VRX - Valeant Pharmaceuticals International Inc.

[Picasso]

It seems like we're seeing other ways that either the NY Times, Citron, or other negative VRX articles are skewing statistics to fit their narrative.  It's a bit funny because Valeant did it with that slide AZ pointed out.

 

Anyway, for example there is this from Zerohedge which quoted the DB analyst which was also quoted by the NY Times. 

 

http://www.zerohedge.com/news/2015-10-04/more-pain-biotechs-ahead-valeants-astronomical-price-increases-take-center-stage-pfi

 

In it, it shows for 2015 an average increase of 65.6% for 69 drugs.  But if you take the median rather than the mean, it's only 10%.  Because we aren't given dollar weightings per drug, the "mean," which will include some extra tails to skew the overall number, is going to make it seem a lot worse than the actual situation. 

 

Much as in the same way Citron points to a 2200% increase for something which is now $10.  Of course the NY Times didn't include that one, they included the few outliers in that sample pool.

 

I'm probably going to fit in revenue estimates for each drug to get a real money weighted answer, but in reality we've already been given it by management.  It would really just be a way to check his response using what I would hope are accurate figures from DB.

[giofranchi]

Exposing The Information That Congress Will Find If It Subpoenas Valeant $VRX

http://www.seekingalpha.com/article/3550016

 

From the article:

Taken together, discontinuing drugs to remove them from prior period baselines and excluding the impacts of generics on organic growth completely warp the true organic growth of Valeant.

 

This is what Pearson had to say about organic growth in Q2 2015 conference call:

Based on our strong base business performance and the approval of Xifaxan for IBS-D we are raising 2015 cash EPS guidance to $11.50 to $11.80, and our revenue guidance we are raising to $10.7 billion to $11.1 billion for the year. We continue to expect total company same-store sales organic growth to exceed 10% for the remainder of the year despite the genericization of Targretin in July, and the expected genericization of Xenazine in August.

Therefore, it doesn’t seem he is removing the impacts of generics on organic growth, in fact he is giving organic growth guidance despite the genericization of some products.

 

What about drugs that are discontinued? My idea is that Pearson would talk about them, exactly as he is talking about drugs that are subject to genericization. And during Q2 2015 conference call he hasn’t mentioned any drug that has been discontinued… Therefore, I don’t see how discontinued drugs could have affected organic growth for the first half of 2015.

 

Cheers,

 

Gio

[Guest Schwab711]

@Liberty: I don't want to dwell on this after everything but I think you should actually read my comments and also be prepared to say why before commenting with the assumption that I'm wrong, especially without any proof. See #3/4 below if you still have concerns about the 2014 EM rev estimates.

 

 

I love the "after I made it clear to you" explanation. To OM, his opinion alone is sufficient evidence for anything. This must be what you learn in engineering school because I never learned this in science classes.

Translation, "after I made it clear" in laymen's terms, means "I think you are wrong (without stating specifically why or how you are wrong), why don't you believe me?" (but with OM's charismatic writing style). In fact, OM "made it clear" by saying he called VRX and then, called them back to say don't worry about it. When he pointed out that p.31 has a definition preceding it (p.30 has a definition for EM rev that matches the 10-K definition) and p.27 doesn't, he is correct. However, I already responded with the quote from VRX's 2014 AR that shows VRX's definition for EM revenue matches the definition on p.30 of that presentation (implying that the $3.1b estimate for EM revenue is probably the more accurate one - I'm still waiting to hear back from VRX). He still has not provided any reasoning (logical or not) for why we shouldn't be concerned about 2 contradicting EM revenue estimates in the first place (much less the substantial EM rev miss). He is right though, I do try to "fit my thesis" to indisputable facts.

 

Also, that 10-K I was "referring to randomly" is VRX's AR from 2014. I thought it seemed pretty relevant to an analysis of VRX's 2014 financial results. Maybe it's just me. I'll remember not to quote SEC filings next time.

 

Schwab, I need to apologize for my last post. Looks like you did finally read slides 27 and 30 whereas I just assumed you did not.

 

Its just that above you say "He still has not provided any reasoning (logical or not) for why we shouldn't be concerned about 2 contradicting EM revenue estimates in the first place..."

 

The point of me alerting you to slides 27 and 30 (whereas you focused only on 31 originally) is that there were never 2 contradicting EM revenue estimates (this is why my prior post assumed you hadn't read those slides). But, given you have read those slides and are still assuming there were 2 significantly contradicting EM revenue estimates just 4 slides apart (in a major presentation by Valeant to the investing public regarding their acquisition of Allergan no less), makes me think you are, well, just trying to obfuscate. I mean do you think even a fraudulent company would attempt to put out 2 estimates with a $0.5 billion difference just 4 slides apart?

 

OR, alternatively, do you think it is you that remains confused?

 

Thank you. Let's just move on.

 

Couple things:

1. First, Picasso and Liberty are correct that I made a mistake in my IBS-D guidance post by saying that VRX provided the IBS-D guidance. It was SLXP's guidance. I truly do not think it effects the validity of the guidance, which is why I am not correcting it (just confirming the distinction). I haven't seen anything to contradict this guidance and everything I've read says that IBS-D sales will be slow at first. Thanks for posting the link, Liberty. The reason I believe the guidance is relevant is because SLXP merger is [claimed to be] on-track in VRX's deal model (probably too early for anyone to confirm or refute) and I have not seen a specific update to that guidance (which would make the 12/16/14 guidance out-dated).

 

2. An interesting detail in the same PR is they also expected peak sales of $2.1b. Basically implies that Xifaxan is a sure blockbuster.

 

3. As to the two EM rev estimates, I do think they are just that, which is why I haven't retracted my claim, yet. Also, me pointing this out was intended to show that it is VRX who is creating the confusion within the presentation (I'm just the messenger). I am waiting to hear back from VRX about the situation (and I will definitely rely whatever they say to me as soon as I hear) and maybe there is a simple explanation that I missed. Don't you think it was a meaningful detail to bring attention to considering none of us can explain it? If you recall, it was actually you who brought attention to the contradicting numbers, so it's not like I did it to obfuscate. I didn't because I wanted to bring up this detail, along with all the others that I consider to be misleading or purposefully unclear, when I was ready to publish a much larger write-up where I would have enough space to provide context for each of these "misleading claims", specifically to avoid the claim that I'm attempting to "obfuscate" (If I was going to write a short article, I really didn't want my short case dismissed because I was using misleading evidence when my biggest complaint of VRX is they mislead investors!).  If you look through my past posts on VRX, I've been clear that I don't think VRX is fraudulent, I spoke against those who made the claim without evidence, and I've tried to be very careful (though I've had to make 3 minor retractions now) to only post things that are new, relevant, and that I feel I have sufficient evidence for. Hopefully you'll reconsider the topic now that you have a better idea of what my intentions are.

(OT: I didn't know a word for what I was trying to avoid so I really like obfuscate)

 

4. As to the specifics of the EM rev estimates, I think most of us would agree that the $2.5b-$2.7b seems like a more reasonable estimate. However, $2.5b-$2.7b EM revenue estimate does not provide a conclusive definition for what it is measuring since it includes the ambiguous "with acquisitions" qualifier (the definition for 2.5-2.7b appears to be on p.24 (2nd bullet point?), but if so, that seems to match the definitions on p.30 and in their 2014 10-k). I also haven't found any mention [in that presentation or others around that time] of what acquisitions are included [in 2.5-2.7b]. AGN's EM revenue is placed adjacent to VRX's and the aggregate of the two is greater than $3.1b so it did not seem likely that the 2.5-2.7b estimate included a presumed AGN merger. This is why I assumed (and still am assuming) both numbers are intended 2014 EM rev estimates/guidance.

 

You are right when you noticed that I absolutely choose $3.1b because it enhanced my thesis. In defense, since the definitions seemed to align I thought it was equally valid to use either $2.6b (mid-point) or $3.1b. FX only accounted for -$104m of the EM revenue difference, so my original claim was valid no matter which number I choose. It was a much stronger statement if I used $3.1b. I will consider using $2.6b or the average of the two until I receive confirmation on the topic from VRX IR group, since I really should stay conservative in a short thesis (if that continues to be my view).

 

The EM rev topic is similar in a way to the PFE conversation between Liberty and I. VRX just doesn't provide enough information about where they classify products within their 10-K or presentations. We are all just guessing (if anyone has insight on where VRX products are classified, I would love to see it). I do have other examples of this type of confusion and many similar examples have been brought up before (AZ_Value's write-up). I agree that any of the cited instances of this are not particularly concerning. The total number of them is why I am concerned.

 

5. It's worth clarifying that I have absolutely no evidence that VRX is a fraud in anyway and I've tried not to even imply that they might be.

 

6. I think there are many more feasible explanations than A) VRX is a fraud, or B) I'm confused. Hopefully I've adequately covered why I think this is a frustrating claim in #3 and #4. If I could prove VRX was a fraud, I'd be on CNBC right now, not writing here. I will note that no one else has provided an explanation and many of us have a fairly strong understanding of VRX. Aren't you (and everyone else) equally as confused as myself (if you want to call it that)? Isn't that concerning? Until I hear an explanation from VRX, I think some other possible explanations could be:

a. VRX simply does not provide enough information in this presentation for anyone to determine what they are talking about (I don't know what this implies)

b. There's an implied definition (for "with acquisitions") from a previous presentation or filing that I'm not properly applying

c. They are using different assumptions for each estimate (this seems very unlikely considering what I wrote in #4).

d. One or both is not an estimate/guidance (why did they even supply the number then? It certainly appears to be estimates/guidance.)

e. VRX made a mistake (I don't know what this implies)

f. The $2.5-$2.7b estimate uses Allergan's EM rev definition so we can compare apples-to-apples (doesn't explain what the difference is)

 

Honestly I really don't know how to explain them which is why I called VRX about it and why I didn't post it when I brought up my theory that price increases in the US helped VRX meet 2014 guidance.

 

Let me know what you think.

[Guest Schwab711]

It seems like we're seeing other ways that either the NY Times, Citron, or other negative VRX articles are skewing statistics to fit their narrative.  It's a bit funny because Valeant did it with that slide AZ pointed out.

 

Anyway, for example there is this from Zerohedge which quoted the DB analyst which was also quoted by the NY Times. 

 

http://www.zerohedge.com/news/2015-10-04/more-pain-biotechs-ahead-valeants-astronomical-price-increases-take-center-stage-pfi

 

In it, it shows for 2015 an average increase of 65.6% for 69 drugs.  But if you take the median rather than the mean, it's only 10%.  Because we aren't given dollar weightings per drug, the "mean," which will include some extra tails to skew the overall number, is going to make it seem a lot worse than the actual situation. 

 

Much as in the same way Citron points to a 2200% increase for something which is now $10.  Of course the NY Times didn't include that one, they included the few outliers in that sample pool.

 

I'm probably going to fit in revenue estimates for each drug to get a real money weighted answer, but in reality we've already been given it by management.  It would really just be a way to check his response using what I would hope are accurate figures from DB.

 

 

Please post your result if you are able to find a volume/revenue weighted estimate of price increases!

[Matson125]

Ackman is going to be speaking to Stephanie Ruhle tomorrow at a Bloomberg Event. 

 

http://www.bloomberglive.com/markets-most-influential/events/#event-862

 

 

[Picasso]

Schwab, I matched up their top 20 products to the list from DB and didn't see anything that indicated massive price hikes to offset the declining volumes of the "non-runoff" portfolio of drugs.  Like I said, the outliers of the Marathon acquisition pushed up the average increase to the 60% or so that gets quoted.  The median is 10% and so yeah the reality ex-Marathon (which isn't that big a part of this pie) is a lot closer to the median than the mean.

 

Having thought about it a bit more, I think the problem is giving their total cash EPS a P&G, or whatever durable, multiple.  The runoff can make the operating growth look better than it actually is by just comparing YoY cash EPS changes.  You probably have $14 of growing cash EPS and $2 of eventually dead cash EPS, but at least that $2 gets to be reinvested.  So I think it's easiest to value the business by saying 15x for $14, and add the NPV of their runoff.  Let's say that's a $1 billion of runoff per year over 5 years.  Maybe that's worth $3 billion today, into 344mm shares, or ~$9/share.  Add the two together and you'll get around a $219 fair value.  This compares to saying that $16 is worth 15x or $240 versus the $219.  Not a lot of difference, but I think that's what causes a lot of the stir around the stock. 

 

There's the point of view that pricing is unsustainable, and you're just capitalizing R&D that needs to be paid for one day.  I would rather think of it like you buy PlatformCo and you're getting GoodCo and BadCo.  BadCo is making the market pay less than 10x for GoodCo.  If you keep focusing on BadCo, you're focusing on a smaller and less significant part of PlatformCo. 

 

But there's the reflexive part of this when investors see these EBITA and cash EPS growth rates.  Investors will want to pay a higher multiple for the story, and it gets kind of dangerous because now they're giving a higher multiple to BadCo.  It increases the chances of lots of volatility when something happens in BadCo.  We've flipped that on it's head and now it's a lot of scrutiny on the business all because of a small part of the business.

 

So not a lot of difference in valuation between the two approaches to cash EPS or EBITA multiples to EV, but not looking at it that way makes investors over/underpay in a big way during euphoria/despair.  Financially it might make some sense to do these runoff portfolio's, but given Valeant's size at this time, I don't know why they would want to do it other than juice up EBITA in the short term and hope the market gives it a high multiple.  It's kind of penny wise/pound foolish especially given the massive trauma it just exposed the company to for relative small amounts of EBITA improvement.

[giofranchi]

Having thought about it a bit more, I think the problem is giving their total cash EPS a P&G, or whatever durable, multiple.  The runoff can make the operating growth look better than it actually is by just comparing YoY cash EPS changes.  You probably have $14 of growing cash EPS and $2 of eventually dead cash EPS, but at least that $2 gets to be reinvested.  So I think it's easiest to value the business by saying 15x for $14, and add the NPV of their runoff.  Let's say that's a $1 billion of runoff per year over 5 years.  Maybe that's worth $3 billion today, into 344mm shares, or ~$9/share.  Add the two together and you'll get around a $219 fair value.  This compares to saying that $16 is worth 15x or $240 versus the $219.  Not a lot of difference, but I think that's what causes a lot of the stir around the stock. 

 

There's the point of view that pricing is unsustainable, and you're just capitalizing R&D that needs to be paid for one day.  I would rather think of it like you buy PlatformCo and you're getting GoodCo and BadCo.  BadCo is making the market pay less than 10x for GoodCo.  If you keep focusing on BadCo, you're focusing on a smaller and less significant part of PlatformCo. 

 

And would you put a 15x multiple on the goodco? ???... Given how fast VRX has grown as a combination of goodco + badco, the goodco must have grown even faster… You must believe VRX's growth rate is falling off a cliff to think a 15x multiple might be a good estimate of FV!

 

I have spent the last few days reading all I could find about government intervention, which I still think is the biggest unknown here… And I have found very little indeed! Now it seems to me that government intervention in the whole pharmaceutical sector is a very low probability… The probability of the government specifically meddling in VRX’s business is even lower.

 

Therefore, I am buying some back today.

 

See Picasso? When I think things are predictable enough, we don’t differ much after all: you like a very attractive price… me too! ;)

 

Cheers,

 

Gio

 

[APG12]

VRX responds:

 

http://www.sec.gov/Archives/edgar/data/885590/000119312515337744/d83478dex991.htm

 

 

[Picasso]

Damn, they even addressed all the AZ blog accusations.

 

See Liberty, I told you he pays attentions to this stuff.

[tombgrt]

Haha this is amazing.

 

Amazing that they actually take the time to respond. Of course, if your business model depends on the stock price being kept high, do you really have another choice?

[Phaceliacapital]

I wouldn't be surprised if Pershing/ValueAct did most of the responding..

 

That being said, they didn't comment on stuff like their wrong CAGR calculations..

 

Glad this ended up in my too hard pile :D

[original mungerville]

It is amazing they responded given the lack of credibility in AZ Blog's analysis. Shows you how powerful the Internet/media is, and how little attention to detail there is when such crappy analysis can be seen to have an impact. They even note the IRR calculations are misleading:

 

AZ Blog IRR Examples  These calculations are misleading when comparing to a company acquisition

as they only look at a 10 year period and do not include terminal value of the

asset at the end of the forecast period.

 

And here I thought I was the only idiot who would waste his time and multiple posts arguing about how AZ's IRR calculations were totally misleading...

 

Wait, hold on, you actually need a terminal value in a IRR calculation? WHAT? REALLY? 

[original mungerville]

Haha this is amazing.

 

Amazing that they actually take the time to respond. Of course, if your business model depends on the stock price being kept high, do you really have another choice?

 

Ya, no - you are mostly incorrect. The business model does not depend on the stock being higher.

[Picasso]

Having thought about it a bit more, I think the problem is giving their total cash EPS a P&G, or whatever durable, multiple.  The runoff can make the operating growth look better than it actually is by just comparing YoY cash EPS changes.  You probably have $14 of growing cash EPS and $2 of eventually dead cash EPS, but at least that $2 gets to be reinvested.  So I think it's easiest to value the business by saying 15x for $14, and add the NPV of their runoff.  Let's say that's a $1 billion of runoff per year over 5 years.  Maybe that's worth $3 billion today, into 344mm shares, or ~$9/share.  Add the two together and you'll get around a $219 fair value.  This compares to saying that $16 is worth 15x or $240 versus the $219.  Not a lot of difference, but I think that's what causes a lot of the stir around the stock. 

 

There's the point of view that pricing is unsustainable, and you're just capitalizing R&D that needs to be paid for one day.  I would rather think of it like you buy PlatformCo and you're getting GoodCo and BadCo.  BadCo is making the market pay less than 10x for GoodCo.  If you keep focusing on BadCo, you're focusing on a smaller and less significant part of PlatformCo. 

 

And would you put a 15x multiple on the goodco? ???... Given how fast VRX has grown as a combination of goodco + badco, the goodco must have grown even faster… You must believe VRX's growth rate is falling off a cliff to think a 15x multiple might be a good estimate of FV!

 

I have spent the last few days reading all I could find about government intervention, which I still think is the biggest unknown here… And I have found very little indeed! Now it seems to me that government intervention in the whole pharmaceutical sector is a very low probability… The probability of the government specifically meddling in VRX’s business is even lower.

 

Therefore, I am buying some back today.

 

See Picasso? When I think things are predictable enough, we don’t differ much after all: you like a very attractive price… me too! ;)

 

Cheers,

 

Gio

 

Well, remember that cash EPS is sort of a pre-tax figure because eventually that low tax rate has to normalize.  As the business matures you'll start to see much smaller growth rates in the EPS for this reason.  They just won't be able to buy up that much goodwill (or maybe they can who knows).

 

The BadCo is fueling reinvestment in GoodCo so I don't know that you can just look at GoodCo and think it's growing faster than BadCo?  The short-term, high returns of BadCo will look very high for the first couple years, get reinvested in GoodCo, and they'll need to replace the growth in BadCo (partially offset by reinvestment in GoodCo).    They don't have to replace the growth of BadCo, but it'll look like growth is slowing without full replacement.

 

So I think 15x is a fair if not optimistic multiple.  If they can keep growing it by leaps and bounds and it stays at 15x, you'll make a lot of money.  Does it really matter that you think it's worth 20x?  The market needs to discount different factors (will they stop doing acquisitions and start paying a higher tax rate, company focus on paying down debt versus acquisitions, etc.) Jarden always had a low multiple but grew in line with growth rates.  Not every rollup has the TDG or CSU multiple.

[giofranchi]

VRX responds:

 

http://www.sec.gov/Archives/edgar/data/885590/000119312515337744/d83478dex991.htm

 

I have founded it very useful, just like I have founded VRX’s responses during the Allergan saga very useful. Anything that makes the picture clearer, increases predictability imo. Therefore, I think it is worthwhile.

 

Cheers,

 

Gio

 

[Picasso]

It is amazing they responded given the lack of credibility in AZ Blog's analysis. Shows you how powerful the Internet/media is, and how little attention to detail there is when such crappy analysis can be seen to have an impact. They even note the IRR calculations are misleading:

 

AZ Blog IRR Examples  These calculations are misleading when comparing to a company acquisition

as they only look at a 10 year period and do not include terminal value of the

asset at the end of the forecast period.

 

And here I thought I was the only idiot who would waste his time and multiple posts arguing about how AZ's IRR calculations were totally misleading...

 

Wait, hold on, you actually need a terminal value in a IRR calculation? WHAT? REALLY?

 

OM, I concede defeat on this issue.  Not sure that I 100% agree with Valeant giving a terminal value on Salix or B+L though (are they really going to sell it at the end of the cash flows?). Marathon is an asset that doesn't have a terminal value that I'm aware of.  But if it's part of their calculation, fine, all that really matters is the actual cash generation that comes from it.  IRR can be misleading to actual returns anyway and their 20% target is probably more of a guideline to a workable deal than trying to make 20% indefinitely. 

[jay21]

Ugh - terminal value doesn't represent the sale price. You slap a multiple on the last CF to represent terminal growth of the biz and discount it back.

 

No one is doing a 50 year DCF.

[Liberty]

Damn, they even addressed all the AZ blog accusations.

 

See Liberty, I told you he pays attentions to this stuff.

 

Well, it certainly was brought to management's attention post Hillary-tweet and after a whole pack of short sellers came out with reports at the same time and then the New York Times joined in, that's for sure. Not sure they would care if they weren't making national news daily. But in this case, you were indeed correct.

[KCLarkin]

I added to my small position yesterday and today. The bear thesis, as I understand it:

 

Debt: High debt levels. Business model only works due to low interest rates

Liquidity: company will have a liquidity crisis in 2018.

Fraud: public disclosures are inaccurate, specifically IRR.  The promised returns are just not possible.

Trust: Pearson is a slick McKinsey alumni.

Durability: Pharma products aren't durable, so adding back amortization is inaccurate

Pricing: Organic growth is driven solely by pricing

Regulatory risk: Clinton will stop price gouging.

Moral: It is immoral for a company to raise prices AND slash R&D.

Too Big: Company will find it harder to make meaningful acquisitions.

Arbitrage: By buying R&D, company is capitalizing instead of expensing R&D.

Tax arbitrage: Company evades taxes, by moving IP offshore.

R&D: Company slashes R&D, so products will inevitably fall off a cliff.

GAAP/FCF: Cash EPS doesn't reflect actual economics.

Expensive: Stock is expensive, if you don't believe in Cash EPS

 

This is actually the weakness in the bear case. They don't have a strong case so they are trying to overcome this weakness by attacking on multiple fronts. There are significant risks, so I will keep this as a small position.

 

Note: I am not posting this to fuel further debate, merely to justify why I have went from bearish to bullish on this stock.

 

[original mungerville]

It is amazing they responded given the lack of credibility in AZ Blog's analysis. Shows you how powerful the Internet/media is, and how little attention to detail there is when such crappy analysis can be seen to have an impact. They even note the IRR calculations are misleading:

 

AZ Blog IRR Examples  These calculations are misleading when comparing to a company acquisition

as they only look at a 10 year period and do not include terminal value of the

asset at the end of the forecast period.

 

And here I thought I was the only idiot who would waste his time and multiple posts arguing about how AZ's IRR calculations were totally misleading...

 

Wait, hold on, you actually need a terminal value in a IRR calculation? WHAT? REALLY?

 

OM, I concede defeat on this issue.  Not sure that I 100% agree with Valeant giving a terminal value on Salix or B+L though (are they really going to sell it at the end of the cash flows?). Marathon is an asset that doesn't have a terminal value that I'm aware of.  But if it's part of their calculation, fine, all that really matters is the actual cash generation that comes from it.  IRR can be misleading to actual returns anyway and their 20% target is probably more of a guideline to a workable deal than trying to make 20% indefinitely.

 

Picasso, I wasn't referring to you - it was getting clearer you were conceding already to a degree in the later posts, simply by not posting. Its Merkhet the Mathematician / ex-lawyer / Ivy Leaguer who won't concede that in the real world you put a terminal value on business valuations (which terminal value depends on a discount rate - so there is feedback loop there - which of course is subjective and open to manipulation by the forecaster/persons doing the calculation). But you don't just assume the terminal value is zero as a going in proposition in order to bolster a weak case - especially without explaining that that is not standard and that that has implications that the business will sell nothing from year 10 onward and/or be sold for zero at year 10. This is just lack of credibility by AZ Value which is why I totally discounted him (like I discounted Hempton).

[giofranchi]

The BadCo is fueling reinvestment in GoodCo so I don't know that you can just look at GoodCo and think it's growing faster than BadCo?  The short-term, high returns of BadCo will look very high for the first couple years, get reinvested in GoodCo, and they'll need to replace the growth in BadCo (partially offset by reinvestment in GoodCo).    They don't have to replace the growth of BadCo, but it'll look like growth is slowing without full replacement.

 

Well, if the badco + the goodco grows at the same rate of the goodco, then I don’t understand the difference between the badco and the goodco. If I am right you are saying the badco is sort of a runoff… it generates cash, but its value gets to zero quickly… have I understood correctly? The goodco, instead, generates cash and its value keep increasing, it is in other words a compounding machine. And a company which is 100% a compounding machine grows faster than a company that is 80% a compounding machine and 20% assets that generate cash while decreasing in value until they become worthless.

 

Cheers,

 

Gio

[original mungerville]

AZ_Value,

 

Is it just me, or did they file that 2-pager with the SEC? Maybe I'm wrong, but I think they filed that. 

 

No, did they file that? I really am not sure.

 

If they did, maybe you can now get together and sue them... Isn't that usually your next step in these games? Or maybe that is already in the cards - would make great bear headlines, probably worth the legal fees.

 

Been there done this one before many times.

 

 

 

 

 

 

 

 

 

 

 

[Picasso]

The BadCo is fueling reinvestment in GoodCo so I don't know that you can just look at GoodCo and think it's growing faster than BadCo?  The short-term, high returns of BadCo will look very high for the first couple years, get reinvested in GoodCo, and they'll need to replace the growth in BadCo (partially offset by reinvestment in GoodCo).    They don't have to replace the growth of BadCo, but it'll look like growth is slowing without full replacement.

 

Well, if the badco + the goodco grows at the same rate of the goodco, then I don’t understand the difference between the badco and the goodco. If I am right you are saying the badco is sort of a runoff… it generates cash, but its value gets to zero quickly… have I understood correctly? The goodco, instead, generates cash and its value keep increasing, it is in other words a compounding machine. And a company which is 100% a compounding machine grows faster than a company that is 80% a compounding machine and 20% assets that generate cash while decreasing in value until they become worthless.

 

Cheers,

 

Gio

 

Yeah, the goodco is obviously much more valuable than the runoff in badco.  As Pearson mentioned, this is a smaller and smaller part of their business and I hope they focus more on the good part.  So far the badco has made the bears come out of the woodwork and attack the company.

 

And jay, when I look at a private equity deal and see the IRR they quote, it will involve some fixed series of cash flows with the sale at the end determining the final IRR.  I  understand in the corporate finance world you will give it some value at the end to say you earned a specific IRR, but the final value isn't a a large number when discounted back to today.  It's also hard to say what that asset is going to be worth so I think it's not the best way of saying you earned some IRR.  But I'm not going to start this debate again, that's just my opinion and clearly Valeant has stated they do it by giving a deal a terminal value.

[matts]

AZ_Value,

 

Is it just me, or did they file that 2-pager with the SEC? Maybe I'm wrong, but I think they filed that. 

 

No, did they file that? I really am not sure.

 

If they did, maybe you can now get together and sue them... Isn't that usually your next step in these games? Or maybe that is already in the cards - would make great bear headlines, probably worth the legal fees.

 

Been there done this one before many times.

 

Dude, take a chill pill....

[merkhet]

It is amazing they responded given the lack of credibility in AZ Blog's analysis. Shows you how powerful the Internet/media is, and how little attention to detail there is when such crappy analysis can be seen to have an impact. They even note the IRR calculations are misleading:

 

AZ Blog IRR Examples  These calculations are misleading when comparing to a company acquisition

as they only look at a 10 year period and do not include terminal value of the

asset at the end of the forecast period.

 

And here I thought I was the only idiot who would waste his time and multiple posts arguing about how AZ's IRR calculations were totally misleading...

 

Wait, hold on, you actually need a terminal value in a IRR calculation? WHAT? REALLY?

 

OM, I concede defeat on this issue.  Not sure that I 100% agree with Valeant giving a terminal value on Salix or B+L though (are they really going to sell it at the end of the cash flows?). Marathon is an asset that doesn't have a terminal value that I'm aware of.  But if it's part of their calculation, fine, all that really matters is the actual cash generation that comes from it.  IRR can be misleading to actual returns anyway and their 20% target is probably more of a guideline to a workable deal than trying to make 20% indefinitely.

 

Picasso, I wasn't referring to you - it was getting clearer you were conceding already to a degree in the later posts, simply by not posting. Its Merkhet the Mathematician / ex-lawyer / Ivy Leaguer who won't concede that in the real world you put a terminal value on business valuations (which terminal value depends on a discount rate - so there is feedback loop there - which of course is subjective and open to manipulation by the forecaster/persons doing the calculation). But you don't just assume the terminal value is zero as a going in proposition in order to bolster a weak case - especially without explaining that that is not standard and that that has implications that the business will sell nothing from year 10 onward and/or be sold for zero at year 10. This is just lack of credibility by AZ Value which is why I totally discounted him (like I discounted Hempton).

 

Oh, for chrissakes, are we really doing this again?

 

IRRs don't have terminal values.

DCFs do have terminal values.

IRRs != DCFs.

 

This is not hard, people.

 

goosfraba.