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VRX - Valeant Pharmaceuticals International Inc.


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og - re: covenants:

 

Biggest issue appears to be 2.5x secured covenant. I think secured debt would be about 12b. So if they hit downside of 5 to 6b in EBITDA then they are close.

 

There is no way, in my opinion, that they can hit 5B EBITDA in 2016.

 

6.5 prob low end of possible. Remember that Valeant sandbags the nums for 'beats' meaning 7.5 was the sandbagged pre Philidor num.

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og - re: covenants:

 

Biggest issue appears to be 2.5x secured covenant. I think secured debt would be about 12b. So if they hit downside of 5 to 6b in EBITDA then they are close.

 

There is no way, in my opinion, that they can hit 5B EBITDA in 2016.

 

6.5 prob low end of possible. Remember that Valeant sandbags the nums for 'beats' meaning 7.5 was the sandbagged pre Philidor num.

 

Agree.

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Valeant sandbagged the same way that GE was "sandbagging" for years.  They found clever ways of pushing the limits, whether through high NPV acquisitions of tail assets or funding the expansion of Philidor or raising prices.  And much like we found out about the hidden leverage behind that finance division that nearly sent GE over the edge, you're seeing those aggressive tactics to beat earnings threaten to throw Valeant over the same cliff.

 

Unless you think Felix the cat has another trick up his sleeve, Valeant is going to be a lot different going forward.  That $7.5 billion guidance for 2016 is rubbish.

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http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-To-Hold-Investor-Day-On-December-16/default.aspx

 

Valeant To Hold Investor Day On December 16

 

11/20/2015

LAVAL, Quebec, Nov. 20, 2015 /PRNewswire/ -- Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (TSX: VRX) announced that the Company will be hosting an Investor Day on December 16, 2015 where the Company will be providing updated financial guidance, discussing certain business operations and highlighting certain R&D programs.

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Valeant sandbagged the same way that GE was "sandbagging" for years.  They found clever ways of pushing the limits, whether through high NPV acquisitions of tail assets or funding the expansion of Philidor or raising prices.  And much like we found out about the hidden leverage behind that finance division that nearly sent GE over the edge, you're seeing those aggressive tactics to beat earnings threaten to throw Valeant over the same cliff.

 

Unless you think Felix the cat has another trick up his sleeve, Valeant is going to be a lot different going forward.  That $7.5 billion guidance for 2016 is rubbish.

 

Nobody is talking about $7.5 billion for 2016 anymore though. We are just trying to note that it won't hit $5B and that at least $6.5B is quite likely (assuming their whole US business is not negatively impacted by Philidor and Marathon).

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Valeant sandbagged the same way that GE was "sandbagging" for years.  They found clever ways of pushing the limits, whether through high NPV acquisitions of tail assets or funding the expansion of Philidor or raising prices.  And much like we found out about the hidden leverage behind that finance division that nearly sent GE over the edge, you're seeing those aggressive tactics to beat earnings threaten to throw Valeant over the same cliff.

 

Unless you think Felix the cat has another trick up his sleeve, Valeant is going to be a lot different going forward.  That $7.5 billion guidance for 2016 is rubbish.

 

Nobody is talking about $7.5 billion for 2016 anymore though. We are just trying to note that it won't hit $5B and that at least $6.5B is quite likely (assuming their whole US business is not negatively impacted by Philidor and Marathon).

 

Yeah - imo mkt is pricing in ~$5b to $6b in EBITDA with potential significant liability / financial restatements. Upside / downside looks pretty decent sub 100 attaching probabilities to each outcome.

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Why do you say market is pricing in $5-6 Billion? I mean you are probably right, but is that just a feeling or is there some metric behind that view?

 

Just gut feeling based on current EV. Double digit yields on the bonds. 90 pricing on the TL. Rating agencies analyzing covenants in the context of ~5.5b EBITDA.

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Valeant sandbagged the same way that GE was "sandbagging" for years.  They found clever ways of pushing the limits, whether through high NPV acquisitions of tail assets or funding the expansion of Philidor or raising prices.  And much like we found out about the hidden leverage behind that finance division that nearly sent GE over the edge, you're seeing those aggressive tactics to beat earnings threaten to throw Valeant over the same cliff.

 

Unless you think Felix the cat has another trick up his sleeve, Valeant is going to be a lot different going forward.  That $7.5 billion guidance for 2016 is rubbish.

 

Yes, of course they won't achieve the 7.5B.  Market doesn't expect that and neither do I.

 

Again, I am benchmarking vs what would have happened had Philidor not been discovered. They would have "beat" the 7.5B as they sandbagged.  Therefore, I think it would require a drop of ~1.1B to bring it to 6.5B ebitda, which seems reasonable.

 

No need for the Felix the cat comments please.

 

 

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Valeant sandbagged the same way that GE was "sandbagging" for years.  They found clever ways of pushing the limits, whether through high NPV acquisitions of tail assets or funding the expansion of Philidor or raising prices.  And much like we found out about the hidden leverage behind that finance division that nearly sent GE over the edge, you're seeing those aggressive tactics to beat earnings threaten to throw Valeant over the same cliff.

 

Unless you think Felix the cat has another trick up his sleeve, Valeant is going to be a lot different going forward.  That $7.5 billion guidance for 2016 is rubbish.

 

Yes, of course they won't achieve the 7.5B.  Market doesn't expect that and neither do I.

 

Again, I am benchmarking vs what would have happened had Philidor not been discovered. They would have "beat" the 7.5B as they sandbagged.  Therefore, I think it would require a drop of ~1.1B to bring it to 6.5B ebitda, which seems reasonable.

 

No need for the Felix the cat comments please.

 

What multiple is right for this business in your opinion? At 10x, its not a long. At 12x with upside optionality to 7b+ EBITDA, it could be.

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Yes had we not discovered fraudulent activity Valeant would have likely done $7.5 billion of EBITDA. That's a nice thought.  We would have gotten away with it too, if it wasn't for those pesky kids!

 

My point (sorry if I wasn't clear) was that Valeant lost almost every tool used to beat their "guidance" in the past. Judging their ability to beat a non-GAAP measure is silly. When have they ever beat a GAAP measure?  Lot's of ways to pump up EBITDA, cash EPS etc.  A lot easier to beat a game you created yourself, especially if it isn't indicative of real economic results.

 

Edit: By the way, I have a good feeling that Valeant will affirm around $7 billion of EBITDA guidance for 2016. We'll see if they can actually do it but I have my doubts.

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Valeant sandbagged the same way that GE was "sandbagging" for years.  They found clever ways of pushing the limits, whether through high NPV acquisitions of tail assets or funding the expansion of Philidor or raising prices.  And much like we found out about the hidden leverage behind that finance division that nearly sent GE over the edge, you're seeing those aggressive tactics to beat earnings threaten to throw Valeant over the same cliff.

 

Unless you think Felix the cat has another trick up his sleeve, Valeant is going to be a lot different going forward.  That $7.5 billion guidance for 2016 is rubbish.

 

Yes, of course they won't achieve the 7.5B.  Market doesn't expect that and neither do I.

 

Again, I am benchmarking vs what would have happened had Philidor not been discovered. They would have "beat" the 7.5B as they sandbagged.  Therefore, I think it would require a drop of ~1.1B to bring it to 6.5B ebitda, which seems reasonable.

 

No need for the Felix the cat comments please.

 

What multiple is right for this business in your opinion? At 10x, its not a long. At 12x with upside optionality to 7b+ EBITDA, it could be.

 

Well, that is an interesting question.  I see EBITDA for 2016 not representative of what it will look like by 2019. I recognize it will take a while for a normal EBITDA multiple to come back.

 

I think it should/will eventually trade at 12x EBITDA, but I see the EBITDA growing rapidly and acquisitions resuming after a 2 yrs of delevering. I also see price hikes continuing, with the company putting great focus on closing the net/gross price increase gap.  All pharmaceutical companies hike prices, so the key in the future is the marketing of it.  There can't be a 5000% gross increase that the media can point to when the net realized increase is only 8%.  I see the current gap closing, and removing scrutiny industry wide.

 

Wouldn't be surprising for me to see 8B EBITDA by 2020.

 

 

 

 

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Yes had we not discovered fraudulent activity Valeant would have likely done $7.5 billion of EBITDA. That's a nice thought.  We would have gotten away with it too, if it wasn't for those pesky kids!

 

:) Funny thing is, I agree with the Scooby analogy. I just disagree on future growth, future market perception, and future extractable cash flows.  Derm will be fine.

 

I also don't see docs recommending people sink their feet in Vix for 60 weeks based on 1 study in my opinion, so I see Jublia being okay as well.

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Yes had we not discovered fraudulent activity Valeant would have likely done $7.5 billion of EBITDA. That's a nice thought.  We would have gotten away with it too, if it wasn't for those pesky kids!

 

My point (sorry if I wasn't clear) was that Valeant lost almost every tool used to beat their "guidance" in the past. Judging their ability to beat a non-GAAP measure is silly. When have they ever beat a GAAP measure?  Lot's of ways to pump up EBITDA, cash EPS etc.  A lot easier to beat a game you created yourself, especially if it isn't indicative of real economic results.

 

Edit: By the way, I have a good feeling that Valeant will affirm around $7 billion of EBITDA guidance for 2016. We'll see if they can actually do it but I have my doubts.

 

Their history is to low-ball guidance. Its not like they did not beat their guidance pre-Philidor and pre-Marathon. Why do you expect this to now suddenly change? I know you have the view that they only beat their guidance in 2015 due to Marathon and Philidor, however how do you explain the history of beating guidance constantly? I don't see it.

 

$7.5 was already a low-ball that they were probably going to beat. There is more uncertainty now, so they'll add an extra cushion, but recent Salix growth could be that added cushion (after netting possible further strength in the US dollar going forward). Now we have to substract the Philidor mess, and add contingency for lower Marathon drug pricing.  I think the Philidor hit will be large in Q4 but not that large in terms of 2016 guidance.

 

I think Q4 will be bad, but am ball-parking guidance is going to be 6.5B EBITDA (with $6B on the low end and $7B on the high end).

 

... And then they will beat whatever guidance they put out.

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My point is that Valeant guides using non-GAAP figures: cash EPS and EBITDA.  Both of those are easy to game and Valeant has a history of finding ways to manipulate those metrics.

 

Valeant adds back 100% of the intangibles associated with tail assets like Marathon to meet cash EPS guidance.  Obviously that's not indicative of everything in the Valeant portfolio but that's the game they play.  To expect them to be honest on 70% of the business when they're dishonest with 30% is sort of silly.  But that's the outcome you get when you focus investors on non-GAAP figures.  I'm amazed at how many sell-side reports use cash EPS as "EPS" or the slides in Valeant presentation which say "net income."  They're not the same thing.

 

I know Valeant has been fine meeting cash EPS/EBITDA estimates in the past but it's because those are easy to manipulate to the detriment of the long-term business.  You've already seen some of the damage this has caused.  Now the thesis has drifted that the rest of the business is so good that it didn't matter they mislead investors on the 30% of the business that didn't deserve adding back intangible expense. 

 

Pearson is going to do a dog and pony show with some $6.5-7 billion EBITDA estimate for 2016.  Whether he hits it or not is debatable.  But it ignores the larger points: where is the free cash left for equity holders?  How durable are these assets?  What happens if they stop acquisitions entirely?  It's a trend I notice with Pearson: he misdirects attention to things that matter least to the equity holders and you have to pull out teeth to get answers.  The business is worth $61 billion today; what are you getting in the long run for buying that $31 billion equity stub?  EBITDA and cash EPS aren't giving you any of those answers.  Who cares what those figures will be next year....

 

My view has become one that the bonds are more than protected because this is a business that absent acquisitions generates a lot of cash in the short-term (5-7 years out, low taxes, low capex) but it gets very dubious in the long-term.  So I don't really care about Pearson's EBITDA estimates or whether they trip covenants.  Those estimates say almost nothing about what the equity is worth long-term.

 

In the short-term, affirming $6.5 billion plus of EBITDA might get people more comfortable with the debt picture and boost the stock. 

 

Disclosure: I don't trust Pearson at all so that skews how I view the situation.  If you trust Pearson then you might believe the cash EPS and EBITDA and think it matters long-term.

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Ackman also sold calls at 165 for Jan 2017.  I know that's a slightly delta hedge, but if you see the value in the 300s, that seems like a bad bet.  Got paid around $3 per share for those calls. 

 

http://www.sec.gov/Archives/edgar/data/885590/000119312515385412/d68063dex995.htm

 

Sold puts to fund 95-165 call spread.  Some kind of synthetic long.

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