VRX - Valeant Pharmaceuticals International Inc.

[Green King]

Well we all have Ws and Ls. Took a small L on this one (relative to port), but sold closer to $18 or $19. I feel bad for Ackman to have staked so much, but I also think it's a cost of doing business in the game he's playing. Marketing wise he's built his career on big bets and they do differentiate him from the market. He may win or he may lose, but he's not going to match the market's return.

 

I don't know this, but I would guess that for him personally it is a +EV move to be so concentrated because when he's right he outperforms big and b/c of his big position sizes he gets in the news often; I bet that has attracted a lot of money over the years in this manner. He's going to collect fees on a bigger base, so even if there's a larger potential for permanent loss of capital this way, it gives him way more leverage to his investments than I suspect the alternative would bring.

 

I'd rather be Ackman right now after the most humiliating loss of his career than 100 out of 100 minor league hedge fund managers who may be good investors but lack the marketing skill to raise billions.

 

Anyone who writes him off after this is crazy.

 

I was talking to my mentor about VRX back when it was at its' top. We felt what he was doing defeated the main reason that he had chosen this path.

 

To prudently allocate our time and capital over time and become successful in the end. So you even if his capital was taken away we can start over from nothing with the edge he built over time. Like at the what happened in Casino (1995) the main character was the only player that survived because the mafia knew he had a edge and hey why ruined a good thing. Having an edge will always be valuable.

 

Therefore this goal can only be done by making good risk adjusted bets. VRX was not one it is either big or zero. That was our source of the dislike. Given our understanding of investing it was highly likely they can't be doing what they say they were. So it was a low probability big or zero. 

 

This is the nature of things people who makes the most money in the bull market are always taking on the most risk. They in turn attracts capitals who view their returns as a signal for skill. 

 

Bad risk adjusted bets in the long run will blow you up. Like what happened to him back in Gotham capital days and VRX recently.

 

[ScottHall]

Well we all have Ws and Ls. Took a small L on this one (relative to port), but sold closer to $18 or $19. I feel bad for Ackman to have staked so much, but I also think it's a cost of doing business in the game he's playing. Marketing wise he's built his career on big bets and they do differentiate him from the market. He may win or he may lose, but he's not going to match the market's return.

 

I don't know this, but I would guess that for him personally it is a +EV move to be so concentrated because when he's right he outperforms big and b/c of his big position sizes he gets in the news often; I bet that has attracted a lot of money over the years in this manner. He's going to collect fees on a bigger base, so even if there's a larger potential for permanent loss of capital this way, it gives him way more leverage to his investments than I suspect the alternative would bring.

 

I'd rather be Ackman right now after the most humiliating loss of his career than 100 out of 100 minor league hedge fund managers who may be good investors but lack the marketing skill to raise billions.

 

Anyone who writes him off after this is crazy.

 

I was talking to my mentor about VRX back when it was at its' top. We felt what he was doing defeated the main reason that he had chosen this path.

 

To prudently allocate our time and capital over time and become successful in the end. So you even if his capital was taken away we can start over from nothing with the edge he built over time. Like at the what happened in Casino (1995) the main character was the only player that survived because the mafia knew he had a edge and hey why ruined a good thing. Having an edge will always be valuable.

 

Therefore this goal can only be done by making good risk adjusted bets. VRX was not one it is either big or zero. That was our source of the dislike. Given our understanding of investing it was highly likely they can't be doing what they say they were. So it was a low probability big or zero. 

 

This is the nature of things people who makes the most money in the bull market are always taking on the most risk. They in turn attracts capitals who view their returns as a signal for skill. 

 

Bad risk adjusted bets in the long run will blow you up. Like what happened to him back in Gotham capital days and VRX recently.

 

The dude's worth over a billion and has a lot of permanent capital. I don't think he's going to blow up any time soon.

 

I think there is a big difference in incentives between asset managers and their investors; it pays big to be really right and to win big. You get convex upside but your personal downside is capped by how much you eat of your own cooking. There is a huge asymmetry of payoff that can incentivize reckless behavior.

 

Good on you for avoiding VRX, but I do think investors are way too willing to place blanket black and white valuations on companies in hindsight. The truth is that the reality that does unfold is not the only reality that is possible; we know this, logically, but it is very hard to internalize. That's why you see pieces that reek of recency bias about investors (including Ackman) all the time. The same media complex that declared him Baby Buffett is now portraying him as this sad clown, shell of a man. And I think that's totally wrong.

 

The truth is that the mistake here wasn't investing in Valeant at all... everyone is going to fuck up sometimes. It happens. The problem was investing in it in the size that he did... and at the end of the day, he takes a hit to the reputation from that, but the calculus is a bit different for him than it is for his investors. He's had big losses before. It's not a situation that he's entirely unfamiliar with.

 

I'm not saying it's good or bad. I'm saying it's a reality that the financial industry has to face every day. And I think any understanding of the lessons that we can learn from Ackman's failure with VRX is incomplete without considering that angle and the hits-based model he's built his fund around. Did he fuck up? Yeah, sure. But I don't think it's as simple as you're portraying it; we're all playing different games.

[Green King]

Well we all have Ws and Ls. Took a small L on this one (relative to port), but sold closer to $18 or $19. I feel bad for Ackman to have staked so much, but I also think it's a cost of doing business in the game he's playing. Marketing wise he's built his career on big bets and they do differentiate him from the market. He may win or he may lose, but he's not going to match the market's return.

 

I don't know this, but I would guess that for him personally it is a +EV move to be so concentrated because when he's right he outperforms big and b/c of his big position sizes he gets in the news often; I bet that has attracted a lot of money over the years in this manner. He's going to collect fees on a bigger base, so even if there's a larger potential for permanent loss of capital this way, it gives him way more leverage to his investments than I suspect the alternative would bring.

 

I'd rather be Ackman right now after the most humiliating loss of his career than 100 out of 100 minor league hedge fund managers who may be good investors but lack the marketing skill to raise billions.

 

Anyone who writes him off after this is crazy.

 

I was talking to my mentor about VRX back when it was at its' top. We felt what he was doing defeated the main reason that he had chosen this path.

 

To prudently allocate our time and capital over time and become successful in the end. So you even if his capital was taken away we can start over from nothing with the edge he built over time. Like at the what happened in Casino (1995) the main character was the only player that survived because the mafia knew he had a edge and hey why ruined a good thing. Having an edge will always be valuable.

 

Therefore this goal can only be done by making good risk adjusted bets. VRX was not one it is either big or zero. That was our source of the dislike. Given our understanding of investing it was highly likely they can't be doing what they say they were. So it was a low probability big or zero. 

 

This is the nature of things people who makes the most money in the bull market are always taking on the most risk. They in turn attracts capitals who view their returns as a signal for skill. 

 

Bad risk adjusted bets in the long run will blow you up. Like what happened to him back in Gotham capital days and VRX recently.

 

The dude's worth over a billion and has a lot of permanent capital. I don't think he's going to blow up any time soon.

 

I think there is a big difference in incentives between asset managers and their investors; it pays big to be really right and to win big. You get convex upside but your personal downside is capped by how much you eat of your own cooking. There is a huge asymmetry of payoff that can incentivize reckless behavior.

 

Good on you for avoiding VRX, but I do think investors are way too willing to place blanket black and white valuations on companies in hindsight. The truth is that the reality that does unfold is not the only reality that is possible; we know this, logically, but it is very hard to internalize. That's why you see pieces that reek of recency bias about investors (including Ackman) all the time. The same media complex that declared him Baby Buffett is now portraying him as this sad clown, shell of a man. And I think that's totally wrong.

 

The truth is that the mistake here wasn't investing in Valeant at all... everyone is going to fuck up sometimes. It happens. The problem was investing in it in the size that he did... and at the end of the day, he takes a hit to the reputation from that, but the calculus is a bit different for him than it is for his investors. He's had big losses before. It's not a situation that he's entirely unfamiliar with.

 

I'm not saying it's good or bad. I'm saying it's a reality that the financial industry has to face every day. And I think any understanding of the lessons that we can learn from Ackman's failure with VRX is incomplete without considering that angle and the hits-based model he's built his fund around. Did he fuck up? Yeah, sure. But I don't think it's as simple as you're portraying it; we're all playing different games.

 

He is worth billions of dollars.

In alternative histories, he would not be worth as much. Making money by being good and making money from looting and raiding are not the same thing. This is what he is doing, his investors gets the downside he gets the upside. It is the long Henry Singleton or John Malone VS Warren Buffett debate.

 

Is he skilled? Yes

I agree with your view that he is rich and successful he must be doing something right. Indeed he is good at what he does and he has done some great deals in the past.

 

The second layer to the VRX mistake (Nature of him and the game)

 

I think it is Sharks that has to keep on swimming to breathe, never ending aggression must continue or it will die. Nature of money management today is the same if you can't control yourself and desire of others it will eventually destroy you by taking beyond your limit and lose money worst of all disappointing people that believed in you enough to invest in you.

 

Today the game is one where if you can produce you will get more money than you need because there are more money than good ideas. If have a trillion dollars AUM your returns have to average solely due to the laws of the world, compound interest and physical limitation of scale. But at the pension fund level, they are under pressure to produce returns to meeting their unachievable obligations.

 

From this force, Ackman with his edge grew from a few million to a few hundred million to a few billion. The game gets much harder when you reach the billion stage. He and everyone else has to keep on swimming or they will die and their past good ideas are quickly forgotten. What have you done for me recently?

 

Compared to Buffett he and the others are weak unable to control their own nature or that of others. This force would have been weakened by slowing the growth of his fund, structuring a more sticky setup, or did what Buffett did when he could not find good ideas close his partnership.

 

They bet on VRX because it gave them what they wanted and allowed them to keep on swimming.

 

There are always more layers to great failures. I looked at VRX for around 15 to 20 mins and ran it through my mental models and passed "too hard". Ask my mentor about it when we had lunch isn't it interesting all these big names are investing in this. It has been becoming harder to find new ideas we agreed.

 

After the VRX blow up in retrospect I think they were feeling the same thing luckily they found VRX.

 

[arcube]

Hold on a second Bill!  I thought this was like the Amex salad oil scandal.....aren't we supposed to recover...

 

Wonder whether he shows up at the Indian Wells tournament this week!

[Guest roark33]

This is such a good thread to go back and read through, really understand how confirmation bias and reliance on others' due diligence plays into our decisions.  Better than any CFA course you could ever take.

[rb]

This is such a good thread to go back and read through, really understand how confirmation bias and reliance on others' due diligence plays into our decisions.  Better than any CFA course you could ever take.

What I remember from back when I did that thing. They insisted that the market is rational and efficient. So technically this can't happen in the CFA world.

[CorpRaider]

"He is worth billions of dollars.

In alternative histories, he would not be worth as much. Making money by being good and making money from looting and raiding are not the same thing. This is what he is doing, his investors gets the downside he gets the upside. It is the long Henry Singleton or John Malone VS Warren Buffett debate."

 

 

I have had that thought a lot.  I wasn't aware it was a long, well known debate.  Would be interested to hear where singleton figures in or perhaps some references to source materials so I can evaluate that myself.  (I've read that one book about him by his former number 2 and the outsiders).  I definitely view you know who as a result of selection bias or at least try to be very aware of the problem when examining his record. Thx.

[undervalued]

"He is worth billions of dollars.

In alternative histories, he would not be worth as much. Making money by being good and making money from looting and raiding are not the same thing. This is what he is doing, his investors gets the downside he gets the upside. It is the long Henry Singleton or John Malone VS Warren Buffett debate."

 

 

I have had that thought a lot.  I wasn't aware it was a long, well known debate.  Would be interested to hear where singleton figures in or perhaps some references to source materials so I can evaluate that myself.  (I've read that one book about him by his former number 2 and the outsiders).  I definitely view you know who as a result of selection bias or at least try to be very aware of the problem when examining his record. Thx.

 

That one book about Singleton, was it digital or hard copy?

 

 

https://www.bloomberg.com/view/articles/2017-03-14/bill-ackman-is-done-losing-money-on-valeant

 

For those who invested in VRX, what did we learn from this whole episode? I bought in when it was trading at $100 or so and got out when it went up to $107. I don't have any position in VRX anymore. I just wanted to see what lessons the board got and what can be applied to similar situation like TDG, and maybe BAM/BUD? I am going to get a lot of trolls for this lol.

 

To tell you the truth, I did not learn anything. The position was too complex to begin with. With a lot of people saying it was too complex to really value. For the most part it was gambling on the jockey Pearson and a lot of value investors who were in the stock.

 

Congrats to those who made tons of money (early investors). This is one lesson why you should not fall in love with a company when it's time to sell, sell it.

[rb]

 

For those who invested in VRX, what did we learn from this whole episode? I bought in when it was trading at $100 or so and got out when it went up to $107. I don't have any position in VRX anymore. I just wanted to see what lessons the board got and what can be applied to similar situation like TDG, and maybe BAM/BUD? I am going to get a lot of trolls for this lol.

Not trying to troll you. But I'm curious why you think BUD is similar to VRX. You could PM me if you don't want to clog the thread.

[LC]

 

For those who invested in VRX, what did we learn from this whole episode? I bought in when it was trading at $100 or so and got out when it went up to $107. I don't have any position in VRX anymore. I just wanted to see what lessons the board got and what can be applied to similar situation like TDG, and maybe BAM/BUD? I am going to get a lot of trolls for this lol.

 

I was no investor, but I followed it. This thread has 240 pages. Half of the participants pretty much said "too complicated for XYZ reason - too hard pile. Next." You can certainly go back and read those to learn some specific lessons.

 

That said, I think the most obvious lesson is this:

 

When fellow boardmembers are going beyond just questioning the acquisitions, the accounting, the long-term strategy...but are also questioning the ethical practices...do not invest.

 

In other words, adhere to the smell test.

[Guest roark33]

Here is my takeaway.  You have to do your own work.  After Philidor, my thought process was, Is this a cancer that can be cut out or is this the heart of the organization?  You needed to answer that question when the stock was at $100.  Ackman discusses in his conference call that he held a call with a bunch of derm doctors, but I think that was a mistake.  It was easier to just go to the pharmacies to see how Philidor fit into the puzzle.  If you went to a few pharmacies, you could see that the high margin derm scripts were not filled through your local pharmacies, but only through Philidor.  This was pretty easy after calling maybe 20 pharmacies.  No one stocked that stuff, etc, too expensive to inventory, too hard to get pre-approval from insurance, etc. 

 

The interesting thing that AZ Value sort of missed is the numbers weren't necessarily cooked, but that Philidor was so important, once it went away, the company was dead.  When people heard Enron, people assumed the numbers were made up, that wasn't the case, the numbers were real, but they were the result of a really, really aggressive pharmacy operation in Philidor.  Without that, VRX could not sell its drugs. 

 

I think Ackman could have figured that out pretty easily. 

 

And full disclosure, I think I lost money on both the long and short side of this trade, so there is that. 

[no_free_lunch]

I followed it for quite awhile.

 

If you look back through the posts there were all these arguments against Valeant.  One was regarding whether the operational cuts were sustainable in that they could lead to revenue decline over the long term but there were many bear case theses.  The main counter argument, brought up again and again and again, was that X was invested in it.  X is smarter than you, has more resources at hand, has better access to company internals, is better looking than you, smells better, etc..  The counter argument was not to refute the argument but just, it can't be true because smarter people are buying it so it must be okay.  I thought those arguments were BS at the time and I continue to think the same going forward.

 

So the main lesson is not to invest blindly just because some guru investor(s) are investing.  Know what and why you are buying.

[merkhet]

I followed it for quite awhile.

 

If you look back through the posts there were all these arguments against Valeant.  One was regarding whether the operational cuts were sustainable in that they could lead to revenue decline over the long term but there were many bear case theses.  The main counter argument, brought up again and again and again, was that X was invested in it.  X is smarter than you, has more resources at hand, has better access to company internals, is better looking than you, smells better, etc..  The counter argument was not to refute the argument but just, it can't be true because smarter people are buying it so it must be okay.  I thought those arguments were BS at the time and I continue to think the same going forward.

 

So the main lesson is not to invest blindly just because some guru investor(s) are investing.  Know what and why you are buying.

 

lol

[Mephistopheles]

I followed it for quite awhile.

 

If you look back through the posts there were all these arguments against Valeant.  One was regarding whether the operational cuts were sustainable in that they could lead to revenue decline over the long term but there were many bear case theses.  The main counter argument, brought up again and again and again, was that X was invested in it.  X is smarter than you, has more resources at hand, has better access to company internals, is better looking than you, smells better, etc..  The counter argument was not to refute the argument but just, it can't be true because smarter people are buying it so it must be okay.  I thought those arguments were BS at the time and I continue to think the same going forward.

 

So the main lesson is not to invest blindly just because some guru investor(s) are investing.  Know what and why you are buying.

 

lol

 

He must be referring to the cerulean blue eyed, tall, athletic one.

[KCLarkin]

If you look back through the posts there were all these arguments against Valeant.  One was regarding whether the operational cuts were sustainable in that they could lead to revenue decline over the long term but there were many bear case theses.

 

Yes, but these bear arguments weren't material to the implosion. Gutting R&D and OpEx are not the reason why they are in this mess. Overpaying for acquisitions with massive amounts of debt was the real problem. For investors, the blindspot was ignoring debt when things were going well. Now, debt is all that matters.

[Guest roark33]

Even the debt didn't matter as long as they had Philidor.  People still don't really seem to understand that.  Jublia didn't go from a blockbuster to a no revenue drug because of their debt.  Revenue and profits were wiped out when VRX couldn't bilk insurance comapnies with their "speciality pharmacy"....I still don't know if Ackman gets that. 

[Mephistopheles]

Even the debt didn't matter as long as they had Philidor.  People still don't really seem to understand that.  Jublia didn't go from a blockbuster to a no revenue drug because of their debt.  Revenue and profits were wiped out when VRX couldn't bilk insurance comapnies with their "speciality pharmacy"....I still don't know if Ackman gets that. 

 

Why were insurance cos compensating so highly for Jublia before and not now? I don't get why they'd pay highly only because it's through a "specialty pharma", but I must be missing something.

[Guest roark33]

It was sort of a rounding error that no one caught, Philidor kept pushing it through if it ever got rejected. I think you are imagining some "omniscient" insurance company, but that is very rare.  Same thing has happened in the addiction treatment centers.  Insurance companies were paying $1000 for multiple urine tests each week for about 3 years, until someone finally woke up.  Check the stock price of AAC.  Happens all the time. 

[no_free_lunch]

If you look back through the posts there were all these arguments against Valeant.  One was regarding whether the operational cuts were sustainable in that they could lead to revenue decline over the long term but there were many bear case theses.

 

Yes, but these bear arguments weren't material to the implosion. Gutting R&D and OpEx are not the reason why they are in this mess. Overpaying for acquisitions with massive amounts of debt was the real problem. For investors, the blindspot was ignoring debt when things were going well. Now, debt is all that matters.

 

The high purchase price/debt is completely coupled to the cuts.  The argument was always that the cuts would have no impact on sales because they were just cutting bloat.  If sales could continue to slowly increase after cutting costs then with the increased earnings the the debt would be fine.  Isn't the problem that you have debt and a shrinking ice cube?  The ice cube wasn't supposed to start shrinking, that was a core part of the argument.

[cmlber]

Even the debt didn't matter as long as they had Philidor.  People still don't really seem to understand that. 

 

I don't think this was the key issue.  This was only 7% of revenue and to date I don't think there has been anything to suggest the 7% of revenue figure cited by the company was ever misrepresented.  That was ~$700 million in revenue. 

 

Guidance for 2016 last January was $12.6 billion in revenue, $7 billion EBITDA.  Today's guidance for 2017 is $9 billion revenue, $3.6 billion EBITDA.  Where did the $3.6 billion of revenue come from if Philidor was only $700 million?

 

It was likely management assuming more gigantic price increases in 2016 that they couldn't get away with anymore because with all of the scrutiny from Congress and the industry, the PBMs who had no incentive to lower prices (higher prices = higher rebates) finally started to do their jobs. 

[Guest roark33]

Hmm, I think they were just lying about the 7%....that's my point.

[rb]

I never owned it. I wanted to because a number of investors I admire spoke glowingly about it. So I looked at it a lot. But I could never make sense of the numbers. You had a ton of acquisitions, everything was adjusted. It was basically "Trust us these are the numbers. And they're AWESOME!" and I always work with a healthy dose of skepticism.

 

Then it was the operational side of things. There were a lot of acquisitions. These take time to integrate. At the pace they were going it must have been a mess operationally.

 

Then there was the stock price. The stock was tripling every 3 years. It's impossible to create so much value. So either they are the greatest value creator in the history of the world or the stock is expensive. Again my skepticism was telling me that the stock has to be expensive so why should i buy an expensive stock?

 

Moreover all this value was being generated not by inventing something or having an awesome product but by buying companies at a premium. Yes there is some fat at most companies. But there simply isn't that much fat around to justify this value. Another red flag was when they purchased B&L. They bought it from a PE shop. Those guys are not known for selling things cheaply or for leaving a lot of fat around.

 

Basically this was easily avoidable if one were to employ some common sense and follow the basic rules of value investing: look to buy at a discount, stay in your circle of competence, don't follow the crowd, and keep a dose of skepticism.

 

 

 

[KCLarkin]

The high purchase price/debt is completely coupled to the cuts.  The argument was always that the cuts would have no impact on sales because they were just cutting bloat.  If sales could continue to slowly increase after cutting costs then with the increased earnings the the debt would be fine.  Isn't the problem that you have debt and a shrinking ice cube?  The ice cube wasn't supposed to start shrinking, that was a core part of the argument.

 

I've seen no evidence that these businesses were any more sustainable with more OpEx and R&D.

[Guest roark33]

This is a good example of how Philidor was basically bilking the system:

 

https://www.pissedconsumer.com/company/philidor-rx-services/philidor-rx-services-llc-took-my-hsa-funds-20150102577512.html

[writser]

Basically this was easily avoidable if one were to employ some common sense and follow the basic rules of value investing: look to buy at a discount, stay in your circle of competence, don't follow the crowd, and keep a dose of skepticism.

 

Tend to agree. Some posters here were so blinded by greed and the intellectual challenge that they spent thousands of posts and dollars defending a company that they could (and I think in most cases should) have dismissed in ten seconds.