VRX - Valeant Pharmaceuticals International Inc.

[dorsiacapital]

So, who knows right? I guess I find it interesting that pre-2015, Valeant pitched pretty hard the idea that we are not a traditional pharmaceutical company reliant on blockbusters. Instead, we are about these durable branded products and a very diverse product line. Then in 2015 they acquire Xifaxan, Sprout, Dendreon, all of which are high upside, high downside products.  (My totally biased opinion is that they switched because they needed a blockbuster drug breakout to justify the rather frothy stock prices that Valeant was trading at end of 2014 as well as trigger those option packages but again that is just an inference I am making from my  perspective of motivated reasoning.)

 

I see it as more nuanced than that.  Ackman pitched the durable hardline and for the most part it was true and that was probably their business plan.  Subsequently the durable/generic price game began to show up on the radar of their competitors. 

 

Valeant pivoted when they saw the chance to pick up a few blockbuster/blockbuster-hopefuls at attractive prices.  I mean why limit yourself to durables if you're in the acquiring mispriced assets game?  I don't think it has anything to do with trying to reach compensation benchmarks-that's a bit cynical.  It's like that old Howard Marksism about riskier assets produce higher returns (if they did so reliably then why are they riskier?).  If just plopping down for blockbusters generated higher returns then what is Valeant doing diverging from the "tried and true" pharma playbook?

 

I think Pearson and Co try to pick their spots.  They don't have a predilection to either durables or exclusive blockbusters -they just want assets that the market is undervaluing (if it is the most favorable opportunity relative to the other options they have with regards to deploying capital).

 

I know this is belated, but I'd meant to give a response.

 

(As an initial matter, I think a bit of cynicism about Pearson & co's objectives is warranted. Especially when you consider how gigantic the compensation benchmarks were for his executive team. The general counsel sold $40 million worth of shares just this year, and had 400% inflators. That's GIGANTIC compensation for a general counsel. Ari Kellem, from McKinsey, netted $50 million the year before that. The new CFO, Rosiello, had a compensation package where, if he hit all his benchmarks, he'd net hundreds of millions of dollars. But anyway, this turns into an argument about intentions and that devolves very quickly)

 

Here's why I find the timeline strange.

 

At the beginning of 2015, Valeant gives various interviews about how they're committed to reducing the debt and how they're excited about the opportunity to have several clean quarters in a row to show people the strength of the business.

 

Then, within a month, they spend $15 billion on Salix (final price of $173 a share). So let's break down Salix's price history. Salix had traded up to the $150 range based on very strong growth numbers. Allergan, fleeing desperately from Valeant, bid $205 for Salix. Then, during initial due diligence, Allergan found the massive inventory problems that had inflated the growth and dropped its bid, reportedly, to $175 a share. Salix's board appears to have turned it down. The stock fell to $95 for a bit and then started to creep up on M&A rumors. (Salix hired some investment bankers to shop it, citing liquidity concerns). Valeant came in with a $158 bid, Endo made a brief bid, Valeant raised to $173. 

 

So does this mean Salix is an underpriced asset? At best, Valeant paid slightly less than Allergan's initial bid when the problems weren't known. At medium, Valeant paid slightly over the market price for Salix before the efficient market knew of the inventory problems. At worst Valeant overpaid for an asset that had used inventory stuffing to mask demand (because who knows if Allergan would have even paid $175 after they got done with their DD, and, besides Endo, no other actual bidders emerged even though Salix was getting shopped hard.) 

 

And, moreover, I find it strange that within a month-ish of saying they were paying down debt, they near doubled their total debt in order to buy the pharmaceutical company that was very publicly on sale. And Salix, as far as I can see, had little of the Valeant hallmarks - it's R&D by the end was mainly concentrated on getting IBS approval for Xifaxan. Valeant still needed the Salix salesforce because it's an entirely different target market.

 

On the other two big purchases

 

Dendreon - a lot of people put a lot of money and time into trying to make Dendreon into a blockbuster drug. And despite those efforts, the company went bankrupt because the product's efficacy is limited and it's very expensive to produce. If we don't approach the issue with any innate faith in Pearson's abilities, what is the argument that Dendreon was a mispriced asset? (My suspicion is because cancer drugs are one of the limited groups of drugs that absolutely have to be included in formularies and thus it was a way of avoiding substitution issues even after massive price increases occur but as far as I know Pearson hasn't said that.)

 

Sprout - this drug had been abandoned by its original manufacturer and rejected twice by the FDA. It's efficacy seems highly questionable. Again, what, apart from faith in Pearson, leads us to think that it's an underpriced asset (apart from the fact that it's daily nature makes it ideal for being pushed through Philidor).

 

Valeant at least had a pretty good story about why its acquisitions were mispriced assets - R&D is ineffective, we take the drug, cut the R&D operations that every other drug manufacturer is doing as a charitable endeavor, and boom, mispriced assets. But that story doesn't work for any of these assets because there was no ongoing R&D at Dendreon or Sprout and quite limited R&D at Salix. So why then were those assets mispriced??

 

 

[LongHaul]

Nice find on the importation from Canada possibility.  Good writeup. 

Pearson is good at telling fairly tales and a lot of the longs believe him.

He must have had a lot of practice at Mckinsey.

 

[Liberty]

Cindy Whitehead already out at Sprout. Probably not a good sign...

[doughishere]

http://basehitinvesting.com/valeant-short-selling-and-the-too-hard-pile/

 

Valeant, Short Selling, and the Too-Hard Pile

By John Huber On December 6, 2015 · 9 Comments

[mbharadwaj]

Valeant in a distribution deal with Walgreens. Stock up in pre-market.

 

https://finance.yahoo.com/news/valeant-distribution-deal-walgreens-133359942.html

[Happy]

It seems that Walgreens is the replacing specialty pharmacy for Philidor, but they are careful not to use the term because it has a bad connotation to it at the moment. Seems good that they were able to get such a well-known company as the new partner. The 10% discount seems reasonable, Philidor had lower margins as well.

What I don't have a good understanding about yet is the average 50% reduction for branded products with generic competition that will get offered at the generic price at Walgreens. Isn't that bad for prices of those products long-term? Can't many patients then just buy the product much cheaper at Walgreens (or Walgreens competitors if they make more deals like this) when they would have paid a significantly higher price before?

 

The next year will prove out then how much Valeant was relying on price. I'm confident that they will do just fine.

[original mungerville]

This looks like a huge huge deal for Valeant. The stuff they are giving a 10% price cut to is the Philidor stuff, but through a much broader and deeper distribution across the entire US  now. Looks to me that although you won't get as many hits/prices per customer as you did through Philidor (because of the shenanigans if we assume those are true which they sure seem to be), you get way way more distribution/volume. And the margins are so high on these products that giving away price is fine.

 

In terms of the 50% haircut on their branded portfolio that can not compete with generics, they had a minuscule share of that market anyway, and Philidor probably helped them with that. But on the other side, Walgreens distribution will be huge here as well.

 

I think they make more money this way, more sustainably now. I am no expert but this seems huge - actually seems to be turning the negative at Philidor, past neutral and into a positive - especially longer term.

 

Other views?

[100 Shares]

This looks like a huge huge deal for Valeant. The stuff they are giving a 10% price cut to is the Philidor stuff, but through a much broader and deeper distribution across the entire US  now. Looks to me that although you won't get as many hits/prices per customer as you did through Philidor (because of the shenanigans if we assume those are true which they sure seem to be), you get way way more distribution/volume. And the margins are so high on these products that giving away price is fine.

 

In terms of the 50% haircut on their branded portfolio that can not compete with generics, they had a minuscule share of that market anyway, and Philidor probably helped them with that. But on the other side, Walgreens distribution will be huge here as well.

 

I think they make more money this way, more sustainably now. I am no expert but this seems huge - actually seems to be turning the negative at Philidor, past neutral and into a positive - especially longer term.

 

Other views?

 

Also there are three short clips with MP on CNBC that provide a little more detail not covered in the press release.

 

Big things I thought were:

1. The agreement with Walgreens cuts out the distribution middle man, whih cuts out a lot of cost for Valeant

2. When people order the generics at Walgreens they will get valeants branded generics filled for them.

[Vish_ram]

This should restore some lost credibility. I trimmed my position a bit.

[blainehodder]

This looks like a huge huge deal for Valeant. The stuff they are giving a 10% price cut to is the Philidor stuff, but through a much broader and deeper distribution across the entire US  now. Looks to me that although you won't get as many hits/prices per customer as you did through Philidor (because of the shenanigans if we assume those are true which they sure seem to be), you get way way more distribution/volume. And the margins are so high on these products that giving away price is fine.

 

In terms of the 50% haircut on their branded portfolio that can not compete with generics, they had a minuscule share of that market anyway, and Philidor probably helped them with that. But on the other side, Walgreens distribution will be huge here as well.

 

I think they make more money this way, more sustainably now. I am no expert but this seems huge - actually seems to be turning the negative at Philidor, past neutral and into a positive - especially longer term.

 

Other views?

 

Agree completely.  This is a huge deal.

[rpadebet]

This looks like a huge huge deal for Valeant. The stuff they are giving a 10% price cut to is the Philidor stuff, but through a much broader and deeper distribution across the entire US  now. Looks to me that although you won't get as many hits/prices per customer as you did through Philidor (because of the shenanigans if we assume those are true which they sure seem to be), you get way way more distribution/volume. And the margins are so high on these products that giving away price is fine.

 

In terms of the 50% haircut on their branded portfolio that can not compete with generics, they had a minuscule share of that market anyway, and Philidor probably helped them with that. But on the other side, Walgreens distribution will be huge here as well.

 

I think they make more money this way, more sustainably now. I am no expert but this seems huge - actually seems to be turning the negative at Philidor, past neutral and into a positive - especially longer term.

 

Other views?

 

Agree completely.  This is a huge deal.

 

Would this have happened if not for the shorts focusing so intensely on Philidor?

I like the fact that there could be increased volume of sales. This is good for sustainable organic growth and thus market might afford VRX a higher multiple going forward.

[Liberty]

Good step forward.

[blainehodder]

This looks like a huge huge deal for Valeant. The stuff they are giving a 10% price cut to is the Philidor stuff, but through a much broader and deeper distribution across the entire US  now. Looks to me that although you won't get as many hits/prices per customer as you did through Philidor (because of the shenanigans if we assume those are true which they sure seem to be), you get way way more distribution/volume. And the margins are so high on these products that giving away price is fine.

 

In terms of the 50% haircut on their branded portfolio that can not compete with generics, they had a minuscule share of that market anyway, and Philidor probably helped them with that. But on the other side, Walgreens distribution will be huge here as well.

 

I think they make more money this way, more sustainably now. I am no expert but this seems huge - actually seems to be turning the negative at Philidor, past neutral and into a positive - especially longer term.

 

Other views?

 

Agree completely.  This is a huge deal.

 

Would this have happened if not for the shorts focusing so intensely on Philidor?

I like the fact that there could be increased volume of sales. This is good for sustainable organic growth and thus market might afford VRX a higher multiple going forward.

 

Interesting point.  I doubt it would have happened without the shorts. Interesting as I see this making the company stronger than pre Philidor. Walgreens distribution of derm is massive even with a small price haircut.  It also sets the stage for future specialty products to go through Walgreens.

[cmlber]

Previous guidance was $7.5b "+".  Pearson said on CNBC that this Walgreens deal more than replaces Philidor.  So it's conceivable that he could still guide to $7.5b tomorrow. 

[ourkid8]

When will the products be available for sale at Walgreens?

 

Previous guidance was $7.5b "+".  Pearson said on CNBC that this Walgreens deal more than replaces Philidor.  So it's conceivable that he could still guide to $7.5b tomorrow.

[Liberty]

Interviews with Pearson:

 

http://www.bnn.ca/Video/player.aspx?vid=770435

 

http://www.cnbc.com/2015/12/15/valeant-strikes-distribution-deal-with-walgreens.html

[Picasso]

Nice trade for those who bought under $80.  This deal looks like a big positive. 

[rpadebet]

Previous guidance was $7.5b "+".  Pearson said on CNBC that this Walgreens deal more than replaces Philidor.  So it's conceivable that he could still guide to $7.5b tomorrow.

 

I am not sure about this.

 

But I am still thinking why did VRX go with Philidor as the first choice when something like Walgreens was available to them? There was some advantage they derived from Philidor which is now lost. Does this deal make up for that in it's entirety?

[blainehodder]

Nice trade for those who bought under $80.  This deal looks like a big positive.

 

Thanks. This has been a very stressful large position to hold, but it has worked out very well so far.

[blainehodder]

Previous guidance was $7.5b "+".  Pearson said on CNBC that this Walgreens deal more than replaces Philidor.  So it's conceivable that he could still guide to $7.5b tomorrow.

 

I am not sure about this.

 

But I am still thinking why did VRX go with Philidor as the first choice when something like Walgreens was available to them? There was some advantage they derived from Philidor which is now lost. Does this deal make up for that in it's entirety?

 

Given VRX has a history of sandbagging prior guidance, even if Walgreens is a bit less, they might still hit 7.5B EBITDA

[cmlber]

Previous guidance was $7.5b "+".  Pearson said on CNBC that this Walgreens deal more than replaces Philidor.  So it's conceivable that he could still guide to $7.5b tomorrow.

 

I am not sure about this.

 

But I am still thinking why did VRX go with Philidor as the first choice when something like Walgreens was available to them? There was some advantage they derived from Philidor which is now lost. Does this deal make up for that in it's entirety?

 

Given VRX has a history of sandbagging prior guidance, even if Walgreens is a bit less, they might still hit 7.5B EBITDA

 

Exactly... Everyone is forgetting the "+" in the guidance.  It was previously 7.5b+.  They've got a history of beating guidance, so if the Walgreens deal is a little worse than Philidor, there's still probably a cushion to exceed 7.5b next year.  We'll see tomorrow. 

[original mungerville]

I don't think we get $7.5 billion in EBITDA guidance - that would be at the very very top of any range I can think of. I would say we get north of $6.5 billion... I am not sure this Walgreens deal kicks in on Jan 1, and it'll take time to ramp up so I can't see $7.5 billion in guidance.

 

Q4 will be horrible but that will be viewed as history.

[Guest Schwab711]

Still have no position but I think the Dec 18th puts are a pretty good value if you bought today.

 

I can't speak for all those negative on VRX but I have been quiet because of all the new folks in the thread. It's too difficult to correct the misinformation posted when it's already been discussed in this thread. There is really no factual support for this sandbagging claim. It was last true in 2012 or 2013. In 500+ pages, no one has attempted to value VRX on a product basis. I'm not sure what else anyone is supposed to say. I have no update to my short thesis. If anything, I think today's announcement strengthens my argument.

 

Also, the thread is still using $7.5B+ EBITDA estimate for some unknown reason. The "+" is because of a new indication of Xifaxan that is expected to add roughly $25m-$50m in EBITDA in 2015. It's a rounding error, at best. As OM mentioned, the $7.5b number is irrelevant and out-dated.

 

 

The companies have also inked a separate deal under which Valeant will distribute more than 30 branded products, where generics are available, through Walgreens at generic prices. The discounted pricing, ranging from 5% to 95%, will be available to patients in H2 2016. Eligible products represent dermatology, ophthalmology, gastrointestinal and neurology/other and include Aldara, Tiazac and Glumetza.

 

Valeant expects the price discounts to provide up to $600M in annual savings to the U.S. healthcare system, when fully implemented.

article

 

What!? $600m in savings sounds good for VRX's bottom line...

 

VRX's patent-protected derma drugs will now be introduced to new generic competition by going through Walgreens (which is why specialty pharmas were used in the first place). If we go back to my estimated "true" organic growth, the actual situation is much worse than my assumption of "flat growth", in spite of folks considering my rough estimate low at the time. As of 3Q15, the only products with nominal revenue growth of >= $9m y/y are included in this deal of massive guaranteed price cuts. Most bulls were assuming no change/flat growth moving forward for these same drugs a few pages back. Now we know that will certainly not happen. So how is this deal a positive (compared to expectations)?

 

The direct distribution model for Valeant's dermatology and ophthalmology products through Walgreens and independent pharmacies is designed to help reduce costs and administrative processes, yielding savings that can benefit patients and the healthcare system.

 

Just another massive change in the business model from just 30 months ago. No big deal. Do longs' even know what the business model is anymore?

 

 

We also found out that the CEO/founder of Sprout (Addyi) quit. VRX has ~$2b in liquidity at the moment (including available revolver) before we find out how bad 4Q15 is. The high-yield market is tanking and they are likely going to take a loss/ have negative FCF in 4Q15 (which is scary considering their acquisition model). If a fine is handed out in the near-term then VRX could be forced to sell assets. Are you comfortable owning assets at >2x the acquisition price? It is hard to see how VRX could possibly produce GAAP profit by 2018, so how are they going to resolve their funding gap in 2018-2023?

 

My guess is VRX will be forced to sell assets, merge, or declare bankruptcy at some point in the next few years. No change to the short thesis in my mind. If anything, it is crystallizing.

[Picasso]

Yeah the business model has changed several times over the past several years.  One could argue that it's masking the poor underlying business model by changing the yardstick every six months.  Someone else could argue that it makes Pearson unique and allows him to create value by showing a willingness to adapt.  Depends whether you're glass half empty or full about the prospects for the stock.

 

My opinion is that Pearson has created a business that shows good cash flows up front without the ability to determine how durable those cash flows are.  Those cash flows over a couple years won't tell you what the real economic profits will be over the lifetime of owning Valeant.  Yet investors are okay with looking out a couple years for that cash flow and giving it a fairly high multiple. 

 

It's a bit like religion as this point.... You can't prove God doesn't exist but you can't prove he exists either.  You won't know if cash EPS is real until it's too late to sell/buy the stock.  I'm not exactly going to put my faith in Pearson either.  I just happen to think that if you invest in 100 of these situations, you're going to end up losing money over time.  For every success story you get a couple blow ups and it makes for a difficult investing strategy. 

[giofranchi]

Yeah the business model has changed several times over the past several years.  One could argue that it's masking the poor underlying business model by changing the yardstick every six months.  Someone else could argue that it makes Pearson unique and allows him to create value by showing a willingness to adapt.  Depends whether you're glass half empty or full about the prospects for the stock.

 

My opinion is that Pearson has created a business that shows good cash flows up front without the ability to determine how durable those cash flows are.  Those cash flows over a couple years won't tell you what the real economic profits will be over the lifetime of owning Valeant.  Yet investors are okay with looking out a couple years for that cash flow and giving it a fairly high multiple. 

 

It's a bit like religion as this point.... You can't prove God doesn't exist but you can't prove he exists either.  You won't know if cash EPS is real until it's too late to sell/buy the stock.  I'm not exactly going to put my faith in Pearson either.  I just happen to think that if you invest in 100 of these situations, you're going to end up losing money over time.  For every success story you get a couple blow ups and it makes for a difficult investing strategy.

 

This is exactly what I meant with “fraud” from the beginning: those who liked VRX liked its business model and the CEO who was implementing that business model. Pearson told his shareholders that he was buying durable assets at a good price, and that he was then cutting unnecessary costs to the bone. To keep doing so, in an industry which already enjoys very high margins, requires focus and discipline. And he was showing his shareholders very good business results (a very strong organic growth included).

 

Of course, if and when results reported by management are put in doubt, I am lost: I have my own businesses to run each day, and I don’t have the time to do all the work necessary to disprove an accusation of fraud.

 

The lesson I think is to invest only with those owner/managers whose reputation is so much respected that it most probably won’t be attacked: Buffett, Malone, Watsa, and a few others.

 

This being said, I’ll continue to follow VRX closely: I am very curious to know what will happen in the next few years. I would be delighted if I see it will be successful and Pearson will be proven a truly reliable manager after all. He will then surely deserve a place among those managers whose reputation will never be attacked again, and I will then be very glad to invest with him again, albeit at a much higher price and when VRX will be a much larger company.

 

Cheers,

 

Gio