VRX - Valeant Pharmaceuticals International Inc.

[KCLarkin]

Apparently the new VRX bull argument is: VRX is a good investment because Lou Simpson/Bill Ackman/Jeff Ubben think it is.

 

Because apparently invoking Lou Simpson's name defeats any and all opposing arguments.

 

Just to be clear, that isn't my point at all. I can understand why the more aggressive superinvestors are in this debt death trap, but Lou looks out of place. I can't figure out what he is doing here.

 

And I am certainly not a VRX bull. I feel like it will blow up, but the facts don't seem to agree.

[Picasso]

Bronte put another article on Valeant out which basically says that the prices of Salix are being raised and Pearson is lying.  Hasn't he done enough due diligence on VRX to know that isn't true?

 

Even Zhou on Seeking Alpha is saying he's short VRX for the betterment of mankind.  Citron is basically saying that Valeant is gouging taxpayers and needs to be shut down.  Citron is also saying that Valeant's model is to the detriment of the system.  Huh?  Not every pharma is pursuing the Valeant model and far from it.  If Pfizer or Merck or whoever can get better returns from R&D, then let them go for it. 

 

Do people suddenly have a problem with capitalism?  This isn't the non-profit space where people are borrowing money to buy something that gives them no benefits and then costs the taxpayer.  Drug companies should be able to unload parts of their portfolio, otherwise you're going to hurt returns on R&D even more.  And if Valeant decides to buy them and reprice the asset based on the value, there's already a check and balance in place because real price gouging would start to impact how doctors view the rest of the Valeant portfolio.  Or maybe they already have and there's widespread evidence of this which I haven't found?

 

There's a balance that needs to take place between society and capitalism, but is that a good reason to be shorting the stock?  The risks to the stock are dependent on so many other things, the last thing I think of is government forcing companies to give away drugs for a very low price.  Isn't an industry wide low return on R&D spend a sign that it's difficult as it is?

 

I'm more interested in signs of accounting fraud or durability.  Going through that list of drug price hikes led me to the 10% category that we already had received as an explanation.  So far no one has shown that we're seeing massive price hikes on the other 90% of the portfolio.

 

Just seems like people are getting overly emotional from a society standpoint and hatred for the stock.  I'm not a giant fan of Valeant but there just seems to be no balance and little truth to some of these arguments.

[Liberty]

Bronte put another article on Valeant out which basically says that the prices of Salix are being raised

 

Saw that. I'm sure he's aware that Salix was massively discounting to reduce inventory after its scandal, and that this depressed revenue temporarily. In the most recent Q transcript, Glenn Greenberg asks about Salix's Q4 run-rate and Pearson confirms that it should be ~600m, and that it's fair to annualize that. With Xifaxan growing over 30% YoY thanks to the IBS-D indication, and possibly accelerating further into the next year because of DTC ads, you easily get to the 20% figure that Hempton pretends to find high (I don't think I've seen anyone complain about Salix price increases since Valeant bought them...). Salix also has higher margins than the VRX average, so the impact on the bottom line should be proportionally higher.

 

From what I can tell, the 90% of VRX's portfolio that isn't tail assets and such doesn't seem to have that much pricing power. More than inflation, but nothing out of the ordinary compared to what the healthcare sector as a whole has been taking lately.

[original mungerville]

Bronte = John Hempton = Brogalboy. A key player in the huge FFH short in the 2000 to 2005 era. Close but ultimately wrong. If there ever is a history written about this board, he would be mentioned.

 

Good analyst, just not great - and that makes all the difference. Been there done that, I'm not wasting my time reading his shit (unless you guys read it and find something useful in there, I might take a look - like I said good analyst so sometimes something he digs up is worth paying attention to)

[original mungerville]

Bronte put another article on Valeant out which basically says that the prices of Salix are being raised

 

Saw that. I'm sure he's aware that Salix was massively discounting to reduce inventory after its scandal, and that this depressed revenue temporarily. In the most recent Q transcript, Glenn Greenberg asks about Salix's Q4 run-rate and Pearson confirms that it should be ~600m, and that it's fair to annualize that. With Xifaxan growing over 30% YoY thanks to the IBS-D indication, and possibly accelerating further into the next year because of DTC ads, you easily get to the 20% figure that Hempton pretends to find high (I don't think I've seen anyone complain about Salix price increases since Valeant bought them...). Salix also has higher margins than the VRX average, so the impact on the bottom line should be proportionally higher.

 

From what I can tell, the 90% of VRX's portfolio that isn't tail assets and such doesn't seem to have that much pricing power. More than inflation, but nothing out of the ordinary compared to what the healthcare sector as a whole has been taking lately.

 

So Liberty, you are saying Pearson alluded to $2.4 billion in annual revenue run rate (and you think that that is growing at 20% annually?) Am I interpreting that right?

[Guest Schwab711]

If you follow your link, the 2nd slide states that durable revenue accounts for 26% of total 2014 revenue.

 

You are misreading it, I believe.

 

They mean that ±60% of rx revenues are durable, and that this 60% of rx represents ±26% of total. That's just the rx and durable, not the total durable.

 

You are right, 90% appears a little high. I didn't have time to post a full rebuttal today but I didn't want you to think that I'm ignoring your response or that I was "trolling" with that estimate. I'll try to post soon. Here is a quick response.

 

85% durable revenue is laughably out-dated and looks like it was wrong when they published it. Clearly it's at least 20% from SLXP + on-patent Rx + reasonable estimates of durable v. non-durable for the other 3 categories. That is >35% + splits from other 3 categories. Is VRX really claiming that every $ of revenue in emerging markets comes from durable products (not patented)?

 

Also in that 85% slide they estimate $8.5b in 2014 revenue (which was almost dead-on), but they assumed $3.1b in emerging market revenue, not including on-patent Rx. However, most of the on-patent Rx in the top-20 have additional patents worldwide (and VRX holds these rights). Also, actual emerging market revenue for 2014 came in at just $2.1b, which is ~$1b less than they projected on 04/22/2014 (excluding on-patent Rx). What happened here?

 

If you look at the "85%" slide you can see that all non-Rx revenue is considered durable. As I go through the products individually I'm having a hard time determining how VRX classifies durable, since there are many patent protected drugs that are labeled "durable". As a quick example, Asertin is clearly an on-patent Rx product but they automatically assume all "physician dispensed" products are durable. VRX cornered the market on all Minocyclines (they have 4 brands each with multiple strengths) by purchasing every approved generic and then raised the prices. Sun Pharmaceuticals has manufactured these products for VRX (and previously for Medicis/Precision) and has recently gained approval for a new Minicycline generic, now the only generic for this drug that is not owned by VRX. The fact that VRX outsources their manufacturing seems to be a new risk since their manufacturers are also their competitors. This is in addition to the debt/liquidity, tax inversion, and drug pricing concerns.

 

Also, just because I was off on my % of durable v. non-durable revenue does not mean the content of my comment was wrong. If the non-durable revenue is even around 50% then that is a big difference from the current assumptions and my post on liquidity concerns is relevant.

 

Has anyone else attempted to estimate the current durable v. non-durable revenue split?

Has anyone been able to reconcile their AGN presentation to what actually happened? I don't understand how they missed by so much for developed and emerging. Did I miss something obvious?

 

 

Anyone interested in starting a new thread for VRX that is limited to just a discussion of numbers?

[Guest Schwab711]

Bronte put another article on Valeant out which basically says that the prices of Salix are being raised and Pearson is lying.  Hasn't he done enough due diligence on VRX to know that isn't true?

 

Even Zhou on Seeking Alpha is saying he's short VRX for the betterment of mankind.  Citron is basically saying that Valeant is gouging taxpayers and needs to be shut down.  Citron is also saying that Valeant's model is to the detriment of the system.  Huh?  Not every pharma is pursuing the Valeant model and far from it.  If Pfizer or Merck or whoever can get better returns from R&D, then let them go for it. 

 

Do people suddenly have a problem with capitalism?  This isn't the non-profit space where people are borrowing money to buy something that gives them no benefits and then costs the taxpayer.  Drug companies should be able to unload parts of their portfolio, otherwise you're going to hurt returns on R&D even more.  And if Valeant decides to buy them and reprice the asset based on the value, there's already a check and balance in place because real price gouging would start to impact how doctors view the rest of the Valeant portfolio.  Or maybe they already have and there's widespread evidence of this which I haven't found?

 

There's a balance that needs to take place between society and capitalism, but is that a good reason to be shorting the stock?  The risks to the stock are dependent on so many other things, the last thing I think of is government forcing companies to give away drugs for a very low price.  Isn't an industry wide low return on R&D spend a sign that it's difficult as it is?

 

I'm more interested in signs of accounting fraud or durability.  Going through that list of drug price hikes led me to the 10% category that we already had received as an explanation.  So far no one has shown that we're seeing massive price hikes on the other 90% of the portfolio.

 

Just seems like people are getting overly emotional from a society standpoint and hatred for the stock.  I'm not a giant fan of Valeant but there just seems to be no balance and little truth to some of these arguments.

 

 

The US and Chile are the only developed countries in the world that have no restrictions or caps on drug prices. We can still be a capitalist country and control our healthcare costs.

 

The current system is getting out of hand. The whole point of relaxing IP laws from 60's - 80's (and through present) was to improve the availability of medicine (which it absolutely has done). There was always an understanding that once these drugs lost patent protection the whole country would benefit from better medicine at cheap prices (due to generic competition). There is not enough competition in the industry right now so we are seeing generic drugs with pricing power. This was not how the system was meant to function. Congress hasn't even started picking on companies like GILD for their pricing of drugs like TAF, which is literally just a combination of two already approved drugs (line-extension). This is artificially increasing the costs to treat disease. Due to price caps everywhere but the US, Americans are basically subsidizing R&D for the rest of the world.

 

I would probably write the same thing as you if I were invested in a pharmaceutical company, but realistically our pharmaceutical industry has major problems that need reform.

 

 

[ZenaidaMacroura]

The current system is getting out of hand. The whole point of relaxing IP laws from 60's - 80's (and through present) was to improve the availability of medicine (which it absolutely has done). There was always an understanding that once these drugs lost patent protection the whole country would benefit from better medicine at cheap prices (due to generic competition). There is not enough competition in the industry right now so we are seeing generic drugs with pricing power. This was not how the system was meant to function.

The emphasized portion is something I've been thinking about lately -namely whether it is necessarily a given that some large pharmaceutical interest is going to enter into competition with each of Valeant's sub 250mm revenue drugs when they roll off patent protection?  It seems like the smaller companies might be constrained with regards to marketing/more attractive opportunities whereas for the larger pharmas the effort isn't enough to move the gauge. 

 

Is this why some of Valeant's patent protected stuff is considered "durable?" 

 

It seems too simple...

 

(EDIT: hey the last couple of posts have been constructive/informative!  Let's keep it going..?)

[giofranchi]

Also, just because I was off on my % of durable v. non-durable revenue does not mean the content of my comment was wrong. If the non-durable revenue is even around 50% then that is a big difference from the current assumptions and my post on liquidity concerns is relevant.

 

Sincerely, I don’t see how.

Once again it is all about organic growth. Until there is organic growth, I don’t see how they should experience a liquidity problem, given that amortization is not a cash expense.

What might happen instead is the following: if you are right and lots of their products are not durable, they won’t keep growing organically without investing more in R&D. (By the way, until now they have proven your concern wrong, because they have grown organically without large investments in R&D). The matter here though has never been how much R&D they are going to make, instead it has always been the ROIC they are going to achieve. Their level of R&D will vary in time… And, if justified by a satisfactory ROIC, it might be much higher than it has been until now… What won’t change imo is they’ll keep cutting all fat to the bone, not accepting any waste.

This is what sets them apart imo: in a sector that is among the richest and will become ever richer, they are not complacent, but laser focused on ROIC. Period. How to achieve the best ROIC possible? They will be flexible, and do what works in each different situation.

 

Cheers,

 

Gio

 

[giofranchi]

And shame on people like gio who keep trying to pump up this stock.

 

Ahahah!!... I have just cut my investment in half... Very stange way to "keep trying to pump up this stock"! ;)

 

Cheers,

 

Gio

[giofranchi]

He seemed to worry about your investment process. Given your track record that seems like a valid concern since buying a random broadly diversified ETF would probably have delivered better returns

 

Mmm... Come on! He used the word "self-destruct"... Would you define a 10% compounded for the last 5 years a "self-destruction"... just because it has lagged behind some indeces? ???

 

By the way, the remaining 12% from the cash flow of my company shouldn’t be dismissed so easily imo: because what I do is basically taking strategic and investing decisions for my company. It is not stock market investing, I know… But it surely is related to the investing process.

On this board we often talk about private business investing or real estate investing: well, that’s exactly the right way to think about it.

 

Cheers,

 

Gio

 

[giofranchi]

(due to the potential change in the macro picture, not this subpoena and not anything Valeant did or did not do)

 

Thank you OM!

So basically you don’t think “government intervention” might be a serious threat? Is it just noise?

How could we be sure? This is not a business judgement… it looks more like speculation imo. Once the government starts intervening, how could we judge what it might or might not do? I just don’t know… Therefore, I am asking.

 

Cheers,

 

Gio

 

[Guest Grey512]

My 2 cents:

• Government intervention would likely impact a large chunk of the entire pharma sector, not just Valeant. Gilead and a bunch of others could be affected. There's no point getting angry about it. Live by the sword, die by the sword. The companies made supernormal profits for a number of years. If a 'rebalancing' of the system moves economic value out from these companies and to some other agents (hopefully, the public), then so be it. Let the equity (and debt holders) take their losses and roll with it.
  

 

• The 'price-gouging' and 'regulatory action' topics for Valeant are surely interesting and fascinating to talk about. But I think they do obscur the wider issue of Valeant's very business model. I think of Valeant as a big beast that just runs on a treadmill and has to constantly re-create its revenue pipeline, and to do it, it requires leverage. It requires QE. It requires steadily-functioning debt markets. It benefits from lower rates. And the last thing that Valeant wants is for more capital to enter the sector and other folks to start copying what it does (Allergan, Endo), even in part. But that is inevitable. I must have now read about at least 2 men in their late-20s who came out of hedge funds and jumped into the pharma/bio-tech game, picking up properties on the cheap and either hiking the prices or taking their companies public. Believe me, I am a big proponent of healthcare and R&D to rid the humanity of its ailments and enable people to live longer. But the capital markets have this tendency whereby an idea with some seed of truth in it gets taken way too far. And that causes bubbles.
   
  So I put a short on Valeant as a hedge against a broader de-leveraging of the developed economies, and I feel that the de-leveraging would impact Valeant's business model. And yes, the fact that Valeant's free cash flows were a tiny fraction of its enterprise value at the time also contributed to my decision to short. I realized 1 more thing after I shorted: there is a lot of hedge fund money in Valeant. Everyone "knows" that Valeant is "awesome".
   
  So even if there is no government action, I think Valeant's traded value has a decent probability of compressing due to other factors, factors that have little to do with subpoenas or Hillary.
   
   
  

 

• Gio, I thought that a few of your posts were hard to follow, i.e. hard to pin down what your decision-making process is. But in the end - judge not. In fact, I respect that you are posting without the cloak of anonymity. Like any of us, posting about things publicly (and non-anonymously, no less!) it does potentially expose you to a bias where you feel like you have to stick with positions because you posted about them beforehand, but because you changed your mind about VRX, it seems you have kept that bias in check, and I respect that a lot.
  

 

Maybe I am not adding anything original. But I do want to move the discussion into a more fruitful, and perhaps, less 'personal', less 'Gio-centric' direction.

[giofranchi]

Gio, I thought that a few of your posts were hard to follow, i.e. hard to pin down what your decision-making process is.

 

I look for:

1) Great businesses,

2) Managed by a great operator,

3) Predictable businesses,

4) Selling at an attractive price,

5) In order to hold them for many years.

You probably think my decision was “hard to follow” because I decided to sell when the price was more attractive… But then you would be totally ignoring point n.3: whenever I think a business loses predictability, I sell no matter what the price… Let’s say I have much more confidence in my judgement about business dynamics than in my skillfulness as an analyst… When I stop understanding a business comfortably enough, I don’t spend much time trying to understand if it is undervalued or not. I sell and look for a business that I think I can predict instead. Period.

I hope it is clearer now.

 

Cheers,

 

Gio

 

[Picasso]

I think those are good points Grey.  So there are a lot of other companies besides VRX which people should be shorting too, such as PRGO.  PRGO has similar debt/EBITDA, also uses cash EPS,  claims of durability on 70% of portfolio, spends 3% on R&D, etc.  It seems like we've all focused on VRX because of concentrated hedge fund holdings that have made this so controversial. 

 

Perhaps from a market psychology standpoint, the recent top in the stock was sort of like Apple when it hit $700.  Almost everyone was long the stock and it priced in a hell of a lot, and then suddenly sentiment shifted and the company couldn't do anything right.  A few years later, profits have proven wrong all the people who said Android is going to take profits, or Samsung, or whoever and the stock is well above the previous peak after falling 40% on those fears.  And then Apple is still trade for 10x because the narrative is similar, but volatility has died down because there isn't as much hedge fund concentration in the stock.  So maybe we're in the "show me" mode of the VRX cycle.

 

Also keep in mind that so far Valeant is somewhat unmatched in many areas compared to the competition.  They can seemingly do very smart deals (they tried to buy Actavis pre-Allergan in 2013), Endo was unable to compete on an offer for Salix because of their scale and size differences,  and the bigger they get the more this gap widens.  And acknowledging that competition comes in and takes away the opportunity means that there is an opportunity to reap returns, right?  The argument sometimes shifts from "they're destroying value, they aren't actually generating cash" to "someone else is just going to come in and take those returns now that the market is aware of the strategy."  You can't have that one both ways.

 

In terms of the cost of capital, they've been able to grow cash EPS from a much higher cost of capital in the past.  So not sure how a 50 basis point change is their bond interest costs change the picture that much.  By the way, we've seen this kind of spread blow out on Valeant about four times over the past three years.  This happens with a lot of rollups though (in 2014 Post Holdings debt cost of capital went from 6% to 8%, stock went from $60 to $30 before going back up to $70).  If they get high returns from earnings reinvestment, then that's not the worst thing in the world either.  If they reduce/hold leverage stable at 3x and continue to do deals, they can probably buy up $7 billion of assets each year over time. 

 

At a minimum the situation isn't as good as what it was at $260.  And you're right there might be other things to bring this down besides what has been in the news cycle lately.

[writser]

On a tangent: is anybody looking at the SURG takeover? At current prices you get a free CVR worth up to $1. I'm not sure about the deal risk given the recent turmoil but this acquisition seems so small that I have a hard time seeing it fail.

[giofranchi]

Government intervention would likely impact a large chunk of the entire pharma sector, not just Valeant. Gilead and a bunch of others could be affected. There's no point getting angry about it. Live by the sword, die by the sword. The companies made supernormal profits for a number of years. If a 'rebalancing' of the system moves economic value out from these companies and to some other agents (hopefully, the public), then so be it. Let the equity (and debt holders) take their losses and roll with it.

 

This doesn’t really bother me: the public sector replacing the private sector as a whole?... No, unless we stop caring about better and healthier lives! ;)

 

The 'price-gouging' and 'regulatory action' topics for Valeant are surely interesting and fascinating to talk about. But I think they do obscur the wider issue of Valeant's very business model. I think of Valeant as a big beast that just runs on a treadmill and has to constantly re-create its revenue pipeline, and to do it, it requires leverage.

 

I know this is the most widely argument brought up by the bears, but once again it totally misses organic growth, which has been very healthy until now… You might say it will falter, and I say I don’t think it will… Those are two different judgements about the same business: actually, there is no way to know for sure which one is correct… therefore, I guess we’ll have to wait and see!

 

Cheers,

 

Gio

 

 

[original mungerville]

(due to the potential change in the macro picture, not this subpoena and not anything Valeant did or did not do)

 

Thank you OM!

So basically you don’t think “government intervention” might be a serious threat? Is it just noise?

How could we be sure? This is not a business judgement… it looks more like speculation imo. Once the government starts intervening, how could we judge what it might or might not do? I just don’t know… Therefore, I am asking.

 

Cheers,

 

Gio

 

Well, I think change is probably due and the system needs to be rebalanced towards the public. That rebalancing, however, would affect the whole industry not just Valeant. And if Pearson is not basically misinforming, Valeant is likely to be affected a lot less that others. I can see some pricing impacts on that portion of their portfolio.  But we have to realise the following:

 

1. Market prices for pharma acquirees have come down significantly (more than outweighing any negative impact Valeant would have from higher junk bond spreads). Moreover, they need not incur more debt, just refinance opportunistically in what could be a bear market and reinvest their earnings in lower priced acquisitions. If it got really bad, they could simply pay down debt (and possibly buy 1 unit of common in for every 2 units of debt - depending on cash flows).

 

2. Importantly, their deal models focus on a relatively short payback period. So my view is a) what are the odds of a subpoena (less than 50%?), b) if a subpoena, sure short-term public relations nightmare but what comes out of that immediately? (maybe 50% chance Pearson says he'll just drop the prices and that small portion of the portfolio?). So there is maybe a 25% chance of this? Or maybe Pearson just drops in anyway without the subpoena? (20% chance?) So it doesn't matter that much right now to the value of the stock. Then, beyond the most obvious price increases, in order for any major/other impacts to happen (eg, minimum R&D, pricing in general, etc, etc,) the election has to happen, Democrats need to fight with Republicans for at least a year, lobbying from the entire industry will occur (as Pearson says Valeant would/could be least affected), so when does all this get implemented? 2 years or 3 years? And in the meantime Valeant earns 15-25 Billion in EBITDA on the existing businesses - ie around 2/3rds of their debt load.

 

3. Now remember that as #2 is playing out (odds might be 50% at best), if indeed it plays out at all, pharma stock market values are coming down, Valeant debt is coming down (assuming Pearson holds off on acquisitions for a year or two as the politicians fight it out), Pearson starts adjusting his deal model to account for #2 in relation to the new acquisitions. Maybe he focuses his attention on a non-US acquisition or smaller tuck-ins and debt repayment. At the end of the day, if you believe in Valeant, you believe in Pearson's capital allocation abilities and he will adjust to this new environment if indeed there is one. 

 

The stock price currently seems to reflect this potential new environment already - the odds of which I believe are not more than 50% and not sooner that a few years from now (other than pricing on a small part of the portfolio for public relations purposes).

 

Just some thoughts - I am not a political or pharma expert. It does seem value has to shift to the public, but valuations of acquirees will surely reflect that. And to guide Pearson through this, they have an extremely strong investor base and board which looks long-term (Sequoia, Value Act, etc). They aren't likely going to fire their acquisition gun too early in this potentially changing environment. Valeant just tapped the junk bond markets while they were cheap, bought up a lot and loaded up with cheap debt that they can now repay with the high cash flows the acquisitions are generating. In retrospect, pretty good timing if you ask me.

[original mungerville]

Just to be clear, I don't think the stock is going to $300 anytime soon like I did before say July/August. But at 160 a share here, rather than 240 a share a month ago, I think all this stuff is in the price now. 

[Bagehot]

On a tangent: is anybody looking at the SURG takeover? At current prices you get a free CVR worth up to $1. I'm not sure about the deal risk given the recent turmoil but this acquisition seems so small that I have a hard time seeing it fail.

 

I think that would be a smart thing to take a look at as an individual investor. No fund can really touch it because it is so small. You do have to lay out a bunch of capital and take on deal risk to get the CVR (not tradeable), but I'd say the odds of the deal not closing are <1%.

[giofranchi]

Martin Shkreli Shows Us How Regulation Drives Inequality

 

https://niskanencenter.org/blog/martin-shkreli-show-us-how-regulation-drives-inequality/

 

Cheers,

 

Gio

[Matson125]

I read the piece Hempton put out on VRX.  What are your thoughts on Norma Provencio?

[giofranchi]

Well, I think change is probably due and the system needs to be rebalanced towards the public. That rebalancing, however, would affect the whole industry not just Valeant. And if Pearson is not basically misinforming, Valeant is likely to be affected a lot less that others. I can see some pricing impacts on that portion of their portfolio.  But we have to realise the following:

 

1. Market prices for pharma acquirees have come down significantly (more than outweighing any negative impact Valeant would have from higher junk bond spreads). Moreover, they need not incur more debt, just refinance opportunistically in what could be a bear market and reinvest their earnings in lower priced acquisitions. If it got really bad, they could simply pay down debt (and possibly buy 1 unit of common in for every 2 units of debt - depending on cash flows).

 

2. Importantly, their deal models focus on a relatively short payback period. So my view is a) what are the odds of a subpoena (less than 50%?), b) if a subpoena, sure short-term public relations nightmare but what comes out of that immediately? (maybe 50% chance Pearson says he'll just drop the prices and that small portion of the portfolio?). So there is maybe a 25% chance of this? Or maybe Pearson just drops in anyway without the subpoena? (20% chance?) So it doesn't matter that much right now to the value of the stock. Then, beyond the most obvious price increases, in order for any major/other impacts to happen (eg, minimum R&D, pricing in general, etc, etc,) the election has to happen, Democrats need to fight with Republicans for at least a year, lobbying from the entire industry will occur (as Pearson says Valeant would/could be least affected), so when does all this get implemented? 2 years or 3 years? And in the meantime Valeant earns 15-25 Billion in EBITDA on the existing businesses - ie around 2/3rds of their debt load.

 

3. Now remember that as #2 is playing out (odds might be 50% at best), if indeed it plays out at all, pharma stock market values are coming down, Valeant debt is coming down (assuming Pearson holds off on acquisitions for a year or two as the politicians fight it out), Pearson starts adjusting his deal model to account for #2 in relation to the new acquisitions. Maybe he focuses his attention on a non-US acquisition or smaller tuck-ins and debt repayment. At the end of the day, if you believe in Valeant, you believe in Pearson's capital allocation abilities and he will adjust to this new environment if indeed there is one. 

 

The stock price currently seems to reflect this potential new environment already - the odds of which I believe are not more than 50% and not sooner that a few years from now (other than pricing on a small part of the portfolio for public relations purposes).

 

Just some thoughts - I am not a political or pharma expert. It does seem value has to shift to the public, but valuations of acquirees will surely reflect that. And to guide Pearson through this, they have an extremely strong investor base and board which looks long-term (Sequoia, Value Act, etc). They aren't likely going to fire their acquisition gun too early in this potentially changing environment. Valeant just tapped the junk bond markets while they were cheap, bought up a lot and loaded up with cheap debt that they can now repay with the high cash flows the acquisitions are generating. In retrospect, pretty good timing if you ask me.

 

Ok, thank you again! Very valid points.

I am not much concerned about government intervention for the whole industry. I just don’t see the public being as efficient as the private sector (despite all its flaws)… And in healthcare we really want to proceed as fast as possible.

Instead, I am worried about the government meddling with VRX’s business in particular… Just because VRX takes to the extreme things like cutting fat, tax inversion, cutting unproductive R&D, raising prices whenever it can, because it is held by many hedge fund managers, etc. … In other words because VRX seems much more focused on making money than any other pharma company I know of!

And I don’t even know how to attach a probability to such a threat…

 

Cheers,

 

Gio

 

[original mungerville]

Well, I think change is probably due and the system needs to be rebalanced towards the public. That rebalancing, however, would affect the whole industry not just Valeant. And if Pearson is not basically misinforming, Valeant is likely to be affected a lot less that others. I can see some pricing impacts on that portion of their portfolio.  But we have to realise the following:

 

1. Market prices for pharma acquirees have come down significantly (more than outweighing any negative impact Valeant would have from higher junk bond spreads). Moreover, they need not incur more debt, just refinance opportunistically in what could be a bear market and reinvest their earnings in lower priced acquisitions. If it got really bad, they could simply pay down debt (and possibly buy 1 unit of common in for every 2 units of debt - depending on cash flows).

 

2. Importantly, their deal models focus on a relatively short payback period. So my view is a) what are the odds of a subpoena (less than 50%?), b) if a subpoena, sure short-term public relations nightmare but what comes out of that immediately? (maybe 50% chance Pearson says he'll just drop the prices and that small portion of the portfolio?). So there is maybe a 25% chance of this? Or maybe Pearson just drops in anyway without the subpoena? (20% chance?) So it doesn't matter that much right now to the value of the stock. Then, beyond the most obvious price increases, in order for any major/other impacts to happen (eg, minimum R&D, pricing in general, etc, etc,) the election has to happen, Democrats need to fight with Republicans for at least a year, lobbying from the entire industry will occur (as Pearson says Valeant would/could be least affected), so when does all this get implemented? 2 years or 3 years? And in the meantime Valeant earns 15-25 Billion in EBITDA on the existing businesses - ie around 2/3rds of their debt load.

 

3. Now remember that as #2 is playing out (odds might be 50% at best), if indeed it plays out at all, pharma stock market values are coming down, Valeant debt is coming down (assuming Pearson holds off on acquisitions for a year or two as the politicians fight it out), Pearson starts adjusting his deal model to account for #2 in relation to the new acquisitions. Maybe he focuses his attention on a non-US acquisition or smaller tuck-ins and debt repayment. At the end of the day, if you believe in Valeant, you believe in Pearson's capital allocation abilities and he will adjust to this new environment if indeed there is one. 

 

The stock price currently seems to reflect this potential new environment already - the odds of which I believe are not more than 50% and not sooner that a few years from now (other than pricing on a small part of the portfolio for public relations purposes).

 

Just some thoughts - I am not a political or pharma expert. It does seem value has to shift to the public, but valuations of acquirees will surely reflect that. And to guide Pearson through this, they have an extremely strong investor base and board which looks long-term (Sequoia, Value Act, etc). They aren't likely going to fire their acquisition gun too early in this potentially changing environment. Valeant just tapped the junk bond markets while they were cheap, bought up a lot and loaded up with cheap debt that they can now repay with the high cash flows the acquisitions are generating. In retrospect, pretty good timing if you ask me.

 

Ok, thank you again! Very valid points.

I am not much concerned about government intervention for the whole industry. I just don’t see the public being as efficient as the private sector (despite all its flaws)… And in healthcare we really want to proceed as fast as possible.

Instead, I am worried about the government meddling with VRX’s business in particular… Just because VRX takes to the extreme things like cutting fat, tax inversion, cutting unproductive R&D, raising prices whenever it can, because it is held by many hedge fund managers, etc. … In other words because VRX seems much more focused on making money than any other pharma company I know of!

And I don’t even know how to attach a probability to such a threat…

 

Cheers,

 

Gio

 

VRX directly? I would say very low. Remember, there are Republicans not just Democrats - and its hard to legislate business models. Also, look what happened in banking in the US after the financial crisis. That was a much more acute / public relations type nightmare than this pharma thing, and Goldman's biz model did not get taken apart, neither did those of the other major banks. Why should we expect something more here? And why only directly focused on VRX? I would say very low.

[original mungerville]

Bronte put another article on Valeant out which basically says that the prices of Salix are being raised

 

Saw that. I'm sure he's aware that Salix was massively discounting to reduce inventory after its scandal, and that this depressed revenue temporarily. In the most recent Q transcript, Glenn Greenberg asks about Salix's Q4 run-rate and Pearson confirms that it should be ~600m, and that it's fair to annualize that. With Xifaxan growing over 30% YoY thanks to the IBS-D indication, and possibly accelerating further into the next year because of DTC ads, you easily get to the 20% figure that Hempton pretends to find high (I don't think I've seen anyone complain about Salix price increases since Valeant bought them...). Salix also has higher margins than the VRX average, so the impact on the bottom line should be proportionally higher.

 

From what I can tell, the 90% of VRX's portfolio that isn't tail assets and such doesn't seem to have that much pricing power. More than inflation, but nothing out of the ordinary compared to what the healthcare sector as a whole has been taking lately.

 

I lied, I actually perused Hempton/brogalboy's post - couldn't help myself, but what a complete waste of time... as expected, I should have know better...

 

This is typical Hempton shit and Liberty your counter-arguments are of course completely logical. He pretends they did not get the IBS-D indication, assumes a reduced Salix revenue base from a prior year, tries to make himself sound credible, and then says hey, if they are going to get to $2 billion plus in 2016 like Pearson says they will, it all has to be price increases!?!

 

Then he spews stuff about their audit person!

 

Now, after this prior credibility-starved drivel he puts out as "analysis" on Salix, why the hell should anyone spend time investigating his audit person allegations?