VRX - Valeant Pharmaceuticals International Inc.

[Guest Schwab711]

In 2017, I fully expect that with no other acquisitions they will be able to pay down $4-5 billion in debt.

 

OK. Let's say it's $4-5b in 2017.

Is that really worth $70b of EV and $50b of market cap, today? Given all the integrity issues?

 

$5b is a 13% fcf yield at todays market cap, assuming they don't grow at all in 2017.  Yes it's levered, but it's still a 9%+ yield unlevered, on a business that can be safely levered with a capital allocator that, despite recent controversy, has created significant value in a short period of time.  What's the short thesis?

 

That the majority of their assets will expire before they finish paying off the debt. Thus, you are paying ~$38b for all the cash flows from generics and B&L 10 years from now (and beyond). In the mean time, they have some potential funding/liquidity issues to get through.

 

What's the bull case (other than multiple expansion)?

[dorsiacapital]

In 2017, I fully expect that with no other acquisitions they will be able to pay down $4-5 billion in debt.

 

OK. Let's say it's $4-5b in 2017.

Is that really worth $70b of EV and $50b of market cap, today? Given all the integrity issues?

 

$5b is a 13% fcf yield at todays market cap, assuming they don't grow at all in 2017.  Yes it's levered, but it's still a 9%+ yield unlevered, on a business that can be safely levered with a capital allocator that, despite recent controversy, has created significant value in a short period of time.  What's the short thesis?

 

I would imagine lots of companies would have enticing fcf yields if we gave them the full benefit of their 2017 projections. And many of these companies didn't just implement brand new business distribution models that have never been tried before in their industry.

 

Their TTM OCF was 2.5 billion, and 400 million of that is Allergan. That means their current fcf yield is 6.25% levered and 3.5% unlevered.  (Gilead, by the way, has a current levered fcf yield of 12% - are the problems facing Gilead worse than the problems facing Valeant?)

 

Also, so far, Valeant has done about 40 billion of acquisitions since Pearson took over. The TTM ocf ROIC on those acquisitions is about 6.25%. That's equivalent to the cost of capital on the unsecured debt that Valeant issued to fund the Salix transaction. Even if you just look at the debt issued - Valeant has issued about 30 billion of debt to create 2.5 billion of OCF. That's a TTM ocf ROIC of 8.3%. (Yes, I know, much of that debt is Salix and thus unrealized.)

 

Therefore, I'm not sure that it's fair to say that Pearson has already proved himself to be a capital allocator that has created significant value. (He has certainly created significant equity appreciation, but that is a different issue).  But yes, I know, once things normalize (which in January of this year was supposed to be this year, and then in September of this year was supposed to be 2016, and now in December of this year is supposed to be 2017) we'll see the real cash generative abilities of these assets. 

 

 

 

 

 

 

 

[sswan11]

http://video.cnbc.com/gallery/?video=3000467311

 

Chanos: Valeant model doesn't work, remain short

[RichardGibbons]

3) Most of all REPUTATION: in the public markets I have finally come to realize that reputation is paramount! And from now on I’ll limit my investment universe to those companies led by managers who have been successful in building an almost unassailable reputation for themselves. Because probably they won't be accused of fraud, and should they get under attack for some other reasons, I must have the conviction to keep trusting what they do and say.

 

Just out of curiosity, does this mean that you're selling Biglari Holdings?  By this point, I would think Biglari has a reputation in the ten percentile.  Or do you see that as a separate issue?

[giofranchi]

Just out of curiosity, does this mean that you're selling Biglari Holdings?  By this point, I would think Biglari has a reputation in the ten percentile.  Or do you see that as a separate issue?

 

I have sold out of BH some months ago.

 

Cheers,

 

Gio

[giofranchi]

If someone did enough due diligence, you would have easily found out about the stuff behind the scenes.  That's not really fraud.

 

When the Philidor news hit, those investors didn't know if it was real fraud or not. Even Ackman fell into that camp according the to a WSJ article. If you spend the time to understand the business you'll know what you're dealing with versus trusting management.  I think there are other reasons why one would not feel comfortable with this investment as well.

 

Anyway I think there is a lot more to learn here than just trying to invest with good management but that's just me.

 

Picasso,

 

do you think Pearson knew price increases were not really sustainable? And did he know Philidor could have raised problematic questions to answer?

If so, is it too much to ask for a CEO who not only says “hey, look how fast we are growing and how good results are!”, but also “to be completely fair to our shareholders a large part of organic growth until now has been achieved through price hikes, and I don’t think that’s sustainable going forward”?

 

Or do you think he wasn’t aware of these issues? If he wasn’t, how could a minority shareholder ever be aware of issues even the CEO ignores?

 

Cheers,

 

Gio

[Happy]

MP bonus is tied to his own cash matrix which doesn't expense any acquisition cost and he kept changing his matrix every year. If that doesn't sound fishy, I don't know what is.

 

MP's share bonus is tied to total shareholder return, not cash EPS.

[Happy]

do you think Pearson knew price increases were not really sustainable? And did he know Philidor could have raised problematic questions to answer?

If so, is it too much to ask for a CEO who not only says “hey, look how fast we are growing and how good results are!”, but also “to be completely fair to our shareholders a large part of organic growth until now has been achieved through price hikes, and I don’t think that’s sustainable going forward”?

 

Valeant's previous strategy was supposed to optimize returns for the way the industry worked. I think we can agree that the pharma world looks a bit different now than it did just months ago and therefore they do a moderate shift in strategy. Depending on whether you are long or short you can call that being opportunistic and properly adjusting to the new situation or an admission that their previous strategy wasn't working.

Given how much controversy there is about Valeant in the press and that it's important for them to improve their reputation I don't think the best way would be for the CEO to give the media quotes that could be construed as an admission of excessive price gouging in the past as their general strategy.

[giofranchi]

Given how much controversy there is about Valeant in the press and that it's important for them to improve their reputation I don't think the best way would be for the CEO to give the media quotes that could be construed as an admission of excessive price gouging in the past as their general strategy.

 

Not now, of course! But I have read all the conference call transcripts of the last 4 years… And I have never found any comment about the sustainability of price increases, nor how it would affect organic growth. Let alone warnings about Philidor and its dubious practices…

 

Is it too much to ask for a CEO who at least dwells on possible risks “before” they have become real threats?

 

Cheers,

 

Gio

 

[Picasso]

Gio, I think those all fit in the circle of competence. Did you know the difference between gross and net when you bought the stock? Did you understand the distribution of their dermatology drugs?

 

Actually did you even read the 10K?  I'm not judging here but I bet a lot of investors didn't. It was a trust in management and the numbers they chose to use when it was convenient to use them.

 

All those things go with investing outside your circle of competence. Pearson wasn't bound to telling you all those things, but it made sense to dig further because the claims were so bizarre. Why are the drugs durable? Why was growth coming from these old not-so-special dermatology drugs? How many tail assets are in the portfolio? These are all questions you ask if you understand the industry.  It's harder to know the right questions when you aren't an expert in that field.

[Picasso]

By the way, some of those questions are easily addressed and others are not. It wasn't really fraud as much as misleading behavior from management. At least that is what I believe.

[Happy]

Not now, of course! But I have read all the conference call transcripts of the last 4 years… And I have never found any comment about the sustainability of price increases, nor how it would affect organic growth. Let alone warnings about Philidor and its dubious practices…

 

Is it too much to ask for a CEO who at least dwells on possible risks “before” they have become real threats?

 

I believe the entire pharma system in the U.S. is broken to some degree. How much sense does it really make that you need to increase the list price by 20% to realize maybe a 1% increase in net price for some products? But as one player in this huge system, when you obviously can't expect to get the system fixed yourself you can just try to do the best you can under the rules that are laid out for you. Munger is most likely correct that Valeant didn't think enough about the ethics of the price gouging and therefore they did things that they shouldn't have done in retrospect. But the Marathon deal was just a tiny part of their business.

If you can't possibly change the rules yourself and you adapted to them the best way you can, why would you hurt your business by saying that you take price increases that you can push through but that might turn out to be unsustainable once the system does change for one reason or another? I think hurting your operations in that way is too much to ask and probably goes against the duties of the CEO to protect his shareholders. I wouldn't want to do negotiations when I called my last price increases unsustainable myself. And we have seen what can happen when one company gets singled out for practices the entire industry is doing. The others surely wouldn't just admit they are doing the same thing.

[giofranchi]

Actually did you even read the 10K?

 

Yes, I did. The parts of a 10k that I think should be read at least. But I never think I know a business very well, simply because I have read its 10k. There is so much more about a business that outside shareholders don’t really get the chance to know. That is surely the case with my own businesses (which are small). And I don’t see how it could not be even more so for a huge, very acquisitive public company. Trust in management is a fundamental part of investing as a minority shareholder. And I think we should keep learning which manager truly deserves our trust, and which one instead does not. Is the VRX experience useful in this regard? I think it is.

 

Cheers,

 

Gio

 

[giofranchi]

It wasn't really fraud as much as misleading behavior from management.

 

Then you should also agree that a manager who doesn’t mislead his/her shareholders is important.

 

Cheers,

 

Gio

 

[giofranchi]

If you can't possibly change the rules yourself and you adapted to them the best way you can, why would you hurt your business by saying that you take price increases that you can push through but that might turn out to be unsustainable once the system does change for one reason or another? I think hurting your operations in that way is too much to ask and probably goes against the duties of the CEO to protect his shareholders.

 

Either you don’t do what is risky, or you must have the strength to be candid about it with your shareholders and the public.

 

“I want to give minority shareholders all the information I would want if our positions were reversed”… Well, exactly!

 

Cheers,

 

Gio

 

[ZenaidaMacroura]

I'm not really sure that an informational advantage is the way to go even for a particularly enterprising investors.  It might be better to understand the few key drivers that will make or break the investment.  For Valeant one of those questions might be whether the durability of products Ackman touted in previous presentations persistswhen you remove alternative fulfillment/business practices with bad optics.

 

--

 

Also I read a few people asking what the Xifaxan limit of "3" fills refer to (is it yearly, per script, lifetime). In the investor day it was mentioned, per label, that it refers to annual.

[dorsiacapital]

 

I believe the entire pharma system in the U.S. is broken to some degree. How much sense does it really make that you need to increase the list price by 20% to realize maybe a 1% increase in net price for some products? But as one player in this huge system, when you obviously can't expect to get the system fixed yourself you can just try to do the best you can under the rules that are laid out for you. Munger is most likely correct that Valeant didn't think enough about the ethics of the price gouging and therefore they did things that they shouldn't have done in retrospect. But the Marathon deal was just a tiny part of their business.

I

 

What is your a priori market justification for why Valeant is entitled to realize any increases in net prices on drugs for which there are much cheaper, chemically identical alternatives available? I would say in a functioning market, Valeant would realize significant decreases in net prices on these products. 

 

I also think Marathon is not a tiny part of their cash flow business. Isuprel and Nitropress generated revenue last quarter of 85 million. I think that's basically pure cash because the costs of manufacture are cheap (just a few years ago they were sold for less than 10% of the current price) and Valeant needs to do no marketing on these products because hospitals actually need them. Let's say that they got 75 million in cash. That's 10% of their gaap cash flow last quarter of 737 million.  In 2Q, Isuprel and Nitropress generated revenue of 105 million. Valeant's GAAP cash flow from operations in 2Q was 411 million. Isuprel and Nitropress were probably 20% of their GAAP cash flow that quarter. (Cuprimine, the Wilson's Disease drug, generated 26 million of revenue last quarter - that is, again, I think almost all cash).

 

I also think there's no market justification for these price increases. Because of slightly archaic FDA regulations, Valeant happened to be the sole authorized U.S. manufactuer of a specialty chemical. If we simply allowed importation from Canada, hospitals could buy the drug for $150 rather than $1,350. (http://www.pharmacychecker.com/brand/price-comparison/isuprel/0.2+mg&252ml/).

 

 

[Happy]

What is your a priori market justification for why Valeant is entitled to realize any increases in net prices on drugs for which there are much cheaper, chemically identical alternatives available? I would say in a functioning market, Valeant would realize significant decreases in net prices on these products. 

They took price increases because the demand was there at the higher price. Theoretically that's exactly what a corporation then should do. The problem is that their products are health-related and therefore are so important to their consumers that the decisions shouldn't be purely about the economics. For moral reasons it's important that the drugs stay affordable to patients. I think Valeant is addressing your concerns well with the Walgreens deal which makes it a lot more about volume growth than price. With that they realize significant decreases in net prices on products where generic competition is available.

 

I also think Marathon is not a tiny part of their cash flow business.

Valeant bought Marathon for $286 million not long ago if I remember correctly. To argue that it's not a tiny part of their business you would have to say that they made an incredibly good deal (just from a financial standpoint) and I really doubt you'd say that. It would already have to be worth multiples of what they paid for it.

[dorsiacapital]

 

They took price increases because the demand was there at the higher price. Theoretically that's exactly what a corporation then should do. The problem is that their products are health-related and therefore are so important to their consumers that the decisions shouldn't be purely about the economics. For moral reasons it's important that the drugs stay affordable to patients. I think Valeant is addressing your concerns well with the Walgreens deal which makes it a lot more about volume growth than price. With that they realize significant decreases in net prices on products where generic competition is available.

 

 

I was actually responding to your post immediately before which asked " How much sense does it really make that you need to increase the list price by 20% to realize maybe a 1% increase in net price for some products?" 

 

Your example shows that the demand was not there. They raised prices by 20% and there was no actual demand to support the price increase so they only realized a 1% increase.  Now you say the demand was there at higher prices, but it actually wasn't there.

 

More broadly, you seem to be mistaking me for a price control socialist. Rather, I am a moderate liberal who believes that glaring market failures caused by inefficient government regulation should be fixed by better government regulation that encourages a more functioning free market.  The generic drug market is a galling example of market failure.

 

Let’s say you made a particular type of widgets. The way to make this widget has been known for a long time. The method is simple and is readily available to any potential widget manufacturer.  The widget is known to be safe. The widget is necessary in various commercial operations.

 

But the U.S. government, because other, new types of widgets sometimes hurt people, had required all potential manufacturers of widgets, whether the widget design is new or old, to undergo a lengthy and difficult approval process to make widgets.  The U.S. government bars importation of identical widgets made and sold in other countries like Canada and the U.K.

 

Now, for a long time, you make this particular kind of widget.  It’s a niche business. You charge a small premium because there’s nothing special that you’ve brought to the widget making process. Eventually, you notice that there are no other authorized manufacturers of this widget left in the United States.  Somewhat to your surprise, you possess a monopoly.

 

So, what do you do? You could raise your prices a lot. You are the only manufacturer. People really need your widget.  And the costs of that price raise would be spread out over the cost of the product in which the widget is used, so individual consumers would not notice.  This would probably be the short-term economically efficient action to take. You are just maximizing your profit like a good businessman.

 

The problem is that you have no actual control over your moat.  Your moat is simply a result of inefficient and unnecessary government regulation.  (Do you think that  the Cuprimine that Valeant sells for $260 a pill is any different than the generic Cuprimine that is sold in Europe for $1 a pill - http://www.nytimes.com/2015/10/05/business/valeants-drug-price-strategy-enriches-it-but-infuriates-patients-and-lawmakers.html?_r=0) 

 

So, the government can fill in your moat at any time.  You do not want to call attention to your moat because it is so vulnerable.  If you call attention to the market failure by exploiting it too vigorously, then the Government starts filling in the moats that it accidentally created and your rentier capitalism is destroyed. 

 

Indeed, there’s no limiting principle to your argument. Valeant raised the prices of isuprel and nitropress by 500 and 200%.  (http://www.wsj.com/articles/pharmaceutical-companies-buy-rivals-drugs-then-jack-up-the-prices-1430096431).  Why didn’t they raise them by 5,000%. Why not by 50,000%? After all, Nitropress is on the WHO Model List of Essential Medicines (https://en.wikipedia.org/wiki/Sodium_nitroprusside).  Why would a savvy businessman only raise it by 212% when he enjoyed an unofficial monopoly?

 

Martin Shkreli applied your logic that a businessman should raise prices as much as possible.  This roused the Government and now moats are getting filled in. That’s why it is not necessarily the best thing for a businessman enjoying rentier profits from a market failure to engage in monopolistic behavior that jeopardizes the continuing existence of the market failure.  Economic theories about price demand curves do not precisely apply when the demand is based on market failures.

 

I do think the Walgreen's deal appears to address these concerns (although allowing generic importation would be even better), but whether that's a good or bad thing for Valeant's cash generative abilities seems to me to be a very open question.

 

 

Valeant bought Marathon for $286 million not long ago if I remember correctly. To argue that it's not a tiny part of their business you would have to say that they made an incredibly good deal (just from a financial standpoint) and I really doubt you'd say that. It would already have to be worth multiples of what they paid for it.

 

To argue that it is not a tiny part of their business, I just have to use the revenue numbers from their presentations and logical inferences about profit margins based on what the product was previously selling for before Valeant bought it.  You do not disagree with either of these points so I assume you concede that it was 10-20% of their cash flow the last two quarters.

 

And you are too cynical about me. I do think that they made an INCREDIBLY good financial deal based on the understandable assumption that the market failure would persist.  Whether or not that assumption was justified is the question. It's now in the hands of Washington. And, based on Valeant's recent hirings, the continued validity of that assumption is some doubt. (http://www.fiercepharma.com/story/valeant-amps-its-game-washington-adding-lawyer-lobbyists-its-defensive-squa/2015-12-14)

 

[dorsiacapital]

http://www.vanityfair.com/news/2015/12/martin-shkreli-pharmaceuticals-ceo-interview

 

I know that Pearson said he and Shkreli have nothing at all in common, but maybe Shkreli didn't realize that?

 

"Shkreli says his initial idea for Retrophin was to purchase two drugs from Valeant, Cuprimine and Syprine, which are used to treat Wilson disease, an inherited disorder that causes severe liver and nerve damage. His plan, he says, was to jack up the prices. But the deal fell apart. He pulls up a spreadsheet, for Syprine, which, he tells me, had about $200,000 in sales per month in the fall of 2012, but now has sales of $10 million a month, an increase that is due purely to price increases by Valeant. Cuprimine is a similar story. In other words, Valeant did exactly what Shkreli was hoping to do."

[ni-co]

Schwab711,

 

Did you take your own advice on Dec 16 and buy the Dec 18 puts on VRX?

 

Clown question, bro.

 

No, that was a serious question bro.

 

I did the opposite and bought December 18 calls.

 

Yeah, that's what I call value investing! :D

[Rasputin]

Vogue writer talks about her Addyi experience

 

http://www.vogue.com/13374393/female-viagra-addyi-results/

[Liberty]

Mike Pearson hospitalized with "severe pneumonia":

 

http://www.cnbc.com/2015/12/25/the-associated-press-valeant-ceo-hospitalized-with-severe-pneumonia.html

 

Not a merry xmas.. :(

 

Guess this is what happens when a guy who works all the time starts working even more for a few months...

[Picasso]

Poor guy.  I wish him well and hope he sees a speedy recovery. 

[Guest roark33]

Vogue writer talks about her Addyi experience

 

http://www.vogue.com/13374393/female-viagra-addyi-results/

 

Did you notice that Philidor was most likely the filling pharmacy:

"My hard-won prescription could be filled only by a specialty pharmacy in Pennsylvania, 200 miles from my home"