VRX - Valeant Pharmaceuticals International Inc.

[scorpioncapital]

I've noticed a pattern here - and with other industries where change will occur.

 

An accusation is made. Most of it is not true. It serves as a catalyst for a larger social issue with the industry / business model. The next few years cause depressed returns.

 

The issue in this industry is high prices for generic drugs or combination of drugs that even other pharmaceutical companies such as Depomed have come out and said a person can buy the two ingredients and compound them together for $30 to $40 per month but that the combined pill costs $1500 per month. The reason for all these ills is that these are generic ingredients. Really, they should be priced far lower and there shouldn't be some sort of pharmacy cartel and manufacturers propping up prices. What's a fair price? Who knows but it seems the issues the last 30-60 days will cause business models that use debt and high prices and run-off products to be weak and therefore the incident that precipitated it - such as a false accusation of fraud or a grey area practice - causes valuations, models, and businesses to change. This could be what investors call a permanent change of the environment.

 

 

[jay21]

People keep bringing up the Munger quote but I remember reading that someone actually asked him to expand on it after the meeting. The person reported that Munger said he doesn't know much about VRX or Pearson and that a few people that he respects reached out to him after and said complimentary things about Pearson.

 

 

[merkhet]

People keep bringing up the Munger quote but I remember reading that someone actually asked him to expand on it after the meeting. The person reported that Munger said he doesn't know much about VRX or Pearson and that a few people that he respects reached out to him after and said complimentary things about Pearson.

 

It was Ackman who reached out to Munger for an explanation.

[Picasso]

I think there are relatively simple reasons to explain the opaqueness around Philidor.  First, this is absolutely a competitive advantage  for the 10% of their U.S. portfolio which flows through that channel.  This isn't the first time that Valeant has been able to create a more efficient pharma model before others catch on (i.e. tax inversion).  They can acquire a derma drug that is under heavy generic competition because of distribution differences (not have to pay a ton for it because their seller doesn't know about Philidor) and create a lot of value by distributing it through their specialty pharmacies.  This isn't something you want to announce to the world if you can avoid it.  Sellers will begin to realize they can demand a higher price for their drugs if the buyer uses a specialty pharmacy network.

 

Also I suspect they have been testing out this distribution method and it has worked a lot better than they expected.  As a result they purchased a financially insignificant option to own their distribution network in late 2014 which eliminates the need to tell the world about your competitive advantage.  After all, did Allergan bring this issue up as a reason to dislike the Valeant acquisition?  No, and I'm fairly certain they would have if it was problematic.  They aren't booking sales that are not occurring, they aren't stuffing channels, and they are legally employing a distribution method which has been in place for decades. 

 

It sounds more and more like R&O is extorting Philidor because of the California license issue.  That doesn't lead back to making the distribution model illegal.  Whether there might be fines for this indirect ownership because of non-licenses in California is another story.  I would have to assume that lawyers signed off on the distribution method in California through R&O, West Wilshire, etc. unless that turns out to be fraudulent.  Is that enough to wipe out $30 billion of market cap?

 

What I find most amazing is the dramatic losses/fines that Volkswagen is going to see from the emissions scandal and yet the market losses between Valeant and Volkswagen are identical. Is Valeant also going to have impaired earnings on Salix, B+L, etc for the next ten years?  Are they also going to be fined in the tens of billions? 

 

Just amazing what a squabble between two distributors has done to the stock. 

[ZenaidaMacroura]

Well is Kaufman a big law firm or some two bit lawyer?  When they first broke the story they made it sound like this was a white shoe firm suing valeant.  The lawyer is ok with basically helping his client extort a large cap pharma?

[Picasso]

Well is Kaufman a big law firm or some two bit lawyer?  When they first broke the story they made it sound like this was a white shoe firm suing valeant.  The lawyer is ok with basically helping his client extort a large cap pharma?

 

Let's just say this.  The guy rents the cheapest office space in Century City (lots of lawyers there), went to school at CSUN (worst Cal State school) and law school at Southwestern by MacArthur Park (also low tier law school).  Out of all the lawyers in Century City, he's not exactly someone from Irell & Manella or Proskauer.

[original mungerville]

No, that is the Evercore interview. But the veritas interview was on that page. Here it is:

http://www.bloomberg.com/news/videos/2015-10-23/valeant-under-scrutiny-veritas-searches-for-truth

 

I listened to that once already, but now I listened again and thanks for the link. Starting at the 5:30 mark, you have two separate guys on there that seem to know something about pharma agreeing that there is nothing even illegal for Philidor to sell only Valeant drugs. Its just "aggressive" IN THEIR VIEW (and probably the industry's) or not the gentleman's way of arranging things. But at the end of the day, these pharma companies market to the doctors, and the doctors prescribe the medecine - in my country at least, they do it by name. So they would prescribe Jublia and not "go get a toe nail fungus ointment". So the recommendation is made by the doctor and then the direct model Philidor/Valeant are using cuts out the retail brick and mortar pharma mark-up (how good is a 20-40% retail mark-up or whatever it is for insurance companies and payers?). In any case, its not like the insurance companies don't know what is going on in the industry, and they are big boys too that can handle themselves and their procedures, Valeant does not have to play the parent, they need to sell drugs aggressively, legally (and be ethical) - that's it. If Valeant is being aggressive, and Philidor is even doing some unethical things/possibly breaching regulations in CA and/or other states, Philidor will get slapped and, at worst, some Philidor biz in California limited. BUT being aggressive and being different, which Valeant is with cutting research, tax, raising prices and this, is NOT illegal. Furthermore, as I have been saying, exercising an option to buy Philidor would probably require prior regulatory approvals across various states (just like the option Philidor has to by R&O requires prior approval in California).

 

Holy shit man. So lets say these two guys are actually correct in what they are saying (which is highly likely), all this Veritas guy has is that they thought it was too good to be true, so they put a sell on it a year ago or two, and now this lawsuit between Philidor and R&O comes out and confirms their sell rating bias, so they feel vindicated?!? And now there is too much uncertainty and so they won't even re-rate it - despite him saying that Philidor selling only Valeant drugs is not illegal per say?

 

I guess he hasn't figured out what the Evercore guy did - that this is actual sales. And he hasn't figured out that they don't disclose small acquisitions or VIEs due to them not being material under accounting rules which I am sure the auditors signed off on. And, any auditor, you would think, would have looked at the logic carefully about how they decided it was not material. They could get a wrist slap there by the SEC, if others don't agree with the materiality test.

 

So that's more or less all there is with Philidor accounting for only 6% of their total revenues! Let's say Philidor shoved 2x as many sales down the throats of customers that they did not need. Total impact is 3% of sales for Valeant.

 

The stock is trading at 6x earnings with mid teens organic growth and an ability to allocate capital at 20-25% returns. They don't even have to make acquisitions now, they can just buy back stock with 1/3rd of cash flow and retire debt with the other 2/3rs. That will bring growth 20% while deleveraging. That's the worst case.

 

[KCLarkin]

For those spouting the cockroach theory.

 

Charlie Munger's firm, Berkshire Hathaway, is the largest shareholder in DaVita. In the last few years, DaVita has the following legal issues:

 

- illegal kickbacks to doctors - $350 million settlement

http://www.justice.gov/opa/pr/davita-pay-350-million-resolve-allegations-illegal-kickbacks

 

- defrauding medicare - $495 million settlement

http://www.denverpost.com/business/ci_28046592/davita-will-pay-495-million-settle-atlanta-whistleblower

 

- subpoena, possibly related to overbilling medicare

http://www.wsj.com/articles/davita-healthcare-subpoenaed-over-medicare-coding-1435144294

 

And just for fun, it is a healthcare rollup.

 

--

 

Bekshire Hathaway also owns Clayton Homes. A mobile home manufacturer that is accused of hiding a captive network of subprime lenders:

http://www.seattletimes.com/business/real-estate/the-mobile-home-trap-how-a-warren-buffett-empire-preys-on-the-poor/

 

The disastrous deal ruined their finances and nearly their marriage. But until informed recently by a reporter, they didn’t realize that the homebuilder (Golden West), the dealer (Oakwood Homes) and the lender (21st Mortgage) were all part of a single company: Clayton Homes, the nation’s biggest homebuilder, which is controlled by its second-richest man — Warren Buffett.

 

 

 

 

[Liberty]

For those spouting the cockroach theory.

 

Charlie Munger's firm, Berkshire Hathaway, is the largest shareholder in DaVita. In the last few years, DaVita has the following legal issues:

 

- illegal kickbacks to doctors - $350 million settlement

http://www.justice.gov/opa/pr/davita-pay-350-million-resolve-allegations-illegal-kickbacks

 

- defrauding medicare - $495 million settlement

http://www.denverpost.com/business/ci_28046592/davita-will-pay-495-million-settle-atlanta-whistleblower

 

- subpoena, possibly related to overbilling medicare

http://www.wsj.com/articles/davita-healthcare-subpoenaed-over-medicare-coding-1435144294

 

And just for fun, it is a healthcare rollup.

 

--

 

Bekshire Hathaway also owns Clayton Homes. A mobile home manufacturer that is accused of hiding a captive network of subprime lenders:

http://www.seattletimes.com/business/real-estate/the-mobile-home-trap-how-a-warren-buffett-empire-preys-on-the-poor/

 

The disastrous deal ruined their finances and nearly their marriage. But until informed recently by a reporter, they didn’t realize that the homebuilder (Golden West), the dealer (Oakwood Homes) and the lender (21st Mortgage) were all part of a single company: Clayton Homes, the nation’s biggest homebuilder, which is controlled by its second-richest man — Warren Buffett.

 

The stake in Moody's could be seen as controversial too.

[Picasso]

It should also be noted that DaVita is heavily levered as well.

 

Or what about the cockroaches at Walmart?

 

http://www.reuters.com/article/2012/04/24/us-walmart-idUSBRE83L0C820120424

 

BECKY: So Wal-Mart has had its own issues. There was a report in The New York Times alleging bribery in Mexico in its operations there. Has that changed your opinion about the stock?

 

BUFFETT: Well, not really. We have 270,000 people working at Berkshire, and it's a little early in the morning, but I will guarantee you that during the rest of the day, at least, some people will be doing something wrong. I mean, it's the thing that scares the dickens out of me as the CEO, because you can't have 270,000 people without somebody doing something wrong. People are just not that— no matter what instructions you...

 

THis is par for the course when you make an investment.  You just need to make sure the price insulates you from the risks involved.  Buying Moody's after the ratings debacle would have been well timed.  Or buying Walmart after the bribery.  Or buying DaVita after it's several investigations.  I guess it's easy to forget what value investing means when you see scary allegations and "Enron" or "ITT" thrown in here and there.

[original mungerville]

And the Buffett partnerships. He was limited to 99 partners or whatever and then set up a bunch of them to get around the limit. Then he and Munger together between the two of them had so much cross-ownership with entities, etc that the SEC started looking into them.

 

And then there are the layoffs by 3G and the leverage they employ. Tell me that is not aggressive, and Berkshire is all for it.

 

And guess, what, its all legal - its just aggressive. How do you win without being aggressive? I want Valeant to be aggressive.

[rb]

Well is Kaufman a big law firm or some two bit lawyer?  When they first broke the story they made it sound like this was a white shoe firm suing valeant.  The lawyer is ok with basically helping his client extort a large cap pharma?

I think it's a bit rich for Valeant or people associated with Valeant to complain about some other party trying to extort them.

[Yours Truly]

I've noticed a pattern here - and with other industries where change will occur.

 

An accusation is made. Most of it is not true. It serves as a catalyst for a larger social issue with the industry / business model. The next few years cause depressed returns.

 

The issue in this industry is high prices for generic drugs or combination of drugs that even other pharmaceutical companies such as Depomed have come out and said a person can buy the two ingredients and compound them together for $30 to $40 per month but that the combined pill costs $1500 per month. The reason for all these ills is that these are generic ingredients. Really, they should be priced far lower and there shouldn't be some sort of pharmacy cartel and manufacturers propping up prices. What's a fair price? Who knows but it seems the issues the last 30-60 days will cause business models that use debt and high prices and run-off products to be weak and therefore the incident that precipitated it - such as a false accusation of fraud or a grey area practice - causes valuations, models, and businesses to change. This could be what investors call a permanent change of the environment.

 

Since these are generics, what's stopping another pharma from coming in and competing if there are profits to be made? Is capitalism dead?

[cmlber]

I've noticed a pattern here - and with other industries where change will occur.

 

An accusation is made. Most of it is not true. It serves as a catalyst for a larger social issue with the industry / business model. The next few years cause depressed returns.

 

The issue in this industry is high prices for generic drugs or combination of drugs that even other pharmaceutical companies such as Depomed have come out and said a person can buy the two ingredients and compound them together for $30 to $40 per month but that the combined pill costs $1500 per month. The reason for all these ills is that these are generic ingredients. Really, they should be priced far lower and there shouldn't be some sort of pharmacy cartel and manufacturers propping up prices. What's a fair price? Who knows but it seems the issues the last 30-60 days will cause business models that use debt and high prices and run-off products to be weak and therefore the incident that precipitated it - such as a false accusation of fraud or a grey area practice - causes valuations, models, and businesses to change. This could be what investors call a permanent change of the environment.

 

Since these are generics, what's stopping another pharma from coming in and competing if there are profits to be made? Is capitalism dead?

 

I think that's part of the point with these specialty pharmacies.  When a doctor writes a prescription for Product A and the patient takes it to Walgreens, Walgreens asks "Would you like the generic, it's the same thing but costs $XX less."  Many customers switch to the generic.  But if the doctor writes a prescription and recommends the patient call Philidor instead of going to Walgreens, Philidor will ship the Valeant brand and not offer the substitution, and the patient doesn't care because Valeant covers the copay so it's "free." 

 

 

[KCLarkin]

A pharma company takes massive risk to develop a drug. They spend a billion dollars in R&D. They spend millions building a brand name and developing a product. A patient goes to a doctor and asks for Lipitor. The doctor prescribes Lipitor.

 

The patient goes to a pharmacy who gives a generic because it is 1 penny cheaper. Of course it is cheaper. The generic is manufactured in a shoddy facility in India by a company that doesn't need to recoup any R&D or marketing costs. It coat-tails on the pharma's clinical trials and doesn't even need to pay a license fee.

 

The generic gets all the profits and and all the market share.

 

And then people wonder why specialty pharma companies need to "price gouge" and engage in aggressive sales tactics.

 

BMO had a report that drug prices have increased at 2+% over the last five years. Hardly seems woth Clinton's time.

[rohitc99]

A pharma company takes massive risk to develop a drug. They spend a billion dollars in R&D. They spend millions building a brand name and developing a product. A patient goes to a doctor and asks for Lipitor. The doctor prescribes Lipitor.

 

The patient goes to a pharmacy who gives a generic because it is 1 penny cheaper. Of course it is cheaper. The generic is manufactured in a shoddy facility in India by a company that doesn't need to recoup any R&D or marketing costs. It coat-tails on the pharma's clinical trials and doesn't even need to pay a license fee.

 

The generic gets all the profits and and all the market share.

 

And then people wonder why specialty pharma companies need to "price gouge" and engage in aggressive sales tactics.

 

BMO had a report that drug prices have increased at 2+% over the last five years. Hardly seems woth Clinton's time.

 

I think you should read up on some of the annual reports on these generic companies. They have FDA inspected facilties, spend 5%+ on R&D and cannot sell a generic till its offpatent or have been able to challenge a patent (which is rare).

[original mungerville]

I've noticed a pattern here - and with other industries where change will occur.

 

An accusation is made. Most of it is not true. It serves as a catalyst for a larger social issue with the industry / business model. The next few years cause depressed returns.

 

The issue in this industry is high prices for generic drugs or combination of drugs that even other pharmaceutical companies such as Depomed have come out and said a person can buy the two ingredients and compound them together for $30 to $40 per month but that the combined pill costs $1500 per month. The reason for all these ills is that these are generic ingredients. Really, they should be priced far lower and there shouldn't be some sort of pharmacy cartel and manufacturers propping up prices. What's a fair price? Who knows but it seems the issues the last 30-60 days will cause business models that use debt and high prices and run-off products to be weak and therefore the incident that precipitated it - such as a false accusation of fraud or a grey area practice - causes valuations, models, and businesses to change. This could be what investors call a permanent change of the environment.

 

Since these are generics, what's stopping another pharma from coming in and competing if there are profits to be made? Is capitalism dead?

 

I think that's part of the point with these specialty pharmacies.  When a doctor writes a prescription for Product A and the patient takes it to Walgreens, Walgreens asks "Would you like the generic, it's the same thing but costs $XX less."  Many customers switch to the generic.  But if the doctor writes a prescription and recommends the patient call Philidor instead of going to Walgreens, Philidor will ship the Valeant brand and not offer the substitution, and the patient doesn't care because Valeant covers the copay so it's "free."

 

And what does Walgreens mark up the generic by to cover the cost of capital of all the real-estate investment? Valeant is marketing to doctors, trying to do business, and delivering directly. Why doesn't the doctor prescribe a generic directly? Valeant is allowed to compete.

 

[scorpioncapital]

A pharma company takes massive risk to develop a drug. They spend a billion dollars in R&D. They spend millions building a brand name and developing a product. A patient goes to a doctor and asks for Lipitor. The doctor prescribes Lipitor.

 

The patient goes to a pharmacy who gives a generic because it is 1 penny cheaper. Of course it is cheaper. The generic is manufactured in a shoddy facility in India by a company that doesn't need to recoup any R&D or marketing costs. It coat-tails on the pharma's clinical trials and doesn't even need to pay a license fee.

 

The generic gets all the profits and and all the market share.

 

And then people wonder why specialty pharma companies need to "price gouge" and engage in aggressive sales tactics.

 

BMO had a report that drug prices have increased at 2+% over the last five years. Hardly seems woth Clinton's time.

 

I think you should read up on some of the annual reports on these generic companies. They have FDA inspected facilties, spend 5%+ on R&D and cannot sell a generic till its offpatent or have been able to challenge a patent (which is rare).

 

I've noticed some generic companies don't have facilities but outsource to a standard chemical manufacturer like BASF for instance. Is there some companies that just hold rights? That seems like a more capital light business model.

[rb]

Since these are generics, what's stopping another pharma from coming in and competing if there are profits to be made? Is capitalism dead?

Basically it's due to the approval process. The meds that the price gets hiked a lot tend to be lower volume drugs. Another pharma would still have to go through the approval process on the generic formulation. When you take into account the cost to get the drug approved it's not so profitable to compete.

 

The government could simplify the approval process for generics and that would solve part of the pricing issue. I don't really see that happening though, cause if the gov't does that you'll start to see the "Government doesn't care about peoples' heath/safety/etc..." campaigns.

[rohitc99]

A pharma company takes massive risk to develop a drug. They spend a billion dollars in R&D. They spend millions building a brand name and developing a product. A patient goes to a doctor and asks for Lipitor. The doctor prescribes Lipitor.

 

The patient goes to a pharmacy who gives a generic because it is 1 penny cheaper. Of course it is cheaper. The generic is manufactured in a shoddy facility in India by a company that doesn't need to recoup any R&D or marketing costs. It coat-tails on the pharma's clinical trials and doesn't even need to pay a license fee.

 

The generic gets all the profits and and all the market share.

 

And then people wonder why specialty pharma companies need to "price gouge" and engage in aggressive sales tactics.

 

BMO had a report that drug prices have increased at 2+% over the last five years. Hardly seems woth Clinton's time.

 

I think you should read up on some of the annual reports on these generic companies. They have FDA inspected facilties, spend 5%+ on R&D and cannot sell a generic till its offpatent or have been able to challenge a patent (which is rare).

 

I've noticed some generic companies don't have facilities but outsource to a standard chemical manufacturer like BASF for instance. Is there some companies that just hold rights? That seems like a more capital light business model.

 

Usually not, atleast not in the case of indian pharma companies. companies like sun pharma, Torrent pharma etc have multiple FDA inspected facilities, 1000s of PHD scientist working in R&D labs in india, europe and US in multiple areas such as CVS, derma, Oncology etc. The work of developing the generic starts years before the product goes off patent and only after the patent expires, do some of these companies get the FTF (first to file) advantage in some of these products. This first to file advantage is generally for 180 days where they make higher profits. Once additional competition enters, the drug pricing drops by close to 60-70%.

 

In most of the cases, these companies manufacture using their own facility and in several cases work with the innovator companies developing the generic with them. In several cases, there are doing contract research and even NCE research on their own.

 

Most of these companies are spending 5-6% of sales on R&D and around 4-5% of sales on sales and marketing too.

 

These are not sweat shops employing child labor to produce generic products. As far i understand, the point of a generic drug is that it will not enjoy patent protection and hence is open to competition

[rb]

A pharma company takes massive risk to develop a drug. They spend a billion dollars in R&D. They spend millions building a brand name and developing a product. A patient goes to a doctor and asks for Lipitor. The doctor prescribes Lipitor.

 

The patient goes to a pharmacy who gives a generic because it is 1 penny cheaper. Of course it is cheaper. The generic is manufactured in a shoddy facility in India by a company that doesn't need to recoup any R&D or marketing costs. It coat-tails on the pharma's clinical trials and doesn't even need to pay a license fee.

 

The generic gets all the profits and and all the market share.

 

And then people wonder why specialty pharma companies need to "price gouge" and engage in aggressive sales tactics.

 

BMO had a report that drug prices have increased at 2+% over the last five years. Hardly seems woth Clinton's time.

Well for R&D the companies get a patent they make good money during the patent. After the patent expires sorry, it goes generic. You don't get the patent in perpetuity. Also based on the returns on capital that the pharma companies make it doesn't look like a persecuted industry who needs to gouge and engage in aggressive tactics just to survive. Oh and btw 30% return on capital is not something bestowed by a deity on the pharma industry.

 

When it comes to Valeant they don't even do a lot of R&D, yet they've raised prices on their drug portfolio by way more than 2% per year. So they don't add any utility to society but extract a cost. It seems like the issue is worthy of someone's time.

[rohitc99]

Since these are generics, what's stopping another pharma from coming in and competing if there are profits to be made? Is capitalism dead?

Basically it's due to the approval process. The meds that the price gets hiked a lot tend to be lower volume drugs. Another pharma would still have to go through the approval process on the generic formulation. When you take into account the cost to get the drug approved it's not so profitable to compete.

 

The government could simplify the approval process for generics and that would solve part of the pricing issue. I don't really see that happening though, cause if the gov't does that you'll start to see the "Government doesn't care about peoples' heath/safety/etc..." campaigns.

 

There is a process of filing a DMF for an API which goes into the drug. Also a generic company has to file an ANDA with the FDA for an generic. Once these are approved, the company can produce and sell only from an FDA approved and inspected facility.

 

All of the above needs a scale of operation for the entire development, filings/ approval and production process. In addition these companies also need front marketing and sales facilities to sell in the US (which differs from the other emerging markets).

 

The margins and return on invested capital for these generic companies is good, but it is not very high.

[Yours Truly]

Not sure if this is a new report but just throwing It out there:

 

[CONeal]

Regarding the discussion about patents and comparing to generic companies.  One thing that should be kept in mind is that alot of time a patented drug spends so much time going through the initial drug approval process that by the time a drug comes to market the patent life is really not that long.  When you factor in that a drug on average cost about 500 million to bring to market (going through the approval process) it's easy to see why drugs are expensive as a company needs to recoup the cost they spent brining that drug to market and also to try and put enough money in their coffers to get their next pipeline drug through the process before competition over runs them.

 

On the other hand a generic company has economies of scale in that they can target serval drugs coming off patent at the same time.  They still have to go through an FDA review to prove the drug is the exact same but the cost of this process is small compared to the branded drug and they have alot less risk. 

 

I have seen multiple post about people bitching about how much a company spends on r&d and think it's ridiculous.  The government is not going to come in and regulate how much a company has to spend on r&d.  If they really want to play hardball Pharm companies will cut back on the drugs brought to market as it's the governments process, where a majority of the cost and risk is associated getting approval.

 

Comparing a generic drug r&d to a brand r&d missing the point in that a generic company  r&d is not brining 1 or 2 drugs to market each year.  That r&d is supporting bringing multiple drugs a year to market.  All a generic company is doing is making a drug with all the hard work done upfront and all they need to do is work from a blueprint based on the branded drug went through.

 

 

Regarding the use of VRX using a special pharmacy to get their drugs used more often is not an issue and really not even an ethical issue.  All they are doing is making sure their drug is used over a competitor.  Since Medco does not exist as a legal entity anymore I'll use them as an example.  Medco really did not make money on branded drugs.  It was the generic versions where they made money and they made a killing in that area.  As you can imagine they made sure everyone was going to use the generic version very quickly once the drug was off patent.  For someone to use the branded drug version required a person to go through alot of red tape bc it wasn't in Medcos best interest to fill branded drugs when the generic was available.  Why is this story important?  Bc all Valeant is doing to playing the hand they are delt with competitors and trying to get their drugs used when other forces are trying to keep people from using their drug.

 

I went long in VRX a coupe of days ago and am very comfortable with their business practices.

[rpadebet]

4X2016 FCF is better than 7x. I would be then happy to sell it at 15-18x next year. I am waiting for the short thesis to fully play out...this is a fun stock especially if you can get the timing right 8)

 

I agree.

But I still don’t think the freefall in stock price has been due to valuation (like you seem to believe).

And I still think that, if VRX definitely proves it is not a fraud, it could be trading for 15-18x FCF for many years in the future, and in the meantime keep growing its FCF at high rates.

If you sell at 15-18x, you’ll end up leaving lots of money on the table.

 

This of course is theory… Because, the only thing that matters now is that VRX gains back the confidence of the public and institutional investors. Will it ever succeed? We will see.

 

Cheers,

 

Gio

 

Also I think your way of valuing VRX on a balance sheet basis is not correct.

Of course I think the businesses they have bought are much more valuable now because of:

1) Fat cut to the bone,

2) Better and much larger sales channels,

3) A better focus on marketing,

4) The good use of synergies,

5) A much lower tax rate.

But you simply cannot take all the capital they have deployed, estimate how much the businesses they have purchased are truly worth now, take out all the debt, and arrive at a FV for VRX... Because that completely misses future opportunities. And I guess the first idea all longs have is they have invested in VRX because of Pearson's ability to find good investment opportunities in the healthcare sector!... Your balance sheet valuation would be like valuing VRX based only on its future organic growth, while we longs believe organic growth is good and necessary, but most of the value will still come from new acquisitions in the future.

 

Cash EPS is the best metric to value VRX: look for which cash EPS multiple other pharma companies with the same rate of growth are selling for, and adjust that multiple for the heavier debt load VRX has right now. I have still to see a better valuation model!

 

Cheers,

 

Gio

 

Gio,

I limit my valuation to the tools I am comfortable with. I did the fcf/ cash eps and b/s valuation and got pretty much in the same range. I did it last year and this year and my valuation moved only a little bit, which makes sense because in a normal business not much can change in one short year. My range is still 120-150 depending on how serious the regulatory risk and its impact on growth is.

 

Anyway, I don't think you can base your valuation on future deals Pearson might make. A lot depends on the price paid, execution, integration and general business luck. You can't assume he will always get things on cheap and execute perfectly. The business environment also is subject to cycles...

 

Btw I am a long too now, so I take offense at leaving me out when you talk about " us longs" ;)

 

I simply try to buy below my valuation and sell above. I wait for margin of safety on either side with a bias towards holding the stock long. Right now I will buy below 100 and sell above 250... Just making a market here with a decent spread.

 

You may disagree with my methods. It works for me so I follow it..