VRX - Valeant Pharmaceuticals International Inc.

[Graham Osborn]

Ackman pushed his options out until 2019 (they were previously set to expire in Jan 2017).  The thesis creep is strong here.  I think the initial reaction was that Citron was blowing smoke and when the smoke cleared, the valuation gap would close.  Now, the thesis is that there is some value (there was a fire), but Ackman thinks he can put the fire out and unlock the value over time, i.e. before 2019. 

 

https://www.sec.gov/Archives/edgar/data/885590/000119312516619164/d196271dsc13da.htm

 

I honestly think the biggest lesson from this is that you need to know your thesis going in and if it "breaks", you need to sell.  Admit you were wrong and take your losses.

 

Amen.  I have a question not specifically related to VRX - how do you buy 2019 LEAPS?  Is there a retail version or can only institutions like Pershing buy that far out.

[Graham Osborn]

Many ways to make (and lose) money in the markets. I guess the question boils down to: when is it okay to put on a position that runs against your long-term fundamental view of the business (or even of the specific security in the capital structure)?

 

I don't think there's any one answer.  Obviously lots of folks doing it these days, and some making good money doing it (at least those are the ones we tend to hear from).  All I can tell you is that my personal experience has been this doesn't work for me.  Part of the reason is the times I have made real profits have required some level of interim adversity or at least uncertainty, and I don't think I would have had the resolve to stay in if I didn't have the strong fundamental view.  That's why Buffett likens buying a stock to getting married: if your wife is screaming at you and acting like a total * it will be awfully tempting to put up and leave, yet if she is a real keeper that is likely to be a defining moment in the relationship.  My strategy (adopted from Graham/ Buffett/ Jim Rogers) is basically a function of my tendency to experience emotion in proportion to my time spent trading.  My experience has been that winning trades require "sitting" time and some degree of pain.

 

To put this in practical terms, say you bought VRX yesterday and the stock dropped 5% today (which it did).  If I bought it for a bounce I'd be inclined to sell to manage risk.  Conversely if I bought because I thought the company was undervalued and growing I might tolerate that or even buy more.  You can see how a short term mindset forces you into an almost robotic, emotion-oriented trading strategy.  This is why Buffett described the market as an instrument that "transfers money from the impatient to the patient." Even great technical strategies require intensive preparation prior to going "live," so I believe this principle applies there as well.  Losing control is an antecedent to losing money.

 

I think the key is to understand that when you trade for a bounce that is a technical strategy, and everything you ever learned about fundamental analysis will suddenly fail you.  There are technical traders who make excellent and consistent profits but this is because they have a personal, highly specialized technical strategy.  Chances are you don't.  One thing that impressed me about the Market Wizards books was that TA and pattern trading really does work, but without free lunches - strategies that work take just as much sweat and blood to develop as a personal process for fundamental analysis.  When people who focus on fundamentals of businesses try to initiate a technical strategy (beyond some basics - like don't buy into a death slide) we'll generally fail over time simply because we don't know what the hell we are doing and we don't have a consistent process in place.  One corollary to a longer term holding strategy is it discourages us from venturing into an art we are not master of.

 

 

[rb]

Many ways to make (and lose) money in the markets. I guess the question boils down to: when is it okay to put on a position that runs against your long-term fundamental view of the business (or even of the specific security in the capital structure)?

The answer is NEVER. At that point you're not investing, you're just gambling. There's gonna be lots of people saying that they've made a lot of money that way. But also lots of people made a lot of money at the roulette table. That doesn't change the facts of the matter - that roulette is a game of chance. In the markets things get more obscure because momentum and survivorship bias  muddy the waters. A rising tide lifts all boats but when the tide goes out you see who's swimming naked.... or however that saying goes.

 

If you're gonna gamble do it in a nice casino where there's lots of pretty girls, it'll be more enjoyable that doing it from behind a computer screen.

 

[Graham Osborn]

Many ways to make (and lose) money in the markets. I guess the question boils down to: when is it okay to put on a position that runs against your long-term fundamental view of the business (or even of the specific security in the capital structure)?

The answer is NEVER. At that point you're not investing, you're just gambling. There's gonna be lots of people saying that they've made a lot of money that way. But also lots of people made a lot of money at the roulette table. That doesn't change the facts of the matter - that roulette is a game of chance. In the markets things get more obscure because momentum and survivorship bias  muddy the waters. A rising tide lifts all boats but when the tide goes out you see who's swimming naked.... or however that saying goes.

 

If you're gonna gamble do it in a nice casino where there's lots of pretty girls, it'll be more enjoyable that doing it from behind a computer screen.

 

Preferably with someone else's money.. now that Mike Pearson has retired I'm sure he has plenty of time to swim naked with pretty girls ;)

[Picasso]

By the way, I made an error when I said FCF after acquisitions and purchase of intangibles/ IPR&D was the best way to assess cash flow for AGN/ VRX/ ENDP.  If you really want to understand what gave Pearson and Saunders grey hair, you need to calculate "levered" FCF after acquisitions and intangibles/ IPR&D.  That means you need to deduct the cost of debt service as well since you hold the equity.  This is a business that literally chews up capital..

 

Interest expense is already being taken out of free cash flow?  They'll need to refinance the debt as some of it comes due and that will be a headwind at current rates, but it depends on how well they can manage the business ahead of it.  The debt's actually trading pretty well.  But I don't get your point about taking out debt service a second time?

 

Many ways to make (and lose) money in the markets. I guess the question boils down to: when is it okay to put on a position that runs against your long-term fundamental view of the business (or even of the specific security in the capital structure)?

The answer is NEVER. At that point you're not investing, you're just gambling. There's gonna be lots of people saying that they've made a lot of money that way. But also lots of people made a lot of money at the roulette table. That doesn't change the facts of the matter - that roulette is a game of chance. In the markets things get more obscure because momentum and survivorship bias  muddy the waters. A rising tide lifts all boats but when the tide goes out you see who's swimming naked.... or however that saying goes.

 

If you're gonna gamble do it in a nice casino where there's lots of pretty girls, it'll be more enjoyable that doing it from behind a computer screen.

 

 

How is investing not a game of probabilities?  In my eyes investing is not much different than gambling, if at all.  Now you can go gamble in Vegas with 48% odds at roulette and there are public investments with odds of success ranging from 0.001% to 99.999%.  You get to pick and choose your odds with different payouts in the public markets.  You get to pick them in Vegas as well, depending on what game you play and how you play it.  I'd rather avoid the pretty girls and free drinks to pick out better odds with better payouts behind some computer screen.

 

I think my point is that maybe there is a 80% chance that this is not a 4x FCF business, but a 6-8x FCF business.  But everyone hates it so much that they see it as a 10% probability of being worth 1.5-2x as much as the current price.  I mean AGN still has a massive market cap and EV, especially compared to VRX.  It doesn't matter that *you* (and now almost everyone else on twitter and CoBF) might think it's a crappy gamble with low probabilities, it only matters across the many bets one gets to take over your investing career and the actual probability.  Just looking at what has already gone wrong, it isn't hard to imagine that more things can go right than can keep going wrong.  And maybe more wrongs are already priced in at 4x FCF.

 

Then again who knows.  I'm not long the stock, I just happen to think the price and odds favor a long.  In some ways it reminds me of HPQ when they had the Autonomy scandal and it dropped down to $12 or something.  Everyone hated it, no one could own it, it was a crappy business, Chanos was short it as well, but you made a ton of money going long into that period.  Will HPQ be worth $0 one day?  Maybe.  But it doesn't mean you that 3-4x FCF for HPQ was a terrible gamble. 

[shalab]

Whoever wants to invest in this at this time should read "The Sovereign State of ITT" - it is interesting that Charlie Munger made an analogy to this company. At worst, it will help build mental models - i.e., if you care about those  ;)

 

https://www.goodreads.com/book/show/2723712-the-sovereign-state-of-itt

 

[Patmo]

By the way, I made an error when I said FCF after acquisitions and purchase of intangibles/ IPR&D was the best way to assess cash flow for AGN/ VRX/ ENDP.  If you really want to understand what gave Pearson and Saunders grey hair, you need to calculate "levered" FCF after acquisitions and intangibles/ IPR&D.  That means you need to deduct the cost of debt service as well since you hold the equity.  This is a business that literally chews up capital..

 

Interest expense is already being taken out of free cash flow?  They'll need to refinance the debt as some of it comes due and that will be a headwind at current rates, but it depends on how well they can manage the business ahead of it.  The debt's actually trading pretty well.  But I don't get your point about taking out debt service a second time?

 

Many ways to make (and lose) money in the markets. I guess the question boils down to: when is it okay to put on a position that runs against your long-term fundamental view of the business (or even of the specific security in the capital structure)?

The answer is NEVER. At that point you're not investing, you're just gambling. There's gonna be lots of people saying that they've made a lot of money that way. But also lots of people made a lot of money at the roulette table. That doesn't change the facts of the matter - that roulette is a game of chance. In the markets things get more obscure because momentum and survivorship bias  muddy the waters. A rising tide lifts all boats but when the tide goes out you see who's swimming naked.... or however that saying goes.

 

If you're gonna gamble do it in a nice casino where there's lots of pretty girls, it'll be more enjoyable that doing it from behind a computer screen.

 

 

How is investing not a game of probabilities?  In my eyes investing is not much different than gambling, if at all.  Now you can go gamble in Vegas with 48% odds at roulette and there are public investments with odds of success ranging from 0.001% to 99.999%.  You get to pick and choose your odds with different payouts in the public markets.  You get to pick them in Vegas as well, depending on what game you play and how you play it.  I'd rather avoid the pretty girls and free drinks to pick out better odds with better payouts behind some computer screen.

 

I think my point is that maybe there is a 80% chance that this is not a 4x FCF business, but a 6-8x FCF business.  But everyone hates it so much that they see it as a 10% probability of being worth 1.5-2x as much as the current price.  I mean AGN still has a massive market cap and EV, especially compared to VRX.  It doesn't matter that *you* (and now almost everyone else on twitter and CoBF) might think it's a crappy gamble with low probabilities, it only matters across the many bets one gets to take over your investing career and the actual probability.  Just looking at what has already gone wrong, it isn't hard to imagine that more things can go right than can keep going wrong.  And maybe more wrongs are already priced in at 4x FCF.

 

Then again who knows.  I'm not long the stock, I just happen to think the price and odds favor a long.  In some ways it reminds me of HPQ when they had the Autonomy scandal and it dropped down to $12 or something.  Everyone hated it, no one could own it, it was a crappy business, Chanos was short it as well, but you made a ton of money going long into that period.  Will HPQ be worth $0 one day?  Maybe.  But it doesn't mean you that 3-4x FCF for HPQ was a terrible gamble.

 

I think this is one of the most underappreciated yet most important parts of investing

[rb]

Yea I don't see how any of this doesn't align with what i've said.

 

Oreo asked when is it ok to take a position that runs against your fundamental view of the business. I said never.

 

In picasso's case, his opinion is that there's an 80% chance that VRX is a 6-8x FCF business, meaning the stock has 50-80% upside from here. I assume that he got to this points by analyzing the facts related to the company. So basically considering to take a long position aligns with his fundamental view of the business.

 

If picasso would have said " I am 80% sure that this is a 2x FCF business but I'll take a long position because maybe someone will give me some more money for it a month from now" that would align with what Oreo was asking and I stand by my view that it's never ok to do that. Doesn't mean that people won't do it anyway.

[Patmo]

Yea I don't see how any of this doesn't align with what i've said.

 

Oreo asked when is it ok to take a position that runs against your fundamental view of the business. I said never.

 

In picasso's case, his opinion is that there's an 80% chance that VRX is a 6-8x FCF business, meaning the stock has 50-80% upside from here. I assume that he got to this points by analyzing the facts related to the company. So basically considering to take a long position aligns with his fundamental view of the business.

 

If picasso would have said " I am 80% sure that this is a 2x FCF business but I'll take a long position because maybe someone will give me some more money for it a month from now" that would align with what Oreo was asking and I stand by my view that it's never ok to do that. Doesn't mean that people won't do it anyway.

 

I didn't claim the contrary though...

[Graham Osborn]

Interest expense is already being taken out of free cash flow?  They'll need to refinance the debt as some of it comes due and that will be a headwind at current rates, but it depends on how well they can manage the business ahead of it.  The debt's actually trading pretty well.  But I don't get your point about taking out debt service a second time?

 

The distinction is between interest and principal repayments.  Here are the formulae:

 

Unlevered FCF = Cash Flow from Operations + Interest Expense * (1 – Tax Rate) – Interest Income * (1 – Tax Rate) – CapEx

 

Levered FCF = Cash Flow from Operations – CapEx – Mandatory Debt Repayments

 

I mean AGN still has a massive market cap and EV, especially compared to VRX.

 

Isn't that interesting.  I guess it never dawned on me someone might use that as an argument that VRX was UNDERvalued.  To give you some perspective, 2018 puts are on AGN are currently the largest position in my portfolio.  And given the seriousness of their issues, I think the odds are pretty good on that one.

 

[gfp]

I have no dog in this fight, but just noticed Papa picked up $5m worth of shares on the open market last week -

http://www.sec.gov/Archives/edgar/data/885590/000124221516000001/xslF345X03/primary_doc.xml

[johnny]

What is a reasonable range for Papa's net worth?

[Ballinvarosig Investors]

I have no dog in this fight, but just noticed Papa picked up $5m worth of shares on the open market last week -

http://www.sec.gov/Archives/edgar/data/885590/000124221516000001/xslF345X03/primary_doc.xml

http://api40.10kwizard.com/cgi/convert/pdf/ValeantPharmaceuticalsInternationalInc-20160427-8K-20160421.pdf?ipage=10893864&xml=1&quest=1&rid=23&section=1&sequence=-1&pdf=1&dn=1

 

It was in his employement agreement that he must purchase $5M of stock. He is more than good for it.

[gfp]

Thanks for pointing that out.  He was required to do it.  His net worth is private of course, but I would estimate at least $25 million, probably considerably more.

[Mephistopheles]

With his employment agreement, his upside/downside on that $5 million is much better than ours. I'd take that deal too if I had it.

[Guest wellmont]

he had to do it. but he had 11 months to do it. why didn't he wait till it got to zero? ;)

[Graham Osborn]

I have no dog in this fight, but just noticed Papa picked up $5m worth of shares on the open market last week -

http://www.sec.gov/Archives/edgar/data/885590/000124221516000001/xslF345X03/primary_doc.xml

 

Imagine having to buy 5M of VRX with your own money.  There are much more enjoyable/ nobler ways to lose 5M IMHO.

[Hielko]

http://www.bloomberg.com/news/articles/2016-06-14/valeant-said-to-hire-morgan-stanley-to-sell-dermatology-assets

Valeant Pharmaceuticals International Inc. is working with advisers at Morgan Stanley as it weighs the sale of dermatology units Obagi Medical Products and Solta Medical to raise cash to reduce debt, according to people familiar with the matter. The two businesses could fetch up to $500 million and attract interest from other pharmaceutical companies, the people said, asking not to be identified because the deliberations are private. The sale process could start as early as this week, they said.

Valeant bought the two for $668 million in 2013...

[fareastwarriors]

Valeant Holds a Shareholder Meeting, and Nothing Goes Wrong

 

http://www.bloomberg.com/news/articles/2016-06-14/valeant-ceo-would-consider-selling-core-assets-if-price-is-right

[NBL0303]

 

In my eyes investing is not much different than gambling, if at all. 

 

One way they are different is that gambling is a negative-sum game while investing is a positive-sum game, so in that important sense rather than being similar they could not be more dissimilar.

[Spekulatius]

Many ways to make (and lose) money in the markets. I guess the question boils down to: when is it okay to put on a position that runs against your long-term fundamental view of the business (or even of the specific security in the capital structure)?

 

The answer for me would be "Never". I will never buy something that I am not willing to hold based on present knowledge. I will change my opinion, if new information warrants it from my POV.

[alpha asset strategies]

Valeant Holds a Shareholder Meeting, and Nothing Goes Wrong

 

http://www.bloomberg.com/news/articles/2016-06-14/valeant-ceo-would-consider-selling-core-assets-if-price-is-right

 

 

I would bet my life that as long as Ackman is involved, everything is for sale at the right price.  That is the primary reason why I cannot be overly bearish on VRX.  If the M&A market went to hell and / or financing / liquidity dried up, then I would become much more bearish.

[randomep]

 

In my eyes investing is not much different than gambling, if at all. 

 

One way they are different is that gambling is a negative-sum game while investing is a positive-sum game, so in that important sense rather than being similar they could not be more dissimilar.

 

Gambler vs. gambler where they pay no rake/fees is a zero sum game. For example, poker, mahjong.

 

In the 10,000 ft view yes investing is a positive sum, but look closely and certain segments are negative sum, for example the airline industry from the days of the wright brothers to today.

 

 

I think gambling and investing are similar.

 

 

[JBTC]

 

In my eyes investing is not much different than gambling, if at all. 

 

One way they are different is that gambling is a negative-sum game while investing is a positive-sum game, so in that important sense rather than being similar they could not be more dissimilar.

 

Gambler vs. gambler where they pay no rake/fees is a zero sum game. For example, poker, mahjong.

 

In the 10,000 ft view yes investing is a positive sum, but look closely and certain segments are negative sum, for example the airline industry from the days of the wright brothers to today.

 

 

I think gambling and investing are similar.

 

For 99% of the population (including perhaps most on this board), the difference between the positive sum nature of investing and the negative sum nature of gambling is night and day. They cannot be compared. Which is why even though gambling is referenced sometimes, thankfully not many threads here are about gambling specifically.

 

For a small minority of people who have the ability to correctly assess odds in investing and gambling and only play when odds are in their favor, there is a similarity in approach between the two activities.

 

But even for those highly intelligent handicappers, the outcomes from these two activities are vastly different. If devoted to betting on horses, Buffett would likely have made a good living. But he'd be unlikely to become one of the richest men in the world.

 

[NBL0303]

 

In my eyes investing is not much different than gambling, if at all. 

 

One way they are different is that gambling is a negative-sum game while investing is a positive-sum game, so in that important sense rather than being similar they could not be more dissimilar.

 

Gambler vs. gambler where they pay no rake/fees is a zero sum game. For example, poker, mahjong.

 

In the 10,000 ft view yes investing is a positive sum, but look closely and certain segments are negative sum, for example the airline industry from the days of the wright brothers to today.

 

I think gambling and investing are similar.

 

I appreciate the thoughtful reply, but I do not agree with the logic behind the airline industry example.  The fact that a particular subset of investments has not offered positive aggregate returns does not change the fundamental nature of investing.  After all, if one person put their entire net worth on the number 21 on one spin of the roulette wheel, and 21 turned out to be a winner on that spin, and that gambler quit gambling forever on the spot, they would have an outstanding return on their gambling activities - but that does not alter the fundamental character of gambling.

 

Also, the gambling circumstance referenced as a zero-sum game, poker, etc., are not actually gambling in the sense that is being discussed on this thread, but are more akin to games of skill (with of course aspects of like just like basketball or any other game of skill) rather than the type of gambling referenced here - which are bets on games of chance with probabilistic returns, which are indeed negative-sum games because there is always a croupier cost of some kind.