VRX - Valeant Pharmaceuticals International Inc.

[Haasje]

...An imminent collapse seems very unlikely due to the buying by the CFO and ValueAct.

 

I'm increasingly thinking my theory of no pending asset sales makes sense. The CFO probably wouldn't buy with action coming up. ValueAct generally has a longer time horizon (a three-year average holding period) vs. Pershing Square (a 1.5-year average holding period).

 

Consequently, ValueAct might take the long view. Pershing might have equally good arguments to bail because of a lack of near-term catalysts and the drag on their reputation. On balance, I believe the ValueAct and CFO buying trumps the Pershing selling.

 

Conclusion from my article on VRX: http://seekingalpha.com/article/4056135-valueact-vs-pershing-square

 

I did not like the Pershing sale at all but the ValueAct + CFO trumps it imo.

 

 

[Green King]

Regarding learnings for the future, it seems that all these roll-ups end up facing trouble eventually.

 

There was a study of total shareholder returns based on acquisition strategies. Frequent acquirers actually provided the best returns. Presumably the winners (e.g. Berkshire) are able to make up for the frequent catastrophic losses in roll-ups.

 

In other words, shorting a single roll-up might be a good idea. But shorting a basket of all roll-ups is a bad idea.

 

Unfortunately, I can't recall who did the study. But I have seen similar studies before.

 

Under that theory Fairfax should be up 5x by next week.

 

Found the source: McKinsey Valuation

 

My comment wasn't meant to be a criticism of your comment/the study which may be very valid. More a comment on the prolific number of M&A deals FFH is involved in. I find it unlikely that they are all driving fantastic IRR's.

 

On top that normal distribution associated statistical tools doesn't apply in the world of handicapping. It can be used as a guide but watch out for the turkey problem. We simply don`t have enough data to see the true statistical characteristics of extremistan distributions.

 

Like the correlation between Education and Income. If you put Bill Gates and Steve Jobs into the statistical sample I think the conclusion would be much different.

[Guest Schwab711]

...An imminent collapse seems very unlikely due to the buying by the CFO and ValueAct.

 

I'm increasingly thinking my theory of no pending asset sales makes sense. The CFO probably wouldn't buy with action coming up. ValueAct generally has a longer time horizon (a three-year average holding period) vs. Pershing Square (a 1.5-year average holding period).

 

Consequently, ValueAct might take the long view. Pershing might have equally good arguments to bail because of a lack of near-term catalysts and the drag on their reputation. On balance, I believe the ValueAct and CFO buying trumps the Pershing selling.

 

Conclusion from my article on VRX: http://seekingalpha.com/article/4056135-valueact-vs-pershing-square

 

I did not like the Pershing sale at all but the ValueAct + CFO trumps it imo.

 

Don't mean to call you out but this is very dangerous thinking and almost exactly how everyone lost so much money in VRX. It assumes that the phrase 'insiders may sell for a lot of reasons, but they only buy for one reason' is true. It's not. There are a lot of situations and real world examples where insiders bought prior to bankruptcy or some investigation. They do it because folks believe the company is safe if an insider buys. To them, spending a trivial % of their net worth may be worth propping up the stock price. There is no substitute for actual due diligence. You have no idea why ValueAct bought (since you wouldn't be posting here if you did) but you are ascribing the best possible reason as a certainty. I think it's really important to conservatively consider or value anything related to pharmaceutical companies and particularly VRX.

 

I'd also point out, ValueAct held most of their holdings from $200+ to ~$10 a share. Are we supposed to believe that this time it's different? Are you buying all of ValueAct's other holdings as well? If not, why is their position in VRX anymore predictive?

 

I think your theory about pending sales may be correct, but I'd guess it has more to do with how bad their products are. If you really like the business model then just buy JNJ. VRX has lost 2 more generic monopolies since mid-2016. I'm not sure they have more than 1 or 2 non-trivial generic monopolies left. VRX is the perfect example of why I tend to hate highly levered companies. Folks attempt to value them on EV/EBITDA basis but ignore the fact that even if the equity had trivial value the company would still trade at a high EV/EBITDA multiple. In VRX's case, if equity = $0 then the company still trades > 7x EV/EBITDA. GILD is trading at 5.5x EBITDA right now. Almost any sale for less than 7x will pull them closer to bankruptcy. Dendreon (sale at ~5x) is an example of how desperate VRX is right now.

 

Xifaxan is the single most important compound VRX owns yet it's already near projected peak sales (~$400m/yr). Everyone quotes the JPM presentation of $2.0-$2.5b in peak annual sales but most of the projections at the time assumed $400-$600m peak sales. Blockbuster status never made sense for a glorified high-strength Imodium. It's efficacy is only trivially greater than Imodium. Viberzi has taken IBS market share over the last year and is now doing $40m/qtr in sales (it was approved roughly one year ago). What happens if Viberzi and Xifaxan trade places? This is just one example of what I see as unrealistic expectations regarding VRX.

 

VRX is almost certainly going bankrupt (unless someone saves them by paying > 10x for B&L). The odds of bankruptcy are increasing with each passing day. There are large, unreserved fines coming in the future. It blows my mind that anyone would consider investing in VRX without modeling all of their drugs individually (so you can see the drop offs coming over the next 8 years) and making conservative estimates for future fines, refinancing costs (direct and higher interest rates), and so on. The worst-case downside at $10 is identical to the downside at $200. You can still lose 100%.

 

I'm only posting because I saw you are long and it does not seem like you understand this name. I really really think you should reconsider your position here. If you do have a model that shows positive equity value, I'd really like to see it. Maybe I'm wrong but I don't think I am.

[arcube]

...An imminent collapse seems very unlikely due to the buying by the CFO and ValueAct.

 

I'm increasingly thinking my theory of no pending asset sales makes sense. The CFO probably wouldn't buy with action coming up. ValueAct generally has a longer time horizon (a three-year average holding period) vs. Pershing Square (a 1.5-year average holding period).

 

Consequently, ValueAct might take the long view. Pershing might have equally good arguments to bail because of a lack of near-term catalysts and the drag on their reputation. On balance, I believe the ValueAct and CFO buying trumps the Pershing selling.

 

Conclusion from my article on VRX: http://seekingalpha.com/article/4056135-valueact-vs-pershing-square

 

I did not like the Pershing sale at all but the ValueAct + CFO trumps it imo.

 

Don't mean to call you out but this is very dangerous thinking and almost exactly how everyone lost so much money in VRX. It assumes that the phrase 'insiders may sell for a lot of reasons, but they only buy for one reason' is true. It's not. There are a lot of situations and real world examples where insiders bought prior to bankruptcy or some investigation. They do it because folks believe the company is safe if an insider buys. To them, spending a trivial % of their net worth may be worth propping up the stock price. There is no substitute for actual due diligence. You have no idea why ValueAct bought (since you wouldn't be posting here if you did) but you are ascribing the best possible reason as a certainty. I think it's really important to conservatively consider or value anything related to pharmaceutical companies and particularly VRX.

 

I'd also point out, ValueAct held most of their holdings from $200+ to ~$10 a share. Are we supposed to believe that this time it's different? Are you buying all of ValueAct's other holdings as well? If not, why is their position in VRX anymore predictive?

 

I think your theory about pending sales may be correct, but I'd guess it has more to do with how bad their products are. If you really like the business model then just buy JNJ. VRX has lost 2 more generic monopolies since mid-2016. I'm not sure they have more than 1 or 2 non-trivial generic monopolies left. VRX is the perfect example of why I tend to hate highly levered companies. Folks attempt to value them on EV/EBITDA basis but ignore the fact that even if the equity had trivial value the company would still trade at a high EV/EBITDA multiple. In VRX's case, if equity = $0 then the company still trades > 7x EV/EBITDA. GILD is trading at 5.5x EBITDA right now. Almost any sale for less than 7x will pull them closer to bankruptcy. Dendreon (sale at ~5x) is an example of how desperate VRX is right now.

 

Xifaxan is the single most important compound VRX owns yet it's already near projected peak sales (~$400m/yr). Everyone quotes the JPM presentation of $2.0-$2.5b in peak annual sales but most of the projections at the time assumed $400-$600m peak sales. Blockbuster status never made sense for a glorified high-strength Imodium. It's efficacy is only trivially greater than Imodium. Viberzi has taken IBS market share over the last year and is now doing $40m/qtr in sales (it was approved roughly one year ago). What happens if Viberzi and Xifaxan trade places? This is just one example of what I see as unrealistic expectations regarding VRX.

 

VRX is almost certainly going bankrupt (unless someone saves them by paying > 10x for B&L). The odds of bankruptcy are increasing with each passing day. There are large, unreserved fines coming in the future. It blows my mind that anyone would consider investing in VRX without modeling all of their drugs individually (so you can see the drop offs coming over the next 8 years) and making conservative estimates for future fines, refinancing costs (direct and higher interest rates), and so on. The worst-case downside at $10 is identical to the downside at $200. You can still lose 100%.

 

I'm only posting because I saw you are long and it does not seem like you understand this name. I really really think you should reconsider your position here. If you do have a model that shows positive equity value, I'd really like to see it. Maybe I'm wrong but I don't think I am.

 

+1.

[Haasje]

Hey thanks for this. Some really good points. I'm not buying or selling on insider actions but its important to weigh the moves of the big guys with board seats as the company's future is highly dependent on asset sales and not hitting the EBITDA covenants.

 

"It assumes that the phrase 'insiders may sell for a lot of reasons, but they only buy for one reason' is true. It's not. There are a lot of situations and real world examples where insiders bought prior to bankruptcy or some investigation. They do it because folks believe the company is safe if an insider buys. To them, spending a trivial % of their net worth may be worth propping up the stock price."

 

Good point. I should have given more thought to something like this. The amount could be trivial to the CFO as he's made a lot of money in the past and I don't know much about his lifestyle. It's somewhat of a stretch for me to believe he's propping up here.

 

"There is no substitute for actual due diligence. You have no idea why ValueAct bought (since you wouldn't be posting here if you did) but you are ascribing the best possible reason as a certainty."

 

No argument on the due diligence. ValueAct, it would surprise me if they had an agenda as well. Especially, given the public comments by Ubben that I referenced. If I KNEW KNEW I wouldn't be writing articles speculating on it, true. 

 

I don't think I own any other ValueAct stocks. I look at what they do and have no problem copycatting them but currently they dont even like most of their own holdings and are selling down to hold unusually amounts of cash.

 

Its not just the best reason, its also the most likely, most common reason and it makes sense given the situation.

 

"I think it's really important to conservatively consider or value anything related to pharmaceutical companies and particularly VRX."

 

I'm interested to learn why?

 

"I'd also point out, ValueAct held most of their holdings from $200+ to ~$10 a share. Are we supposed to believe that this time it's different? Are you buying all of ValueAct's other holdings as well? If not, why is their position in VRX anymore predictive?"

 

They sold at least a billion at $200+ http://www.barrons.com/articles/valueact-sells-nearly-1-billion-in-valeant-shares-1434662782

ValueAct has a pretty good track record with Valeant however I agree its pretty meaningless and I don't want you or anyone to believe anything. I just think its fair if I update my thinking based on the Ackman sale, I also do so on CFO and ValueAct buying. Even though none of these acts communicates perfect information. Would you take into account the Ackman sale and disregard the subsequent insider buying?

 

"I think your theory about pending sales may be correct, but I'd guess it has more to do with how bad their products are."

 

My theory is we dont see them for two quarters but after that.

 

If you really like the business model then just buy JNJ.

 

I don't really like the business model. I don't know enough about it. I don't have any information that inclines me to want to own JNJ. Why would I buy it?

 

VRX is the perfect example of why I tend to hate highly levered companies. Folks attempt to value them on EV/EBITDA basis but ignore the fact that even if the equity had trivial value the company would still trade at a high EV/EBITDA multiple. In VRX's case, if equity = $0 then the company still trades > 7x EV/EBITDA.

 

I'm not ignoring it though. Virtually every article I've written about Valeant contains a mention of the debt load. FCF or EBITDA has a place in the thesis but asset sales are paramount imho.

 

"GILD is trading at 5.5x EBITDA right now. Almost any sale for less than 7x will pull them closer to bankruptcy. Dendreon (sale at ~5x) is an example of how desperate VRX is right now."

 

Not familiar enough with GILD, maybe they are very attractive?, but where did you get the notion Dendreon was sold at 5x EBITDA? Here's my take http://seekingalpha.com/article/4035536-objective-review-valeants-asset-sales  Maybe I have outdated info but eh, that EBITDA figure would surprise me.

 

Xifaxan is the single most important compound VRX owns yet it's already near projected peak sales (~$400m/yr). Everyone quotes the JPM presentation of $2.0-$2.5b in peak annual sales but most of the projections at the time assumed $400-$600m peak sales. Blockbuster status never made sense for a glorified high-strength Imodium. It's efficacy is only trivially greater than Imodium.

 

Drugs that are trivially more effective compared to alternatives generally don't do too well?

 

"Viberzi has taken IBS market share over the last year and is now doing $40m/qtr in sales (it was approved roughly one year ago). What happens if Viberzi and Xifaxan trade places? This is just one example of what I see as unrealistic expectations regarding VRX. "

 

Interesting thank you. I'll think about it.

 

"VRX is almost certainly going bankrupt (unless someone saves them by paying > 10x for B&L). The odds of bankruptcy are increasing with each passing day. There are large, unreserved fines coming in the future. It blows my mind that anyone would consider investing in VRX without modeling all of their drugs individually (so you can see the drop offs coming over the next 8 years) and making conservative estimates for future fines, refinancing costs (direct and higher interest rates), and so on. The worst-case downside at $10 is identical to the downside at $200. You can still lose 100%."

 

I don't dispute the fact VRX can go bankrupt. In multiple articles I've expressed the idea odds of a bankruptcy may outweigh survival. I think I put them at 66:33 or something at one point.

 

I know almost nothing about drugs. I don't usually invest in pharma's that are valued based on the prospects for their drugs and future cash flow estimates. I realize that's most of them, most of the time. I have great respect for people who make these models and would love to see them. Its a variant viewpoint too given the analyst estimates.

 

"The worst-case downside at $10 is identical to the downside at $200. You can still lose 100%."

 

Yes true but the upside part of the equation changed. I think I may lose my stake a fair amount of the time. Already, VRX should be able to muddle through a couple of years. The tricky thing are the debt covenants which could set off the total loss scenarios. FCF or adjusted EBITDA is actually fairly sizeable. There aren't that much floating rate bonds and they are taking those out first.

 

I get you believe odds are 50%? 80%? Valeant will go bust.

 

But to dismiss it as a terrible investment look at some of the scenarios where it survives. Where it sells a couple of big assets at the absolutely terrific prices it achieved so far... What if they achieve the growth analysts peg them on? Don't just look at this year or the next. Look beyond that as they likely have quite a bit of runway before hitting the brick wall of debt.

 

I think you will find Valeant needs to go busto a surprisingly high % of the time to make this a terrible bet. In addition it may have some of the characteristics Ubben was looking for Idiosyncracy etc. which you don't find in a JNJ.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Green King]

Hey thanks for this. Some really good points. I'm not buying or selling on insider actions but its important to weigh the moves of the big guys with board seats as the company's future is highly dependent on asset sales and not hitting the EBITDA covenants.

 

"It assumes that the phrase 'insiders may sell for a lot of reasons, but they only buy for one reason' is true. It's not. There are a lot of situations and real world examples where insiders bought prior to bankruptcy or some investigation. They do it because folks believe the company is safe if an insider buys. To them, spending a trivial % of their net worth may be worth propping up the stock price."

 

Good point. I should have given more thought to something like this. The amount could be trivial to the CFO as he's made a lot of money in the past and I don't know much about his lifestyle. It's somewhat of a stretch for me to believe he's propping up here.

 

"There is no substitute for actual due diligence. You have no idea why ValueAct bought (since you wouldn't be posting here if you did) but you are ascribing the best possible reason as a certainty."

 

No argument on the due diligence. ValueAct, it would surprise me if they had an agenda as well. Especially, given the public comments by Ubben that I referenced. If I KNEW KNEW I wouldn't be writing articles speculating on it, true. 

 

I don't think I own any other ValueAct stocks. I look at what they do and have no problem copycatting them but currently they dont even like most of their own holdings and are selling down to hold unusually amounts of cash.

 

Its not just the best reason, its also the most likely, most common reason and it makes sense given the situation.

 

"I think it's really important to conservatively consider or value anything related to pharmaceutical companies and particularly VRX."

 

I'm interested to learn why?

 

"I'd also point out, ValueAct held most of their holdings from $200+ to ~$10 a share. Are we supposed to believe that this time it's different? Are you buying all of ValueAct's other holdings as well? If not, why is their position in VRX anymore predictive?"

 

They sold at least a billion at $200+ http://www.barrons.com/articles/valueact-sells-nearly-1-billion-in-valeant-shares-1434662782

ValueAct has a pretty good track record with Valeant however I agree its pretty meaningless and I don't want you or anyone to believe anything. I just think its fair if I update my thinking based on the Ackman sale, I also do so on CFO and ValueAct buying. Even though none of these acts communicates perfect information. Would you take into account the Ackman sale and disregard the subsequent insider buying?

 

"I think your theory about pending sales may be correct, but I'd guess it has more to do with how bad their products are."

 

My theory is we dont see them for two quarters but after that.

 

If you really like the business model then just buy JNJ.

 

I don't really like the business model. I don't know enough about it. I don't have any information that inclines me to want to own JNJ. Why would I buy it?

 

VRX is the perfect example of why I tend to hate highly levered companies. Folks attempt to value them on EV/EBITDA basis but ignore the fact that even if the equity had trivial value the company would still trade at a high EV/EBITDA multiple. In VRX's case, if equity = $0 then the company still trades > 7x EV/EBITDA.

 

I'm not ignoring it though. Virtually every article I've written about Valeant contains a mention of the debt load. FCF or EBITDA has a place in the thesis but asset sales are paramount imho.

 

"GILD is trading at 5.5x EBITDA right now. Almost any sale for less than 7x will pull them closer to bankruptcy. Dendreon (sale at ~5x) is an example of how desperate VRX is right now."

 

Not familiar enough with GILD, maybe they are very attractive?, but where did you get the notion Dendreon was sold at 5x EBITDA? Here's my take http://seekingalpha.com/article/4035536-objective-review-valeants-asset-sales  Maybe I have outdated info but eh, that EBITDA figure would surprise me.

 

Xifaxan is the single most important compound VRX owns yet it's already near projected peak sales (~$400m/yr). Everyone quotes the JPM presentation of $2.0-$2.5b in peak annual sales but most of the projections at the time assumed $400-$600m peak sales. Blockbuster status never made sense for a glorified high-strength Imodium. It's efficacy is only trivially greater than Imodium.

 

Drugs that are trivially more effective compared to alternatives generally don't do too well?

 

"Viberzi has taken IBS market share over the last year and is now doing $40m/qtr in sales (it was approved roughly one year ago). What happens if Viberzi and Xifaxan trade places? This is just one example of what I see as unrealistic expectations regarding VRX. "

 

Interesting thank you. I'll think about it.

 

"VRX is almost certainly going bankrupt (unless someone saves them by paying > 10x for B&L). The odds of bankruptcy are increasing with each passing day. There are large, unreserved fines coming in the future. It blows my mind that anyone would consider investing in VRX without modeling all of their drugs individually (so you can see the drop offs coming over the next 8 years) and making conservative estimates for future fines, refinancing costs (direct and higher interest rates), and so on. The worst-case downside at $10 is identical to the downside at $200. You can still lose 100%."

 

I don't dispute the fact VRX can go bankrupt. In multiple articles I've expressed the idea odds of a bankruptcy may outweigh survival. I think I put them at 66:33 or something at one point.

 

I know almost nothing about drugs. I don't usually invest in pharma's that are valued based on the prospects for their drugs and future cash flow estimates. I realize that's most of them, most of the time. I have great respect for people who make these models and would love to see them. Its a variant viewpoint too given the analyst estimates.

 

"The worst-case downside at $10 is identical to the downside at $200. You can still lose 100%."

 

Yes true but the upside part of the equation changed. I think I may lose my stake a fair amount of the time. Already, VRX should be able to muddle through a couple of years. The tricky thing are the debt covenants which could set off the total loss scenarios. FCF or adjusted EBITDA is actually fairly sizeable. There aren't that much floating rate bonds and they are taking those out first.

 

I get you believe odds are 50%? 80%? Valeant will go bust.

 

But to dismiss it as a terrible investment look at some of the scenarios where it survives. Where it sells a couple of big assets at the absolutely terrific prices it achieved so far... What if they achieve the growth analysts peg them on? Don't just look at this year or the next. Look beyond that as they likely have quite a bit of runway before hitting the brick wall of debt.

 

I think you will find Valeant needs to go busto a surprisingly high % of the time to make this a terrible bet. In addition it may have some of the characteristics Ubben was looking for Idiosyncracy etc. which you don't find in a JNJ.

 

cc @BagholderQuotes

[zenith]

FWIW, from Andrew Left of Citron in response to ValueAct

 

https://www.bloomberg.com/news/articles/2017-03-17/the-anti-ackman-valeant-short-sellers-have-made-2-8-billion

 

 

 

  A Bloomberg dispatch to The Globe says that for short sellers, it has been nothing short of a boon. Traders who borrowed the stock in hopes that it would retreat made as much as $2.8-billion in profit since Valeant's peak in August, 2015. The drug maker's stock has carried an average short interest of about $800-million in that period. With the stock down 96 per cent from its record and Mr. Ackman no longer boosting the company, short sellers have come to a crossroads: bet the stock heads toward zero or get out of the way as high-profile backers such as ValueAct Capital add to long positions. For Andrew Left of Citron Research, one of the company's most vocal detractors, news that ValueAct added three million shares to its stake after Mr. Ackman's withdrawal this week is a warning for short sellers. "The bet on zero has changed with ValueAct buying more shares, because I trust them," Mr. Left told Bloomberg. "They know the company as well as anyone. If you're short the stock with ValueAct in it, make sure to think twice."

[ccplz]

^ Why does it matter what Citron says?

[Hielko]

^ Why does it matter what Citron says?

He's a smart guy that is right more often than most.

[rb]

If the bolded part above is true then why initiate a VRX short in the first place? Valueact was a very sizeable shareholder.

[Patmo]

^ Why does it matter what Citron says?

He's a smart guy that is right more often than most.

 

Yeah but his opinion is "these guys are in it, therefore you shouldn't bet against" it has nothing to do with the business itself, it's a peanut gallery call. If he had published a report based on investigations, it would be worth considering, but as it stands, this opinion is as useful as your average morning dump

[ccplz]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

[Gregmal]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

 

I still wouldn't even argue against that. The environment drastically changed, more or less overnight and his company became a scapegoat for industry wise practices. Mainly because, they were the best/more egregious and perfected a model that while unethical, was legal. Pearson IMO was right about most of those things

[cmlber]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

 

I still wouldn't even argue against that. The environment drastically changed, more or less overnight and his company became a scapegoat for industry wise practices. Mainly because, they were the best/more egregious and perfected a model that while unethical, was legal. Pearson IMO was right about most of those things

 

That's a little bit like saying Bernie Madoff was an Outsider but then the environment drastically changed in the financial crisis and ruined his strategy. 

[Picasso]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

 

I still wouldn't even argue against that. The environment drastically changed, more or less overnight and his company became a scapegoat for industry wise practices. Mainly because, they were the best/more egregious and perfected a model that while unethical, was legal. Pearson IMO was right about most of those things

 

That's a little bit like saying Bernie Madoff was an Outsider but then the environment drastically changed in the financial crisis and ruined his strategy.

 

I'm dying. +1

[Guest Schwab711]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

 

I still wouldn't even argue against that. The environment drastically changed, more or less overnight and his company became a scapegoat for industry wise practices. Mainly because, they were the best/more egregious and perfected a model that while unethical, was legal. Pearson IMO was right about most of those things

 

That's a little bit like saying Bernie Madoff was an Outsider but then the environment drastically changed in the financial crisis and ruined his strategy.

 

+10

[Gregmal]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

 

I still wouldn't even argue against that. The environment drastically changed, more or less overnight and his company became a scapegoat for industry wise practices. Mainly because, they were the best/more egregious and perfected a model that while unethical, was legal. Pearson IMO was right about most of those things

 

That's a little bit like saying Bernie Madoff was an Outsider but then the environment drastically changed in the financial crisis and ruined his strategy.

 

Except running a Ponzi scheme has never been legal or legitimate. Pearson saw that wasting loads of money on R&D was not efficient. Especially if you could simply purchase established products with those resources and then raise prices. Raising prices is something a company should be able to do. Unfortunately for Pearson this subject became a platform for the populist campaigns, and that was the end of him and presumably VRX, ENDP, etc. Philidor wasn't the downfall. It was the business model which was completely legal, becoming inoperable within a matter of months.

[rb]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

 

I still wouldn't even argue against that. The environment drastically changed, more or less overnight and his company became a scapegoat for industry wise practices. Mainly because, they were the best/more egregious and perfected a model that while unethical, was legal. Pearson IMO was right about most of those things

 

That's a little bit like saying Bernie Madoff was an Outsider but then the environment drastically changed in the financial crisis and ruined his strategy.

 

Except running a Ponzi scheme has never been legal or legitimate. Pearson saw that wasting loads of money on R&D was not efficient. Especially if you could simply purchase established products with those resources and then raise prices. Raising prices is something a company should be able to do. Unfortunately for Pearson this subject became a platform for the populist campaigns, and that was the end of him and presumably VRX, ENDP, etc. Philidor wasn't the downfall. It was the business model which was completely legal, becoming inoperable within a matter of months.

Hence the SEC and DOJ investigations.

[Gregmal]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

 

I still wouldn't even argue against that. The environment drastically changed, more or less overnight and his company became a scapegoat for industry wise practices. Mainly because, they were the best/more egregious and perfected a model that while unethical, was legal. Pearson IMO was right about most of those things

 

That's a little bit like saying Bernie Madoff was an Outsider but then the environment drastically changed in the financial crisis and ruined his strategy.

 

Except running a Ponzi scheme has never been legal or legitimate. Pearson saw that wasting loads of money on R&D was not efficient. Especially if you could simply purchase established products with those resources and then raise prices. Raising prices is something a company should be able to do. Unfortunately for Pearson this subject became a platform for the populist campaigns, and that was the end of him and presumably VRX, ENDP, etc. Philidor wasn't the downfall. It was the business model which was completely legal, becoming inoperable within a matter of months.

Hence the SEC and DOJ investigations.

 

GM had DOJ/SEC investigations. What about WFC or pretty much every single financial firm. So has pretty much every major pharma company. When the magnifying glass shined on a sector is as intense as it currently is on pharma, dirt always comes out. Confusing that with the business model though seems silly to me. Pearson's model of slashing R&D and spending on existing products and then raising prices wasn't illegal. In hind site everyone claims to have seen it coming, sure. That's always how it works. Hopefully all you folks made a fortune shorting this. I never bought it because of an aversion to companies with large amounts of debt and a skepticism of non-GAAP financial reporting, but that's besides the point. 

[TwoCitiesCapital]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

 

I still wouldn't even argue against that. The environment drastically changed, more or less overnight and his company became a scapegoat for industry wise practices. Mainly because, they were the best/more egregious and perfected a model that while unethical, was legal. Pearson IMO was right about most of those things

 

That's a little bit like saying Bernie Madoff was an Outsider but then the environment drastically changed in the financial crisis and ruined his strategy.

 

Except running a Ponzi scheme has never been legal or legitimate. Pearson saw that wasting loads of money on R&D was not efficient. Especially if you could simply purchase established products with those resources and then raise prices. Raising prices is something a company should be able to do. Unfortunately for Pearson this subject became a platform for the populist campaigns, and that was the end of him and presumably VRX, ENDP, etc. Philidor wasn't the downfall. It was the business model which was completely legal, becoming inoperable within a matter of months.

 

If something can't go forever, it won't. A business model dependent on levering up to buy drugs/companies to raise the prices so you can lever up more to buy more drugs and companies to continue to grow your EPS even as the underlying businesses decay from being deprived of growth capital is not a trend that can continue forever.

 

It continues until capital markets dry up OR you've raised prices to the highest level the market can bear OR the cost of refinancing the debt exceeds the marginal benefit from EPS growth OR you're too large for an acquisition to make a marginal impact etc.

 

It was a model that worked well until it was broken - but it could have, and would have, been broken by any number of those things listed above had it continued. Maybe you would have been smart enough to get out at the top? Maybe not? The point is, it was basically a ponzi scheme - It was totally reliant on the next acquisition or major price hike to make up for the deteriorating portfolio of drugs. New money had to come in faster than old value was decaying and when the music stops and no new money comes in...you're f*cked. Just like a ponzi scheme.

[rb]

Yes, and GM, WFC, and pretty much every financial institution have done illegal shit. That doesn't make what Valeant did with Philidor legal. The diference between Valeant and the others is that at the others actually had a business and the illegal shit was just to pad the numbers. At Valeant it was the model. Right now they're not using Philidor but the price for their drugs is still higher than when they bought them. So basically the model is still in place. How's that working out?

 

Also do you remember when Valeant kept on going on and on about how they don't really take so much price. That the returns are coming from other parts of their awesomeness. Like their brilliant sales and marketing. Right.... because the other drug makers really suck at sales and marketing.

 

But the thing is that the model was never going to work. They had to start using Philidor because the insurers started to not pay for their drugs anymore. But even if that didn't happen the government was always going to step in. Drug makers get protection to make good profits in order to incentivize R&D. Using those protections instead to hold people's lives and health out for ransom won't be tolerated. This is irrespective of political leanings or party in power. Ideology has a way of slipping away when you're sick and you can't afford medication. The model would just work for a while until people clue in on what's going on.

 

Btw, i don't think that we're anywhere near the end of the whole drug pricing issue.

[Gregmal]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

 

I still wouldn't even argue against that. The environment drastically changed, more or less overnight and his company became a scapegoat for industry wise practices. Mainly because, they were the best/more egregious and perfected a model that while unethical, was legal. Pearson IMO was right about most of those things

 

That's a little bit like saying Bernie Madoff was an Outsider but then the environment drastically changed in the financial crisis and ruined his strategy.

 

Except running a Ponzi scheme has never been legal or legitimate. Pearson saw that wasting loads of money on R&D was not efficient. Especially if you could simply purchase established products with those resources and then raise prices. Raising prices is something a company should be able to do. Unfortunately for Pearson this subject became a platform for the populist campaigns, and that was the end of him and presumably VRX, ENDP, etc. Philidor wasn't the downfall. It was the business model which was completely legal, becoming inoperable within a matter of months.

 

If something can't go forever, it won't. A business model dependent on levering up to buy drugs/companies to raise the prices so you can lever up more to buy more drugs and companies to continue to grow your EPS even as the underlying businesses decay from being deprived of growth capital is not a trend that can continue forever.

 

It continues until capital markets dry up OR you've raised prices to the highest level the market can bear OR the cost of refinancing the debt exceeds the marginal benefit from EPS growth OR you're too large for an acquisition to make a marginal impact etc.

 

It was a model that worked well until it was broken - but it could have, and would have, been broken by any number of those things listed above had it continued. Maybe you would have been smart enough to get out at the top? Maybe not? The point is, it was basically a ponzi scheme - It was totally reliant on the next acquisition or major price hike to make up for the deteriorating portfolio of drugs. New money had to come in faster than old value was decaying and when the music stops and no new money comes in...you're f*cked. Just like a ponzi scheme.

 

Fair enough. Perhaps it was destined to fail. Perhaps they could have made adjustments. Woulda, shoulda, coulda. I think there are examples of other companies whom weren't as aggressive that used the model that will be ok. Actavis grew predominantly by acquisition. The killer IMO was the negative publicity, which then led to scrutiny, that ultimately led to the company being shut out of the capital markets. Something that could theoretically happen to anyone. What if TSLA gets shut out of the capital markets? They're done too. I wouldn't go as far as to say you could pin the beginning of the end of VRX on a certain fund manager everyone loves to hate, but it definitely didn't help.

[merkhet]

Doesn't the issue just reduce to the idea that VRX had embedded reflexivity in its business model that wasn't well understood or reflected in the prevailing investment theses?

[undervalued]

It's interesting that since Pearson took over Valeant,  VRX is a 20 bagger in under 10 years - and people still don't believe he's built

a better mousetrap. Since the beginning he's talked about big pharma and all the wasteful R&D spending - and lack of capital

allocation discipline. He has totally gone against most of the pharma industry with his approach.

He looking more like a candidate for an "Outsider" type of CEO to me.

 

Hmm

 

I still wouldn't even argue against that. The environment drastically changed, more or less overnight and his company became a scapegoat for industry wise practices. Mainly because, they were the best/more egregious and perfected a model that while unethical, was legal. Pearson IMO was right about most of those things

 

That's a little bit like saying Bernie Madoff was an Outsider but then the environment drastically changed in the financial crisis and ruined his strategy.

 

Except running a Ponzi scheme has never been legal or legitimate. Pearson saw that wasting loads of money on R&D was not efficient. Especially if you could simply purchase established products with those resources and then raise prices. Raising prices is something a company should be able to do. Unfortunately for Pearson this subject became a platform for the populist campaigns, and that was the end of him and presumably VRX, ENDP, etc. Philidor wasn't the downfall. It was the business model which was completely legal, becoming inoperable within a matter of months.

 

If something can't go forever, it won't. A business model dependent on levering up to buy drugs/companies to raise the prices so you can lever up more to buy more drugs and companies to continue to grow your EPS even as the underlying businesses decay from being deprived of growth capital is not a trend that can continue forever.

 

It continues until capital markets dry up OR you've raised prices to the highest level the market can bear OR the cost of refinancing the debt exceeds the marginal benefit from EPS growth OR you're too large for an acquisition to make a marginal impact etc.

 

It was a model that worked well until it was broken - but it could have, and would have, been broken by any number of those things listed above had it continued. Maybe you would have been smart enough to get out at the top? Maybe not? The point is, it was basically a ponzi scheme - It was totally reliant on the next acquisition or major price hike to make up for the deteriorating portfolio of drugs. New money had to come in faster than old value was decaying and when the music stops and no new money comes in...you're f*cked. Just like a ponzi scheme.

 

Why can't they just stop buying new companies and lower the leverage?

[rb]

Fair enough. Perhaps it was destined to fail. Perhaps they could have made adjustments. Woulda, shoulda, coulda. I think there are examples of other companies whom weren't as aggressive that used the model that will be ok. Actavis grew predominantly by acquisition. The killer IMO was the negative publicity, which then led to scrutiny, that ultimately led to the company being shut out of the capital markets. Something that could theoretically happen to anyone. What if TSLA gets shut out of the capital markets? They're done too. I wouldn't go as far as to say you could pin the beginning of the end of VRX on a certain fund manager everyone loves to hate, but it definitely didn't help.

If your business model relies on being a market darling and having continuous access to capital markets then your model is broken.

 

If your model cannot take scrutiny and negative publicity then your model is broken.