay:

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-To-Hold-Conference-Call-For-Investors-To-Provide-Business-Update/default.aspx

 

Also going long here. I like what I heard, and the price seems attractive.

[100 Shares]

Anyone have a recording of the audio from today?

 

The number is on the Valeant website for the replay:

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-To-Hold-Conference-Call-For-Investors-To-Provide-Business-Update/default.aspx

 

Thank you. Just wondering if someone has the audio so i can be fast forward and rewind

[rpadebet]

http://www.valeant.com/Portals/25/PDF/151108%20Rebuttal.pdf

 

This is interesting. Rebuttal to az_value and message board posts  :).

[Liberty]

http://www.cnbc.com/2015/11/10/citron-researchs-left-mallinckrodt-not-a-pharmaceutical-company.html

 

Andrew Left (Citron) on CNBC, mentions Valeant a few times.. Even says half-positive things about them and says his short position is "significantly, significantly reduced".

[arcube]

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?

 

Looks like no one is working there? FedEx labels for delivery just sticking around!

[wisdom]

I thought Mr Left believed Valeant was a $0. And now he thinks another company is a better short. How can anything be better than something going to $0?

[nodnub]

I thought Mr Left believed Valeant was a $0. And now he thinks another company is a better short. How can anything be better than something going to $0?

 

He obviously is backing down from some of his previous claims to cover his ass.

 

But even if he wasn't... the time to reach zero matters and affects returns.  Also borrow fees add up?

 

I don't have a position in this either way.

[blainehodder]

Some may laugh at this but I think this stock is beginning to exhibit anti fragility. The barrage of negative articles has made the market numb to it, and slowly the focus will be placed on quarterly results and debt pay down. I think it is highly likely this will trade back up to 150 in the next year. The main takeaway I had from the CC was confidence in organic growth and fast debt pay down. Both very positive in my opinion.

 

I see this like EBIX, FFH, the banks, BP, VW, Salad oil etc. At some point the market says "meh. Don't care about anything but the fact it earns money"

 

...Or I'm wrong, Philidor liability transfers to Valeant, significant unprecedented fines come, price hike scrutiny cripples organic growth, debt continues to trade down for 2+ years, Doctors stop prescribing meds they were prescribing before, people who wear B&L contacts start to care about who Mike Pearson is, accounting irregularities crop up, Hedge funds capitulate, and price collapses.  I'm betting that does not happen, but if it does, you are welcome to say I told you so in a friendly manner.

 

 

 

[lessthaniv]

I thought Mr Left believed Valeant was a $0. And now he thinks another company is a better short. How can anything be better than something going to $0?

 

There is only one way.  Ride the stock down, sell out and capture the majority (which he's done), roll your investment into the next position, use your CNBC time to knock it down too ... rinse, repeat.

 

 

[ZenaidaMacroura]

Orbit #2 (new location)

 

Mike Pearson: And I would have gotten away with it too, if it weren't for that meddling LongHaul.

 

I snapped a picture of his ride in the parking lot at the last Cobaf houston meetup:

http://i.imgur.com/2yxIG1c.jpg

[fareastwarriors]

Biggest Valeant Holder Plumbed Philidor Ties

 

Manager of Sequoia Fund reached out to former employees of the mail-order pharmacy, as Valeant’s shares plunged in recent weeks

 

 

http://www.wsj.com/articles/biggest-valeant-holder-plumbed-philidor-ties-1447202547

[original mungerville]

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.

 

Picasso,

 

Sequoia wanted the leverage down BEFORE this whole episode. So them pushing to a greater extent for a deleveraging now makes even more sense (given cost of debt up, reputation/refinancing more difficult, impairment of Philidor channel, etc).

 

I did not like the leverage either, so "yes" I think it is an issue. Frankly, I don't see major issues for the business - seems like Philidor is the main problem. I expect weak Q4 cash earnings (due to product and distribution costs remaining via the Philidor channel with revenues near zero) - ie more than a 7% hit; but I still expect strong guidance and strong actual 2016 cash earnings (ie they are going to take the bulk of the Philidor hit in Q4) with a wildcard being the $US (which has been rising and could continue to do so). I could actually see them hitting $16 per share cash earnings in 2016 and not likely less than $14.

 

What concerns do you have with the rest of the business? Or are you just so negative on Pearson that you think the whole business is now a house of cards? Where are you coming from?

[cmlber]

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.

 

Picasso,

 

Sequoia wanted the leverage down BEFORE this whole episode. So them pushing to a greater extent for a deleveraging now makes even more sense (given cost of debt up, reputation/refinancing more difficult, impairment of Philidor channel, etc).

 

I did not like the leverage either, so "yes" I think it is an issue. Frankly, I don't see major issues for the business - seems like Philidor is the main problem. I expect weak Q4 cash earnings (due to product and distribution costs remaining via the Philidor channel with revenues near zero) - ie more than a 7% hit; but I still expect strong guidance and strong actual 2016 cash earnings (ie they are going to take the bulk of the Philidor hit in Q4) with a wildcard being the $US (which has been rising and could continue to do so). I could actually see them hitting $16 per share cash earnings in 2016 and not likely less than $14.

 

What concerns do you have with the rest of the business? Or are you just so negative on Pearson that you think the whole business is now a house of cards? Where are you coming from?

 

I generally agree with Picasso.  If the cash EPS is truly "durable" like they say it is, then VRX should have no issues refinancing the debt in 2018 and therefore shouldn't be so worried about paying it down so quickly.

 

At the same time, buying debt back on the open market at 9%+ yields and essentially reissuing it for a new acquisition in a couple of years at investment grade credit and a substantially lower yield will result in a pretty attractive return as well.  And just changing the narrative to rapid delevering setting up for investment grade credit rating and capacity to make new acquisitions may be worth more to shareholders than buybacks.

[blainehodder]

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.

 

Picasso,

 

Sequoia wanted the leverage down BEFORE this whole episode. So them pushing to a greater extent for a deleveraging now makes even more sense (given cost of debt up, reputation/refinancing more difficult, impairment of Philidor channel, etc).

 

I did not like the leverage either, so "yes" I think it is an issue. Frankly, I don't see major issues for the business - seems like Philidor is the main problem. I expect weak Q4 cash earnings (due to product and distribution costs remaining via the Philidor channel with revenues near zero) - ie more than a 7% hit; but I still expect strong guidance and strong actual 2016 cash earnings (ie they are going to take the bulk of the Philidor hit in Q4) with a wildcard being the $US (which has been rising and could continue to do so). I could actually see them hitting $16 per share cash earnings in 2016 and not likely less than $14.

 

What concerns do you have with the rest of the business? Or are you just so negative on Pearson that you think the whole business is now a house of cards? Where are you coming from?

 

I agree with Mungerville, debt pay down is the smart thing to do. Luckily with $14 cash EPS and growing, servicing interest and paying the debt is no problem at all. This is trading at 6x. Perhaps not cheap to some who fear debt, but certainly cheap if you are comfortable with the company's ability to generate the cash and pay it off.

 

Some appear to believe the earnings are fraudulent and the business is one step away from being discovered. In that scenario, the debt will take it to 0 in no time.

 

I don't share that view as I see no evidence of earnings fraud. Only issue is Philidor, a separate entity which has been cut loose. Time to put that behind, pay whatever fines may come and get back to business. In my experience it takes about 1-1.5 yrs for the multiple to normalize, which should mean a triple or so.

 

 

[Picasso]

OM,

 

Where did you see comments that Sequoia wanted the leverage down?  I just recall them saying that Valeant maintained leverage on the upper end of what they were comfortable with and then that nice letter when the stock hit $100. 

 

I have a problem with Sequoia's and Pershing's logic here.  If you have a problem with the debt, then the earnings aren't real or sustainable.  If the earnings aren't real or sustainable, then why are they still long the stock?  Who cares if the market value on the debt is costing them 9%.  They don't need to issue anymore anyway.

 

I have other issues with Pearson but that goes beyond the ridiculousness that is Sequoia and Pershing.  We can go into that later....

[original mungerville]

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?

 

I totally agree with 1) through 6) however re 7) just because i) the Philidor channel is toast and ii) earnings will come down on Marathon it doesn't mean the whole business is toast. I think they could have mid single digit organic growth without Philidor and Marathon and hit mid teens cash EPS over the next two years (eg, $13 to $17 per share). I don't get the impression that they are going to just crawl under a rock now and not compete.

 

[Picasso]

Ah and I forgot to mention the other silliness behind this sudden debt repayment. 

 

Weren't they supposed to be getting 20% unlevered IRR's on these deals?  If their models are right then even with debt at 9% they can just focus on running the business as usual.  We're all so used to seeing junk bond yields at 6% ever since 2008, but 9% yields on junky debt with disclosure issues isn't that big of a deal.  This should be a non-event. 

 

Maybe this is just pressure from Sequoia.  I just don't get their logic if they really believe in the cash EPS.

[original mungerville]

OM,

 

Where did you see comments that Sequoia wanted the leverage down?  I just recall them saying that Valeant maintained leverage on the upper end of what they were comfortable with and then that nice letter when the stock hit $100. 

 

I have a problem with Sequoia's and Pershing's logic here.  If you have a problem with the debt, then the earnings aren't real or sustainable.  If the earnings aren't real or sustainable, then why are they still long the stock?  Who cares if the market value on the debt is costing them 9%.  They don't need to issue anymore anyway.

 

I have other issues with Pearson but that goes beyond the ridiculousness that is Sequoia and Pershing.  We can go into that later....

 

It was in one of their prior annual reports or investor day transcripts. I am looking but can't find it. They said something like leverage was at the very top end of what they felt comfortably with. They were not saying "get it down", just that it was at the very top end of their comfort zone implying they would be more comfortable with a little less.

[original mungerville]

Ah and I forgot to mention the other silliness behind this sudden debt repayment. 

 

Weren't they supposed to be getting 20% unlevered IRR's on these deals?  If their models are right then even with debt at 9% they can just focus on running the business as usual.  We're all so used to seeing junk bond yields at 6% ever since 2008, but 9% yields on junky debt with disclosure issues isn't that big of a deal.  This should be a non-event. 

 

Maybe this is just pressure from Sequoia.  I just don't get their logic if they really believe in the cash EPS.

 

Agree with your logic. I don't think the model is necessarily broken. I think the large investors are thinking its better to be safe than sorry here. Debt now is a bet that the future will look like the past. So best to pay some of that down now, see how the pharma environment and Valeant legal issues develop over the next year or 18 months, then take it from there (ie incorporate the new environment, if there is one developing, into the deal models and continue on with now lower debt).

[KJP]

OM,

 

Where did you see comments that Sequoia wanted the leverage down?  I just recall them saying that Valeant maintained leverage on the upper end of what they were comfortable with and then that nice letter when the stock hit $100. 

 

I have a problem with Sequoia's and Pershing's logic here.  If you have a problem with the debt, then the earnings aren't real or sustainable.  If the earnings aren't real or sustainable, then why are they still long the stock?  Who cares if the market value on the debt is costing them 9%.  They don't need to issue anymore anyway.

 

I have other issues with Pearson but that goes beyond the ridiculousness that is Sequoia and Pershing.  We can go into that later....

 

It was in one of their prior annual reports or investor day transcripts. I am looking but can't find it. They said something like leverage was at the very top end of what they felt comfortably with. They were not saying "get it down", just that it was at the very top end of their comfort zone implying they would be more comfortable with a little less.

 

It's in Sequioa's October 28 letter available here:  http://www.sequoiafund.com/Letter%20to%20Clients%20and%20Shareholders.pdf

 

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.

[original mungerville]

I am talking about something they said before October 2015 - that debt was at the top end of their comfort range...

[original mungerville]

During the Allergan saga, in May 2014. (Valeant was quite leveraged then, not unlike after it acquired Salix early in 2015).

 

 

Sequoia:

"It is generating quite a bit of free cash flow relative to the debt load. So this year, if you were to exclude some of the cash payments for the restructuring charges that it is going to have to pay, Valeant might generate cash flow approaching $2.5 billion to $3 billion. The debt is five to six times cash flow. That is on the high end of what we would feel comfortable with. Historically if you look at Sequoia companies, they have not had a lot of debt. But that is just part of the model. At least in the short term, Valeant is looking to reduce its debt burden and one way it could do that is by merging with Allergan, which would reduce the leverage ratio. It depends on the terms because as it stands, management said it can reduce the ratio of debt to EBITDA to three times. But Valeant is going to be making a higher offer, it sounds like, in two weeks and that higher offer will probably result in a higher leverage ratio unless the company decides to issue more equity for the deal. But it is something that we definitely watch out for. Valeant is at the very high end of the range of where we would feel comfortable."

 

 

http://www.sequoiafund.com/Reports/Transcript14.htm

 

bottom of page 16 and top of page 17

[Picasso]

They felt comfortable with it then, not sure why they feel uncomfortable with it now if they felt okay using $16 of cash EPS in that last letter.  Unless you want to debate whether high end of comfortable means comfortable or not.  They should have sold out some of their position if they felt uncomfortable, especially with it trading for 3-4x the cost of acquisitions.  The pressure to lower debt now seems silly if they believe the business is A-OK.

 

Let's say Valeant drops the debt burden by $3 billion in 2016 and then again in 2017.  Alright so in 2018 there will be debt of $24 billion.  Do you really think people will look at that and be like "oh cool, there isn't a lot of debt anymore let's buy the stock."  Are the rating agencies going to give them an investment grade rating?  Those two things seems really unlikely.

 

All these guys (Pearson, Pershing, Sequoia) are a lot smarter and better paid than I am, so maybe you should trust their judgement on reducing the debt instead.  I just don't see they they reconcile "Valeant lives on" with "too much debt."  The pieces don't fit for me.

[Guest Schwab711]

More on debt: Someone asks if they have drawn on their revolver.

 

Yes, the company says. The current revolver draw is $845 million, but they plan to pay it off along with the broader pay-down of debt. Pearson says the revolver is first priority on paying down debt, but it sounds as if it won’t be done this year. Sounds like they used it to fund some of the past year’s acquisitions.

 

Their $1.5b revolver was unused on 10/19/2015. So as they talk about paying off debt they have increased it by ~$1b.

 

What would they need to draw on this?

 

 

Also interesting on the call:

Questions coming in about the impact on the dermatology business. Pearson said it’s filling prescriptions for free for now, something that it’s only going to do for a short time as it sorts this out. That will have a short-term impact on its own, but sales haven’t shown a hit… yet. Pearson says he expects some decline.