VRX - Valeant Pharmaceuticals International Inc.

[rb]

As I was saying:

 

https://www.bloomberg.com/politics/articles/2017-03-29/trump-s-fda-nominee-wants-to-lower-drug-costs-with-more-generics

[writser]

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

 

Well, a risk is that if they overpaid for previous acquisitions with borrowed money they are essentially bankrupt if the market stops believing the story.

[Jurgis]

This is (still) a swamp thread but I'll step in for teeny tiny bit (might run away if I get sucked in)  8)

 

There is some truth that rollup Outsiders are/were at the similar risk as Valeant. I don't remember details of Teledyne, but didn't it almost go BK on rollup? Isn't there a risk that some Malone co will go BK? (Didn't Malone had a brush with that already? Even in TCI days?).

 

This was one of my criticisms of the whole "Outsiders" story. I.e. the author picked couple rollups that did not blow up and proclaimed them to be messiahs. How many did blow up?

 

I believe the author thought Valeant was Outsider company too...

 

Maybe better continued in "Outsiders" thread...

[Gregmal]

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.

 

I guess the debate is then on the word reliant. Any public company, even many private rely on the capital markets to varying degrees. VRX used the markets to grow, vs dumping money into R&D. Debt was cheap, so why not. I'm sure at some point, like the guy above mentions, they planned to scale down and delever. Similar to what ClubCorp does with golf courses. Like I said, Actavis, now AGN, did the same thing just not as aggressively. They're fine.

[Green King]

Here is a Question

 

How do you show people confirmation of a 30% IRR or high returns with you acquisitions? If the market prices in the information of your recent acquisition and adjust the price accordingly.

[rb]

Here is a Question

 

How do you show people confirmation of a 30% IRR or high returns with you acquisitions? If the market prices in the information of your recent acquisition and adjust the price accordingly.

By showing them the thrice giggled, doubly adjusted cash EPS of course.

[Green King]

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.

 

I guess the debate is then on the word reliant. Any public company, even many private rely on the capital markets to varying degrees. VRX used the markets to grow, vs dumping money into R&D. Debt was cheap, so why not. I'm sure at some point, like the guy above mentions, they planned to scale down and delever. Similar to what ClubCorp does with golf courses. Like I said, Actavis, now AGN, did the same thing just not as aggressively. They're fine.

 

The low return R&D premise is wrong. You have to consider the R&D in terms all spending, the drugs it produced and the value it generated. Pharma R&D is more like a call option that could generate billions every time they try they should not be view as an investment in say the building of a factory. In the long run, if the world gets richer and the developing world becomes developed think of the value of a drug that saves the lives of a 1 billion people on average making 50K a year.

[Green King]

Here is a Question

 

How do you show people confirmation of a 30% IRR or high returns with you acquisitions? If the market prices in the information of your recent acquisition and adjust the price accordingly.

By showing them the thrice giggled, doubly adjusted cash EPS of course.

Yes :) or buy something with a high return yield up front with a steep declining curve. Owners will sell because they know what they are selling and they buyers will buy because their stocks prices and hence options would go up. 

[Guest Schwab711]

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

 

I'm fairly sure current covenants prevent them from making future acquisitions. They are essentially in run-off indefinitely at present.

 

One of the risks that was rarely discussed back in 2015-2016 was that debt was used to buy cash flows with an undefinable distribution function. When PFE or MRK buy assets like that, they use excess cash (for the same reason VRX destroyed >$100 billion of MC and the reason you don't use your credit card to fund casino trips that represent large %s of your net worth). This wasn't like some P-E firm doing a LBO on Clorox or some other relatively predictable and/or stable cash flows. VRX management was incentivized to grow as large as possible. They underwent the acquisitions you'd expect with this type of incentive structure (and at times, to deliver evidence that the narrative was true). They used debt to buy assets that had low-probability/high-reward payouts. The expected value of those assets was never worth the acquisition price. VRX management only cared about 90% percentile outcome divided by the acquisition price. I doubt expected value was ever more than a passing thought. Occasionally, VRX hit on their long-shot bets like Isuprel. With Salix, the horse didn't even finish the race. Regardless of everything else, Salix was going to kill a large % of the equity value. Philidor was perfectly timed to ensure they went over the edge.

 

Management did exactly what they were incentivized to do and they did it very well. They needed the equity value to grow by 15%-45% annually (and they were certainly shooting for >45%). So they created a portfolio of assets with the highest probability possible that still met that condition. It just so happens that probability was always very low AND for the market didn't recognize what VRX management was doing. To further illustrate what I mean, at one point (shortly after Salix acq closed) VRX chose to wait roughly 4 months to start distributing Xifaxan for newly approved indication(s). It was extremely obvious at the time that they were doing this so they could show >10% "organic growth" for an extra 3-4 quarters, even though it made no sense for shareholders to defer patent-protected cash flows. Companies pay 9-figures for vouchers to extend patent protection by 6 months and VRX voluntarily chose to delay distribution for roughly that period. Management just needed to show evidence supporting the narrative for as long as possible. It was one of the most selfish acts by an executive that I can think of.

[Green King]

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

 

I'm fairly sure current covenants prevent them from making future acquisitions. They are essentially in run-off indefinitely at present.

 

One of the risks that was rarely discussed back in 2015-2016 was that debt was used to buy cash flows with an undefinable distribution function. When PFE or MRK buy assets like that, they use excess cash (for the same reason VRX destroyed >$100 billion of MC and the reason you don't use your credit card to fund casino trips that represent large %s of your net worth). This wasn't like some P-E firm doing a LBO on Clorox or some other relatively predictable and/or stable cash flows. VRX management was incentivized to grow as large as possible. They underwent the acquisitions you'd expect with this type of incentive structure (and at times, to deliver evidence that the narrative was true). They used debt to buy assets that had low-probability/high-reward payouts. The expected value of those assets was never worth the acquisition price. VRX management only cared about 90% percentile outcome divided by the acquisition price. I doubt expected value was ever more than a passing thought. Occasionally, VRX hit on their long-shot bets like Isuprel. With Salix, the horse didn't even finish the race. Regardless of everything else, Salix was going to kill a large % of the equity value. Philidor was perfectly timed to ensure they went over the edge.

 

Management did exactly what they were incentivized to do and they did it very well. They needed the equity value to grow by 15%-45% annually (and they were certainly shooting for >45%). So they created a portfolio of assets with the highest probability possible that still met that condition. It just so happens that probability was always very low AND for the market didn't recognize what VRX management was doing. To further illustrate what I mean, at one point (shortly after Salix acq closed) VRX chose to wait roughly 4 months to start distributing Xifaxan for newly approved indication(s). It was extremely obvious at the time that they were doing this so they could show >10% "organic growth" for an extra 3-4 quarters, even though it made no sense for shareholders to defer patent-protected cash flows. Companies pay 9-figures for vouchers to extend patent protection by 6 months and VRX voluntarily chose to delay distribution for roughly that period. Management just needed to show evidence supporting the narrative for as long as possible. It was one of the most selfish acts by an executive that I can think of.

 

Nice work. :)

[Green King]

Ghost of teledyne from @MTsetsekas

[fareastwarriors]

https://www.bloomberg.com/news/articles/2017-03-29/ackman-is-profoundly-sorry-for-4-billion-valeant-mistake

[LC]

VRX chose to wait roughly 4 months to start distributing Xifaxan for newly approved indication(s). It was extremely obvious at the time that they were doing this so they could show >10% "organic growth" for an extra 3-4 quarters, even though it made no sense for shareholders to defer patent-protected cash flows.

 

Was that the reason? I remember the reason they got such a good deal for Salix was because they had 6 months of channel stuffing baked into the price. So they had to wait for that product to work its way thru the pipeline before they could distribute more product.

[kab60]

https://www.bloomberg.com/news/articles/2017-03-29/ackman-is-profoundly-sorry-for-4-billion-valeant-mistake

"Ackman decided to sell because even a significant rebound in the share price wouldn’t be enough to make up for the amount of effort the ongoing investment would have taken, he said."

lol

What a lazy bum (or what complete bs)

[rb]

https://www.bloomberg.com/news/articles/2017-03-29/ackman-is-profoundly-sorry-for-4-billion-valeant-mistake

"Ackman decided to sell because even a significant rebound in the share price wouldn’t be enough to make up for the amount of effort the ongoing investment would have taken, he said."

lol

What a lazy bum (or what complete bs)

Well..... he's definitely not lazy.... but he is completely full of shit.

[Picasso]

I wouldn't give Ackman $1 to manage.  He seems to have no problem lying and stretching the truth.  In 2015 he was talking about how great of an acquisition Salix was.  Now he's saying they overpaid and that's Valeant's mistake?  Isn't it just as much his mistake for being so vocal about how great of a deal Salix was?  How about when Valeant overpaid for Sprout all because Ackman put in a "good word" to sell to a Mr. Pearson?  I guess Ackman gets to keep the profit on the sale but that's $1 billion his LP's lost through their Valeant stake. 

 

That guy is a clown among clowns. 

[ScottHall]

I wouldn't give Ackman $1 to manage.  He seems to have no problem lying and stretching the truth.  In 2015 he was talking about how great of an acquisition Salix was.  Now he's saying they overpaid and that's Valeant's mistake?  Isn't it just as much his mistake for being so vocal about how great of a deal Salix was?  How about when Valeant overpaid for Sprout all because Ackman put in a "good word" to sell to a Mr. Pearson?  I guess Ackman gets to keep the profit on the sale but that's $1 billion his LP's lost through their Valeant stake. 

 

That guy is a clown among clowns.

 

I don't know. I found out about GGP because of him.

[Picasso]

Look he's had some killer trades and trades that have killed him, I just think his conduct and incapacity to admit he's wrong more than detracts from the positives.  Big blow ups are inevitable when you have that kind of attitude. 

 

Also pretty sure I had this exact same conversation in 2014 and someone brought up that MBIA trade as a reason to give him the benefit of the doubt.  That worked out pretty well didn't it...

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/pershing-square-holdings-debuts/msg192806/#msg192806

[ScottHall]

Look he's had some killer trades and trades that have killed him, I just think his conduct and incapacity to admit he's wrong more than detracts from the positives.  Big blow ups are inevitable when you have that kind of attitude.

 

I have a similar outlook but chalk it up more to its value for marketing & the fact that he's playing a different game than we are, rather than him being a clown. My suspicion is that Bill Ackman is a very clever businessman, and that sometimes gets in the way of the investment side of the job.

[Picasso]

Naw, he's a clown.

 

I'll give you another example.

 

When Valeant dropped down to $115 he did that super long three hour call to go over absolutely everything he knew about Valeant.  Someone asked if he read the AZ Value blog and what he thought of it.  He responded by saying he never heard of it.  Maybe it's just me, but if I plow $3 billion or so into a stock I'll probably try to keep tabs on everything being said about that said stock through that convenient thing called the internet.  It's really not that hard.  Okay fine, maybe he missed it.  But Valeant released an 8-K disputing the AZ Value blog by name.  Wouldn't you read that 8-K and go check out the accusations in the blog?  Fine fine, maybe he did read it but didn't want to admit it because someone running an $18 billion fund doesn't read blogs like other plebs.  But that just strikes into the heart of what makes this guy such a reckless investor.  There's this arrogance about why he's right and the market is always wrong.  It's terrible risk management.  Yes, he'll get a GGP or two or three.  But you don't realize how much risk he's taking on until stuff hits the fan.  It makes him uninvestable in my opinion, all the other conduct stuff aside. 

[Spekulatius]

I agree with Picasso here that I wouldn't give him a dollar of my own money. for me, it is debatable if he is a clown, since me made out extremely well for himself, projecting the image of an astute investor, while he really is a gambler.

 

The clowns are the people who give him money to invest, imo.

[Gregmal]

Look he's had some killer trades and trades that have killed him, I just think his conduct and incapacity to admit he's wrong more than detracts from the positives.  Big blow ups are inevitable when you have that kind of attitude.

 

I have a similar outlook but chalk it up more to its value for marketing & the fact that he's playing a different game than we are, rather than him being a clown. My suspicion is that Bill Ackman is a very clever businessman, and that sometimes gets in the way of the investment side of the job.

 

I think this is pretty accurate. He's a brilliant guy, but IMO clearly a gambler. The issue is that the business promotes risk taking. He's at the point where he's financially secure. He probably always has been from my understanding of his situation. So the "win big you get obscenely wealthy/lose big you still get 2% and can always start another fund" mentality makes sense. But larger than all that, is that yes, there's an ugly side of the financial world in which more important than making money is marketing and self promotion. Some would even call it lying. Some are very, very good at it. Watch an interview where Berkowitz talks about SHLD. You'd have no clue this guy was down 75% after a decade long hold. You'd think he was a genius if you didn't know the background on it.

[writser]

VRX up 70% since last post. Is this topic a contrarian indicator or what?

[Hielko]

VRX up 70% since last post. Is this topic a contrarian indicator or what?

Don't think it's coincidence

[randomep]

Look he's had some killer trades and trades that have killed him, I just think his conduct and incapacity to admit he's wrong more than detracts from the positives.  Big blow ups are inevitable when you have that kind of attitude.

 

I have a similar outlook but chalk it up more to its value for marketing & the fact that he's playing a different game than we are, rather than him being a clown. My suspicion is that Bill Ackman is a very clever businessman, and that sometimes gets in the way of the investment side of the job.

 

I think this is pretty accurate. He's a brilliant guy, but IMO clearly a gambler. The issue is that the business promotes risk taking. He's at the point where he's financially secure. He probably always has been from my understanding of his situation. So the "win big you get obscenely wealthy/lose big you still get 2% and can always start another fund" mentality makes sense. But larger than all that, is that yes, there's an ugly side of the financial world in which more important than making money is marketing and self promotion. Some would even call it lying. Some are very, very good at it. Watch an interview where Berkowitz talks about SHLD. You'd have no clue this guy was down 75% after a decade long hold. You'd think he was a genius if you didn't know the background on it.

 

well said, as I get older and less naive, I realize so much of raising up the corporate ladder involves lying......