VRX - Valeant Pharmaceuticals International Inc.

[original mungerville]

Why do they deserve better than the last six months?  These are all self inflicted wounds with plenty of time to get out. Not that they deserve losses but they don't deserve gains either. Take a look at this thread six months ago and how people reacted to the AZ blog. I remember saying that the response made me want to short the stock and a few people attacked me. Now it's super quiet on here and investors are blaming this train wreck as an operator error but shareholders have stood on the track for months watching it come barreling straight for their faces.

 

Lol, I'm well aware of how this thread reacted. The majority of this thread was jumping down my throat for continuing AZ's work (remember when VRX missed both of their guidance figures for international revenue?). There were very few bears after AZ's post.

 

But the point is all shareholders deserve honesty or regulator intervention if they invest in US-listed stocks. The SEC should have started this investigation months ago (maybe 2 years ago?). If they did do it at that time then the SEC should have also known that VRX never disclosed it. VRX management is obviously at fault for everything but where was the SEC when all of this was becoming obvious? The SEC frequently waits too long to intervene. Someone correct me if I'm wrong, but in an ideal world I'd like to see a more active SEC.

 

No, we were jumping down your throat because you weren't making sense and were taking the wrong numbers from the wrong places to support your "analysis" or your extension of AZ Value's "analysis".

[original mungerville]

And just to be clear, I was wrong with my assessment of Pearson/Valeant. I am not saying I was right or my analysis wasn't shit, I am just saying AZ Value's analysis was shit.

[Picasso]

Why do they deserve better than the last six months?  These are all self inflicted wounds with plenty of time to get out. Not that they deserve losses but they don't deserve gains either. Take a look at this thread six months ago and how people reacted to the AZ blog. I remember saying that the response made me want to short the stock and a few people made fun of me. Now it's super quiet on here and investors are blaming this train wreck as an operator error but shareholders have stood on the track for months watching it come barreling straight for their faces.

 

Picasso, the AZ Value blog is still a piece of shit in my view (including the IRR analysis we debated). I haven't changed my opinion on AZ Value - I am pretty sure that that is little Johnny Hempton posing under AZ Value then linking it to his site. 

 

That's why I got so pissed about the IRR thing; because Johnny likes to bring other posters in with him - in the beginning, I thought you were one of them - I no longer think that.

 

No worries.  I was long VRX at one point too... Even though I turned a nice profit on it, I consider it one of my stupidest mistakes.  I only sold when I realized the investor base was better at telling stories than verifying the numbers.  The AZ blog was good at getting a reaction from investors who clearly drank way too much of the kool aid.  That was more telling than anything AZ could have put up on the blog.

[james22]

I don't want to start a thread on precious metals here...

 

Do please start a thread.

[original mungerville]

The AZ Value blog was a piece of shit - and a piece of shit will always get a negative reaction. If the AZ Value blog had a thesis backed by good analysis, I would have sold immediately. But instead I argued with you about how screwed up their IRRs were - because they were. If AZ Value had a strong enough case such that they did not have to fudge the IRRs, I would have listened and sold my stock - but they didn't. 

[Picasso]

Eh, I think you're being too myopic with the whole IRR thing.  He was just saying how it's a silly way of measuring value creation, which he is right on.  You can't take 20% IRR's out to infinity on this business; you're just fabricating an insane amount of value out of assets private equity guys are happy to sell to VRX after already stripping them down.  He was just saying okay fine, do your IRR's and show me what the cash flows look like.  Guess what?  No one bothered to do it.  When you couple the IRR with the business practices and durability issues, a lot of that cash "IRR" is just a return of capital. 

 

Their best IRR is probably Marathon and it's practically sinking the company all on its own.  Try doing the real IRR on that deal.

[original mungerville]

Eh, I think you're being too myopic with the whole IRR thing.  He was just saying how it's a silly way of measuring value creation, which he is right on.  You can't take 20% IRR's out to infinity on this business; you're just fabricating an insane amount of value out of assets private equity guys are happy to sell to VRX after already stripping them down.  He was just saying okay fine, do your IRR's and show me what the cash flows look like.  Guess what?  No one bothered to do it.  When you couple the IRR with the business practices and durability issues, a lot of that cash "IRR" is just a return of capital. 

 

Their best IRR is probably Marathon and it's practically sinking the company all on its own.  Try doing the real IRR on that deal.

 

I don't want to argue IRRs again -

 

1) Yes, IRR incorporates a growth assumption by management and therefore can be suspect - we agree on this, no issue with that.

 

2) BUT AZ Value, in order to inflate his analysis so that it demonstrated management was projecting insane growth imbedded in their IRRs, actually truncated the IRR at year 10 and assumed a business value of zero (ie no terminal value). Nobody, I mean nobody does that. Had he not done that, his analysis would not have shown that management was assuming insane growth imbedded in their IRRs. They were probably still aggressive and based on price increases, but certainly not the insanity that AZ Value was trying to portray.

 

Surely you agree with this second point. I certainly agree on the first point.

[Picasso]

I don't get your second point.  No business Valeant ever acquired has shown the ability to grow for 10+ years at 20% IRR's.  Valeant themselves truncate this by throwing in their six year payback.  They never say what happens after six years. 

 

In addition, throwing in a 10+ year terminal value when these acquisitions have a ten year average amortization period seems just as silly.  Either there is little terminal value or the amortization isn't a cost.  You can't have substantial terminal value for 20% IRR's + add back all the amortization on these various acquisitions.  That's having cake and eating it too.

 

AZ never got a chance to post the rest of this because when you tie it together it makes the whole IRR thing look like smoke and mirrors to distract from all the amortization expenses.  It's essentially "don't worry, our returns are so high and our payback is six years so you don't need to worry about what happens after; trust our deal model."

 

I think that's all he was saying.  No need to throw out his entire analysis because you didn't agree with 1/10th of it.

 

Edit: Anyway not looking to pick an argument here.  Neither of us are long or short at this point, I just find the topic interesting.

[writser]

No need to throw out his entire analysis because you didn't agree with 1/10th of it.

 

I couldn't agree more. The whole IRR discussion was, as far as I am concerned, a typical case of 'not seeing the forest for the trees'.

[merkhet]

Oh good. We're back to this topic.

 

http://lookingforthemissingme.files.wordpress.com/2014/07/they-pull-me-back-in-image.jpg

 

Regardless of how you see the IRRs, the main thing was that management looked aggressive on its IRR assumptions. Now, you don't necessarily have to agree with the way that AZ tried to portray this given his assumptions -- but once AZ started poking around at the IRRs, everyone should have poked around at the IRRs with our own assumptions to see if they were believable. (I mean, ideally, everyone should have poked around at the IRRs at the very beginning... but better late than never.)

[original mungerville]

No need to throw out his entire analysis because you didn't agree with 1/10th of it.

 

I couldn't agree more. The whole IRR discussion was, as far as I am concerned, a typical case of 'not seeing the forest for the trees'.

 

Other major parts of the analysis also were severely flawed.

 

[original mungerville]

Oh good. We're back to this topic.

 

http://lookingforthemissingme.files.wordpress.com/2014/07/they-pull-me-back-in-image.jpg

 

Regardless of how you see the IRRs, the main thing was that management looked aggressive on its IRR assumptions. Now, you don't necessarily have to agree with the way that AZ tried to portray this given his assumptions -- but once AZ started poking around at the IRRs, everyone should have poked around at the IRRs with our own assumptions to see if they were believable. (I mean, ideally, everyone should have poked around at the IRRs at the very beginning... but better late than never.)

 

Fair, but I did poke around at the IRRs, making adjustments I felt necessary (ie a terminal value) - they went from insane/impossible to aggressive. This did not immediately strike me as an issue.

[original mungerville]

By the way, Lou Simpson, Ackman, Sequoia, etc, etc probably all also read AZ Value's blog.

 

You guys make it sound like it was obvious now. I think the short thesis was severely flawed and remains so - they got lucky, in my opinion, to a large degree with the California lawsuit re Philidor. This did, however, uncovered real problems with Valeant's business model / aggressiveness / sustainability.

 

In my opinion, many of you are confusing AZ Value's (ie Hempton's in disguise) shit analysis with the above. I had the extra bias having dealt with Hempton in the past and seeing the type of crap he tries to make stick passing it as certainty / good analysis. That history, along with not picking up on the fact that the decentralised model / aggressiveness combination could really backfire is what caught me off guard. I thought the debt was the main risk, which if combined with a screw-up, could really cause problems - which is why I bought the calls rather than the stock from the beginning.

 

I certainly did not "anchor" on AZ Value's shit IRR calculations - trust me. I was trying to point out to the board that the guy was being as aggressive with his "analysis" as Pearson was with the business. Again, every hedge fund, Lou Simpson, Ackman, Sequoia, etc also looked at that analysis...

 

Last but not least, at this point there could be another problem that comes out and the stock could decline significantly, or not and all the bad stuff is out and the stock could double or even triple from here in a few years (assuming the stock market holds together). We just don't know.

[merkhet]

Fair enough, OM. For me, the main thing was the disconnect between what management was saying and what a few reasonable assumptions on my part were indicating.

 

I felt the IRRs were aggressive, but management kept saying that they had a six-year payback and that their IRRs were conservative. Add this to a few other things that didn't quite add up and/or sit right with me and my general bias against/lack of knowledge concerning pharmaceutical companies, even special ones like this was supposed to be, and it kept me from being a long multiple times.

 

It didn't push me over to being a short though -- I mean, my temperament isn't geared towards shorting anyway, so my threshold is probably higher than most for putting on a short.

[Valueguy134]

By the way, Lou Simpson, Ackman, Sequoia, etc, etc probably all also read AZ Value's blog.

 

You guys make it sound like it was obvious now. I think the short thesis was severely flawed and remains so - they got lucky, in my opinion, to a large degree with the California lawsuit re Philidor. This did, however, uncovered real problems with Valeant's business model / aggressiveness / sustainability.

 

In my opinion, many of you are confusing AZ Value's (ie Hempton's in disguise) shit analysis with the above. I had the extra bias having dealt with Hempton in the past and seeing the type of crap he tries to make stick passing it as certainty / good analysis. That history, along with not picking up on the fact that the decentralised model / aggressiveness combination could really backfire is what caught me off guard. I thought the debt was the main risk, which if combined with a screw-up, could really cause problems - which is why I bought the calls rather than the stock from the beginning.

 

I certainly did not "anchor" on AZ Value's shit IRR calculations - trust me. I was trying to point out to the board that the guy was being as aggressive with his "analysis" as Pearson was with the business. Again, every hedge fund, Lou Simpson, Ackman, Sequoia, etc also looked at that analysis...

 

Last but not least, at this point there could be another problem that comes out and the stock could decline significantly, or not and all the bad stuff is out and the stock could double or even triple from here in a few years (assuming the stock market holds together). We just don't know.

 

So you bought into the company knowing that a small problem would derail them under the debt load, and AZ Value has a shit analysis? I guess a call option makes it different. Somehow. 

[original mungerville]

By the way, Lou Simpson, Ackman, Sequoia, etc, etc probably all also read AZ Value's blog.

 

You guys make it sound like it was obvious now. I think the short thesis was severely flawed and remains so - they got lucky, in my opinion, to a large degree with the California lawsuit re Philidor. This did, however, uncovered real problems with Valeant's business model / aggressiveness / sustainability.

 

In my opinion, many of you are confusing AZ Value's (ie Hempton's in disguise) shit analysis with the above. I had the extra bias having dealt with Hempton in the past and seeing the type of crap he tries to make stick passing it as certainty / good analysis. That history, along with not picking up on the fact that the decentralised model / aggressiveness combination could really backfire is what caught me off guard. I thought the debt was the main risk, which if combined with a screw-up, could really cause problems - which is why I bought the calls rather than the stock from the beginning.

 

I certainly did not "anchor" on AZ Value's shit IRR calculations - trust me. I was trying to point out to the board that the guy was being as aggressive with his "analysis" as Pearson was with the business. Again, every hedge fund, Lou Simpson, Ackman, Sequoia, etc also looked at that analysis...

 

Last but not least, at this point there could be another problem that comes out and the stock could decline significantly, or not and all the bad stuff is out and the stock could double or even triple from here in a few years (assuming the stock market holds together). We just don't know.

 

So you bought into the company knowing that a small problem would derail them under the debt load, and AZ Value has a shit analysis? I guess a call option makes it different. Somehow.

 

No, I bought into the company understanding my upside was about 5 times my downside with the call options. AZ Value's analysis did not alter my stance. If the probability of success was greater than 20%, it was a good bet. If the probability of success was less than 20%, it was a bad bet.

[Valueguy134]

By the way, Lou Simpson, Ackman, Sequoia, etc, etc probably all also read AZ Value's blog.

 

You guys make it sound like it was obvious now. I think the short thesis was severely flawed and remains so - they got lucky, in my opinion, to a large degree with the California lawsuit re Philidor. This did, however, uncovered real problems with Valeant's business model / aggressiveness / sustainability.

 

In my opinion, many of you are confusing AZ Value's (ie Hempton's in disguise) shit analysis with the above. I had the extra bias having dealt with Hempton in the past and seeing the type of crap he tries to make stick passing it as certainty / good analysis. That history, along with not picking up on the fact that the decentralised model / aggressiveness combination could really backfire is what caught me off guard. I thought the debt was the main risk, which if combined with a screw-up, could really cause problems - which is why I bought the calls rather than the stock from the beginning.

 

I certainly did not "anchor" on AZ Value's shit IRR calculations - trust me. I was trying to point out to the board that the guy was being as aggressive with his "analysis" as Pearson was with the business. Again, every hedge fund, Lou Simpson, Ackman, Sequoia, etc also looked at that analysis...

 

Last but not least, at this point there could be another problem that comes out and the stock could decline significantly, or not and all the bad stuff is out and the stock could double or even triple from here in a few years (assuming the stock market holds together). We just don't know.

 

So you bought into the company knowing that a small problem would derail them under the debt load, and AZ Value has a shit analysis? I guess a call option makes it different. Somehow.

 

No, I bought into the company understanding my upside was about 5 times my downside with the call options. AZ Value's analysis did not alter my stance. If the probability of success was greater than 20%, it was a good bet. If the probability of success was less than 20%, it was a bad bet.

 

God I hope you don't manage other people's money.

[Guest Grey512]

You guys make it sound like it was obvious now. I think the short thesis was severely flawed and remains so

 

You've got to be kidding me. I mean come on.

[LongHaul]

Oh good. We're back to this topic.

 

http://lookingforthemissingme.files.wordpress.com/2014/07/they-pull-me-back-in-image.jpg

 

Regardless of how you see the IRRs, the main thing was that management looked aggressive on its IRR assumptions. Now, you don't necessarily have to agree with the way that AZ tried to portray this given his assumptions -- but once AZ started poking around at the IRRs, everyone should have poked around at the IRRs with our own assumptions to see if they were believable. (I mean, ideally, everyone should have poked around at the IRRs at the very beginning... but better late than never.)

 

Funny Merket! Made me laugh.

 

AZ Value did everyone a big service.  The Sanitas analysis and the CAGR lie were dead on.  I think there were probably some mistakes in some of the other analysis but overall I thought AZ Value did an outstanding job.  I hope he publishes more.  So did Munger last year when he compared Pearson to the old ITT CEO.  It takes courage to do these things.    You can expect to get a lot of criticism.      Pearson and crew are bottom 2% types.  They shouldn't be running a public company or even a fudge store.

 

If Xiafaxan has successful generic competition, VRX could be a 0.  I have no strong view on the Xiafaxan patent.

Dorsia - any view?

 

 

 

[arcube]

Pearson and crew are bottom 2% types.  They shouldn't be running a public company or even a fudge store.

 

You summed it up in two lines. Very spot on. There are far too many cockroaches here and they keep waterboarding their shareholder base with these one off releases related to various investigations resulting in huge volatility. I believe earlier in this thread after the Citron report, Ericpoly suggested that they come out with everything negative in one go as WEB has always recommended. That would have been the best hope for recovery for this.

[merkhet]

Pearson and crew are bottom 2% types.  They shouldn't be running a public company or even a fudge store.

 

You summed it up in two lines. Very spot on. There are far too many cockroaches here and they keep waterboarding their shareholder base with these one off releases related to various investigations resulting in huge volatility. I believe earlier in this thread after the Citron report, Ericpoly suggested that they come out with everything negative in one go as WEB has always recommended. That would have been the best hope for recovery for this.

 

I had a similar thought over the last 24 hours. They are failing the Machiavelli test. If you have bad news, do it all at once, and eventually people will forget. Drip the good news over time so that people always think you're doing good things.

 

Valeant keeps dripping the bad news over time...

[Hielko]

You guys make it sound like it was obvious now. I think the short thesis was severely flawed and remains so - they got lucky, in my opinion, to a large degree with the California lawsuit re Philidor. This did, however, uncovered real problems with Valeant's business model / aggressiveness / sustainability.

Why do you think this thread is so big? Not because everybody was believing the story, exactly because there were big questions about certain aspects of VRX business do we have one of the longest threads on CoBF. This is as obvious as it gets probably. How many threads about a company are on this board with a poll on the first page asking whether or not the company is a fraud?!!??!

 

And yes, I don't think everything is AZ values piece was equally correct. But calling him lucky is a bit extreme isn't it? He saw smoke because there were big problems with the companies business model / aggressiveness / sustainability. If it would not have been Philidor it would have been something else that was generating that smoke.

 

In my opinion, many of you are confusing AZ Value's (ie Hempton's in disguise) shit analysis with the above. I had the extra bias having dealt with Hempton in the past and seeing the type of crap he tries to make stick passing it as certainty / good analysis. That history, along with not picking up on the fact that the decentralised model / aggressiveness combination could really backfire is what caught me off guard.

And you are still being totally paranoid about Hempton's involvement. If there would be a good way to make it happen I would very happily bet a lot of money on the fact that it isn't him. And even if it would be him you would have been smart to listen. He has a great track record shorting questionable companies! There is no way I would want to be at the opposite of his trades unless I have really done my homework. And trusting management guidance and taking a leap of faith isn't doing your homework... and lets be realistic, with a stock this complicated that it the only thing that small investors really could do. That's why I lot of people didn't want to invest, myself included!

[Ballinvarosig Investors]

AZ Value did everyone a big service.  The Sanitas analysis and the CAGR lie were dead on.

When you're drawing up a short thesis, not all the dirt your analysis will kind will stick. Not all of AZ VAlue's analysis did stick, but he raised enough red flags that really should have convinced investors to at least keep away.

 

The funny thing about all this was how so many value investors got suckered into Valeant because they said Bill Ackman manages a $20bn fund - how could he be wrong and this upstart AZ Value be right  ;D I have zero sympathy for people who are going to act like a bunch of sheep being led to the killing floor.

[original mungerville]

Pearson and crew are bottom 2% types.  They shouldn't be running a public company or even a fudge store.

 

You summed it up in two lines. Very spot on. There are far too many cockroaches here and they keep waterboarding their shareholder base with these one off releases related to various investigations resulting in huge volatility. I believe earlier in this thread after the Citron report, Ericpoly suggested that they come out with everything negative in one go as WEB has always recommended. That would have been the best hope for recovery for this.

 

I had a similar thought over the last 24 hours. They are failing the Machiavelli test. If you have bad news, do it all at once, and eventually people will forget. Drip the good news over time so that people always think you're doing good things.

 

Valeant keeps dripping the bad news over time...

 

Yes, this seems to be the case - which is bad. And you often don't have any choice but to do this when you owe a lot of debt. A similar thing could have been said about Fairfax circa 2002 - indeed Hempton was saying that then.

[original mungerville]

By the way, Lou Simpson, Ackman, Sequoia, etc, etc probably all also read AZ Value's blog.

 

You guys make it sound like it was obvious now. I think the short thesis was severely flawed and remains so - they got lucky, in my opinion, to a large degree with the California lawsuit re Philidor. This did, however, uncovered real problems with Valeant's business model / aggressiveness / sustainability.

 

In my opinion, many of you are confusing AZ Value's (ie Hempton's in disguise) shit analysis with the above. I had the extra bias having dealt with Hempton in the past and seeing the type of crap he tries to make stick passing it as certainty / good analysis. That history, along with not picking up on the fact that the decentralised model / aggressiveness combination could really backfire is what caught me off guard. I thought the debt was the main risk, which if combined with a screw-up, could really cause problems - which is why I bought the calls rather than the stock from the beginning.

 

I certainly did not "anchor" on AZ Value's shit IRR calculations - trust me. I was trying to point out to the board that the guy was being as aggressive with his "analysis" as Pearson was with the business. Again, every hedge fund, Lou Simpson, Ackman, Sequoia, etc also looked at that analysis...

 

Last but not least, at this point there could be another problem that comes out and the stock could decline significantly, or not and all the bad stuff is out and the stock could double or even triple from here in a few years (assuming the stock market holds together). We just don't know.

 

So you bought into the company knowing that a small problem would derail them under the debt load, and AZ Value has a shit analysis? I guess a call option makes it different. Somehow.

 

No, I bought into the company understanding my upside was about 5 times my downside with the call options. AZ Value's analysis did not alter my stance. If the probability of success was greater than 20%, it was a good bet. If the probability of success was less than 20%, it was a bad bet.

 

God I hope you don't manage other people's money.

 

I sure as shit wouldn't manage yours if you begged me to.