VRX - Valeant Pharmaceuticals International Inc.

[original mungerville]

Allergan Exploring Sale to Sanofi, J&J

 

"Allergan Inc. has contacted companies including Sanofi and Johnson & Johnson to see if either would be interested in acquiring the Botox maker, said people with knowledge of the matter, as it explores its options after receiving an unsolicited $45.7 billion bid from Valeant Pharmaceuticals Inc."

 

http://www.bloomberg.com/news/2014-04-29/allergan-said-to-explore-sale-to-sanofi-j-j-instead-of-valeant.html

 

Speculation obviously.

 

Its hard for someone else to overpay as much as Valeant and still make a good return - but then again, others are not as interested in great returns so who knows, and that's why Valeant is so potent in this industry. Whether or not Allergan is acquired by Valeant, my baseline model above holds which should lead to a higher stock price of about 15-20% compounded for the next several years.

 

Its just as good for Allergan not to go through, then maybe Valeant's stock plummets, and we get a better price on it.

[Liberty]

Whether or not Allergan is acquired by Altius, my baseline model above holds which should lead to a higher stock price of about 15-20% compounded for the next several years.

 

Brian Dalton is quite the multi-talented individual ;)

[original mungerville]

Whether or not Allergan is acquired by Altius, my baseline model above holds which should lead to a higher stock price of about 15-20% compounded for the next several years.

 

Brian Dalton is quite the multi-talented individual ;)

 

Right, exactly. Now we are on the same wavelength!

[original mungerville]

I did cut my stake by just over half this morning.

 

I think this company is still too misunderstood - and my bet is I can get a better price. (Of course my short-term bets are usually wrong, so you all may want to do the opposite.)

[Liberty]

ValueAct's Jeff Ubben talking about VRX (and MSFT):

 

http://www.reuters.com/video/2014/04/29/milken-tremendous-upside-in-microsoft-ub?&videoId=312773082

 

(gotta love their interview location, with random people walking like 6 inches from the interviewee)

[loganc]

ValueAct's Jeff Ubben talking about VRX (and MSFT):

 

http://www.reuters.com/video/2014/04/29/milken-tremendous-upside-in-microsoft-ub?&videoId=312773082

 

(gotta love their interview location, with random people walking like 6 inches from the interviewee)

 

Seems pretty clear to me that ValueAct is selling some (if not a significant part) of their VRX position based on these comments.  Anyone else read this differently? 

[indythinker85]

Great find thank you!! Also, REALLY enjoyed this video found it informative and funny, Ubben doesnt do many interviews so enjoy it!

Found via http://www.valuewalk.com/2014/04/jeff-ubben-cliff-robbins-barry-rosenstein-search-alpha/?utm_source=mailchimp&utm_medium=email&utm_campaign=EMAIL_DAILY&utm_content=quick_link

[loganc]

Great find thank you!! Also, REALLY enjoyed this video found it informative and funny, Ubben doesnt do many interviews so enjoy it!

Found via http://www.valuewalk.com/2014/04/jeff-ubben-cliff-robbins-barry-rosenstein-search-alpha/?utm_source=mailchimp&utm_medium=email&utm_campaign=EMAIL_DAILY&utm_content=quick_link

 

While this is not really relevant to the VRX thread, thanks for posting.  I haven't listened to all of this but it is hilarious that they rail on Icahn - look at the scoreboard; how many people have a better record than Icahn?

[PJM]

ValueAct's Jeff Ubben talking about VRX (and MSFT):

 

http://www.reuters.com/video/2014/04/29/milken-tremendous-upside-in-microsoft-ub?&videoId=312773082

 

(gotta love their interview location, with random people walking like 6 inches from the interviewee)

 

Seems pretty clear to me that ValueAct is selling some (if not a significant part) of their VRX position based on these comments.  Anyone else read this differently?

 

Why do you think ValueAct is selling some?

[loganc]

ValueAct's Jeff Ubben talking about VRX (and MSFT):

 

http://www.reuters.com/video/2014/04/29/milken-tremendous-upside-in-microsoft-ub?&videoId=312773082

 

(gotta love their interview location, with random people walking like 6 inches from the interviewee)

 

Seems pretty clear to me that ValueAct is selling some (if not a significant part) of their VRX position based on these comments.  Anyone else read this differently?

 

Why do you think ValueAct is selling some?

 

I obviously don't know and it is purely speculative on my part.  But, listen to what Ubben is saying - Mason leaving the board, we've been in this a long time, we've caught the sweet spot, etc. - does this not strike you as someone that is at least selling some of their position? 

[PJM]

ValueAct's Jeff Ubben talking about VRX (and MSFT):

 

http://www.reuters.com/video/2014/04/29/milken-tremendous-upside-in-microsoft-ub?&videoId=312773082

 

(gotta love their interview location, with random people walking like 6 inches from the interviewee)

 

Seems pretty clear to me that ValueAct is selling some (if not a significant part) of their VRX position based on these comments.  Anyone else read this differently?

 

Why do you think ValueAct is selling some?

 

I obviously don't know and it is purely speculative on my part.  But, listen to what Ubben is saying - Mason leaving the board, we've been in this a long time, we've caught the sweet spot, etc. - does this not strike you as someone that is at least selling some of their position?

 

I personally doubt that they would offload part of their holdings. They strongly feel about this business model and think that Valeant can become much bigger. Mason has left the board because he will probably spend more time with MSFT which is also one of their largest holding and has more things to fix.

[PJM]

@txlaw - Only thing I would add is that acquisitions are important to mid teens EPS growth. If they were to stop acquiring new companies then organic growth rate is in 6-8% range.

 

How does a business that barely spends anything on R&D get 6-8% organic growth? JNJ has a great portfolio of durable products, but they don't get 6-8%. Pharma peers that spend 3x on R&D don't get it either typically. How do you know what the "organic" growth rate is anyways with VRX?

 

Does anyone else find it strange that firms like Allergan (2013 target was about 16.9% of annual sales) are compensating management based on R&D reinvestment as a percentage of sales. Naturally it is in their interest to spend on R&D, despite been wasteful.

 

I agree that it will be very difficult to achieve 6-8% growth sans acquisition for Valeant, but I also dont think that R&D spend is a factor for organic growth at other firms. Firms should be able to achieve organic growth through lean operations, aggressive sales, geographical expansion and line extensions.

[Spekulatius]

How does a business that barely spends anything on R&D get 6-8% organic growth? JNJ has a great portfolio of durable products, but they don't get 6-8%. Pharma peers that spend 3x on R&D don't get it either typically. How do you know what the "organic" growth rate is anyways with VRX?

 

I guess simply by getting 4-7% in most of their products, and 11-12% in aesthetics, and 10-13% in emerging markets.

 

Listen, you and I simply don’t know the so called Val-gan business as well as Mr. Pearson… Would you argue with that? I hope not.

Therefore, is Mr. Pearson a reliable manager? I mean: does he usually under-promise and over-deliver? My answer is: Yes! Yours, instead, might be: No!

 

Any answer you give to that question, I would keep it as simple as that! ;)

 

Gio

 

I'd say trust but verify, especially when you deal with rollups. I don't think it's possible to verify the organic growth rates from VRX numbers. I did note in the 10K that they lost roughly 300M$ in revenue due to reduced Zovirax sales (I assume this is patent expiration related). I wonder if this kind of stuff is included in the 6-8% growth rate or not.

 

I can say for sure that a business that has 27B$ in assets and a 8B$ revenue run rate cannot make a 20% ROI. I would also argue against assuming the the rest of the industry is run by dummies. The LT track record of AGN is actually quite good, even prior to the takeover boost.

[loganc]

 

I obviously don't know and it is purely speculative on my part.  But, listen to what Ubben is saying - Mason leaving the board, we've been in this a long time, we've caught the sweet spot, etc. - does this not strike you as someone that is at least selling some of their position?

 

I personally doubt that they would offload part of their holdings. They strongly feel about this business model and think that Valeant can become much bigger. Mason has left the board because he will probably spend more time with MSFT which is also one of their largest holding and has more things to fix.

 

To invert, where is your data to support the fact that they wouldn't sell some shares?  For example, on February 24, 2011 VRX repurchased 7.4MM shares from ValueAct where the pricing was calculated "in a similar manner to Valeant's privately negotiated share repurchase from ValueAct completed in May 2010."  The previous statement is taken from the 2010 10-K.  Wouldn't they have felt pretty strong about the business model at that point? 

 

This is just a random example.  I am not sure that selling some of their shares would be inconsistent with their "strong feeling about this business model."  Maybe the position is too big for their liking or maybe their LPs want some money...who knows.  My point is that Ubben's comments seem more consistent with one that would be selling some shares.  That is all.  I could obviously be wrong, as I often am.  Further, if ValueAct is in fact selling some shares, it would seem to me to be a pretty foolish decision as I am quite enamored with the AGN deal and believe that it will create immense value for VRX and AGN shareholders.   

[loganc]

I'd say trust but verify, especially when you deal with rollups. I don't think it's possible to verify the organic growth rates from VRX numbers. I did note in the 10K that they lost roughly 300M$ in revenue due to reduced Zovirax sales (I assume this is patent expiration related). I wonder if this kind of stuff is included in the 6-8% growth rate or not.

 

I can say for sure that a business that has 27B$ in assets and a 8B$ revenue run rate cannot make a 20% ROI. I would also argue against assuming the the rest of the industry is run by dummies. The LT track record of AGN is actually quite good, even prior to the takeover boost.

 

If you have not, I think it would be worth checking the "same store sales" and "pro-forma" organic growth rates that are provided in the 8K filings for the earnings releases.  Further, you should review the earnings call slide decks where management reviews the earnings growth rates of previous acquisitions (e.g. 2Q13).

 

As I recall, when you put out your "ballpark numbers" you were assuming much lower EBIT margins than the VRX model.  You are obviously skeptical (as are many in the industry) that running a pharma business with 20% SG&A and 3-5% R&D is a sustainable business model.  I understand the skepticism and would encourage you to review the extensive disclosure that VRX management provides in the aforementioned 8K filings.   

[PJM]

 

I obviously don't know and it is purely speculative on my part.  But, listen to what Ubben is saying - Mason leaving the board, we've been in this a long time, we've caught the sweet spot, etc. - does this not strike you as someone that is at least selling some of their position?

 

I personally doubt that they would offload part of their holdings. They strongly feel about this business model and think that Valeant can become much bigger. Mason has left the board because he will probably spend more time with MSFT which is also one of their largest holding and has more things to fix.

 

To invert, where is your data to support the fact that they wouldn't sell some shares?  For example, on February 24, 2011 VRX repurchased 7.4MM shares from ValueAct where the pricing was calculated "in a similar manner to Valeant's privately negotiated share repurchase from ValueAct completed in May 2010."  The previous statement is taken from the 2010 10-K.  Wouldn't they have felt pretty strong about the business model at that point? 

 

This is just a random example.  I am not sure that selling some of their shares would be inconsistent with their "strong feeling about this business model."  Maybe the position is too big for their liking or maybe their LPs want some money...who knows.  My point is that Ubben's comments seem more consistent with one that would be selling some shares.  That is all.  I could obviously be wrong, as I often am.  Further, if ValueAct is in fact selling some shares, it would seem to me to be a pretty foolish decision as I am quite enamored with the AGN deal and believe that it will create immense value for VRX and AGN shareholders. 

 

I may very well be wrong. I do not have any data set and would like to focus my efforts in that direction. I'm not a holder of VRX because of ValueAct, so it should not influence my decisions. Obviously if they or any other large holder (especially value investors) do sell their holdings, then i would re-evaluate my investment just to make sure that the investment thesis is still intact.

[giofranchi]

I'd say trust but verify, especially when you deal with rollups. I don't think it's possible to verify the organic growth rates from VRX numbers. I did note in the 10K that they lost roughly 300M$ in revenue due to reduced Zovirax sales (I assume this is patent expiration related). I wonder if this kind of stuff is included in the 6-8% growth rate or not.

 

I can say for sure that a business that has 27B$ in assets and a 8B$ revenue run rate cannot make a 20% ROI. I would also argue against assuming the the rest of the industry is run by dummies. The LT track record of AGN is actually quite good, even prior to the takeover boost.

 

I agree. But, as you also say, it is very difficult to verify a business that is constantly evolving… From the bulls I get some numbers… From the bears, instead, I get completely different numbers… Which ones are right? Both and none… Simply because they are too rapidly changing!

 

Two basic things I do believe, though:

1) the pharma industry is still plagued by burdensome and unnecessary costs,

2) the returns on R&D investments have been very poor for more than a decade now.

 

Mr. Pearson (and others, he is not the only one!) is trying to address those two problems, and until now he has done so successfully. It is also true he has attracted many detractors, who are more than willing to attack him and VRX business model… but I guess success very rarely is treated differently, right?

 

Cash Earnings last year were $2 billion, which is a return on assets of 7.4%. With a leverage of 2.7x you get a ROI of 20%. A diversified portfolio of durable products, with characteristics very similar to consumer products, might justify such a leverage. Because it produces a large and safe stream of cash on a regular basis. At least until interest rates stay low, and VRX doesn’t have to pay too much for its debt.

 

Gio

 

[giofranchi]

http://seekingalpha.com/article/2175923-valeants-low-returns-on-capital-and-other-problems?isDirectRoadblock=false&uprof=25

 

 

The longer I read bear arguments on VRX, the more I find myself asking if those people are paid to write, or they truly don’t get it…

 

The author of the article above calculates a return on capital for VRX in 2013 of 12.8%. And complains it is not enough.

First:

I don’t think an operating return on capital of 12.8% is bad at all. BRK has an operating return on capital for many of its businesses far lower than 12.8%. If you add the increase in value of some well executed acquisitions to that 12.8%, you can easily get to around 20%.

Second:

VRX is a work in process. A huge business like Bausch and Lomb has been acquired only 8 months ago… How could anyone expect that 2013 cash earnings are what VRX could earn in a steady state scenario?

 

Then the author talks about organic growth, and says it was negative… in Q4 2013… Really??! A quarter??? Who cares!! Have you ever run a business?? … Anything can happen in 3 months!! Clearly, I hope this is not serious…

 

Then again the old refrain: short-term focus causes long-term harm…

Mr. Pearson is not against R&D: he is against unprofitable R&D!

The author says Mr. Pearson has never provided data to back-up the fact returns on R&D investments are too low: evidently, he missed page 33 of Mr. Ackman’s presentation (or page 45 of the VRX’s presentation)…

 

In a previous article of his the author had written VRX has no pipeline: evidently, he also missed page 30 and page 37 of Mr. Ackman’s presentation (or page 35 to 39 of the VRX's presentation)…

 

Finally, the author talks about “economic goodwill”…

My simple answer is a question: which organization do you think has a higher economic goodwill?

1) 80 scientists, with 50 of them who produce no tangible financial results for the company,+ 20 reps, who don’t have the time to follow their clients like they should;

2) 30 scientists, all of them producing tangible financial results for the company, + 60 reps, who have the time to follow their clients closely, + 10 shrewd capital and resources allocators, who decide how many scientists and how many reps are truly justified and necessary to maximize financial results for the long term.

 

Gio

 

[original mungerville]

I'd say trust but verify, especially when you deal with rollups. I don't think it's possible to verify the organic growth rates from VRX numbers. I did note in the 10K that they lost roughly 300M$ in revenue due to reduced Zovirax sales (I assume this is patent expiration related). I wonder if this kind of stuff is included in the 6-8% growth rate or not.

 

I can say for sure that a business that has 27B$ in assets and a 8B$ revenue run rate cannot make a 20% ROI. I would also argue against assuming the the rest of the industry is run by dummies. The LT track record of AGN is actually quite good, even prior to the takeover boost.

 

I agree. But, as you also say, it is very difficult to verify a business that is constantly evolving… From the bulls I get some numbers… From the bears, instead, I get completely different numbers… Which ones are right? Both and none… Simply because they are too rapidly changing!

 

Two basic things I do believe, though:

1) the pharma industry is still plagued by burdensome and unnecessary costs,

2) the returns on R&D investments have been very poor for more than a decade now.

 

Mr. Pearson (and others, he is not the only one!) is trying to address those two problems, and until now he has done so successfully. It is also true he has attracted many detractors, who are more than willing to attack him and VRX business model… but I guess success very rarely is treated differently, right?

 

Cash Earnings last year were $2 billion, which is a return on assets of 7.4%. With a leverage of 2.7x you get a ROI of 20%. A diversified portfolio of durable products, with characteristics very similar to consumer products, might justify such a leverage. Because it produces a large and safe stream of cash on a regular basis. At least until interest rates stay low, and VRX doesn’t have to pay too much for its debt.

 

Gio

 

Hi Gio,

 

Ackman's estimate of organic growth is lower than Valeant's - that's what he says in the presentation he made with Valeant. So maybe just go with Ackmans' - I think he is at 6% for the mix of products.

 

In any case, that is not the driver of near term growth (ie next 2-5 years). The driver of near term growth is either AGN closing or other acquisitions at an IRR of 20%. So as long as we feel there is some organic growth rather than shrinkage should Valeant halt all acquisitions, its all good. Therefore, I am not sure its worth debating whether its 10% or 5% organic growth - because acquisitions will lead to at least 15% inorganic growth - for a total of 20-25% growth. Do I really care if its 20 or 25% when I am paying a 15x multiple today? No. (I may care if I was paying a 20-25x multiple, but that is not where we are today)

[original mungerville]

http://seekingalpha.com/article/2175923-valeants-low-returns-on-capital-and-other-problems?isDirectRoadblock=false&uprof=25

 

 

The longer I read bear arguments on VRX, the more I find myself asking if those people are paid to write, or they truly don’t get it…

 

The author of the article above calculates a return on capital for VRX in 2013 of 12.8%. And complains it is not enough.

First:

I don’t think an operating return on capital of 12.8% is bad at all. BRK has an operating return on capital for many of its businesses far lower than 12.8%. If you add the increase in value of some well executed acquisitions to that 12.8%, you can easily get to around 20%.

Second:

VRX is a work in process. A huge business like Bausch and Lomb has been acquired only 8 months ago… How could anyone expect that 2013 cash earnings are what VRX could earn in a steady state scenario?

 

Then the author talks about organic growth, and says it was negative… in Q4 2013… Really??! A quarter??? Who cares!! Have you ever run a business?? … Anything can happen in 3 months!! Clearly, I hope this is not serious…

 

Then again the old refrain: short-term focus causes long-term harm…

Mr. Pearson is not against R&D: he is against unprofitable R&D!

The author says Mr. Pearson has never provided data to back-up the fact returns on R&D investments are too low: evidently, he missed page 33 of Mr. Ackman’s presentation (or page 45 of the VRX’s presentation)…

 

In a previous article of his the author had written VRX has no pipeline: evidently, he also missed page 30 and page 37 of Mr. Ackman’s presentation (or page 35 to 39 of the VRX's presentation)…

 

Finally, the author talks about “economic goodwill”…

My simple answer is a question: which organization do you think has a higher economic goodwill?

1) 80 scientists, with 50 of them who produce no tangible financial results for the company,+ 20 reps, who don’t have the time to follow their clients like they should;

2) 30 scientists, all of them producing tangible financial results for the company, + 60 reps, who have the time to follow their clients closely, + 10 shrewd capital and resources allocators, who decide how many scientists and how many reps are truly justified and necessary to maximize financial results for the long term.

 

Gio

 

Yes, some of these write-ups are a little nuts. The skepticism comes from roll-ups / serial acquirers not usually working out well, especially when using different non-GAAP accounting measures of value. But hey, that's not always the case, and Valeant looks to be an exception. If it weren't for the massive confusion around this business model, this thing would probably be trading much higher. So I guess we should thank these skeptics who can't see that Valeant is creating value.

[giofranchi]

Yes, some of these write-ups are a little nuts. The skepticism comes from roll-ups / serial acquirers not usually working out well, especially when using different non-GAAP accounting measures of value. But hey, that's not always the case, and Valeant looks to be an exception. If it weren't for the massive confusion around this business model, this thing would probably be trading much higher. So I guess we should thank these skeptics who can't see that Valeant is creating value.

 

;)

 

Gio

[original mungerville]

How does a business that barely spends anything on R&D get 6-8% organic growth? JNJ has a great portfolio of durable products, but they don't get 6-8%. Pharma peers that spend 3x on R&D don't get it either typically. How do you know what the "organic" growth rate is anyways with VRX?

 

I guess simply by getting 4-7% in most of their products, and 11-12% in aesthetics, and 10-13% in emerging markets.

 

Listen, you and I simply don’t know the so called Val-gan business as well as Mr. Pearson… Would you argue with that? I hope not.

Therefore, is Mr. Pearson a reliable manager? I mean: does he usually under-promise and over-deliver? My answer is: Yes! Yours, instead, might be: No!

 

Any answer you give to that question, I would keep it as simple as that! ;)

 

Gio

 

I'd say trust but verify, especially when you deal with rollups. I don't think it's possible to verify the organic growth rates from VRX numbers. I did note in the 10K that they lost roughly 300M$ in revenue due to reduced Zovirax sales (I assume this is patent expiration related). I wonder if this kind of stuff is included in the 6-8% growth rate or not.

 

I can say for sure that a business that has 27B$ in assets and a 8B$ revenue run rate cannot make a 20% ROI. I would also argue against assuming the the rest of the industry is run by dummies. The LT track record of AGN is actually quite good, even prior to the takeover boost.

 

The key is not whether the long-term track record of AGN is good, its whether Valeant can or can not make it better with the acquisition. The whole pharma industry's record for R&D output over the last decade or two has been horrible. AGN as part of that industry, may have incorporated some of these inefficiencies into its business. Despite this, I am sure what you say is correct, that AGN's LT record is quite good, but the question is, are they spending correctly or not on R&D (ie are they like the rest of the industry in this respect - certainly tying AGN mgmt's compensation to R&D spend is assinine to say the least, so my hunch is they are like the rest of the industry), do they have bloated overhead (like the rest of the industry - half my friends are in pharma and hearing what they do as middle managers makes me think middle management is bloated), and finally revenue synergies could be substantial. So Valeant wants to restructure the industry, including AGN. Is that business model more or less productive than AGN's, that's the only question.

[fareastwarriors]

Tax avoidance: The Irish inversion

 

US companies are shifting their headquarters abroad to protect growing overseas cash piles

 

 

http://www.ft.com/intl/cms/s/2/d9b4fd34-ca3f-11e3-8a31-00144feabdc0.html#axzz30PY6vYG3

Tax_avoidance_-_The_Irish_inversion.pdf

[Bagehot]

How does a business that barely spends anything on R&D get 6-8% organic growth? JNJ has a great portfolio of durable products, but they don't get 6-8%. Pharma peers that spend 3x on R&D don't get it either typically. How do you know what the "organic" growth rate is anyways with VRX?

 

I guess simply by getting 4-7% in most of their products, and 11-12% in aesthetics, and 10-13% in emerging markets.

 

Listen, you and I simply don’t know the so called Val-gan business as well as Mr. Pearson… Would you argue with that? I hope not.

Therefore, is Mr. Pearson a reliable manager? I mean: does he usually under-promise and over-deliver? My answer is: Yes! Yours, instead, might be: No!

 

Any answer you give to that question, I would keep it as simple as that! ;)

 

Gio

 

I'd say trust but verify, especially when you deal with rollups. I don't think it's possible to verify the organic growth rates from VRX numbers. I did note in the 10K that they lost roughly 300M$ in revenue due to reduced Zovirax sales (I assume this is patent expiration related). I wonder if this kind of stuff is included in the 6-8% growth rate or not.

 

I can say for sure that a business that has 27B$ in assets and a 8B$ revenue run rate cannot make a 20% ROI. I would also argue against assuming the the rest of the industry is run by dummies. The LT track record of AGN is actually quite good, even prior to the takeover boost.

 

The key is not whether the long-term track record of AGN is good, its whether Valeant can or can not make it better with the acquisition. The whole pharma industry's record for R&D output over the last decade or two has been horrible. AGN as part of that industry, may have incorporated some of these inefficiencies into its business. Despite this, I am sure what you say is correct, that AGN's LT record is quite good, but the question is, are they spending correctly or not on R&D (ie are they like the rest of the industry in this respect - certainly tying AGN mgmt's compensation to R&D spend is assinine to say the least, so my hunch is they are like the rest of the industry), do they have bloated overhead (like the rest of the industry - half my friends are in pharma and hearing what they do as middle managers makes me think middle management is bloated), and finally revenue synergies could be substantial. So Valeant wants to restructure the industry, including AGN. Is that business model more or less productive than AGN's, that's the only question.

 

AGN's long term R&D record is pretty poor. They've spent $9.5B over the last 15 years, yet 80% of their sales have been externally sourced. Nearly half of their sales were sourced over fifteen years ago before a dime of that $9.5B was spent. Strangely, management is partly compensated on gross R&D spend without regard for productivity, so I guess it's no surprise that so much has been spent for such little return.

[moody202]

 

 

The key is not whether the long-term track record of AGN is good, its whether Valeant can or can not make it better with the acquisition. The whole pharma industry's record for R&D output over the last decade or two has been horrible. AGN as part of that industry, may have incorporated some of these inefficiencies into its business. Despite this, I am sure what you say is correct, that AGN's LT record is quite good, but the question is, are they spending correctly or not on R&D (ie are they like the rest of the industry in this respect - certainly tying AGN mgmt's compensation to R&D spend is assinine to say the least, so my hunch is they are like the rest of the industry), do they have bloated overhead (like the rest of the industry - half my friends are in pharma and hearing what they do as middle managers makes me think middle management is bloated), and finally revenue synergies could be substantial. So Valeant wants to restructure the industry, including AGN. Is that business model more or less productive than AGN's, that's the only question.

 

If I recall correctly from the Ackman's presentation, he showed the combined pipeline for the two companies. AGN's pipeline was much smaller compared to Valeant's despite higher R&D cost!