VRX - Valeant Pharmaceuticals International Inc.

[cmlber]

 

What about the standard of disclosures in the past makes the forward guidance not believable?  Because they didn't disclose they had an option to buy Philidor?  Haven't they had a history of at least hitting guidance and in most cases beating?

 

EM revenue guidance from 04/22/2014? They completely changed the way they provided guidance after that presentation. I believe it was also the last mention of "durable" in any presentation. Those are major shifts that I don't think investors have caught up with.

 

 

Similar to the AGN attempt at an acquisition, restructuring costs are rolling off and using TTM isn't how you're going to value this stock.  Free cash flow after interest expense will be around $4 billion next year and before interest expense around $5.5 billion.  So it trades for 10x levered FCF and 12.7x unlevered FCF.  Take your pick whether you want to use an unlevered or levered metric. 

 

What is the weighted-life expectancy of the product portfolio? This is why I have been showing the low durability of their portfolio. There is a revenue cliff in 10-12 years with very little means to replace it. It just so happens that VRX's debt/interest/D&A all align with this date (those bankers are smart). The fact that VRX is paying cash taxes shows that EM profits are likely negative or negligible. So you are paying 12.7x FCF for ~12 years of FCF and negligible terminal value (worth maybe one more year of proj 2016 FCF in aggregate).

 

Does Bausch and Lomb have terminal value? 

[Guest Grey512]

 

What about the standard of disclosures in the past makes the forward guidance not believable?  Because they didn't disclose they had an option to buy Philidor?  Haven't they had a history of at least hitting guidance and in most cases beating?

 

EM revenue guidance from 04/22/2014? They completely changed the way they provided guidance after that presentation. I believe it was also the last mention of "durable" in any presentation. Those are major shifts that I don't think investors have caught up with.

 

 

Similar to the AGN attempt at an acquisition, restructuring costs are rolling off and using TTM isn't how you're going to value this stock.  Free cash flow after interest expense will be around $4 billion next year and before interest expense around $5.5 billion.  So it trades for 10x levered FCF and 12.7x unlevered FCF.  Take your pick whether you want to use an unlevered or levered metric. 

 

What is the weighted-life expectancy of the product portfolio? This is why I have been showing the low durability of their portfolio. There is a revenue cliff in 10-12 years with very little means to replace it. It just so happens that VRX's debt/interest/D&A all align with this date (those bankers are smart). The fact that VRX is paying cash taxes shows that EM profits are likely negative or negligible. So you are paying 12.7x FCF for ~12 years of FCF and negligible terminal value (worth maybe one more year of proj 2016 FCF in aggregate).

 

+1

You've put it very well.

[Guest Schwab711]

 

What about the standard of disclosures in the past makes the forward guidance not believable?  Because they didn't disclose they had an option to buy Philidor?  Haven't they had a history of at least hitting guidance and in most cases beating?

 

EM revenue guidance from 04/22/2014? They completely changed the way they provided guidance after that presentation. I believe it was also the last mention of "durable" in any presentation. Those are major shifts that I don't think investors have caught up with.

 

 

Similar to the AGN attempt at an acquisition, restructuring costs are rolling off and using TTM isn't how you're going to value this stock.  Free cash flow after interest expense will be around $4 billion next year and before interest expense around $5.5 billion.  So it trades for 10x levered FCF and 12.7x unlevered FCF.  Take your pick whether you want to use an unlevered or levered metric. 

 

What is the weighted-life expectancy of the product portfolio? This is why I have been showing the low durability of their portfolio. There is a revenue cliff in 10-12 years with very little means to replace it. It just so happens that VRX's debt/interest/D&A all align with this date (those bankers are smart). The fact that VRX is paying cash taxes shows that EM profits are likely negative or negligible. So you are paying 12.7x FCF for ~12 years of FCF and negligible terminal value (worth maybe one more year of proj 2016 FCF in aggregate).

 

Does Bausch and Lomb have terminal value? 

 

You are right, I was too aggressive on terminal value there. I'm just trying to show that valuing this company on a multiple of earnings is [equally] non-sense.

[giofranchi]

What is the weighted-life expectancy of the product portfolio? This is why I have been showing the low durability of their portfolio. There is a revenue cliff in 10-12 years with very little means to replace it. It just so happens that VRX's debt/interest/D&A all align with this date (those bankers are smart). The fact that VRX is paying cash taxes shows that EM profits are likely negative or negligible. So you are paying 12.7x FCF for ~12 years of FCF and negligible terminal value (worth maybe one more year of proj 2016 FCF in aggregate).

 

I have said this over and over again… But evidently you have chosen not to answer… Anyway, the truth is it simply doesn’t matter how durable VRX’s products are or are not, as long as we see organic growth. Because, as long as we see organic growth, their existing businesses are worth more not less than what they were worth when purchased. And amortization of intangibles is not a true expense.

Now that there is no doubt VRX’s sales have not been artificially inflated, I believe reported organic growth is legitimate.

You might believe future organic growth will peter out and become nonexistent... That might be your business judgment, mine is simply different!

 

Cheers,

 

Gio

 

[petec]

 

Pete,

of course you are right most of the times… But this is no “business as usual”… Here reputation is at stake. Ask WB how much he thinks reputation is worth… because in an economy that is solely based on trust, if people call you a liar, and you don’t answer firmly and convincingly, you are out of business. Period. And if you are out of business, you won’t be able to show how much cash you generate over time!

 

This being said, I think the conference call and the presentation were good. Of course, page 47 of the presentation is particularly relevant to me.

 

Cheers,

 

Gio

 

I'm not an expert on Valeant, but it seems to me that being called a fraud is businesses as usual for them!  The major difference this time is that the stock price has gone down.  I don't believe an honest management team would panic and change their daily focus just because someone shouted "ENRON!". 

 

Anyway... ;)

 

P

 

 

[Picasso]

You have revenue around 80% durable and 20% non-durable.  You guys should also go out there and form a short thesis around PRGO if you don't think VRX is durable.  PRGO is twice as expense.

 

Put a multiple on the 80% and run the 20% through DCF.  But you also have to account for underlying upside on existing R&D from Salix, etc.  When I ran the calculation the DCF approach on the 20% of revenue didn't change the valuation by much.

 

Schwab, I'm not going to argue EM guidance.  That's going to come in where it's going to come in.  And just because they stopped mentioning the word durable doesn't mean it's suddenly a non-durable portfolio.  That's just silly.

[cmlber]

 

What about the standard of disclosures in the past makes the forward guidance not believable?  Because they didn't disclose they had an option to buy Philidor?  Haven't they had a history of at least hitting guidance and in most cases beating?

 

EM revenue guidance from 04/22/2014? They completely changed the way they provided guidance after that presentation. I believe it was also the last mention of "durable" in any presentation. Those are major shifts that I don't think investors have caught up with.

 

 

Similar to the AGN attempt at an acquisition, restructuring costs are rolling off and using TTM isn't how you're going to value this stock.  Free cash flow after interest expense will be around $4 billion next year and before interest expense around $5.5 billion.  So it trades for 10x levered FCF and 12.7x unlevered FCF.  Take your pick whether you want to use an unlevered or levered metric. 

 

What is the weighted-life expectancy of the product portfolio? This is why I have been showing the low durability of their portfolio. There is a revenue cliff in 10-12 years with very little means to replace it. It just so happens that VRX's debt/interest/D&A all align with this date (those bankers are smart). The fact that VRX is paying cash taxes shows that EM profits are likely negative or negligible. So you are paying 12.7x FCF for ~12 years of FCF and negligible terminal value (worth maybe one more year of proj 2016 FCF in aggregate).

 

Does Bausch and Lomb have terminal value? 

 

You are right, I was too aggressive on terminal value there. I'm just trying to show that valuing this company on a multiple of earnings is [equally] non-sense.

 

Cash EPS will be $15-16/share in 2016.  They could pay that out to shareholders for your 10-12 years and Bausch and Lomb will be worth the entire debt load or more at that time.  That assumes no organic growth beyond 2016 and no acquisitions.

[giofranchi]

Do you think even one person on earth is considering not using Valeant products because Andrew Left claimed they are channel stuffing and the WSJ claimed Valeant employees had Philidor email addresses?

 

No, of course I don't think so.

That doesn't change my mind about how much reputation is important in business. And that you should defend it at all costs.

 

Cheers,

 

Gio

[Guest Schwab711]

What is the weighted-life expectancy of the product portfolio? This is why I have been showing the low durability of their portfolio. There is a revenue cliff in 10-12 years with very little means to replace it. It just so happens that VRX's debt/interest/D&A all align with this date (those bankers are smart). The fact that VRX is paying cash taxes shows that EM profits are likely negative or negligible. So you are paying 12.7x FCF for ~12 years of FCF and negligible terminal value (worth maybe one more year of proj 2016 FCF in aggregate).

 

I have said this over and over again… But evidently you have chosen not to answer… Anyway, the truth is it simply doesn’t matter how durable VRX’s products are or are not, as long as we see organic growth. Because, as long as we see organic growth, their existing businesses are worth more not less than what they were worth when purchased. And amortization of intangibles is not a true expense.

Now that there is no doubt VRX’s sales have not been artificially inflated, I believe reported organic growth is legitimate.

You might believe future organic growth will peter out and become nonexistent... That might be your business judgment, mine is simply different!

 

Cheers,

 

Gio

 

VRX paid for "organic growth". Next year they are going to show large "organic growth" because IBS-D had a slow introduction this year. One year from now, VRX will point to 30% growth from branded pharmaceuticals and say "See!". The thing is, it's not "organic" in a true sense (I think it's incredibly misleading that they call it SSS). VRX has to keep acquiring or it will end. They have very little gun powder (no big acquisitions) and a treasury schedule that will catch up to them. I'm saying that this is all planned and the BOD is very smart. VRX needs a high stock price and bond liquidity to continue. Folks overpaying are what keeps this system in motion. Just like GILD, someone will eventually realize that the gold at the end of the rainbow wasn't worth the journey and long-term shareholders will earn crappy returns.

 

Just look at the EV relative to acquisition prices (which included premiums). Would you really pay $15b for B&L ($8.8b * 70/40 = $15b) or $27b for SLXP? Is VRX really worth a 75% premium to acquisition price? JNJ has a more "durable" portfolio (and better "branded US Rx" portfolio) than VRX could ever dream of owning. Somehow, VRX assets are worth more than JNJ's?

 

EDIT: No need to make a new post. This is B&L (more or less) when VRX acquired.

 

http://www.sec.gov/Archives/edgar/data/1416436/000119312513122167/d502777ds1.htm

[Guest Schwab711]

How did you arrive at 80/20 split for durable v. non-durable?

 

How do you figure that VRX could distribute 100% of "Cash EPS"?

 

I really don't mind being wrong. I just don't think I am.

[cmlber]

What is the weighted-life expectancy of the product portfolio? This is why I have been showing the low durability of their portfolio. There is a revenue cliff in 10-12 years with very little means to replace it. It just so happens that VRX's debt/interest/D&A all align with this date (those bankers are smart). The fact that VRX is paying cash taxes shows that EM profits are likely negative or negligible. So you are paying 12.7x FCF for ~12 years of FCF and negligible terminal value (worth maybe one more year of proj 2016 FCF in aggregate).

 

I have said this over and over again… But evidently you have chosen not to answer… Anyway, the truth is it simply doesn’t matter how durable VRX’s products are or are not, as long as we see organic growth. Because, as long as we see organic growth, their existing businesses are worth more not less than what they were worth when purchased. And amortization of intangibles is not a true expense.

Now that there is no doubt VRX’s sales have not been artificially inflated, I believe reported organic growth is legitimate.

You might believe future organic growth will peter out and become nonexistent... That might be your business judgment, mine is simply different!

 

Cheers,

 

Gio

 

VRX paid for "organic growth". Next year they are going to show large "organic growth" because IBS-D had a slow introduction this year. One year from now, VRX will point to 30% growth from branded pharmaceuticals and say "See!". The thing is, it's not "organic" in a true sense (I think it's incredibly misleading that they call it SSS). VRX has to keep acquiring or it will end. They have very little gun powder (no big acquisitions) and a treasury schedule that will catch up to them. I'm saying that this is all planned and the BOD is very smart. VRX needs a high stock price and bond liquidity to continue. Folks overpaying are what keeps this system in motion. Just like GILD, someone will eventually realize that the gold at the end of the rainbow wasn't worth the journey and long-term shareholders will earn crappy returns.

 

Just look at the EV relative to acquisition prices (which included premiums). Would you really pay $15b for B&L ($8.8b * 70/40 = $15b) or $27b for SLXP? Is VRX really worth a 75% premium to acquisition price? JNJ has a more "durable" portfolio (and better "branded US Rx" portfolio) than VRX could ever dream of owning. Somehow, VRX assets are worth more than JNJ's?

 

Yes, I'd pay $15b for B&L.  Actually, I'd pay much more than that.

 

Yes, I'd pay $27b for SLXP.  Actually, I was one of the lucky shareholders that bought the stock after it sold of 50% on, funny enough, channel stuffing, and made a quick 75%.  I thought SLXP sold out too cheap.

[Phaceliacapital]

With their stock trading down it seems they didn't convince a lot of people ..

[Picasso]

How did you arrive at 80/20 split for durable v. non-durable?

 

How do you figure that VRX could distribute 100% of "Cash EPS"?

 

I really don't mind being wrong. I just don't think I am.

 

First, I don't cash EPS will ever equal FCF.  My FCF is at a 15-20% discount to cash EPS.  Start with the $7.5 billion of 2016 EBITA and add in taxes, interest expense and capex.  They need a certain amount of leverage to strip out earnings in the U.S. to pay lower taxes.  As long as they generate the cash flows they will have a relatively large 3-4x EBITDA debt burden.  But unlike other 3-4x levered stocks, VRX actually pays very little tax, very little depreciation, minimal expense from amortization (when you adjust for non-durable), and minimal capex.  In theory Valeant could probably lever up more because of their large and sustainable interest expense coverage.

 

I went through all the products to figure out what's durable and what isn't.  Neuro/other is not durable as well as some stuff going off patent.  Other than that, everything else is very durable including the Salix stuff you seem to think is not durable.

[giofranchi]

VRX paid for "organic growth". Next year they are going to show large "organic growth" because IBS-D had a slow introduction this year. One year from now, VRX will point to 30% growth from branded pharmaceuticals and say "See!". The thing is, it's not "organic" in a true sense (I think it's incredibly misleading that they call it SSS). VRX has to keep acquiring or it will end. They have very little gun powder (no big acquisitions) and a treasury schedule that will catch up to them. I'm saying that this is all planned and the BOD is very smart. VRX needs a high stock price and bond liquidity to continue. Folks overpaying are what keeps this system in motion. Just like GILD, someone will eventually realize that the gold at the end of the rainbow wasn't worth the journey and long-term shareholders will earn crappy returns.

 

I don’t understand: when they stopped buying other companies for some quarters, what we saw was: 1) good organic growth, 2) a debt level that went down quickly, 3) GAAP Earnings that started closing the gap with Cash EPS. This trend (1 + 2 + 3) makes me think the exact opposite of what you have said!

Basically, your whole thesis boils down to this simple fact: you still don’t believe their organic growth numbers. Period.

Who knows… You might be proven right!

 

Cheers,

 

Gio

 

[Picasso]

With their stock trading down it seems they didn't convince a lot of people ..

 

Well I've made it my largest position but I'm really hoping this gets sold down to $60-70.  To be honest, there wasn't a lot that needed convincing.  The shorts found a stock that could be easily manipulated and most of this stuff is noise.

[giofranchi]

My FCF is at a 15-20% discount to cash EPS.

 

At last! That’s exactly the way I have been saying VRX should be valued for a while! I am not specifically endorsing the 15-20% discount, but the methodology in general.

 

Cheers,

 

Gio

 

[Phaceliacapital]

I've scrolled through their presentation.

 

Slide 21: We do not own Philidor

 

Slide 22: We can buy Philidor for USD 0.

 

So you do not "own" the company and its completely independent but you did spent 100 mn (and another 33 mn milestones) on the company and are now able to buy the company at a price of 0.. ?

 

How is that not owning?? Who would ever believe this company will act independently?

[jay21]

I've scrolled through their presentation.

 

Slide 21: We do not own Philidor

 

Slide 22: We can buy Philidor for USD 0.

 

So you do not "own" the company and its completely independent but you did spent 100 mn (and another 33 mn milestones) on the company and are now able to buy the company at a price of 0.. ?

 

How is that not owning?? Who would ever believe this company will act independently?

 

Thats why they have to consolidate. Also, maybe they want to avoid legal liability so structured the deal that way? Whoops

[Guest roark33]

My understanding of the presentation was that VRX could buy Philidor for an additional 133m in hurdles, i.e. 233m total.  But I do think the control issue is relevant, considering the potential licensing liability. 

[KCLarkin]

I thought this was fun from WSJ live blog:

 

Mr. Ingram had come under fire last year when what was then Allergan Inc. blasted him in a lawsuit against Valeant and Pershing Square that alleged insider trading. Allergan said Mr. Ingram, who had been on both Allergan and Valeant’s boards, had told Allergan he would stay on that board and quit Valeant’s, only to switch. Valeant and Pershing Square denied all the charges, and Valeant rushed to defend Mr. Ingram. The suit was later dropped in a settlement between the sides.

 

So Ingram, an Allergan board member, and Ackman, Allergan's largest shareholder both knew Allergan intimitaley and put their money on Valeant.

 

Sorry if this old news, but I missed it the first time.

[jay21]

My understanding of the presentation was that VRX could buy Philidor for an additional 133m in hurdles, i.e. 233m total.  But I do think the control issue is relevant, considering the potential licensing liability.

 

Accounting control and legal liability are different.

[original mungerville]

There may be something funky about Valeant's option to buy Philidor, and Philidor's option to buy R&O and others. But at 7x (ie 110/$16 per share) multiple with strong organic growth and 1/3 capital to share buyback with 2/3 to debt repayment I can get to/close 20% growth or so per share.

 

So, while paying down debt, this thing trades at a yield of 14% growing at 20% per year. If I look out 3 years, its a 25% yield. OK, there maybe something funky with Philidor, but I think they will acquire them outright or cut ties based on not liking Philidor practices in certain areas and that decision won't take long.

 

CA may sue Philidor and/or Valeant here (in a worse case scenario). Valeant has an argument that they don't operate Philidor per say. Philidor is more exposed. My guess is they ultimately cut it loose.

 

 

[mcliu]

http://www.wsj.com/articles/valeants-ties-to-pharmacy-scrutinized-1445817449

Valeant and Pharmacy More Intertwined Than Thought

Relationship with Philidor draws scrutiny; workers used alternative names

 

???

[Guest Schwab711]

I've scrolled through their presentation.

 

Slide 21: We do not own Philidor

 

Slide 22: We can buy Philidor for USD 0.

 

So you do not "own" the company and its completely independent but you did spent 100 mn (and another 33 mn milestones) on the company and are now able to buy the company at a price of 0.. ?

 

How is that not owning?? Who would ever believe this company will act independently?

 

I saw that too. The issue of unlicensed access to patient records comes up if you are not a licensed pharma. I'm sure that's why they set this up like this. Prior cases tend to side with patient privacy (CA is extremely strict). There are huge penalties for unauthorized access to more than 150 patient records.

[Guest roark33]

If you think VRX may cut Philidor loose, you have to consider what impact using traditional pharmacies without "aggressive" call centers will have on VRX's growth.  That's the issue I have at this point.  The board's investigation would be easy if that option were a non-issue with regards to impact on revenue, but I have a strong feeling it isn't, hence the reason that VRX decided to use Philidor.