VRX - Valeant Pharmaceuticals International Inc.

[TwoCitiesCapital]

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

 

It's not necessarily a bad bet and it's not really delta hedging. He's funding his purchase of calls by selling other options against it.  His shareholders will be very, very happy indeed if Valeant goes to $300 with this trade even if they don't benefit beyond $165.

 

He won't get the upside beyond $165, but he's also getting his exposure for just a few dollars per share by foregoing the further upside and the premiums from option sales limit downside.

 

He's got exposure to 9,120,000 for $6.75 a share with calls gaining from $95 to $165.

He's got exposure to another 3,380,000 for $1.18 a share with calls gaining from $100 to $130.

 

If Valeant goes to $165+, Acman is going to net around $650M from the options that cost him $65.5M. A return of 10x his money even without being exposed to the upside from $165 - $300. I think he's ok with giving away the upside beyond $165 to make 10x on the incremental investment.

 

To get similar upside in shares going to $165, Ackman would have to purchase 8.125M shares for $707M. The mathmatics don't get too much better if you assume it goes to $300. He'd still have to have purchased 3M shares for $261M to make the same amount of money. I don't think his investors will complain on missing the upside from $165 to $300 to structure the trade in a way that allows them to make 10x their money on the way to $165. 

 

He's certainly got some balls...

 

[Picasso]

Ackman officially went full tilt on this position.  His reputation is going to be tarnished pretty badly if this blows up in his face. 

 

Somewhere Pearson is sitting around knowing where this business should be valued.  Schiller probably has a good idea as well.  I don't know if more than a couple guys in the world truly know what's going on behind the scenes at VRX.  We'll see if Ackman has as much insight on this situation as he thinks he does.  So far he's been very wrong about some very key parts of the thesis and there's a substantial amount of thesis drift going on.

 

I think he's putting too much trust on management which is affecting his judgment.

[wisdom]

Or it could be he knows how to make money and he has identified mispricing.

[ourkid8]

+1

 

Or it could be he knows how to make money and he has identified mispricing.

[Picasso]

Ackman runs money for institutions that consider risk very differently than we do. Even if VRX goes to a dollar he can't throw his whole fund in that position unless he wants redemptions to flood in.

 

All mispricings have probability functions. Ackman might think he's got a high probability of being right but he runs very concentrated. That off chance he's wrong will kill him in more ways than just seeing VRX lose value. The market will front run the sales of other stocks in his portfolio once it figures out redemptions will force his hand which hurts his investors. He has to balance that risk to his investors besides just plowing good money after bad over a belief which has been shown to be wrong in at least two key ways.

 

Anyway my point is, mispricing isn't everything here. What do you think happens if VRX trades down to $50 after he doubled down?

[wisdom]

Permanent capital and lock ins

[ccplz]

Or it could be he knows how to make money and he has identified mispricing.

 

Lol

 

Didn't he identify mispricing at 190 and then 220?

[Guest Schwab711]

http://imgur.com/sEgo9vD

 

Why would PS buy and sell 1.5m shares today? Did PS buy every share it could and then sell the excess to fall <10%?

[original mungerville]

Ackman runs money for institutions that consider risk very differently than we do. Even if VRX goes to a dollar he can't throw his whole fund in that position unless he wants redemptions to flood in.

 

All mispricings have probability functions. Ackman might think he's got a high probability of being right but he runs very concentrated. That off chance he's wrong will kill him in more ways than just seeing VRX lose value. The market will front run the sales of other stocks in his portfolio once it figures out redemptions will force his hand which hurts his investors. He has to balance that risk to his investors besides just plowing good money after bad over a belief which has been shown to be wrong in at least two key ways.

 

Anyway my point is, mispricing isn't everything here. What do you think happens if VRX trades down to $50 after he doubled down?

 

What are the two key ways which have been shown to be wrong?

[orthopa]

Or it could be he knows how to make money and he has identified mispricing.

 

Lol

 

Didn't he identify mispricing at 190 and then 220?

 

Could mean the market became more irrational. Doesnt mean his is wrong in his thesis.

[Picasso]

1) This is a consumer products company like P&G, deserving of a P&G multiple (85% durable according to Ackman)

2) Pershing estimated $7.5 billion 2016 EBITDA and $16 of cash EPS which gave him a $250 fair value

 

Ackman thinks there should be a premium for the "platform value."  That's not exactly happening either?  These guys are locked out of the capital markets.

 

I think we've seen enough evidence to know this is isn't consumer products like P&G and they aren't going to hit $16 of cash EPS anytime soon.  It's ignoring whether cash EPS matters in the case of Valeant, but that's at least two big parts of the thesis gone very wrong. 

[ZenaidaMacroura]

http://imgur.com/sEgo9vD

 

Why would PS buy and sell 1.5m shares today? Did PS buy every share it could and then sell the excess to fall <10%?

 

He is executing a fairly large option trade so there are counterparty dynamics in play.  The counterparty had an expensive time hedging their short VRX deltas so they jacked up the price on him and he said, “screw it, I’ll execute my own hedge."  He likely bought up to $94 today, and sold towards the end of the day at $88 and change.  Why would he "purposely" buy high and sell low? 

 

To get more favorable pricing for each legs of his call spread/short put strategy.

[johnny]

Or it could be he knows how to make money and he has identified mispricing.

 

Lol

 

Didn't he identify mispricing at 190 and then 220?

 

Well I think we can all agree it was certainly mispriced then

[original mungerville]

1) This is a consumer products company like P&G, deserving of a P&G multiple (85% durable according to Ackman)

2) Pershing estimated $7.5 billion 2016 EBITDA and $16 of cash EPS which gave him a $250 fair value

 

Ackman thinks there should be a premium for the "platform value."  That's not exactly happening either?  These guys are locked out of the capital markets.

 

I think we've seen enough evidence to know this is isn't consumer products like P&G and they aren't going to hit $16 of cash EPS anytime soon.  It's ignoring whether cash EPS matters in the case of Valeant, but that's at least two big parts of the thesis gone very wrong.

 

Well, he didn't understand the details going on at Philidor that's for sure. Take the Philidor blow-up out of the picture and they would have not only met those 2016 targets but they would have exceeded them.

 

A P&G multiple is in the 20x range if I am not mistaken. I think Ackman's point was that 15x was not unreasonable and that gives no value to the platform value, which if you trust management, was significant. Having said this, the bonehead Marathon and Philidor issues/decisions by management and related negative publicity have taken a substantial amount of that platform value away in the short- and potentially even medium-term. On top of that, we have the earnings impact of Philidor to deal with along with legal issues, etc. so the market has dropped enterprise value by half. 

[Guest Grey512]

The topic of how much actual cash flow will VRX earn in 2016, not bullshit "cash EPS" or EBITDA, but actual, "stuff that I can see on the cash-flow statement" cash flow continues to occupy my mind. On this thread, I've tried out several approaches to ball-park a number. Let's try another one.

 

Did anyone yet get a rock solid, absolutely conservative, "downside case" FCFF for Valeant for 2016?

 

Please, walk with me. I look at current trailing FCFF of Valeant and check what further FCFF can be contributed from B&L and Salix. I would be grateful if someone could look at this and critique this. I am focused on unlevered FCF (calculated as Cash from Ops, adding back interest expense, subtracting capex).

 

 

B&L: In the years prior to getting bought by Valeant, B&L earned revenues of about $3b, EBITDA around $600-700m and free cash flows (ex acquisitions, before interest expense) of about $200m annual. Valeant then went and bought B&L for $8b. Valeant paid 40x FCF. To the best of my knowledge, B&L organic growth under VRX ownership is mid-single digits. Let's say that 2016 B&L revenues will be $4b, FCF will be $1b; (i.e. $800m higher than in the current year). Next:

 

Salix: Prior to getting bought by VRX, Salix reported $1.1b revenues, $300b EBITDA (in its best year). Not much FCF. VRX then bought Salix for $14b. Let's use adjusted guidance and assume revenues next year for Salix will be around $3b; EBITDA of $1.5b. Let's say that the FCF margin will be the same as B&L (which is generous! B&L is a better business). I.e. Salix too will get FCF of $1b.

 

Therefore:

2016 FCFF (before new acquisitions, before interest) = current trailing FCFF ($3.5b) + extra $0.8b from B&L + $1b from Salix = $5.5b.

 

Now that is beginning to look kinda reasonable, against a total enterprise value of $60b, of which $30b is debt. Buying VRX equity at current prices means paying about 10.5x FCFF. There are more than a few other things that you could buy at that sort of price, in the current environment (e.g. WMT) but without the regulatory risk & the 2016/17 covenant risk that VRX has. 

 

So: I still don't get Ackman and other buyers at current prices.

[Picasso]

1) This is a consumer products company like P&G, deserving of a P&G multiple (85% durable according to Ackman)

2) Pershing estimated $7.5 billion 2016 EBITDA and $16 of cash EPS which gave him a $250 fair value

 

Ackman thinks there should be a premium for the "platform value."  That's not exactly happening either?  These guys are locked out of the capital markets.

 

I think we've seen enough evidence to know this is isn't consumer products like P&G and they aren't going to hit $16 of cash EPS anytime soon.  It's ignoring whether cash EPS matters in the case of Valeant, but that's at least two big parts of the thesis gone very wrong.

 

Well, he didn't understand the details going on at Philidor that's for sure. Take the Philidor blow-up out of the picture and they would have not only met those 2016 targets but they would have exceeded them.

 

A P&G multiple is in the 20x range if I am not mistaken. I think Ackman's point was that 15x was not unreasonable and that gives no value to the platform value, which if you trust management, was significant. Having said this, the bonehead Marathon and Philidor issues/decisions by management and related negative publicity have taken a substantial amount of that platform value away in the short- and potentially even medium-term. On top of that, we have the earnings impact of Philidor to deal with along with legal issues, etc. so the market has dropped enterprise value by half.

 

Philidor is what gave VRX its pricing power and appearance of durability in a good part of their portfolio.  Philidor wasn't just a blow up; it was aggressive and unethical activity (which may have been outright fraud) that made 2015 results look better than they otherwise should have been.  It doesn't matter if they would have beat 2015, 2016, or 2017 targets with Philidor.  That wasn't a sustainable strategy.

 

Also Ackman said 85% of Valeant deserved a 20x multiple and the other 15% deserved an 8x multiple.  And that's not even GAAP EPS, that's cash EPS multiples.  Do you think that's turned out to be a realistic view of this company?

[jawn619]

He's selling volatility because it's overpriced relative to historical vol. If the stock goes to 60 he get's to own it. If the stock goes to above 165 he loses extra upside.

 

Meanwhile he collects a juicy premium. He loses if the stock goes under 60-his premium or above 165+his premium.

[LongHaul]

If you don't have the skill to tell if you are being deceived by Pearson and crew with the numbers then you should not own this.

 

 

[Liberty]

http://www.bloombergview.com/articles/2015-11-24/bill-ackman-found-a-cheap-way-to-buy-more-valeant-stock

[doughishere]

Heh

[original mungerville]

1) This is a consumer products company like P&G, deserving of a P&G multiple (85% durable according to Ackman)

2) Pershing estimated $7.5 billion 2016 EBITDA and $16 of cash EPS which gave him a $250 fair value

 

Ackman thinks there should be a premium for the "platform value."  That's not exactly happening either?  These guys are locked out of the capital markets.

 

I think we've seen enough evidence to know this is isn't consumer products like P&G and they aren't going to hit $16 of cash EPS anytime soon.  It's ignoring whether cash EPS matters in the case of Valeant, but that's at least two big parts of the thesis gone very wrong.

 

Well, he didn't understand the details going on at Philidor that's for sure. Take the Philidor blow-up out of the picture and they would have not only met those 2016 targets but they would have exceeded them.

 

A P&G multiple is in the 20x range if I am not mistaken. I think Ackman's point was that 15x was not unreasonable and that gives no value to the platform value, which if you trust management, was significant. Having said this, the bonehead Marathon and Philidor issues/decisions by management and related negative publicity have taken a substantial amount of that platform value away in the short- and potentially even medium-term. On top of that, we have the earnings impact of Philidor to deal with along with legal issues, etc. so the market has dropped enterprise value by half.

 

Philidor is what gave VRX its pricing power and appearance of durability in a good part of their portfolio.  Philidor wasn't just a blow up; it was aggressive and unethical activity (which may have been outright fraud) that made 2015 results look better than they otherwise should have been.  It doesn't matter if they would have beat 2015, 2016, or 2017 targets with Philidor.  That wasn't a sustainable strategy.

 

Also Ackman said 85% of Valeant deserved a 20x multiple and the other 15% deserved an 8x multiple.  And that's not even GAAP EPS, that's cash EPS multiples.  Do you think that's turned out to be a realistic view of this company?

 

 

Ya, ya - let's just say there was illegal activity at Philidor. Check. Yes, of course Philidor made the first half of 2015 results look better than they should have been (and will make the last quarter of 2015 looks very bad). Yes, that is not sustainable as a strategy. We agree on all that.

 

But it is a big stretch to then say that Philidor "is what gave VRX its pricing power and appearance of durability in a good part of their portfolio" - other than if you are stating the obvious and talking only about the part of the portfolio which was distributed by Philidor (around 7-8% of Valeant or something).

 

With respect to what I assume you mean by "good part of their portfolio", two points: 1) durability is not some binary thing where if you have revenues growing for a product through some volume/price growth combination the product is durable, and if you don't its not durable; 2) even if revenues are flat and only being held up by price increases this is not a clear sign that your overall portfolio in aggregate is not durable because you still have to factor in the pipeline of new products coming into that portfolio.

 

All these worst case analyses of durability for the dermatology business seem to totally neglect any potential contributions from the pipeline. And its not like this is high risk research, but it should help maintain units sold for the dermatology portfolio (after the one time step down in sales due to Philidor and eventually Marathon is taken into account).

 

Isn't the above a fair description of the possible reality? Or are you just saying screw it, I don't trust Pearson, the pipeline is all bullshit so I'll assume nothing will be developed for that "good part of their portfolio"?

[dorsiacapital]

1) This is a consumer products company like P&G, deserving of a P&G multiple (85% durable according to Ackman)

2) Pershing estimated $7.5 billion 2016 EBITDA and $16 of cash EPS which gave him a $250 fair value

 

Ackman thinks there should be a premium for the "platform value."  That's not exactly happening either?  These guys are locked out of the capital markets.

 

I think we've seen enough evidence to know this is isn't consumer products like P&G and they aren't going to hit $16 of cash EPS anytime soon.  It's ignoring whether cash EPS matters in the case of Valeant, but that's at least two big parts of the thesis gone very wrong.

 

Well, he didn't understand the details going on at Philidor that's for sure. Take the Philidor blow-up out of the picture and they would have not only met those 2016 targets but they would have exceeded them.

 

A P&G multiple is in the 20x range if I am not mistaken. I think Ackman's point was that 15x was not unreasonable and that gives no value to the platform value, which if you trust management, was significant. Having said this, the bonehead Marathon and Philidor issues/decisions by management and related negative publicity have taken a substantial amount of that platform value away in the short- and potentially even medium-term. On top of that, we have the earnings impact of Philidor to deal with along with legal issues, etc. so the market has dropped enterprise value by half.

 

Philidor is what gave VRX its pricing power and appearance of durability in a good part of their portfolio.  Philidor wasn't just a blow up; it was aggressive and unethical activity (which may have been outright fraud) that made 2015 results look better than they otherwise should have been.  It doesn't matter if they would have beat 2015, 2016, or 2017 targets with Philidor.  That wasn't a sustainable strategy.

 

Also Ackman said 85% of Valeant deserved a 20x multiple and the other 15% deserved an 8x multiple.  And that's not even GAAP EPS, that's cash EPS multiples.  Do you think that's turned out to be a realistic view of this company?

 

 

Ya, ya - let's just say there was illegal activity at Philidor. Check. Yes, of course Philidor made the first half of 2015 results look better than they should have been (and will make the last quarter of 2015 looks very bad). Yes, that is not sustainable as a strategy. We agree on all that.

 

But it is a big stretch to then say that Philidor "is what gave VRX its pricing power and appearance of durability in a good part of their portfolio" - other than if you are stating the obvious and talking only about the part of the portfolio which was distributed by Philidor (around 7-8% of Valeant or something).

 

With respect to what I assume you mean by "good part of their portfolio", two points: 1) durability is not some binary thing where if you have revenues growing for a product through some volume/price growth combination the product is durable, and if you don't its not durable; 2) even if revenues are flat and only being held up by price increases this is not a clear sign that your overall portfolio in aggregate is not durable because you still have to factor in the pipeline of new products coming into that portfolio.

 

All these worst case analyses of durability for the dermatology business seem to totally neglect any potential contributions from the pipeline. And its not like this is high risk research, but it should help maintain units sold for the dermatology portfolio (after the one time step down in sales due to Philidor and eventually Marathon is taken into account).

 

Isn't the above a fair description of the possible reality? Or are you just saying screw it, I don't trust Pearson, the pipeline is all bullshit so I'll assume nothing will be developed for that "good part of their portfolio"?

 

Hi OM,

 

Valeant lists its late stage portfolio here. http://www.valeant.com/operational-expertise/valeant-united-states/pipeline

 

There's two listed dermatology products both still compounds without names. The earliest is expected to launch 2017/2018. This does not sound like a strong pipeline.. Perhaps there are products, like jublia, that Valeant is launching right now with small sales, but I would think we'd have heard more about them.

 

Aren't we trusting Pearson if we say the current pipeline is bullshit? After all, it's Pearson who has been saying for years that Valeant with certain (Jublia) exceptions is not good at drug development and only acquires it through M&A. Do you think the pipeline can be replenished with M&A over the next year or two? Do you think Valeant will have the cash flow to boost R&D to 500 million in 2016 like they'd promised? (Also, if you note, Valeant has consistently made 50-100 million a year over the last several years selling compounds in development to other drug companies. I think that must be Valeant selling its most promising assets, but could be wrong). 

 

Also, you mention cash eps. Why is it reasonable to deduct amortization for the loan expense (at least 8-9 billion, maybe another 4 if they're amoritizing Salix loans they assumed) of acquiring Salix's portfolio since those are all patented products that I have trouble defining as durable assets? Do you have a thesis for why Xifaxan will retain pricing power after its patent exclusivity expires (there are at least grounds for an ANDA challenge in 2017 and the first/strongest patents expire in 2024). 

[dorsiacapital]

The topic of how much actual cash flow will VRX earn in 2016, not bullshit "cash EPS" or EBITDA, but actual, "stuff that I can see on the cash-flow statement" cash flow continues to occupy my mind. On this thread, I've tried out several approaches to ball-park a number. Let's try another one.

 

Did anyone yet get a rock solid, absolutely conservative, "downside case" FCFF for Valeant for 2016?

 

Please, walk with me. I look at current trailing FCFF of Valeant and check what further FCFF can be contributed from B&L and Salix. I would be grateful if someone could look at this and critique this. I am focused on unlevered FCF (calculated as Cash from Ops, adding back interest expense, subtracting capex).

 

B&L: In the years prior to getting bought by Valeant, B&L earned revenues of about $3b, EBITDA around $600-700m and free cash flows (ex acquisitions, before interest expense) of about $200m annual. Valeant then went and bought B&L for $8b. Valeant paid 40x FCF. To the best of my knowledge, B&L organic growth under VRX ownership is mid-single digits. Let's say that 2016 B&L revenues will be $4b, FCF will be $1b; (i.e. $800m higher than in the current year). Next:

 

Salix: Prior to getting bought by VRX, Salix reported $1.1b revenues, $300b EBITDA (in its best year). Not much FCF. VRX then bought Salix for $14b. Let's use adjusted guidance and assume revenues next year for Salix will be around $3b; EBITDA of $1.5b. Let's say that the FCF margin will be the same as B&L (which is generous! B&L is a better business). I.e. Salix too will get FCF of $1b.

 

Therefore:

2016 FCFF (before new acquisitions, before interest) = current trailing FCFF ($3.5b) + extra $0.8b from B&L + $1b from Salix = $5.5b.

 

Now that is beginning to look kinda reasonable, against a total enterprise value of $60b, of which $30b is debt. Buying VRX equity at current prices means paying about 10.5x FCFF. There are more than a few other things that you could buy at that sort of price, in the current environment (e.g. WMT) but without the regulatory risk & the 2016/17 covenant risk that VRX has. 

 

So: I still don't get Ackman and other buyers at current prices.

 

Now you're talking my language! I think your analysis is generally correct.

 

Few points - B&L should already be in the TTM trailing cash flow, so I wouldn't add it to the 2016 cash flow? As far as I know Valeant said all synergies were basically done by end of 2014, so we should be seeing all that cash right now. 

 

-Not sure why you prefer unlevered free cash flow since levering is such a key part of the Valeant story? The interest expense will be about 1.7 billion over the next year (using last quarter's $420 million that includes Salix debt). Unlevered free cash flow seems more important as a metric before you load a company up with debt but, to each his own!

 

-Not sure how you want to handle the 400 million from Pershing Square lurking in the CFFO and, on the other hand, the 400-500 million in integration costs. Assuming good faith, works out to basically a wash.

 

-I don't know if a conservative case for Valeant would use the adjusted Salix guidance (or not incorporate potential problems from dermatological). If you look at the last Salix 10-k, after they adjusted for the inventory scandal, then it's a picture of a company that's not exactly thriving. But I do not know how getting the IBS-D indication affects formulary coverage/reimbursement (Cafepharma boards pre-Citron indicate that Salix is still having to fight quite hard to get satisfactory formulary coverage). And then there's derm, but that's obviously a very black box subject.

 

-There should probably be some consideration of Marathon, Xenazine, other generic competition but maybe that's only 100-200 million of effect. 

 

Anyway, not huge changes as long as we accept usage of unlevered free cash flow. I get about 4.5 billion (primarily from not re-adding B&L). Adding interest expense takes you under 3 billion and that's before any long-term hit to derm, bad formulary renegotiations, etc., etc.,

[dorsiacapital]

Isolani voluntarily dismissing its lawsuit against Reitz. Wonder if he's going to get to keep that 19 million?

 

http://www.scribd.com/doc/291061375/Isolani-Motion-for-Dismissal

 

 

[Guest Grey512]

The topic of how much actual cash flow will VRX earn in 2016, not bullshit "cash EPS" or EBITDA, but actual, "stuff that I can see on the cash-flow statement" cash flow continues to occupy my mind. On this thread, I've tried out several approaches to ball-park a number. Let's try another one.

 

Did anyone yet get a rock solid, absolutely conservative, "downside case" FCFF for Valeant for 2016?

 

Please, walk with me. I look at current trailing FCFF of Valeant and check what further FCFF can be contributed from B&L and Salix. I would be grateful if someone could look at this and critique this. I am focused on unlevered FCF (calculated as Cash from Ops, adding back interest expense, subtracting capex).

 

B&L: In the years prior to getting bought by Valeant, B&L earned revenues of about $3b, EBITDA around $600-700m and free cash flows (ex acquisitions, before interest expense) of about $200m annual. Valeant then went and bought B&L for $8b. Valeant paid 40x FCF. To the best of my knowledge, B&L organic growth under VRX ownership is mid-single digits. Let's say that 2016 B&L revenues will be $4b, FCF will be $1b; (i.e. $800m higher than in the current year). Next:

 

Salix: Prior to getting bought by VRX, Salix reported $1.1b revenues, $300b EBITDA (in its best year). Not much FCF. VRX then bought Salix for $14b. Let's use adjusted guidance and assume revenues next year for Salix will be around $3b; EBITDA of $1.5b. Let's say that the FCF margin will be the same as B&L (which is generous! B&L is a better business). I.e. Salix too will get FCF of $1b.

 

Therefore:

2016 FCFF (before new acquisitions, before interest) = current trailing FCFF ($3.5b) + extra $0.8b from B&L + $1b from Salix = $5.5b.

 

Now that is beginning to look kinda reasonable, against a total enterprise value of $60b, of which $30b is debt. Buying VRX equity at current prices means paying about 10.5x FCFF. There are more than a few other things that you could buy at that sort of price, in the current environment (e.g. WMT) but without the regulatory risk & the 2016/17 covenant risk that VRX has. 

 

So: I still don't get Ackman and other buyers at current prices.

 

Now you're talking my language! I think your analysis is generally correct.

 

Few points - B&L should already be in the TTM trailing cash flow, so I wouldn't add it to the 2016 cash flow? As far as I know Valeant said all synergies were basically done by end of 2014, so we should be seeing all that cash right now. 

 

-Not sure why you prefer unlevered free cash flow since levering is such a key part of the Valeant story? The interest expense will be about 1.7 billion over the next year (using last quarter's $420 million that includes Salix debt). Unlevered free cash flow seems more important as a metric before you load a company up with debt but, to each his own!

 

-Not sure how you want to handle the 400 million from Pershing Square lurking in the CFFO and, on the other hand, the 400-500 million in integration costs. Assuming good faith, works out to basically a wash.

 

-I don't know if a conservative case for Valeant would use the adjusted Salix guidance (or not incorporate potential problems from dermatological). If you look at the last Salix 10-k, after they adjusted for the inventory scandal, then it's a picture of a company that's not exactly thriving. But I do not know how getting the IBS-D indication affects formulary coverage/reimbursement (Cafepharma boards pre-Citron indicate that Salix is still having to fight quite hard to get satisfactory formulary coverage). And then there's derm, but that's obviously a very black box subject.

 

-There should probably be some consideration of Marathon, Xenazine, other generic competition but maybe that's only 100-200 million of effect. 

 

Anyway, not huge changes as long as we accept usage of unlevered free cash flow. I get about 4.5 billion (primarily from not re-adding B&L). Adding interest expense takes you under 3 billion and that's before any long-term hit to derm, bad formulary renegotiations, etc., etc.,

 

dorsiacapital - excellent, many thanks. And I appreciate your nametag reference to American Psycho (liked the film; didn't read the book).

 

If $4.5b unlevered and $3b levered is a good conservative set of numbers for 2016, then the next logical question: what is a fair EV/unlevered or mcap/levered multiple. But I think that is a topic that people can debate forever. Still, if those are the current numbers, then I don't get how at current prices (13x EV/unlevered, 10x mcap/levered) Valeant is "a steal" or a "bargain" (two of the epithets that people are throwing around). Pfizer or Merck at 14x P/E - a steal. Valeant - at 10x? Not so sure.