VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

Ciao Giovanni,

the presentation is currently ongoing, I suppose at the end of the webcast it will be available in .pdf.

Ackman is telling some nice anectodes about Pearson frugality.

 

Great! Thank you! :)

 

Gio

[Liberty]

Ackman going through ever single accounting adjustment that Valeant does, has found no "mickey mouse" stuff there, says it all makes sense to better tell you the economic properties of the business.

 

Saying the restructuring charges are better thought as part of the price of the acquisition rather than as against income, which is how Valeant thinks about it internally.

[giofranchi]

Ackman going through ever single accounting adjustment that Valeant does, has found no "mickey mouse" stuff there, says it all makes sense to better tell you the economic properties of the business.

 

Hey! Come on! You believe Mr. Ackman… and you don’t believe me?!?! ;D ;D ;D

 

Gio

 

[Liberty]

Ackman going through ever single accounting adjustment that Valeant does, has found no "mickey mouse" stuff there, says it all makes sense to better tell you the economic properties of the business.

 

Hey! Come on! You believe Mr. Ackman… and you don’t believe me?!?! ;D ;D ;D

 

Gio

 

Valeant is one of my biggest positions, I wasn't the one doubting it :)

[giofranchi]

Valeant is one of my biggest positions, I wasn't the one doubting it :)

 

I was just kidding, of course! ;)

 

Gio

[Liberty]

New info: Ackman just said that they're already working on their next deal with Valeant (a deal suggested by Pearson, as was Allergan as a target).

 

This wasn't mentioned again in the Q&A unfortunately, he just said it in passing...

[fareastwarriors]

Bill Ackman Gets into the Hostile Takeover Business

 

 

http://www.bloombergview.com/articles/2014-04-22/bill-ackman-gets-into-the-hostile-takeover-business

[wbr]

I like the medical aesthetic business very much.

If, following this acquisition, VRX revises Cash EPS upward to $9.5 (from $8.5, circa a 12% increase), we are still paying a multiple of 14x. Not bad, given all the prospects for future growth.

 

Gio

 

Is $9.5 your estimate or was this number mentioned by VRX?

[Liberty]

Has anyone found Ackman's presentation slides yet?

 

Valeant's are here:

 

[Guest wellmont]

I like the medical aesthetic business very much.

If, following this acquisition, VRX revises Cash EPS upward to $9.5 (from $8.5, circa a 12% increase), we are still paying a multiple of 14x. Not bad, given all the prospects for future growth.

 

Gio

 

Is $9.5 your estimate or was this number mentioned by VRX?

 

the slides suggest $10.75 pro forma 2014 cash eps (can someone verify?)

[fareastwarriors]

Valeant CEO breaks the mold in building drug empire

 

 

 

http://www.reuters.com/article/2014/04/22/us-allergan-offer-valeant-idUSBREA3L1OB20140422

[original mungerville]

I like the medical aesthetic business very much.

If, following this acquisition, VRX revises Cash EPS upward to $9.5 (from $8.5, circa a 12% increase), we are still paying a multiple of 14x. Not bad, given all the prospects for future growth.

 

Gio

 

Is $9.5 your estimate or was this number mentioned by VRX?

 

the slides suggest $10.75 pro forma 2014 cash eps (can someone verify?)

 

 

The run-rate EPS should be higher than 10.75 pro forma 2014. First off, on slide 11 it says pro forma 2014 of 10.95 to 11.20. Now that's 2014, the run rate will be higher.

 

The way I look at it in very rough broad terms, on page 61 it says 8.25 to 8.75 2014 Cash EPS ...so a mid-point of $8.50 2014 Cash EPS for Valeant only. So with a stock price of about $US 135 closing today, that's just under 16x for 2014 EPS.

 

Phaceliacapital, in his post above states a 10.88 or roughly 11x FCF multiple for the acquisition.

 

Now, this is roughly a merger of equals (neglecting the 15 billion in debt for now), so a 16x multiple and 11x multiple averaged works out to 13.5x run-rate Cash EPS multiple for the merged company. Now the $15 billion in debt should actually lower that slightly. So ballpark, I think you are looking at 13x multiple for Valeant post-merger (16x if merger does not go through). Also, the 13x does not include a) the tax synergies, and b) the revenue synergies.

 

13x (excluding tax and revenue synergies) is not that expensive. Presumably Valeant is worth at least 15x after all synergies.

 

Is this not roughly the situation?

 

[Liberty]

Found it:

 

http://www.sec.gov/Archives/edgar/data/885590/000119312514152949/d714482d425.htm

[original mungerville]

Found it:

 

http://www.sec.gov/Archives/edgar/data/885590/000119312514152949/d714482d425.htm

 

Great.

[Guest wellmont]

I like the medical aesthetic business very much.

If, following this acquisition, VRX revises Cash EPS upward to $9.5 (from $8.5, circa a 12% increase), we are still paying a multiple of 14x. Not bad, given all the prospects for future growth.

 

Gio

 

Is $9.5 your estimate or was this number mentioned by VRX?

 

the slides suggest $10.75 pro forma 2014 cash eps (can someone verify?)

 

 

The run-rate EPS should be higher than 10.75 pro forma 2014. First off, on slide 11 it says pro forma 2014 of 10.95 to 11.20. Now that's 2014, the run rate will be higher.

 

The way I look at it in very rough broad terms, on page 61 it says 8.25 to 8.75 2014 Cash EPS ...so a mid-point of $8.50 2014 Cash EPS for Valeant only. So with a stock price of about $US 135 closing today, that's just under 16x for 2014 EPS.

 

Phaceliacapital, in his post above states a 10.88 or roughly 11x FCF multiple for the acquisition.

 

Now, this is roughly a merger of equals (neglecting the 15 billion in debt for now), so a 16x multiple and 11x multiple averaged works out to 13.5x run-rate Cash EPS multiple for the merged company. Now the $15 billion in debt should actually lower that slightly. So ballpark, I think you are looking at 13x multiple for Valeant post-merger (16x if merger does not go through). Also, the 13x does not include a) the tax synergies, and b) the revenue synergies.

 

13x (excluding tax and revenue synergies) is not that expensive. Presumably Valeant is worth at least 15x after all synergies.

 

Is this not roughly the situation?

 

I appreciate your work. I see it like this. You can "create" the combined company (assuming it goes through) for about $135 by buying VRX. If the combo (once the dust clears) can earn $11 a share, you are buying the combination today for 12x earnings. The growth profile is mid teens. I think a company like this could actually trade for 20x once big investors are comfortable with it.

[original mungerville]

13x (excluding tax and revenue synergies) is probably damn close to 12x all in, no - maybe even 11x? So we agree on the rough multiple.

 

But how do you get to growth of mid-teens? I mean Valeant was not growing by that much organically pre-announcement. So how can the combined company -ie something like 80 billion market cap - grow at mid-teens organic growth going forward? I think the presentation indicates organic growth between 5-13% depending on the product - so averaging that out to something in the mid to high single digits maybe. Its going to be hard, which means that kind of growth is reliant on acquisitions. At 80 billion market cap, its not simple to compound by another 7% or so via acquisition.

 

I mean sure, if they do another $50 Billion acquisition, and then another merger of then equals of $130 billion. But, not factoring acquisitions in at this point, because those are not no-brainers and there are fewer and fewer targets, let alone that the current one has not closed!

 

SO, in summary, Valeant is at say an 11-12x multiple for a 6-9% organic grower that still intends to make at least one more 50 billion acquisition which if successful could boost that organic growth to mid teens for a few years and receding back to organic growth levels. I'll agree with that (although I would not assume a $130 billion type merger to follow which would be required to sustain mid-teens growth for more than a few years). All that to say, its probably worth more than $US 135 a share - noting that its runway is getting much shorter after this merger.

 

 

 

[Guest wellmont]

the EPS growth rate is projected at mid teens. they get there by allocating free cash flow and managing costs---Acquisitions, debt reduction, share repurchases, and ringing costs out of the system are in the tool kit. the company has grown earnings from $1 to $8 in a handful of years. So management knows how to create per share earnings growth. Down the road you could easily see it broken up via spin offs or division sales.

[Liberty]

I mean sure, if they do another $50 Billion acquisition, and then another merger of then equals of $130 billion. But, not factoring acquisitions in at this point, because those are not no-brainers and there are fewer and fewer targets, let alone that the current one has not closed!

 

I don't think lack of targets for M&A will be a problem. Pearson has talked about this a few times in this past, including today, and Ackman also had a few slides on this.

 

Just in pharma there's probably like 6-7+ trillion in market cap, and if you add other areas of healthcare (because Valeant isn't just looking at pharma), that's many more trillions, with many of those being private companies (Pearson mentioned that in many places they are looking, 99% of companies are private and sometimes there's not even a stock exchange -- he mentioned he was recently in Vietnam, Indonesia, etc).

 

So there's tons of targets for acquisitions if they want to do more, I'm not worried about that. It's selecting the right assets, and then discipline and execution that matters.

[original mungerville]

Also, don't forget the debt load at something like 3x EBITDA or 3-4x AT combined earnings. So a multiple of 15x earnings for a leveraged company might be similar to a 17-18x multiple for an unleveraged company. So a 15x multiple is not that conservative (unless you look forward to the next acquisition or acquisitions following this one).

 

I might stick to 15x, and say Valeant is at 11x after synergies are realised which means IF this deals goes through there is probably about 35% upside in the stock.

 

After all it was trading at a 15-16x multiple BEFORE this announcement. That multiple incorporated both organic and acquisition related growth. So now with this deal it goes down to 11x, but how can we expect the multiple to expand past 16x on a sustainable basis once the company has doubled in size post acquisition. I mean sure, the market can take it to 20x no problem, but for your and my purposes trying to come up with a somewhat reasonable / slightly conservative multiple, I would not go to 20x considering another 3-4x in debt. I would stick with 15x making Valeant worth 35% more should this deal close.

 

[original mungerville]

Liberty / Wells,

 

I started investigating this company late this afternoon so take this with a grain of salt. But at an 11x post merger/synergies multiple, and if you are correct that this thing is worth 20x (given an apparently limitless opportunity set of $50 billion dollar / $100 billion acquirees) - you figure this is a 55 cent dollar at this point (ie 11x/20x)?

[original mungerville]

Look, I know its possible, and I do think Valeant will do a couple other big ones. But we have to concede that the game will get harder and harder after this acquisition.

 

When is the last time Buffett did a deal worth more than $50 billion?

 

But I guess Buffett is not wringing out the synergies like Valeant is when he buys...so should be a bit easier for Valeant... but it gets much harder politically I would imagine: boards, anti-trust, governments protective of national champion companies, etc.

[Guest wellmont]

you don't even need more big acquisitions for this to be a good investment. tuck ins will be fine. the multiple here is way too low if they bag Allergan.

[Guest wellmont]

Liberty / Wells,

 

I started investigating this company late this afternoon so take this with a grain of salt. But at an 11x post merger/synergies multiple, and if you are correct that this thing is worth 20x (given an apparently limitless opportunity set of $50 billion dollar / $100 billion acquirees) - you figure this is a 55 cent dollar at this point (ie 11x/20x)?

 

it will take work to get there (20x). but just look at the combined companies and more importantly, management. it's going to take time for big investors to get comfortable and "look through" to cash earnings. but this is going to be a must own for large cap growth investors.

[Liberty]

Valeant is a bit like 3G, Buffett's partners in Heinz (Ackman even referenced them today, he did the Burger King deal with them). They make what they buy a lot more valuable because they take a low-margin mindset to a high-margin industry and benchmark against true economic metrics. Pharma in general is bloated and doesn't focus on the right things at all (at least from a shareholder's point of view -- I'm sure it's great for employees and management ). For example, Allergan's management gets compensation based partly on the absolute R&D spend of the company -- measuring inputs rather than outputs. Valeant has more product launches in 2014 and better organic growth than they do but they spend much more on R&D and SG&A...

 

I bet Buffett wishes he had the in-house expertise to take over big pharma companies and operate them better, that would make his hunting grounds a lot larger... But who wants to buy most pharmas and keep running them as they have been run?

 

VRX doesn't have to keep making acquisitions to create value. If they were to forever stop today (except for a few bolt-ons and licensing deals), they would still grow decently organically, deleverage over a few years and then would have massive cash flow to pay huge dividends and/or do buybacks. But if they can create more value than that through acquisitions, they should keep doing them, as I expect they will.

 

Is VRX worth 15x? 20x? I can't say for sure, but I think it's cheap now, and ideally I'm looking at 5-10 years down the road, not next quarter. (of course that would change if management or the strategy changes in ways I don't like) I look at it more like I look at Liberty Media or Altius or Transdigm than how I look at Bank of America or AIG, it's a different mental model. It's a solid platform for someone who I think is a great capital allocator. We'll see how it turns out.

[original mungerville]

I agree with you both. If they don't bag this one, its trading at 16x which isn't exactly overvalued given potential tuck-ins, etc. Ackman seems to be suggesting it should trade higher indicating a range of 16 to 20x on page 82 of his presentation. I'll stick with 16x.

 

If they do bag this one, its trading at 12x or something like that which seems too low - probably far too low given they'll probably bag more in future.

 

So I guess, at worst, its either they bag this now, or they bag one or few smaller ones latter which will get us to 12x one way or the other eventually. Which means regardless of what happens, its probably underpriced. This is the platform value creation Ackman is identifying on page 98 of the presentation.