VRX - Valeant Pharmaceuticals International Inc.

[johnny]

I think everybody is overreacting here; I'm sure Pearson is only being hospitalized for tax reasons.

[100 Shares]

Never a boring day with this company.  The guy from VIC who said to short VRX at the top just came out with a new short write up for another move down to $32.  Pearson is still in the hospital and supposedly they're looking for a new CEO, perhaps Schiller. 

 

Anyone still think Pearson is put in the next version of the Outsiders?  It seems like people get upset when someone is bearish on this stock, but the thesis creep on VRX is ridiculous.  Perhaps Ackman still thinks it's a platform with someone else running the show.

 

For those of us without full VIC membership, what's the thesis for the new short?

[Picasso]

When you adjust for their new cost of capital, FCF/share is around $4 and it deserves an 8x multiple.  They will have no choice but to roll over the debt in somr fashion at much higher rates. The Walgreen's deal doesn't fix the Philidor revenue losses and there is also the potential for more cockroaches. Basically saying the gig is up and they can't hide the crappy business model anymore.

[Txvestor]

Agree with picasso. They are likely to get squeezed from multiple angles. Cost of money goes up, sales are pressured, reputation in tatters, payers push back knowing that, gov't and regulatory risk rampant, and shorts keep at it knowing all of the above, removing the equity capital raise as a viable option(without massively diluting current shareholders). I think their business model to a significant extent was based on financial engineering and that ability has changed significantly and irreparably now.

This is unlikely to go the way of Enron, but I suspect it won't be a good investment at these levels, as the clock can't be turned back in these situations.

[dorsiacapital]

Not trying to imply a conspiracy theory, but I believe MP's restricted shares vest early if he is forced to step down due to illness. Pneumonia is potentially worth 100's of millions to MP and gets him far away from testifying under oath.

 

Ha, I was thinking the same thing except there is the clause that voids early vesting if fraud is involved. 

 

In the finance industry it isn't unusual to force time off, say two weeks at a time every year.  They don't do this because they think you need the days off but rather it's a policy that helps uncover fraudulent activity.  If you're gone for a couple weeks it's a lot harder to hide some of the shadier activities that may be going on.

 

Anyway, I hope Pearson recovers from his illness and finds a better work/life balance.  It definitely seemed like he's taken a lot of these attacks against the company very personally.  It reminds me that you can kill yourself by working and someone else will get to enjoy all your hard work.  You guys might be drawing lessons about black swans, etc., but I'm reminded to take time for myself and family and try to enjoy life a little more.

 

Pearson's Employment Contract

http://api40.10kwizard.com/cgi/convert/pdf/ValeantPharmaceuticalsInternationalInc-20150113-8K-20150107.pdf?ipage=9997530&xml=1&quest=1&rid=23&section=1&sequence=-1&pdf=1&dn=1

 

Based on Picasso and Schwab's comments, I assume this vesting because of disability is a pretty standard feature in employment contracts but still thought it was worth quoting in detail below.  I do find it interesting that if terminated for cause (like willful fraud), he gets equity previously vested.  It does not appear that the 450,000 PSUs that Pearson was granted at the beginning of 2015 would vest right now because they're based on a price of $140 and Pearson has to generate an annualized total shareholder return of 10% for them to vest. I don't know the details of his prior share grants. 

 

(And just to make clear, I hope Pearson makes a full recovery. I wish him no ill health. As Picasso says, it does seem like his work/life balance may not be optimal and perhaps this can serve as a reminder.).

 

 

9(b) "Termination by the Company for Disability or Death. If Executive’s employment is terminated by the Company for Disability or by reason of Executive’s death, the Company shall pay Executive (or his beneficiaries, as applicable) the Accrued Compensation, and Executive shall be entitled to the following benefits:

 

The Company shall pay to Executive within sixty (60) days following the termination date, any bonus earned but unpaid in

respect of any fiscal year preceding the termination date;

(2) Notwithstanding anything to the contrary set forth in the applicable award agreement, each unvested stock option outstanding on

the date hereof and held by Executive at the time of such termination shall vest in full and, in the case of Disability, remain

exercisable for one year following termination (but in no event beyond the expiration of the original term) or, in the case of death,

remain exercisable for the remainder of the original term;

(3) Notwithstanding anything to the contrary set forth in the applicable award agreement, the performance measures applicable to

each unvested performance-share unit outstanding on the date hereof and held by Executive at the time of such termination (other

than the 2015 Performance Units) will be applied as though the termination date were the end of the measurement period (but in no

event shall the measurement period be less than one year) and the units will vest in a manner consistent with the respective vesting

provisions applicable to those awards; and

(4) Each other unvested equity award held by Executive at the time of termination (including, without limitation, any Resulting

RSUs (as defined in Section 10)) shall be governed by the terms of the applicable award agreement (which in the case of the 2015

Performance Units, shall conform to the terms of Exhibit A)."

 

It does seem there are restrictions so not all the RSUs would vest b/c goals hadn't been acheived....

 

There is a termination for cause provision

 

"Cause. The Company may terminate Executive’s employment for “Cause,” effective as of the date of the Notice of Termination (as defined

in Section 8 below) and as evidenced by a resolution adopted in good faith by a majority of the independent members of the Board

(excluding Executive), and Executive shall be entitled to the benefits provided in Section 9(a) hereof. “Cause” shall mean, for purposes of

this Agreement: (1) conviction of any felony (other than one related to a vehicular offense) or other criminal act involving fraud; (2) willful

misconduct that results in a material economic detriment to the Company; (3) material violation of Company policies and directives, which is not cured after written notice and an opportunity for cure; (4) continued refusal by Executive to perform his duties after written notice identifying the deficiencies and an opportunity for cure; and (5) a material violation by Executive of any material covenants to the Company. No action or inaction shall be

deemed willful if (x) not demonstrably willful and (y) taken, or not taken, by Executive in good faith and with the understanding that such

action, or inaction, was not adverse to the best interests of the Company. References in this paragraph to the Company shall also include

direct and indirect subsidiaries of the Company, and materiality shall be measured based on the action or inaction and the impact upon the

Company taken as a whole. Without limiting the other rights of the Company under this Section 7, the Company may suspend, without

pay, Executive upon Executive’s indictment for the commission of a felony as described under clause (1) above. Such suspension may

remain effective until such time as the indictment is either dismissed or a verdict of not guilty has been entered. If such indictment does not

result in a conviction, as soon as practicable following such dismissal or verdict, the Company will pay Executive the target bonus amount

that Executive would have received for the period during which Executive was suspended without pay (with interest from the date such

amounts would otherwise have been paid at the short-term applicable federal rate, compounded semi-annually, as determined under Section 1274 of the Code for the month in which payment would have been made but for the delay) and Executive will receive vesting credit for purposes of Executive's Outstanding Equity Awards."

 

If Pearson is terminated for cause, he will still get 9(a)

 

"(2) any previous compensation which Executive has previously deferred (including any interest earned or credited thereon), in

accordance with the terms and conditions of the applicable deferred compensation plans or arrangements then in effect;

(3) equity and incentive awards, to the extent previously vested, shall be paid or delivered to Executive in accordance with the terms

of such awards;"

 

 

 

 

 

[dorsiacapital]

When you adjust for their new cost of capital, FCF/share is around $4 and it deserves an 8x multiple.  They will have no choice but to roll over the debt in somr fashion at much higher rates. The Walgreen's deal doesn't fix the Philidor revenue losses and there is also the potential for more cockroaches. Basically saying the gig is up and they can't hide the crappy business model anymore.

 

Just curious - was this the same author who did the positive carry thesis on valeant (one of the most underrated pieces I read - http://seekingalpha.com/article/3536686-the-drug-carry-trade-valeants-massively-leveraged-long-short-strategy-is-about-to-unwind)

 

What cost of capital is he using? 7%-ish?

[Picasso]

Different author, closer to 8% new cost of debt.

 

But it sort of implies they need to issue equity here or find a buyer ASAP.  Who can Valeant buy with stock to reduce leverage and the buyer would be okay with all VRX stock?  That assumes you think the stock is expensive, which some people here disagree with.

[jay21]

When you adjust for their new cost of capital, FCF/share is around $4 and it deserves an 8x multiple.  They will have no choice but to roll over the debt in somr fashion at much higher rates. The Walgreen's deal doesn't fix the Philidor revenue losses and there is also the potential for more cockroaches. Basically saying the gig is up and they can't hide the crappy business model anymore.

 

I thought his first writeup was poor and this one seems like it will be equally poor to me. They wont have to roll debt until 2018 at the earliest, leaving plenty of time for deleveraging. If they do cum 4-7b in debt pay down and dont grow EBITDA from the 7b forecasted then they are at what: 3x to 4x leverage? I think they can easily pull that off and issue at more reasonable spreads relative to the market.

 

The Walgreens issue will be interesting to read and that's a valid question.

 

Most important issue right now is current product portfolio and how that leads to EBITDA growth over time. If they are growing EBITDA and paying down debt, they can delever pretty quickly. So I would like to hear more on their actual portfolio and how that will perform over time.

[ourkid8]

You have to give me credit for this call, HS is interim CEO. 

 

Guaranteed is a big word.  But ultimately to me this seems somewhat similar to the Salomon situation in other ways too.  You have reputational issues, a lack of oversight by the CEO etc.

 

If they fire MP, HS will come back for the interim; guaranteed.

 

Am I the only one who thinks it would be fun to see Ackman or Ubben become CEO ala Warren Buffett at Salomon Brothers?

 

It has definitely crossed my mind, but I don't think it is likely to happen.

[original mungerville]

Different author, closer to 8% new cost of debt.

 

But it sort of implies they need to issue equity here or find a buyer ASAP.  Who can Valeant buy with stock to reduce leverage and the buyer would be okay with all VRX stock?  That assumes you think the stock is expensive, which some people here disagree with.

 

The write-up sounds stupid from what you described. Seems the author assumes 8% cost of debt, then says hey cash flow per share drops a lot under that scenario, then says given that low cash flow they won't be able to service their debt.

 

A more appropriate (but still approximate) write-up would consider the major near-term maturities of existing debt, any potential increase/decrease in EBDA (ie cash flow after interest and taxes), and if those can be paid at maturity or not. If yes, there is no dilution and no way stock goes to $32. If no, then maybe. If somewhere in between, then they refinance a bit of debt at the higher rates.

 

But assuming 8% cost now and hitting cash flow with that now makes no sense obviously.

 

 

[Picasso]

I'm going to side with the VIC guy on this one.

 

First off, his original write-up has been almost spot on and he didn't need to do it with a 500 page thread or a 200 page slide deck at Ira Sohn.  There's something to be said for succinctly giving the bearish/bullish case.  Philidor and the pricing issues might have accelerated the downfall but those were just part of the shady behavior that made investors think this was an A+ franchise versus something closer to C+/B-. 

 

Also VRX is a junk rated company with a lot of near term EBITDA but no visibility on long-term EBITDA without pulling off a number of acquisitions.  These guys were on a treadmill to keep the party going and they found as many ways to hide the crappy business as they could.  Now that acquisitions look off the table for a while, you can easily pay back some debt and get leverage down but you won't be able to get any real growth.  And if that growth doesn't come like everyone still thinks it will then this isn't a $100 stock and your total cost of capital is going up anyway.  8% on a junk rated issuer with a history of deceptive and shady behavior isn't all that high, we're just used to seeing these companies raising debt at 5-6% for so long since 2010.  When you start doing the math on that, when the heck do equity holders get paid?

[dorsiacapital]

When you adjust for their new cost of capital, FCF/share is around $4 and it deserves an 8x multiple.  They will have no choice but to roll over the debt in somr fashion at much higher rates. The Walgreen's deal doesn't fix the Philidor revenue losses and there is also the potential for more cockroaches. Basically saying the gig is up and they can't hide the crappy business model anymore.

 

I thought his first writeup was poor and this one seems like it will be equally poor to me. They wont have to roll debt until 2018 at the earliest, leaving plenty of time for deleveraging. If they do cum 4-7b in debt pay down and dont grow EBITDA from the 7b forecasted then they are at what: 3x to 4x leverage? I think they can easily pull that off and issue at more reasonable spreads relative to the market.

 

The Walgreens issue will be interesting to read and that's a valid question.

 

Most important issue right now is current product portfolio and how that leads to EBITDA growth over time. If they are growing EBITDA and paying down debt, they can delever pretty quickly. So I would like to hear more on their actual portfolio and how that will perform over time.

 

Nonadjusted TTM Ebitda was 5 billion, and that includes 400 million from Pershing Square/Allergan.  I understand that the 7 billion forecast is "adjusted," but I think it's important to remember that their forecast still assumes significant ebitda growth in 2016 just to reach 7 billion.

 

Also in their promise to pay down debt, they said they had about 800 million of amortization due in 2016.  I think it's reasonable to argue once you actually start having real amortization bills, then you should look at a company's ebitd and drop the a. 

 

[jay21]

Debt amortization is not an expense and they will go beyond it in terms of pay downs.

 

They will pick up a good chunk of that EBITDA from Xifaxan.

[Picasso]

Of course debt amortization is not an expense but when do equity holders get to see some of this compounding we've been told is there?  We're told it's in the cash EPS, stock repurchases that never come, etc.  You're using EBITDA estimates that management gives you.  You're also using talking points from management like Xifaxan.  I haven't seen anyone actually try to say why these products are still durable in 5 or 10 years so that we can figure out what is the right multiple on FCF or EV/EBITDA.  Rasputin put in some detail on this but other than that it's been just blind faith in these EBITDA numbers. 

 

Not really singling out jay or anyone here, but I find it a bit funny that people call someone's brief short case on VRX weak and yet spend no time at all backing their EBITDA/durability claims.  Maybe because it's really hard to do and it's easier to just throw out some numbers and make the current share price look undervalued.

[dorsiacapital]

My point on EBITDA is that people cite EBITDA as a convenient shorthand for cash earning power. If you take a company with minimal to reasonable debt, and predictable capex, then that makes sense.  I think it starts making a lot less sense when you take a company with very high levels of debt. Amortization may not be a "real expense" but it does represent 800 million in cash that Valeant will be paying to debt holders rather than helping the equity owners in some way.  If you focus on OCF instead, I find it hard to get much above 3 billion in 2016. An 8.3% yield (OCF/equity value) is good, but not amazing. (JNJ Ocf/equity is 7.1%; Gilead is 12.7%). 

 

Also, on Xifaxan, I'm curious jay21 (and anyone else) your thoughts on the following points.

 

-Rifaximin was first compounded in Italy in the 1980s (http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3099332/) - sure, Salix got some 2009 patents on rifaximin, but how do you evaluate the inevitable 2017 patent challenge by a generic drug manufacturer. The prior art seems pretty strong to me. If you google, you'll see cheap rifaximin is available in the UK and Canada....Salix only bought the U.S. rights to it.

 

-How do you analyze the potential threat of Vibrezi to the IBS-D market?

 

-How much growth do you think there is for Xifaximin considering Salix was pushing it off-label for IBS-D since 2010?

 

-Are you concerned about the continuing reports on the Salix Cafepharma boards about continuing massive layoffs to the sales force and discussions of missed projections? (And again, I've seen none of the prominent Valeant skeptics, like Hempton, mention Salix or Xifaxan at all, so I struggle to believe these are part of an elaborate short seller conspiracy. But I understand the counter perspective because of the Fairfax shenanigans.)

 

-Are you not concerned at all about why Salix felt the need to stuff the channels so hard in 2014, especially because they had a blockbuster indication approval pending?

 

-What is a reasonable depreciation schedule for the 15 billion cost that Valeant took to acquire Salix, which is basically just Xifaxan? Or do you think Xifaxan can permanently avoid generic competition?

[jay21]

Im furthest from a VRX expert, but on the last point: people have linked to the merger doc with cash flow estimates for Xifaxan. I believe these were declining cash flows. The way it was valued was on a DCF basis.

 

That's not going to be a non-durable smoking gun.

 

The focus on EBITDA was because people think they can't roll debt at attractive rates, not the amount of capital they can return to equity holders (I dont think too many ppl look at it as FCFE but more FCFF shorthand). I dont think anyone is counting on CF returns to equity holders.

[fareastwarriors]

How Valeant Tripled Prices, Doubled Sales of Flatlining Old Drug

 

 

http://www.bloomberg.com/news/articles/2016-01-08/how-valeant-tripled-prices-doubled-sales-of-flatlining-old-drug

 

 

 

On Finance Talent, Valeant Board Enjoys an Embarrassment of Riches

 

http://blogs.wsj.com/cfo/2016/01/08/on-finance-talent-valeant-board-enjoys-an-embarrassment-of-riches/

 

[Picasso]

Sequoia Fund is sued over big Valeant stake

 

http://www.reuters.com/article/us-sequoia-valeant-idUSKCN0UP23120160111

 

Other defendants include the author Roger Lowenstein, who chairs Sequoia's board, and director Robert Swiggett. The lawsuit seeks to recoup damages and management fees for the fund.

 

I'm confused on the losses and damages here.  Are they suing over the fact that SEQUX lost paper profits when VRX was trading at an absurd valuation?  They've been closed for a while so I can't imagine there are any real losses yet.  Weird but likely to put pressure on SEQUX to sell down VRX.

[John Hjorth]

Sequoia Fund is sued over big Valeant stake

 

http://www.reuters.com/article/us-sequoia-valeant-idUSKCN0UP23120160111

 

Other defendants include the author Roger Lowenstein, who chairs Sequoia's board, and director Robert Swiggett. The lawsuit seeks to recoup damages and management fees for the fund.

 

I'm confused on the losses and damages here.  Are they suing over the fact that SEQUX lost paper profits when VRX was trading at an absurd valuation?  They've been closed for a while so I can't imagine there are any real losses yet.  Weird but likely to put pressure on SEQUX to sell down VRX.

 

Isen't it about this part :

According to the complaint filed on Friday in a New York state court in Manhattan, this violated Sequoia's policy of not investing more than 25 percent of assets in one industry.

If this correct, you have an objective criteria on which to calculate a loss suffered based on the manager going outside his mandate as manager? [policy/agreement?]

 

[i.e. I remember Sanjeev mentioning on here a few years back that MPIC had to sell some BAC shares - when BAC started taking off from USD 6 - because there was an existing agreement with the investors of a position cap - for MPIC it was per stock, not industry, if I remember correctly]

[Picasso]

http://nymag.com/daily/intelligencer/2016/01/valeant-wall-st-darling-to-pariah.html?mid=twitter-share-di

 

Our answers to the whole Reitz drama.  Eric you can take off your Nancy Drew underwear at this point. Mystery is solved.

 

Reitz seems just as sleezy as Philidor. I personally don't buy the nice guy act. Amazing how that was the catalyst for this disaster.

[blainehodder]

Pretty excellent article regardless of anyone's long or short position in the stock.

[original mungerville]

http://nymag.com/daily/intelligencer/2016/01/valeant-wall-st-darling-to-pariah.html?mid=twitter-share-di

 

Our answers to the whole Reitz drama.  Eric you can take off your Nancy Drew underwear at this point. Mystery is solved.

 

Reitz seems just as sleezy as Philidor. I personally don't buy the nice guy act. Amazing how that was the catalyst for this disaster.

 

How do you figure he is just as sleazy (ie from that article)?

[jay21]

http://nymag.com/daily/intelligencer/2016/01/valeant-wall-st-darling-to-pariah.html?mid=twitter-share-di

 

Our answers to the whole Reitz drama.  Eric you can take off your Nancy Drew underwear at this point. Mystery is solved.

 

Reitz seems just as sleezy as Philidor. I personally don't buy the nice guy act. Amazing how that was the catalyst for this disaster.

 

How do you figure he is just as sleazy (ie from that article)?

 

He retained the checks (and cashed some of them). Seems crazy to me but the whole situation is crazy.

[Picasso]

What jay said.  It really seems like he found a way to exploit Valeant between his language and how he went about the whole thing.  Absolutely crazy.

[original mungerville]

Right - If he cashed the checks, you could say he supported the wrongdoing.