VRX - Valeant Pharmaceuticals International Inc.

[Rasputin]

As somebody who has a large portion of my portfolio in BAC in the past 4 years, current VRX problems are no where near what BAC had to go through.  I see similarities between BAC circa 2011 and VRX today:

 

1.  Both have good underlying businesses

Bausch+Lomb, dermatology franchise, Salix are good parts of VRX. 

 

2.  Investigations by state attorneys, doj, etc. 

In BAC (countrywide) case, the consumers were foreclosed, mbs investors lost their investments, fannie/freddie losses due to bad origination.  In VRX case, the consumers are happy, patients are happy, physicians are happy.  I would be thrilled to buy Atralin through Philidor for $125.  The unhappy parties are the PBMs, hospitals, and insurance companies. 

 

3.  Constant media vilification

I remember in 2011, everyday articles on how insolvent BAC was (bloomberg, reuters, wsj piled on even after Buffett's investments), collateral problems if BAC ratings were downgraded lol, senators telling ppl to close their bac accounts (remember when BAC tested $5 debit card fees? oh the furor lol), how bad management was (fed rejected their dividend increase in 2011, stress test issues, etc). 

 

Look at BAC now 4 years later, and it's still cheap.  I read their most recent Q few weeks ago and compared it to 3Q 2011, night and day. 

 

In countrywide case, even several years after BAC completed the acquisition, recently deceased Mariana Pfaelzer refused to pierce corporate veil.  I don't see how VRX can be liable for Philidor. 

 

Comparing VRX acquisition costs to current value in my view is wrong.  Buffett explained it in terms of economic goodwill vs book value goodwill.  Just look at what VRX management did with B+L, it's 3G amazing.  Add to that VRX low tax structure...

 

Damodaran's IV analysis - garbage in garbage out.  He would have given an F had his student did the same spreadsheet.  Blainehodder got it right. 

 

Every $ that VRX use to pay down debt increase equity value by the same $ with constant EV. 

 

I'm a buyer of VRX and I hope the price goes down lower...VRX to $10 :)  Let's revisit in 4 years. 

 

 

[ourkid8]

Rational thinking...  :)

 

As somebody who has a large portion of my portfolio in BAC in the past 4 years, current VRX problems are no where near what BAC had to go through.  I see similarities between BAC circa 2011 and VRX today:

 

1.  Both have good underlying businesses

Bausch+Lomb, dermatology franchise, Salix are good parts of VRX. 

 

2.  Investigations by state attorneys, doj, etc. 

In BAC (countrywide) case, the consumers were foreclosed, mbs investors lost their investments, fannie/freddie losses due to bad origination.  In VRX case, the consumers are happy, patients are happy, physicians are happy.  I would be thrilled to buy Atralin through Philidor for $125.  The unhappy parties are the PBMs, hospitals, and insurance companies. 

 

3.  Constant media vilification

I remember in 2011, everyday articles on how insolvent BAC was (bloomberg, reuters, wsj piled on even after Buffett's investments), collateral problems if BAC ratings were downgraded lol, senators telling ppl to close their bac accounts (remember when BAC tested $5 debit card fees? oh the furor lol), how bad management was (fed rejected their dividend increase in 2011, stress test issues, etc). 

 

Look at BAC now 4 years later, and it's still cheap.  I read their most recent Q few weeks ago and compared it to 3Q 2011, night and day. 

 

In countrywide case, even several years after BAC completed the acquisition, recently deceased Mariana Pfaelzer refused to pierce corporate veil.  I don't see how VRX can be liable for Philidor. 

 

Comparing VRX acquisition costs to current value in my view is wrong.  Buffett explained it in terms of economic goodwill vs book value goodwill.  Just look at what VRX management did with B+L, it's 3G amazing.  Add to that VRX low tax structure...

 

Damodaran's IV analysis - garbage in garbage out.  He would have given an F had his student did the same spreadsheet.  Blainehodder got it right. 

 

Every $ that VRX use to pay down debt increase equity value by the same $ with constant EV. 

 

I'm a buyer of VRX and I hope the price goes down lower...VRX to $10 :)  Let's revisit in 4 years.

[jay21]

What about price? Is BAC at $5 analogous to VRX at $80? Maybe. But I am not sure.

[Guest roark33]

I don't know what the value of VRX is, but I think one point about the derm business is misguided.  The sales increase in derm have been driven by alternative fulfillment channels and price increases.  Add in the mix that more and more of those drugs are generic than when VRX originally acquired them and the long-term value of that "franchise" is probably not worth VRX paid for it anymore.  Think about the neuro unit, they bought those two drugs from marathon and raised the prices.  Now, Pearson is saying that they are giving price cuts, around 20-25%.  Is that still as valuable now? 

 

Just my two cents.

[Vish_ram]

Forget BAC, this reminds me of EBIX. Some of the ethically challenged COBF posters & others continually spread rumors and lies about the company and CEO. It took a while for smoke to clear though.

 

VRX will take years to heal itself. The stock is still not very cheap given debt load.

 

Disclaimer: I have a 0.5% position through short puts and stock/cov calls.

[Rasputin]

What about price? Is BAC at $5 analogous to VRX at $80? Maybe. But I am not sure.

 

VRX $75 is more like BAC at $10 imo. 

[Rasputin]

I don't know what the value of VRX is, but I think one point about the derm business is misguided.  The sales increase in derm have been driven by alternative fulfillment channels and price increases.  Add in the mix that more and more of those drugs are generic than when VRX originally acquired them and the long-term value of that "franchise" is probably not worth VRX paid for it anymore.  Think about the neuro unit, they bought those two drugs from marathon and raised the prices.  Now, Pearson is saying that they are giving price cuts, around 20-25%.  Is that still as valuable now? 

 

Just my two cents.

 

What I mean by dermatology is their retin A franchise, fraxel, thermage, cerave.  Just use 2014 number, Philidor was negligible in 2014.  I think price cuts are temporary, let's revisit in 2019. 

[Rasputin]

Forget BAC, this reminds me of EBIX. Some of the ethically challenged COBF posters & others continually spread rumors and lies about the company and CEO. It took a while for smoke to clear though.

 

VRX will take years to heal itself. The stock is still not very cheap given debt load.

 

Disclaimer: I have a 0.5% position through short puts and stock/cov calls.

 

I'm not familiar with EBIX, but I am very familiar with BAC thus the comparison.  Debt/EBITDA is not as high if people take into account how much more of VRX EBITDA falls to bottom line.  I don't mind losing on paper for 4 years.  This situation fits my temperament. 

[ourkid8]

He said 20% price cut but remember that's after VRX raised the prices of Nitropress by 212% and Isuprel by 525% after the acquisition from Marathon Pharma.

 

I don't know what the value of VRX is, but I think one point about the derm business is misguided.  The sales increase in derm have been driven by alternative fulfillment channels and price increases.  Add in the mix that more and more of those drugs are generic than when VRX originally acquired them and the long-term value of that "franchise" is probably not worth VRX paid for it anymore.  Think about the neuro unit, they bought those two drugs from marathon and raised the prices.  Now, Pearson is saying that they are giving price cuts, around 20-25%.  Is that still as valuable now? 

 

Just my two cents.

[ni-co]

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.

 

Yeah, I've read that, too. But does this change anything? After all, they are not vested now because the initial grant got canceled. That he's under water now? Tough luck I would say. He could have sold his shares, couldn't he?

[Vish_ram]

Forget BAC, this reminds me of EBIX. Some of the ethically challenged COBF posters & others continually spread rumors and lies about the company and CEO. It took a while for smoke to clear though.

 

VRX will take years to heal itself. The stock is still not very cheap given debt load.

 

Disclaimer: I have a 0.5% position through short puts and stock/cov calls.

 

I'm not familiar with EBIX, but I am very familiar with BAC thus the comparison.  Debt/EBITDA is not as high if people take into account how much more of VRX EBITDA falls to bottom line.  I don't mind losing on paper for 4 years.  This situation fits my temperament.

 

feel free to read some posts in EBIX thread.

 

EBIX - VRX common stuff

- both are roll ups

- both stock went up phenomenally until shorts caught up with it

- both aggressive cost cutters, sport high margins, low organic growth

- both paid low taxes, ebix with india dev center that had tax advantages, singapore patents etc

- very ambitious CEO's

- both have big PR issues - Raina & Pearson perceived as not forthcoming;

- both were assumed as frauds ; Raina's indian orgin didn't help either. Any transgressions if found are so far very minor and doesn't threaten core biz.

 

This too shall pass.

 

BAC is a different story; Most of their problem stemmed from country wide acq, BAC wasn't a roll up.

[KCLarkin]

BAC is a different story; Most of their problem stemmed from country wide acq, BAC wasn't a roll up.

 

Fair points, but BAC was definitely a roll-up.

[fareastwarriors]

Valeant's Favorite Pharmacy Made Life Easy for Doctors, at a Price

 

http://www.bloomberg.com/news/articles/2015-11-12/pharmacies-like-philidor-make-life-easy-for-doctors-at-a-price

[ourkid8]

It's definitely a roll-up, please see their acquisition history since 1998:

 

1998 - Nations Bank acquired Bank of America and Nations Bank renamed itself to Bank of America

2004 - National Processing Company

2004 - FleetBoston Financial

2005 - MBNA

2006 - The United States Trust Company

2007 - LaSalle Bank Corporation, LaSalle Corporate Finance and ABN Amro North America

2008 - Countrywide Financial

 

BAC is a different story; Most of their problem stemmed from country wide acq, BAC wasn't a roll up.

 

Fair points, but BAC was definitely a roll-up.

[fareastwarriors]

It's definitely a roll-up, please see their acquisition history since 1998:

 

1998 - Nations Bank acquired Bank of America and Nations Bank renamed itself to Bank of America

2004 - National Processing Company

2004 - FleetBoston Financial

2005 - MBNA

2006 - The United States Trust Company

2007 - LaSalle Bank Corporation, LaSalle Corporate Finance and ABN Amro North America

2008 - Countrywide Financial

 

BAC is a different story; Most of their problem stemmed from country wide acq, BAC wasn't a roll up.Fair points, but BAC was definitely a roll-up.

 

 

 

And Merrill Lynch too.

[mertons_opus]

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.

 

That Southern Investigative Reporting Foundation is a great Thing. "Each of our stories is the result of thousands of dollars of expense: Salary, editing, legal vetting and, in the very near future (hopefully), graphic design and art. We think we are giving the individual investor a resource that only well-heeled investors like hedge funds traditionally have access to."

Well great, look at the numbers in 2013 and imagine how it Looks like today (after probably donations increased significantly):

 

Contributions: 163,628

Expenses: 162,428

Salary Roderick Boyd: 96'000

Health Benefit Roderick Boyd: 9,981

 

Average working hours per week:

Roderick Boyd: 40

Christopher Roush: 1

William Cohan: 2

Bethany McLean: 1

Christopher Byron: 2

 

Office Expense: 1,239

Travel Expense: 9,268

Total Expenses: 17,669

 

That sounds very valuable - for him. And that's just 2013...

http://pdfs.citizenaudit.org/2014_03_EO/45-5560402_990EZ_201312.pdf

 

 

 

[ourkid8]

ah, Yes; I forgot Merill. Vish_ram probably got my point though. 

 

It's definitely a roll-up, please see their acquisition history since 1998:

 

1998 - Nations Bank acquired Bank of America and Nations Bank renamed itself to Bank of America

2004 - National Processing Company

2004 - FleetBoston Financial

2005 - MBNA

2006 - The United States Trust Company

2007 - LaSalle Bank Corporation, LaSalle Corporate Finance and ABN Amro North America

2008 - Countrywide Financial

 

BAC is a different story; Most of their problem stemmed from country wide acq, BAC wasn't a roll up.Fair points, but BAC was definitely a roll-up.

 

 

 

And Merrill Lynch too.

[siddharth18]

No position in VRX but do remember a thing or two about EBIX. The biggest and most important thing that I remember is that EBIX's core clientele wasn't running away. Their existing revenue was never under pressure. This is what gave me immense confidence to buy EBIX. Also the fact that the entire saga was a concoction of the shorts which kept feeding upon itself. The trouble for EBIX never came from within, but that it was foisted upon - by the shorts.Here are some differences I can list from what little I know about VRX:

 

-EBIX was never overlevered. VRX is levered to the hilt.

 

-EBIX did most of its acquisitions with stock and cash.

 

-EBIX had a demonstrated ability to generate real cash. There's real argument to be had about what the what portion of VRX's future cash flow is potent and reproducible and what portion isn't. Is amortization a real cost? what is the real "cash eps"? Should restructuring charges be added in? Should AGN gain should be considered OCF?

 

-EBIX's products were a near utility with no alternatives (Moving off of EBIX exchange would be very time consuming and costly). Part of VRX's portfolio would be hard to replace but it won't matter if they lose their pricing power. Also someone mentioned that parts of VRX's current portfolio will face generic alternatives? The pricing power could be attacked from two sides - regulators and generic alternatives - correct?

 

-EBIX's core business model was never under attack. This IMO is the single most important factor. From my (very limited) understanding of VRX's business and the details that are emerging, it seems that parts of VRX's core seem to be threatened. Not not the B&L segment but the eye popping price gouging, the sour regulatory and public sentiment, increasing cost of capital...or the fact that it has to resort to companies like Philidor to show sales increases and rely on the mercy of the overloaded, scrutinized and reviled - US healthcare framework. Is it possible VRX will have to roll back some of it's price increases? Or even lower pricing on products that it never increased to begin with - simply to placate those in charge?

 

 

If you're buying an equity stub of a highly levered entity whose future income relies on its ability to sell 4ml Jublia bottles for ~$400 each then you better be sure that those bottles will be sold in the same quantity and at the same price or higher much, much longer into the future. And given the number of moving parts (regulators, generic alternatives, push back from the outrageous price) here that's a tough call to make.

 

I don't know...but I do know that I would be a lot more interested if there wasn't so much darn debt.

 

It's just so hysterical to see Ackman drag in Buffett, Munger, Coke, etc. Actually not surprising...people do remember he got teary-eyed during HLF presentation? I thought Investing 101 taught that one should never mix business with emotions? BTW how can anyone justify VRX with COKE?

 

For starters you don't need COKE to survive. No person died because he forwent a can of coke. It's a luxury.

 

VRX style drug price gouging would be akin to levering up to buy your state's utility company (you know - the one that gives you gas and electric) then jacking up the price of electricity by 300% overnight because you know that's what the "market will bear." I mean it's not like people will stop using the heat in winter because their electric bill just tripled, right? Yes I'm implying that a life-saving drug is a utility...more than utility...to a person whose life depended on it...

 

 

How is the pharma price gouging any different than the utility company jacking up the price of gas/electric 500% during winter knowing full well that the customers will pay it rather than risk freezing to death? And what does that have ANYTHING to do with COKE?

[oddballstocks]

 

VRX style drug price gouging would be akin to levering up to buy your state's utility company (you know - the one that gives you gas and electric) then jacking up the price of electricity by 300% overnight because you know that's what the "market will bear." I mean it's not like people will stop using the heat in winter because their electric bill just tripled, right? Yes I'm implying that a life-saving drug is a utility...more than utility...to a person whose life depended on it...

 

 

 

Hmmm....seem to remember a company a bit more than a decade ago that tried the exact same thing.  Lever up a utility then jack up prices artificially in California.  Wonder what happened to them....?  I believe they also had some wunderkids running the show there as well.

[ZenaidaMacroura]

http://mobile.nytimes.com/2015/11/13/business/huge-valeant-stake-exposes-rift-at-sequoia-fund.html?smid=tw-share&referer=

 

"Sequoia gave no reason for the departures, but they came just days after a contentious board meeting in which the fund’s managers revealed they had bought more shares in the embattled drug maker Valeant Pharmaceuticals International, despite objections by the independent directors. All the directors had repeatedly expressed concern over the size of an already large stake in Valeant. The managers disclosed the purchase of an additional 1.5 million shares, increasing Sequoia’s stake in Valeant to more than 10 percent, "

 

Am I reading this timeline correctly?  As everyone has been speculating whether they were trimming they instead added to their position another 1.5 million shares?!

[Picasso]

Good post siddharth.

 

If anything, Mr. Buffett takes an even dimmer view of Valeant, though he has not been as outspoken.

 

Hmm....

[Rasputin]

If you're buying an equity stub of a highly levered entity whose future income relies on its ability to sell 4ml Jublia bottles for ~$400 each then you better be sure that those bottles will be sold in the same quantity and at the same price or higher much, much longer into the future. And given the number of moving parts (regulators, generic alternatives, push back from the outrageous price) here that's a tough call to make.

 

 

2014 revenue $8.2 Billion

2014 jublia revenue $ 69 Million

2014 glumetza revenue $0

2014 isuprel revenue $0

2014 nitropress revenue $0

2014 cuprimine revenue $22 Million

 

9mo 2015 revenue $7.7 Billion

9mo 2015 jublia revenue $270 Million

9mo 2015 glumetza revenue $79 Million

9mo 2015 isuprel revenue $171 Million

9mo 2015 nitropress revenue $161 Million

9mo 2015 cuprimine revenue $43 Million

 

Revenue for Mephyton and Edecrin are not disclosed. 

 

Bausch + Lomb

 

2012 sales $3.04 Billion

2012 ebitda $643 million

 

2014 sales $3.44 Billion

2014 ebitda $1.6 billion

 

[Picasso]

Looks like they added before the Philidor debacle but after the price gouging hit. But they told the whole world they can't buy anymore shares so there is that too.

[NeverLoseMoney]

Why didn't she raise concerns with the huge position in Berkshire before it was reduced? Why didn't she have concerns over the summer on the size of the position?

 

Next, asking Buffett? Buffett has always taken concentrated bets, Amex/Geico and you can name many others. Come on guys, let's stop speculating on things that don't make much sense. 

 

About Sequoia Fund and possible redemptions: one of the two directors who resigned was Sharon Osberg. She's a bridge partner and close friend of Warren Buffett. According to the WSJ article she had expressed concerns about the size of Sequoia's VRX position in recent months.

My post doesn't sound so silly now, does it?

 

Ms. Osberg had been expressing her worries about Valeant at board meetings for over a year, and she grew so concerned that she insisted the discussions be reflected in the minutes. In recent weeks, Mr. Buffett advised Ms. Osberg on her predicament and agreed with her decision to resign after concluding she had done all she could as a board member. Ms. Osberg sold her stake in Sequoia shortly after resigning.

 

If anything, Mr. Buffett takes an even dimmer view of Valeant, though he has not been as outspoken.

Source: http://mobile.nytimes.com/2015/11/13/business/huge-valeant-stake-exposes-rift-at-sequoia-fund.html?_r=0

[oddballstocks]

Why didn't she raise concerns with the huge position in Berkshire before it was reduced? Why didn't she have concerns over the summer on the size of the position?

 

Next, asking Buffett? Buffett has always taken concentrated bets, Amex/Geico and you can name many others. Come on guys, let's stop speculating on things that don't make much sense. 

 

About Sequoia Fund and possible redemptions: one of the two directors who resigned was Sharon Osberg. She's a bridge partner and close friend of Warren Buffett. According to the WSJ article she had expressed concerns about the size of Sequoia's VRX position in recent months.

My post doesn't sound so silly now, does it?

 

Ms. Osberg had been expressing her worries about Valeant at board meetings for over a year, and she grew so concerned that she insisted the discussions be reflected in the minutes. In recent weeks, Mr. Buffett advised Ms. Osberg on her predicament and agreed with her decision to resign after concluding she had done all she could as a board member. Ms. Osberg sold her stake in Sequoia shortly after resigning.

 

If anything, Mr. Buffett takes an even dimmer view of Valeant, though he has not been as outspoken.

Source: http://mobile.nytimes.com/2015/11/13/business/huge-valeant-stake-exposes-rift-at-sequoia-fund.html?_r=0

 

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