VRX - Valeant Pharmaceuticals International Inc.

[ourkid8]

Touche!

 

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

[AzCactus]

I am so interested in Valeant.  However, this one is in the way too hard pile.  It's kinda like you have some top notch value managers pitted against Buffett and Munger.  It's like a soap opera almost.  Does anyone else feel that within a year or two we will have learned some valuable lessons here one way or the other?

[intothebreach]

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

 

Allow me a comment on the lighter side here: I like the url reference for that article...  it makes it seem as if someone is getting tomorrow's news today (the article itself is dated 11/12...  just too bad I guess  : )

[LongHaul]

Unless the Sequoia fund managers/analysts had their ears closed, I believe they knew Philidor was engaged in extremely unethical

practices and probably illegal ones too.  Sequoia apparently talked to some ex/Philidor employees so that had to of come out.  Weird.

 

Other stuff:

 

I think VRX products are under close scrutiny by PBM's and insurance payors who are weary of the company.

I also think doctors may not be writing as many scrips because of all the negative press and practices at Philidor, investigations, etc.  Very hard to quantify though.

[Jurgis]

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

 

Allow me a comment on the lighter side here: I like the url reference for that article...  it makes it seem as if someone is getting tomorrow's news today (the article itself is dated 11/12...  just too bad I guess  : )

 

There's a Freudian innuendo in the title too.  ::)

[original mungerville]

Lou Simpson, a long-time Berkshire portfolio manager who Buffett has praised multiple years over the course of several decades, also had a large Valeant position in his current portfolio.

 

 

 

[AzCactus]

Lou Simpson, a long-time Berkshire portfolio manager who Buffett has praised multiple years over the course of several decades, also had a large Valeant position in his current portfolio.

 

I wonder if or how he's adjusted his position as of 9/30. 

[Guest roark33]

One thing I thought I might throw out there just for balance sake is the idea that Munger was down 30%+ two years in a row.  Total, that's about 48% down over that period.  Ackman and Sequx are down about 20% this year.  Just a little perspective.....

[Picasso]

If Ackman is down 50%, Pershing Square closes up and reopens as Pershing Triangle. 

 

Honestly, I think the SEQUX losses are probably overblown.  How much total capital have they deployed in VRX and what is it worth today?  They're probably still long around $50 even with their recent buy.

 

The problem is, investors thought that big spike in the fund value was real money.  Unless Sequoia dumped their shares it was just a paper gain that was destined to disappear.  The fund is back to where it was in August of 2013.  Not exactly the end of the world.  Sequoia might not have handled the massive gain very well, like say ValueAct did, but that's just how investing goes.  It's not like they pulled a Bill Ackman and put 30% of their capital in it at the tippy top. 

 

Going from the 1st to the 100th floor and back to the 80th floor never feels good, but it's a lot better than going from the 1st to the 10th.  Investors just have a bad time handling those emotions.  Sequoia could dump all their shares at a discount and still do just fine over time.  Same goes for Ackman.    If it was a mistake or the risk is too great, learn from it and move on. 

 

Btw jay, you're right in that I was probably oversimplifying the buybacks/debt repayment thing given how much pressure Pearson may be facing from bondholders/rating agencies.  The logic just seemed weird as to why he mentioned a stock buyback at $160 and then said let's pay back our debt at $80. 

[merkhet]

Btw jay, you're right in that I was probably oversimplifying the buybacks/debt repayment thing given how much pressure Pearson may be facing from bondholders/rating agencies.  The logic just seemed weird as to why he mentioned a stock buyback at $160 and then said let's pay back our debt at $80.

 

The reality is probably somewhere in the middle, right? I mean, bumping up against possible covenants and having to pay back down your debt isn't exactly a good place to be.

[Picasso]

Reality is usually somewhere in the middle.... Maybe it's just another of those VRX things where it only looks bad but it isn't really bad.  Like Pearson says "the stock at $160 looks like the best investment we could possibly make" and then the stock is at $80 and he gets margin called. 

 

It reminds me of the Louie CK skit "Of course!..... but maybe...." Of course everything VRX says or does just looks terrible, but maybe they're just not that great at communicating.  You keep having that trend and eventually you gotta be like "okay, something else is going on here..." 

 

Edit: And it's not just the weird stock buyback comment at $160 and then debt buyback plan at $80, it's that he still says the business is doing just fine and doctors still love Valeant.  It'd be another thing if he said "yeah, the business is showing some deterioration as a result of this god awful PR and we need to paydown debt until we see the full impact in 2016/2017." Just like at least knowledge the business isn't doing that well anymore.  Or maybe the business is still doing really well, I dunno.  Less than half the revenue comes from the "good stuff," it's the other 50% that's in a terrible position right now. 

[Rasputin]

Reality is usually somewhere in the middle.... Maybe it's just another of those VRX things where it only looks bad but it isn't really bad.  Like Pearson says "the stock at $160 looks like the best investment we could possibly make" and then the stock is at $80 and he gets margin called. 

 

It reminds me of the Louie CK skit "Of course!..... but maybe...." Of course everything VRX says or does just looks terrible, but maybe they're just not that great at communicating.  You keep having that trend and eventually you gotta be like "okay, something else is going on here..." 

 

Edit: And it's not just the weird stock buyback comment at $160 and then debt buyback plan at $80, it's that he still says the business is doing just fine and doctors still love Valeant.  It'd be another thing if he said "yeah, the business is showing some deterioration as a result of this god awful PR and we need to paydown debt until we see the full impact in 2016/2017." Just like at least knowledge the business isn't doing that well anymore.  Or maybe the business is still doing really well, I dunno.  Less than half the revenue comes from the "good stuff," it's the other 50% that's in a terrible position right now.

 

Can you detail which 50% of the business in a terrible position?  I can't find anything near that 50%. 

[Picasso]

This is from his e-mail to employee's:

 

• In 2016, we expect to generate approximately 30% of our revenue outside the U.S., where we have historically realized little to no net price increases

and in fact, during some quarters, our net price has actually decreased. We expect continued high single-digit/low double-digit growth in our emerging

markets and 3-5% growth in ex-U.S. developed markets going forward.

• We expect approximately 20% of our 2016 revenue to come from U.S. businesses including Contact Lenses, Consumer, Surgical Devices and

Generics. These businesses realize, on average, small price increases in line with the Consumer Price Index, or no price increases at all. We expect

continued double-digit growth overall for these businesses.

• Dermatology, Ophthalmology RX and Dentistry Rx 2016 revenue is expected to represent approximately 20% of revenue and, across these businesses,

our teams have delivered over 30% script growth year to date. We expect continued double-digit growth for the foreseeable future given the strength

of our brands (e.g., Jublia, Prolensa, Retin-A Micro franchise, Solodyn) and a strong, late stage pipeline (Addyi, brodalumab, IDP-118 and Vesneo).

• We expect the Salix business to represent approximately 20% of our 2016 revenue and expect double-digit script growth and corresponding revenue

growth trends to continue.

• Finally, we expect the remaining approximately 10% of our business in 2016 to come from our Neuro and Other portfolio, where we have historically

taken price increases. This business is becoming a smaller part of our portfolio over time, and is one area whose growth is not driven by volume. With

the recent genericization of Xenazine, this portfolio is composed primarily of off-patent, legacy products that are competing against low-priced

generics. This segment also includes Isuprel and Nitropress, which have been the focus of much of the U.S. press. We purchased these two assets

earlier this year and we thought the best long-term commercial strategy was to reprice these brands. However, it is worth mentioning that neither

product’s revenue is part of our organic same-store sales growth calculation since we have owned them for less than a year. On average, we have

budgeted a mid-single digit revenue growth rate for this segment in 2016.

 

That's probably the best breakdown I've seen especially since they throw all kinds of stuff into non-U.S. and it can be hard to track exactly everything.

 

The 30% of revenue outside the U.S. has to be under a ton of pressure from currency issues.  There's some cafe pharma posts about channel stuffing overseas but I'll just ignore those allegations for now.  Maybe the currency stuff will subside but that has to be a serious headwind right now.

 

It's the 20% of revenue coming from derma, etc. that is going under negative pricing pressures right now.  There was also a big increase in discounting over the past few quarters (and that's the division showing a ton of growth, mostly from Philidor) so I have to assume you're seeing some big problems in those channels.

 

Then you have neuro/other dying off.  That's around 10% for 2016 but 16% of 2015. 

 

I think those three will round out to around 50% of the business under crappy conditions.  The first two might be temporary depending on your views, the last one is definitely going to zero over time.

 

I also can't imagine what "specialty" pharmacy wants to take the risk of helping distribute those Valeant products that went through Philidor.  They'll get audited from the PBM's up the wazoo, why even take the risk?  They don't want to end up as the next Linden.  Unless someone knows otherwise I don't see how they're having any success finding someone else to push hard on the sales of those tier 3/4 products.

[Rasputin]

Damodaran updated his spreadsheet to account for Salix

 

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

 

He still misses big lol. 

 

Damodaran on bloomberg

 

http://www.bloomberg.com/news/videos/2015-11-11/is-valeant-s-business-model-broken-

 

 

[Rasputin]

This is from his e-mail to employee's:

 

• In 2016, we expect to generate approximately 30% of our revenue outside the U.S., where we have historically realized little to no net price increases

and in fact, during some quarters, our net price has actually decreased. We expect continued high single-digit/low double-digit growth in our emerging

markets and 3-5% growth in ex-U.S. developed markets going forward.

• We expect approximately 20% of our 2016 revenue to come from U.S. businesses including Contact Lenses, Consumer, Surgical Devices and

Generics. These businesses realize, on average, small price increases in line with the Consumer Price Index, or no price increases at all. We expect

continued double-digit growth overall for these businesses.

• Dermatology, Ophthalmology RX and Dentistry Rx 2016 revenue is expected to represent approximately 20% of revenue and, across these businesses,

our teams have delivered over 30% script growth year to date. We expect continued double-digit growth for the foreseeable future given the strength

of our brands (e.g., Jublia, Prolensa, Retin-A Micro franchise, Solodyn) and a strong, late stage pipeline (Addyi, brodalumab, IDP-118 and Vesneo).

• We expect the Salix business to represent approximately 20% of our 2016 revenue and expect double-digit script growth and corresponding revenue

growth trends to continue.

• Finally, we expect the remaining approximately 10% of our business in 2016 to come from our Neuro and Other portfolio, where we have historically

taken price increases. This business is becoming a smaller part of our portfolio over time, and is one area whose growth is not driven by volume. With

the recent genericization of Xenazine, this portfolio is composed primarily of off-patent, legacy products that are competing against low-priced

generics. This segment also includes Isuprel and Nitropress, which have been the focus of much of the U.S. press. We purchased these two assets

earlier this year and we thought the best long-term commercial strategy was to reprice these brands. However, it is worth mentioning that neither

product’s revenue is part of our organic same-store sales growth calculation since we have owned them for less than a year. On average, we have

budgeted a mid-single digit revenue growth rate for this segment in 2016.

 

That's probably the best breakdown I've seen especially since they throw all kinds of stuff into non-U.S. and it can be hard to track exactly everything.

 

The 30% of revenue outside the U.S. has to be under a ton of pressure from currency issues.  There's some cafe pharma posts about channel stuffing overseas but I'll just ignore those allegations for now.  Maybe the currency stuff will subside but that has to be a serious headwind right now.

 

It's the 20% of revenue coming from derma, etc. that is going under negative pricing pressures right now.  There was also a big increase in discounting over the past few quarters (and that's the division showing a ton of growth, mostly from Philidor) so I have to assume you're seeing some big problems in those channels.

 

Then you have neuro/other dying off.  That's around 10% for 2016 but 16% of 2015. 

 

I think those three will round out to around 50% of the business under crappy conditions.  The first two might be temporary depending on your views, the last one is definitely going to zero over time.

 

I also can't imagine what "specialty" pharmacy wants to take the risk of helping distribute those Valeant products that went through Philidor.  They'll get audited from the PBM's up the wazoo, why even take the risk?  They don't want to end up as the next Linden.  Unless someone knows otherwise I don't see how they're having any success finding someone else to push hard on the sales of those tier 3/4 products.

 

Thank you, I read that too.

 

 

1.  30% non US sales is already taking the FX hit.  It's not going to zero.  It may have 0 growth due to FX.  I view non US as a great part of Valeant.  In Asia, its all cash pay.  China growing like crazy, and they're starting to sell their derm products in China.  I think they have great position there.  Asians love US brands.  Cerave will do very well there.  B+L is doing well in China and taking shares.  I just love B+L under Valeant.

 

2.  20% is derma rx PLUS ophthalmology rx PLUS dental rx

 

I estimate derma rx is around $1 billion for first 9mo of 2015 vs $7.7 B total revenue.  This includes jublia, solodyn, elidel, ziana, acanya, onexton, zyclara, retin a, atralin, targetrin plus $200 million others.  Derma rx is about 13% of 2015 (even after philidor boost). 

Let's write it down to zero.  Opthalmology rx and Dental rx are doing fine. 

 

3.  10% is neurology and others, write it down to zero.

 

So at most 25% of the business is zero.  Even after writing down derm rx and neurology to zero, they will still do almost $10 billion 2016 revenue, $5 billion 2016 ebitda.  Subtract $1.6 billion interest expense, $400 million capex, $200 million working capital, $350 million taxes (10% tax rate).  I still get $2.5 billion in fcf vs $26 billion of market cap.  This is assuming instant death of derm rx, neurology and others.

 

 

[Picasso]

Thanks Rasputin.  Let's just take your $5 billion of EBITDA as a worst case scenario.  That's basically where the covenant issues start becoming problematic, but that aside....

 

If Valeant shows YoY declines in operating results, then how much of that free cash flow is durable?  Meaning is there some amount of maintenance capex/R&D that is required to maintain those cash flows?  Will part of that $2.5 billion of FCF disappear over time?  It is my belief that declining operating results will mean some of that free cash flow isn't real and the market will realize that and penalize the business.  Whether they want 10x or 7x or 5x FCF is debatable, we won't really know.  Do you think that FCF is either very durable or Valeant will just start making smaller, maybe "smarter" deals to offset these potential costs?  (I say smarter as in things less dependent on price increases/special channels).

 

If I get your argument correctly, you are saying in a worst case scenario they won't trip covenants, you'll still accrue 10% returns in a few years, they'll get through this storm and you'll start to see them get back to what they do best?  And if that happens you'll probably start compounding whatever their cash flows compound per share.... But first you need to have some clarity on how much of those free cash flows are supported without additional spend, no?

[ourkid8]

This is exactly what major shareholders (Sequoia, Pershing, Valueact etc) and I expect them to go back to - "smarter" M&A growth strategy and in the process they will delever their balance sheet via acquisitions or paying down debt. (They will obviously avoid companies in which they need to significantly raise the price)  The majority of their acquisitions in the past have been private companies and there are still many of them around. 

 

Do you think that FCF is either very durable or Valeant will just start making smaller, maybe "smarter" deals to offset these potential costs?  (I say smarter as in things less dependent on price increases/special channels).

[jay21]

Picasso, can you provide the link to the source for that excerpt detailing the revenue growth of the segments?

 

Thanks

[Picasso]

http://d1lge852tjjqow.cloudfront.net/CIK-0000885590/de4052c7-c9b1-4f7b-a189-7abe36d652d2.pdf?noexit=true

[Rasputin]

Thanks Rasputin.  Let's just take your $5 billion of EBITDA as a worst case scenario.  That's basically where the covenant issues start becoming problematic, but that aside....

 

If Valeant shows YoY declines in operating results, then how much of that free cash flow is durable?  Meaning is there some amount of maintenance capex/R&D that is required to maintain those cash flows?  Will part of that $2.5 billion of FCF disappear over time?  It is my belief that declining operating results will mean some of that free cash flow isn't real and the market will realize that and penalize the business.  Whether they want 10x or 7x or 5x FCF is debatable, we won't really know.  Do you think that FCF is either very durable or Valeant will just start making smaller, maybe "smarter" deals to offset these potential costs?  (I say smarter as in things less dependent on price increases/special channels).

 

If I get your argument correctly, you are saying in a worst case scenario they won't trip covenants, you'll still accrue 10% returns in a few years, they'll get through this storm and you'll start to see them get back to what they do best?  And if that happens you'll probably start compounding whatever their cash flows compound per share.... But first you need to have some clarity on how much of those free cash flows are supported without additional spend, no?

 

That $5 billion ebitda took care of "bad Valeant" (non durable, non ethical, immoral, questionable) by eliminating it.  Derm rx (I think retin a franchise is durable, also onexton is awesome, but assume zero)  includes jublia, solodyn, others that are much discussed.  Neurology and others included wellbutrin, the crazily priced drugs, drugs mentioned in NYT article.  They are out of the $5 billion ebitda. 

 

Since the bad part is eliminated, the "good Valeant" can show growth.  That $5 billion ebitda doesn't take into account Addyi (with 150 sales people per recent article), the expansion of B+L manufacturing line, intro of derm products in China, growth of B+L in China, Amoun, etc. 

 

However, the $5 billion ebitda included Salix (roughly $1.5 billion ebitda, $1 billion 2016 merger doc forecast + $500 million cost save).  Per merger document stand-alone Salix's revenue and ebitda won't peak until 2025.  Not forever durable but it seems like it's going to grow over the next 10 years.  I can't predict any better than the merger document. 

 

So combined, very likely "good Valeant" will show growth. 

 

The $2.5 billion fcf already took into account $400 million of capex and $200 million of working capital investment, and R&D is expensed. 

 

Yes, that's my argument.  Taking into account only "good Valeant", I'm getting almost 10% yield that's very likely to grow over the next 10 years. 

 

On top of operational growth, by just buying $2.5 billion of their debt yielding 9%, 2017 fcf will grow by $200 million. 

 

If I'm right with that $5 billion "good valeant" ebitda, covenant can be modified if tripped, assuming temporary "bad valeant" negative ebitda (giving the drugs for free). 

 

 

[Picasso]

Are you taking the figures out of 2016 estimates?  Meaning, starting with the $7.5 billion guidance and then subtracting things out to zero?  This is where I struggle with the math because we're kind of taking management on their word for what 2016 was supposed to look like.  I also thought it was reasonable to expect around $2.5 billion+ of free cash flow but it required usage of numbers given from management.  I would much rather be able to just pull everything out of the Q's and K's to get a more straightforward answer.  Would like to avoid the typical sell-side garbage in/garbage out if possible.

 

In your worst case, based on number of shares outstanding today, cash EPS would be around $8.  That's a huge discount to what 90% of shareholders are saying about the stock.  You can pull up Sequoia, or Ackman, or some others on this thread still talking about $12 cash eps +.  I'd like to think expectations from shareholders aren't low enough where there's no downside in that event.  It's kind of weird.... stock has been decimated but lots of investors still pointing to the 2016 guidance and pulling out a couple bucks to account for these problems....

 

So risk for the stock is likely to be bad cash EPS + not durable cash flows (negative SSS) forming a narrative around a really low valuation metric like 7x cash EPS (there are stocks like CXRX trading for 4x cash EPS).  In that situation investors can easily make this a $30 stock.  Maybe as a long-term investor that's just par for the course but I think there's at least a majority chance of that happening.  So if you think that's the worst case you also have to discount the market reaction to that event.  Almost the entire sell-side is still positive on the stock and no big holder has capitulated yet....

 

Like you said, maybe it's like BAC at $9 when Warren did the warrants.  It was a good deal but you still had the stock hit $5.  VRX is different than BAC and requires a lot more conviction around some anecdotal ideas to be able to buy more and just hold through that.

 

Also, are you just going to ignore the enterprise value and simply focus on the equity value?  So your logic would be that you are buying the stock because you assume they survive, so what's the debt matter?  There's probably a really good chance the market won't view it that way if they do indeed start reporting bad numbers.  And that's where I think you would have a great opportunity to buy the stock assuming no other big cockroaches started scurrying out of the kitchen....

 

Edit: By the way, not dismissing your numbers or idea.  Just trying to follow the logic and kill your thesis if possible. 

[merkhet]

I don't know if this was already posted or not.

 

http://www.reuters.com/article/2015/11/12/valeant-pharmacies-officers-idUSL1N1361N720151112#eFEJf3lrU7LqUPRT.97

 

The Valeant employees worked with the founders of the pharmacy, Philidor Rx Services, to set up the business in 2013 and expand its operations, three of the former employees said. The Valeant employees then remained closely involved in details of running the pharmacy.

 

At different points in the company's evolution, their roles included interviewing job applicants and involvement with billing.

 

I know CONeal said before that it's often very common for pharmaceutical companies to sit at a specialty pharmacy to make sure that things are set up correctly, but is the above also common?

[Rasputin]

Are you taking the figures out of 2016 estimates?  Meaning, starting with the $7.5 billion guidance and then subtracting things out to zero?  This is where I struggle with the math because we're kind of taking management on their word for what 2016 was supposed to look like.  I also thought it was reasonable to expect around $2.5 billion+ of free cash flow but it required usage of numbers given from management.  I would much rather be able to just pull everything out of the Q's and K's to get a more straightforward answer.  Would like to avoid the typical sell-side garbage in/garbage out if possible.

 

In your worst case, based on number of shares outstanding today, cash EPS would be around $8.  That's a huge discount to what 90% of shareholders are saying about the stock.  You can pull up Sequoia, or Ackman, or some others on this thread still talking about $12 cash eps +.  I'd like to think expectations from shareholders aren't low enough where there's no downside in that event.  It's kind of weird.... stock has been decimated but lots of investors still pointing to the 2016 guidance and pulling out a couple bucks to account for these problems....

 

So risk for the stock is likely to be bad cash EPS + not durable cash flows (negative SSS) forming a narrative around a really low valuation metric like 7x cash EPS (there are stocks like CXRX trading for 4x cash EPS).  In that situation investors can easily make this a $30 stock.  Maybe as a long-term investor that's just par for the course but I think there's at least a majority chance of that happening.  So if you think that's the worst case you also have to discount the market reaction to that event.  Almost the entire sell-side is still positive on the stock and no big holder has capitulated yet....

 

Like you said, maybe it's like BAC at $9 when Warren did the warrants.  It was a good deal but you still had the stock hit $5.  VRX is different than BAC and requires a lot more conviction around some anecdotal ideas to be able to buy more and just hold through that.

 

Also, are you just going to ignore the enterprise value and simply focus on the equity value?  So your logic would be that you are buying the stock because you assume they survive, so what's the debt matter?  There's probably a really good chance the market won't view it that way if they do indeed start reporting bad numbers.  And that's where I think you would have a great opportunity to buy the stock assuming no other big cockroaches started scurrying out of the kitchen....

 

Edit: By the way, not dismissing your numbers or idea.  Just trying to follow the logic and kill your thesis if possible.

 

I do it both ways. 

 

1.  Use solely the 2014 10K + Salix merger document

 

This eliminates most of Philidor/captive pharmacy effect, Jublia (launched in Q2 2014, minimal sales in 2014),  Glumetza, Isuprel, Nitropress.

 

2014 ebit $2.04 Billion (this includes restructuring charges, iprd impairments, acquisition costs etc,).

deduct 2014 other income $270 million (gain from divestitures of injectables, etc)

2014 core ebit $1.77 Billion (this excludes gain from allergan)

2014 d&a $1.74 Billion

2014 ebitda $3.5 Billion

2016 salix stand-alone ebitda $1.0 Billion (subtract glumetza from merger doc)

2016 salix cost save $0.5 Billion

2016 ebitda $5 Billion

 

2.  Use September 28 2015 letter, but this requires us to use management slides to estimate how much revenue comes from derm rx, what kind of revenue/ebitda management has in mind for 2016 etc. 

 

Going by Q3 2015 slide deck, low end 2015 revenue guidance = $10.7 Billion

In that letter, Mike talks about high single digit growth for emerging markets, 3% growth in ex US developed market.  Exclude growth from dermatology, opthalmology rx , dentistry rx, neurology and others (30% of 2016 revenue).  let's just say 5% combined growth from the rest of the business (70%).  2016 non salix revenue = $11.1 Billion

Add Salix 2016 revenue = $2.3 Billion (subtract glumetza)

Total 2016 revenue = $13.4 Billion

Deduct 25% for derma rx, neurology and others (insta death "bad valeant")

2016 "good valeant" revenue = $10 Billion

2016 ebitda = $5 Billion (50% ebitda margin)

 

In both of these scenarios, I don't take into account ebitda from non salix 2015 acquisitions, even though on the interest expense line, I accounted for all the debt.

 

I use fcf/market cap yield rather than ebitda/ev yield because of their low tax rate. 

 

Likelihood of valeant being forced to liquidate or sell subsidiaries for cheap due to debt is  low. 

 

I'm prepared for the stock to go down to $30 and I would be very ecstatic.  It would be my Christmas gift. 

 

Buying BAC at $10 in 2011, still get 70% return in 4 years.  The only requirement for that 70% return is to keep holding it even as the stock went from $10 to less than $5.  My lowest cost lot is $4.94 executed on 12/19/2011 outside regular hours due to my limit order at IB.  I still own all of the shares I bought in 2011 and have added more through out the years. 

 

I actually find buying VRX today a lot easier than BAC 2011.  The good valeant is solid.  No regulators can force raising capital at very cheap stock price.  No tens of billions of dollar lawsuit.  No worry about rejection of deal with private label, customers closing accounts, etc. etc.   

 

 

[Liberty]

In the past few days, I’ve sold my VRX position. I always try to keep the old Churchill saying in mind: “When the facts change, I change my mind.”

 

When this thing started, I was pretty sure that the “phantom network of pharmacies” with “fake sales” and “channel stuffing” was BS, and the shady character of the shorts made me even wearier of their accusations. I think the early attacks turned out to be incorrect.

 

Then other things were dug up that were harder to decide on. I gave management the benefit of the doubt and waited to see their response. I wasn’t entirely reassured by it. To be fair, it’s not completely their fault; it’s expected that they won’t comment on an ongoing investigation that could take months to bear fruit. This still meant that my confidence was somewhat eroded, I couldn’t get answers to many questions, and I ended closer to sitting on the fence. And I don’t want to sit on the fence with my investments. I need more confidence than that.

 

But the real reason I ended up selling is that I didn’t sign up for this, this isn’t really the kind of thing I want to do. Life’s too short. I try to build a portfolio of high-quality businesses with reinvestment opportunities that I can hold for a long time without too much worry. VRX has turned into a real pain trade where you basically will get paid for your ability to suffer through it (unless things are worse than I expect…).

 

So I thought about it and I don’t need the stress in my life. I’d rather take the loss and move on (thankfully I invested a while ago, so the loss on my original investment wasn’t quite as catastrophic as it would be for someone who bought at the top). It’s likely that I’ve bottom-ticked it and from now on all the news are good and the stock rallies to the sky, but so be it — sometimes you have to make a call.

 

Some people are much better than I am at doing these pain-based-investments, living with bad news and uncertainty for months and years until the negativity clears up and the blue sky reappears. People who bought EBIX in 2013 more than tripled their money…

 

But I thought about how much I wanted the money vs. all the drama, spending so much time and energy on this for possibly months if not years, and I’d rather have fewer worries when I’m with my wife and young son :)

 

I invest to increase my independence. When my investments start to reduce how free I feel, they’re probably not worth it.

[rishig]

In the past few days, I’ve sold my VRX position. I always try to keep the old Churchill saying in mind: “When the facts change, I change my mind.”

 

When this thing started, I was pretty sure that the “phantom network of pharmacies” with “fake sales” and “channel stuffing” was BS, and the shady character of the shorts made me even wearier of their accusations. I think the early attacks turned out to be incorrect.

 

Then other things were dug up that were harder to decide on. I gave management the benefit of the doubt and waited to see their response. I wasn’t entirely reassured by it. To be fair, it’s not completely their fault; it’s expected that they won’t comment on an ongoing investigation that could take months to bear fruit. This still meant that my confidence was somewhat eroded, I couldn’t get answers to many questions, and I ended closer to sitting on the fence. And I don’t want to sit on the fence with my investments. I need more confidence than that.

 

But the real reason I ended up selling is that I didn’t sign up for this, this isn’t really the kind of thing I want to do. Life’s too short. I try to build a portfolio of high-quality businesses with reinvestment opportunities that I can hold for a long time without too much worry. VRX has turned into a real pain trade where you basically will get paid for your ability to suffer through it (unless things are worse than I expect…).

 

So I thought about it and I don’t need the stress in my life. I’d rather take the loss and move on (thankfully I invested a while ago, so the loss on my original investment wasn’t quite as catastrophic as it would be for someone who bought at the top). It’s likely that I’ve bottom-ticked it and from now on all the news are good and the stock rallies to the sky, but so be it — sometimes you have to make a call.

 

Some people are much better than I am at doing these pain-based-investments, living with bad news and uncertainty for months and years until the negativity clears up and the blue sky reappears. People who bought EBIX in 2013 more than tripled their money…

 

But I thought about how much I wanted the money vs. all the drama, spending so much time and energy on this for possibly months if not years, and I’d rather have fewer worries when I’m with my wife and young son :)

 

I invest to increase my independence. When my investments start to reduce how free I feel, they’re probably not worth it.

 

Wow. Thanks Liberty for the honest update. Respect!