VRX - Valeant Pharmaceuticals International Inc.

[doughishere]

Schwab, I agree so you have to adjust the model a bit...agian once the patent on the A+ Mall expires it now becomes a b+ or c- or what ever rating mall you assign to it.

[Guest Schwab711]

Schwab, I agree so you have to adjust the model a bit...agian once the patent on the A+ Mall expires it now becomes a b+ or c- or what ever rating mall you assign to it.

 

I agree, if property taxes are $500m/yr and the c- mall looks like this...

[Patmo]

Schwab, I agree so you have to adjust the model a bit...agian once the patent on the A+ Mall expires it now becomes a b+ or c- or what ever rating mall you assign to it.

 

I agree, if property taxes are $500m/yr and the c- mall looks like this...

 

That looks more like the malls on my son's report card

[dorsiacapital]

It depends on the drug, if it's a small market then maybe limited competition. But for big drugs slide xifaxan and Jublia, generics flood the market and the price goes basically to 0. Many times patent holders don't even bother to make a generic. That is just the reality of pharma.

 

Xifaxan is a 15 billion purchase that could be worthless in 4 years if the allergan challenge is successful.

[dorsiacapital]

Anyone know what these debt covenants that are suposed to be tripped are about? Are we looking at a bankruptcy here soon? I think theres value in the drug patents. Anyone have any insight into liquidation value.

 

I dont give a shit about earnings and am most likely going to stay on the sidelines of this one. but what kind of position are they in if they start getting down grades and such?  I'm kinda thinking like a pre-bk GGP here.

 

I wrote this in Nov 2015:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg242514/#msg242514

 

 

 

Valeant's assets were acquired for an aggregate of $40B in negotiated transactions where the sellers were not distressed. No reason to think that the sellers sold these assets for anything but a fair price. The $40B in purchase price reflects the economics of these assets without Valeant's aggressive strategy to juice the assets using (i) aggressive pricing (ii) aggressive growth through their specialty channels (iii) cut costs (iv) low taxes. Three of four of these are not sustainable.

 

At $30B in outstanding debt and $30B in market cap (when the stock was in mid 90s), I didn't think it was a screaming discount. At $30B in debt and $12B in market cap ($42B in enterprise value), I don't think it is a discount. I asked this many times in the thread earlier, why are assets purchased at $40B worth significantly higher in Valeant's hands? I haven't gotten a compelling response so far from the longs. 

 

On the debt covenant, delay on the filing can trip it into a technical default, if 25% of the notes demand it.

 

I think what the have been doing is capitalizing/monetizing the patent values...when a firm does r&d gaap doesnt allow you to make it an asset even if you have been granted a patent....in order to make in an asset you need to find a market rate for it....vrx's model has been to purchase the patent and thus you can shift the expenses it to thus balance sheet as an asset.....

 

I am confused by your response. My argument is that the "fair" value of Valeant is no higher than what they paid for each of its acquisitions, given that these were negotiated transactions with sellers who exactly knew what their assets were worth based on economics of a normal operating pharma company.

 

So, it does not matter how what is expensed and where it sits on the balance sheet - what can Valeant do today going forward beyond what the old owners of the assets to get more economic value for the assets than what they paid (and they paid $40B).

 

If you purchase the stock today, you are saying that you believe that these assets are worth a lot more than what Valeant paid for it. Explain to me why.

 

(I have tried asking this exact question multiple times in the past, so far, I have only being ignored or may be I am too dumb to understand these responses that seem "convoluted" to me).

 

I want to give a RESOUNDING  amen to this valuation model especially since many longs are arguing sum of the parts valuation.

 

I'd ad that almost everything  valeant bought was heavily shopped and they were the highest bidder. Would others even pay what Valeant paid? Especially with debt markets no longer as forgiving.

 

Another way to put it, standard M&A deal premium is 25-50%. With no premium, assets worth less than debt. And many of those assets have had patent years run since or are under real scrutiny. (Anyone want to pay 300 million for nitropress and isuprel and go to Senate hearings while waiting for generics to enter?)

 

Also, valeant could pay more because of their tax status. Others without inversion can't bid as aggressively.

[dorsiacapital]

And not to reopen old wounds, but the cash eps metric meant any acquisition was accretive so long as the assets Ocf was greater than interest payments. Think that encouraged disciplined M&A?

[Guest Schwab711]

 

Another way to put it, standard M&A deal premium is 25-50%. With no premium, assets worth less than debt. And many of those assets have had patent years run since or are under real scrutiny. (Anyone want to pay 300 million for nitropress and isuprel and go to Senate hearings while waiting for generics to enter?)

 

Also, valeant could pay more because of their tax status. Others without inversion can't bid as aggressively.

 

One thing I could never figure out is how Valeant could have inverted Salix. When and how much was the transfer payment? They couldn't defer much of the tax bill given their size prior to acquisition. If you noticed, they are paying roughly 20% tax rate. Been the same for 3 quarters (since EM revenue growth tanked).

[dorsiacapital]

 

Another way to put it, standard M&A deal premium is 25-50%. With no premium, assets worth less than debt. And many of those assets have had patent years run since or are under real scrutiny. (Anyone want to pay 300 million for nitropress and isuprel and go to Senate hearings while waiting for generics to enter?)

 

Also, valeant could pay more because of their tax status. Others without inversion can't bid as aggressively.

 

One thing I could never figure out is how Valeant could have inverted Salix. When and how much was the transfer payment? They couldn't defer much of the tax bill given their size prior to acquisition. If you noticed, they are paying roughly 20% tax rate. Been the same for 3 quarters (since EM revenue growth tanked).

 

There's been twitter rumors that valeant method for tax inversions was very quick and sloppy. Not sure if answers but always thought it was another possible cockroaches.

[original mungerville]

Not sure if this was posted: http://www.bloombergview.com/articles/2016-03-15/ackman-s-valeant-investment-keeps-getting-worse

 

1) it provides a good summary of Ackman's losses at various Valeant stock prices. Looks like he is down about $3.6 or so billion at today's close; and

 

2) it also reminds us of that call from two weeks ago that Pearson did with a set of analysts and it questions what the hell the point of that call was ... I guess Pearson figured that today's guidance would be taken more in stride by the market?... and so reassuring this set of analysts 2 weeks ago made sense because in Pearson's mind things are not all that bad at this point?

 

This is the third big 50% leg down in the stock: from the low $200s to the low $100s, then to $60 a few days ago, and now at $30. For every leg down they "disappointed" investors but with the debt overhang, any "disappointment" is magnified into a 50% slide of the stock price from the previous level. I am not sure Pearson totally gets that and just how bad things can get for Valeant if there is one more internal or external shock to the company. I think his board probably gets it at this point. One more shock to this company and they need to sell significant "core" assets at prices that are probably discounted.

 

The board can 

 

A) hope Pearson can pull off a recovery with no more shocks and things might work out over time (a number of years) at which point the stock could say triple to $100, or

B) you could argue that their best risk-adjusted option is to merge with another company now and provide it with their tax advantage (assuming that company is willing to take on the litigation going forward). Someone asked why the assets purchased for $40B are more valuable in Valeant's fold. I think its hard to argue that their tax advantage does not add significant value, and that value is retained for Valean't businesses (maybe its worth $10 billion) and it is multiplied for the acquiree's businesses (maybe another $10 billion). The current enterprise value is around $40 billion (30 debt plus $10 billion market cap) which is what they paid for the assets before the tax advantage. They might sell it for $50 billion in enterprise value, maybe in a sale the stock price might double with the market cap moving from $10 to $20 billion.

 

B) seems more certain. If you can arrange of sale now, you might get a double with 100% odds of getting it done before another surprise.

 

If the board goes with A) and there is a one third chance of another shock or two, then the stock goes to zero; this leaves two-thirds of a chance for a triple to $100 over time. So risk-adjusted, A) is no better to B)

 

If you go somewhere between A) and B) - which it seems is what the board / Ackman seems to be thinking (ie sell some core assets to pay down debt), then maybe that takes the consequences of that one third chance of a another shock down significantly (ie because debt is payed down so if there is another shock, Valeant can handle it without the stock going to zero) but you have to do that now, if you are going to do it, before another shoe potentially drops. Otherwise, you are just going with strategy A).

 

Not sure these odds or valuations are right - just throwing this two option model out there - you can make the case the stock is worth less or more in A) or B). I guess its pretty obvious, but one more shoe to drop, and major asset sales are likely to occur at bigger discounts than the already discounted values they could get now.

 

 

 

   

 

[doughishere]

Can anyone tell me the nature of the restatements? Swamped with school work....i know cop out so i wont really feel bad if no one does.

[Picasso]

We should invite Mr. Pearson to the BTU thread and organize a knowledge exchange. It would be good to pick his brains and accrete some new mental models in our mental model network collection.

 

I have such a hard time grasping the higher level thinking that comes from Mr. Pearson.  We could invite him to the thread, but it would probably look like he communicates in Wingdings.

[Spekulatius]

My guess is that the higher level thinking of Mr Pearson boils down to "Bet it on black".

 

When it 's all said and done , all the Protagonists ( Ackman, Pearson ) in this drama will look like bad gamblers.

[Guest Grey512]

Just read an article in the FT about boardroom disagreements between ValueAct and Pershing Square. Pershing Square pushed for aggressive 2016 guidance, whilst ValueAct pushed for caution. Caution prevailed. This probably is the reason for the erroneous EBITDA guidance in the press release.

 

Another data point confirming what I already long suspected: Ackman is emotionally compromised and no longer capable of thinking rationally when it comes to Valeant. That's what happens when you massively oversize a position and then publicly double-down on the dip. In contrast, had he kept a low public profile, took some money off the table (like ValueAct did in Q2 2015), and taken a wait-and-see approach in Q4 2015 instead of increasing his position, there would be less psychological pressure to push Pearson towards aggressive guidance. If you are a student of corporate scandals, you know that the last thing that Valeant needs right now is aggressive guidance & aggressive numbers. The "make the numbers or else" attitude is what led us to Volkswagen, Toshiba, etc.  To survive long-term, Valeant needs a 'beautiful cleansing' of the culture; that's what ValueAct is trying to do, and Ackman is getting in the way!

I am worried whether Ackman has the mental fortitude to control his instincts here. Putting a lawyer on the board (Fraidin) is also an ambiguous signal.

[Rasputin]

Since I've been working with $5 B EBITDA assumption, the guidance today isn't surprising to me.  I think it's a testament to VRX business strength that even under powerful attacks, it can still generate $5.7 B of EBITDA.

 

I quintupled my position today as my limit orders triggered, bought all the way down to $40 so far today.  Valuation wise, $40 for VRX is similar to $5-$6 for BAC.

 

Talk about a binomial outcome... By the time the Aug 2018 debentures come due, either you make $$$$$ and retire to the Bahamas, or the investment is a zero.

 

It maybe binomial to you, not to me.  Even with $5.7 B EBITDA, they generate over $3 B in fcf (this year there is almost $1 B in contingent pay that won't be repeated next year).

 

Out of curiosity... how do you calculate the $3b FCF?

If FCF (I assume your number is levered FCF) is $3-4b, then roughly speaking it would take the company 8-10 years to pay down its outstanding debt. That does not concern you?

 

And if I can add to this, if they truly have over $3B in free cash flow coming this year, why do they only plan to pay back $1.7 billion in debt? What could they possibly be spending $1.3 billion on that would be more important than repaying debt?

 

gosh i think this is the last question i'm answering today lol.

 

They have close to $1 B contingent payment in 2016 that won't be repeated.

 

Thanks. Sincere word to the wise: Be careful of that feeling like you're the only one that knows what's going on. I've seen many people ride that feeling into the dust. This is an enormously complicated situation with many variables changing at once. It seems to me that the CEO himself is struggling to figure it out. I wish you luck, though - no dog in the fight here.

 

I don't think I'm the only one that know what's going on.  Everything I know is public info.  I do have different perspective on the market than most market participants.  I got lucky when I graduated college, my aunt told me to read everything about Warren Buffett.  In his 1987 annual letter, he told us Ben Graham's Mr Market story.  That insulates me from getting infected by market's mood.  I don't think VRX situation is complicated.  The price is now cheap enough that I don't need a spreadsheet to know that it's cheap. 

[Rasputin]

Since I've been working with $5 B EBITDA assumption, the guidance today isn't surprising to me.  I think it's a testament to VRX business strength that even under powerful attacks, it can still generate $5.7 B of EBITDA.

 

I quintupled my position today as my limit orders triggered, bought all the way down to $40 so far today.  Valuation wise, $40 for VRX is similar to $5-$6 for BAC.

 

I'm curious what your position size is. Also what will you do if share price goes down to  10 with no change in the business?

 

It's about 8-9% of my port now from less than 0.5% on Monday.  I only have meaningful investments in 2 businesses, BAC and VRX (I do have 100 shares of many different ones).  If VRX business remains the same, I'd love to buy it at $10.  I'd probably have to sell some of my BAC.  But BAC at $14, VRX at $10, I'd pick VRX. 

[tylerdurden]

Rasputin, how can you have confidence in VRX's numbers though? I mean I think that's the real issue. Also how can someone discount the political risk after November? VRX price might be low but it does not seem to me you can make any judgments on the intrinsic value of the business with high degree of confidence. I also don't like the management and wouldn't risk my money for some people with shady business practices when there are many other alternative ways to make money...

[Rasputin]

Problem with Valeant is that to get debt down in 2016, they can't do it through cash flow materially and would have to sell assets - at a time when they won't get top dollar for their assets necessarily.

 

If I take this presentation from January slide 23 http://ir.valeant.com/~/media/Files/V/Valeant-IR/reports-and-presentations/jpm-2016-presentation.pdf which shows debt paydown of 2.2 Billion based on adjusted EBITDA of 7.0 Billion for 2016; and combine that with new 2016 adjusted EBITDA guidance of $5.7 billion (midpoint from below quote) then that translates to $0.9 Billion in debt paydown for 2016. That is close enough to zero for me - ie no ability to materially pay down debt in 2016 - because if the 0.9 billion materializes they might need that for liquidity, legal, paying bankers for divestitures, another operating surprise, etc. Who knows what 2017 looks like, first they have to get there, and then they get into debt maturities a year or two later.

 

Their debt is surely going to get downgraded tonight or in the coming days. This is now most likely to be a restructuring situation rather than business as usual. Basically seems like a shit show now (I haven't yet listened to the conference call today though).

 

The debt is probably investable at some point and may present a bargain. Stock is extremely tricky - Ackman is in over his head on this one, although he does have a background in bankruptcy proceedings, etc so that could help him here a bit.

 

 

http://finance.yahoo.com/news/valeant-pharmaceuticals-reports-preliminary-unaudited-100000035.html

 

"2016 Guidance Update

 

Total Revenue expected to be $11.0 - $11.2 billion from previous guidance of $12.5 - $12.7 billion

Adjusted EPS (non-GAAP) expected to be $9.50 - $10.50 from previous guidance of $13.25 - $13.75

Adjusted EBITDA (non-GAAP) expected to be $5.6 - $5.8 billion from previous guidance of $6.9 - $7.1 billion

Financial guidance for 2016 reflects reduced revenue assumptions for certain businesses, new managed care contracts and increased investment in key functions, such as financial reporting, public and government relations and compliance, as well as the impact of the weak first quarter of 2016. "

 

You can't just subtract $1.3 B (the amount of EBITDA reduction) from the $2.2 B min debt pay down they showed Dec 16 2015.  Working capital need declined as business is not growing as fast.  They also kept around $0.5 b for flexibility.  So what if their debt is downgraded?  They don't have any major capital call until after 2017.

 

Let's look at my fantasy scenario:

 

Let's say VRX issues 350 million shares at $15 per share.  I think that's very doable (maybe ValueAct will back it).  That will bring in $5.25 B of cash.  That's enough to pre-pay min amortization and maturities through the end of 2018.  FCF remains around $3 B (let's forget the reduction in interest expense).  Per share fcf is now around $4.3 (700 million shares outstanding).  At $33 VRX is still at 7.5 times fcf with no capital call until 2019. 

[Rasputin]

Anyone know what these debt covenants that are suposed to be tripped are about? Are we looking at a bankruptcy here soon? I think theres value in the drug patents. Anyone have any insight into liquidation value.

 

I dont give a shit about earnings and am most likely going to stay on the sidelines of this one. but what kind of position are they in if they start getting down grades and such?  I'm kinda thinking like a pre-bk GGP here.

 

I wrote this in Nov 2015:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg242514/#msg242514

 

Valeant's assets were acquired for an aggregate of $40B in negotiated transactions where the sellers were not distressed. No reason to think that the sellers sold these assets for anything but a fair price. The $40B in purchase price reflects the economics of these assets without Valeant's aggressive strategy to juice the assets using (i) aggressive pricing (ii) aggressive growth through their specialty channels (iii) cut costs (iv) low taxes. Three of four of these are not sustainable.

 

At $30B in outstanding debt and $30B in market cap (when the stock was in mid 90s), I didn't think it was a screaming discount. At $30B in debt and $12B in market cap ($42B in enterprise value), I don't think it is a discount. I asked this many times in the thread earlier, why are assets purchased at $40B worth significantly higher in Valeant's hands? I haven't gotten a compelling response so far from the longs. 

 

On the debt covenant, delay on the filing can trip it into a technical default, if 25% of the notes demand it.

 

I'll answer this.  Seems simple to me.  Buffett talks about this in terms of book value goodwill vs economic goodwill.

 

Let's take my favorite, B+L.  VRX paid $8.7 B in May 2013 for B+L that was run by Allergan CEO Saunders for Warburg Pincus.  2012 B+L EBITDA was $643 Million.  2012 B+L sales was $3.038 Billion.  VRX then cut op expenses around 28% of 2012 sales, grew sales to $3.44 B in 2014 and B+L will continue to grow.  Look at what's happening at Alcon after VRX bought B+L.  There is barely any price increases.  After VRX bought B+L, B+L launched new products, gained market share.  It's obvious to me economic goodwill of B+L has increased dramatically since VRX bought it though book value goodwill remain static.  BTW nobody else, not including 3G can cut 28% of sales worth of expenses and grow sales. 

 

On top of being operationally savvy, VRX has the low tax structure advantage.  Yes there is doubt around it now, but as long as this low tax structure advantage exists, most businesses are worth more under VRX vs stand-alone. 

[Rasputin]

Rasputin, how can you have confidence in VRX's numbers though? I mean I think that's the real issue. Also how can someone discount the political risk after November? VRX price might be low but it does not seem to me you can make any judgments on the intrinsic value of the business with high degree of confidence. I also don't like the management and wouldn't risk my money for some people with shady business practices when there are many other alternative ways to make money...

 

This is where I differ with most market participants view.  I think only a minor part (probably 25%) of VRX business involves raising prices significantly, while all major newspaper, most ppl here believe it's 100% of VRX business.  There is no price increases at B+L or emerging market.  Just write that 25% off to zero.

 

They have learned their lesson and are now taking the medicine.  All their business partners demanded discounts.  Yes the medicine is painful but I believe patient will survive.

 

I've talked about how I get my $5 B ebitda assumption, and I'm comfortable with it.  If you just go to my profile, you can see all my posts. 

 

The problem with insurance paying multiple of patients cash outlay occurs through out our health care system (blood tests, emergency room, ambulance, prescription drugs. etc). 

[rishig]

Anyone know what these debt covenants that are suposed to be tripped are about? Are we looking at a bankruptcy here soon? I think theres value in the drug patents. Anyone have any insight into liquidation value.

 

I dont give a shit about earnings and am most likely going to stay on the sidelines of this one. but what kind of position are they in if they start getting down grades and such?  I'm kinda thinking like a pre-bk GGP here.

 

I wrote this in Nov 2015:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg242514/#msg242514

 

Valeant's assets were acquired for an aggregate of $40B in negotiated transactions where the sellers were not distressed. No reason to think that the sellers sold these assets for anything but a fair price. The $40B in purchase price reflects the economics of these assets without Valeant's aggressive strategy to juice the assets using (i) aggressive pricing (ii) aggressive growth through their specialty channels (iii) cut costs (iv) low taxes. Three of four of these are not sustainable.

 

At $30B in outstanding debt and $30B in market cap (when the stock was in mid 90s), I didn't think it was a screaming discount. At $30B in debt and $12B in market cap ($42B in enterprise value), I don't think it is a discount. I asked this many times in the thread earlier, why are assets purchased at $40B worth significantly higher in Valeant's hands? I haven't gotten a compelling response so far from the longs. 

 

On the debt covenant, delay on the filing can trip it into a technical default, if 25% of the notes demand it.

 

I'll answer this.  Seems simple to me.  Buffett talks about this in terms of book value goodwill vs economic goodwill.

 

Let's take my favorite, B+L.  VRX paid $8.7 B in May 2013 for B+L that was run by Allergan CEO Saunders for Warburg Pincus.  2012 B+L EBITDA was $643 Million.  2012 B+L sales was $3.038 Billion.  VRX then cut op expenses around 28% of 2012 sales, grew sales to $3.44 B in 2014 and B+L will continue to grow.  Look at what's happening at Alcon after VRX bought B+L.  There is barely any price increases.  After VRX bought B+L, B+L launched new products, gained market share.  It's obvious to me economic goodwill of B+L has increased dramatically since VRX bought it though book value goodwill remain static.  BTW nobody else, not including 3G can cut 28% of sales worth of expenses and grow sales. 

 

On top of being operationally savvy, VRX has the low tax structure advantage.  Yes there is doubt around it now, but as long as this low tax structure advantage exists, most businesses are worth more under VRX vs stand-alone.

 

They are worth more because you are saying two of out four strategies (i) cut expense and (ii) pay low taxes are sustainable. The key is having very high confidence you know how sustainable these are and how much more these assets are worth.

 

The exact same thing as you said above was said at $250, $150, $90, and now at $30. At $30 (i.e. $40B in enterprise value), you are paying what Valeant acquired these assets for. Do you think Valeant didn't pay up the $40B in aggregate after accounting for these advantages and assuming a few other things (aggressive growth and pricing) to get their "15% IRR".

[Rasputin]

Anyone know what these debt covenants that are suposed to be tripped are about? Are we looking at a bankruptcy here soon? I think theres value in the drug patents. Anyone have any insight into liquidation value.

 

I dont give a shit about earnings and am most likely going to stay on the sidelines of this one. but what kind of position are they in if they start getting down grades and such?  I'm kinda thinking like a pre-bk GGP here.

 

I wrote this in Nov 2015:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg242514/#msg242514

 

Valeant's assets were acquired for an aggregate of $40B in negotiated transactions where the sellers were not distressed. No reason to think that the sellers sold these assets for anything but a fair price. The $40B in purchase price reflects the economics of these assets without Valeant's aggressive strategy to juice the assets using (i) aggressive pricing (ii) aggressive growth through their specialty channels (iii) cut costs (iv) low taxes. Three of four of these are not sustainable.

 

At $30B in outstanding debt and $30B in market cap (when the stock was in mid 90s), I didn't think it was a screaming discount. At $30B in debt and $12B in market cap ($42B in enterprise value), I don't think it is a discount. I asked this many times in the thread earlier, why are assets purchased at $40B worth significantly higher in Valeant's hands? I haven't gotten a compelling response so far from the longs. 

 

On the debt covenant, delay on the filing can trip it into a technical default, if 25% of the notes demand it.

 

I'll answer this.  Seems simple to me.  Buffett talks about this in terms of book value goodwill vs economic goodwill.

 

Let's take my favorite, B+L.  VRX paid $8.7 B in May 2013 for B+L that was run by Allergan CEO Saunders for Warburg Pincus.  2012 B+L EBITDA was $643 Million.  2012 B+L sales was $3.038 Billion.  VRX then cut op expenses around 28% of 2012 sales, grew sales to $3.44 B in 2014 and B+L will continue to grow.  Look at what's happening at Alcon after VRX bought B+L.  There is barely any price increases.  After VRX bought B+L, B+L launched new products, gained market share.  It's obvious to me economic goodwill of B+L has increased dramatically since VRX bought it though book value goodwill remain static.  BTW nobody else, not including 3G can cut 28% of sales worth of expenses and grow sales. 

 

On top of being operationally savvy, VRX has the low tax structure advantage.  Yes there is doubt around it now, but as long as this low tax structure advantage exists, most businesses are worth more under VRX vs stand-alone.

 

They are worth more because you are saying two of out four strategies (i) cut expense and (ii) pay low taxes are sustainable. The key is having very high confidence you know how sustainable these are and how much more these assets are worth.

 

The exact same thing as you said above was said at $250, $150, $90, and now at $30. At $30 (i.e. $40B in enterprise value), you are paying what Valeant acquired these assets for. Do you think Valeant didn't pay up the $40B in aggregate after accounting for these advantages and assuming a few other things (aggressive growth and pricing) to get their "15% IRR".

 

You missed the 3rd prong: product launches.  This is another one where I differ with major newspaper and most ppl here: VRX doesn't do R&D lol. 

 

B+L was bought in 2013 and they have been gaining market share with their new products and Alcon is having problem.  This occured while they cut 28% of sales.  It's a miracle! 

 

I don't place any importance on what VRX mgmt vs other think about IRR.  It has nothing to do with the performance of their businesses.  They give us all the numbers, we can decide however we want to use it. 

 

If i own 100% of VRX, would I be happy with b+L? absolutely.  If I have $13 B yesterday, and VRX is willing to be bought out at no premium, would I buy 100% of VRX?  absolutely. 

[Phaceliacapital]

When Michael Pearson made his first public appearance since returning as chief executive of Valeant on Tuesday morning, he told analysts on a conference call that he hoped to start afresh.

 

“It’s a bit of a starting over point for me,” he said, a fortnight after retaking the helm, having taken two months of sick leave following his hospitalisation with pneumonia at Christmas.

 

But, as new beginnings go, it is hard to see how things could have been any worse for the besieged Canadian drugmaker and its chief executive.

 

Shares in the group suffered their worst ever one-day drop on Tuesday, closing down more than 50 per cent to give the company a market capitalisation of less than $12bn — a far cry from the roughly $90bn valuation it had in August.

 

Investors were spooked by the company’s admission that it could default on its $30bn of debt, its investigation by several US authorities, and its decision to slash its full-year earnings forecast for the second time in four months.

 

Divisions between executives and directors over how to present the health of Valeant’s business to investors complicated the company’s attempts to turn over a new leaf, according to people familiar with the matter.

 

In particular, directors representing two of Valeant’s largest shareholders — Bill Ackman’s hedge fund, Pershing Square, and Jeffrey Ubben’s ValueAct — disagreed over the right strategy, the people said.

 

This was the latest instance of a long-held rivalry between the two investors, who hold sharply differing views over how best to manage the company.

 

Mr Pearson — having spent two weeks catching up on the company’s performance in his absence — was of the view that the group had suffered a poor first quarter, but would regain its mojo in the spring.

 

He therefore wanted to issue a forecast for earnings that signalled this rebound — and was supported in his position by Stephen Fraidin, who joined the company’s board earlier this week as a representative of Pershing Square, Valeant’s second largest shareholder.

 

However, some directors urged greater caution, including Mason Morfit and Robert Hale, who represent ValueAct. They argued the company should set less taxing goals that it could easily meet, thus paving the way for a recovery in the share price in the coming months.

 

 

In the end, the cautious camp won the argument, and Mr Pearson admitted as much on the conference call. “We have taken a little bit more of a conservative approach on forecasting,” he said, as he unveiled a prediction that adjusted earnings would be about $5.7bn in 2016.

 

That forecast was much lower than the one published in December, which predicted earnings of about $7bn.

 

“I sense some disagreement between management and the board,” said Evercore ISI analyst Umer Raffat in a note to investors.

 

As a compromise, Valeant took the unusual step of publishing a rosier 12-month earnings forecast, which skipped the first quarter and started in the second.

 

But there was disagreement over whether it should do this and, again, over the degree of conservatism that should be built into the number, the people said — conflict that contributed to the damaging confusion over the company’s numbers.

 

In a press release, Valeant said it expected adjusted earnings to be about $6.4bn in the 12 months from April, whereas an accompanying slide deck put the figure at $6bn. In the ensuing conference call, the company was forced to confirm that the lower number was correct, and rush out a correction, adding to the sense of chaos and fuelling a sell-off of its shares.

 

 

Pershing Square and ValueAct declined to comment, while a spokesperson for Valeant did not respond to a request for comment.

 

Reports of the boardroom disagreements suggest that simmering tensions between Pershing Square and ValueAct have boiled over in recent days.

 

Mr Ubben and his representatives on Valeant’s board believe that overly demanding targets were one of the main reasons the company landed itself in trouble in the first place, according to people familiar with the matter.

 

They trace the company’s woes to its decision to team up with Mr Ackman in 2014 to make a hostile bid for Allergan, the maker of Botox that later sold itself to a rival drugmaker.

 

Mr Ubben was so incensed by the Allergan bid that he pulled his director, Mr Morfit, off Valeant’s board. Mr Morfit rejoined the board in October last year.

 

Allergan’s then chief executive, David Pyott, responded to the hostile bid by attacking Valeant’s business model, in an attempt to drive down the value of the company’s offer, which comprised a significant chunk of its own shares.

 

I sense some disagreement between management and the board

Umer Raffat, Evercore ISI analyst

His tactic worked, and some directors and investors believe Valeant then tried to boost its share price by publishing demanding targets and running the business more aggressively to meet them, according to people familiar with the matter.

 

They argue that this resulted in some of its biggest mis-steps, such as its decision to work so closely with Philidor — a chain of pharmacies that was tasked with boosting its revenues, and which is now the focus of an investigation by the Securities and Exchange Commission.

 

They also say Valeant’s new targets underpinned its decision last year to acquire two drugs that are given to critically ill heart patients and raise their prices, overnight, by 212 per cent and 525 per cent, respectively.

 

That move earned condemnation from politicians including Hillary Clinton, and helped spark the precipitous slide in its shares amid fears of a government crackdown on drug prices.

 

Mr Ackman, who suffered paper losses of almost $1bn on his Valeant stake on Tuesday alone, responded to the drama by pledging to take a “much more proactive role” at the company.

 

His statement reflected anger at the way the board overruled management’s forecasts, and at the company’s general handling of its problems.

 

As a result, it seems that Pershing Square’s feud with ValueAct is unlikely to end soon.

 

Interesting to see his reaction at 12:50 on "Allergan Ambush".

[original mungerville]

This is the sense I get as well of how the problems unfolded.

 

During/after the Allergan fight Valeant got overly aggressive - probably because of Pearson's previously expressed goal of being a big global pharma player in relatively short order. Set up Philidor, then bought drugs and hiked prices to meet targets, then incurred a bunch of debt to buy Salix with imbedded organic growth (because Allergan faulted Valeant for not having any growth due to no dollars put into R&D, etc and if Valeant wanted a merger of equals at some point they would have to address that lack of internal growth to keep a high stock multiple), then female viagra. Ackman did not help, but it seems Pearson's pay structure as well as the pressure he put on his management teams across the company, along with Pearson's previously stated goal of being a big boy in pharma with a merger of equals at some point, was tinder that was ready for Ackman to come in and push until the bonfire we now have on our hands erupted.

 

 

[original mungerville]

Problem with Valeant is that to get debt down in 2016, they can't do it through cash flow materially and would have to sell assets - at a time when they won't get top dollar for their assets necessarily.

 

If I take this presentation from January slide 23 http://ir.valeant.com/~/media/Files/V/Valeant-IR/reports-and-presentations/jpm-2016-presentation.pdf which shows debt paydown of 2.2 Billion based on adjusted EBITDA of 7.0 Billion for 2016; and combine that with new 2016 adjusted EBITDA guidance of $5.7 billion (midpoint from below quote) then that translates to $0.9 Billion in debt paydown for 2016. That is close enough to zero for me - ie no ability to materially pay down debt in 2016 - because if the 0.9 billion materializes they might need that for liquidity, legal, paying bankers for divestitures, another operating surprise, etc. Who knows what 2017 looks like, first they have to get there, and then they get into debt maturities a year or two later.

 

Their debt is surely going to get downgraded tonight or in the coming days. This is now most likely to be a restructuring situation rather than business as usual. Basically seems like a shit show now (I haven't yet listened to the conference call today though).

 

The debt is probably investable at some point and may present a bargain. Stock is extremely tricky - Ackman is in over his head on this one, although he does have a background in bankruptcy proceedings, etc so that could help him here a bit.

 

 

http://finance.yahoo.com/news/valeant-pharmaceuticals-reports-preliminary-unaudited-100000035.html

 

"2016 Guidance Update

 

Total Revenue expected to be $11.0 - $11.2 billion from previous guidance of $12.5 - $12.7 billion

Adjusted EPS (non-GAAP) expected to be $9.50 - $10.50 from previous guidance of $13.25 - $13.75

Adjusted EBITDA (non-GAAP) expected to be $5.6 - $5.8 billion from previous guidance of $6.9 - $7.1 billion

Financial guidance for 2016 reflects reduced revenue assumptions for certain businesses, new managed care contracts and increased investment in key functions, such as financial reporting, public and government relations and compliance, as well as the impact of the weak first quarter of 2016. "

 

You can't just subtract $1.3 B (the amount of EBITDA reduction) from the $2.2 B min debt pay down they showed Dec 16 2015.  Working capital need declined as business is not growing as fast.  They also kept around $0.5 b for flexibility.  So what if their debt is downgraded?  They don't have any major capital call until after 2017.

 

Let's look at my fantasy scenario:

 

Let's say VRX issues 350 million shares at $15 per share.  I think that's very doable (maybe ValueAct will back it).  That will bring in $5.25 B of cash.  That's enough to pre-pay min amortization and maturities through the end of 2018.  FCF remains around $3 B (let's forget the reduction in interest expense).  Per share fcf is now around $4.3 (700 million shares outstanding).  At $33 VRX is still at 7.5 times fcf with no capital call until 2019.

 

I think they are being conservative on guidance potentially but massaging the numbers a bit now on the liquidity front (because they can't make that look as bad as it might be, I would argue that even ValueAct would agree to keep these numbers "aggressive" if their equity value was in danger) so I prefer to take the January assumptions to be conservative. I don't disagree with your thesis that the stock is likely a buy here, although I would probably buy the calls again (to limit downside and keep upside) and not position myself in the stock if I were to decide to invest here.

[plato1976]

wow, so you have most of your portfolio in cash now?

 

Since I've been working with $5 B EBITDA assumption, the guidance today isn't surprising to me.  I think it's a testament to VRX business strength that even under powerful attacks, it can still generate $5.7 B of EBITDA.

 

I quintupled my position today as my limit orders triggered, bought all the way down to $40 so far today.  Valuation wise, $40 for VRX is similar to $5-$6 for BAC.

 

I'm curious what your position size is. Also what will you do if share price goes down to  10 with no change in the business?

 

It's about 8-9% of my port now from less than 0.5% on Monday.  I only have meaningful investments in 2 businesses, BAC and VRX (I do have 100 shares of many different ones).  If VRX business remains the same, I'd love to buy it at $10.  I'd probably have to sell some of my BAC.  But BAC at $14, VRX at $10, I'd pick VRX.