VRX - Valeant Pharmaceuticals International Inc.

[simplefocus]

This stock is getting interesting.  Who's buying at this level?  What do you think is the worst case scenario?  bankruptcy?  What do you think is the risk/reward?  Thanks.

[RadMan24]

That FT article was extremely interesting. I think most people on this board are just as anxious to have calm waters, a 10K, and a sound strategy.

 

But it proves that activist investors are not always right nor create value all the time. The dual Allergan bid was a mistake, and a red flag.

 

However, the Sequoia fund should be ashamed really. They ignored Munger's comments, all the short sellers, and ended up in a mess.

 

Why ignore and brush away Munger's warnings?

 

Their response at their annual meeting, don't have link, would have shown they really didn't understand what was going on.

[Valueguy134]

This stock is getting interesting.  Who's buying at this level?  What do you think is the worst case scenario?  bankruptcy?  What do you think is the risk/reward?  Thanks.

This stock is like holding a wet paper bag of shit that's about to fall out.

[Rasputin]

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.

 

no, i'm about 10% into margin.  over 90% in bac/bac warrants, 8% valeant, 3% dundee pref series d, the rest are my small positions. 

[Guest roark33]

Ok, a few random thoughts. 

 

The short case so far has been easily "beatable" for the following reasons:

 

1. Citron Fraud: well, it isn't fraud, in fact the lawsuit proves the exact opposite, that they were selling products and Reitz was getting paid.

 

2. Hempton: Focused mainly on insurance fraud.  If that's the case, cut out the tumor, pay a fine and move on.  This was the crux of Ackman's argument. 

 

 

Future Short case: The Philidor sales channel model is much more important to VRX than they are currently disclosing.  I can't really prove this yet, but I made lots of call to pharmacies and I encourage any of you to do the same.  Go visit a costco during the middle of the day.  I came away with the realization that very few, if any, of VRX's drugs move through this "normal" channel.  Their drugs don't move that way because of many hurdles:

 

1. Pharmacist suggest a generic.

2. Insurance pre-approval requires "dispense as written" so doctor must call doctor, delay, delay.

3. Most of VRX's drug have such a high sticker price that they aren't stocked.  (try to find jublia in stock at your local pharmacy, it isn't there).

 

So, the patient comes to pharmacy, they need to order Jublia, go back and forth with insurance, a week later they get the product in and the patient just doesn't come and pick it up. 

 

All of these hurdles combined are the reason for Philidor and its ilk.  Without them, I am having a hard time believing that VRXs products will sell anywhere near the numbers they are selling now.  That might not show up this Q, but it will in Q1.

 

VRX claims multiple times that Philidor is only 7% of sales, but I think Philidor may be fudging that and the network pharmacies are not being consolidated.  If I am wrong on how they are fudging it, I am probably still right on the underlying business channel problems.  I think VRX is playing fast and loose with the definition of specialty pharmacy and the amount of revenues that makes up, in the same way they were playing fast and loose with the idea that they don't "own" Philidor.  Anyway, my two cents.  I did this research when I was long the stock (I bought after the citron piece on Oct 21). I sold earlier this week, so there's my bias... Open to thoughts or suggestions.

 

Rasputin: I admire your conviction and concentration.....But, see above. This has been the missing piece from many "street" analysis.  They continue to look at excel spreadsheets and refuse to ask, how is Jublia and Retin-A doing so much in revenue.  If you were analyzing SAM, you would visit some grocery store, check out local pubs, but people refuse to go to pharmacies. 

 

The Philidor channel was hugely important and made up way more than 6% of ebitda/revenue, whatever metric they said.  You can see it now in their Q4 and guidance. 

 

Just step back and figure out how people used to buy Retin-A or Jublia vs. how they will buy those products in the future.

 

Pearson has mentioned multiple times that the Walgreens deal will allow them to make up the lost revenue on volume.  But that math seems really fuzzy.  Retin-A generics (avita) sell for around 5% of the branded Retin-A product that VRX sells.  So, VRX is hoping to sell 20x as much now (more actually given COGS of the product).  That just doesn't seem viable.  And the same situation goes for many other drugs, Jublia, Glumetza, etc.

 

Pearson wasn't blind-sided by this strategy, it was the crux of their business model.  That he "deceived" outside investors to the extent that he did should make you seriously question anything else he says. 

 

If you were looking at any other company, you would know their competitors, but I have never heard Ackman discusses how VRX is able to beat generics?  I seriously doubt he would know the generic version of Retin-A or Glumetza.  That's a problem. 

[dorsiacapital]

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.

 

I largely agree with this theory.

 

My more sinister variant is that top management bought the first big thing available that could give growth (Salix). They realized relatively quickly that they'd made a mistake buying Salix, and then things started to spin out of control afterwards. (I'm basing that largely on exec. departures in summer of 2015).

 

 

[Rasputin]

Ok, a few random thoughts. 

 

The short case so far has been easily "beatable" for the following reasons:

 

1. Citron Fraud: well, it isn't fraud, in fact the lawsuit proves the exact opposite, that they were selling products and Reitz was getting paid.

 

2. Hempton: Focused mainly on insurance fraud.  If that's the case, cut out the tumor, pay a fine and move on.  This was the crux of Ackman's argument. 

 

 

Future Short case: The Philidor sales channel model is much more important to VRX than they are currently disclosing.  I can't really prove this yet, but I made lots of call to pharmacies and I encourage any of you to do the same.  Go visit a costco during the middle of the day.  I came away with the realization that very few, if any, of VRX's drugs move through this "normal" channel.  Their drugs don't move that way because of many hurdles:

 

1. Pharmacist suggest a generic.

2. Insurance pre-approval requires "dispense as written" so doctor must call doctor, delay, delay.

3. Most of VRX's drug have such a high sticker price that they aren't stocked.  (try to find jublia in stock at your local pharmacy, it isn't there).

 

So, the patient comes to pharmacy, they need to order Jublia, go back and forth with insurance, a week later they get the product in and the patient just doesn't come and pick it up. 

 

All of these hurdles combined are the reason for Philidor and its ilk.  Without them, I am having a hard time believing that VRXs products will sell anywhere near the numbers they are selling now.  That might not show up this Q, but it will in Q1.

 

VRX claims multiple times that Philidor is only 7% of sales, but I think Philidor may be fudging that and the network pharmacies are not being consolidated.  If I am wrong on how they are fudging it, I am probably still right on the underlying business channel problems.  I think VRX is playing fast and loose with the definition of specialty pharmacy and the amount of revenues that makes up, in the same way they were playing fast and loose with the idea that they don't "own" Philidor.  Anyway, my two cents.  I did this research when I was long the stock (I bought after the citron piece on Oct 21). I sold earlier this week, so there's my bias... Open to thoughts or suggestions.

 

Rasputin: I admire your conviction and concentration.....But, see above. This has been the missing piece from many "street" analysis.  They continue to look at excel spreadsheets and refuse to ask, how is Jublia and Retin-A doing so much in revenue.  If you were analyzing SAM, you would visit some grocery store, check out local pubs, but people refuse to go to pharmacies. 

 

The Philidor channel was hugely important and made up way more than 6% of ebitda/revenue, whatever metric they said.  You can see it now in their Q4 and guidance. 

 

Just step back and figure out how people used to buy Retin-A or Jublia vs. how they will buy those products in the future.

 

Pearson has mentioned multiple times that the Walgreens deal will allow them to make up the lost revenue on volume.  But that math seems really fuzzy.  Retin-A generics (avita) sell for around 5% of the branded Retin-A product that VRX sells.  So, VRX is hoping to sell 20x as much now (more actually given COGS of the product).  That just doesn't seem viable.  And the same situation goes for many other drugs, Jublia, Glumetza, etc.

 

Pearson wasn't blind-sided by this strategy, it was the crux of their business model.  That he "deceived" outside investors to the extent that he did should make you seriously question anything else he says. 

 

If you were looking at any other company, you would know their competitors, but I have never heard Ackman discusses how VRX is able to beat generics?  I seriously doubt he would know the generic version of Retin-A or Glumetza.  That's a problem.

 

Roark,

 

I'm very familiar Retin-A (generic: tretinoin) since I've been using its various versions since 2012.  I'm also vain so I follow various top dermatologists around the country (tweet, blog, website, etc.).  I'm also big on saving money so I've been a Costco member for 16 years.

 

Tretinoin is the only drug approved by the FDA that reduces fine wrinkles.  All other products are only allowed to claim "reduce the appearance of wrinkles".  Because tretinoin changes your skin on the cellular level, it is harsh on your skin.  The reason dermatologists prefer atralin/renova to generic tretinoin is atralin/renova formulation contains emollient that results in less skin irritation.  With tretinoin, derms want formulation that results in least irritation to ensure patients compliance.  No top derms use generic tretinoin on their own skin lol :) 

 

Here are prices at Costco if you type in tretinoin/retin-a micro/atralin/renova:

 

Tretinoin 0.025% cream (manufactured by ALP) $81.50/$157.87/$235.04 for 20/40/60 g tube

Retin-A Micro Pump 0.04% gel (Valeant) $916.96/$1811.4/$2703.17 for 45/90/135 g pump

Atralin (Coria, division of Valeant) $625.86/$1241.91/$1845.02 for 45/90/135 g tube

Renova (Valeant) $268.07/$532.37/$793.97 for 40/80/120 g tube

 

Above age 35, insurance doesn't cover tretinoin, since they think it's only for cosmetic purposes (nobody above age 35 has acne per insurance companies).

 

Costco listed prices for Valeant's tretinoin version are outrageous.  I don't know who actually pay those listed price.  Even generics seem costly especially, as most ppl experience, they can't tolerate generics thus they don't use it, 0 result.  I can go into micro vs regular tretinoin but it's gonna make this post too long, but basically micro is less irritation.

 

The derms I follow have been frustrated with the crazy prices of RetinA family of drugs.  And guess what:

 

Recently, they have notified their patients that they have found a reasonable solution that is in the $70 per tube range.

 

And the $70 solution....drumroll...Obagi Tretinoin gel 20 g tube.  The Obagi Tretinoin 0.05% gel formulation is exactly the same as Atralin.  Less irritation, cost less than generic ***BIG WIN***  Patients can get it directly from the derms' office. 

 

Valeant also has cash pay coupon for Atralin that I found by researching VRX.  The coupon price is $125 for Atralin 45 g tube (see attached, read the small print at the bottom). They have since changed their cash pay coupon system with the start of their patient access program at Walgreen. 

 

I'm amazed at how fast VRX came to a deal with Walgreen.  It's roughly about 1 month after Philidor debacle.  It's the first deal of the kind, so they had to adjust to appease angered parties :)  I think it will be a success. 

 

But you can just zero out retin A if you don't like it.  Feel free to zero out jublia too.  And see what remains :) 

 

*Edit: I forget to mention that the older a person gets, his/her skin gets less tolerant.  This is the main reason you won't find top derms (who tend to be 50+) use generic tretinoin on their face.  Most of them use Renova/Atralin on their own face*

 

They are planning for Glumetza going to zero.  Even in Salix merger document, glumetza is projected to be less than $15 million per year by 2018.  Just zero it out. 

 

ATRALIN_$125_CASH_PAY_COUPON.pdf

[Guest roark33]

Rasputin, that was a pretty good response on the specific drugs.  I do, however, have a question?  Where do you think all the cash flow comes from if you are zeroing out all of these drugs?  B&L and Salix?  Salix was bought about a year ago for 15B and B&L around 8B, so double B&L at 16 and salix at 15, and you barely cover the debt?  Where's the equity value.  My example with Retin-A was that VRX's entire line-up is full of these types of drugs and I question whether they have any value. 

 

 

[Valueguy134]

This stock is getting interesting.  Who's buying at this level?  What do you think is the worst case scenario?  bankruptcy?  What do you think is the risk/reward?  Thanks.

This stock is like holding a wet paper bag of shit that's about to fall out.

#Timestamp

[Rasputin]

Rasputin, that was a pretty good response on the specific drugs.  I do, however, have a question?  Where do you think all the cash flow comes from if you are zeroing out all of these drugs?  B&L and Salix?  Salix was bought about a year ago for 15B and B&L around 8B, so double B&L at 16 and salix at 15, and you barely cover the debt?  Where's the equity value.  My example with Retin-A was that VRX's entire line-up is full of these types of drugs and I question whether they have any value.

 

Salix and B+L are worth more on on-going basis than the debt due to low cost debt and low tax structure. 

 

The 2 will generate roughly $3.2 b EBITDA in 2016 normalized. 

Interest expense  $1.625 B

Capex $0.35 B

Working capital $0.2 B (excluding milestone +contingent payments)

Cash tax $0.16 B

FCF roughly $0.9 B

 

Capex and working capital can be adjusted a lot lower going forward if there is no growth. 

 

Systemic price gouging is only in the US.  Their ex US business is worth something (close to $3 B of revenue).

 

At $30 the market is pricing VRX at $10.5 B.  A lot of things have been zeroed out by the market.

 

I believe they will get the waivers they need, there is no capital call until 2018, so the quick sale debt paydown scenario is unlikely in my view.

 

People have to do their own work and get to their own comfort level.  I obviously don't zero out all of their rx.  I did zero out derm rx (this includes jublia and retinA), glumetza, neuro, and others. 

 

 

[rishig]

Rasputin, that was a pretty good response on the specific drugs.  I do, however, have a question?  Where do you think all the cash flow comes from if you are zeroing out all of these drugs?  B&L and Salix?  Salix was bought about a year ago for 15B and B&L around 8B, so double B&L at 16 and salix at 15, and you barely cover the debt?  Where's the equity value.  My example with Retin-A was that VRX's entire line-up is full of these types of drugs and I question whether they have any value.

 

Salix and B+L are worth more on on-going basis than the debt due to low cost debt and low tax structure. 

 

The 2 will generate roughly $3.2 b EBITDA in 2016 normalized. 

Interest expense  $1.625 B

Capex $0.35 B

Working capital $0.2 B (excluding milestone +contingent payments)

Cash tax $0.16 B

FCF roughly $0.9 B

 

Capex and working capital can be adjusted a lot lower going forward if there is no growth. 

 

Systemic price gouging is only in the US.  Their ex US business is worth something (close to $3 B of revenue).

 

At $30 the market is pricing VRX at $10.5 B.  A lot of things have been zeroed out by the market.

 

I believe they will get the waivers they need, there is no capital call until 2018, so the quick sale debt paydown scenario is unlikely in my view.

 

People have to do their own work and get to their own comfort level.  I obviously don't zero out all of their rx.  I did zero out derm rx (this includes jublia and retinA), glumetza, neuro, and others.

 

At $30, the market is pricing VRX at $40B enterprise value. Just looking at market value of $10B is not sufficient. Does Salix and B+L support a $40B enterprise value? As per your math of $3.2B in EBITDA, that is still over 12x EV/EBITDA. Debt has to paid back, not all of it can be rolled over, given their leverage.

 

Low cost debt is an advantage if it is really long-term.

 

Revolving Credit Facility

 

Series A-1 Tranche A Term Loan Facility April 2016          139.8M

Series A-2 Tranche A Term Loan Facility April 2016          136.6M

Series A-3 Tranche A Term Loan Facility October 2018  1,878.0M

Series D-2 Tranche B Term Loan Facility Feb 2019        1,085.8M

Series C-2 Tranche B Term Loan Facility Dec 2019            833.7M

Series A-4 Tranche A Term Loan Facility April 2020          962.8M

Series E-1 Tranche B Term Loan Facility Aug 2020        2,530.3M

Series F Tranche B Term Loan Facility    April 2022        4,062.2M

 

Senior Notes:

6.75%  August 2018      1,587.7M

6.375% October 2020    2,225.3M

7.00%  October 2020      687.8M

5.375% March 2020      1,978.1M

6.75%  August 2021        645.9M

7.50%  July 2021          1,609.0M

5.625% Dec 2021          893.0M

7.25%  July 2022            541.8M

5.50%  March 2023        990.4M

5.875% May 2023        3,212.7M

4.50%  May 2023    1,657.3M

6.125% April 2025      3,212.3M

 

 

 

[Rasputin]

Rasputin, that was a pretty good response on the specific drugs.  I do, however, have a question?  Where do you think all the cash flow comes from if you are zeroing out all of these drugs?  B&L and Salix?  Salix was bought about a year ago for 15B and B&L around 8B, so double B&L at 16 and salix at 15, and you barely cover the debt?  Where's the equity value.  My example with Retin-A was that VRX's entire line-up is full of these types of drugs and I question whether they have any value.

 

Salix and B+L are worth more on on-going basis than the debt due to low cost debt and low tax structure. 

 

The 2 will generate roughly $3.2 b EBITDA in 2016 normalized. 

Interest expense  $1.625 B

Capex $0.35 B

Working capital $0.2 B (excluding milestone +contingent payments)

Cash tax $0.16 B

FCF roughly $0.9 B

 

Capex and working capital can be adjusted a lot lower going forward if there is no growth. 

 

Systemic price gouging is only in the US.  Their ex US business is worth something (close to $3 B of revenue).

 

At $30 the market is pricing VRX at $10.5 B.  A lot of things have been zeroed out by the market.

 

I believe they will get the waivers they need, there is no capital call until 2018, so the quick sale debt paydown scenario is unlikely in my view.

 

People have to do their own work and get to their own comfort level.  I obviously don't zero out all of their rx.  I did zero out derm rx (this includes jublia and retinA), glumetza, neuro, and others.

 

At $30, the market is pricing VRX at $40B enterprise value. Just looking at market value of $10B is not sufficient. Does Salix and B+L support a $40B enterprise value? As per your math of $3.2B in EBITDA, that is still over 12x EV/EBITDA. Debt has to paid back, not all of it can be rolled over, given their leverage.

 

Low cost debt is an advantage if it is really long-term.

 

Revolving Credit Facility

 

Series A-1 Tranche A Term Loan Facility April 2016          139.8M

Series A-2 Tranche A Term Loan Facility April 2016          136.6M

Series A-3 Tranche A Term Loan Facility October 2018  1,878.0M

Series D-2 Tranche B Term Loan Facility Feb 2019        1,085.8M

Series C-2 Tranche B Term Loan Facility Dec 2019            833.7M

Series A-4 Tranche A Term Loan Facility April 2020          962.8M

Series E-1 Tranche B Term Loan Facility Aug 2020        2,530.3M

Series F Tranche B Term Loan Facility    April 2022        4,062.2M

 

Senior Notes:

6.75%  August 2018      1,587.7M

6.375% October 2020    2,225.3M

7.00%  October 2020      687.8M

5.375% March 2020      1,978.1M

6.75%  August 2021        645.9M

7.50%  July 2021          1,609.0M

5.625% Dec 2021          893.0M

7.25%  July 2022            541.8M

5.50%  March 2023        990.4M

5.875% May 2023        3,212.7M

4.50%  May 2023    1,657.3M

6.125% April 2025      3,212.3M

 

Obviously if I think only Salix and B&L have value, VRX's financial will be too close for me to buy more than 100 shares.

 

In a fantasy world where only Salix and B+L generate cash, VRX can make their interest payment, and still pay down debt.  On an on-going basis Salix and B+L are worth more than the $30 B of debt, of course with a caveat that interest rate on debt won't go beyond their unlevered fcf.   

 

In the real world, VRX will generate over $5 Billion of annual ebitda.  This is after taking into account major price reduction on their derm rx.  Since I went through 08-09, liquidity, debt maturity profile are on top of my check list :)   

 

The quick sale - debt paydown scenario is similar to bac mark to market loan portfolio-liability talk in 2011 that gets people to their $0 bac valuation. 

 

I saw Cramer screaming on cnbc who wants to buy vrx non core asset.  1 asset sale that VRX told us closing in Q2 is selling for over $100 million (part of synergetics).  It's similar to the cry "who wants to buy bac's loan book" lol.  Just look at BAC's gains on NPL sale in the past 4 years lol. 

 

My limit order at $30 triggered, next one is $29.  I have orders all the way to $20 for now.  I think VRX at these prices is a no brainer but we'll see. 

 

 

[rishig]

Rasputin, that was a pretty good response on the specific drugs.  I do, however, have a question?  Where do you think all the cash flow comes from if you are zeroing out all of these drugs?  B&L and Salix?  Salix was bought about a year ago for 15B and B&L around 8B, so double B&L at 16 and salix at 15, and you barely cover the debt?  Where's the equity value.  My example with Retin-A was that VRX's entire line-up is full of these types of drugs and I question whether they have any value.

 

Salix and B+L are worth more on on-going basis than the debt due to low cost debt and low tax structure. 

 

The 2 will generate roughly $3.2 b EBITDA in 2016 normalized. 

Interest expense  $1.625 B

Capex $0.35 B

Working capital $0.2 B (excluding milestone +contingent payments)

Cash tax $0.16 B

FCF roughly $0.9 B

 

Capex and working capital can be adjusted a lot lower going forward if there is no growth. 

 

Systemic price gouging is only in the US.  Their ex US business is worth something (close to $3 B of revenue).

 

At $30 the market is pricing VRX at $10.5 B.  A lot of things have been zeroed out by the market.

 

I believe they will get the waivers they need, there is no capital call until 2018, so the quick sale debt paydown scenario is unlikely in my view.

 

People have to do their own work and get to their own comfort level.  I obviously don't zero out all of their rx.  I did zero out derm rx (this includes jublia and retinA), glumetza, neuro, and others.

 

At $30, the market is pricing VRX at $40B enterprise value. Just looking at market value of $10B is not sufficient. Does Salix and B+L support a $40B enterprise value? As per your math of $3.2B in EBITDA, that is still over 12x EV/EBITDA. Debt has to paid back, not all of it can be rolled over, given their leverage.

 

Low cost debt is an advantage if it is really long-term.

 

Revolving Credit Facility

 

Series A-1 Tranche A Term Loan Facility April 2016          139.8M

Series A-2 Tranche A Term Loan Facility April 2016          136.6M

Series A-3 Tranche A Term Loan Facility October 2018  1,878.0M

Series D-2 Tranche B Term Loan Facility Feb 2019        1,085.8M

Series C-2 Tranche B Term Loan Facility Dec 2019            833.7M

Series A-4 Tranche A Term Loan Facility April 2020          962.8M

Series E-1 Tranche B Term Loan Facility Aug 2020        2,530.3M

Series F Tranche B Term Loan Facility    April 2022        4,062.2M

 

Senior Notes:

6.75%  August 2018      1,587.7M

6.375% October 2020    2,225.3M

7.00%  October 2020      687.8M

5.375% March 2020      1,978.1M

6.75%  August 2021        645.9M

7.50%  July 2021          1,609.0M

5.625% Dec 2021          893.0M

7.25%  July 2022            541.8M

5.50%  March 2023        990.4M

5.875% May 2023        3,212.7M

4.50%  May 2023    1,657.3M

6.125% April 2025      3,212.3M

 

Obviously if I think only Salix and B&L have value, VRX's financial will be too close for me to buy more than 100 shares.

 

In a fantasy world where only Salix and B+L generate cash, VRX can make their interest payment, and still pay down debt.  On an on-going basis Salix and B+L are worth more than the $30 B of debt, of course with a caveat that interest rate on debt won't go beyond their unlevered fcf.   

 

In the real world, VRX will generate over $5 Billion of annual ebitda.  This is after taking into account major price reduction on their derm rx.  Since I went through 08-09, liquidity, debt maturity profile are on top of my check list :)   

 

The quick sale - debt paydown scenario is similar to bac mark to market loan portfolio-liability talk in 2011 that gets people to their $0 bac valuation. 

 

I saw Cramer screaming on cnbc who wants to buy vrx non core asset.  1 asset sale that VRX told us closing in Q2 is selling for over $100 million (part of synergetics).  It's similar to the cry "who wants to buy bac's loan book" lol.  Just look at BAC's gains on NPL sale in the past 4 years lol. 

 

My limit order at $30 triggered, next one is $29.  I have orders all the way to $20 for now.  I think VRX at these prices is a no brainer but we'll see.

 

OK. I don't quite agree with the comparison with BAC, but you seem fairly convinced that they are similar. So, I won't try to argue.

 

Let me ask you a different question. Is there *any* future scenario under which the long thesis of buying at $30 may not work out? What is the scenario? In that case, what is the downside? What are the odds of this happening?

[Rasputin]

Rasputin, that was a pretty good response on the specific drugs.  I do, however, have a question?  Where do you think all the cash flow comes from if you are zeroing out all of these drugs?  B&L and Salix?  Salix was bought about a year ago for 15B and B&L around 8B, so double B&L at 16 and salix at 15, and you barely cover the debt?  Where's the equity value.  My example with Retin-A was that VRX's entire line-up is full of these types of drugs and I question whether they have any value.

 

Salix and B+L are worth more on on-going basis than the debt due to low cost debt and low tax structure. 

 

The 2 will generate roughly $3.2 b EBITDA in 2016 normalized. 

Interest expense  $1.625 B

Capex $0.35 B

Working capital $0.2 B (excluding milestone +contingent payments)

Cash tax $0.16 B

FCF roughly $0.9 B

 

Capex and working capital can be adjusted a lot lower going forward if there is no growth. 

 

Systemic price gouging is only in the US.  Their ex US business is worth something (close to $3 B of revenue).

 

At $30 the market is pricing VRX at $10.5 B.  A lot of things have been zeroed out by the market.

 

I believe they will get the waivers they need, there is no capital call until 2018, so the quick sale debt paydown scenario is unlikely in my view.

 

People have to do their own work and get to their own comfort level.  I obviously don't zero out all of their rx.  I did zero out derm rx (this includes jublia and retinA), glumetza, neuro, and others.

 

At $30, the market is pricing VRX at $40B enterprise value. Just looking at market value of $10B is not sufficient. Does Salix and B+L support a $40B enterprise value? As per your math of $3.2B in EBITDA, that is still over 12x EV/EBITDA. Debt has to paid back, not all of it can be rolled over, given their leverage.

 

Low cost debt is an advantage if it is really long-term.

 

Revolving Credit Facility

 

Series A-1 Tranche A Term Loan Facility April 2016          139.8M

Series A-2 Tranche A Term Loan Facility April 2016          136.6M

Series A-3 Tranche A Term Loan Facility October 2018  1,878.0M

Series D-2 Tranche B Term Loan Facility Feb 2019        1,085.8M

Series C-2 Tranche B Term Loan Facility Dec 2019            833.7M

Series A-4 Tranche A Term Loan Facility April 2020          962.8M

Series E-1 Tranche B Term Loan Facility Aug 2020        2,530.3M

Series F Tranche B Term Loan Facility    April 2022        4,062.2M

 

Senior Notes:

6.75%  August 2018      1,587.7M

6.375% October 2020    2,225.3M

7.00%  October 2020      687.8M

5.375% March 2020      1,978.1M

6.75%  August 2021        645.9M

7.50%  July 2021          1,609.0M

5.625% Dec 2021          893.0M

7.25%  July 2022            541.8M

5.50%  March 2023        990.4M

5.875% May 2023        3,212.7M

4.50%  May 2023    1,657.3M

6.125% April 2025      3,212.3M

 

Obviously if I think only Salix and B&L have value, VRX's financial will be too close for me to buy more than 100 shares.

 

In a fantasy world where only Salix and B+L generate cash, VRX can make their interest payment, and still pay down debt.  On an on-going basis Salix and B+L are worth more than the $30 B of debt, of course with a caveat that interest rate on debt won't go beyond their unlevered fcf.   

 

In the real world, VRX will generate over $5 Billion of annual ebitda.  This is after taking into account major price reduction on their derm rx.  Since I went through 08-09, liquidity, debt maturity profile are on top of my check list :)   

 

The quick sale - debt paydown scenario is similar to bac mark to market loan portfolio-liability talk in 2011 that gets people to their $0 bac valuation. 

 

I saw Cramer screaming on cnbc who wants to buy vrx non core asset.  1 asset sale that VRX told us closing in Q2 is selling for over $100 million (part of synergetics).  It's similar to the cry "who wants to buy bac's loan book" lol.  Just look at BAC's gains on NPL sale in the past 4 years lol. 

 

My limit order at $30 triggered, next one is $29.  I have orders all the way to $20 for now.  I think VRX at these prices is a no brainer but we'll see.

 

OK. I don't quite agree with the comparison with BAC, but you seem fairly convinced that they are similar. So, I won't try to argue.

 

Let me ask you a different question. Is there *any* future scenario under which the long thesis of buying at $30 may not work out? What is the scenario? In that case, what is the downside? What are the odds of this happening?

 

1.  Cash is fake like Parmalat - I depended a lot on their cash flow statement

 

2.  Failure to get waiver/extension - cross default - ch 11

 

3.  Lenders + Bondholders demand 100% increase in interest rates in exchange for waiver/extension

 

4.  Failure to ever file 2015 10K

 

5.  Failure to generate $5 B EBITDA with no credible plan to improve it.  This may result from price control, massive sales group attrition, severe reputation damage with physicians/patients, generic approval of xifaxan, etc.

 

6.  Major product problems - B&L solution/contact lenses blind customers eyes, Solta's Fraxel & Thermage destroy patients skins, customers dying from taking any Valeant's products, etc. 

 

7.  Nuclear attack on US soil

 

Frankly you can go to their 10K page 10-21 to see all the risk factors.  The downside is $0 equity value. 

 

I have posted my math on how I get to my $5 B EBITDA. 

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg244586/#msg244586

 

I haven't seen any other post since, that show in a reasonable environment, VRX will generate much less than $5 B EBITDA. 

[Guest Schwab711]

1.  Cash is fake like Parmalat - I depended a lot on their cash flow statement

 

2.  Failure to get waiver/extension - cross default - ch 11

 

3.  Lenders + Bondholders demand 100% increase in interest rates in exchange for waiver/extension

 

4.  Failure to ever file 2015 10K

 

5.  Failure to generate $5 B EBITDA with no credible plan to improve it.  This may result from price control, massive sales group attrition, severe reputation damage with physicians/patients, generic approval of xifaxan, etc.

 

6.  Major product problems - B&L solution/contact lenses blind customers eyes, Solta's Fraxel & Thermage destroy patients skins, customers dying from taking any Valeant's products, etc. 

 

7.  Nuclear attack on US soil

 

Frankly you can go to their 10K page 10-21 to see all the risk factors.  The downside is $0 equity value. 

 

I have posted my math on how I get to my $5 B EBITDA. 

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg244586/#msg244586

 

I haven't seen any other post since, that show in a reasonable environment, VRX will generate much less than $5 B EBITDA.

 

The tax rate has been 20%-25% for the last 3 quarters.

 

*I tax EBTDA because their depreciation/amortization is almost exclusively non-tax-deductible.

 

$5b EBITDA

- ~$2b in interest payments

= ~$3b EBTDA

* (1-.25) [book taxes - should be higher since cash taxes are what shareholders actually get]

= $2.25b EBDA

- ~$2b in D/A

= $0.25b or $250m GAAP NI in an ideal scenario.

 

Cash taxes have been much greater than book taxes for 3 straight quarters and the situation is likely to continue. Debt/EBTDA is 9x - 10x at $5b EBITDA.

 

As time goes by, it looks like the correct interpretation of VRX's [book] tax rate is probably 20%-30% (with no chance of LT single-digits). What's worse, because VRX was so aggressive with their DTLs (look at my post where I modeled the SLXP PPA), I'm guessing the actual cash tax rate will be >40% in the long run due to the sharp decline in EM revenue. Also, it's important to note that cash taxes >> book taxes and will continue to be that way. $250m GAAP NI will probably be ~$0 in "true" new cash flow + D/A. Which brings me back to my c- mall comment and why I think D/A is a real expense (in this specific case).

 

There's a couple issues with EM revenue. First, did anyone notice that FX "caused" revenue to be lower by ~$125m in 4Q 2015 alone! That's over 10% hit due to FX even though the USD was roughly flat against most of the currencies they would be taking revenues in...

 

Also, declining EM revenues is a concern because that is how they were going to generate "single-digit tax rates". The issue is it works both ways. If EM revenue continues to decline then they will have to pay their aggressively booked DTLs. It's possible VRX's future tax bills could reach 100% of taxable income at times (remember that D/A is non-deductible!).

 

 

Some old discussions that are worth reading:

Discussing Xifaxan and my thoughts on why they purchased SLXP (I think they purposely delayed IBS-D launch by 6 months so they could show "organic growth"):

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg243146/#msg243146

 

Issues with claimed tax rate target:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg243114/#msg243114

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg241657/#msg241657

which was discussed in the first few pages without sufficient clarification:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/80/

 

VRX has made HUGE errors on previous guidance before. Trusting them is tough for a lot of folks that have been following this closely:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg240320/#msg240320

 

They have made it pattern to take longer and longer to release CFS and BS after their initial earnings PR:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg240459/#msg240459

 

I can't find my post but it might be worth finding my breakdown of product-by-product growth in a post-Philidor world. A couple other folks also had some nice write-ups as well. To summarize, as of 3Q15, VRX didn't have a single product (they've held for 1+ years) that had >$9m in rev and was growing. D/A expenses are very real.

 

You mention B&L a lot. VRX quietly reclassified a few product categories over a year ago to show "organic growth" at B&L. In reality, B&L had a few patents approved at or shortly after VRX purchased them. They are the only growth and the rest of B&L is struggling (flat to negative growth in non-trivial segments). B&L has zero pipeline now due to the recent approvals and lack of R&D. You should look into B&L accounting changes in 2014.

 

I'm writing all this out [again] just so you don't think that your claims are indisputable. Folks valuing VRX based on EBITDA should be careful for the reason I showed above. VRX's structure is extremely deceptive.

 

[dorsiacapital]

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.

 

Someone who's read Warren Buffett! That is a significant advantage.

 

Curious how you square your readership/ownership with this Buffet quote

 

""We’ll (Berkshire Hathaway) never buy a company when the managers talk about EBITDA. There are more frauds talking about EBITDA. That term has never appeared in the annual reports of companies like Wal-Mart, General Electric, or Microsoft. The fraudsters are trying to con you or they’re trying to con themselves. Interest and taxes are real expenses. Depreciation is the worst kind of expense: You buy an asset first and then pay a deduction, and you don’t get the tax benefit until you start making money. We have found that many of the crooks look like crooks. They are usually people that tell you things that are too good to be true. They have a smell about them."

 

In particular, and this is a question I have never, ever heard a Valeant fan answer, how do you justify excluding all of the Salix amortization.  Valeant took on 13.5 billion in debt to buy Salix. Salix's two big products were Xifaxan and Glumetza. Glumetza goes generic this year. Xifaxan has a pending ANDA challenge (meaning if Allergan wins they can enter market in 2019, with rest of competitors shortly behind) and the first/best Salix patents start expiring in 2024.  Let's use a conservative 10 year amortization schedule for just the 13.5 billion (treating 1.5 bil in equity that Valeant used as play money).  That's a 1.35 billion hit each year to ebitda.  If you use a 5 year schedule to reflect patent challenge, then that's a 2.7 billion hit to ebitda. And that is real debt that needs to be repaid at some point.

 

Toss in the Sprout and Dendreon amortization, that takes you up to 1.5 billion a year in ebitda. 

 

Here are some other Buffett quotes presented without comment:

 

--

 

"Most buyers competing against us, however, follow a different path. For them, acquisitions are “merchandise.” Before the ink dries on their purchase contracts, these operators are

contemplating “exit strategies.” We have a decided advantage, therefore, when we encounter sellers who truly care about the future of their businesses.

 

Some years back our competitors were known as “leveraged-buyout operators.” But LBO became a

bad name. So in Orwellian fashion, the buyout firms decided to change their moniker. What they did not change, though, were the essential ingredients of their previous operations, including their cherished fee structures and love of leverage.

 

Their new label became “private equity,” a name that turns the facts upside-down: A purchase of a business by these firms almost invariably results in dramatic reductions in the equity portion of the acquiree’s capital structure compared to that previously existing. A number of these acquirees, purchased only two to three years ago, are now in mortal danger because of the debt piled on them by their private-equity buyers. Much of the bank debt is selling below 70¢ on the dollar, and the public debt has taken a far greater beating."

 

---

 

“In the world of business, bad news often surfaces serially...You see a cockroach in your kitchen; as the days go by, you meet his relatives.”

 

---

(Valeant has paid 500 million in IB fees in last 4 years)

 

"Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20 per cent to 50 per cent premiums over market price for publicly held businesses.

 

"The bankers tell the buyer that the premium is justified for 'control value' and for the wonderful things that are going to happen once the acquirer's CEO takes charge. (What acquisition-hungry manager will challenge that assertion?)

 

"A few years later, bankers – bearing straight faces – again appear and just as earnestly urge spinning off the earlier acquisition in order to 'unlock shareholder value'. Spin-offs, of course, strip the owning company of its purported 'control value' without any compensating payment.

 

"The bankers explain that the spun-off company will flourish because its management will be more entrepreneurial, having been freed from the smothering bureaucracy of the parent company. (So much for that talented CEO we met earlier.)

 

"If the divesting company later wishes to reacquire the spun-off operation, it presumably would again be urged by its bankers to pay a hefty 'control' premium for the privilege.

 

"Mental 'flexibility' of this sort by the banking fraternity has prompted the saying that fees too often lead to transactions rather than transactions leading to fees."

 

---

 

"When leverage works, it magnifies your gains. Your spouse thinks you're clever, and your neighbors get envious,"

 

"But leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices. And as we all learned in third grade — and some relearned in 2008 — any series of positive numbers, however impressive the numbers may be, evaporates when multiplied by a single zero. History tells us that leverage all too often produces zeroes, even when it is employed by very smart people."

 

---

 

"I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over."

 

---

 

"Investors making purchases in an overheated market need to recognize that it may often take an extended period for the value of even an outstanding company to catch up with the price they paid."  (Pearson acquisitions last few years...)

 

---

 

 

And here's one from Munger

 

"In an interview Saturday, Munger tore anew into the besieged drug company, calling its practice of acquiring rights to treatments and boosting prices legal but “deeply immoral” and “similar to the worst abuses in for-profit education.” In his role as chairman of Good Samaritan Hospital in Los Angeles, Munger said, "I could see the price gouging.” And speaking as a storied value investor, he said, its strategy isn’t sustainable: “It’s deeply wrong.”

[dorsiacapital]

 

 

I do it both ways. 

 

1.  Use solely the 2014 10K + Salix merger document

 

This eliminates most of Philidor/captive pharmacy effect, Jublia (launched in Q2 2014, minimal sales in 2014),  Glumetza, Isuprel, Nitropress.

 

2014 ebit $2.04 Billion (this includes restructuring charges, iprd impairments, acquisition costs etc,).

deduct 2014 other income $270 million (gain from divestitures of injectables, etc)

2014 core ebit $1.77 Billion (this excludes gain from allergan)

2014 d&a $1.74 Billion

2014 ebitda $3.5 Billion

2016 salix stand-alone ebitda $1.0 Billion (subtract glumetza from merger doc)

2016 salix cost save $0.5 Billion

2016 ebitda $5 Billion

 

2.  Use September 28 2015 letter, but this requires us to use management slides to estimate how much revenue comes from derm rx, what kind of revenue/ebitda management has in mind for 2016 etc. 

 

Going by Q3 2015 slide deck, low end 2015 revenue guidance = $10.7 Billion

In that letter, Mike talks about high single digit growth for emerging markets, 3% growth in ex US developed market.  Exclude growth from dermatology, opthalmology rx , dentistry rx, neurology and others (30% of 2016 revenue).  let's just say 5% combined growth from the rest of the business (70%).  2016 non salix revenue = $11.1 Billion

Add Salix 2016 revenue = $2.3 Billion (subtract glumetza)

Total 2016 revenue = $13.4 Billion

Deduct 25% for derma rx, neurology and others (insta death "bad valeant")

2016 "good valeant" revenue = $10 Billion

2016 ebitda = $5 Billion (50% ebitda margin)

 

In both of these scenarios, I don't take into account ebitda from non salix 2015 acquisitions, even though on the interest expense line, I accounted for all the debt.

 

I use fcf/market cap yield rather than ebitda/ev yield because of their low tax rate. 

 

Likelihood of valeant being forced to liquidate or sell subsidiaries for cheap due to debt is  low. 

 

I'm prepared for the stock to go down to $30 and I would be very ecstatic.  It would be my Christmas gift. 

 

Buying BAC at $10 in 2011, still get 70% return in 4 years.  The only requirement for that 70% return is to keep holding it even as the stock went from $10 to less than $5.  My lowest cost lot is $4.94 executed on 12/19/2011 outside regular hours due to my limit order at IB.  I still own all of the shares I bought in 2011 and have added more through out the years. 

 

I actually find buying VRX today a lot easier than BAC 2011.  The good valeant is solid.  No regulators can force raising capital at very cheap stock price.  No tens of billions of dollar lawsuit.  No worry about rejection of deal with private label, customers closing accounts, etc. etc. 

 

Okay a few questions on this

 

-I don't really follow how you broke out the Allergan profits which I thought were in q 2014, I didn't see another leg down from 1.77 billion. They were about 250 million.

 

-They sold half of Medicis in 2014, how do you account for those lost earnings.

 

-Why is it reasonable at this point to just take Pearson's word on the Salix synergies. Salix serves an entirely different market (GIs vs. derms vs. opthos) with a separate sales force and separate hq. 

 

-After Glumetza expires, Salix is basically just Xifaxan. Simply the revenue from Xifaxan in q4 2015 was about 200 million. That's a run rate of less than 1 billion in revenue. Not ebitda. Revenue. Xifaxan has been on the market for 5 years, and just got a huge ad push. Maybe it just ends up being a billion dollar revenue drug.  What's your ebitda margin on that?

 

Finally, on the last call, an analyst asked is it right that you had 300 million in ocf in q1 2016?  The treasurer didn't deny it, which means that is AT BEST how much ocf they have this quarter. Can you explain how they ramp back up? Even if they get the ocf to 2 billion for the year, I think they are drawing dead on feasible debt repayment without significant growth.

[plato1976]

On your point 3:

"

3.  Lenders + Bondholders demand 100% increase in interest rates in exchange for waiver/extension"

I think we don't need a 100% rate increase to destroy this investment case, right?

They don't have much margin of safety, and the rate increase is very real, which means they may not have enough money to pay debt

 

Rasputin, that was a pretty good response on the specific drugs.  I do, however, have a question?  Where do you think all the cash flow comes from if you are zeroing out all of these drugs?  B&L and Salix?  Salix was bought about a year ago for 15B and B&L around 8B, so double B&L at 16 and salix at 15, and you barely cover the debt?  Where's the equity value.  My example with Retin-A was that VRX's entire line-up is full of these types of drugs and I question whether they have any value.

 

Salix and B+L are worth more on on-going basis than the debt due to low cost debt and low tax structure. 

 

The 2 will generate roughly $3.2 b EBITDA in 2016 normalized. 

Interest expense  $1.625 B

Capex $0.35 B

Working capital $0.2 B (excluding milestone +contingent payments)

Cash tax $0.16 B

FCF roughly $0.9 B

 

Capex and working capital can be adjusted a lot lower going forward if there is no growth. 

 

Systemic price gouging is only in the US.  Their ex US business is worth something (close to $3 B of revenue).

 

At $30 the market is pricing VRX at $10.5 B.  A lot of things have been zeroed out by the market.

 

I believe they will get the waivers they need, there is no capital call until 2018, so the quick sale debt paydown scenario is unlikely in my view.

 

People have to do their own work and get to their own comfort level.  I obviously don't zero out all of their rx.  I did zero out derm rx (this includes jublia and retinA), glumetza, neuro, and others.

 

At $30, the market is pricing VRX at $40B enterprise value. Just looking at market value of $10B is not sufficient. Does Salix and B+L support a $40B enterprise value? As per your math of $3.2B in EBITDA, that is still over 12x EV/EBITDA. Debt has to paid back, not all of it can be rolled over, given their leverage.

 

Low cost debt is an advantage if it is really long-term.

 

Revolving Credit Facility

 

Series A-1 Tranche A Term Loan Facility April 2016          139.8M

Series A-2 Tranche A Term Loan Facility April 2016          136.6M

Series A-3 Tranche A Term Loan Facility October 2018  1,878.0M

Series D-2 Tranche B Term Loan Facility Feb 2019        1,085.8M

Series C-2 Tranche B Term Loan Facility Dec 2019            833.7M

Series A-4 Tranche A Term Loan Facility April 2020          962.8M

Series E-1 Tranche B Term Loan Facility Aug 2020        2,530.3M

Series F Tranche B Term Loan Facility    April 2022        4,062.2M

 

Senior Notes:

6.75%  August 2018      1,587.7M

6.375% October 2020    2,225.3M

7.00%  October 2020      687.8M

5.375% March 2020      1,978.1M

6.75%  August 2021        645.9M

7.50%  July 2021          1,609.0M

5.625% Dec 2021          893.0M

7.25%  July 2022            541.8M

5.50%  March 2023        990.4M

5.875% May 2023        3,212.7M

4.50%  May 2023    1,657.3M

6.125% April 2025      3,212.3M

 

Obviously if I think only Salix and B&L have value, VRX's financial will be too close for me to buy more than 100 shares.

 

In a fantasy world where only Salix and B+L generate cash, VRX can make their interest payment, and still pay down debt.  On an on-going basis Salix and B+L are worth more than the $30 B of debt, of course with a caveat that interest rate on debt won't go beyond their unlevered fcf.   

 

In the real world, VRX will generate over $5 Billion of annual ebitda.  This is after taking into account major price reduction on their derm rx.  Since I went through 08-09, liquidity, debt maturity profile are on top of my check list :)   

 

The quick sale - debt paydown scenario is similar to bac mark to market loan portfolio-liability talk in 2011 that gets people to their $0 bac valuation. 

 

I saw Cramer screaming on cnbc who wants to buy vrx non core asset.  1 asset sale that VRX told us closing in Q2 is selling for over $100 million (part of synergetics).  It's similar to the cry "who wants to buy bac's loan book" lol.  Just look at BAC's gains on NPL sale in the past 4 years lol. 

 

My limit order at $30 triggered, next one is $29.  I have orders all the way to $20 for now.  I think VRX at these prices is a no brainer but we'll see.

 

OK. I don't quite agree with the comparison with BAC, but you seem fairly convinced that they are similar. So, I won't try to argue.

 

Let me ask you a different question. Is there *any* future scenario under which the long thesis of buying at $30 may not work out? What is the scenario? In that case, what is the downside? What are the odds of this happening?

 

1.  Cash is fake like Parmalat - I depended a lot on their cash flow statement

 

2.  Failure to get waiver/extension - cross default - ch 11

 

3.  Lenders + Bondholders demand 100% increase in interest rates in exchange for waiver/extension

 

4.  Failure to ever file 2015 10K

 

5.  Failure to generate $5 B EBITDA with no credible plan to improve it.  This may result from price control, massive sales group attrition, severe reputation damage with physicians/patients, generic approval of xifaxan, etc.

 

6.  Major product problems - B&L solution/contact lenses blind customers eyes, Solta's Fraxel & Thermage destroy patients skins, customers dying from taking any Valeant's products, etc. 

 

7.  Nuclear attack on US soil

 

Frankly you can go to their 10K page 10-21 to see all the risk factors.  The downside is $0 equity value. 

 

I have posted my math on how I get to my $5 B EBITDA. 

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg244586/#msg244586

 

I haven't seen any other post since, that show in a reasonable environment, VRX will generate much less than $5 B EBITDA.

[Rasputin]

1.  Cash is fake like Parmalat - I depended a lot on their cash flow statement

 

2.  Failure to get waiver/extension - cross default - ch 11

 

3.  Lenders + Bondholders demand 100% increase in interest rates in exchange for waiver/extension

 

4.  Failure to ever file 2015 10K

 

5.  Failure to generate $5 B EBITDA with no credible plan to improve it.  This may result from price control, massive sales group attrition, severe reputation damage with physicians/patients, generic approval of xifaxan, etc.

 

6.  Major product problems - B&L solution/contact lenses blind customers eyes, Solta's Fraxel & Thermage destroy patients skins, customers dying from taking any Valeant's products, etc. 

 

7.  Nuclear attack on US soil

 

Frankly you can go to their 10K page 10-21 to see all the risk factors.  The downside is $0 equity value. 

 

I have posted my math on how I get to my $5 B EBITDA. 

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg244586/#msg244586

 

I haven't seen any other post since, that show in a reasonable environment, VRX will generate much less than $5 B EBITDA.

 

The tax rate has been 20%-25% for the last 3 quarters.

 

*I tax EBTDA because their depreciation/amortization is almost exclusively non-tax-deductible.

 

$5b EBITDA

- ~$2b in interest payments

= ~$3b EBTDA

* (1-.25) [book taxes - should be higher since cash taxes are what shareholders actually get]

= $2.25b EBDA

- ~$2b in D/A

= $0.25b or $250m GAAP NI in an ideal scenario.

 

Cash taxes have been much greater than book taxes for 3 straight quarters and the situation is likely to continue.

 

As time goes by, it looks like the correct interpretation of VRX's [book] tax rate is probably 20%-30% (with no chance of LT single-digits). What's worse, because VRX was so aggressive with their DTLs (look at my post where I modeled the SLXP PPA), I'm guessing the actual cash tax rate will be >40% in the long run due to the sharp decline in EM revenue. Also, it's important to note that cash taxes >> book taxes and will continue to be that way. $250m GAAP NI will probably be ~$0 in "true" new cash flow + D/A. Which brings me back to my c- mall comment and why I think D/A is a real expense (in this specific case).

 

There's a couple issues with EM revenue. First, did anyone notice that FX "caused" revenue to be lower by ~$125m in 4Q 2015 alone! That's over 10% hit due to FX even though the USD was roughly flat against most of the currencies they would be taking revenues in...

 

Also, declining EM revenues is a concern because that is how they were going to generate "single-digit tax rates". The issue is it works both ways. If EM revenue continues to decline then they will have to pay their aggressively booked DTLs. It's possible VRX's future tax bills could reach 100% of taxable income at times (remember that D/A is non-deductible!).

 

 

Some old discussions that are worth reading:

Discussing Xifaxan and my thoughts on why they purchased SLXP (I think they purposely delayed IBS-D launch by 6 months so they could show "organic growth"):

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg243146/#msg243146

 

Issues with claimed tax rate target:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg243114/#msg243114

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg241657/#msg241657

which was discussed in the first few pages without sufficient clarification:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/80/

 

VRX has made HUGE errors on previous guidance before. Trusting them is tough for a lot of folks that have been following this closely:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg240320/#msg240320

 

They have made it pattern to take longer and longer to release CFS and BS after their initial earnings PR:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg240459/#msg240459

 

I can't find my post but it might be worth finding my breakdown of product-by-product growth in a post-Philidor world. A couple other folks also had some nice write-ups as well. To summarize, as of 3Q15, VRX didn't have a single product (they've held for 1+ years) that had >$9m in rev and was growing. D/A expenses are very real.

 

You mention B&L a lot. VRX quietly reclassified a few product categories over a year ago to show "organic growth" at B&L. In reality, B&L had a few patents approved at or shortly after VRX purchased them. They are the only growth and the rest of B&L is struggling (flat to negative growth in non-trivial segments). B&L has zero pipeline now due to the recent approvals and lack of R&D. You should look into B&L accounting changes in 2014.

 

I'm writing all this out [again] just so you don't think that your claims are indisputable. Folks valuing VRX based on EBITDA should be careful for the reason I showed above. VRX's structure is extremely deceptive.

 

A.  Don't know how you get to $2 B in interest expense. 

 

B.  Don't know how you get to $0.75 B in cash taxes or 25% cash tax rate

 

C.  I use all capex and working capital need as replacement for D&A. 

 

D.  EM revenue is NOT how they get to 5-10% cash tax rate.  There are many articles out there explaining what VRX did.  It's NOT through EM revenue. 

 

E.  I can easily give 1 product as of 3Q15 with >$9m in rev that they have owned for > 1 yr and is growing - CERAVE even with FX.

 

F.  B+L launching lens for astigmatism in Q2 and Q3 with many more product launches scheduled in 2017-2020.  I mention it a lot because it's a documented proof of how savvy management is operationally.  Look at lens sales prior/after VRX.  Look at competitor prior/after VRX. 

 

[Rasputin]

There is about $2.5 B in fcf assuming $5 B EBITDA - $1.625 B interest expense - $0.34 B cash taxes - $0.35 B capex - $0.2 B WC need. 

 

On your point 3:

"

3.  Lenders + Bondholders demand 100% increase in interest rates in exchange for waiver/extension"

I think we don't need a 100% rate increase to destroy this investment case, right?

They don't have much margin of safety, and the rate increase is very real, which means they may not have enough money to pay debt

 

Rasputin, that was a pretty good response on the specific drugs.  I do, however, have a question?  Where do you think all the cash flow comes from if you are zeroing out all of these drugs?  B&L and Salix?  Salix was bought about a year ago for 15B and B&L around 8B, so double B&L at 16 and salix at 15, and you barely cover the debt?  Where's the equity value.  My example with Retin-A was that VRX's entire line-up is full of these types of drugs and I question whether they have any value.

 

Salix and B+L are worth more on on-going basis than the debt due to low cost debt and low tax structure. 

 

The 2 will generate roughly $3.2 b EBITDA in 2016 normalized. 

Interest expense  $1.625 B

Capex $0.35 B

Working capital $0.2 B (excluding milestone +contingent payments)

Cash tax $0.16 B

FCF roughly $0.9 B

 

Capex and working capital can be adjusted a lot lower going forward if there is no growth. 

 

Systemic price gouging is only in the US.  Their ex US business is worth something (close to $3 B of revenue).

 

At $30 the market is pricing VRX at $10.5 B.  A lot of things have been zeroed out by the market.

 

I believe they will get the waivers they need, there is no capital call until 2018, so the quick sale debt paydown scenario is unlikely in my view.

 

People have to do their own work and get to their own comfort level.  I obviously don't zero out all of their rx.  I did zero out derm rx (this includes jublia and retinA), glumetza, neuro, and others.

 

At $30, the market is pricing VRX at $40B enterprise value. Just looking at market value of $10B is not sufficient. Does Salix and B+L support a $40B enterprise value? As per your math of $3.2B in EBITDA, that is still over 12x EV/EBITDA. Debt has to paid back, not all of it can be rolled over, given their leverage.

 

Low cost debt is an advantage if it is really long-term.

 

Revolving Credit Facility

 

Series A-1 Tranche A Term Loan Facility April 2016          139.8M

Series A-2 Tranche A Term Loan Facility April 2016          136.6M

Series A-3 Tranche A Term Loan Facility October 2018  1,878.0M

Series D-2 Tranche B Term Loan Facility Feb 2019        1,085.8M

Series C-2 Tranche B Term Loan Facility Dec 2019            833.7M

Series A-4 Tranche A Term Loan Facility April 2020          962.8M

Series E-1 Tranche B Term Loan Facility Aug 2020        2,530.3M

Series F Tranche B Term Loan Facility    April 2022        4,062.2M

 

Senior Notes:

6.75%  August 2018      1,587.7M

6.375% October 2020    2,225.3M

7.00%  October 2020      687.8M

5.375% March 2020      1,978.1M

6.75%  August 2021        645.9M

7.50%  July 2021          1,609.0M

5.625% Dec 2021          893.0M

7.25%  July 2022            541.8M

5.50%  March 2023        990.4M

5.875% May 2023        3,212.7M

4.50%  May 2023    1,657.3M

6.125% April 2025      3,212.3M

 

Obviously if I think only Salix and B&L have value, VRX's financial will be too close for me to buy more than 100 shares.

 

In a fantasy world where only Salix and B+L generate cash, VRX can make their interest payment, and still pay down debt.  On an on-going basis Salix and B+L are worth more than the $30 B of debt, of course with a caveat that interest rate on debt won't go beyond their unlevered fcf.   

 

In the real world, VRX will generate over $5 Billion of annual ebitda.  This is after taking into account major price reduction on their derm rx.  Since I went through 08-09, liquidity, debt maturity profile are on top of my check list :)   

 

The quick sale - debt paydown scenario is similar to bac mark to market loan portfolio-liability talk in 2011 that gets people to their $0 bac valuation. 

 

I saw Cramer screaming on cnbc who wants to buy vrx non core asset.  1 asset sale that VRX told us closing in Q2 is selling for over $100 million (part of synergetics).  It's similar to the cry "who wants to buy bac's loan book" lol.  Just look at BAC's gains on NPL sale in the past 4 years lol. 

 

My limit order at $30 triggered, next one is $29.  I have orders all the way to $20 for now.  I think VRX at these prices is a no brainer but we'll see.

 

OK. I don't quite agree with the comparison with BAC, but you seem fairly convinced that they are similar. So, I won't try to argue.

 

Let me ask you a different question. Is there *any* future scenario under which the long thesis of buying at $30 may not work out? What is the scenario? In that case, what is the downside? What are the odds of this happening?

 

1.  Cash is fake like Parmalat - I depended a lot on their cash flow statement

 

2.  Failure to get waiver/extension - cross default - ch 11

 

3.  Lenders + Bondholders demand 100% increase in interest rates in exchange for waiver/extension

 

4.  Failure to ever file 2015 10K

 

5.  Failure to generate $5 B EBITDA with no credible plan to improve it.  This may result from price control, massive sales group attrition, severe reputation damage with physicians/patients, generic approval of xifaxan, etc.

 

6.  Major product problems - B&L solution/contact lenses blind customers eyes, Solta's Fraxel & Thermage destroy patients skins, customers dying from taking any Valeant's products, etc. 

 

7.  Nuclear attack on US soil

 

Frankly you can go to their 10K page 10-21 to see all the risk factors.  The downside is $0 equity value. 

 

I have posted my math on how I get to my $5 B EBITDA. 

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg244586/#msg244586

 

I haven't seen any other post since, that show in a reasonable environment, VRX will generate much less than $5 B EBITDA.

[Guest Schwab711]

A.  Don't know how you get to $2 B in interest expense. 

 

B.  Don't know how you get to $0.75 B in cash taxes or 25% cash tax rate

 

C.  I use all capex and working capital need as replacement for D&A. 

 

D.  EM revenue is NOT how they get to 5-10% cash tax rate.  There are many articles out there explaining what VRX did.  It's NOT through EM revenue. 

 

E.  I can easily give 1 product as of 3Q15 with >$9m in rev that they have owned for > 1 yr and is growing - CERAVE even with FX.

 

F.  B+L launching lens for astigmatism in Q2 and Q3 with many more product launches scheduled in 2017-2020.  I mention it a lot because it's a documented proof of how savvy management is operationally.  Look at lens sales prior/after VRX.  Look at competitor prior/after VRX.

 

A. https://www.sec.gov/Archives/edgar/data/885590/000119312516504187/d135599dex991.htm

http://financials.morningstar.com/income-statement/is.html?t=VRX&region=USA&culture=en_US

 

It looks like slightly more than $1.7b. I wrote ~ (approximately). The difference doesn't affect the validity.

 

B. https://www.sec.gov/Archives/edgar/data/885590/000119312516504187/d135599dex991.htm

 

I was pretty thorough in this explanation? When and how much was the transfer payment for SLXP?

Why do you think they are paying book taxes with negative GAAP NI? Lots of non-deductible expenses.

 

C. This is the mall argument all over. See Dorsia's comment on SLXP (8 year depreciation schedule or ~$1.7b/year for next 7 years). This is probably the biggest reason you see value where most don't at this point.

 

D. Please explain VRX's tax structure. EM revenue/profits are necessary because if VRX has too much revenue/profit (as % of total) come from the US then they will lose their tax status.

 

E. You are right. I misquoted my original post. Here's my original post I suggested you read.

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg244089/?topicseen#msg244089

 

F. I referred to your rebuttal in my post to you. The new lens driving the growth in the category were known at purchase. They are not replenishing their pipeline, which was my argument to you. That's the long-term issue.

 

You are ignoring why B&L is growing. They reorganized to remove generics, leaving the best products in "B&L". So any claim that B&L operations have improved under VRX management is apples-to-oranges. We know those generics moved out of B&L reporting segment are declining. Try adding their y/y results to the reported B&L results and see what apples-to-apples growth looks like.

[Rasputin]

 

 

I do it both ways. 

 

1.  Use solely the 2014 10K + Salix merger document

 

This eliminates most of Philidor/captive pharmacy effect, Jublia (launched in Q2 2014, minimal sales in 2014),  Glumetza, Isuprel, Nitropress.

 

2014 ebit $2.04 Billion (this includes restructuring charges, iprd impairments, acquisition costs etc,).

deduct 2014 other income $270 million (gain from divestitures of injectables, etc)

2014 core ebit $1.77 Billion (this excludes gain from allergan)

2014 d&a $1.74 Billion

2014 ebitda $3.5 Billion

2016 salix stand-alone ebitda $1.0 Billion (subtract glumetza from merger doc)

2016 salix cost save $0.5 Billion

2016 ebitda $5 Billion

 

2.  Use September 28 2015 letter, but this requires us to use management slides to estimate how much revenue comes from derm rx, what kind of revenue/ebitda management has in mind for 2016 etc. 

 

Going by Q3 2015 slide deck, low end 2015 revenue guidance = $10.7 Billion

In that letter, Mike talks about high single digit growth for emerging markets, 3% growth in ex US developed market.  Exclude growth from dermatology, opthalmology rx , dentistry rx, neurology and others (30% of 2016 revenue).  let's just say 5% combined growth from the rest of the business (70%).  2016 non salix revenue = $11.1 Billion

Add Salix 2016 revenue = $2.3 Billion (subtract glumetza)

Total 2016 revenue = $13.4 Billion

Deduct 25% for derma rx, neurology and others (insta death "bad valeant")

2016 "good valeant" revenue = $10 Billion

2016 ebitda = $5 Billion (50% ebitda margin)

 

In both of these scenarios, I don't take into account ebitda from non salix 2015 acquisitions, even though on the interest expense line, I accounted for all the debt.

 

I use fcf/market cap yield rather than ebitda/ev yield because of their low tax rate. 

 

Likelihood of valeant being forced to liquidate or sell subsidiaries for cheap due to debt is  low. 

 

I'm prepared for the stock to go down to $30 and I would be very ecstatic.  It would be my Christmas gift. 

 

Buying BAC at $10 in 2011, still get 70% return in 4 years.  The only requirement for that 70% return is to keep holding it even as the stock went from $10 to less than $5.  My lowest cost lot is $4.94 executed on 12/19/2011 outside regular hours due to my limit order at IB.  I still own all of the shares I bought in 2011 and have added more through out the years. 

 

I actually find buying VRX today a lot easier than BAC 2011.  The good valeant is solid.  No regulators can force raising capital at very cheap stock price.  No tens of billions of dollar lawsuit.  No worry about rejection of deal with private label, customers closing accounts, etc. etc. 

 

Okay a few questions on this

 

-I don't really follow how you broke out the Allergan profits which I thought were in q 2014, I didn't see another leg down from 1.77 billion. They were about 250 million.

 

-They sold half of Medicis in 2014, how do you account for those lost earnings.

 

-Why is it reasonable at this point to just take Pearson's word on the Salix synergies. Salix serves an entirely different market (GIs vs. derms vs. opthos) with a separate sales force and separate hq. 

 

-After Glumetza expires, Salix is basically just Xifaxan. Simply the revenue from Xifaxan in q4 2015 was about 200 million. That's a run rate of less than 1 billion in revenue. Not ebitda. Revenue. Xifaxan has been on the market for 5 years, and just got a huge ad push. Maybe it just ends up being a billion dollar revenue drug.  What's your ebitda margin on that?

 

Finally, on the last call, an analyst asked is it right that you had 300 million in ocf in q1 2016?  The treasurer didn't deny it, which means that is AT BEST how much ocf they have this quarter. Can you explain how they ramp back up? Even if they get the ocf to 2 billion for the year, I think they are drawing dead on feasible debt repayment without significant growth.

 

1. That $1.77 B exclude Allergan gain - see 2014 10K.

 

2.  I don't account for the sale of fillers + toxin probably around $400 million of annual revenue.  I also don't take into account non Salix acquisition so I figure they're a wash.

 

3.  I've seen it done with B+L so I believe their cost cut estimate.  I haven't seen anybody doubting their cost cutting prowess.  I've seen ppl say they cut cost too much. 

 

4.  See Salix merger document forecast.  Xifaxan had problems in Q4 2015 and Q1 2016.  Prescription growth is still ongoing.  We'll see if it gets to $1 B in 2016.  Time will tell.  As far as generic version from Actavis, i see generic ANDA filing all the time, everybody wants to be the first one to file.  Doesn't mean anything. 

 

5.  Walgreen patient access program cause chaos in Q1 2016.  I think they paid retention bonuses too in Q1.  Historically, Q1 tend to be a weaker Q for GAAP Cash flow from operations.  Well the questioner basically used cash balance on dec 31 2015 vs cash balance on march 15 2016, revolver balance on dec 31 2015 vs revolver balance on march 15 2016 and the payments they have made to get to his $305 million cash flow generation.  He could be right but I'd wait for Q1 results.  I'm not a quarterly person, my investment horizon is probably longer than most market participants. 

 

As far as Buffett and EBITDA, I think his message is that EBITDA is not free cash flow.  Buffett even came up with owners earnings. 

 

"we can gain some insights about what may be called “owner earnings.” These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N’s items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c) . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)"

 

In his 2012 annual letter, Buffett has talked about Wells Fargo core deposits amortization expense is not a real expense, same with IBM

 

“Non-real” amortization expense also looms large at some of our major investees. IBM has made many

small acquisitions in recent years and now regularly reports “adjusted operating earnings,” a non-GAAP figure that

excludes certain purchase-accounting adjustments. Analysts focus on this number, as they should.

 

A “non-real” amortization charge at Wells Fargo, however, is not highlighted by the company and never, to

my knowledge, has been noted in analyst reports. The earnings that Wells Fargo reports are heavily burdened by an

“amortization of core deposits” charge, the implication being that these deposits are disappearing at a fairly rapid

clip. Yet core deposits regularly increase. The charge last year was about $1.5 billion. In no sense, except GAAP

accounting, is this whopping charge an expense.

 

 

[dorsiacapital]

There is about $2.5 B in fcf assuming $5 B EBITDA - $1.625 B interest expense - $0.34 B cash taxes - $0.35 B capex - $0.2 B WC need. 

 

On your point 3:

"

3.  Lenders + Bondholders demand 100% increase in interest rates in exchange for waiver/extension"

I think we don't need a 100% rate increase to destroy this investment case, right?

They don't have much margin of safety, and the rate increase is very real, which means they may not have enough money to pay debt

 

Rasputin, that was a pretty good response on the specific drugs.  I do, however, have a question?  Where do you think all the cash flow comes from if you are zeroing out all of these drugs?  B&L and Salix?  Salix was bought about a year ago for 15B and B&L around 8B, so double B&L at 16 and salix at 15, and you barely cover the debt?  Where's the equity value.  My example with Retin-A was that VRX's entire line-up is full of these types of drugs and I question whether they have any value.

 

Salix and B+L are worth more on on-going basis than the debt due to low cost debt and low tax structure. 

 

The 2 will generate roughly $3.2 b EBITDA in 2016 normalized. 

Interest expense  $1.625 B

Capex $0.35 B

Working capital $0.2 B (excluding milestone +contingent payments)

Cash tax $0.16 B

FCF roughly $0.9 B

 

Capex and working capital can be adjusted a lot lower going forward if there is no growth. 

 

Systemic price gouging is only in the US.  Their ex US business is worth something (close to $3 B of revenue).

 

At $30 the market is pricing VRX at $10.5 B.  A lot of things have been zeroed out by the market.

 

I believe they will get the waivers they need, there is no capital call until 2018, so the quick sale debt paydown scenario is unlikely in my view.

 

People have to do their own work and get to their own comfort level.  I obviously don't zero out all of their rx.  I did zero out derm rx (this includes jublia and retinA), glumetza, neuro, and others.

 

At $30, the market is pricing VRX at $40B enterprise value. Just looking at market value of $10B is not sufficient. Does Salix and B+L support a $40B enterprise value? As per your math of $3.2B in EBITDA, that is still over 12x EV/EBITDA. Debt has to paid back, not all of it can be rolled over, given their leverage.

 

Low cost debt is an advantage if it is really long-term.

 

Revolving Credit Facility

 

Series A-1 Tranche A Term Loan Facility April 2016          139.8M

Series A-2 Tranche A Term Loan Facility April 2016          136.6M

Series A-3 Tranche A Term Loan Facility October 2018  1,878.0M

Series D-2 Tranche B Term Loan Facility Feb 2019        1,085.8M

Series C-2 Tranche B Term Loan Facility Dec 2019            833.7M

Series A-4 Tranche A Term Loan Facility April 2020          962.8M

Series E-1 Tranche B Term Loan Facility Aug 2020        2,530.3M

Series F Tranche B Term Loan Facility    April 2022        4,062.2M

 

Senior Notes:

6.75%  August 2018      1,587.7M

6.375% October 2020    2,225.3M

7.00%  October 2020      687.8M

5.375% March 2020      1,978.1M

6.75%  August 2021        645.9M

7.50%  July 2021          1,609.0M

5.625% Dec 2021          893.0M

7.25%  July 2022            541.8M

5.50%  March 2023        990.4M

5.875% May 2023        3,212.7M

4.50%  May 2023    1,657.3M

6.125% April 2025      3,212.3M

 

Obviously if I think only Salix and B&L have value, VRX's financial will be too close for me to buy more than 100 shares.

 

In a fantasy world where only Salix and B+L generate cash, VRX can make their interest payment, and still pay down debt.  On an on-going basis Salix and B+L are worth more than the $30 B of debt, of course with a caveat that interest rate on debt won't go beyond their unlevered fcf.   

 

In the real world, VRX will generate over $5 Billion of annual ebitda.  This is after taking into account major price reduction on their derm rx.  Since I went through 08-09, liquidity, debt maturity profile are on top of my check list :)   

 

The quick sale - debt paydown scenario is similar to bac mark to market loan portfolio-liability talk in 2011 that gets people to their $0 bac valuation. 

 

I saw Cramer screaming on cnbc who wants to buy vrx non core asset.  1 asset sale that VRX told us closing in Q2 is selling for over $100 million (part of synergetics).  It's similar to the cry "who wants to buy bac's loan book" lol.  Just look at BAC's gains on NPL sale in the past 4 years lol. 

 

My limit order at $30 triggered, next one is $29.  I have orders all the way to $20 for now.  I think VRX at these prices is a no brainer but we'll see.

 

OK. I don't quite agree with the comparison with BAC, but you seem fairly convinced that they are similar. So, I won't try to argue.

 

Let me ask you a different question. Is there *any* future scenario under which the long thesis of buying at $30 may not work out? What is the scenario? In that case, what is the downside? What are the odds of this happening?

 

1.  Cash is fake like Parmalat - I depended a lot on their cash flow statement

 

2.  Failure to get waiver/extension - cross default - ch 11

 

3.  Lenders + Bondholders demand 100% increase in interest rates in exchange for waiver/extension

 

4.  Failure to ever file 2015 10K

 

5.  Failure to generate $5 B EBITDA with no credible plan to improve it.  This may result from price control, massive sales group attrition, severe reputation damage with physicians/patients, generic approval of xifaxan, etc.

 

6.  Major product problems - B&L solution/contact lenses blind customers eyes, Solta's Fraxel & Thermage destroy patients skins, customers dying from taking any Valeant's products, etc. 

 

7.  Nuclear attack on US soil

 

Frankly you can go to their 10K page 10-21 to see all the risk factors.  The downside is $0 equity value. 

 

I have posted my math on how I get to my $5 B EBITDA. 

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg244586/#msg244586

 

I haven't seen any other post since, that show in a reasonable environment, VRX will generate much less than $5 B EBITDA.

 

Rasputin, you do put in work, I'll give you that.

 

Could you please provide a bridge for me of how Valeant went from at end of Q3 2015 - totally untapped revolver and 1.4 billion in cash

 

(http://api40.10kwizard.com/cgi/convert/pdf/ValeantPharmaceuticalsInternationalInc-20151026-10Q-20150930.pdf?ipage=10538133&xml=1&quest=1&rid=23&section=1&sequence=-1&pdf=1&dn=1)

 

to about now

 

where Valeant has tapped 1.45 billion of their revolver and has 1.2 billion in cash

 

So after six months of cash flows and a basically fully tapped revolver, Valeant has less cash than it had at end of Q3.

 

I understand there's a lot of acqs mixed in there (my count is 1.8 bil-ish) and some long term debt repayment, but curious what your figures look like.

 

 

 

 

[dorsiacapital]

 

 

I do it both ways. 

 

1.  Use solely the 2014 10K + Salix merger document

 

This eliminates most of Philidor/captive pharmacy effect, Jublia (launched in Q2 2014, minimal sales in 2014),  Glumetza, Isuprel, Nitropress.

 

2014 ebit $2.04 Billion (this includes restructuring charges, iprd impairments, acquisition costs etc,).

deduct 2014 other income $270 million (gain from divestitures of injectables, etc)

2014 core ebit $1.77 Billion (this excludes gain from allergan)

2014 d&a $1.74 Billion

2014 ebitda $3.5 Billion

2016 salix stand-alone ebitda $1.0 Billion (subtract glumetza from merger doc)

2016 salix cost save $0.5 Billion

2016 ebitda $5 Billion

 

2.  Use September 28 2015 letter, but this requires us to use management slides to estimate how much revenue comes from derm rx, what kind of revenue/ebitda management has in mind for 2016 etc. 

 

Going by Q3 2015 slide deck, low end 2015 revenue guidance = $10.7 Billion

In that letter, Mike talks about high single digit growth for emerging markets, 3% growth in ex US developed market.  Exclude growth from dermatology, opthalmology rx , dentistry rx, neurology and others (30% of 2016 revenue).  let's just say 5% combined growth from the rest of the business (70%).  2016 non salix revenue = $11.1 Billion

Add Salix 2016 revenue = $2.3 Billion (subtract glumetza)

Total 2016 revenue = $13.4 Billion

Deduct 25% for derma rx, neurology and others (insta death "bad valeant")

2016 "good valeant" revenue = $10 Billion

2016 ebitda = $5 Billion (50% ebitda margin)

 

In both of these scenarios, I don't take into account ebitda from non salix 2015 acquisitions, even though on the interest expense line, I accounted for all the debt.

 

I use fcf/market cap yield rather than ebitda/ev yield because of their low tax rate. 

 

Likelihood of valeant being forced to liquidate or sell subsidiaries for cheap due to debt is  low. 

 

I'm prepared for the stock to go down to $30 and I would be very ecstatic.  It would be my Christmas gift. 

 

Buying BAC at $10 in 2011, still get 70% return in 4 years.  The only requirement for that 70% return is to keep holding it even as the stock went from $10 to less than $5.  My lowest cost lot is $4.94 executed on 12/19/2011 outside regular hours due to my limit order at IB.  I still own all of the shares I bought in 2011 and have added more through out the years. 

 

I actually find buying VRX today a lot easier than BAC 2011.  The good valeant is solid.  No regulators can force raising capital at very cheap stock price.  No tens of billions of dollar lawsuit.  No worry about rejection of deal with private label, customers closing accounts, etc. etc. 

 

Okay a few questions on this

 

-I don't really follow how you broke out the Allergan profits which I thought were in q 2014, I didn't see another leg down from 1.77 billion. They were about 250 million.

 

-They sold half of Medicis in 2014, how do you account for those lost earnings.

 

-Why is it reasonable at this point to just take Pearson's word on the Salix synergies. Salix serves an entirely different market (GIs vs. derms vs. opthos) with a separate sales force and separate hq. 

 

-After Glumetza expires, Salix is basically just Xifaxan. Simply the revenue from Xifaxan in q4 2015 was about 200 million. That's a run rate of less than 1 billion in revenue. Not ebitda. Revenue. Xifaxan has been on the market for 5 years, and just got a huge ad push. Maybe it just ends up being a billion dollar revenue drug.  What's your ebitda margin on that?

 

Finally, on the last call, an analyst asked is it right that you had 300 million in ocf in q1 2016?  The treasurer didn't deny it, which means that is AT BEST how much ocf they have this quarter. Can you explain how they ramp back up? Even if they get the ocf to 2 billion for the year, I think they are drawing dead on feasible debt repayment without significant growth.

 

1. That $1.77 B exclude Allergan gain - see 2014 10K.

 

2.  I don't account for the sale of fillers + toxin probably around $400 million of annual revenue.  I also don't take into account non Salix acquisition so I figure they're a wash.

 

3.  I've seen it done with B+L so I believe their cost cut estimate.  I haven't seen anybody doubting their cost cutting prowess.  I've seen ppl say they cut cost too much. 

 

4.  See Salix merger document forecast.  Xifaxan had problems in Q4 2015 and Q1 2016.  Prescription growth is still ongoing.  We'll see if it gets to $1 B in 2016.  Time will tell.  As far as generic version from Actavis, i see generic ANDA filing all the time, everybody wants to be the first one to file.  Doesn't mean anything. 

 

5.  Walgreen patient access program cause chaos in Q1 2016.  I think they paid retention bonuses too in Q1.  Historically, Q1 tend to be a weaker Q for GAAP Cash flow from operations.  Well the questioner basically used cash balance on dec 31 2015 vs cash balance on march 15 2016, revolver balance on dec 31 2015 vs revolver balance on march 15 2016 and the payments they have made to get to his $305 million cash flow generation.  He could be right but I'd wait for Q1 results.  I'm not a quarterly person, my investment horizon is probably longer than most market participants. 

 

As far as Buffett and EBITDA, I think his message is that EBITDA is not free cash flow.  Buffett even came up with owners earnings. 

 

"we can gain some insights about what may be called “owner earnings.” These represent (a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N’s items (1) and (4) less ( c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume. (If the business requires additional working capital to maintain its competitive position and unit volume, the increment also should be included in ( c) . However, businesses following the LIFO inventory method usually do not require additional working capital if unit volume does not change.)"

 

In his 2012 annual letter, Buffett has talked about Wells Fargo core deposits amortization expense is not a real expense, same with IBM

 

“Non-real” amortization expense also looms large at some of our major investees. IBM has made many

small acquisitions in recent years and now regularly reports “adjusted operating earnings,” a non-GAAP figure that

excludes certain purchase-accounting adjustments. Analysts focus on this number, as they should.

 

A “non-real” amortization charge at Wells Fargo, however, is not highlighted by the company and never, to

my knowledge, has been noted in analyst reports. The earnings that Wells Fargo reports are heavily burdened by an

“amortization of core deposits” charge, the implication being that these deposits are disappearing at a fairly rapid

clip. Yet core deposits regularly increase. The charge last year was about $1.5 billion. In no sense, except GAAP

accounting, is this whopping charge an expense.

 

I think Buffet was making a larger point about what it means about management when they aggressively tout ebitda

 

So your position is that the depreciation of the 13.5 billion in debt for Salix is not a real charge because Xifaxan (a patented drug whose patent will expire) is an infinite asset comparable to that of Wells Fargo's core deposits amortization? Are all patented drugs infinite? Should, for example, depreciation of Gilead's purchase of Pharmasett for 11 billion be excluded  because that 11 billion isn't real money because Gilead will be able to sell the Hep-C drugs forever? We should tell Gilead's management.

 

On Xifaxan sales, you say "look at the Salix merger forecast"

 

I say that's shit management says with the help of investment bankers when they're closing deals

 

or as Buffet says:

 

"Investment bankers, being paid as they are for action, constantly urge acquirers to pay 20 per cent to 50 per cent premiums over market price for publicly held businesses.

 

"The bankers tell the buyer that the premium is justified for 'control value' and for the wonderful things that are going to happen once the acquirer's CEO takes charge. (What acquisition-hungry manager will challenge that assertion?)

 

I think the position at time of deal was that after inventory issues worked through in first half of 2015, Xifaxan would soar. It was supposed to do $400 million in sales last q and did 200 million. It has no direct connection with Philidor.  And yet on the call, Pearson appeared to say that the problems were because payers thought that it was somehow connected to the Walgreen's deal.

[Rasputin]

A.  Don't know how you get to $2 B in interest expense. 

 

B.  Don't know how you get to $0.75 B in cash taxes or 25% cash tax rate

 

C.  I use all capex and working capital need as replacement for D&A. 

 

D.  EM revenue is NOT how they get to 5-10% cash tax rate.  There are many articles out there explaining what VRX did.  It's NOT through EM revenue. 

 

E.  I can easily give 1 product as of 3Q15 with >$9m in rev that they have owned for > 1 yr and is growing - CERAVE even with FX.

 

F.  B+L launching lens for astigmatism in Q2 and Q3 with many more product launches scheduled in 2017-2020.  I mention it a lot because it's a documented proof of how savvy management is operationally.  Look at lens sales prior/after VRX.  Look at competitor prior/after VRX.

 

A. https://www.sec.gov/Archives/edgar/data/885590/000119312516504187/d135599dex991.htm

http://financials.morningstar.com/income-statement/is.html?t=VRX&region=USA&culture=en_US

 

It looks like slightly more than $1.7b. I wrote ~ (approximately). The difference doesn't affect the validity.

 

B. https://www.sec.gov/Archives/edgar/data/885590/000119312516504187/d135599dex991.htm

 

I was pretty thorough in this explanation? When and how much was the transfer payment for SLXP?

Why do you think they are paying book taxes with negative GAAP NI? Lots of non-deductible expenses.

 

C. This is the mall argument all over. See Dorsia's comment on SLXP (8 year depreciation schedule or ~$1.7b/year for next 7 years). This is probably the biggest reason you see value where most don't at this point.

 

D. Please explain VRX's tax structure. EM revenue/profits are necessary because if VRX has too much revenue/profit (as % of total) come from the US then they will lose their tax status.

 

E. You are right. I misquoted my original post. Here's my original post I suggested you read.

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg244089/?topicseen#msg244089

 

F. I referred to your rebuttal in my post to you. The new lens driving the growth in the category were known at purchase. They are not replenishing their pipeline, which was my argument to you. That's the long-term issue.

 

You are ignoring why B&L is growing. They reorganized to remove generics, leaving the best products in "B&L". So any claim that B&L operations have improved under VRX management is apples-to-oranges. We know those generics moved out of B&L reporting segment are declining. Try adding their y/y results to the reported B&L results and see what apples-to-apples growth looks like.

 

A.  $300 million is a lot to me especially since I've killed a lot of things to get to $5 B EBITDA.

 

B.  Their projected cash taxes is only $215 million in 2016 vs your $750 million. 

 

C.  Have you looked at Salix merger document?  See their revenue forecast all the way to 2029.  It's not zero in 2026 :)  There is amortization expense I'm sure since it has limited patent lives but is it an additional $1.45 B per year (on top of $350 million capex and $200 million working capital need)??  That capex includes new manufacturing lines for B&L. 

 

D.  I don't remember where I read it exactly but the crux of the article is that Valeant loaded US (high tax rate) subs with debt, and loaded low tax rate subs with IP.  Low tax rate subs then charges US subs for the use of the IP.  So taxable income from US subs is basically zero.  And most of the income flow through low tax rate subs.  I think that's how it goes. 

 

E.  Most ppl think if there is generic, branded will go to zero.  I think this is wrong.  From my research, there are valid reasons why physicians prescribe branded vs generic.  It may have to do with delivery agent, pharmacokinetics, etc.  While active ingredients maybe the same, in some cases, better results are observed by using branded.  Physicians want to see results.  VRX is already pricing branded lower than generics as I've shown with tretinoin.  In june, all derm rx branded will be priced as generics.

 

F.  The numbers I see for B&L total sales grew from 2012, 2013, and 2014 along with EBITDA.