VRX - Valeant Pharmaceuticals International Inc.

[original mungerville]

The doctors make the decision and assign the prescription. Valeant/Philidor then fulfills directly. The more I think about it, I actually have ZERO problems with this. There is nothing unethical about it.

 

Valeant is making it as easy as possible for the patient to get access to the drug AFTER a doctor recommends it. Sure, in this model, there is price inelasticity, and sure insurance companies/payers have to be vigilant given lack of economic co-pay (where a customer's costs are reimbursed by Valeant), etc, etc - but that is not Valeant's problem at this point. That's a problem for insurance companies (or maybe not because it may give them more biz potentially over time) and payers. The customer gets great service it seems. Payers need to understand there is a new model out there and need to ensure the right safeguards and procedures are in place so they don't get taken advantage of by a Valeant or by their competitors. Just like they did through the traditional pharma channels where they effectively pre-negotiate list prices for common drugs. Just because Valeant is pushing a different distribution model harder and with a twist just makes me more happy to be a shareholder, not less.

 

And to think the other pharmas are not doing this as well? The DOCTOR makes the recommendation for the product. Are you telling  me that these specialty pharmas that are "independent" start recommending generics online when the prescription/patient is asking for a certain brand of some big pharma.

[rpadebet]

It was my first impression that this particular short thesis is flimsy. Hearing the citron guy speak on Bloomberg tv, confirmed that. The way he walked back his Enron rhetoric was telling...but I do not think the shorts have a more nefarious reason than to make some money out of panic....that's perfectly legal as well ;) sellers last week sold of their own free will, there was no gun to their heads...

 

I initially thought licensing issue in California might be problematic, but that seems fine as well. The concerned authority in California had problems with the salesman (Philidor  who was distributing the product) not the product itself....so I think it's fine to sell it through someone else whom the local authority approves off..

 

 

[KCLarkin]

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).

 

Sorry, I didn't mean to take this so far off topic. I am just speaking about the general economics of the business. Patented drugs have a very short window to provide adequate risk-adjusted returns. Patents are based on the filing date and it can take years to get a drug to market. Valeant's female libido drug only has 11 years of exclusivity.

 

Maybe I am biased against generics as a Canadian:

http://www.thestar.com/news/canada/2015/06/01/inside-look-into-health-canada-battle-with-apotex.html

 

By the way, the 5% R&D number is misleading.

 

Coca-Pharma:

$100 / pill revenue

20% R&D

---

$20 / pill R&D

 

RC-Generic:

$25/pill revenue

5% R&D

--

$1.25 / pill R&D

 

 

 

[SwimmingNaked]

Donville is probably right here. It's pathetic what has happened in the last few weeks, with this and other healthcare stocks, and regulators need to get involved.

 

The model is out, it's not all that different from a classic bear raid but now with the internet and how fast things get disseminated, it's only getting easier. I mean a crappy write up on Seeking Alpha made Nobilis Health's stock crash 50+% in a matter of days. I'm not an investor in Valeant (just don't want to allocate the time analyzing the company), but I have invested in a couple of other health care stocks that have been irrationally sold off.

 

How to crush a stock in a few days 101:

 

- Pick a vulnerable company that has uncertainty surrounding it for whatever reason. Make sure the company is complex enough that it will take time to clear the air.

- Start shorting the stock

- Put out a hit piece, spread internet rumours, make a comparison to Enron for good measure (point out a couple of similarities and not the million differences), make a mountain out of a molehill

- Because there is already uncertainty out there, your message will get traction from traders/the media and make weak hands sell

- Do this in a coalition with your hedge fund buddies, who also short the hell out of the stock

- Selling begets selling, momentum day traders pile in, margin calls result in more selling

- Market panic is successfully created and stock gets crushed

- Enjoy the profits

 

On one hand, this creates opportunities but it really undermines the credibility of the capital markets. You could do everything right in your fundamental analysis and get crushed by unethical people who would shout fire in a crowded theatre. The Citron guy has the exact demeanour of the kind of asshole you could expect this kind of behaviour from.

[KCLarkin]

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.

 

Sure, Merck and Pfizer have survived over the last 15 years. They have just been lousy investments.

 

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.

 

This is how silicon valley works. Some clowns invent YouTube. They don't have the capital to scale to a billion users. It will take 10 years before it is profitable. They sell to Google for $1.65 Billion. A thousand startups start working on the New New Thing hoping to sell to Google for $1B. Google spends their "R&D" to create annoying ads and invade our privacy.

 

Let's invert. Let's assume that all pharma companies spend 100% of revenue on R&D. How many new drugs will be invented in the next 50 years?

 

I'm not sure why people forget how capitalism works when they talk about pharma companies:

High ROE -> More Capital -> More Competition -> More Innovation

 

 

 

 

[KCLarkin]

Great article on WSJ:

http://www.wsj.com/articles/valeants-disclosure-why-now-1445645280

 

On Friday, Valeant said in a statement to The Wall Street Journal that Philidor and related pharmacies comprise less than 1% of Valeant’s total assets and hence were “determined to be not material” to the larger company’s financial statements. Accounting rules generally provide that companies aren’t required to disclose transactions if they’re not material.

 

The balance-sheet approach was what the company deemed appropriate in determining whether the relationship was material, said the person familiar with the matter.

 

Experts say a lack of materiality could justify a lack of disclosure.

 

Valeant in its 2014 annual report, released in February 2015, says that during 2014 it completed “smaller acquisitions, including the consolidation of variable interest entities,” which were “not material.”

 

The other trigger for disclosure would be a "customer concentration" disclosure if Philidor accounted for more than 10% of sales but it was only 6% in 2014. So everything seems kosher.

 

In addition, Valeant is facing subpoenas from federal prosecutors seeking information about the company’s drug pricing, distribution and patient assistance.

 

Oh yeah, with all this Philidor bullshit, I almost forgot there was real news.

 

[rb]

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.

 

Sure, Merck and Pfizer have survived over the last 15 years. They have just been lousy investments.

 

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.

 

This is how silicon valley works. Some clowns invent YouTube. They don't have the capital to scale to a billion users. It will take 10 years before it is profitable. They sell to Google for $1.65 Billion. A thousand startups start working on the New New Thing hoping to sell to Google for $1B. Google spends their "R&D" to create annoying ads and invade our privacy.

 

Let's invert. Let's assume that all pharma companies spend 100% of revenue on R&D. How many new drugs will be invented in the next 50 years?

 

I'm not sure why people forget how capitalism works when they talk about pharma companies:

High ROE -> More Capital -> More Competition -> More Innovation

Right, Mark and Pfizer have been lousy investments. In your time frame Merck has outperformed the S&P by about 80% and Pfizer by about 100%. If those are lousy investments, may I ask, what do you define as a mediocre investment?

 

Your analogy of pharma and silicon valley is also disingenuous at best. I can live my life just fine without watching cute cats on youtube. Do I like watching those? Sure! But I will be just fine without them. But if there's some medication that I cannot afford anymore then that will significantly impact my life because I cannot just choose to stop my medication just like I would choose to stop watching cute cats.

 

Now for a long time the narrative has been that hey, this is capitalism if we want medicine the people making it should make money too. Ok, it's been a lot of money, but it's ok they come up with great stuff. Yea I can get behind that. They come up with great new medication because we pay them lots of money to do that. But Valeant's model is not that. Actually just the opposite. Their whole premise is that R&D is wasteful and don't do that. Instead they're model is based on profiting on the weaknesses in the current pharma model. But they're not and won't be bringing to market new life saving drugs.

 

The fact that nobody looses from aggressive tactics is bullshit as well. There's three classes of pharma customers. Insure by the government, insured by private insurers through employment, and uninsured. If costs go up for insured by the government will result in higher taxes for the population, so money out of pocket. The uninsured are the worst ones cause they may not be able to get medication or more likely suffer a lot of financial damage. The third kind, insured by privates is the grey area because it seams that it'll be the big bad insurance companies that suffer, but they'll pass the costs in the end, there's just gonna be a bit of a time lag.

[Range]

As a personal anecdote, I am a Valeant customer on a derma ointment. It's not a life and death product but it's important to comfort of life. I used the drug before Valeant even existed. It's a generic that's been around since the 1960s. For me it's covered by insurance so normally I wouldn't know anything about it. But since we're having these discussions here I went and asked. This is what I've found. This is what I've found. Since Valeant took over the drug the price went up by 800%. In addition to that they've reformulated the drug so now it has a 3 month shelf life as opposed to 2 years it did before so now I throw 90% of it away and get a refill every 3 months.

 

I know it's a bit of a personal question, but would you mind sharing the name of drug?  If you'd rather not mention it publicly, I'd appreciate a PM and would obviously keep it to myself.  Totally understand if you'd rather not share.

 

Now I'm not a saint and I am aggressive in making money for me and my clients but I am aware of the situations I am involved in and I like to call a spade a spade. Now you may like that Valeant found a way to make you a lot of money. Ok, so say that, but please don't go around preaching the Valeant is doing God's work bullshit.

 

+1

[giofranchi]

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..

 

Well, Pearson has said that when VRX was selling around $115 last year, it was wildly undervalued. Now we also have Salix, bought at a very attractive price and which is performing in line with expectations.

I was trying to say why I think a valuation based on VRX balance sheet, and which arrives at a FV slightly above $120 might not be how Pearson thinks about VRX.

Of course the way you are thinking about VRX might be working very well for you right now, but it doesn't mean it is correct.

Another possibility is that Pearson is dishonest and only wants to pump the stock price up...

 

Cheers,

 

Gio

[giofranchi]

 

The other trigger for disclosure would be a "customer concentration" disclosure if Philidor accounted for more than 10% of sales but it was only 6% in 2014. So everything seems kosher.

 

 

Bottom line, Pearson at best got caught with his hands in the cookie jar and at worst has lost all credibility and we're in the midst of gradually figuring out just how many cockroaches there really are.

 

Ackman's 2010 book might prove to be perfectly named.

 

Well, I don't see any need to keep repeating these things over and over again at this time: on Monday we will finally know for sure!

 

Cheers,

 

Gio

[Guest Grey512]

The funny thing is, if this goes down the way I think it will, it will be painfully obvious to people in hindsight. The signs were all there.

 

CEO comp structure motivating risky behavior - check.

 

Excessively complex industry where companies AT BEST legally yet immorally take advantage of complexity to generate abnormal profits, and AT WORST engage in fraud - check. (The US healthcare / pharma reimbursement system is just a tragic joke)

 

Overcrowded trade - I mean, who was the marginal buyer here? Check. Everyone "knew" that platforms and roll-ups are a perfect model for value creation.

 

Huge leverage - check.

 

Huge multiple of free cash flow - check. Yes, still. Still not cheap.

 

Dependence on open and steadily-functioning capital markets to continue doing deals - check.

 

 

This is still a short. This is no Transdigm. This is no Berkshire. Whomever is long VRX at this point should go out and get their head examined.

 

But Ackman bought more, you will say. Surely the smart money is staying long. Time will tell who was right. I posit that Ackman's move was one driven by emotion, denial. If this goes the way I think it will, Ackman's reputation will take a massive beating. Not just Ackman - Sequoia, Brave Warrior, etc. It will be like there are no more geniuses among the modern value investor crowd.

 

 

 

[giofranchi]

The funny thing is, if this goes down the way I think it will, it will be painfully obvious to people in hindsight. The signs were all there.

 

CEO comp structure motivating risky behavior - check.

 

Excessively complex industry where companies AT BEST legally yet immorally take advantage of complexity to generate abnormal profits, and AT WORST engage in fraud - check. (The US healthcare / pharma reimbursement system is just a tragic joke)

 

Overcrowded trade - I mean, who was the marginal buyer here? Check. Everyone "knew" that platforms and roll-ups are a perfect model for value creation.

 

Huge leverage - check.

 

Huge multiple of free cash flow - check. Yes, still. Still not cheap.

 

Dependence on open and steadily-functioning capital markets to continue doing deals - check.

 

 

This is still a short. This is no Transdigm. This is no Berkshire. Whomever is long VRX at this point should go out and get their head examined.

 

But Ackman bought more, you will say. Surely the smart money is staying long. Time will tell who was right. I posit that Ackman's move was one driven by emotion, denial. If this goes the way I think it will, Ackman's reputation will take a massive beating. Not just Ackman - Sequoia, Brave Warrior, etc. It will be like there are no more geniuses among the modern value investor crowd.

 

I think all the above is wrong.

The only thing that matters to me right now is that on Monday Pearson adresses convincingly once and for all this issue: has VRX cut the corners somehow? I don't think so, but I need him to be very clear and convincing.

 

Cheers,

 

Gio

[KCLarkin]

Right, Mark and Pfizer have been lousy investments. In your time frame Merck has outperformed the S&P by about 80% and Pfizer by about 100%. If those are lousy investments, may I ask, what do you define as a mediocre investment?

 

2000-2015

Merck total return: -1.5% per year

Pfizer TR: 0%

SP500: 4.2% per year

 

Please sign me up for an investment that will return -1.5% per year for 15 years.

 

[Picasso]

The funny thing is, if this goes down the way I think it will, it will be painfully obvious to people in hindsight. The signs were all there.

 

CEO comp structure motivating risky behavior - check.

 

Excessively complex industry where companies AT BEST legally yet immorally take advantage of complexity to generate abnormal profits, and AT WORST engage in fraud - check. (The US healthcare / pharma reimbursement system is just a tragic joke)

 

Overcrowded trade - I mean, who was the marginal buyer here? Check. Everyone "knew" that platforms and roll-ups are a perfect model for value creation.

 

Huge leverage - check.

 

Huge multiple of free cash flow - check. Yes, still. Still not cheap.

 

Dependence on open and steadily-functioning capital markets to continue doing deals - check.

 

 

This is still a short. This is no Transdigm. This is no Berkshire. Whomever is long VRX at this point should go out and get their head examined.

 

But Ackman bought more, you will say. Surely the smart money is staying long. Time will tell who was right. I posit that Ackman's move was one driven by emotion, denial. If this goes the way I think it will, Ackman's reputation will take a massive beating. Not just Ackman - Sequoia, Brave Warrior, etc. It will be like there are no more geniuses among the modern value investor crowd.

 

That was the case when it was trading for $250+. Are you saying a company at $40 billion doing $4 billion of free cash flow is now too expensive?

[KCLarkin]

For the conspiracy newbie:

 

Oh my god. I just found out that PROPUBLICA is part of Philidor:

Name: PERFECT PRIVACY, LLC

https://who.is/whois/propublica.org

 

And I have conclusive evidence that Philidor has a network of 3,000,000 fake pharmacies:

Registrant Org PERFECT PRIVACY, LLC was found in ~3,078,919 other domains

 

CitronResearch.com might be part of Philidor! They are also hiding their domain ownership:

https://who.is/whois/citronresearch.com

Registrant Organization: MyPrivacy.net Ltd.

 

Oh my god, SIRF is part of this conspiracy too:

Email: Email Masking Image@networksolutionsprivateregistration.com

 

The only possible explanation is that Valeant is Enron.

[Picasso]

And now that we have descended into using 4chan as a resource (jesus) what exactly is uncovered there?  The poster says they shipped out a lot of drugs for free because they couldn't get reimbursed on some of them. How is that cooking the books? 

 

Also the Google trends tells you how material this business was in the recent past. Not at all until late 2014. So what is the point there?  So now we can suddenly shift the logic and say how can there be a ton of revenue from that channel given search volumes?  I thought this was supposed to be a significant source of revenue between $1.5-4B (according to Roddy Boyd)? 

[Picasso]

For the conspiracy newbie:

 

Oh my god. I just found out that PROPUBLICA is part of Philidor:

Name: PERFECT PRIVACY, LLC

https://who.is/whois/propublica.org

 

And I have conclusive evidence that Philidor has a network of 3,000,000 fake pharmacies:

Registrant Org PERFECT PRIVACY, LLC was found in ~3,078,919 other domains

 

CitronResearch.com might be part of Philidor! They are also hiding their domain ownership:

https://who.is/whois/citronresearch.com

Registrant Organization: MyPrivacy.net Ltd.

 

Oh my god, SIRF is part of this conspiracy too:

Email: Email Masking Image@networksolutionsprivateregistration.com

 

The only possible explanation is that Valeant is Enron.

 

Hahahaha. +1.

 

Obligatory 237 link:

[FFHWatcher]

The only thing that matters to me right now is that on Monday Pearson adresses convincingly once and for all this issue: has VRX cut the corners somehow? I don't think so, but I need him to be very clear and convincing.

 

Cheers,

 

Gio

 

As a guy who has only read 10-20% of what is available here and who is not a long-term investor or long-term short in VRX (short term puts and calls, just for fun) I would suggest that if this turns out like other similar situations, that Monday will not be, "...once and for all...".  It will be the start of a 6-12 month ordeal that will probably end one of two ways. Pretty bad or marginally good.  I have never seen a similar situation solved in a few weeks or a few conference calls or a few quarters or a few press releases.  This feels like years to me, especially given the size of VRX, the debt and the fact that Ackman is involved.  I will check back in Oct 2016 and see if this is a completed matter.  In the meantime, 10-20% weekly moves will be the norm, imo.

[Liberty]

Just to address the recent repeated meme of "incentives encouraged the CEO to behave badly", take into account that his shares are restricted until years after he retires, and he's cut his base salary to $1. He's basically almost perfectly aligned with shareholders and with long-term sustainability, and if shareholders lose or something bad happens, the CEO will lose almost everything.

 

His compensation was designed by ValueAct to discourage sandbagging but also to encourage long-term thinking.

 

As for the problem that some of us have with this gang of shorts, I don't think it's that they are short, or were short Fairfax or whatever. It's how they've did it. I wasn't around at the time, but I've heard the Fairfax stories, and it seems beyond the pale and way over the line of market manipulation and bad faith...

[scorpioncapital]

Even if there is no fraud issues, there is no doubt in my mind that this industry's profits and growth are going to be either flat (solid balance sheets and better/complex products) or decreasing (run-off, high debt, and those open to easy alternatives). Those who can find the differences between the companies might make some decent change.

 

 

[KCLarkin]

Hempton has the situation pretty well surrounded. Or at least his line of questioning certainly fits my narrative.

 

http://brontecapital.blogspot.ca/2015/10/valeant-and-its-captive-pharmacies-some.html

 

 

 

[feynmanresearch]

The funny thing is, if this goes down the way I think it will, it will be painfully obvious to people in hindsight. The signs were all there.

 

CEO comp structure motivating risky behavior - check.

 

Excessively complex industry where companies AT BEST legally yet immorally take advantage of complexity to generate abnormal profits, and AT WORST engage in fraud - check. (The US healthcare / pharma reimbursement system is just a tragic joke)

 

Overcrowded trade - I mean, who was the marginal buyer here? Check. Everyone "knew" that platforms and roll-ups are a perfect model for value creation.

 

Huge leverage - check.

 

Huge multiple of free cash flow - check. Yes, still. Still not cheap.

 

Dependence on open and steadily-functioning capital markets to continue doing deals - check.

 

 

This is still a short. This is no Transdigm. This is no Berkshire. Whomever is long VRX at this point should go out and get their head examined.

 

But Ackman bought more, you will say. Surely the smart money is staying long. Time will tell who was right. I posit that Ackman's move was one driven by emotion, denial. If this goes the way I think it will, Ackman's reputation will take a massive beating. Not just Ackman - Sequoia, Brave Warrior, etc. It will be like there are no more geniuses among the modern value investor crowd.

+1

[rb]

 

2000-2015

Merck total return: -1.5% per year

Pfizer TR: 0%

SP500: 4.2% per year

 

Please sign me up for an investment that will return -1.5% per year for 15 years.

I'm sorry. You're right. It was a late night post and mixed up the lines on the chart.

 

Merck and Pfizer still have great economics. They're stocks are expensive though. I can see how shareholders may not get a great return from these levels.

[ourkid8]

I would also love to see a completed review of Philador and all the special pharma's by PWC with their stamp of approval as they are VRX's external auditors. That should help alleviate this bear raid and give us a very nice bounce Monday.

[Guest wellmont]

 

2000-2015

Merck total return: -1.5% per year

Pfizer TR: 0%

SP500: 4.2% per year

 

Please sign me up for an investment that will return -1.5% per year for 15 years.

I'm sorry. You're right. It was a late night post and mixed up the lines on the chart.

 

Merck and Pfizer still have great economics. They're stocks are expensive though. I can see how shareholders may not get a great return from these levels.

 

do these returns include medco (merk) and zoetis (pfizer) spin offs?