VRX - Valeant Pharmaceuticals International Inc.

[Uccmal]

Mr. Pearson has gone on Medical leave.  He must be pretty sick. 

 

People are always looking for correct definition if a Black Swan...  well here it is. 

 

 

[ScottHall]

I hope he ends up making it. All that stress isn't good for your longevity. If this job is putting a major strain on his health, I hope he quits.

[Liberty]

Officially a medical leave:

 

http://www.nytimes.com/2015/12/29/business/valeant-pearson-chief-executive-medical-leave.html?smid=tw-dealbook&smtyp=cur

 

Valeant did not name an interim chief. Instead, its board created an “office of the chief executive officer,” which will include Robert Chai-Onn, its executive vice president and general counsel; Dr. Ari Kellen, executive vice president and company group chairman; and Robert Rosiello, executive vice president and chief financial officer.

[original mungerville]

Mr. Pearson has gone on Medical leave.  He must be pretty sick. 

 

People are always looking for correct definition if a Black Swan...  well here it is.

 

Certainly seems that way...

[dorsiacapital]

Mr. Pearson has gone on Medical leave.  He must be pretty sick. 

 

People are always looking for correct definition if a Black Swan...  well here it is.

 

Well, Taleb defines black swan as follows

 

"First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme 'impact'. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

 

I stop and summarize the triplet: rarity, extreme 'impact', and retrospective (though not prospective) predictability. A small number of Black Swans explains almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives."

 

I'm not sure how an unhealthy man in his mid 50s getting sick after working incredibly long hours under tremendous stress qualifies as a black swan.  It does not seem to lie outside the realm of regular expectations.  To be morbid, a man between 55-64 appears to have a 1 in 112 chance of dying in any given year. Is something with about a 1% chance of happening a black swan event?  (http://www.medicine.ox.ac.uk/bandolier/booth/Risk/dyingage.html)

 

I find Burry's thoughts on Black Swans to be somewhat appropriate here. 

 

And that is about how I view Mr. Taleb’s premise of the Black Swan. I have found markets to be anything but random, and I find many of the future events that are bound to be dismissed as random or explainable only in hindsight in fact

can be foretold in time with the rhythm of history. If one does the work.

 

(http://csinvesting.org/wp-content/uploads/2012/09/burry_scion_1q_2008.pdf)

 

I am not saying that Pearson's illness could be foretold, but do think that we should be careful about calling things black swans. In general, I would be skeptical of any company where the investment thesis is largely dependent on the continued health/thriving of one man (Buffet: “I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.").  Furthermore, the troika that Valeant has appointed are all incredibly well compensated for their relative positions. Chai-On may be one of the highest paid GC's in the country; Ari Kellem made 50 million dollars in 2014, and Rosiello has a pay package that could range in the hundreds of millions with good performance.  I imagine shareholders should be confident that Pearson gave these executives pay packages commensurate with their intrinsic talents...and they should be able to fill Pearson's hopefully short absence. (Especially since Pearson has finished negotiating the landmark Walgreen's deal.)

[Uccmal]

Mr. Pearson has gone on Medical leave.  He must be pretty sick. 

 

People are always looking for correct definition if a Black Swan...  well here it is.

 

Well, Taleb defines black swan as follows

 

"First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme 'impact'. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable.

 

I stop and summarize the triplet: rarity, extreme 'impact', and retrospective (though not prospective) predictability. A small number of Black Swans explains almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our own personal lives."

 

I'm not sure how an unhealthy man in his mid 50s getting sick after working incredibly long hours under tremendous stress qualifies as a black swan.  It does not seem to lie outside the realm of regular expectations.  To be morbid, a man between 55-64 appears to have a 1 in 112 chance of dying in any given year. Is something with about a 1% chance of happening a black swan event?  (http://www.medicine.ox.ac.uk/bandolier/booth/Risk/dyingage.html)

 

I find Burry's thoughts on Black Swans to be somewhat appropriate here. 

 

And that is about how I view Mr. Taleb’s premise of the Black Swan. I have found markets to be anything but random, and I find many of the future events that are bound to be dismissed as random or explainable only in hindsight in fact

can be foretold in time with the rhythm of history. If one does the work.

 

(http://csinvesting.org/wp-content/uploads/2012/09/burry_scion_1q_2008.pdf)

 

I am not saying that Pearson's illness could be foretold, but do think that we should be careful about calling things black swans. In general, I would be skeptical of any company where the investment thesis is largely dependent on the continued health/thriving of one man (Buffet: “I try to buy stock in businesses that are so wonderful that an idiot can run them because sooner or later, one will.").  Furthermore, the troika that Valeant has appointed are all incredibly well compensated for their relative positions. Chai-On may be one of the highest paid GC's in the country; Ari Kellem made 50 million dollars in 2014, and Rosiello has a pay package that could range in the hundreds of millions with good performance.  I imagine shareholders should be confident that Pearson gave these executives pay packages commensurate with their intrinsic talents...and they should be able to fill Pearson's hopefully short absence. (Especially since Pearson has finished negotiating the landmark Walgreen's deal.)

 

Well its a black swan to me, or perhaps everyone here saw the entire series of events coming. 

 

As to your part two: Massive salaries equals massive egos.  Let the infighting begin.  Otherwise I have no other comment.  I haven't followed Valeant in any detail.  I try to stay away from Guru stocks for the very reasons we are seeing now.

[original mungerville]

Uccmal,

 

I'm interested in this comment: "I try to stay away from Guru stocks for the very reasons we are seeing now." Can you expand on that a bit, I think there is something to that ...but what in more detail?

[dorsiacapital]

 

Well its a black swan to me, or perhaps everyone here saw the entire series of events coming. 

 

 

I don't think anyone saw the entire exact series of events coming but that sets a very high bar for forecasting that  would turn many future events into black swans.  Similar to CDS, I think there's a strong argument that several people (Munger, Chanos, Hempton, Grant) foretold in time that a debt-fueled rollup with aggressive accounting and pricing practices may run into trouble. 

 

 

[Guest Schwab711]

Not trying to imply a conspiracy theory, but I believe MP's restricted shares vest early if he is forced to step down due to illness. Pneumonia is potentially worth 100's of millions to MP and gets him far away from testifying under oath.

[Picasso]

Not trying to imply a conspiracy theory, but I believe MP's restricted shares vest early if he is forced to step down due to illness. Pneumonia is potentially worth 100's of millions to MP and gets him far away from testifying under oath.

 

Ha, I was thinking the same thing except there is the clause that voids early vesting if fraud is involved. 

 

In the finance industry it isn't unusual to force time off, say two weeks at a time every year.  They don't do this because they think you need the days off but rather it's a policy that helps uncover fraudulent activity.  If you're gone for a couple weeks it's a lot harder to hide some of the shadier activities that may be going on.

 

Anyway, I hope Pearson recovers from his illness and finds a better work/life balance.  It definitely seemed like he's taken a lot of these attacks against the company very personally.  It reminds me that you can kill yourself by working and someone else will get to enjoy all your hard work.  You guys might be drawing lessons about black swans, etc., but I'm reminded to take time for myself and family and try to enjoy life a little more. 

[dorsiacapital]

I don't want to get into conspiracy theories, but I do find it a bit surprising the number of executives and board members appointed in Pearson's absence.

 

By way of comparison, United Airlines just named its general counsel as acting CEO after its CEO  took what appears to be a 3-4 month absence after a heart attack... (http://www.nytimes.com/2015/11/06/business/oscar-munoz-uniteds-chief-to-return-in-first-quarter.html?_r=0.

[loganc]

Not trying to imply a conspiracy theory, but I believe MP's restricted shares vest early if he is forced to step down due to illness. Pneumonia is potentially worth 100's of millions to MP and gets him far away from testifying under oath.

 

I don't want to get into conspiracy theories, but I do find it a bit surprising the number of executives and board members appointed in Pearson's absence.

 

By way of comparison, United Airlines just named its general counsel as acting CEO after its CEO  took what appears to be a 3-4 month absence after a heart attack... (http://www.nytimes.com/2015/11/06/business/oscar-munoz-uniteds-chief-to-return-in-first-quarter.html?_r=0.

 

I love these posts.  It reminds me of that age-old qualifier: "With all due respect, ..."

 

[Uccmal]

Uccmal,

 

I'm interested in this comment: "I try to stay away from Guru stocks for the very reasons we are seeing now." Can you expand on that a bit, I think there is something to that ...but what in more detail?

 

I will try.  At its simplest, I have only seen a handful of "gurus" maintain performance year in and year out at high rates of return, for a long time.  I am sure you have likely noticed this OM as we have both been at it for a long time.  I dont want to get sidetracked with Buffett.  Had I bought the stock 20 years ago and nothing else I would have been well rewarded, but he was 66, 20 years ago, with no obvious successor. 

 

Virtually all high fliers, Which I am calling Gurus revert to the mean, usually about the time the public, WE notice.  Fairfax outperformed the CDN banks for twelve years, and has since performed below.  Sears Holding... Eddie was supposed to turn this into a powerhouse.  George Amoryan (Clarke) was supposed to be the next wizard in capital allocation.  It turns out he enjoys a good fight and has had some success, mostly for himself.  Other examples from this board: Tom Ward (SD) made off like a bandit, The dissolving pulp guy (I forget the P&P company).  VRX (stock performance was so predicatable - maybe not a black swan after all).  Lukeadia (luk). 

 

Possible exceptions: Bruce Flatt (you do better with the subs than BAM itself); Buffett; John Malone, Starbucks Howard Schultz.  All of these are subject to founder risk - we already saw it with SBux. 

 

Most of the great performing businesses have been run by successive CEOs chosen from the rank and file: Home Depot, Coke, Pepsi, Macdonalds, Cdn Banks, Nestle, Enbridge, TCP.  Buffett's ham sandwich rule at work. 

 

The type of businesses they are in is interesting to observe.  Together they could make up Berkshire.  Buffett's level of genius is not duplicable, he is very old, and not replaceable.  BTW, I did not say Berk. would collapse, just that without Buffett it will start to have down times. 

 

In summary, by the time we, the low level investor, find a "Guru", the best is usually in the past.  I used to run spreadsheets of FFh expanding at the rate it did in the mid-90s into the future.  We are about 15 years behind my projections. 

 

[original mungerville]

Thanks, I have noticed this as well - and FFH is a great example. The stock is not much higher in $US than were it was 16-17 years ago. VRX's leverage always scared me (and so my losses were with call options rather than the common). Funny that FFH's leverage back then was high as well. Ackman and his platform stock concept is interesting but these usually come with lots of debt. Maybe its rear-view mirror extrapolation into the future combined with hubris that gets investors into trouble. Taking a good idea to far such that it is the idea with kernels of truth that kill you as you take them too far.

 

Its interesting that Monish Pabrai's whole investment thesis is based on filtering with guru stocks first whereas you are saying stay away. (I remember my first times reading Outstanding Investor Digest thinking these guys are so smart/great investors; but before or during the financial crisis with these guys making the case for their top picks, I would compare them to my top pick, at the time anyway, and think that they did not compare.)

 

I wonder if its black or white or if reality is somewhere in between. Monish really seems to think that starting with Guru stocks is the way to go.

 

[dorsiacapital]

Not trying to imply a conspiracy theory, but I believe MP's restricted shares vest early if he is forced to step down due to illness. Pneumonia is potentially worth 100's of millions to MP and gets him far away from testifying under oath.

 

I don't want to get into conspiracy theories, but I do find it a bit surprising the number of executives and board members appointed in Pearson's absence.

 

By way of comparison, United Airlines just named its general counsel as acting CEO after its CEO  took what appears to be a 3-4 month absence after a heart attack... (http://www.nytimes.com/2015/11/06/business/oscar-munoz-uniteds-chief-to-return-in-first-quarter.html?_r=0.

 

I love these posts.  It reminds me of that age-old qualifier: "With all due respect, ..."

 

With all due respect, touche!

 

I'll respectfully recant - office of the CEO structure has been used by others

 

United Health Group (http://www.unitedhealthgroup.com/newsroom/articles/feed/unitedhealth%20group/2014/1112seniorleadershipteam.aspx)

 

Cabot Corporation (http://www.businesswire.com/news/home/20151202006292/en/Cabot-Corporation-Announces-CEO-Medical-Leave-Absence)

 

As mentioned on t

[obtuse_investor]

Just ran across this on Twitter- had to take a screenshot for this thread.

 

[Guest Schwab711]

I will definitely watch this movie opening night

[sswan11]

http://www.bloomberg.com/news/articles/2015-12-31/ackman-s-pershing-square-trims-valeant-position-for-tax-savings

[rpadebet]

What happens with Shire and Baxalta will be interesting when viewed threw VRX lens.

 

There are lots of possibilities here to create immense value for all stakeholders, if people involved act in their rational self interest.

[dorsiacapital]

What happens with Shire and Baxalta will be interesting when viewed threw VRX lens.

 

There are lots of possibilities here to create immense value for all stakeholders, if people involved act in their rational self interest.

 

You mean Baxalta should fight off the deal as hard as possible because a white knight will emerge that can pay significantly more than Shire is willing to offer?

[rpadebet]

What happens with Shire and Baxalta will be interesting when viewed threw VRX lens.

 

There are lots of possibilities here to create immense value for all stakeholders, if people involved act in their rational self interest.

 

You mean Baxalta should fight off the deal as hard as possible because a white knight will emerge that can pay significantly more than Shire is willing to offer?

 

Nope. that would only create value for only one of the parties. Focus on "all stakeholders".

 

I am probably just dreaming though..

[Picasso]

Never a boring day with this company.  The guy from VIC who said to short VRX at the top just came out with a new short write up for another move down to $32.  Pearson is still in the hospital and supposedly they're looking for a new CEO, perhaps Schiller. 

 

Anyone still think Pearson is put in the next version of the Outsiders?  It seems like people get upset when someone is bearish on this stock, but the thesis creep on VRX is ridiculous.  Perhaps Ackman still thinks it's a platform with someone else running the show.

[Liberty]

 

BREAKING: Valeant planning to appoint new leader as CEO Pearson remains hospitalized, new CEO would replace committee running co. now - DJ

 

Wow.

 

Edit: http://www.wsj.com/articles/valeant-planning-to-appoint-new-leader-as-ceo-remains-hospitalized-1452036751

[Guest Grey512]

Looking at shorting this again. Call me crazy.

[original mungerville]

Never a boring day with this company.  The guy from VIC who said to short VRX at the top just came out with a new short write up for another move down to $32.  Pearson is still in the hospital and supposedly they're looking for a new CEO, perhaps Schiller. 

 

Anyone still think Pearson is put in the next version of the Outsiders?  It seems like people get upset when someone is bearish on this stock, but the thesis creep on VRX is ridiculous.  Perhaps Ackman still thinks it's a platform with someone else running the show.

 

Yup, its crazy. Reminds me of Fairfax 2002. At one point in that story, it could have gone either way. Had Watsa not had huge long bond gains in Q1 following a very precarious year-end, it might have been game over for the stock (ie huge dilution) not necessarily bankruptcy. Same thing here, if they don't deliver in 2016, stock could take a big hit (although Ackman doesn't think it goes below $70 or whatever based on his options); if they deliver, the gains could also be decent. But now with Pearson out, that's a negative. What is needed is delivery on the business front. Not sure how putting a CFO in charge is going to help with that but I guess its better than a committee.