VRX - Valeant Pharmaceuticals International Inc.

[biaggio]

VRX is one of the largest holdings of Sequoia Fund, so you can search for "valeant" in these links to know their reasoning:

 

http://www.sequoiafund.com/Reports/Transcript11.htm

http://www.sequoiafund.com/Reports/Transcript12.htm

 

UK

 

I could be wrong on VRX if these guys are in it as obviously they are much smarter, have the resources and have obviously researched it more thoroughly.

 

Its possible that VRX would work.

 

 

[giofranchi]

If you really like VRX, you might want to look at Paladin Labs instead

 

Same kind of company in that it is buying other companies with perceived products that are mature but under marketed, low risk/low expense. i.e big pharma thought they were crap (can t retain a profit) products

 

They are much smaller at EV of ~ $600million. Have cash net of debt of $234 million. Pretax earnings of $56 million. Owners earnings of $72 million (these are from my Nov 2012 notes so they could be out of date)

 

Management/Goodman family own 25% of company (I think Moore likes Goodman family- i think they are well respected as capitalist)

 

Full disclosure-I don t own any of these either, as I don t like their products + generally try to stay away from serial acquirers.

 

biaggio,

I forgot to thank you for the paladin idea! :)

I started looking into it and I noticed that John Goodman is on medical leave: do you have any more detailed news to share with us on his actual health conditions?

 

Cheers!

 

giofranchi

 

[Drokos]

On VRX:

 

-Some folks are concerned about the debt, but I am not. If you read through CC's you can get a good idea of how management looks at acquisitions. If they have the chance to buy a firm and get a 20% return on investment, it absolutely makes sense to leverage up and borrow at 5-7%.

-Valeant is the best firm I have seen at integrating a deal. If any of you really want to do some research, look at the Medicis acquisition. Medicis has 2011 operating expenses of $470m, Valeant is cutting $300m of that. I believe on a recent CC they said each firm had a 75 person dermatology sales force, and now the combined entity is only keeping 75 total. The incremental cost of pushing more products through your salesforce/infrastructure is very small. In addition, VRX was able to take Medicis' tax rate from the 20s or 30s down to about 5%, a huge benefit. Valeant's low tax rate gives them easy arbitrage on acquisitions.

-Pearson is a great capital allocator, his priority is return on investment, not growing the size of the firm. He has bought back stock opportunistically when it has been cheap.

-Not only does Sequoia hold it as a top position, but so does Lou Simpson.

 

Paladin:

-It is interesting, basically pursuing the same strategy, however it is odd to me that they refuse to use debt and prefer to use equity. With interest rates so low there is no reason not to borrow at 5% when you have investment opportunities producing 10-15%+.

-It is also much smaller so it has less scale and is expanding out into new regions (Latin America, Africa, etc) which slightly concerns met.

-That being said, you can see from the chart it has been a successful strategy and I think they will continue to do well in the future.

 

[muscleman]

On VRX:

 

-Some folks are concerned about the debt, but I am not. If you read through CC's you can get a good idea of how management looks at acquisitions. If they have the chance to buy a firm and get a 20% return on investment, it absolutely makes sense to leverage up and borrow at 5-7%.

-Valeant is the best firm I have seen at integrating a deal. If any of you really want to do some research, look at the Medicis acquisition. Medicis has 2011 operating expenses of $470m, Valeant is cutting $300m of that. I believe on a recent CC they said each firm had a 75 person dermatology sales force, and now the combined entity is only keeping 75 total. The incremental cost of pushing more products through your salesforce/infrastructure is very small. In addition, VRX was able to take Medicis' tax rate from the 20s or 30s down to about 5%, a huge benefit. Valeant's low tax rate gives them easy arbitrage on acquisitions.

-Pearson is a great capital allocator, his priority is return on investment, not growing the size of the firm. He has bought back stock opportunistically when it has been cheap.

-Not only does Sequoia hold it as a top position, but so does Lou Simpson.

 

Paladin:

-It is interesting, basically pursuing the same strategy, however it is odd to me that they refuse to use debt and prefer to use equity. With interest rates so low there is no reason not to borrow at 5% when you have investment opportunities producing 10-15%+.

-It is also much smaller so it has less scale and is expanding out into new regions (Latin America, Africa, etc) which slightly concerns met.

-That being said, you can see from the chart it has been a successful strategy and I think they will continue to do well in the future.

 

Is there any way to verify that the per-acquisition economics is really as good as 20% ROE?

[Drokos]

They tried to map it out in this presentation(page 9): http://ir.valeant.com/files/3Q12%20PresentationFinal2.pdf

 

I don't think there is a way to calculate it exactly, but I think the proof is in the growth the past 5 years. The stock has been a 10 bagger since Pearson took over, and valuation hasnt really changed so profits are up a similar amount. It is tough to do that in such a short time unless you're getting very strong ROI on acquisitions.

 

2012 Investor Day presentation for additional background incase anyone is interested: http://ir.valeant.com/files/doc_presentations/2012_Investor_Day_Final_Deck_plus_Appendix2.pdf

 

[biaggio]

If you really like VRX, you might want to look at Paladin Labs instead

 

Same kind of company in that it is buying other companies with perceived products that are mature but under marketed, low risk/low expense. i.e big pharma thought they were crap (can t retain a profit) products

 

They are much smaller at EV of ~ $600million. Have cash net of debt of $234 million. Pretax earnings of $56 million. Owners earnings of $72 million (these are from my Nov 2012 notes so they could be out of date)

 

Management/Goodman family own 25% of company (I think Moore likes Goodman family- i think they are well respected as capitalist)

 

Full disclosure-I don t own any of these either, as I don t like their products + generally try to stay away from serial acquirers.

 

biaggio,

I forgot to thank you for the paladin idea! :)

I started looking into it and I noticed that John Goodman is on medical leave: do you have any more detailed news to share with us on his actual health conditions?

 

Cheers!

 

giofranchi

 

Sorry I don t have any info.

[giofranchi]

12:21 PM Valeant (VRX) is nearing a deal to acquire Bausch & Lomb for ~$9B, WSJ says.

 

1:50 PM More on Bausch & Lomb/ Valeant (VRX +12.8%): Warburg Pincus may agree to terms with VRX as early as next week, but sources tell WSJ the deal could still fall apart. If the deal fails to come to fruition, Warburg may opt for an IPO of Bausch & Lomb instead, something the private-equity firm has mulled since early this year.

 

giofranchi

[giofranchi]

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2013/Valeant-Pharmaceuticals-International-Inc-To-Acquire-Bausch--Lomb-For-87-Billion/default.aspx

 

giofranchi

[giofranchi]

6:30 AM Valeant (VRX) shares surge 7.7% premarket following news the company will acquire Bausch & Lomb for $8.7B in what is Valeant's 15th purchase since 2010. Ophthalmology is an area that the company has been looking at for three years, says CEO Mike Pearson. "It's a lot like dermatology - a growing market, a growing specialty," Pearson notes.

 

giofranchi

[giofranchi]

M&A Conference Call

 

We have made no secret in the fact that we find the eye health market to be an extremely attractive therapeutic

area. And while we have been slowly building up our presence here in the U.S., this transaction immediately puts us

in a leading position around the world. The eye health market has many similar characteristics to the dermatology

and aesthetics markets that make it a logical one for Valeant to pursue. It is a growing market around the world with

durable products. These products have a low exposure to reimbursement pressure and have a large cash pay

component, both factors that we look for in products and markets. There are a number of demographics

underpinning the market growth we continue to see around the world. In addition to an aging population, which will

only increase in the coming years, there is an increased prevalence of diseases that affect eye health, including

diabetes and cataracts. The rising income levels in the emerging markets also help drive growth. Finally, Valeant

does not focus on high-risk R&D projects. The eye health market offers exciting opportunities to concentrate more

on the development activities and less on early-stage research, again similar to our strategy with the dermatology

market. Essentially, we can put our capital to work in more certain development programs rather than riskier earlier stage

discovery. And there continues to be a large unmet need in eye health that will create opportunities for

continued innovation in the future.

--J. Michael Pearson

 

giofranchi

valeant-pharmaceuticals-ma-conference-call-may282013.pdf

[giofranchi]

What Bausch & Lomb Will Add To Valeant Pharmaceuticals

 

giofranchi

what-bausch-lomb-will-add-to-valeant.pdf

[giofranchi]

9:43 AM Jefferies raises its price target on Valeant (VRX +1%) to $120 from $77 based on applying a 10.3x multiple to revised FY15 EPS estimates of $11.64. The Bausch & Lomb deal (I, II) "is extremely attractive," analyst Corey Davis says, adding that the company should see EPS CAGR of 31% going forward.

 

giofranchi

[Cunninghamew]

For the VRX guys who are also following ENDP where Pearson's old numero #2 took the helm...

 

"MALVERN, Pa. (AP) -- Endo Health Solutions Inc. said Wednesday that Chief Financial Officer Alan G. Levin and Chief Operating Officer Julie H. McHugh are both leaving the company."

 

I guess Rajiv is about to start putting his people in place... market seems to like

[giofranchi]

Impact Of Valeant Pharmaceuticals' Acquisition Of Bausch + Lomb

 

giofranchi

impact-of-valeant-pharmaceuticals-acquisition-of-bausch+lomb.pdf

[Cunninghamew]

I guess I could start a new thread for this, but I assume most people following VRX are also following ENDP. Essentially, the #2 guy at VRX who Mike brought in took the helm at ENDP. It looks like he will employ the same strategy, so you can think of ENDP as a baby VRX (maybe)

 

Last night Rajiv (CEO of ENDP) gave an update on his plans for the company. You can find the presentation here http://www.endo.com/investors/overview

 

Big items of note

* plans to reduce OPEX by $150 mm this year and $325mm run-rate reduction by mid-2014

* Divesting non-core biz --> HealthTronics sell and a few other R&D programs

* He will be moving to a more decentralized mgmt approach

* plans to make 2-3 small deals this year (VRX mentatility towards these deals)  ($250-$500mm deals)

* on tax - overtime he would like to find a way to reduce his tax structure, but this is not a #1 priority right now (this is something VRX did very successfully)

 

[fareastwarriors]

http://blogs.wsj.com/moneybeat/2013/06/25/valeant-must-pay-higher-rate-for-loans-to-buy-bausch-lomb/?mod=WSJ_LatestHeadlines

 

 

 

Valeant Must Pay Higher Rate for Loans to Buy Bausch & Lomb

[giofranchi]

Morningstar assigns a 5 stars rating to VRX (see file in attachment) + "Bausch&Lomb Purchase Highlights Value-Creation Ability of Valeant's Moat".

 

giofranchi

VRX-Morningstar.pdf

BauschLomb_Purchase_Highlights_Value-Creation_Ability_of_Valeants_Moat.pdf

[Phaceliacapital]

I think it's worthwhile to start a new topic for ENDP, no?

[giofranchi]

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2013/Medicis-Announces-Five-Year-Aesthetic-Collaboration-with-Mentor/default.aspx

 

giofranchi

[giofranchi]

 

http://seekingalpha.com/article/1541282-bull-of-the-day-valeant?source=email_rt_article_title

 

giofranchi

[GnDville]

On first glance, Teva when compared to Valeant appears to have:

 

[1] ~5x higher revenue

[2] ~4x higher operating cash flow

[3] ~4x higher tangible assets (book value)

[4] Comparable net-debt

[5] ~4x higher book value of equity

[6] ... but (marginally) lower (!) market capitalization

 

Maybe the above facts are wrong? If not, how do you reconcile them with the valuation logic for Valeant?

 

[constructive]

Has VRX ever broken out exclusive vs non-exclusive margins? Despite concentrating mainly on branded OTC drugs, I'd guess they are not immune to patent cliffs.

 

It looks like Elidel, Acanya, Visudyne, Xenazine, Diastat, Ertaczo, Zylet, Alrex, Atralin, Xerese and Potiga are all going off-patent or losing exclusivity in the next 3 years. How much impact will that have?

 

The normal drug exclusivity period is 7 years. So if a pharma company goes on a buying binge, cash flow will look good, earnings will look bad because of depreciation, and no one will be able to tell which is more accurate until a few years later.

[giofranchi]

I think that VRX business model answers both the valuation and the patent cliff questions.

 

VRX has still relatively small revenues, but a very substantial Cash EPS of $6.2. And this is because it has almost no R&D costs. So, it is Cash EPS that justifies market cap. Furthermore, if growth continues, in just 4 years VRX will have closed the revenue gap with TEVA...

 

The same is true for the patent cliff: VRX is very diversified, and no product is a meaningful percentage of sales. Furthermore, VRX strategy is to buy companies with already approved and established products. Therefore, the process of replacing products that lose patent protection is much faster and certain than for other pharma companies.

 

All in all, I am very pleased to buy VRX anytime it trades between 10x and 13x Cash EPS. After the recent run up in its stock price, I am not adding. Actually, I sold some, to buy more LRE.

 

giofranchi

[Christopher1]

For each year from 2013 to 2017 products with patent expiration are less than 3% of revenue (pro forma for B+L acquisition).

2013-3,1%

2014-2,5%

2015-2%

2016-2,6%

2017-0,6%

[Liberty]

I've been studying this one lately and would just like to thank everybody who contributed to this thread, especially Gio.

 

i've been looking at higher quality businesses lately and trying to see if I have enough conviction in their models and management to pay up for the quality (Transdigm is another example of this). Haven't done anything yet on these two, but will follow them and keep learning.

 

Trivia: I was surprised to see the company is HQ'ed in Laval, the city where I was born.