VRX - Valeant Pharmaceuticals International Inc.

[arcube]

Every day Im reminded how treacherous this investing business is.......its not easy folks.

That is such bullshit. This wasn't hard. It had tons of signs of a bad ending: A torrent of M&A, lots of debt, lots of rumors of unethical behavior, very aggressive management, incentives for management to pump the stock price, lots of adjusted non gaap numbers, and every time you try to read a 10-k you get a splitting headache. If you see these things, it's easy to figure out the right thing to do as an investor - you stay away.

 

The people that got burnt on this didn't do investing. They joined a cult in which common sense is suspended driven by a combination of greed and hero worship. All you have to do is go back a couple of hundred pages on this thread to see it in all its glory. If anyone would say anything negative about VRX then you would have a chorus of people basically:

1. Keep repeating: Well Value Act and Sequoia are is so it must be great!

2. Parroting numbers from the management presentation without any reasonable analysis

3. Declaring: You don't get it man, Pearson is an outsider.

 

There are some things that are hard. This one wasn't!

 

+1. Absolutely nailed it.

[Hielko]

Every day Im reminded how treacherous this investing business is.......its not easy folks.

That is such bullshit. This wasn't hard. It had tons of signs of a bad ending: A torrent of M&A, lots of debt, lots of rumors of unethical behavior, very aggressive management, incentives for management to pump the stock price, lots of adjusted non gaap numbers, and every time you try to read a 10-k you get a splitting headache. If you see these things, it's easy to figure out the right thing to do as an investor - you stay away.

But then again most of these things are also true (or have been true at some point in time) for Berkshire, except that one did work out and Buffett turned out to be truly skilled and this one didn't turn out good. It's easy to say it's easy in hindsight, but I don't think it ever is.

[Libs]

Every day Im reminded how treacherous this investing business is.......its not easy folks.

That is such bullshit. This wasn't hard. It had tons of signs of a bad ending: A torrent of M&A, lots of debt, lots of rumors of unethical behavior, very aggressive management, incentives for management to pump the stock price, lots of adjusted non gaap numbers, and every time you try to read a 10-k you get a splitting headache. If you see these things, it's easy to figure out the right thing to do as an investor - you stay away.

But then again most of these things are also true (or have been true at some point in time) for Berkshire, except that one did work out and Buffett turned out to be truly skilled and this one didn't turn out good. It's easy to say it's easy in hindsight, but I don't think it ever is.

 

I count 7 red flags here, none of which apply / applied to Buffett.

[rb]

Every day Im reminded how treacherous this investing business is.......its not easy folks.

That is such bullshit. This wasn't hard. It had tons of signs of a bad ending: A torrent of M&A, lots of debt, lots of rumors of unethical behavior, very aggressive management, incentives for management to pump the stock price, lots of adjusted non gaap numbers, and every time you try to read a 10-k you get a splitting headache. If you see these things, it's easy to figure out the right thing to do as an investor - you stay away.

But then again most of these things are also true (or have been true at some point in time) for Berkshire, except that one did work out and Buffett turned out to be truly skilled and this one didn't turn out good. It's easy to say it's easy in hindsight, but I don't think it ever is.

Oh yea I forgot that point Valeant is like Berkshire. Let's see for Berkshire:

Lots of debt - check

Lots of rumors of unethical behavior - check

Very aggressive management - check

Incentives for management to pump the stock - check

Aggressive accounting and splitting headache when reading the 10k - check

 

Yes BRK uses some adjusted numbers in their reporting but to compare those to VRX adjusted numbers is akin to saying that heroin and aspirin are the same thing because they're both drugs.

 

Edit: I'm willing to bet that Warren is ready to kill someone given the number of times VRX has been likened to his baby.

[original mungerville]

Every day Im reminded how treacherous this investing business is.......its not easy folks.

That is such bullshit. This wasn't hard. It had tons of signs of a bad ending: A torrent of M&A, lots of debt, lots of rumors of unethical behavior, very aggressive management, incentives for management to pump the stock price, lots of adjusted non gaap numbers, and every time you try to read a 10-k you get a splitting headache. If you see these things, it's easy to figure out the right thing to do as an investor - you stay away.

 

The people that got burnt on this didn't do investing. They joined a cult in which common sense is suspended driven by a combination of greed and hero worship. All you have to do is go back a couple of hundred pages on this thread to see it in all its glory. If anyone would say anything negative about VRX then you would have a chorus of people basically:

1. Keep repeating: Well Value Act and Sequoia are is so it must be great!

2. Parroting numbers from the management presentation without any reasonable analysis

3. Declaring: You don't get it man, Pearson is an outsider.

 

There are some things that are hard. This one wasn't!

 

My issue with Valeant is that you could have said pretty much the above about Fairfax in 2002: it is a value-investing cult based on worshipping Watsa, good long-term investors bought in, management presentations/projections should not be trusted, etc, etc. And none other than Hempton was saying it at the time.

 

Pearson pushed the enveloppe as much as you could in multiple areas and was not forthcoming about it. You could say he was a liar, or you could say he told half-truths about the business due to the perverse incentive system and his lack of ethics. Basically, if you premised your investment on trusting Pearson as I did, you got screwed.  Even though I wrongly trusted Pearson, I was nevertheless always concerned with the large debt-load and so bought the call options rather than the common. This greatly reduced my losses. As did selling once the stock dropped 50% or so rather than waiting until it dropped 85-90%. 

 

Can't believe Ackman did not cut ties earlier and instead doubled-down. And of course Bill Miller is now long so he has company. Its going to be a long workout from here as it looks like earnings were juiced from several angles and areas of the business.

 

 

[original mungerville]

There are probably more cockroaches out there, they just can't get them out yet because the stock would go to zero due to breaches in convenants:

 

http://finance.yahoo.com/news/valeant-walks-knife-edge-debt-194237721.html

 

Its still potentially a shit-show from here. Who knows? Not me.

[rb]

OM, I was actually thinking the same after i wrote my post. That FFH in 2000s would have been a better fit than BRK for one of these companies to be likened to VRX. The short attack on FFH was bullshit, but lets me honest in the 2000s FFH did have some issues.

 

Also, basically looking at companies through that list of flags I've listed it's probably best to stay away from those companies. If FFH fit probably should have stayed away too. I mean yes, FFH worked out and whoever bought it then made a lot of money. I also never said that companies that display those flags always burn down. But a lot more burn down than flourish. So for every FFH you have 8 Valeants. So if you keep going into those situations you'll end up loosing more on VRXs than you make on FFHs thus is better to stay away altogether and adhere to Rule Number 1.

[Ballinvarosig Investors]

https://www.bloomberg.com/view/articles/2016-03-15/ackman-s-valeant-investment-keeps-getting-worse

By my rough math, Pershing Square breaks even at a stock price of about $161.21. It's got another, sadder breakeven at a stock price of about $17.82. That's where the value of its position becomes negative -- that is, where it's lost its entire $4.1 billion, and is still losing more.

I think it's time for Ackman to resign, this has become a holocaust.

[original mungerville]

OM, I was actually thinking the same after i wrote my post. That FFH in 2000s would have been a better fit than BRK for one of these companies to be likened to VRX. The short attack on FFH was bullshit, but lets me honest in the 2000s FFH did have some issues.

 

Also, basically looking at companies through that list of flags I've listed it's probably best to stay away from those companies. If FFH fit probably should have stayed away too. I mean yes, FFH worked out and whoever bought it then made a lot of money. I also never said that companies that display those flags always burn down. But a lot more burn down than flourish. So for every FFH you have 8 Valeants. So if you keep going into those situations you'll end up loosing more on VRXs than you make on FFHs thus is better to stay away altogether and adhere to Rule Number 1.

 

Yes, I agree. More often than not, you want to stay away from those plays. Its probably the rare exception that works out in the end - FFH I guess was such an exception. I don't know what the odds are 2:1, or 4:1, or 8 failures for every one that works. That is probably the other lesson in this for me.

[randomep]

Every day Im reminded how treacherous this investing business is.......its not easy folks.

That is such bullshit. This wasn't hard. It had tons of signs of a bad ending: A torrent of M&A, lots of debt, lots of rumors of unethical behavior, very aggressive management, incentives for management to pump the stock price, lots of adjusted non gaap numbers, and every time you try to read a 10-k you get a splitting headache. If you see these things, it's easy to figure out the right thing to do as an investor - you stay away.

 

The people that got burnt on this didn't do investing. They joined a cult in which common sense is suspended driven by a combination of greed and hero worship. All you have to do is go back a couple of hundred pages on this thread to see it in all its glory. If anyone would say anything negative about VRX then you would have a chorus of people basically:

1. Keep repeating: Well Value Act and Sequoia are is so it must be great!

2. Parroting numbers from the management presentation without any reasonable analysis

3. Declaring: You don't get it man, Pearson is an outsider.

 

There are some things that are hard. This one wasn't!

 

+1. Absolutely nailed it.

 

Investing is as hard as you choose to make it! Buffett has said it enough by now, I would think:

 

VRX is not a 1 ft hurdle. VRX is not a fat pitch in the strike zone. VRX belongs in the too hard pile!

 

 

[Hielko]

Every day Im reminded how treacherous this investing business is.......its not easy folks.

That is such bullshit. This wasn't hard. It had tons of signs of a bad ending: A torrent of M&A, lots of debt, lots of rumors of unethical behavior, very aggressive management, incentives for management to pump the stock price, lots of adjusted non gaap numbers, and every time you try to read a 10-k you get a splitting headache. If you see these things, it's easy to figure out the right thing to do as an investor - you stay away.

But then again most of these things are also true (or have been true at some point in time) for Berkshire, except that one did work out and Buffett turned out to be truly skilled and this one didn't turn out good. It's easy to say it's easy in hindsight, but I don't think it ever is.

Oh yea I forgot that point Valeant is like Berkshire. Let's see for Berkshire:

Lots of debt - check

Lots of rumors of unethical behavior - check

Very aggressive management - check

Incentives for management to pump the stock - check

Aggressive accounting and splitting headache when reading the 10k - check

 

Yes BRK uses some adjusted numbers in their reporting but to compare those to VRX adjusted numbers is akin to saying that heroin and aspirin are the same thing because they're both drugs.

 

Edit: I'm willing to bet that Warren is ready to kill someone given the number of times VRX has been likened to his baby.

for BRK:

- A torrent of M&A: check

- lots of debt: meh, maybe not. But they are not exactly debt free either

- lots of rumors of unethical behavior: there has been some about Buffett for sure, but easily forgotten

- very aggressive management: Buffett has been very aggressive in some aspects, but then agian when it works: that's what people like

- incentives for management to pump the stock price: sure, when you own a big stake you have that incentive as well. Pearson didn't have short-term option incentives, only long-term.

- lots of adjusted non gaap numbers: a bit

- and every time you try to read a 10-k you get a splitting headache: Don't tell me you think reading the Berkshire 10-K is straightforward

[rb]

for BRK:

- A torrent of M&A: check

- lots of debt: meh, maybe not. But they are not exactly debt free either

- lots of rumors of unethical behavior: there has been some about Buffett for sure, but easily forgotten

- very aggressive management: Buffett has been very aggressive in some aspects, but then agian when it works: that's what people like

- incentives for management to pump the stock price: sure, when you own a big stake you have that incentive as well. Pearson didn't have short-term option incentives, only long-term.

- lots of adjusted non gaap numbers: a bit

- and every time you try to read a 10-k you get a splitting headache: Don't tell me you think reading the Berkshire 10-K is straightforward

Obviously you see things that me and others don't. I'm not going to get into a tit for tat defense of BRK, i don't think it's needed. But my argument still stands. If you see those flags in BRK, then don't buy BRK. There's plenty of other stuff out there you can make money on.

[randomep]

 

 

- lots of rumors of unethical behavior: there has been some about Buffett for sure, but easily forgotten

 

 

I am not above arguing point to point. I think the key aspect of ethics that we care about is ethics that hurt the shareholders, who hired the ceo.  Warren Buffett has 300,000 people working for him he has said there will be some scandal exposed, as long as the company exists.  But towards the shareholders Buffett is the most ethical person I can think of.  One simple fact is if he acts unethically towards shareholders he screws himself financially and his reputation which he cares about for reasons beyond financial.  That's what I ask of the CEO when I invest.

 

Compared that with Pearson. This person has used tricks which in the end screws the shareholders but enriches him. No matter what the VRX stock price is, Pearson is much richer than when he joined VRX.

 

If you expand the definition of ethics almost every company is unethical.  I own stocks that promote cigarette sales to minors.  I own stocks threat livestock and the environment horribly. I am a bit saddened, but for my investment decision I don't care about those type of ethical issues.

 

When a investors talks about ethics, he is using it as a bullet on this checklist to decide whether he will make money.  In that sense, Buffett has done nothing unethical.  Can you give me one example to show otherwise?

 

 

 

 

 

[LongHaul]

There are many levels to understanding how the honesty and integrity of a CEO affects a company over the long run. 

Pearson is essentially the opposite of a Buffett or Sam Walton. 

 

Roark - interesting analysis of the PA.  Great work.  Any other insights you have learned?

I heard that Philidor was used for aggressive PA's and helped the Derms do the admin for PA's which gave Philidor/Valeant more business.

 

 

 

 

[alpha asset strategies]

The thing that I keep going back to is that, despite all of their issues, VRX certainly owns some valuable drugs / brands that several of their competitors would love to own.  In my mind, that should put a floor under the stock - at least at some price above $0.

 

Huh?  EV obviously has a floor > 0.  MC has no floor > 0.

 

 

I understand this completely.  When I posted the comment, I felt pretty strongly that market cap was substantially greater than $0 on a SOTP basis - and I hypothesized that could help put a floor under the stock price.

 

After today's earning report and downward revisions, I'm no longer sure about that.  $30b+ in debt is a big nut to cover, given current guidance.

 

Given Ackman's extreme stubbornness / conviction - not to mention his HUGE existing loss in VRX - I continue to believe that he will push the envelope with regard to financial engineering in order to support the stock price.  I'm not saying that he will be successful - just that he will try.

 

Even though VRX is currently publicly stating that core asset sales are off the table, I have little doubt that stance could change if the downward spiral continues.  Ackman's previous emails to Pearson show that he proposed an IPO for part of B & L, and I'm sure that thought hasn't completely left him.

 

Over the past several weeks, I made some small profits in VRX by selling short-term, OTM puts.  I exited all my VRX positions before today's earnings because of the uncertainty (at least in my mind).  Now I'm having a conflict with myself trying to determine if I want to re-enter a VRX position.  This one may go on the "too hard" pile.

 

[PatientCheetah]

Not sure how to interpret why management selectively disclosed B & L operating performance in the conference call - sale, IPO, highlighting the quality of its crown jewel?!?

[ERICOPOLY]

Regarding FFH vs VRX comments...

 

You've got to know when to hold them and know when to fold them.

 

I think that wraps it up.

[rukawa]

every time you try to read a 10-k you get a splitting headache

 

This should be the number one check list item for any investor. Its what ultimately saved me from investing in Ocwen. I was never able to understand their financial statements....and they tanked before I could figure it out.

[original mungerville]

Regarding FFH vs VRX comments...

 

You've got to know when to hold them and know when to fold them.

 

I think that wraps it up.

 

Ok Kenny!:

 

It usually takes me quite a few drinks before playing that one!...but you have to sing-along, otherwise it just doesn't work.

[Spekulatius]

Every day Im reminded how treacherous this investing business is.......its not easy folks.

That is such bullshit. This wasn't hard. It had tons of signs of a bad ending: A torrent of M&A, lots of debt, lots of rumors of unethical behavior, very aggressive management, incentives for management to pump the stock price, lots of adjusted non gaap numbers, and every time you try to read a 10-k you get a splitting headache. If you see these things, it's easy to figure out the right thing to do as an investor - you stay away.

 

The people that got burnt on this didn't do investing. They joined a cult in which common sense is suspended driven by a combination of greed and hero worship. All you have to do is go back a couple of hundred pages on this thread to see it in all its glory. If anyone would say anything negative about VRX then you would have a chorus of people basically:

1. Keep repeating: Well Value Act and Sequoia are is so it must be great!

2. Parroting numbers from the management presentation without any reasonable analysis

3. Declaring: You don't get it man, Pearson is an outsider.

 

There are some things that are hard. This one wasn't!

 

Plus that one:

 

4) CLONING DOES NOT WORK

[NeverLoseMoney]

B-Mac.

 

http://www.vanityfair.com/news/2016/06/the-valeant-meltdown-and-wall-streets-major-drug-problem

 

I thought this was an interesting quote from the article and something else that could have been caught by a hedge fund with a large budget for research:

 

 

Pearson was close to several pharmaceutical C.E.O.’s, including former Johnson & Johnson chairman Bill Weldon (whose son, Ryan Weldon, became a senior executive at Valeant in his early 30s). At McKinsey one of Pearson’s jobs had been to advise Johnson & Johnson on squeezing costs after its $16.6 billion 2006 purchase of Pfizer’s consumer health-care business. The goal was to make the combined business meet the profit targets the company had promised Wall Street. Three former Johnson & Johnson executives blame the cost cuts for what Fortune, in a 2010 investigative report, called a “systemic breakdown in quality control” at a major division within the company, which led to the recall of multiple products and a congressional investigation.

 

“[Pearson] was shoved down our throats,” says a former Johnson & Johnson executive. “What I have heard over and over again is that he kind of just makes it up as he goes along,” says another former Johnson & Johnson executive. “In that situation, he made it up. He’d put people in a room and say, ‘Figure it out until we have the numbers we need to show people.’”

[Ballinvarosig Investors]

Martin Shkreli did a sum of the parts analysis 2 months ago on VRX. I thought the most interesting part of the analysis was that earnings from certain revenue streams just seemed to randomly melt away in unexpected cases.

 

https://www.youtube.com/watch?v=3JlX2FRBqic

[ERICOPOLY]

Regarding FFH vs VRX comments...

 

You've got to know when to hold them and know when to fold them.

 

I think that wraps it up.

 

Ok Kenny!:

 

It usually takes me quite a few drinks before playing that one!...but you have to sing-along, otherwise it just doesn't work.

 

He said, "Son, I've made a life

Out of readin' people's faces

Knowin' what the cards were

By the way they held their eyes

So if you don't mind me sayin'

I can see you're out of aces

For a taste of your whiskey

I'll give you some advice"

 

I think you could apply that wisdom to Prem's face and Pearson's face. 

[fareastwarriors]

Valeant scrambles to restructure Walgreens deal

http://www.ft.com/intl/cms/s/0/e02b9d58-2cee-11e6-bf8d-26294ad519fc.html#axzz4B0TbSWpk

 

 

Valeant is attempting to restructure a deal with Walgreens after warning it is losing money on a large chunk of medicines sold through the chain of US drugstores, according to people briefed on the matter. The Canadian drugmaker will consider terminating the agreement within months unless the situation improves, these people said.

...

Walgreens is filling prescriptions for some of the company’s top drugs without first ensuring that the patient’s health insurer will pay for them, resulting in losses for Valeant, said chief executive Joseph Papa on Tuesday.

 

 

[ERICOPOLY]

Keep It Simple Stupid.

 

FFH in June 2006 was simple.  They would not have lost money in 2005 (including KRW losses) were it not for runoff.  You had Prem in the 2005 Annual Report in your hand, saying he expected runoff to turn the corner in 2006.  You could believe him, or not.  He might be off by a little on the runoff turnaround timeline, but to be off enough to sink the company he would need to be an outright liar.  And the insurance business itself is pretty boring.