VRX - Valeant Pharmaceuticals International Inc.

[wisdom]

http://finance.yahoo.com/news/valeant-provides-financial-guidance-110000534.html

 

$7 B guidance with adjusted cash flow in the mid $13 range.

[Rasputin]

 

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.

 

Q4 2015 Revised Guidance

 

Total Revenues previously $3.25 - $3.45 billion now $2.7 - $2.8 billion

Adjusted EPS* previously $4.00 - $4.20 now $2.55 -$2.65

Adjusted Cash Flow from Operations* previously greater than $1.0 billion, now greater than $600 million

[Guest Schwab711]

 

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.

 

Q4 2015 Revised Guidance

 

Total Revenues previously $3.25 - $3.45 billion now $2.7 - $2.8 billion

Adjusted EPS* previously $4.00 - $4.20 now $2.55 -$2.65

Adjusted Cash Flow from Operations* previously greater than $1.0 billion, now greater than $600 million

 

Do you think they add back the costs of the investigation and Philidor?

[ourkid8]

If the Walgreens deal kicked in Jan 1, I believe guidance would have remained @ $7.5B EBITDA for 2016.

 

http://www.marketwatch.com/story/why-the-valeant-walgreens-deal-could-save-you-money-2015-12-15?siteid=yhoof2

 

Valeant VRX, +16.41%  and Walgreens WBA, -0.55%  announced Tuesday that cheaper dermatological, ophthalmological and some over-the-counter products will be available at discounts of up to 95%, rolling out in Walgreens and independent pharmacies—yet to be announced -- starting in summer 2016.

 

 

UPDATE: The article was incorrect, products will start arriving in Walgreens in Jan 2016 as per the investor's day slides.

[Guest Schwab711]

If the Walgreens deal kicked in Jan 1, I believe guidance would have remained @ $7.5B EBITDA for 2016.

 

Why? Unwavering faith in the VRX business model(s)? :)

[ourkid8]

I am looking at Valeant's investor's day deck:

 

Previous 2016 Outlook - $7.5B EBITDA

-Dermatology Patient Access Program ramp-up ~($225M)

-Changes in pricing assumptions ~($125M)

-Employee retention bonuses ~($75M)

-Incremental legal fees ~($75M)

 

New 2016 Outlook - $7B EBITDA. 

 

Is it really that inconceivable?

 

If the Walgreens deal kicked in Jan 1, I believe guidance would have remained @ $7.5B EBITDA for 2016.

 

Why? Unwavering faith in the VRX business model(s)? :)

[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...

 

Recent market moves have been very favorable for Ackman - obviously. He has about 3x his incremental investment in the options with the recent price movements. Not a bad way to make 120 million in a few days time. 

 

[dorsiacapital]

Here's what I don't understand.

 

They're guiding for 7 billion ebitda, but they're saying that they only expect to pay off 2.2 billion of debt next year. My understanding was that the sole focus of their cash flow next year would be paying off debt...why are they only expecting to pay off 2.2-ish billion of debt?

 

I understand that interest payments amount to 1.6 billion, and taxes a bit more, but that should only take it down to 5 billion ebitda or so. What explains the gap between that and the amount of debt they expect to repay? Do they think they'd be better off just keeping that extra 2.6 billion in the bank.

 

Small detail but I think this shows that Walgreens definitely negotiated hard

"Valeant will credit Walgreens for any inventory on hand in its stores or distribution centers as part of transition"

 

My larger question about Walgreens is who handles the PBM stuff/prior authorizations, etc., - i.e. all the stuff that Philidor did. I don't think Walgreen's is willing to do that. It sounds like Walgreen's is just acting as a convenient warehouse for Valeant and charging a tidy fee. I'm not sure how much Valeant is allowed to handle that stuff...

 

I'm also sad to hear that "adjusted cash flow from operations" will be vanishing from the presentations. I'm going to miss that guy. (Although it seemed to still pop up in a  few places here).

 

 

[ourkid8]

Committed to minimum debt pay down in 2016 of >$2.25B including $562M term loan amortization and $260M maturities.  Management is targeting 4x leverage by year end and the rest of the cash they will bank until they start hunting for new targets  :)   

 

Here's what I don't understand.

 

They're guiding for 7 billion ebitda, but they're saying that they only expect to pay off 2.2 billion of debt next year. My understanding was that the sole focus of their cash flow next year would be paying off debt...why are they only expecting to pay off 2.2-ish billion of debt?

 

I understand that interest payments amount to 1.6 billion, and taxes a bit more, but that should only take it down to 5 billion ebitda or so. What explains the gap between that and the amount of debt they expect to repay? Do they think they'd be better off just keeping that extra 2.6 billion in the bank.

 

Small detail but I think this shows that Walgreens definitely negotiated hard

"Valeant will credit Walgreens for any inventory on hand in its stores or distribution centers as part of transition"

 

My larger question about Walgreens is who handles the PBM stuff/prior authorizations, etc., - i.e. all the stuff that Philidor did. I don't think Walgreen's is willing to do that. It sounds like Walgreen's is just acting as a convenient warehouse for Valeant and charging a tidy fee. I'm not sure how much Valeant is allowed to handle that stuff...

 

I'm also sad to hear that "adjusted cash flow from operations" will be vanishing from the presentations. I'm going to miss that guy. (Although it seemed to still pop up in a  few places here).

[dorsiacapital]

Committed to minimum debt pay down in 2016 of >$2.25B including $562M term loan amortization and $260M maturities.  Management is targeting 4x leverage by year end and the rest of the cash they will bank until they start hunting for new targets  :)   

 

 

Or perhaps they're banking the cash in anticipation of legal fees & fines (75 million might be low). I'd think they'd take the opportunity to buy back their debt at a discount.

 

Anyway, very boring response because waiting is no fun, but let's check back at end of 2016 and see what the cash balance is and the amount of debt repaid.

[rpadebet]

It's probably just me, but I think once you are addicted to acquisitions it's hard to get off.

 

So what would Pearson do if next year he sees a must have deal? Will he stick to, " I am going to pay off the debt " mantra?

 

The way the high yield market is acting, I am pretty sure next year will present a lot of opportunities for acquisitions.

 

Personally, I don't mind the leverage ratio. Why is 4 better than 5? Both are high. They should be buying value wherever, whatever that is.

 

If your usp is capital allocation, you better not stop doing that because of media, short sellers, skeptics, your own public statements...

[original mungerville]

Schwab711,

 

Did you take your own advice on Dec 16 and buy the Dec 18 puts on VRX?

 

 

[ourkid8]

Are you still short VRX?

 

Committed to minimum debt pay down in 2016 of >$2.25B including $562M term loan amortization and $260M maturities.  Management is targeting 4x leverage by year end and the rest of the cash they will bank until they start hunting for new targets  :)   

 

 

Or perhaps they're banking the cash in anticipation of legal fees & fines (75 million might be low). I'd think they'd take the opportunity to buy back their debt at a discount.

 

Anyway, very boring response because waiting is no fun, but let's check back at end of 2016 and see what the cash balance is and the amount of debt repaid.

[John Hjorth]

Gio,

 

Are you still long VRX, or have you sold out [at a loss?, perhaps to tax wise offset other gains?] of this, or are you standing right now on sideline? I have gone through sixty-some pages in this topic without getting to a clear and straight conclusion.

[dorsiacapital]

I significantly trimmed my position in the last week or so because I thought their presentation would be buoyant. I may reenter depending on where the price stabilizes.  If only someone had told me that the markets can (arguably) stay irrational longer than I can stay solvent!

 

 

Are you still short VRX?

 

 

[John Hjorth]

dorsiacapital,

 

What's the inner purpose of just posting quotes of other board members posts without typing anything yourself?

[Guest Schwab711]

Schwab711,

 

Did you take your own advice on Dec 16 and buy the Dec 18 puts on VRX?

 

Clown question, bro.

[dorsiacapital]

I messed up my response and have fixed. Thanks for the gracious correction.

 

dorsiacapital,

 

What's the inner purpose of just posting quotes of other board members posts without typing anything yourself?

[ourkid8]

The target is 4x leverage and if he is able to achieve that target through an acquisition, I personally cannot see why MP would not also explore that option.  However, Sequoia was very direct in their message and I see MP now wanting to listen to shareholders by paying down debt and adopting a more conservative capital structure. 

 

"Because of its large indebtedness and need to

tap the capital markets to make acquisitions Valeant in particular needs the confidence of the

credit market to execute its business model. The company has no large debt maturities over the

next two years, and we believe it intends to pay down scheduled maturities through 2018 out of

cash flows. We’d like Valeant to consider paying down more of its debt early and adopting a

conservative capital structure that insulates it from the possibility of long-term tightness in the

credit markets. |

 

So what would Pearson do if next year he sees a must have deal? Will he stick to, " I am going to pay off the debt " mantra?

[dorsiacapital]

http://fortune.com/2015/12/16/cvs-valeant-walgreens/

 

Interesting comment from CVS CEO

 

"Merlo said 90% of the drugmaker’s programs are either excluded from Caremark’s formulary or have non-preferred status. Six weeks ago, CVS dropped one of Valeant’s former partners from Caremark’s network. CVS said at the time that it was terminating Philidor, a specialty pharmacy facing scrutiny after an internal audit found evidence of “noncompliance with the terms of its provider agreement.”

 

I still don't understand the details of the Walgreen's agreement. It appears that the patients show up at Walgreen's and can immediately pick up their prescription. Walgreen's is just paid a fee for holding the drugs on consignment. Valeant (I guess?) is the one responsible for securing reimbursement.  Is it Walgreen's, Valeant, or some third party that handles all the messy reimbursement stuff like prior authorizations? (The fact that Walgreen's is only holding on consignment suggests it isn't them, but I could be wrong.)

 

Some commentators say that this deal "goes around" the PBMs. But the PBMs hold the key to the real pursestrings - the insurance payors so how does this Walgreen's agreement get Valeant closer to getting reimbursed by PBMs? (Indeed, the PBMs seem to be viewing it as a semi-declaration of war.)  I guess that Valeant can complete the sale at the Walgreen's immediately and then present it to the PBMs as a fait accompli afterwards, and say there's no reason to deny reimbursement because the branded generics cost the same as the generics. This seems like a big hit to margins but I guess volume, volume, volume.

 

 

[rpadebet]

http://fortune.com/2015/12/16/cvs-valeant-walgreens/

 

Interesting comment from CVS CEO

 

"Merlo said 90% of the drugmaker’s programs are either excluded from Caremark’s formulary or have non-preferred status. Six weeks ago, CVS dropped one of Valeant’s former partners from Caremark’s network. CVS said at the time that it was terminating Philidor, a specialty pharmacy facing scrutiny after an internal audit found evidence of “noncompliance with the terms of its provider agreement.”

 

I still don't understand the details of the Walgreen's agreement. It appears that the patients show up at Walgreen's and can immediately pick up their prescription. Walgreen's is just paid a fee for holding the drugs on consignment. Valeant (I guess?) is the one responsible for securing reimbursement.  Is it Walgreen's, Valeant, or some third party that handles all the messy reimbursement stuff like prior authorizations? (The fact that Walgreen's is only holding on consignment suggests it isn't them, but I could be wrong.)

 

Some commentators say that this deal "goes around" the PBMs. But the PBMs hold the key to the real pursestrings - the insurance payors so how does this Walgreen's agreement get Valeant closer to getting reimbursed by PBMs? (Indeed, the PBMs seem to be viewing it as a semi-declaration of war.)  I guess that Valeant can complete the sale at the Walgreen's immediately and then present it to the PBMs as a fait accompli afterwards, and say there's no reason to deny reimbursement because the branded generics cost the same as the generics. This seems like a big hit to margins but I guess volume, volume, volume.

 

This is basically my understanding. Walgreens is just a sales outlet ( very big one though). They get paid for warehousing and filling prescriptions. VRX still takes the risk for getting reimbursed.

 

PBMs can view it as a war, but if other manufacturers also do this now then what do PBMs do? Are they going to reject/limit reimbursement based on volume?

 

It is a volume play clearly. Price increases are off the table, so they have to make the profits through volume. I like this one better.

 

[dorsiacapital]

 

PBMs can view it as a war, but if other manufacturers also do this now then what do PBMs do? Are they going to reject/limit reimbursement based on volume?

 

It is a volume play clearly. Price increases are off the table, so they have to make the profits through volume. I like this one better.

 

I guess Valeant has now become a branded generic manufacturer where the brand no longer carries any price premium? For comparison, Valeant's TTM gross margin was 75% (up from 72% at the end of 2014 and they've been around that 70% mark for a while), Teva (a leading generic manufacturer's) TTM gross margin was 57% and they've consistently been around 55%.  I'd say Valeant's gross margin actually understates their margin on branded generics because they're lumping in to that line their foreign generics and Bausch & Lomb. They said they're slashing prices by an average of 50% on the portfolio of branded generics, so I guess they have to make up for it with a 100% volume increase - quite possible, but still an interesting strategy. 

 

It remains to be seen whether other drug companies want to do this. My guess is that they're happy with their current business model but if others do race to adopt the Walgreen's model then I may certainly reevaluate.

[ourkid8]

Since VRX is cutting out the middle man, MP mentioned margins will be 75% so much higher then Teva.

 

 

PBMs can view it as a war, but if other manufacturers also do this now then what do PBMs do? Are they going to reject/limit reimbursement based on volume?

 

It is a volume play clearly. Price increases are off the table, so they have to make the profits through volume. I like this one better.

 

I guess Valeant has now become a branded generic manufacturer where the brand no longer carries any price premium? For comparison, Valeant's TTM gross margin was 75% (up from 72% at the end of 2014 and they've been around that 70% mark for a while), Teva (a leading generic manufacturer's) TTM gross margin was 57% and they've consistently been around 55%.  I'd say Valeant's gross margin actually understates their margin on branded generics because they're lumping in to that line their foreign generics and Bausch & Lomb. They said they're slashing prices by an average of 50% on the portfolio of branded generics, so I guess they have to make up for it with a 100% volume increase - quite possible, but still an interesting strategy. 

 

It remains to be seen whether other drug companies want to do this. My guess is that they're happy with their current business model but if others do race to adopt the Walgreen's model then I may certainly reevaluate.

[rpadebet]

 

PBMs can view it as a war, but if other manufacturers also do this now then what do PBMs do? Are they going to reject/limit reimbursement based on volume?

 

It is a volume play clearly. Price increases are off the table, so they have to make the profits through volume. I like this one better.

 

I guess Valeant has now become a branded generic manufacturer where the brand no longer carries any price premium? For comparison, Valeant's TTM gross margin was 75% (up from 72% at the end of 2014 and they've been around that 70% mark for a while), Teva (a leading generic manufacturer's) TTM gross margin was 57% and they've consistently been around 55%.  I'd say Valeant's gross margin actually understates their margin on branded generics because they're lumping in to that line their foreign generics and Bausch & Lomb. They said they're slashing prices by an average of 50% on the portfolio of branded generics, so I guess they have to make up for it with a 100% volume increase - quite possible, but still an interesting strategy. 

 

It remains to be seen whether other drug companies want to do this. My guess is that they're happy with their current business model but if others do race to adopt the Walgreen's model then I may certainly reevaluate.

 

Look at this from Walgreens perspective - nice business right? Get paid for what you are doing anyway. You don't have to deal with PBMs or take the risk of under reimbursement. It is like getting paid management fees on AUM :).

 

They might offer this to other manufacturers themselves.

 

Other retail competitors might want in as well when they figure out the economics of this. I see this has the potential to hurt the PBMs business, so they might not want to turn this into a "war" just yet.

[original mungerville]

Schwab711,

 

Did you take your own advice on Dec 16 and buy the Dec 18 puts on VRX?

 

Clown question, bro.

 

No, that was a serious question bro.

 

I did the opposite and bought December 18 calls.