VRX - Valeant Pharmaceuticals International Inc.

[randomep]

This story never ceases to surprise me:

 

Sequoia is already booking a Tax loss:

http://finance.yahoo.com/news/sequoia-fund-sold-1-5-002123572.html

 

 

 

your kidding, $300M tax loss in march? If they wanted to take the loss they can do it in nov/dec, no this is more like get out while we still have something left....

 

 

[muscleman]

This story never ceases to surprise me:

 

Sequoia is already booking a Tax loss:

http://finance.yahoo.com/news/sequoia-fund-sold-1-5-002123572.html

 

 

 

your kidding, $300M tax loss in march? If they wanted to take the loss they can do it in nov/dec, no this is more like get out while we still have something left....

 

I thought Sequoia was one of the original investors in VRX. It looks like they bought a big position last October.

That's a typical mistake of oh it was trading at $260 and now it is only $100 What a bargain type of mistake.  :o

 

I'd like David Poppe to let me why it was cheap at $100 which was 13x EV/EBITDA.

[aws]

This story never ceases to surprise me:

 

Sequoia is already booking a Tax loss:

http://finance.yahoo.com/news/sequoia-fund-sold-1-5-002123572.html

 

 

 

your kidding, $300M tax loss in march? If they wanted to take the loss they can do it in nov/dec, no this is more like get out while we still have something left....

 

 

 

Would they even have had a tax loss in Nov/Dec.?  Their cost basis on most shares was quite low and they would only have had a loss on the shares they purchased post philidor revelations.

[Picasso]

Every share they own is at a loss now. You only take a tax loss if you don't think it's going up in the next 30 days. Especially since it trades at what, 3x "cash EPS?"  If they thought Valeant could get their 10K out by end of April they wouldn't be "tax loss selling."

 

 

[oddballstocks]

I have a bag of popcorn in hand, this is first class entertainment.

 

The CFO's statement was epic, it spoke volumes about the company's culture.  The guy at the top, the one who's name is on the 10-K blamed someone downstream, yet he approved it.  His statement made it seem like he didn't even know what was going on with the financials, if that's his position it's a strange one.  His entire job is to know what's going on with the financials.  So either he wasn't doing his job, which is what he was claiming, and that means anything could be happening.  Or the guy is spineless and willing to throw anyone under the bus.  When the guy at the top is like that I'm guessing he only hired saints right..? Neither situation is good.

 

I think we're in the "pre-bond holders race to the exit" stage of this investment.  We all know it's coming, but it isn't here yet. 

[randomep]

This story never ceases to surprise me:

 

Sequoia is already booking a Tax loss:

http://finance.yahoo.com/news/sequoia-fund-sold-1-5-002123572.html

 

 

 

your kidding, $300M tax loss in march? If they wanted to take the loss they can do it in nov/dec, no this is more like get out while we still have something left....

 

 

 

Would they even have had a tax loss in Nov/Dec.?  Their cost basis on most shares was quite low and they would only have had a loss on the shares they purchased post philidor revelations.

 

nonoooooo

 

I am not trying to play armchair QB with 20/20 hindsight telling them what they should've done last year. They just sold and justified it as a tax loss for 2016. If you want a 2016 tax loss hold it till nov/dec 2016. Why sell now? Unless you have a very  real fear it will go lower.

 

[muscleman]

Every share they own is at a loss now. You only take a tax loss if you don't think it's going up in the next 30 days. Especially since it trades at what, 3x "cash EPS?"  If they thought Valeant could get their 10K out by end of April they wouldn't be "tax loss selling."

 

No. They said 2016 cash EPS would be $38 per share. Remember?  :)

 

This whole "Cash EPS" BS is based on the assumption of acquisition cost readjustments. Clearly this year there will be no more acquisitions, so Cash EPS should be equal to GAAP EPS. But there is no way they can make it to $38 EPS. Not even $3 GAAP EPS.

 

The CFO's statements reminded me of George Soros' "Mergermania" chapter. He said "When the dusts finally all settles, these executives are unlikely have the mood to buckle up to work on day to day details." The party is over so Pearson has to go. Ackman needs a real turnaround specialist that can buckle up and work 16 hours a day.

[shalab]

AZValue was right on the money with his analysis

 

From Sequoia Investor Day conference:

 

Question:

Howard Schiller has resigned as the chief financial officer at Valeant Pharmaceuticals after four years. The Financial Times joked that he may be exhausted from “all this fiddling.” With Valeant’s lofty stock price likely bringing its percentage of our fund’s assets to upwards of 20% and with the company’s accelerated growth likely to be impacted by the specter of rising interest rates, have you been reevaluating our position?

Rory Priday:

He has done quite a bit of fiddling. The market cap since Howard Schiller joined Valeant went from less than $15 billion to over $70 billion today. But I think some people get burned out at the company just because of the number of deals that they do and the number of products that they manage. Some people refer to their time at Valeant as a tour of duty. It was a little concerning for us that he left, but he is going to be on the board hopefully for a long time. He told us that he would be there as long as investors wanted to have him. So I do not think he is going anywhere.

 

David Poppe:

The fact that Howard is staying on the board is a pretty strong sign that there are no disagreements or unhappiness. Not so long ago, he was telling us that Valeant closed a deal at eight o’clock at night on New Year’s Eve. It is a very intense pace. Sometimes you make a lot of money and that pace is too much. I think it is more about that than it is about anything else.

 

...

 

Bob Goldfarb:

After reading about Mr. Munger’s comments, Rory looked for all the books on Harold Geneen that he could find. I think he is the man to answer your question. Rory?

Rory Priday:

We were not at the Daily Journal meeting, where Mr. Munger made the remark comparing Valeant and ITT. So we do not know exactly what he said. But it was something to the effect that Valeant was like ITT, except that Mike Pearson was worse than Harold Geneen, who became CEO of ITT in 1959. ITT was one of a number of serial acquirers that were active particularly in 1960s. Geneen bought a raft of companies — some of the names you will recognize today like Sheraton and Avis. Bob can provide more context than I can because he is pretty familiar with the company as well. But Geneen bought a lot of disparate businesses in different industries. I recall from the books I read that ITT’s sales went from $700 million to $17 billion over eighteen years and the earnings went from $29 million to $550 million. But ITT also issued a lot of equity and was prone to issue equity in order to buy these companies. By the time Geneen stepped down from the CEO’s spot, ITT’s share count had increased tenfold.

One of the big differences is that Valeant is focused on the healthcare sector. Last year, 57% of sales came from pharmaceuticals. The company is not really going outside the healthcare space, and it is not going far outside pharmaceuticals. There are plenty of pharma companies that operate in different therapeutic areas, and the main ones for Valeant today are dermatology, ophthalmology, and gastroenterology. Another difference is that Mike does not like to issue equity. Even though the Bausch & Lomb and Salix acquisitions required him to issue some equity, the share count has not really moved that much.

If you adjust for the dividend that Valeant paid out before the Biovail merger, earnings per share have gone from 81 cents to probably close to $27 this year. Next year’s EPS will be close to $38 a share. So the earnings will have gone up over 45 times in seven years.

Bob Goldfarb:

My guess, when I saw the comments, was that Charlie might have been targeting Valeant’s accounting. If I were going to question the accounting, the principal issue I would have would be with the accounting for the restructuring charges after Valeant makes a large acquisition. The company and the analysts who follow it add back these restructuring charges to derive the company’s cash earnings. What we do is add back the restructuring charges to the purchase price; so that if Valeant buys a company for $9 billion and there are $500 million of after-tax restructuring charges, the company effectively paid $9.5 billion rather than the $9 billion that it announced initially.

If you deduct the restructuring charges associated with significant acquisitions from a given year’s earnings, I do not think that is accurate accounting even though it does conform to GAAP. When we look at a company’s reported earnings in a given year, we are always searching for a sense of what the true earning power of that company is relative to the stock price. If you deduct the large restructuring charges in a given year, you are not going to get an accurate number for the earning power. Heinz — Berkshire acquired 50% of the company — is an example. Jonny, Heinz had very low earnings last year, right, because of the restructuring charges?

Jon Brandt:

Yes, it did.

Bob Goldfarb:

That was GAAP accounting. Heinz’s earning power is clearly very substantial but it was masked in the accounting by that huge restructuring charge. So when we looked at Berkshire in the year Heinz was acquired, we just added back those restructuring charges to get a better idea of what Heinz was earning, half of which Berkshire was earning as well.

 

Question:

I guess it is no surprise that most of the questions are about Valeant. So I will add one more. A few weeks ago in the papers it was reported that Valeant raised the price on a particular drug by 400% – 500%, within a very short period of time after purchasing the rights to that drug from another company. I was troubled by reading that. I am curious to hear your reaction.

Rory Priday:

I understand why reaction to that could be negative. Obviously, Sequoia and our clients that own Valeant are benefiting from those price increases. But in general, the capitalistic approach to pricing is to charge what the market will bear. Valeant believes that when it buys a drug and it is underpriced, it should charge a price that will maximize the company’s long term cash earnings. Some people maybe feel differently about healthcare. It is obviously a more sensitive topic.

 

[ourkid8]

That's exactly the position they sold, what they recently added to around $100/share USD.

 

This story never ceases to surprise me:

 

Sequoia is already booking a Tax loss:

http://finance.yahoo.com/news/sequoia-fund-sold-1-5-002123572.html

 

 

 

your kidding, $300M tax loss in march? If they wanted to take the loss they can do it in nov/dec, no this is more like get out while we still have something left....

 

 

 

Would they even have had a tax loss in Nov/Dec.?  Their cost basis on most shares was quite low and they would only have had a loss on the shares they purchased post philidor revelations.

[JBTC]

I am following the drama from a distance. I presume some holders here initially got involved knowing plenty of investment luminaries were long.

 

Can we put together some hypotheses why all these smart and experienced people got it wrong together?

 

I start with -

 

1) The CEO was a top guy at McKinsey. The CFO was a top guy at Goldman. So the money mangers were dazzled.

2) These people actually clone each other secretly, but we assume they do independent work.

3) ?

 

[original mungerville]

Valeant expects to file its Form 10-K and become current on its financial filings by April 29, 2016 (within the curing period) but to be prudent, the company also announced that it intends to seek a waiver from the lenders under its credit facility. The waiver that the company is seeking will include a request to extend the deadline to file its Form 10-K for December 31, 2015 and the deadline to file its Form 10-Q for the quarter ended March 31, 2016.

 

From today's 8-k.  Picasso pointed this out, so hat tip to him.  If they were going to be able to file by April 29, there is no need for a costly waiver, so I doubt it occurs before then....

 

I just don't know how anyone is able to "invest" in this company.  They are basically saying that they have been cooking the books and the CFO says, Nah, it was the controller, not me. 

 

To hang your hat on ebitda numbers from B+L presumes that those are correct.  If you are a buyer, what are you going to pay for a company whose numbers you can't trust and whose sales force has been pillaged.

 

My take on the situation is that they are going to file however they can not be sure their auditors will give them an unqualified opinion, so it makes sense to get the waiver from the lenders now. So one could say that their press release today is misleading because the real issue is whether or not they get an unqualified opinion - I think...

[muscleman]

I am following the drama from a distance. I presume some holders here initially got involved knowing plenty of investment luminaries were long.

 

Can we put together some hypotheses why all these smart and experienced people got it wrong together?

 

I start with -

 

1) The CEO was a top guy at McKinsey. The CFO was a top guy at Goldman. So the money mangers were dazzled.

2) These people actually clone each other secretly, but we assume they do independent work.

3) ?

 

3) is ignore the value investing principals and "pay a fair price for a great company". The multiples, even judging from EV/EBITDA, made no sense. (20x multiple as a value stock? No way for me.)

4) Ignore the basic due diligence. They hiked the drug prices by so much. I was so mad that I used to apply a cream that cost me $40. In 2013 VRX bought it and hiked it to $450.

 

 

[original mungerville]

And let us just ignore the fact the guy they threw under the bus for accounting fraud was just the interim CEO. Like seriously, I would love to be a fly on the wall during these board meetings. He was probably busy buying up paper shredders at the local Staples during his two month stint as commander in chief.

 

This is really fucked up. I'm convinced it was the compensation plan, and then that was pushed down to key managers including Philidor, and then Ackman comes in and tries to swallow Allergan, and in that process Pearson and Shiller start getting aggressive with acquisitions to remedy perceived or real deficiencies in Valeant's business model (ie Salix for organic growth, raise prices on those two drugs to meet numbers and show organic growth, Philidor, etc, etc) in order to keep the P/E high so they can swallow something else (ie after the Allergan acquisition failed, that is what Ackman said in his fund letter or some interview recently - that Valeant came close to proposing a huge merger/acquisition in the summer 2015 I believe) and somewhere/somebody started fucking with the accounting.

 

At some point, buying equal puts and calls on this thing might work - but I think the market has already figured that out given the pricing on the options. So not much of a play there it seems. Bonds - depending on pricing - are a play because their assets are worth at least $30 billion. This would be consistent with Charlie Munger's view, I think, that this is not Enron because they have some real assets...so bonds could be a reasonable play.

[Picasso]

Why are the assets worth at least $30 billion?  Everything Valeant bought were either dying/orphaned drugs or something that was heavily shopped (Salix, B+L).  Bill Ackman has publicly been on record claiming that Valeant's competitive advantage is that it can overpay for an acquisition.  That implies the real private market value for these assets is a lot less than the purchase price even when you ignore how much stress these businesses are now under.

 

I think rishi asked why you should pay more than "NAV."  NAV is probably negative here.  But under the cost and tax structure of VRX you can actually see a total enterprise value well in excess of the acquisitions costs if it's managed properly.  You see this with MLP's or REIT's where just the news of a conversion will increase the value of the asset.  There's obviously value to the right structure but these guys went off the deep end. 

[original mungerville]

I am following the drama from a distance. I presume some holders here initially got involved knowing plenty of investment luminaries were long.

 

Can we put together some hypotheses why all these smart and experienced people got it wrong together?

 

I start with -

 

1) The CEO was a top guy at McKinsey. The CFO was a top guy at Goldman. So the money mangers were dazzled.

2) These people actually clone each other secretly, but we assume they do independent work.

3) ?

 

- #1 was always a negative for me (but there have been other instances where McKinsey has worked out well: John Malone, Aijit Jain; I was negative on any Goldman guy because I can't differentiate between sewage and the morals in the investment banking industry)

 

- The main negative for me was the debt levels and so I knew the stock would either double in a couple years or I would lose my investment.

 

- The CEO/CFO compensation plans perplexed me - I should have been way more negative on that instead of just perplexed and I should have assumed it permeated the entire business.

 

Given these three issues (but mainly the debt leverage), I bought the calls options rather than the common to limit my downside.

 

I thought Ackman coming in trying to swallow Allergan was a positive, but I think with the screwed up CEO/CFO compensation plan in place, Ackman's Allergan pursuit was the spark that lit the tinder (which tinder was comprised of the screwed-up compensation plan and Pearson's desire to swallow a big pharma company eventually in a merger/acquisition of "equals") to show organic growth going forward (ie buy Salix, buy Sprout, buy two drugs and jack the prices huge to show organic growth) to keep the P/E high to actually merge/acquire a huge company.

 

The big concern at this point to me is to what degree that screwed up CEO compensation plan then permeated the senior and middle management ranks (ie Philidor being but one example potentially).

[original mungerville]

Why are the assets worth at least $30 billion?  Everything Valeant bought were either dying/orphaned drugs or something that was heavily shopped (Salix, B+L).  Bill Ackman has publicly been on record claiming that Valeant's competitive advantage is that it can overpay for an acquisition.  That implies the real private market value for these assets is a lot less than the purchase price even when you ignore how much stress these businesses are now under.

 

I think rishi asked why you should pay more than "NAV."  NAV is probably negative here.  But under the cost and tax structure of VRX you can actually see a total enterprise value well in excess of the acquisitions costs if it's managed properly.  You see this with MLP's or REIT's where just the news of a conversion will increase the value of the asset.  There's obviously value to the right structure but these guys went off the deep end.

 

Picasso, they bought Salix for what? $15 billion? Give that a 1/3rd haircut assuming Valeant overpaid or can't get that value in a sale - so $10 billion. More than one analyst thinks B&L is worth $20 billion - give that a haircut too. And then the other bits a pieces are worth something. I don't think it takes a lot to get to $30-35 billion is asset values.

 

Are you saying all of their assets are worth say less than $25 billion? Like $20 billion? So Salix is worth less than $10 billion and B&L is worth less than $10 billion, and the other bits and pieces are worth nothing, nor is whatever pipeline they have?

 

Regardless, my main point was that the bonds might be a play at some point. Not that they ARE a play.

 

 

[dorsiacapital]

Yeah, the underlying value of the assets is a tricky question. And Valeant certainly hasn't made it easier with all of the bolt-on acquisitions.

 

I will note one thing on Salix that I found interesting. Last quarter, Xifaxan had about 200 million of revenue. That's a run rate of 800 million.  Now, it appears there were still some inventory issues being worked through, but back in 2013, Xifaxan had yearly revenue of 635 million, and then there was the lost year of channel stuffing. 

 

The fact that Salix felt the need to stuff the channel to show growth, and the fact that even with inventory levels stabilizing, Xifaxan is struggling to grow much above where it was in 2013, shows there may not be tremendous organic demand for the product. If it stabilizes at about 1 billion (and it's been on the market for 6 years, so it may be reaching stabilization), then I don't think it's worth 15 billion, even if the patent extended to 2029 (and I think at best it ends in 2024).  But hey, people do seem entranced by gut guy, so there's still hope.

 

(For comparison, Regeneron trades at a 9 price/sales, Celgene at an 8 price/sales, and Gilead at a 4 price/sales, and each of those companies (Gilead somewhat less so) have far more robust R&D platforms. Salix is basically Xifaxan, under these valuations, it would trade somewhere in the 8-9 billion range, probably less because of the no R&D.)

 

Another note on valuing - I've been looking at some other pharmas 10-ks recently, (such as Salix) and it is remarkable how much better the disclosure of unit-by-unit results are in every other pharma I've looked at. (Here's Salix's 10k for reference - http://cdn.salix.com/salix/assets/pdf/investors/2014_10K.pdf?id=790422).  Valeant for the last several years has done everything in just two segments, based on geography. But I know that is kicking a man while he's down. The point is that it's tough to break out and do a sum of the parts valuation when there's so little audited sum of the parts info. Like Valeant just paid 800 million for Amoun. Does anyone have any idea what Amoun looks like? The only glimpse we've ever gotten was AZ on Sanitas, and that looked like a very agressive purchase.

 

I've found it strange that everyone now agrees (or almost everyone) that Pearson and Schiller were not the greatest at accounting. And yet, people still largely accept that they were good at M&A and synergies. I think it may be turtles all the way down, but that's me.

 

[Picasso]

Good points dorsia.

 

And OM, $20 billion for B+L?  There is no way that's reality. Is this the same analyst who said VRX was worth $200 or something?  Bill Ackman thinks it's worth $20 billion so it's safe to say that's on the very high side of a private market value.

[dorsiacapital]

I've started hearing the B&L at 20 billion figure, but not much attempt at an explanation.

 

I think it derives from pg. 20 of this Ackman presentation, where he sets out how Pearson more than double the value of B&L in 1.5 years.

 

https://www.pershingsquareholdings.com/media/2014/09/Ira-Sohn-2015-Presentation.pdf

 

In 2013, pre acquisition, B&L had "adjusted" ebitda of 643 million and revenues of about 3 billion. (https://www.sec.gov/Archives/edgar/data/1416436/000119312513122167/d502777ds1.htm).  The actual ebitda was about 450 million.

 

Warburg Pincus shopped B&L for a long, long time. They couldn't find a buyer and eventually started trying to find a buyer

(http://dealbook.nytimes.com/2013/03/22/bausch-lomb-plans-i-p-o/?_r=0)

 

Pearson bought B&L for 13.5x ev/ebitda. Pearson said there would be 900 million of ebitda that could be realized through synergies. (that's nearly 30% of B&L's revenue - per Ackman, Pearson drove the ebidta margin from 21% to 50% by himself through the synergies).

 

So then Ackman says, B&L has a 2014 free cash flow of 1.4 billion (based largely on the synergies), although Ackman does allocate 100 million for Cap Ex and a 10% tax rate.  (For reference, Warburg Pincus was spending 120 million or so on capex prior to the acquisition.)  Ackman gives it a multiple of between 15-17 to get a valuation of 20+ billion.  Ackman may argue that's not an ev/ebitda multiple but I think it's pretty close. Let's call it a 14 ev/ebitda multiple.

 

So basically, the B&L for 20+ billion argument, to me, centers on whether or not you think Pearson was able to find 900 million of synergies off a 3 billion revenue base.  Now, maybe he did find at least some of those synergies, but, much like Al Dunlop, I think you can question whether or not he cut fat or muscle & bone.

 

This is why the B&L 20+ billion argument very much depends on a trust Pearson argument. Personally, I think you can maybe justify 20% growth a year in B&L, which would leave you at about 12 billion.

 

(You also have to accept that everyone else in pharma, and a very sophisticated P/e firm, missed that there were 900 million of synergies that could be realized that would more than double B&L's value in a year (Warburg Pincus took eight years to double B&L's value).)

 

For reference, 3G is considered gods among men because they raised ebit margins at AnBev by 6% in 5 years and at Kraft by 8% in 2 years (http://www.forbes.com/sites/antoinegara/2015/07/06/kraft-heinz-will-prove-the-power-of-warren-buffetts-dealmaking-partnership-with-3g-capital/#7f7f8fac4709).  Do you think now we should trust that Pearson quadrupled or quintupled the margin improvement of 3g within a year or so? 

[original mungerville]

Good points dorsia.

 

And OM, $20 billion for B+L?  There is no way that's reality. Is this the same analyst who said VRX was worth $200 or something?  Bill Ackman thinks it's worth $20 billion so it's safe to say that's on the very high side of a private market value.

 

No, I agree, I was saying give the rosy $20 billion B&L valuation a haircut. And sure, cut Salix to $9 billion instead of my $10 billion (both of which are a haircut from the $15 or so billion they paid when you include debt incurred). Add up other bits and pieces, and I think that when they off-load one of these major divisions, they might also off-load the whole tax structure which would have value to an acquiree.

 

 

 

[original mungerville]

I've started hearing the B&L at 20 billion figure, but not much attempt at an explanation.

 

I think it derives from pg. 20 of this Ackman presentation, where he sets out how Pearson more than double the value of B&L in 1.5 years.

 

https://www.pershingsquareholdings.com/media/2014/09/Ira-Sohn-2015-Presentation.pdf

 

In 2013, pre acquisition, B&L had "adjusted" ebitda of 643 million and revenues of about 3 billion. (https://www.sec.gov/Archives/edgar/data/1416436/000119312513122167/d502777ds1.htm).  The actual ebitda was about 450 million.

 

Warburg Pincus shopped B&L for a long, long time. They couldn't find a buyer and eventually started trying to find a buyer

(http://dealbook.nytimes.com/2013/03/22/bausch-lomb-plans-i-p-o/?_r=0)

 

Pearson bought B&L for 13.5x ev/ebitda. Pearson said there would be 900 million of ebitda that could be realized through synergies. (that's nearly 30% of B&L's revenue - per Ackman, Pearson drove the ebidta margin from 21% to 50% by himself through the synergies).

 

So then Ackman says, B&L has a 2014 free cash flow of 1.4 billion (based largely on the synergies), although Ackman does allocate 100 million for Cap Ex and a 10% tax rate.  (For reference, Warburg Pincus was spending 120 million or so on capex prior to the acquisition.)  Ackman gives it a multiple of between 15-17 to get a valuation of 20+ billion.  Ackman may argue that's not an ev/ebitda multiple but I think it's pretty close. Let's call it a 14 ev/ebitda multiple.

 

So basically, the B&L for 20+ billion argument, to me, centers on whether or not you think Pearson was able to find 900 million of synergies off a 3 billion revenue base.  Now, maybe he did find at least some of those synergies, but, much like Al Dunlop, I think you can question whether or not he cut fat or muscle & bone.

 

This is why the B&L 20+ billion argument very much depends on a trust Pearson argument. Personally, I think you can maybe justify 20% growth a year in B&L, which would leave you at about 12 billion.

 

(You also have to accept that everyone else in pharma, and a very sophisticated P/e firm, missed that there were 900 million of synergies that could be realized that would more than double B&L's value in a year (Warburg Pincus took eight years to double B&L's value).)

 

For reference, 3G is considered gods among men because they raised ebit margins at AnBev by 6% in 5 years and at Kraft by 8% in 2 years (http://www.forbes.com/sites/antoinegara/2015/07/06/kraft-heinz-will-prove-the-power-of-warren-buffetts-dealmaking-partnership-with-3g-capital/#7f7f8fac4709).  Do you think now we should trust that Pearson quadrupled or quintupled the margin improvement of 3g within a year or so?

 

I don't disagree. So let's take $9 Billion for Salix and $12 billion for B&L. And I would think that their tax structure is worth something if they off-load it with one of these large assets. And then there are the other bits and pieces of the business. 

 

 

[dorsiacapital]

I've started hearing the B&L at 20 billion figure, but not much attempt at an explanation.

 

I think it derives from pg. 20 of this Ackman presentation, where he sets out how Pearson more than double the value of B&L in 1.5 years.

 

https://www.pershingsquareholdings.com/media/2014/09/Ira-Sohn-2015-Presentation.pdf

 

In 2013, pre acquisition, B&L had "adjusted" ebitda of 643 million and revenues of about 3 billion. (https://www.sec.gov/Archives/edgar/data/1416436/000119312513122167/d502777ds1.htm).  The actual ebitda was about 450 million.

 

Warburg Pincus shopped B&L for a long, long time. They couldn't find a buyer and eventually started trying to find a buyer

(http://dealbook.nytimes.com/2013/03/22/bausch-lomb-plans-i-p-o/?_r=0)

 

Pearson bought B&L for 13.5x ev/ebitda. Pearson said there would be 900 million of ebitda that could be realized through synergies. (that's nearly 30% of B&L's revenue - per Ackman, Pearson drove the ebidta margin from 21% to 50% by himself through the synergies).

 

So then Ackman says, B&L has a 2014 free cash flow of 1.4 billion (based largely on the synergies), although Ackman does allocate 100 million for Cap Ex and a 10% tax rate.  (For reference, Warburg Pincus was spending 120 million or so on capex prior to the acquisition.)  Ackman gives it a multiple of between 15-17 to get a valuation of 20+ billion.  Ackman may argue that's not an ev/ebitda multiple but I think it's pretty close. Let's call it a 14 ev/ebitda multiple.

 

So basically, the B&L for 20+ billion argument, to me, centers on whether or not you think Pearson was able to find 900 million of synergies off a 3 billion revenue base.  Now, maybe he did find at least some of those synergies, but, much like Al Dunlop, I think you can question whether or not he cut fat or muscle & bone.

 

This is why the B&L 20+ billion argument very much depends on a trust Pearson argument. Personally, I think you can maybe justify 20% growth a year in B&L, which would leave you at about 12 billion.

 

(You also have to accept that everyone else in pharma, and a very sophisticated P/e firm, missed that there were 900 million of synergies that could be realized that would more than double B&L's value in a year (Warburg Pincus took eight years to double B&L's value).)

 

For reference, 3G is considered gods among men because they raised ebit margins at AnBev by 6% in 5 years and at Kraft by 8% in 2 years (http://www.forbes.com/sites/antoinegara/2015/07/06/kraft-heinz-will-prove-the-power-of-warren-buffetts-dealmaking-partnership-with-3g-capital/#7f7f8fac4709).  Do you think now we should trust that Pearson quadrupled or quintupled the margin improvement of 3g within a year or so?

 

I don't disagree. So let's take $9 Billion for Salix and $12 billion for B&L. And I would think that their tax structure is worth something if they off-load it with one of these large assets. And then there are the other bits and pieces of the business.

 

I think that's a reasonable bull case, I'm a bit harsh on the emerging markets businesses but they have some value. Still 21 billion for Salix/B&L leaves you 9-10 billion more before you get above the debt load. That's why I think if you want to go long, it would be better to do it in the $10-15 range. At that range especially, the equity really would be almost a pure option on the total capital structure, and even some quick changes in valuation could pop it. 

[LongHaul]

Enjoyed the Dorsia and Roark analysis and commentary of VRX. 

 

I wouldn't even touch Valeant at $15.  Here is why.  The more I learn about the company the more negative I get. 

At this point I think there is a good chance of a wipeout on the equity.  What I don't know is what the earnings power of the business is - levered or unlevered because I don't trust the accounting at all.  In my opinion Pearson is a bottom 1% type character wise.  It is so extreme it is not even funny and will make for interesting reading in a book and perhaps a movie.  I think it is more extreme than the Enron guys.  Look who the head of the Audit committee is - Norma Provencio and her background association with a Heartronics which was a total pump and dump fraud. 

 

Back to earnings power.  I have had the impression for at least the last 6 months that the board of Valeant is compromised and pathetic.  They still have not gotten out a report on Philidor ( which I heard from field research that VRX actually set up from the beginning). Where is the report?  Unacceptable.  So you have some very unsavory executives and the only thing they do is an aggressive accounting transaction for ~$60m that front loads profits in the 4Q 2014?  I don't believe that for a second.  The 10-K is not out and the committee mentioned other accounting issues.  The FCF sucks vs what it should be.  I think VRX has been pushing out their current liabilities to enhance FCF also.  With a bad 1Q 16 and 4Q 15 and Philidor gone and the insurance companies tightening on VRX drugs FCF is probably negative now.  In addition VRX is apparently not paying a lot of suppliers.  The prepaids are massively out of line, they changed Salix's reserving and the list goes on.   

See Cafe pharma for Supplier posts and accounting.

 

Oh yeah the Europe channel seems stuffed too.  What about the US channel? 

And a lot of Valeant's answers to tough allegations in their rebuttal is not clear - I wonder why that is?

It is highly humorous to me that anyone can say that Valeant has or ever had a PR problem.  They had an ethics problem and a fundamental slimy way of doing business problem.  The speculators who were long this thing and rationalized Valeant's disgusting behavior got an expensive lesson in ethics. 

 

But now with the Schiller/Tanya Carro factions out we finally have dissent and a breaking up of the likely charade.  Now it is every man for himself with possible criminal indictments and the truth will come out.  I am sure Schiller likes Pearson putting all the blame on him. 

 

Then you get the the most aggressive tax rate and all other liabilities.  It is beyond a mess and the risk is probably much more on the downside.  Frankly it could be even worse than what I am thinking now - I just don't know.  Probably better odds at Las Vegas.

 

I am very glad Pearson will be out shortly and he can no longer gut pharma companies that help improve the lives of humans.  Maybe he will open up a fudge shop on the NJ shore after his likely "vacation". 

 

It will also be very interesting what the New CEO finds.  Everything will get flushed out as he will not want to take any blame.

[PatientCheetah]

This board in many cases is a great contrarian indicator...

[Spekulatius]

Muscleman, can you let us know what your friend's next move will be so we can clone him?

 

Thanks in advance.

 

About valeant, a small shift in perception is all it took for the business model to fall.  This really was a house of cards. 

 

Ackman coming in did not help.  In hindsight, putting valeant in the spotlight increased the reputational risk which put the business model at risk. 

 

You hear about those trades only if they work out.