VRX - Valeant Pharmaceuticals International Inc.

[Picasso]

In that situation we're looking at less than $5 billion of EBITDA.  That's a big difference from the $7.5 billion they still guide to.  Anyway we'll see how it plays out.  If the bulk of the cash flow is going to the debt then you have to wonder what cash is left for equity holders, match that up to any impairment from patent losses/dermatology issues/pricing problems, and how long it will take to see that cash.  This is going to be a long and drawn out battleground....

[Guest Schwab711]

In that situation we're looking at less than $5 billion of EBITDA.  That's a big difference from the $7.5 billion they still guide to.  Anyway we'll see how it plays out.  If the bulk of the cash flow is going to the debt then you have to wonder what cash is left for equity holders, match that up to any impairment from patent losses/dermatology issues/pricing problems, and how long it will take to see that cash.  This is going to be a long and drawn out battleground....

 

I think Nomura is already projecting $6.7b EBITDA for 2016. I haven't seen BMO's report but I'd imagine they are estimating between $6.5b-$7.0b. A 2016 fine of ~$2b appears as if it would cause VRX to trigger covenants. If organic growth comes in at -3% to 3% and actual non-US rev is <-15% again then VRX will likely trigger covenants. When I pointed out there's concerns ~3 months ago it was basically ignored. Now nearly everyone agrees with this concern but are ignoring the causes of such a crisis (poor non-US performance affecting the tax-rate and portfolio that is not as durable as claimed or assumed).

 

If all non-US rev is -15% in 2016 (likely if a rate-hike occurs) then how can VRX possibly have a low tax-rate in 2016? Their tax structure creates "tax leverage" by creating an abnormally low tax-rate in ideal conditions and abnormally high rates when they are unprofitable outside the US. Because of this, I think the next shoe to drop will be VRX's tax issues. They will definitely need to repay DTLs based on current results (which is not included in Nomura's estimates). Based on the magnitude of cash taxes at the moment, I really don't think VRX is all that profitable in the US either. Remember, it's something like 75%-90% of VRX's amortized intangibles are non-tax-deductible. The number just increased with $4.8b in IPR&D moving to intangibles with Xifaxan IBS-D approval.

 

I'd really like to hear thoughts on 2016 organic growth projections. I think actual and organic growth will be much lower than current guidance or estimates for the reasons I mentioned in my previous comments, but it would be great to see dissenting thoughts on the topic. 100 Shares made some excellent points but 2 of VRX's top-5 drugs now have cheap generic competition for the first time. This doesn't even address Isuprel and Nitropress (among the many other extreme price increases). We are probably going to see a few more of my past predictions realized in the coming months as well. There is an extremely high probability of a liquidity crisis. Whether credit is available or not to bail out VRX is debatable.

 

Just to rant quickly. I really don't understand why we are talking about the KO non-sense. It seems like Ackman is using this straw-man tactic to deflect attention away from the serious liquidity issue. I have a much lower opinion of Ackman, in general, due to his actions once VRX started to be scrutinized. His actions are no different than the SA authors that include the BRK ticker for no other reason then to gain undeserved clicks. If you consistently invest, think, or act like Buffett/Munger then people will notice. I think it's pretty immoral to unnecessarily drag Buffett or Munger (or KO) into this non-sense just to hopefully improve public opinion of yourself or VRX. Ackman's strategy has very little overlap with Buffett/Munger or Berkshire, so why is he so frequently comparing himself to them or their past investments?

[ccplz]

 

I said this like 40 pages ago.  Coca Cola provides absolutely no value to society and makes 2x as much money as Valeant.

 

How do they make money if the provide no value whatsoever to society?

 

How do tobacco companies make money if they provide no value whatsoever to society?

 

Tobacco companies create a lot of value for society.

 

You're delusional.

[100 Shares]

Schwann711 - you seem to understand this well. You said Solodyn will have a generic competition available starting this quarter. However in the 2015 guidance presentation on slide 10, it says Solodyn's patent risk isn't until 2018. Can you explain in layman's terms what's going on here?

[Alpaca]

VRX has so many problems it is unbelievable.  They are going to have to navigate a mine field just to survive.

 

How is it possible for VRX to have anything but negative growth?  Obviously the growth will be negative in the short term due to the Philidor shenanigans being put to a stop.  Long term things aren't looking any better as more drugs come off patent.

 

Their R&D budget is literally less than what generic drug makers invest in R&D.  Unless they are incredibly lucky, there is going to be nothing of significant value in the pipeline.  They probably can't afford to change course and increase R&D because of their crushing debt and the covenants tied to it.  They can literally only increase prices in my mind, perhaps they can grow smaller parts of the business organically such as Bausch & Lomb ... but that would be a pretty small chunk of their business.

 

This company isn't going to get back to $150 or $160 like someone mentioned recently in this thread.  It certainly isn't going to get anywhere near the $206 that sell side analyst RBC Capital Markets set as their price target today (what a joke).

 

This company is either going to die quickly or die slowly.  They die quickly if more cockroaches come out of the closet, especially if they are big ones ... or they die slowly over many years as they try to pay down debt with ever decreasing profits.

 

Valeant needs to actually do a call or release meaningful data, not the stupid fluff they have done.  Show how the businesses they own are performing, answer the questions brought up by AZ Value months ago on his blog at http://azvalue.blogspot.com/.

 

I'm tempted to short this sucker, even after the already massive drop.  Watch how low it goes once the hedge funds start running for the doors and unload their stock.

 

 

[ZenaidaMacroura]

Schwann711 - you seem to understand this well. You said Solodyn will have a generic competition available starting this quarter. However in the 2015 guidance presentation on slide 10, it says Solodyn's patent risk isn't until 2018. Can you explain in layman's terms what's going on here?

This is one of the reasons reading this thread (while helpful) is very very tiring.  You have a lot of people who loosely follow the story recall information that may no longer be relevant.  You'll have to look for it but in one of the presentations earlier this year Management mentioned that they got the patent extended (til or through , cant remember) 2017.  So perhaps what Schwann recalls is from an older deck? 

 

I imagine keeping it all straight is easier if you retain a dedicated VRX analyst (hello Pershing or Sequoia)

[sampr01]

Aswath's take on VRX vlaue: If anyone interested

 

http://aswathdamodaran.blogspot.com/2015/11/checkmate-or-stalemate-valeants-fall.html

 

 

[blainehodder]

Pretty lazy model there. He has no position, and isn't paid to cover it, but it screams sloppiness.

 

He uses TTM Salix nums (6 months).

Assumes a massive business model shift.

Assumes price hikes are core to business model.

Assumes no future M&A. Assumes 10% revenue hit for 2016, then growth is done forever.

Assumes higher taxes than likely.

 

 

[ZenaidaMacroura]

Pretty lazy model there. He has no position, and isn't paid to cover it, but it screams sloppiness.

 

He uses TTM Salix nums (6 months).

Assumes a massive business model shift.

Assumes price hikes are core to business model.

Assumes no future M&A. Assumes 10% revenue hit for 2016, then growth is done forever.

Assumes higher taxes than likely.

I think his style is to be ridiculously tight with all assumptions.  Interestingly enough this STILL doesn't always result in margin of safety (maybe the jury is still out here).  His Lukoil and Vale positions still resulted in the bottoms falling out for each due to underlying value continuing to deteriorate.  Commodities  ;)

 

I like reading his stuff tho.

[Guest roark33]

https://www.youtube.com/channel/UC8gjB1PSXv_oAUSAQ16S0fA/live

 

 

This guy is the butt of a lot of jokes, but he did a live stream tonight on valuation of VRX.  It was actually pretty interesting.  The biggest takeaway is how little shelf life VRX's drugs have.  Glumetza is their biggest seller by far and it goes generic 2/1/16.  There are a lot of other interesting tidbits. 

[blainehodder]

Glumetza is clearly not Valeants biggest seller it is 10th. Am I misunderstanding your post? Do you mean it is the biggest seller subject to a near term generic drop off?

[Max Alpha]

Pretty lazy model there. He has no position, and isn't paid to cover it, but it screams sloppiness.

 

He uses TTM Salix nums (6 months).

Assumes a massive business model shift.

Assumes price hikes are core to business model.

Assumes no future M&A. Assumes 10% revenue hit for 2016, then growth is done forever.

Assumes higher taxes than likely.

 

Anyone who thinks they have a valuation dialed in isn't being honest with themselves, be it bullish or bearish. I can understand him erring on the side of conservatism given the number of completely unknown variables.

 

Better to be approximately right than precisely wrong in this case.

 

We aren't talking about a stable mature business taking a blow to its recent steady-state earnings with a short term scandal. Its a highly leveraged roll-up that was arbitraging a low tax rate, high share price, low cost of capital, relying on acquisition synergies and operating the business on the ragged edge.

 

No one was too critical of the valuation models pre-crisis when people were forecasting a $70b+ market cap company to generate double digit FCF yields well into the future without any real moat.

 

The business model is clearly going to come under some degree of pressure in a number of areas, its anyone's guess just how significant the impact of that will be. They won't be returning to their previous glory anytime soon as their fall from grace has compromised their access to capital.

 

A SoTP valuation based on acquisition prices is probably the safest valuation bet. Add a small 'platform premium' if you believe their tax advantage, pricing power, and ability to generate synergies won't be completely eroded. Subtract a 'badwill premium' if you believe they are going to become a public whipping boy for regulators.

 

A breadth of historical evidence would support Damodoran's view that it isn't sustainable, sloppy modeling or not.

[blainehodder]

Pretty lazy model there. He has no position, and isn't paid to cover it, but it screams sloppiness.

 

He uses TTM Salix nums (6 months).

Assumes a massive business model shift.

Assumes price hikes are core to business model.

Assumes no future M&A. Assumes 10% revenue hit for 2016, then growth is done forever.

Assumes higher taxes than likely.

 

Anyone who thinks they have a valuation dialed in isn't being honest with themselves, be it bullish or bearish. I can understand him erring on the side of conservatism given the number of completely unknown variables.

 

Better to be approximately right than precisely wrong in this case.

 

We aren't talking about a stable mature business taking a blow to its recent steady-state earnings with a short term scandal. Its a highly leveraged roll-up that was arbitraging a low tax rate, high share price, low cost of capital, relying on acquisition synergies and operating the business on the ragged edge.

 

No one was too critical of the valuation models pre-crisis when people were forecasting a $70b+ market cap company to generate double digit FCF yields well into the future without any real moat.

 

The business model is clearly going to come under some degree of pressure in a number of areas, its anyone's guess just how significant the impact of that will be. They won't be returning to their previous glory anytime soon as their fall from grace has compromised their access to capital.

 

A SoTP valuation based on acquisition prices is probably the safest valuation bet. Add a small 'platform premium' if you believe their tax advantage, pricing power, and ability to generate synergies won't be completely eroded. Subtract a 'badwill premium' if you believe they are going to become a public whipping boy for regulators.

 

A breadth of historical evidence would support Damodoran's view that it isn't sustainable, sloppy modeling or not.

 

A) prices paid for assets in the past aren't always good indicators of future earnings power, as you have pointed out to longs who paid $200 for this. Not sure why you would revert then to prices paid for B&L etc.

B) There is no breadth of historical evidence on this. This isn't BP.

C) As a recent buyer ($81), I was certainly critical of extreme price predictions.

D) modelling is not exact, true. That isn't an excuse for completely sloppy inputs. Garbage in garbage out. Don't need to be exact, but should at least make an attempt at modelling reality. Even on a napkin model.

 

100% agree with this though:

 

We aren't talking about a stable mature business taking a blow to its recent steady-state earnings with a short term scandal. Its a highly leveraged roll-up that was arbitraging a low tax rate, high share price, low cost of capital, relying on acquisition synergies and operating the business on the ragged edge.

 

I just think the modelling was sloppy and the price today is a bargain.

 

 

 

[Guest Schwab711]

Schwann711 - you seem to understand this well. You said Solodyn will have a generic competition available starting this quarter. However in the 2015 guidance presentation on slide 10, it says Solodyn's patent risk isn't until 2018. Can you explain in layman's terms what's going on here?

This is one of the reasons reading this thread (while helpful) is very very tiring.  You have a lot of people who loosely follow the story recall information that may no longer be relevant.  You'll have to look for it but in one of the presentations earlier this year Management mentioned that they got the patent extended (til or through , cant remember) 2017.  So perhaps what Schwann recalls is from an older deck? 

 

I imagine keeping it all straight is easier if you retain a dedicated VRX analyst (hello Pershing or Sequoia)

 

Drugpatentwatch also shows Solodyn's patents lasting  through 2018. This link explains each of the 3 Solodyn patents and what they protect. From what I've gathered, the 2018 patent does not affect prescription rates. Either way, I know generics of Solodyn are currently available and my notes say that patent protection ended on 11/1/2011 (at which point they paid generic manufacturers to not supply generic versions). I know what slide you are referring to and in hindsight it's pretty misleading considering the lawsuit and generics available at the time.

 

The new generic I was referring to is from Sun Pharma. Sun (who just sold minocycline rights to Torrent Pharma in Apr-2015) just received approval for a new minocycline generic in Aug-2015. Sun was forced to sell their previous generic to Torrent as a condition of their Ranbaxy acquisition (here is why). Just 4 months after their acqusition they received approval for Ximino, which "will be commercially available starting in 4Q15" (not surprising that Sun received approval so quickly considering they have been manufacturing minocyclines for Medicis/Valeant this whole time - terms of divestment). Ximino is particularly interesting because they are approved to use the same dissolution rate as Solodyn's 2018 patent (#5,908,838).

 

Solodyn is interesting because Medicis/Valeant cornered the market on minocyclines and is currently being sued for paying generic manufacturers to delay their generic offerings (search all cases here).

 

Generic minocyclines available

 

Allergan's 2014 presentation seems more relevant now than ever

[Guest roark33]

Glumetza is clearly not Valeants biggest seller it is 10th. Am I misunderstanding your post? Do you mean it is the biggest seller subject to a near term generic drop off?

 

I should have been more clear.  He was using IMS data which reports WAC pricing, so the disparity between WAC and net revenue to VRX explains that difference.  Additionally, Glumetza is technically already in generic form, but Glutmetza is just the "slow" release version of metformin, and even that version is going generic in early 2016.

[zenith]

not sure if this was posted,

Valeant, Ackman Lose In California Court, Must Face Insider Trading Charges

 

http://www.valuewalk.com/2015/11/valeant-insider-trading/

 

U.S. District Judge David Carter in Santa Ana, California, ruled Monday that Valeant and Ackman must face a trial for insider trading in their unsuccessful 2014 acquisition plans to acquire Allergan Inc. The court rejected arguments by Valeant, Ackman and Ackman’s Pershing Square Capital Management to dismiss a civil lawsuit brought by shareholders who sold their Allergan stock before the takeover bid was announced. The insider trading issue was discussed in Congress and a an active debate was said to have taken place among regulators as to whether or not to bring regulatory action against Valeant, Ackman and Pershing Square. Ackman had previously said he welcomed an SEC probe as he had received legal advice from a former SEC enforcement director saying the practice was legal.

 

As reported in ValueWalk, the lawsuit was brought by investors who sold stock between February and April, a period when Ackman’s Pershing Square Capital Management had knowledge of a pending acquisition of Allergan Inc. and discreetly purchased nearly 10% of Allergan’s stock using derivatives contracts. The lawsuit had claimed Ackman had “material, non-public information” that those selling the stock before the acquisition. “The Pershing defendants profited handsomely – and illegally – from their massive purchases of Allergan stock,” the lawsuit charged.

[blainehodder]

Glumetza is clearly not Valeants biggest seller it is 10th. Am I misunderstanding your post? Do you mean it is the biggest seller subject to a near term generic drop off?

 

I should have been more clear.  He was using IMS data which reports WAC pricing, so the disparity between WAC and net revenue to VRX explains that difference.  Additionally, Glumetza is technically already in generic form, but Glutmetza is just the "slow" release version of metformin, and even that version is going generic in early 2016.

 

Ah, okay. So I'm curious...what did he think it is worth?

[Picasso]

Has anyone looked into a similar lawsuit against Valeant to clawback revenue from the sales of improperly handled rx's?  It seems like the PBM's are playing tough with Horizon.  Sequoia did some work into Philidor practices but I got the sense they stopped when their sources were also talking to the press. 

[Max Alpha]

 

A) prices paid for assets in the past aren't always good indicators of future earnings power, as you have pointed out to longs who paid $200 for this. Not sure why you would revert then to prices paid for B&L etc.

B) There is no breadth of historical evidence on this. This isn't BP.

C) As a recent buyer ($81), I was certainly critical of extreme price predictions.

D) modelling is not exact, true. That isn't an excuse for completely sloppy inputs. Garbage in garbage out. Don't need to be exact, but should at least make an attempt at modelling reality. Even on a napkin model.

 

100% agree with this though:

 

We aren't talking about a stable mature business taking a blow to its recent steady-state earnings with a short term scandal. Its a highly leveraged roll-up that was arbitraging a low tax rate, high share price, low cost of capital, relying on acquisition synergies and operating the business on the ragged edge.

 

I just think the modelling was sloppy and the price today is a bargain.

 

The acquisition prices are instructive because they give an indication of market value without the added benefit of unsustainable 'competitive advantages' for lack of a better term. The value of the VRX platform today is clearly significantly less than it was a few months ago as a consequence of reduced acquisition currency, increased cost of capital, and increased scrutiny from pretty much every stakeholder they deal with including regulators.

 

VRX isn't a BP type situation, that is the core of the issue, BP was a stable business with a sustainable proven long term track record and business model. We are debating the variability of future cash flows that VRX haven't even proven they can sustainably earn yet.

 

We will just have to wait and see over the next few years but I don't see a margin-of-safety here, just speculation.

 

 

 

 

 

 

[original mungerville]

Valeant risks violating its credit agreements and triggering a technical default on its senior debt next year if its Ebitda -- earnings before interest, taxes, depreciation and amortization -- over a 12-month period aren’t enough to cover its interest expense at least three times.

 

The company’s interest-coverage ratio was 3.6 times for the 12 months that ended Sept. 30, Valeant said on the call Tuesday. It posted Ebitda of $5.7 billion for that period, according to Michael Levesque, an analyst at Moody’s Investors Service.

 

“We were already seeing uncomfortable closeness to covenant limits before anything blew up,” Bryan said. “I have to assume that covenant pressure is only going to increase.”

 

http://www.bloomberg.com/news/articles/2015-11-11/valeant-creditors-spooked-by-possibility-of-revenue-squeeze

 

Jay21,

 

As you seem to have mentioned these a couple of times, H\have you done any detailed work on these covenants?

 

[100 Shares]

Schwann711 - you seem to understand this well. You said Solodyn will have a generic competition available starting this quarter. However in the 2015 guidance presentation on slide 10, it says Solodyn's patent risk isn't until 2018. Can you explain in layman's terms what's going on here?

This is one of the reasons reading this thread (while helpful) is very very tiring.  You have a lot of people who loosely follow the story recall information that may no longer be relevant.  You'll have to look for it but in one of the presentations earlier this year Management mentioned that they got the patent extended (til or through , cant remember) 2017.  So perhaps what Schwann recalls is from an older deck? 

 

I imagine keeping it all straight is easier if you retain a dedicated VRX analyst (hello Pershing or Sequoia)

 

Drugpatentwatch also shows Solodyn's patents lasting  through 2018. This link explains each of the 3 Solodyn patents and what they protect. From what I've gathered, the 2018 patent does not affect prescription rates. Either way, I know generics of Solodyn are currently available and my notes say that patent protection ended on 11/1/2011 (at which point they paid generic manufacturers to not supply generic versions). I know what slide you are referring to and in hindsight it's pretty misleading considering the lawsuit and generics available at the time.

 

The new generic I was referring to is from Sun Pharma. Sun (who just sold minocycline rights to Torrent Pharma in Apr-2015) just received approval for a new minocycline generic in Aug-2015. Sun was forced to sell their previous generic to Torrent as a condition of their Ranbaxy acquisition (here is why). Just 4 months after their acqusition they received approval for Ximino, which "will be commercially available starting in 4Q15" (not surprising that Sun received approval so quickly considering they have been manufacturing minocyclines for Medicis/Valeant this whole time - terms of divestment). Ximino is particularly interesting because they are approved to use the same dissolution rate as Solodyn's 2018 patent (#5,908,838).

 

Solodyn is interesting because Medicis/Valeant cornered the market on minocyclines and is currently being sued for paying generic manufacturers to delay their generic offerings (search all cases here).

 

Generic minocyclines available

 

Allergan's 2014 presentation seems more relevant now than ever

 

Thanks for the thorough response, you obviously did your research. Honestly that left me confused, I see what's happening but still not why. I guess the question that I need to get answered first, is just what does having a patent for a drug even mean? If anyone knows more, I am very interested in figuring out what is going on here?

 

On the Allergan presentation, it is riddled with errors and false accusations. Valeant issued a response, which has been taken down but is available archived here: http://web.archive.org/web/20140809230658/http://ir.valeant.com/files/doc_presentations/2014/VRX%20Rebuttal%20Deck%20Final2.pdf

 

Also the Allergan presentation can be disproved just with public SEC documents. For example, I haven't even looked at the Allergan side of slide 5, but the v a leant numbers are just blatantly inconsistent with public filings in which there is no need to interpret or do math, Valeant gives base business growth, FX, divestures, and acquired revenue.

[Mephistopheles]

Because nobody needs coke, or ketchup, or macaroni and cheese the same way they need a medication for their skin, or eyes, our brain.

 

Also, Goldman isn't entitled to a loan in the same way that someone may be entitled to affordable healthcare.

[ni-co]

The next cockroach: a free option for Mr. Pearson:

 

The Curious Case of Mr. Pearson’s 502,996 Shares

 

What we can say is that this is the kind of mistake that happens all too rarely in the professional lives of most people. On May 24, 2013, the date of the initial--and errant--restricted unit award Valeant's share price was $84.47; on March 11, 2014, the stock closed at $139.96, a difference of $55.49. According to the footnote, Pearson appears to have rectified the error by writing a check for the "value of such shares on the date of delivery."

 

http://sirf-online.org/2015/11/11/the-curious-case-of-mr-pearsons-502996-shares/

 

He essentially pocketed $28m – if that's true he will have to resign. There might even be criminal charges.

 

Since Pearson created this option in retrospect it doesn't even matter when he had realized this "error" (though it'd be even worse if he knew it all along or willfully forced it). In any case, the windfall profit from cancelling the shares belongs to the company and by buying it at the price from 24 May 2013 (in contrast to buying it at the price on 11 March 2014) he effectively stole this windfall.

[jay21]

Valeant risks violating its credit agreements and triggering a technical default on its senior debt next year if its Ebitda -- earnings before interest, taxes, depreciation and amortization -- over a 12-month period aren’t enough to cover its interest expense at least three times.

 

The company’s interest-coverage ratio was 3.6 times for the 12 months that ended Sept. 30, Valeant said on the call Tuesday. It posted Ebitda of $5.7 billion for that period, according to Michael Levesque, an analyst at Moody’s Investors Service.

 

“We were already seeing uncomfortable closeness to covenant limits before anything blew up,” Bryan said. “I have to assume that covenant pressure is only going to increase.”

 

http://www.bloomberg.com/news/articles/2015-11-11/valeant-creditors-spooked-by-possibility-of-revenue-squeeze

 

Jay21,

 

As you seem to have mentioned these a couple of times, H\have you done any detailed work on these covenants?

 

I have not - I don't really hold that big of a position to warrant a deep dive into them. As I continue to learn more about distressed investing, it seems that TL holders/banks can get very strict very quick when things are going south. They will scrutinize every buyback, acquisition, etc. until they are being priced at par.

 

I am very sure VRX has had lengthy discussions with creditors and rating agencies and they both have probably said that they need to bring the debt down. Therefore, they can't repurchase too many/any shares. Once the TL/revolver is gone, they should be a little less restricted.

 

I haven't checked the debt but I bet the bonds are at a lower price/higher yield than the TL but I bet they repay the TL first (unless there's any calls coming up on the bonds).

 

It's just a little ridiculous for people to say they should buy back equity instead of debt when they are not privy to creditor calls and discussions with the rating agencies. It may not be the company's choice.

[yzstevie]

One of the comments:

 

Your article fails to mention that the 502,996 shares in question are not actually issuable until the year 2019 pursuant to Pearson’s employment agreement. Or did you miss that? It’s right there at the top of page 52 of the 2014 proxy.

That means that he’s actually underwater on these shares given the check he had to write — not exactly the impression your article gives.

Setting all that aside, it’s pretty clear that these would have vested in 2014 anyway given the trajectory of the stock price, so the fact that they were erroneously credited to him a year early would have had no impact on his compensation, other than the interest that he apparently paid.