VRX - Valeant Pharmaceuticals International Inc.

[lu_hawk]

Let's forget the multiple for a minute (the price-to-cash earnings multiple).  Does using the price-to-cash earnings ratio treat the company as if the acquisitions were made for free?  I'm not asking if the multiple should be higher or lower, just whether the methodology of using price-to-cash earnings treats the acquisitions as if they were gifts.

 

I believe using price-to-cash earnings does treat the company as if the acquisitions were gifts, because it does not account for the costs of those acquisitions anywhere, neither in the numerator nor the denominator.  The cost is not reflected in the numerator because market cap is used, and debt is not added.  The cost is not reflected in the denominator because all amortization/deal costs/etc is added back.  Am I correct on that?  Again, I'm not asking about the multiple, just whether price-to-cash earnings treats the acquisitions as free.

 

lu_hawk,

I think I have understood your question the first time you formulated it… And I have tried to answer it as honestly as I could…

Let’s put it this way: “technically” or “in theory” you are perfectly right: neither P, nor E take into account all the debt VRX has accumulated… but “in practice” at least one of them do: because P is the reflection of how the market thinks about VRX… market cap is not “carved in stone”, it is the result of how the market perceives VRX future prospects… and the market is not oblivious VRX has grown very fast (incredibly fast, I daresay!), because or thanks to all the debt it has accumulated on its balance sheet… and the market is not oblivious debt is a burden that must be repaid at some point… Why I think the market is not oblivious to those facts? Because of the multiple the market is according to VRX: it is clearly skeptical of such an amazing growth (meaning it knows that growth has not come without a very real cost!), and is pricing VRX accordingly.

But… If you don’t want hear me talking and reasoning about the P to Cash EPS multiple… I am sorry, I don’t think I have another answer to your question…

 

Gio

 

I don't understand why everyone keeps talking about Valeant's "amazing growth."  As a whole, the company's current assets are stable to declining.  Buying companies using debt is not growth.  I could do the same thing if I was able to borrow $18bn as Valeant has done.  Growth is when a business is able to grow internally, or if it is able to make acquisitions using internally generated funds.  Valeant can do neither.  It simply borrows money to buy companies.  Why do people pretend it is growing?

 

Sure, if I bought companies using debt, AND THEN CONVINCED PEOPLE TO TREAT THE ACQUISITIONS AS FREE AND TO IGNORE THE DEBT, then yes, it would look like I had built a business with amazing growth. 

 

In 2013, Valeant had $1.9bn in amortization of FINITE-LIVED intangibles.  How could it possibly be right to add 100% of that back to get "true" earnings, ESPECIALLY when those assets were bought with debt?  And especially when the existing business will surely decline over time?  (Generic revenues are declining despite reports of "durability"; branded products will have a sharp decline in revenue when they go off-patent, and will likely have a slow decline after that.  More branded products can only be bought with more debt). 

 

The same goes for the one-time deal expenses.  It's not even that I want to debate the semantics of one-time vs recurring as many people have done.  But this is the point: Valeant can only maintain their current level of earnings by making more acquisitions, and a cost that is required to maintain the current level of earnings, IS a cost that needs to be deducted when determining "owner earnings."  This is not a matter of opinion, you can take that straight from a Berkshire annual report. (And it's not a matter of opinion that Valeant's business will decline if they stop making acquisitions, you can clearly see this in their financials).

 

Again, I am someone watching from the sidelines, and trying to figure out something that goes against every amount of logic and experience I can muster.

 

 

[Liberty]

Lu_hawk, did you look into what Ackman said about VRX's declining assets (that are getting good IRRs nonetheless) masking the organic growth in the durable part of the business? If they were to let those run off and didn't buy more soon-to-go-off-patent drugs to replace them, they would have high single-digit growth on the remaining portfolio of products, which is what the ex-generics numbers show. If one does not understand that part about the business (look at it as two parts, not as one), nothing else matters.

 

They are buying good assets with organic growth for low to fair prices and making them more profitable by cutting low ROI spending on R&D and SG&A and getting a lower tax rate, as well as boosting sales efforts and focusing on the most profitable markets and getting out of the more competitive ones. That's real value-creation to me, and much better to do it with money borrowed cheaply than by raising equity (of course they could wait to self-generate the funds internally, which would make the business safer but much slower growing; that's sub-optimal in this case, just like Malone doesn't always pay cash when he has assets that can easily support debt).

[Fat Pitch]

 

I don't understand why everyone keeps talking about Valeant's "amazing growth."  As a whole, the company's current assets are stable to declining.  Buying companies using debt is not growth.  I could do the same thing if I was able to borrow $18bn as Valeant has done.  Growth is when a business is able to grow internally, or if it is able to make acquisitions using internally generated funds.  Valeant can do neither.  It simply borrows money to buy companies.  Why do people pretend it is growing?

 

 

I think you are totally off basis here. A good portion of Valeant's generics are growing internally by simply introducing them to new markets via their global sales force. The company has scored very good wins with some of their acquisitions. So what if their patented drugs are going to decline in sales? They borrowed money at 5% and factoring in total acquisition costs they are making 20%+ returns milking the patents. I'll make that trade all day long.

 

Is their cash earnings metrics a bit too aggressive? Yeah I think so, but you can just make your own adjustments and decide whether the stock is overpriced or not.

 

[giofranchi]

Does this mean that you give a 0% chance to the Allergan merger (which would be significantly deleveraging), or other similarly profitable deals in the future?

 

Yeah! That's excatly the question I also thought immediately… It seems Liberty reads my mind!! ;)

 

Gio

 

[giofranchi]

 

I don't understand why everyone keeps talking about Valeant's "amazing growth."  As a whole, the company's current assets are stable to declining.  Buying companies using debt is not growth.  I could do the same thing if I was able to borrow $18bn as Valeant has done.  Growth is when a business is able to grow internally, or if it is able to make acquisitions using internally generated funds.  Valeant can do neither.  It simply borrows money to buy companies.  Why do people pretend it is growing?

 

 

I think you are totally off basis here. A good portion of Valeant's generics are growing internally by simply introducing them to new markets via their global sales force. The company has scored very good wins with some of their acquisitions. So what if their patented drugs are going to decline in sales? They borrowed money at 5% and factoring in total acquisition costs they are making 20%+ returns milking the patents. I'll make that trade all day long.

 

Is their cash earnings metrics a bit too aggressive? Yeah I think so, but you can just make your own adjustments and decide whether the stock is overpriced or not.

 

Yeah! I repeat once again what should be obvious at this point to everyone who follows VRX:

 

If Mr. Pearson is right, meaning VRX business model truly is the one to solve the problem of all those wasteful costs in unproductive R&D that have plagued the pharma industry during the last 15 years, at least until competition doesn’t become too fierce, VRX is very cheap today. And VRX shareholders will make a lot of money.

The opposite is true, if Mr. Pearson is wrong.

 

It is an entrepreneurial judgment. I have my answer to that question, but I just cannot muster enough conviction… it will certainly be much fun to see how this will end. ;)

 

Gio

 

[biaggio]

Why not look at Enterprise value vs cash earnings?

 

~$59 billion in EV (market value + debt) vs cash earnings of ~ $1.7B that may grow organically at 7%---> ~10% return

 

On a valuation basis does not look like there is any margin of safety. At best fairly priced.

 

Hey Biaggio, always good to hear from you!

 

Does this mean that you give a 0% chance to the Allergan merger (which would be significantly deleveraging), or other similarly profitable deals in the future? It's not like VRX's valuation on an EV basis is much higher now than it's been in the past 6 years...

 

Don t know what chances of merger are. Would want that as a free option.

 

I would have rather invested 6 years ago when revenue was  $843 million and total liability was $484 million.

 

versus today $6.6 billion and almost $23 b in total debt

 

At $6.6 billion in sales not earnings, and EV of almost $60b you are paying almost 10 x sales. That seems expensive too me not very cheap.

[lu_hawk]

When I read the replies on this thread, I feel like I am reading the story of the Emperor's New Clothes.  As a disinterested observer, when I read the SEC filings what I am seeing seems pretty clear: 1) huge amount of debt, 2) declining assets, 3) GAAP losses, 4) huge cash outflows, 5) CEO with limited operating history.

 

And then I come here, and it seems that I must be reading the SEC filings from some other company.  And it seems that it is solely because the company is telling people that they are making a ton of money.  Why is it sane  to trust this from someone who hasn't earned that trust? 

[Liberty]

When I read the replies on this thread, I feel like I am reading the story of the Emperor's New Clothes.  As a disinterested observer, when I read the SEC filings what I am seeing seems pretty clear: 1) huge amount of debt, 2) declining assets, 3) GAAP losses, 4) huge cash outflows, 5) CEO with limited operating history.

 

And then I come here, and it seems that I must be reading the SEC filings from some other company.  And it seems that it is solely because the company is telling people that they are making a ton of money.  Why is it sane  to trust this from someone who hasn't earned that trust?

 

Is it maybe possible that GAAP accounting distorts the picture in this case, as it often does?

 

Would you value Charter (CHTR) on just the GAAP numbers, or would you be better served by trying to understand the real economics of the business?

[loganc]

When I read the replies on this thread, I feel like I am reading the story of the Emperor's New Clothes.  As a disinterested observer, when I read the SEC filings what I am seeing seems pretty clear: 1) huge amount of debt, 2) declining assets, 3) GAAP losses, 4) huge cash outflows, 5) CEO with limited operating history.

 

And then I come here, and it seems that I must be reading the SEC filings from some other company.  And it seems that it is solely because the company is telling people that they are making a ton of money.  Why is it sane  to trust this from someone who hasn't earned that trust?

 

Is it maybe possible that GAAP accounting distorts the picture in this case, as it often does?

 

Would you value Charter (CHTR) on just the GAAP numbers, or would you be better served by trying to understand the real economics of the business?

 

If one is a fool for valuing a company based on free cash flow and ignoring GAAP earnings, then I will put on my dunce cap and join John Malone in the corner of the classroom.

[Spekulatius]

If one is a fool for valuing a company based on free cash flow and ignoring GAAP earnings, then I will put on my dunce cap and join John Malone in the corner of the classroom.

 

That is epic question - who is the fool? Those that believe in GAAP numbers, or those that believe in  Pearson's extensive adjustments to GAAP? Even Pearson's FCF numbers are heavily adjusted.

 

I am only certain about one thing - based on VRX current business and without further acquisitions, VRX is very overvalued. Of course that misses the point too, because VRX is all about making acquisitions.

[giofranchi]

Don t know what chances of merger are. Would want that as a free option.

 

I would have rather invested 6 years ago when revenue was  $843 million and total liability was $484 million.

 

versus today $6.6 billion and almost $23 b in total debt

 

At $6.6 billion in sales not earnings, and EV of almost $60b you are paying almost 10 x sales. That seems expensive too me not very cheap.

 

Hi biaggio!

Do you remember when we talked about SBUX at the FFH AM last April? You said SBUX probably has always been overvalued. I replied that, having gone from let’s say $5 billion in market cap to $100 billion in more or less 15 years, there must surely have been a lot of times when SBUX was actually very cheap!

The same imo is true for VRX… if, and only if, Mr. Pearson’s business model is so effective in eliminating wasteful R&D costs, as I believe it finally will prove to be.

There is simply no way to get around this thing: if Mr. Pearson is right, VRX is cheap; if Mr. Pearson is wrong, VRX is expensive.

 

Gio

 

[peter1234]

There is simply no way to get around this thing: if Mr. Pearson is right, VRX is cheap; if Mr. Pearson is wrong, VRX is expensive.

Gio

 

IMO, this is one of the core insights in this thread.

 

The company under Pearson has been extremely successful and created a lot of value for Pearson, ValuAct and all the other investors. Hard to argue with.

 

What makes it so interesting, is that there are good arguments against this continuing forever. (That's where the bears Grant, Chanos and others come from).

 

Valeant is a debt financed roll-up on steroids that is hard, if not impossible to value from the reported numbers.

 

Hence, if you believe the company to continue in the future as they did in the past, then you like it. :)

If you disagree, you do not like it. :(

 

I do not think that they are planning to stop rolling up, hence why trying to figure out steady state, organic growth, GAAP financials and other more static measures? ???

[Liberty]

http://www.cnbc.com/id/101742317

 

Ackman on CNBC this morning.

 

This video is interesting:

 

http://video.cnbc.com/gallery/?video=3000282619&play=1

 

Ackman called Chanos back when he was studying VRX with inside access, got his 26 page analysis that he went through very carefully, and still thought Chanos is wrong. He offered Chanos to come on the show and talk about this with him but Chanos refused. Apparently Chanos was also short Danaher in the past and has now bought AGN, which is a way to cover his VRX short if the merger goes through. (edit to fix name mixup)

 

More here: http://video.cnbc.com/gallery/?video=3000282601&play=1

 

Michael Porter on big pharma model, AGN and VRX (said VRX has good organic growth, and that AGN would be a great fit for synergies): http://video.cnbc.com/gallery/?video=3000282598&play=1

[peter1234]

Fascinating.

 

Did they mix up the Jim's (Grant and Chanos)? How can Jim Grant be long Allergan to hedge his Valeant short? I did not know Grant was managing money. Or did he recomment in the Observer to go short Valeant and hedge it by going long Allergan? ???

 

Ackman on what

- a good rollup is: Berkshire... :)

- a bad rollup is: Tyco ...

[Liberty]

Fascinating.

 

Did they mix up the Jim's (Grant and Chanos)? How can Jim Grant be long Allergan to hedge his Valeant short? I did not know Grant was managing money. Or did he recomment in the Observer to go short Valeant and hedge it by going long Allergan? ???

 

Ackman on what

- a good rollup is: Berkshire... :)

- a bad rollup is: Tyco ...

 

It's my mixup. Too many similar names early in the morning.

[peter1234]

Looks like Ackman read Jim Chanos' Valeant short thesis in Jim Grant's Interest Observer?  ;)

 

Not that it matters ...

 

Thanks for the great links

:)

[Liberty]

Looks like Ackman read Jim Chanos' Valeant short thesis in Jim Grant's Interest Observer?  ;)

 

That would make sense. Grant did mention the VRX short idea in one of his newsletters, and said that he got the idea from Chanos. And since they've both called Jim/James, it gets confusing...

 

btw, it looks like CNBC is changing the first link that I posted above. They've changed the orders of the videos. Here are some direct links to videos:

 

http://video.cnbc.com/gallery/?video=3000282619&play=1  (this is the Chanos one, where he also explains the way to look at the organic growth/runoff products)

 

http://video.cnbc.com/gallery/?video=3000282601&play=1

 

http://video.cnbc.com/gallery/?video=3000282598&play=1

 

http://video.cnbc.com/gallery/?video=3000282597&play=1

 

In other news:

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2014/Valeant-Pharmaceuticals-Announces-FDA-Approval-Of-Jublia-for-the-Treatment-of-Onychomycosis/default.aspx

 

Valeant Pharmaceuticals Announces FDA Approval Of Jublia® for the Treatment of Onychomycosis

 

"We acquired Jublia® through our purchase of Dow Pharmaceutical Sciences in 2008 and advanced Jublia® from pre-IND stage through Clinical Phases 1, 2 and 3," said J. Michael Pearson, chairman and chief executive officer. "We are working quickly to get this important product launched in the U.S. and Canada in the third quarter of 2014. We anticipate favorable managed care coverage in the U.S., similar to other branded antifungal agents, with peak sales of $300-$800 million in the U.S. alone and we are also working with other regulatory agencies around the world on further approvals. This is the fourth product, sourced from our acquisition of Dow Pharmaceutical Sciences, for which we have received FDA approval – the other three being 1% clindamycin and 5% benzoyl peroxide gel (IDP 111), Acanya® and Retin-A Micro (tretinoin) Gel microsphere 0.08%. We have also filed a new treatment for acne, Onexton™, which has a PDUFA date of November 30, 2014. All these compounds came through our Dow acquisition, bringing with it the full set of R&D capabilities from preclinical through regulatory." 

 

Valeant acquired the Dow assets for 277 million:

 

http://www.contractpharma.com/contents/view_breaking-news/2008-12-10/valeant-to-acquire-dow-pharmaceutical-sciences/

[lu_hawk]

When I read the replies on this thread, I feel like I am reading the story of the Emperor's New Clothes.  As a disinterested observer, when I read the SEC filings what I am seeing seems pretty clear: 1) huge amount of debt, 2) declining assets, 3) GAAP losses, 4) huge cash outflows, 5) CEO with limited operating history.

 

And then I come here, and it seems that I must be reading the SEC filings from some other company.  And it seems that it is solely because the company is telling people that they are making a ton of money.  Why is it sane  to trust this from someone who hasn't earned that trust?

 

Is it maybe possible that GAAP accounting distorts the picture in this case, as it often does?

 

Would you value Charter (CHTR) on just the GAAP numbers, or would you be better served by trying to understand the real economics of the business?

 

Please explain why Valeant's amortization of finite-lived intangibles is a non-economic expense?  (This is the single largest add-back to get "cash earnings", this line item was $364mm last quarter).

 

Are drug patents the type of assets that do not deplete?  When a drug goes generic is its profitability unaffected?  If a drug's profitability is unaffected when the patent expires then yes, you should be adding back all of the amortization charges to get a true picture of earnings.

 

Comparing this to CHTR is like comparing this to P&G and saying that because amortization is not a true expense for P&G, then it's also not a real expense for VRX.  The assets aren't similar: VRX holds declining assets while CHTR and P&G do not.

 

[Liberty]

When I read the replies on this thread, I feel like I am reading the story of the Emperor's New Clothes.  As a disinterested observer, when I read the SEC filings what I am seeing seems pretty clear: 1) huge amount of debt, 2) declining assets, 3) GAAP losses, 4) huge cash outflows, 5) CEO with limited operating history.

 

And then I come here, and it seems that I must be reading the SEC filings from some other company.  And it seems that it is solely because the company is telling people that they are making a ton of money.  Why is it sane  to trust this from someone who hasn't earned that trust?

 

Is it maybe possible that GAAP accounting distorts the picture in this case, as it often does?

 

Would you value Charter (CHTR) on just the GAAP numbers, or would you be better served by trying to understand the real economics of the business?

 

Please explain why Valeant's amortization of finite-lived intangibles is a non-economic expense?  (This is the single largest add-back to get "cash earnings", this line item was $364mm last quarter).

 

Are drug patents the type of assets that do not deplete?  When a drug goes generic is its profitability unaffected?  If a drug's profitability is unaffected when the patent expires then yes, you should be adding back all of the amortization charges to get a true picture of earnings.

 

Comparing this to CHTR is like comparing this to P&G and saying that because amortization is not a true expense for P&G, then it's also not a real expense for VRX.  The assets aren't similar: VRX holds declining assets while CHTR and P&G do not.

 

Because 80-85% of Valeant's assets are not declining, they are growing at mid to high single digit rates (the remaining portion is getting good IRRs, like a company in runoff that you bought at a low enough price).

[fareastwarriors]

Ackman on CNBC talking VRX:

 

http://video.cnbc.com/gallery/?video=3000282597

 

 

http://video.cnbc.com/gallery/?video=3000282601

[lu_hawk]

When I read the replies on this thread, I feel like I am reading the story of the Emperor's New Clothes.  As a disinterested observer, when I read the SEC filings what I am seeing seems pretty clear: 1) huge amount of debt, 2) declining assets, 3) GAAP losses, 4) huge cash outflows, 5) CEO with limited operating history.

 

And then I come here, and it seems that I must be reading the SEC filings from some other company.  And it seems that it is solely because the company is telling people that they are making a ton of money.  Why is it sane  to trust this from someone who hasn't earned that trust?

 

Is it maybe possible that GAAP accounting distorts the picture in this case, as it often does?

 

Would you value Charter (CHTR) on just the GAAP numbers, or would you be better served by trying to understand the real economics of the business?

 

Please explain why Valeant's amortization of finite-lived intangibles is a non-economic expense?  (This is the single largest add-back to get "cash earnings", this line item was $364mm last quarter).

 

Are drug patents the type of assets that do not deplete?  When a drug goes generic is its profitability unaffected?  If a drug's profitability is unaffected when the patent expires then yes, you should be adding back all of the amortization charges to get a true picture of earnings.

 

Comparing this to CHTR is like comparing this to P&G and saying that because amortization is not a true expense for P&G, then it's also not a real expense for VRX.  The assets aren't similar: VRX holds declining assets while CHTR and P&G do not.

 

Because 80-85% of Valeant's assets are not declining, they are growing at mid to high single digit rates (the remaining portion is getting good IRRs, like a company in runoff that you bought at a low enough price).

 

Assuming the 80%-85% number is true, you understand that this includes patented drugs right?  What happens to a patented drug when the patent expires?  If profitability is unaffected, then yes, it is correct to add back all of the amortization of finite-lived intangibles.  We know this is not true though.

 

Your run-off analogy is not correct for the simple fact that Valeant has $18bn in debt.  The cash thrown off by the declining assets isn't necessarily yours.  It's only yours to the extent it exceeds $18bn.  How much is it going to exceed $18bn by?  I don't know, but I don't think anyone else in this thread does either.  I don't think anyone has even thought about that question.  But it's an issue that matters much more than the nice-sounding stories that Valeant puts in their investor presentation.

 

 

 

 

[Liberty]

Assuming the 80%-85% number is true, you understand that this includes patented drugs right?  What happens to a patented drug when the patent expires?  If profitability is unaffected, then yes, it is correct to add back all of the amortization of finite-lived intangibles.  We know this is not true though.

 

This has been explained ad nauseam. This 80-85% includes all kinds of stuff that, for various reasons, can be grown with minimal maintenance investments. Esthetics, dermatology, ophthalmology, and dental,  the specific countries where they sell each thing, haven't been chosen at random...

 

Your run-off analogy is not correct for the simple fact that Valeant has $18bn in debt.  The cash thrown off by the declining assets isn't necessarily yours.  It's only yours to the extent it exceeds $18bn.  How much is it going to exceed $18bn by?  I don't know, but I don't think anyone else in this thread does either.  I don't think anyone has even thought about that question.  But it's an issue that matters much more than the nice-sounding stories that Valeant puts in their investor presentation.

 

That's not what is going on.

 

Imagine two side to a single business:

 

1) Growing at 5-10% a year.

 

2) Buys something for X, and over it's 4 year life it spits 2X in cash before dying.

 

The two combined give you a business that can easily support debt, even if #2 masks the growth of #1 and gives the impression that the assets are declining and shouldn't be able to support debt. They don't buy type 2 assets at the same multiples as the type 1 assets.

 

#2 isn't just whatever random part of #1 happens to have a patent cliff this year. It's a separate thing that is managed with a different model to get good IRRs. #1 doesn't become #2 over time, it keeps growing overall (some stuff dies, other replaces it, but overall there's organic growth). They are separate things under the same roof.

[lu_hawk]

Assuming the 80%-85% number is true, you understand that this includes patented drugs right?  What happens to a patented drug when the patent expires?  If profitability is unaffected, then yes, it is correct to add back all of the amortization of finite-lived intangibles.  We know this is not true though.

 

This has been explained ad nauseam. This 80-85% includes all kinds of stuff that, for various reasons, can be grown with minimal maintenance investments. Esthetics, dermatology, ophthalmology, and dental,  the specific countries where they sell each thing, haven't been chosen at random...

 

Your run-off analogy is not correct for the simple fact that Valeant has $18bn in debt.  The cash thrown off by the declining assets isn't necessarily yours.  It's only yours to the extent it exceeds $18bn.  How much is it going to exceed $18bn by?  I don't know, but I don't think anyone else in this thread does either.  I don't think anyone has even thought about that question.  But it's an issue that matters much more than the nice-sounding stories that Valeant puts in their investor presentation.

 

That's not what is going on.

 

Imagine two side to a single business:

 

1) Growing at 5-10% a year.

 

2) Buys something for X, and over it's 4 year life it spits 2X in cash before dying.

 

The two combined give you a business that can easily support debt, even if #2 masks the growth of #1 and gives the impression that the assets are declining and shouldn't be able to support debt. They don't buy type 2 assets at the same multiples as the type 1 assets.

 

#2 isn't just whatever random part of #1 happens to have a patent cliff this year. It's a separate thing that is managed with a different model to get good IRRs. #1 doesn't become #2 over time, it keeps growing overall (some stuff dies, other replaces it, but overall there's organic growth). They are separate things under the same roof.

 

Can you please give me some concrete examples of Valeant buying an asset for X and then it spitting out cash of 2X before it died?  Hard proof of this would make everything seem a lot more plausible to me.

 

 

[Liberty]

Can you please give me some concrete examples of Valeant buying an asset for X and then it spitting out cash of 2X before it died?  Hard proof of this would make everything seem a lot more plausible to me.

 

Zovirax is their biggest thing in that category right now. If you look up the numbers, I think you'll see that despite the fast-declining revenues, it was quite a profitable asset to own because of the low price paid. Here's your starting point:

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2011/Valeant-Pharmaceuticals-to-Acquire-US-and-Canadian-Rights-to-ZoviraxR/default.aspx

 

There's some info about it here too if you don't want to dig it all up youself:

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/valeant-pharmaceutilcals-international-inc-(vrx)/msg174857/#msg174857

 

But they have a bunch of assets like that, some much smaller.

 

Also, in Q2 of every year, they usually have a slide that shows the IRRs of all their acquired assets since they got them (or maybe it's Q3, can't remember exactly) where you can see if they are on track with their 20% IRR at statutory tax hurdle.

 

Page 7 here shows that slide:

 

 

Note that the CAGR column only shows year revenues vs LTM revenues prior to acquisition, not VRX's returns on the asset. Some assets they've grown, some have declined because they bought them close to their patent cliff (the runoff model), but the profitability of each deal is in the last column. Their model is 20% IRR at statutory tax rates while giving zero value to future pipeline (and their cash taxes are much lower than statutory, so real IRRs are actually higher).

 

Page 8 on same presentation gives a bit more details on where each thing is vs. their hurdle. Note that Afexa, which was behind on revenues, still came on track in cash flow. Probably got more synergies than they had modelled there, but I'm not sure.

 

The reason VRX provides ex-generics number is not to create a "everything but the bad stuff" number to fool people. Who would that fool anyway, it's written right next to the with generics number? It's shareholders who understand the company that asked them to provide this so they can have a better idea of how the durable part of the business is growing without the noise from stuff like Zovirax, which was bought knowing that it would rapidly decline.

[lu_hawk]

Assuming the 80%-85% number is true, you understand that this includes patented drugs right?  What happens to a patented drug when the patent expires?  If profitability is unaffected, then yes, it is correct to add back all of the amortization of finite-lived intangibles.  We know this is not true though.

 

This has been explained ad nauseam. This 80-85% includes all kinds of stuff that, for various reasons, can be grown with minimal maintenance investments. Esthetics, dermatology, ophthalmology, and dental,  the specific countries where they sell each thing, haven't been chosen at random...

 

Your run-off analogy is not correct for the simple fact that Valeant has $18bn in debt.  The cash thrown off by the declining assets isn't necessarily yours.  It's only yours to the extent it exceeds $18bn.  How much is it going to exceed $18bn by?  I don't know, but I don't think anyone else in this thread does either.  I don't think anyone has even thought about that question.  But it's an issue that matters much more than the nice-sounding stories that Valeant puts in their investor presentation.

 

That's not what is going on.

 

Imagine two side to a single business:

 

1) Growing at 5-10% a year.

 

2) Buys something for X, and over it's 4 year life it spits 2X in cash before dying.

 

The two combined give you a business that can easily support debt, even if #2 masks the growth of #1 and gives the impression that the assets are declining and shouldn't be able to support debt. They don't buy type 2 assets at the same multiples as the type 1 assets.

 

#2 isn't just whatever random part of #1 happens to have a patent cliff this year. It's a separate thing that is managed with a different model to get good IRRs. #1 doesn't become #2 over time, it keeps growing overall (some stuff dies, other replaces it, but overall there's organic growth). They are separate things under the same roof.

 

If VRX pays X for an asset, and that asset produces 2X in cash flow, then what is Valeant's profit?  Well, that is easy, it is 2X - X = X.  That's clear and can't be argued.  But "cash earnings" would say that VRX's profit is 2X, because the purchase price would never be deducted.  If the asset has a finite life, as you concede is often the case, then the purchase price MUST BE amortized.  There's no two ways about it. 

 

Yet VRX adds back all amortization of finite-lived intangibles in its presentation of "cash earnings."  I.e., if you take VRX's word for it, then VRX's profit is 2X in the above example.

 

This is as straight-forward as an example as there can be that when you buy assets with a finite life, and patented drugs have a finite life, you have to deduct the purchase price (by amortizing finite-lived intangibles), or else you get a nonsensical result. 

 

VRX's "cash earnings" presentation would show a profit even if the drug was bought for X and it only produced 0.5X in cash flow. 

 

This type of accounting can work wonders for your investment results in your own portfolio.  What is your profit?  Well, it's whatever you sold a stock for, because the purchase price doesn't count. 

 

You'd never get anyone to accept that version of events when evaluating your own investment performance.  But VRX has gotten people to accept that when evaluating its own investment performance.

 

If you want to evaluate this as a run-off, then sure, looking at "cash earnings" might be OK, because at that point you'd only be concerned with the cash being produced in the future.  You wouldn't really be concerned with the purchase price.  But if you are doing that then you cannot ignore the debt.  And most importantly, if you evaluate it as a run-off, you can't apply a multiple to the cash flows.  $1 of cash flow in a run off is worth $1.  It's most definitely not worth $20.