VRX - Valeant Pharmaceuticals International Inc.

[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.

 

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.

 

There should be amortization expense for products with limited patent lives.  But it's not $1.5 B per year for Salix.  Because I think you are wrong with your 10 year duration.  If you look at Salix merger document, 2029 revenue is not zero.  Basically instead of your $1.5 B per year charge, I charge $650 million against that $5 B EBITDA to get to fcf. 

 

[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.

 

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.

 

I don't think you can bridge the difference until cash flow statement for Q4 is issued.  The guy on the call bridge cash from dec 31 2015 to march 15 2016, even then I don't think he's accurate until we see the cash flow statement. 

[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.

 

There should be amortization expense for products with limited patent lives.  But it's not $1.5 B per year for Salix.  Because I think you are wrong with your 10 year duration.  If you look at Salix merger document, 2029 revenue is not zero.  Basically instead of your $1.5 B per year charge, I charge $650 million against that $5 B EBITDA to get to fcf.

 

What's $650 million based on? Is it just the working capital and cap ex figures? If so, then I fail to see any recognition of future debt repayment for Salix in your 5 billion ebitda figure. Debt doesn't matter until it does. At this point, I think it matters a lot

 

 

[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.

 

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.

 

There should be amortization expense for products with limited patent lives.  But it's not $1.5 B per year for Salix.  Because I think you are wrong with your 10 year duration.  If you look at Salix merger document, 2029 revenue is not zero.  Basically instead of your $1.5 B per year charge, I charge $650 million against that $5 B EBITDA to get to fcf.

 

What's $650 million based on? Is it just the working capital and cap ex figures? If so, then I fail to see any recognition of future debt repayment for Salix in your 5 billion ebitda figure. Debt doesn't matter until it does. At this point, I think it matters a lot

 

I used $650 million because that's all capex including growth and working capital need for growth.  But I assume they're all maintenance capex.

 

I don't know when Xifaxan will have $0 revenue because the merger document goes up to 2029 and in 2029 Xifaxan and Salix revenue and EBITDA aren't $0. 

 

If you say 20 year amortization then we're about there.  But I don't know.  What I know is the merger doc disagree with your 10 yr, let alone 5 yr duration.  I know not all of their $2 B D&A are real expense. 

[Eye4Valu]

Nice volleying Rasputin and Dorsia. True bull/bear debate.

[dorsiacapital]

(starting afresh because the quote lengths were getting ridiculous)

 

Look, I understand the merger docs say great things. But every merger doc ever created says rosy things, and yet 70-80% of all mergers fail, so merger docs are not a be all and end all. And the Salix merger docs were created in order to raise 13.5 billion of high yield debt funding; they needed to say good things.

 

Therefore, I think that to simply say that revenues will still be there in 2029+ on a patented drug because the merger docs say so is not persuasive. For example, the merger docs totally neglect the possibility of outside action. What if one of the other pharmas who actually invest in R&D comes up with a blockbuster IBS-D drug that then dominates the market.  What happens then? Allergan, for reference, has introduced its own IBS-D drug this year.

 

I also think questions can be raised about Valeant's forecasting of xifaxan.  For example,  in q3 of 2015, Valeant was projecting 400 mil of sales for Xifaxan in q4 2015. They missed by 50% trying to see 3 months ahead, but you trust that they were able to see 15+ years ahead?

 

The merger doc hasn't been that great either so far.  It said Xifaxan would do 690 mil of revenue in 2015; Xifaxan appears to have done 580 million.  It said Xifaxan would do 1.3 billion of revenue in 2016. I wouldn't say Valeant seemed confident that Xifaxan would get above 1 billion in 2016 on the call. The q4 2015 run rate will have to go up about 50% to reach the merger doc goals.

 

But interestingly, the merger document does say that Glumetza revenue will go from 105 million in 2015 to about 15-20 million consistently from 2017 on. What happens in 2016 is that Glumetza goes generic. The merger doc does not have your faith in the revenue power of patented drugs with generic competition. The main Xifaxan patent held by Valeant is from 2009, that expires in 2024. (There's patents for other forms of rifaximin dating back to the 1980s that could be potent prior art).  The merger doc does project that revenues will start to dip in 2024, but doesn't give that same dramatic 80% drop. What if it did? (The merger doc appears to be splitting the baby by having the Xifaxan revenues drop starting in 2024 but hold up pretty well til 2029 - I think that assumption seems a stretch - either generic competition really enters in 2024 or it doesn't.) And the merger doc doesn't project any significant revenue from any other Salix products besides Xifaxan from 2024 onwards. So, again, let's do a 10 year depreciation for the Salix debt - that's a 1.35 billion hit to your ebitda.

 

More generally, I am still not persuaded that your bull case doesn't involve a great deal of implicit faith in management. I don't know how, at this point, that faith can be warranted.

 

[Picasso]

(starting afresh because the quote lengths were getting ridiculous)

 

Look, I understand the merger docs say great things. But every merger doc ever created says rosy things, and yet 70-80% of all mergers fail, so merger docs are not a be all and end all. And the Salix merger docs were created in order to raise 13.5 billion of high yield debt funding; they needed to say good things.

 

Therefore, I think that to simply say that revenues will still be there in 2029+ on a patented drug because the merger docs say so is not persuasive. For example, the merger docs totally neglect the possibility of outside action. What if one of the other pharmas who actually invest in R&D comes up with a blockbuster IBS-D drug that then dominates the market.  What happens then? Allergan, for reference, has introduced its own IBS-D drug this year.

 

I also think questions can be raised about Valeant's forecasting of xifaxan.  For example,  in q3 of 2015, Valeant was projecting 400 mil of sales for Xifaxan in q4 2015. They missed by 50% trying to see 3 months ahead, but you trust that they were able to see 15+ years ahead?

 

The merger doc hasn't been that great either so far.  It said Xifaxan would do 690 mil of revenue in 2015; Xifaxan appears to have done 580 million.  It said Xifaxan would do 1.3 billion of revenue in 2016. I wouldn't say Valeant seemed confident that Xifaxan would get above 1 billion in 2016 on the call. The q4 2015 run rate will have to go up about 50% to reach the merger doc goals.

 

But interestingly, the merger document does say that Glumetza revenue will go from 105 million in 2015 to about 15-20 million consistently from 2017 on. What happens in 2016 is that Glumetza goes generic. The merger doc does not have your faith in the revenue power of patented drugs with generic competition. The main Xifaxan patent held by Valeant is from 2009, that expires in 2024. (There's patents for other forms of rifaximin dating back to the 1980s that could be potent prior art).  The merger doc does project that revenues will start to dip in 2024, but doesn't give that same dramatic 80% drop. What if it did? (The merger doc appears to be splitting the baby by having the Xifaxan revenues drop starting in 2024 but hold up pretty well til 2029 - I think that assumption seems a stretch - either generic competition really enters in 2024 or it doesn't.) And the merger doc doesn't project any significant revenue from any other Salix products besides Xifaxan from 2024 onwards. So, again, let's do a 10 year depreciation for the Salix debt - that's a 1.35 billion hit to your ebitda.

 

More generally, I am still not persuaded that your bull case doesn't involve a great deal of implicit faith in management. I don't know how, at this point, that faith can be warranted.

 

+1 gazillion

[wescobrk]

I'm by far no expert on this, but, it seems to me it all comes down to can they pay the interest and debt this year and beyond, who cares how lumpy the earnings is, if they can pay the debt and survive, this $30 billion number will be lower over the next 5 and 10 years.

[Rasputin]

1.  Merger doc doesn't say great things.  It shows xifaxan sale will peak and decline, but not to zero in 2029.

 

2.  The merger doc forecast wasn't done by Valeant's management.  You should read it before claiming it's totally wrong. 

 

3.  What 70-80% m&a fail?  Where do you get that statistics?  How many m&A has Valeant done?  How many failed?  How many M&A Berkshire has done?  How many failed?  You can substitute Berkshire for GE, Precision Castparts, etc...

 

4.  Q1 2016 was botched due to chaos after the Walgreen agreement.  You think Costco is happy with Walgreen deal?  Costco also want the same deal.  We shall see if management's $1 B 2016 Xifaxan revenue happens, it won't take too long. 

 

5.  They've always known Glumetza is going to zero.  Bought Salix for GI franchise not diabetes. 

 

6.  I disagree with 10 year depreciation.  Just look at Lipitor.  Guess how long Lipitor patent lives?  hint: It's not 5 year and it's not 10 year.  I'll let you find out.  This is the largest blockbuster drug.  Did Lipitor sales go to zero after patent expires?  It's still non zero in 2015! 

 

I'm not here to persuade anyone.  I was hoping to get a reasonable push back on why VRX is not cheap at $30.  What I get so far is dorsia capital knows more about xifaxan patent than people who prepared the merger doc and therefore merger doc is wrong.  Xifaxan will go to zero in 10 years (maybe 5 years), therefore there is real at least $1.35 B d&a expense annually. 

 

So with your $1.35 B real d&a expense, how about you tell us how much fcf VRX will generate.  Schwab has stated he thinks VRX only generates $0.25 B in net income/fcf.  How about you Dorsia?  I'll bookmark and see what actually develop in 2016 and beyond.  I don't use stock price movement to validate my thesis.  I use business results to do so. 

 

(starting afresh because the quote lengths were getting ridiculous)

 

Look, I understand the merger docs say great things. But every merger doc ever created says rosy things, and yet 70-80% of all mergers fail, so merger docs are not a be all and end all. And the Salix merger docs were created in order to raise 13.5 billion of high yield debt funding; they needed to say good things.

 

Therefore, I think that to simply say that revenues will still be there in 2029+ on a patented drug because the merger docs say so is not persuasive. For example, the merger docs totally neglect the possibility of outside action. What if one of the other pharmas who actually invest in R&D comes up with a blockbuster IBS-D drug that then dominates the market.  What happens then? Allergan, for reference, has introduced its own IBS-D drug this year.

 

I also think questions can be raised about Valeant's forecasting of xifaxan.  For example,  in q3 of 2015, Valeant was projecting 400 mil of sales for Xifaxan in q4 2015. They missed by 50% trying to see 3 months ahead, but you trust that they were able to see 15+ years ahead?

 

The merger doc hasn't been that great either so far.  It said Xifaxan would do 690 mil of revenue in 2015; Xifaxan appears to have done 580 million.  It said Xifaxan would do 1.3 billion of revenue in 2016. I wouldn't say Valeant seemed confident that Xifaxan would get above 1 billion in 2016 on the call. The q4 2015 run rate will have to go up about 50% to reach the merger doc goals.

 

But interestingly, the merger document does say that Glumetza revenue will go from 105 million in 2015 to about 15-20 million consistently from 2017 on. What happens in 2016 is that Glumetza goes generic. The merger doc does not have your faith in the revenue power of patented drugs with generic competition. The main Xifaxan patent held by Valeant is from 2009, that expires in 2024. (There's patents for other forms of rifaximin dating back to the 1980s that could be potent prior art).  The merger doc does project that revenues will start to dip in 2024, but doesn't give that same dramatic 80% drop. What if it did? (The merger doc appears to be splitting the baby by having the Xifaxan revenues drop starting in 2024 but hold up pretty well til 2029 - I think that assumption seems a stretch - either generic competition really enters in 2024 or it doesn't.) And the merger doc doesn't project any significant revenue from any other Salix products besides Xifaxan from 2024 onwards. So, again, let's do a 10 year depreciation for the Salix debt - that's a 1.35 billion hit to your ebitda.

 

More generally, I am still not persuaded that your bull case doesn't involve a great deal of implicit faith in management. I don't know how, at this point, that faith can be warranted.

[Graham Osborn]

Don't mean to bump here - has anyone noticed how the AGN/ TEVA was delayed?  I think we all realize VRX common is toast, but AGN has been pulling the same accounting shenanigans as VRX for years.  Their 10Ks, IPR&D assumptions etc are very similar (although AGN's disclosures have always been a bit better than VRX's - not saying much :)).  This delay may push back the PFE/ AGN deal, which gives shareholders/ regulators even more time to sniff around.  I guess I'm wondering whether AGN has been receiving subpeonas about price hikes at the same time as Valeant but they have been sitting on these hoping the deals go through first.  Now that VRX's "real" growth pharma numbers are coming out I wonder whether analysts will apply the same math to AGN's.  I actually wrote my short thesis on AGN right before the Teva deal was announced, at which point I would have had to redo the whole thing based on changing assumptions - so I just took the easy route and switched to VRX.  They were always a reflexive pair in my mind.  I decided to short AGN again (this time via 2018 OTM puts) once I saw the deal was delayed but it's definitely a small/ high payoff bet relative to my portfolio.

[dorsiacapital]

1. Merger doc still has 900 million of cash flows in 2029.

 

2. Merger doc was done by IB-ers being paid fees by Valeant and Salix. Salix had an interim BoD because their last management had gotten tossed after an absolutely shameless year long channel stuff. So no, still not persuaded by merger doc.

 

3. Harvard Business Review says 70-90% of mergers & acquisitions fail (http://www.businessrevieweurope.eu/finance/390/Why-do-up-to-90-of-Mergers-and-Acquisitions-Fail). How many of Valeant's M&A deals have failed is still TBD.  How many of the M&A deals failed when big investment banks got in on the subprime phenomenon in 2005/2006? I think we may be looking at similar stats for pharma deals in last few years.

 

4. It's funny that Walgreen's deal "caused chaos" because on this very board, I remember all the Valeant bulls talking about what an awesome deal it was and poo-pooing any questions that were raised about it. I think some of this "chaos" is PBMs like CVS and Express Scripts placing huge restrictions on reimbursement for Valeant's derma portfolio (and perhaps they're now being mean on other parts of Valeant portfolio because they have all the leverage). I don't think that "chaos" ends in 1 quarter. Do you think Express, which is getting squeezed by Anthem, goes back in 3 months and says well hey, we held the line on Jublia for a quarter, please reup our contract and don't start your own PBM?  Valeant is bleeding in the water and sharks are circling. Valeant can make deals, but those deals give away pounds and pounds of flesh.

 

5. Agreed. That's why sustainability of Xifaxan is so important.

 

6. Funny, you should bring up Lipitor. This article says Lipitor sales dropped from 13 billion to 600 million almost immediately once generics entered, and I think those 600 million in sales are at much lower margins. (http://blogs.wsj.com/corporate-intelligence/2013/04/30/pfizer-still-hurting-from-collision-with-the-patent-cliff/)

 

You use business results, except we just got a peak of q1 business results and they appear to be incredibly, incredibly ugly. I think q1 represents new reality, I haven't heard a lot of specifics from you about why you think things are going to change except for faith in Pearson.  From Pearson I just heard on the call mumble mumble, inventory, managed care pissed, we're working on it.  That isn't reassuring.

 

But I know everybody here loves models, so here's mine. Valeant said q1 cash flow was at max 300 million. That's a run rate of 1.2 billion. They promised to pay down 1.7 billion in debt this year. I think that's a real gauge of what they think their cash flow can be. I'm going to split those two numbers and say 1.5 billion because I don't think management deserves benefit of the doubt. I'll assume 0% growth going forward because I think the business model is under extreme pressure.  I'll consider the 1.5 billion as operating cash flow. I'll give a generous 20x multiple to that, and then I'll get an enterprise value of 30 billion. Equity's a zero.

 

But Pearson just issued a letter to employees saying that bankruptcy isn't a concern: http://www.bloomberg.com/news/articles/2016-03-18/pearson-moves-to-reassure-staff-that-valeant-isn-t-going-broke.  I'm sure that the CEO having to issue a letter saying bankruptcy isn't imminent is a good sign. (http://www.truth-out.org/archive/component/k2/item/60407:enron-prosecutor-tells-of-lies-and-choices)

 

By the way, I still haven't heard you say much, if anything, about the disappearance of the controller and the utter failure to file a 10k. Don't think that happened at BAC in 2011?

 

P.s. - how do you model in an excel spreadsheet the world burning down?

 

1.  Merger doc doesn't say great things.  It shows xifaxan sale will peak and decline, but not to zero in 2029.

 

2.  The merger doc forecast wasn't done by Valeant's management.  You should read it before claiming it's totally wrong. 

 

3.  What 70-80% m&a fail?  Where do you get that statistics?  How many m&A has Valeant done?  How many failed?  How many M&A Berkshire has done?  How many failed?  You can substitute Berkshire for GE, Precision Castparts, etc...

 

4.  Q1 2016 was botched due to chaos after the Walgreen agreement.  You think Costco is happy with Walgreen deal?  Costco also want the same deal.  We shall see if management's $1 B 2016 Xifaxan revenue happens, it won't take too long. 

 

5.  They've always known Glumetza is going to zero.  Bought Salix for GI franchise not diabetes. 

 

6.  I disagree with 10 year depreciation.  Just look at Lipitor.  Guess how long Lipitor patent lives?  hint: It's not 5 year and it's not 10 year.  I'll let you find out.  This is the largest blockbuster drug.  Did Lipitor sales go to zero after patent expires?  It's still non zero in 2015! 

 

I'm not here to persuade anyone.  I was hoping to get a reasonable push back on why VRX is not cheap at $30.  What I get so far is dorsia capital knows more about xifaxan patent than people who prepared the merger doc and therefore merger doc is wrong.  Xifaxan will go to zero in 10 years (maybe 5 years), therefore there is real at least $1.35 B d&a expense annually. 

 

So with your $1.35 B real d&a expense, how about you tell us how much fcf VRX will generate.  Schwab has stated he thinks VRX only generates $0.25 B in net income/fcf.  How about you Dorsia?  I'll bookmark and see what actually develop in 2016 and beyond.  I don't use stock price movement to validate my thesis.  I use business results to do so. 

 

(starting afresh because the quote lengths were getting ridiculous)

 

Look, I understand the merger docs say great things. But every merger doc ever created says rosy things, and yet 70-80% of all mergers fail, so merger docs are not a be all and end all. And the Salix merger docs were created in order to raise 13.5 billion of high yield debt funding; they needed to say good things.

 

Therefore, I think that to simply say that revenues will still be there in 2029+ on a patented drug because the merger docs say so is not persuasive. For example, the merger docs totally neglect the possibility of outside action. What if one of the other pharmas who actually invest in R&D comes up with a blockbuster IBS-D drug that then dominates the market.  What happens then? Allergan, for reference, has introduced its own IBS-D drug this year.

 

I also think questions can be raised about Valeant's forecasting of xifaxan.  For example,  in q3 of 2015, Valeant was projecting 400 mil of sales for Xifaxan in q4 2015. They missed by 50% trying to see 3 months ahead, but you trust that they were able to see 15+ years ahead?

 

The merger doc hasn't been that great either so far.  It said Xifaxan would do 690 mil of revenue in 2015; Xifaxan appears to have done 580 million.  It said Xifaxan would do 1.3 billion of revenue in 2016. I wouldn't say Valeant seemed confident that Xifaxan would get above 1 billion in 2016 on the call. The q4 2015 run rate will have to go up about 50% to reach the merger doc goals.

 

But interestingly, the merger document does say that Glumetza revenue will go from 105 million in 2015 to about 15-20 million consistently from 2017 on. What happens in 2016 is that Glumetza goes generic. The merger doc does not have your faith in the revenue power of patented drugs with generic competition. The main Xifaxan patent held by Valeant is from 2009, that expires in 2024. (There's patents for other forms of rifaximin dating back to the 1980s that could be potent prior art).  The merger doc does project that revenues will start to dip in 2024, but doesn't give that same dramatic 80% drop. What if it did? (The merger doc appears to be splitting the baby by having the Xifaxan revenues drop starting in 2024 but hold up pretty well til 2029 - I think that assumption seems a stretch - either generic competition really enters in 2024 or it doesn't.) And the merger doc doesn't project any significant revenue from any other Salix products besides Xifaxan from 2024 onwards. So, again, let's do a 10 year depreciation for the Salix debt - that's a 1.35 billion hit to your ebitda.

 

More generally, I am still not persuaded that your bull case doesn't involve a great deal of implicit faith in management. I don't know how, at this point, that faith can be warranted.

[writser]

Intriguing post about the VRX 10K delay: http://cafepharma.com/boards/threads/glossary-of-hostile-takeover-terms-with-discussion.559657/page-42

 

The official reason, as filed with the SEC, for missing the deadline (and for not having a target date) is that the "Ad Hoc Committee" has not finished it's investigation. The Ad Hoc Committee, as those who follow this story recall, was created to investigate the accounting issues associated with Philidor when that debacle exploded (October-November 2015). The committee is composed of and reports to the Board of Directors.

 

I am going to call "Bull" on this excuse.

 

The AHC was not appointed by, required by, or reports to the external auditors (PWC). While everything and anything they find (or fail to find) needs to be brought to the attention of the auditors, the audited report is never contingent on their findings. The auditors are perfectly capable -- in fact, are absolutely required -- to do all the investigations themselves. That's why we have independent auditors to begin with. Additionally, whatever charter the AHC was given; endangering the company's continued existence through lack of timeliness surely wasn't part of it. Even if it didn't have a pre-grace-period-expiration deadline to begin with, such would surely have been added by the Board afterward. If AHC slowness was really the issue here, and their report was really the missing piece for the audited financials, the Board would have immediately issued an order for the AHC to finish immediately and report whatever they got so far. It's not pretty ordering a quasi-independent internal investigation to finish before they say they are finished; but the mortal danger to the company's existence trumps prettiness.

 

[..]

 

Perhaps a few words about auditor reports are now merited: Auditors, after spending thousands of man-hours conducting an audit, issue remarkably short reports. A standard (unqualified) Audit report only has 3 sentences, and the first two say nothing meaningful (just that we did an audit); the third sentence provides the result of the audit, and it, too, doesn't say anything meaningful (just that the audit was successful). Every CPA candidate memorizes the exact wordings of the third sentence: It says "In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2015, and the results of its operations and its cash flows for the year then ended in accordance with generally accepted accounting principles in the United States of America." That's it. It doesn't say if the company is doing well or badly, if management is good or bad, if the future prospects are bright or dark. None of that. All the auditors are saying is that the retrospective numbers management presented in the financial statements are legit. Whether those numbers are good or bad, and what they imply regarding the future of the company, that's for the investors to decide.

Whereas the audit process is entirely retrospective -- it only looks at what has already transpired, never try to divine what will be -- there is one super-important exception to this guideline: The auditors must examine the company's ability to continue as a "going concern" into the intermediate future (often, but not exclusively, defined as 12 months). If not, they need to add the dreaded "going concern" fourth sentence "The accompanying financial statements have been prepared assuming that the Company will continue as a going concern." followed by a brief explanation of why it might not be and what might happen then.

 

Just about every bond covenant has a clause that instantly puts the company into default whenever there is a Going Concern.

 

So, if the PWC report is indeed complete, and it has a Going Concern Disclosure, that would be a good enough reason to not to release it even after the grace period expired. What's the worst that can happen (from Valeant's perspective) by not releasing it? -- going into bond default a month from now (and only after someone got 25% of the bonds of any one issue to ask for it). If they do release it? Instant default, today.

 

So, what's next: Ackman is right (for a change) that Valeant needs to start liquidating and fast. Don't worry about "core" and "non-core" (as MP is still muttering), sell anything you can get a decent price for. If enough is sold between now and when the debt holders will have the right to demand early payment (a bit over a month from now), it might be possible to remove the Going Concern language (technically, the language is as-of the last day of 2015, but Auditors can have a bit of leeway, say, if the company raised a ton of cash through asset sales in early 2016, to conclude that, actually, they were not a going concern risk on 12/31/2015 after all); or to buy down a lot of debt. Unfortunately, for them, between the taint on all their assets and the fire sale situation, this is going to be very tough. Additionally, two of the largest potential buyers, Allergan and Pfizer, can't easily buy anything until their own merger either closes or breaks. Valeant will probably get some bond holders to give them more time, but unless they get every last one of them (75%+ in each bond issue), it's worthless (but they'll still make a big announcement out of it).

 

Rasputin: I admire your contrarian stance and looks like you did your homework.  I'm probably not qualified to give you any advice with respect to Valeant. Nevertheless I would like to say one thing. Even if your long-term analysis is correct, things could go wrong in the short term. The market is reflexive (that term is probably overused, but whatever). The common stock has imploded during the past few days. If that makes a few bondholders panic (regardless of whether they should!) and take a stance the common will be in even more danger. If they are forced to sell assets people can rip them off, common will fall even more, that will worry more bondholders, rinse and repeat. The question is not only if Valeant can survive, it is also whether all stakeholders want to give it a try.

[twacowfca]

Here's my two cents, and that won't help Valeant's balance sheet.

 

Their IBS drug works, but it has significant potential side effects. Erythromycin is an old drug long out of patent that works almost as well

treating IBS.  It's side effects are so low that it has been seriously considered for classification as a non prescription drug.

 

The US health system is all about increasing costs, but that is not the case in other countries. Projections for sales of their drug in other countries may not be realized when physicians realize that a generic drug that costs pennies a tablet works almost as well with lower side effects,.

[dbuch]

Valeant said q1 cash flow was at max 300 million

 

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.

 

 

 

 

Here is what was said, they mentioned they paid a large payment for Sprout of $500M

 

<Q>: Can you just kind of provide us a little bit of a bridge on the cash balance? Because when we look at it, we see

you had roughly $600mm of cash in Q4, looks like you drew down $1.2B on the revolver, so it take you to $1.8B, you

paid $900mm between the – for the term loan and then there was another payment that you made. So that should have

left you with about $900mm of cash and you are saying you have $1.2B of cash, so that would imply then that you

generated $300mm of cash in Q1, and that doesn’t really line up with the guidance for $2.2B of cash flow for the year.

So, like, how do we get comfortable that you’re going to generate an extra $1B of cash than where you're currently

running?

<A - Linda LaGorga>: So – it’s Linda – on the revolver, we ended the year with $250mm drawn on the revolver and

we’re now at $1.45B. We obviously are generating cash in Q1. We did have, however, some large payments in Q1 that

we discussed. $500mm for Sprout that we talked about.

 

To-date, in Q1, we have completed the Sprout payment of $500mm in January and have repaid $405mm in term

loans, including our Q1 $145mm mandatory amortization and $260mm in term loan maturities.

 

As you might remember from a prior call or more than a prior call, the Salix severance is a big piece of that. There is a

lot of Salix charges that were paid out for over a year and so that is still flowing through just based on how the

severance was structured. On contingent consideration milestones and payments, again that number does include the

Sprout payment, which is done, and the other big payment is there is the $150mm milestone payment for the drug that’s

listed on the page. And what I would say is depending there is something that are scheduled for fourth quarter and if

they don’t happen in Q4, they could happen in Q1, but that’s our best estimate.

 

 

Going through all the line items it seems to square up.

 

Beg Cash 597

Drawn Revolver Change + 1200

CFO + 562

Milestone Pmt (Brodalumab) - 150

Sprout Payment - 500

Repaid Term Loans - 405

Salix Severance? - 100

Current Cash 1204

 

This implies CFO was $597M and that number includes at least $240M in payments for integration and acquisition costs.

[Guest bksimon]

Just checked major holders of VRX in Yahoo Finance and look what the navigation says...

[siddharth18]

Just checked major holders of VRX in Yahoo Finance and look what the navigation says...

 

 

The letter "g" seems to have been cut off from bottom. A lousy photo-shop work.

[wachtwoord]

Just checked major holders of VRX in Yahoo Finance and look what the navigation says...

 

 

The letter "g" seems to have been cut off from bottom. A lousy photo-shop work.

 

It's a website, why the hell would you Photoshop. Just take 2.5 seconds to change the DOM element.....

[Rasputin]

 

But I know everybody here loves models, so here's mine. Valeant said q1 cash flow was at max 300 million. That's a run rate of 1.2 billion. They promised to pay down 1.7 billion in debt this year. I think that's a real gauge of what they think their cash flow can be. I'm going to split those two numbers and say 1.5 billion because I don't think management deserves benefit of the doubt. I'll assume 0% growth going forward because I think the business model is under extreme pressure.  I'll consider the 1.5 billion as operating cash flow. I'll give a generous 20x multiple to that, and then I'll get an enterprise value of 30 billion. Equity's a zero.

 

You do realize that cash flow from operations or operating cash flow is after interest expense. 

 

If you want to count the debt of $30 Billion, you should add back interest expense to your $1.5 B operating cash flow.

 

The reason is:

 

If I shell out $40 B to buy all of Valeant (which means I paid off the debt), based on your model, I'm getting $3.2 B (your $1.5 B of operating cash flow plus $1.7 B of interest expense, since there won't be any interest expense if debt is paid off).

 

That $1.7 Billion they promised to pay down in 2016 is after paying contingent/milestone payment that won't be repeated in 2017 (close to $1 Billion).

 

[rpadebet]

A bag-holder here with net cost basis of around $75-80 in my last tranche. Lucky to have limited it to a 4-5% position after trimming half near $96.

 

The big mistakes here was to bet again after knowing

 

a) How assets in VRX hands couldn't  be significantly more valuable than in others hands

b) Realizing management was over extending themselves with leverage, but ignoring it.

c) Realizing that management had lost credibility with their "average growth" and "cash eps" metrics, but attributing it to "mistakes which could be rectified".

d) Realizing they were overpaying for Salix and just dumb in investing in Addyi, yet hoping that it could somehow work out if I bought at the right price given the quality of the B&L franchise.

e) ValueAct - yes I did give VRX more benefit of doubt than warranted because ValueAct was involved very closely and they are usually quite reasonable and knowledgeable activists.

 

I am still holding on at this price, because it is pretty much inconsequential to the portfolio at current weighting ( could be another mistake but not something I will regret for long  ;)).

 

Coming to the current situation, despite all the hate Ackman has received, he has put forth the most attractive remedy from common stock holder point of view. VRX doesn't seem to have a liquidity crisis for chapter 11 bankruptcy to help them. They seem to have a management credibility issue which is now affecting the business.

 

Management most likely needs to be replaced for their 2015 acquisitions if not for anything else. Their leverage remains high so to restore confidence back in the business, they need to pursue asset sales. They will likely get a high price for B&L, but I would like to probably see them get rid of Salix.

 

If they don't do this and are adamant about their abilities to pay down debt with adjusted cash flows, they will most likely be digging themselves into a deeper hole. Bankruptcy filing will ensure asset sales anyway.

 

At this point, I find some of the bonds interesting at the right prices. Especially if there is a chance of getting stock in a post restructuring franchise.

[Guest Grey512]

Anyone watch the news?

The likelihood that the equity here is gradually heading to 0 continues to increase.

Notwithstanding AZValue's IRR analysis or the contempt that most folks here feel for Hempton's Fairfax antics, the shorts were right, so I tip my hat to AZ, Hempton and everyone who had the cojones to take a negative position (e.g. dorsia).

[big_triece]

http://www.bloomberg.com/news/articles/2016-03-21/valeant-ceo-pearson-to-step-down-after-company-finds-replacement

 

Pearson out as CEO. Also noted "improper conduct" by the CFO.

[Picasso]

Anyone watch the news?

The likelihood that the equity here is gradually heading to 0 continues to increase.

Notwithstanding AZValue's IRR analysis or the contempt that most folks here feel for Hempton's Fairfax antics, the shorts were right, so I tip my hat to AZ, Hempton and everyone who had the cojones to take a negative position (e.g. dorsia).

 

Naw dude, just a well thought out bear raid by John Hempton & Co.  ;)

 

Reading back through this thread is really eye opening.  Some of you guys need to take your money and just index it.  It's amazing to see how certain investors on this board couldn't become negative when faced with very negative information. 

 

And I need to go take a shower knowing that I was long this stock at one point. 

[Guest Grey512]

Perplexed by the 10% positive up-move intraday.

[Uccmal]

Anyone watch the news?

The likelihood that the equity here is gradually heading to 0 continues to increase.

Notwithstanding AZValue's IRR analysis or the contempt that most folks here feel for Hempton's Fairfax antics, the shorts were right, so I tip my hat to AZ, Hempton and everyone who had the cojones to take a negative position (e.g. dorsia).

 

Naw dude, just a well thought out bear raid by John Hempton & Co.  ;)

 

Reading back through this thread is really eye opening.  Some of you guys need to take your money and just index it.  It's amazing to see how certain investors on this board couldn't become negative when faced with very negative information. 

 

And I need to go take a shower knowing that I was long this stock at one point. 

 

lol.  The resemblance to Nortel is uncanny at this point.  If anyone recalls, Nortel was bankrupted to pay off debt, after having 3 or 4 Ceos try to fix it.  The next step for valeant is to run through a few fix it guys, before totally wiping out.  Sorry to those who got hammered here... this goes over to the other thread on mistakes.  We all make them.....!

[Uccmal]

Perplexed by the 10% positive up-move intraday.

 

The irrationality of investors doesn't amaze me any longer.