VRX - Valeant Pharmaceuticals International Inc.

[lu_hawk]

Well I'm more interested in the this: Medicis was purchased for $2.5bn, and the drugs were sold to Galderma for $1.4bn.  The sale was about 21 months after the purchase of Medicis.  Is there enough information to evaluate the numbers on this deal?

[Guest wellmont]

There isn't anything here yet other than John Hempton saying he will be posting his bear case for VRX... just thought I would pass on the link for those interested in reading as they come out

 

http://brontecapital.blogspot.com/

 

can someone fill me in....how spot on was his analysis of Fairfax when he got short? did he miss anything major?

[Liberty]

Well I'm more interested in the this: Medicis was purchased for $2.5bn, and the drugs were sold to Galderma for $1.4bn.  The sale was about 21 months after the purchase of Medicis.  Is there enough information to evaluate the numbers on this deal?

 

Medicis wasn't just the toxin and fillers.

 

http://i.imgur.com/1563ULr.png

[loganc]

Certainly going to be interesting to read Hempton's short thesis.

 

So, given that we now know that AGN mgmt is going to fight the deal to the bitter end and assuming the bear thesis is correct (i.e. that VRX is an unsustainable business that is required to continually do deals to avoid implosion), why would VRX stay the course with AGN?

 

My thinking is that the AGN deal won't close until early 2015 and it seems unlikely to me that VRX closes some other very large transaction before closing the AGN deal.  Therefore, VRX is going to end up showing "cleaner" numbers for 3Q14 and 4Q14.  So, if VRX is going to blow up unless they do deals why continue down the path with AGN and be forced to show numbers that will more or less approach the run-rate numbers of the company later this year?

 

 

[indythinker85]

There isn't anything here yet other than John Hempton saying he will be posting his bear case for VRX... just thought I would pass on the link for those interested in reading as they come out

 

http://brontecapital.blogspot.com/

 

http://brontecapital.blogspot.com/2014/06/valeant-pharmaceuticals-international.html

http://brontecapital.blogspot.com/2014/06/valeant-pharmaceuticals-part-ii-gaap.html

http://www.valuewalk.com/2014/05/hempton-short-valeant/

[loganc]

The losses are not quite so bad on an EPS basis because of a massively increasing share count, but these are hardly typical of a company with such a rapidly increasing stock price.

 

LOL.  This is just completely untrue.  As a matter of fact, I was very surprised when I started doing work on VRX to see how little the share count had increased from 2011 to present despite the fact that they had done so many acquisitions.  Further, if you look at the fully diluted share count from 2011 to present, the share count has barely increased despite the fact that VRX issued equity to raise capital for the B&L deal.

 

Also, with respect to the GAAP EPS numbers.  Take out the 10Q from Q1.  The company lost money on a GAAP income basis but cash flow from operations was 484MM.  Do you care about the GAAP loss or the 484MM of cash flow?  Is it possible that the GAAP loss presents a view of the company that is not exactly representative of economic reality?

[lu_hawk]

The losses are not quite so bad on an EPS basis because of a massively increasing share count, but these are hardly typical of a company with such a rapidly increasing stock price.

 

LOL.  This is just completely untrue.  As a matter of fact, I was very surprised when I started doing work on VRX to see how little the share count had increased from 2011 to present despite the fact that they had done so many acquisitions.  Further, if you look at the fully diluted share count from 2011 to present, the share count has barely increased despite the fact that VRX issued equity to raise capital for the B&L deal.

 

Also, with respect to the GAAP EPS numbers.  Take out the 10Q from Q1.  The company lost money on a GAAP income basis but cash flow from operations was 484MM.  Do you care about the GAAP loss or the 484MM of cash flow?  Is it possible that the GAAP loss presents a view of the company that is not exactly representative of economic reality?

 

If they issued shares for acquisitions then they could not pretend that the acquisitions were free.  People would not ignore an increased share count.  By doing deals with debt, they have convinced people the acquisitions were free.  Question: why would you treat the acquisition as free if debt paid for it, but you would not treat as free if shares were used to pay? 

 

And by using debt to fund deals, VRX has also convinced its investors of something else: it's profits are the same regardless of the price paid for one of its deals.  Pay $1bn?  Ok.  Pay $2bn?  Doesn't matter, the cash earnings are the same no matter what. 

 

 

[jschembs]

The losses are not quite so bad on an EPS basis because of a massively increasing share count, but these are hardly typical of a company with such a rapidly increasing stock price.

 

LOL.  This is just completely untrue.  As a matter of fact, I was very surprised when I started doing work on VRX to see how little the share count had increased from 2011 to present despite the fact that they had done so many acquisitions.  Further, if you look at the fully diluted share count from 2011 to present, the share count has barely increased despite the fact that VRX issued equity to raise capital for the B&L deal.

 

Also, with respect to the GAAP EPS numbers.  Take out the 10Q from Q1.  The company lost money on a GAAP income basis but cash flow from operations was 484MM.  Do you care about the GAAP loss or the 484MM of cash flow?  Is it possible that the GAAP loss presents a view of the company that is not exactly representative of economic reality?

 

i haven't dug through the notes in much detail, but are you sure there aren't a bunch of options/RSUs/warrants/etc? when they're reporting a gaap loss, basic = diluted in shares outstanding and per share calcs.

[loganc]

The losses are not quite so bad on an EPS basis because of a massively increasing share count, but these are hardly typical of a company with such a rapidly increasing stock price.

 

LOL.  This is just completely untrue.  As a matter of fact, I was very surprised when I started doing work on VRX to see how little the share count had increased from 2011 to present despite the fact that they had done so many acquisitions.  Further, if you look at the fully diluted share count from 2011 to present, the share count has barely increased despite the fact that VRX issued equity to raise capital for the B&L deal.

 

Also, with respect to the GAAP EPS numbers.  Take out the 10Q from Q1.  The company lost money on a GAAP income basis but cash flow from operations was 484MM.  Do you care about the GAAP loss or the 484MM of cash flow?  Is it possible that the GAAP loss presents a view of the company that is not exactly representative of economic reality?

 

If they issued shares for acquisitions then they could not pretend that the acquisitions were free.  People would not ignore an increased share count.  By doing deals with debt, they have convinced people the acquisitions were free.  Question: why would you treat the acquisition as free if debt paid for it, but you would not treat as free if shares were used to pay? 

 

And by using debt to fund deals, VRX has also convinced its investors of something else: it's profits are the same regardless of the price paid for one of its deals.  Pay $1bn?  Ok.  Pay $2bn?  Doesn't matter, the cash earnings are the same no matter what.

 

This "considering the deals as free" criticism that you continue to reiterate is only true in your own mind. 

 

If I decided tomorrow that I wanted to buy the whole company, obviously the total price I would pay for the company would include the assumption of the debt of the company.  That assumption of debt is obviously not free.  The cost of the acquisitions would not be deducted from the stream of cash flows that I would project to determine the value of the company due to the fact that the cost had already been incurred.

 

When I buy a stock, I value it like I am buying the whole company.  This way of thinking has been described by a certain other famous investor.

[loganc]

The losses are not quite so bad on an EPS basis because of a massively increasing share count, but these are hardly typical of a company with such a rapidly increasing stock price.

 

LOL.  This is just completely untrue.  As a matter of fact, I was very surprised when I started doing work on VRX to see how little the share count had increased from 2011 to present despite the fact that they had done so many acquisitions.  Further, if you look at the fully diluted share count from 2011 to present, the share count has barely increased despite the fact that VRX issued equity to raise capital for the B&L deal.

 

Also, with respect to the GAAP EPS numbers.  Take out the 10Q from Q1.  The company lost money on a GAAP income basis but cash flow from operations was 484MM.  Do you care about the GAAP loss or the 484MM of cash flow?  Is it possible that the GAAP loss presents a view of the company that is not exactly representative of economic reality?

 

i haven't dug through the notes in much detail, but are you sure there aren't a bunch of options/RSUs/warrants/etc? when they're reporting a gaap loss, basic = diluted in shares outstanding and per share calcs.

 

I have seen that disclosure and it is provided clearly on page 46 of the 10Q.  The maximum increase in share count due to compensation would be approximately 10.9MM shares versus a current share count of 335MM shares.

 

For reference, the weighted average diluted share count as of 1Q11 was 332.9MM.  I struggle to see the "massive" increase in share count.

[topofeaturellc]

As a lurker turned poster I love this discussion. 

 

IMO this is one of those names that is going to be great until its terrible, and then its really going to be terrible.  So probably not for me.  As for when it stops - well - that'll be some combination of rates, perceived creditworthiness (Which will mostly be a function of the underlying business performance) and M&A targets. 

 

I guess the thing that I can't get a handle on is how these deals actually perform.  I look at a business that at the end of 2010 was generating about 375 mil in CFO-capex( I did a really lazy PF on Biovail and Valeant off of the Q's in CapIQ) and on an LTM basis today has generated about 1100 in CFO-capex. Meanwhile GAAP Invested Capital has gone from 10 bil to 25bil - more like 27bil when you add back the non cash charges - so you got 725 mil in CFO-capex for like 16000-17000 in new invested capital.  I appreciate that I think I'm missing like a Q of B&L so lets round up to 900 mil? so like a mid 5's return on incremental capital?

 

I mean I think that's a super rough number and you could say its more like 1000 on 15000 - but I don't think the bull argument is that he's earning a long-term CoC on these deals.

 

Just food for thought. Not involved, not going to be involved.

[lu_hawk]

The losses are not quite so bad on an EPS basis because of a massively increasing share count, but these are hardly typical of a company with such a rapidly increasing stock price.

 

LOL.  This is just completely untrue.  As a matter of fact, I was very surprised when I started doing work on VRX to see how little the share count had increased from 2011 to present despite the fact that they had done so many acquisitions.  Further, if you look at the fully diluted share count from 2011 to present, the share count has barely increased despite the fact that VRX issued equity to raise capital for the B&L deal.

 

Also, with respect to the GAAP EPS numbers.  Take out the 10Q from Q1.  The company lost money on a GAAP income basis but cash flow from operations was 484MM.  Do you care about the GAAP loss or the 484MM of cash flow?  Is it possible that the GAAP loss presents a view of the company that is not exactly representative of economic reality?

 

If they issued shares for acquisitions then they could not pretend that the acquisitions were free.  People would not ignore an increased share count.  By doing deals with debt, they have convinced people the acquisitions were free.  Question: why would you treat the acquisition as free if debt paid for it, but you would not treat as free if shares were used to pay? 

 

And by using debt to fund deals, VRX has also convinced its investors of something else: it's profits are the same regardless of the price paid for one of its deals.  Pay $1bn?  Ok.  Pay $2bn?  Doesn't matter, the cash earnings are the same no matter what.

 

This "considering the deals as free" criticism that you continue to reiterate is only true in your own mind. 

 

If I decided tomorrow that I wanted to buy the whole company, obviously the total price I would pay for the company would include the assumption of the debt of the company.  That assumption of debt is obviously not free.  The cost of the acquisitions would not be deducted from the stream of cash flows that I would project to determine the value of the company due to the fact that the cost had already been incurred.

 

When I buy a stock, I value it like I am buying the whole company.  This way of thinking has been described by a certain other famous investor.

 

 

You can distill this into a pretty easy analysis IMO: Valeant is guiding to roughly $2.8bn in "cash earnings" this year.  Let's assume that is the FCF.  There is $17bn in debt.  When you factor in the interest on the debt (running at over $1bn per year currently!), they'd have to do $2.8bn in "cash earnings" for another 9 years just to have enough cash to pay off the debt!  But earnings will decline over time.  Every branded product that VRX owns now will be generic by that time.  And so it would take more than 9 years, and possibly this current set of drugs owned by VRX would never produce enough cash to pay off $17bn in debt.

 

 

But to buy the stock they don't need to just produce another $17bn in cash.  They need to produce the $17bn  and then another $42bn (the current market cap).  That's $59bn in cash that the current drugs need to produce in order to justify the current stock price.  Off a base of $2.8bn currently, and the $2.8bn is going to decline.  It will take 21.5 years to do that, but that's not right because we know the drugs will decline.  And it actually is worse than that because you have to figure in time value, so the drugs really need to produce significantly more than $59bn in cash over their lives, and that is just to justify the CURRENT price. 

 

Does anyone really believe that Valeant's current assets can produce $59bn in cash?  This isn't Gillette razors or Coca-Cola, these are pharmaceuticals.  In 10 years none of their products will even be branded anymore, some might not even be sold anymore.  Let alone 21.5 years.

 

You think they will do more deals?  OK, but how are they going to create value by buying Allergan at 30x earnings?  OK, they will slash r&d which will lower costs, but it also will turn Allergan into another asset that begins to deplete the day they buy it. 

 

They can keep trying to buy more companies to pay off the debt they've incurred in previous deals, but if they are not buying them at prices that materially undervalues them, then it just gets them further into the hole, despite what "cash earnings" might say. 

 

If the music stops, can VRX produce $60bn in cash?  If not, then you can't rationally own the stock.  You can try to get lucky, but it's not an investment.  And if the music stops could Valeant even produce enough cash to pay off the debt?  If not, then it's not fundamentally different than a Ponzi scheme.  Bring in more assets to pay off the previously-incurred debt, but you can never catch up. 

 

 

 

[Liberty]

You can distill this into a pretty easy analysis IMO: Valeant is guiding to roughly $2.8bn in "cash earnings" this year.  Let's assume that is the FCF.  There is $17bn in debt.  When you factor in the interest on the debt (running at over $1bn per year currently!), they'd have to do $2.8bn in "cash earnings" for another 9 years just to have enough cash to pay off the debt!  But earnings will decline over time.  Every branded product that VRX owns now will be generic by that time.  And so it would take more than 9 years, and possibly this current set of drugs owned by VRX would never produce enough cash to pay off $17bn in debt.

 

This makes no sense. You are aware that 'branded' doesn't mean 'patented', right? And that not everything that is patented faces the same kind of cliff in revenues when the patent expires?

 

"Every branded product that VRX owns now will be generic by that time."

 

A lot of their products are already not protected by patents and doing well in the market place, growing in fact. Their whole M.O. is finding durable products that don't need patent protection, or that have protection that can easily be extended (reformulation, etc), or that don't interest generic makers for various reasons. They do spend on R&D in areas where they are sure to get good ROIs, so it's not like there's no maintenance of the assets. They have more product launches than Allergan planned for the next few years, with higher peak sales estimates in the near-term pipeline, but that's a different story.

 

Their durable portfolio is growing at high single digits. In 10 years, it'll be making more money for them than it is now, not less. You can see this by tracking how past deals are doing. That's why it makes sense to leverage up. It's not a declining asset, despite how their profitable investments in declining things like Zovirax make it seem on a consolidated basis.

 

And their adjusted cash flow from operations makes sense because the one-time items that are related to acquisitions really are one time items, and they are great investments. If it costs them 450m to get 900m extra a year from B&L in synergies (I don't have the numbers handy, but on B&L they said: "Cost to achieve synergies will be approximately half of full synergies"), that's a huge return, and they only have to spend it once on B&L yet will reap the benefits every year (and they include the cost of those synergies in their acquisition cost to track their IRR).  Maybe they'll have more one-time costs on other acquisitions, but these are real one-time costs in the way that matters, in that if they were to stop acquiring, these would go to zero relatively quick and the real earning power of the business would match the adjusted number, not the current number that includes those one-time costs.

 

Here's the CFO at last year's investor day:

 

Now, the key question in all this is, what happens if we were to cease all BD activities?  Do these numbers go to zero? And the answer is it absolutely will trend to zero.  And I'm not being cute.  I use the word trend simply because we do have some acquisitions we've made that still need some restructuring. But, once the acquisitions in the pipeline that we've currently closed would be restructured, these numbers would go to zero.  And we're going to continue to disclose this on a deal-by-deal basis.

 

If they stopped spending all that money on restructuring/synergies, their un-adjusted numbers would look much better, but their real economic performance would be much worse. I suppose that would make some people happy..

[jschembs]

You can distill this into a pretty easy analysis IMO: Valeant is guiding to roughly $2.8bn in "cash earnings" this year.  Let's assume that is the FCF.  There is $17bn in debt.  When you factor in the interest on the debt (running at over $1bn per year currently!), they'd have to do $2.8bn in "cash earnings" for another 9 years just to have enough cash to pay off the debt!  But earnings will decline over time.  Every branded product that VRX owns now will be generic by that time.  And so it would take more than 9 years, and possibly this current set of drugs owned by VRX would never produce enough cash to pay off $17bn in debt.

 

This makes no sense. You are aware that 'branded' doesn't mean 'patented', right? And that not everything that is patented faces the same kind of cliff in revenues when the patent expires?

 

"Every branded product that VRX owns now will be generic by that time."

 

A lot of their products are already not protected by patents and doing well in the market place, growing in fact. Their whole M.O. is finding durable products that don't need patent protection, or that have protection that can easily be extended (reformulation, etc), or that don't interest generic makers for various reasons. They do spend on R&D in areas where they are sure to get good ROIs. They have more product launches than Allergan planned for the next few years, with higher peak sales estimates in the near-term pipeline, but that's a different story.

 

Their durable portfolio is growing at high single digits. In 10 years, it'll be making more money for them than it is now, not less. You can see this by tracking how past deals are doing. That's why it makes sense to leverage up. It's not a declining asset, despite how their profitable investments in declining things like Zovirax make it seem on a consolidated basis.

 

And their adjusted cash flow from operations makes sense because the one-time items that are related to acquisitions really are one time items, and they are great investments. If it costs them 450m to get 900m extra a year from B&L in synergies (I don't have the numbers handy, but on B&L they said: "Cost to achieve synergies will be approximately half of full synergies"), that's a huge return, and they only have to spend it once on B&L yet will reap the benefits every year (and they include the cost of those synergies in their acquisition cost to track their IRR).  Maybe they'll have more one-time costs on other acquisitions, but these are real one-time costs in the way that matters, in that if they were to stop acquiring, these would go to zero relatively quick and the real earning power of the business would match the adjusted number, not the current number that includes those one-time costs.

 

Here's the CFO at last year's investor day:

 

Now, the key question in all this is, what happens if we were to cease all BD activities?  Do these numbers go to zero? And the answer is it absolutely will trend to zero.  And I'm not being cute.  I use the word trend simply because we do have some acquisitions we've made that still need some restructuring. But, once the acquisitions in the pipeline that we've currently closed would be restructured, these numbers would go to zero.  And we're going to continue to disclose this on a deal-by-deal basis.

 

If they stopped spending all that money on restructuring/synergies, their un-adjusted numbers would look much better, but their real economic performance would be much worse. I suppose that would make some people happy..

 

can we start a new thread where you two argue the same points over and over? :) doesn't even have to relate to vrx, perhaps god's existence or whether illmatic was the greatest hip hop album of all time.

[Liberty]

can we start a new thread where you two argue the same points over and over? :) doesn't even have to relate to vrx, perhaps god's existence or whether illmatic was the greatest hip hop album of all time.

 

You're so right, this is annoying as all hell. If there was a god, I'd ask her for the strength to ignore people who claim that valeant's basically a terminal runoff pulling basic accounting fraud over Greenberg, Ackman, Sequoia, and ValueAct (two of which have inside information access to do their DD). But I'm weak. Forgive me for I have sinned.

[lu_hawk]

Tyco and Worldcom fooled a lot of people too, so nothing to be ashamed of.  The good thing is, this isn't a theoretical thing, the music will stop one day, and we'll get to see how it plays out.

[loganc]

As a lurker turned poster I love this discussion. 

 

IMO this is one of those names that is going to be great until its terrible, and then its really going to be terrible.  So probably not for me.  As for when it stops - well - that'll be some combination of rates, perceived creditworthiness (Which will mostly be a function of the underlying business performance) and M&A targets. 

 

I guess the thing that I can't get a handle on is how these deals actually perform.  I look at a business that at the end of 2010 was generating about 375 mil in CFO-capex( I did a really lazy PF on Biovail and Valeant off of the Q's in CapIQ) and on an LTM basis today has generated about 1100 in CFO-capex. Meanwhile GAAP Invested Capital has gone from 10 bil to 25bil - more like 27bil when you add back the non cash charges - so you got 725 mil in CFO-capex for like 16000-17000 in new invested capital.  I appreciate that I think I'm missing like a Q of B&L so lets round up to 900 mil? so like a mid 5's return on incremental capital?

 

I mean I think that's a super rough number and you could say its more like 1000 on 15000 - but I don't think the bull argument is that he's earning a long-term CoC on these deals.

 

Just food for thought. Not involved, not going to be involved.

 

Haha.  Don't you think you should at least pro forma the LTM CFO-capex for a full 12 months of B&L?  I mean...considering that your number would only include it from August and B&L represents more than half of the incrementally invested capital.

 

You could just annualize 1Q14 and get like 1.7B.  Plus, the 1.7B estimate is a lowball number because it includes like 100MM of B&L integration charges in 1Q14 that will likely be of negligible size by 4Q14.

 

 

[Liberty]

You could just annualize 1Q14 and get like 1.7B.  Plus, the 1.7B estimate is a lowball number because it includes like 100MM of B&L integration charges in 1Q14 that will likely be of negligible size by 4Q14.

 

That's a better way to look at it, but that's still low because VRX is a fairly seasonal business. They usually get about 40% of their revenue in Q1 and Q2 and 60% in Q3 and Q4 (B&L might have made them somewhat less seasonal, though..). Plus this year they have more R&D expenses in the first half than usual because they have some late-stage pipeline stuff from B&L that they're spending on. So full year should be a good chunk higher than just Q1 annualized (though that gives a ballpark).

[Guest wellmont]

As a lurker turned poster I love this discussion. 

 

IMO this is one of those names that is going to be great until its terrible, and then its really going to be terrible.  So probably not for me.  As for when it stops - well - that'll be some combination of rates, perceived creditworthiness (Which will mostly be a function of the underlying business performance) and M&A targets. 

 

I guess the thing that I can't get a handle on is how these deals actually perform.  I look at a business that at the end of 2010 was generating about 375 mil in CFO-capex( I did a really lazy PF on Biovail and Valeant off of the Q's in CapIQ) and on an LTM basis today has generated about 1100 in CFO-capex. Meanwhile GAAP Invested Capital has gone from 10 bil to 25bil - more like 27bil when you add back the non cash charges - so you got 725 mil in CFO-capex for like 16000-17000 in new invested capital.  I appreciate that I think I'm missing like a Q of B&L so lets round up to 900 mil? so like a mid 5's return on incremental capital?

 

I mean I think that's a super rough number and you could say its more like 1000 on 15000 - but I don't think the bull argument is that he's earning a long-term CoC on these deals.

 

Just food for thought. Not involved, not going to be involved.

 

Haha.  Don't you think you should at least pro forma the LTM CFO-capex for a full 12 months of B&L?  I mean...considering that your number would only include it from August and B&L represents more than half of the incrementally invested capital.

 

You could just annualize 1Q14 and get like 1.7B.  Plus, the 1.7B estimate is a lowball number because it includes like 100MM of B&L integration charges in 1Q14 that will likely be of negligible size by 4Q14.

 

very common tactic of vrx bears is to ignore b&l. :) I mean b&l changed "everything" so it's kind of telling why they do this. it's actually worse than that. because they use the shares and debt from the b & l deal but not the sales and cash earnings.  ???

[topofeaturellc]

As a lurker turned poster I love this discussion. 

 

IMO this is one of those names that is going to be great until its terrible, and then its really going to be terrible.  So probably not for me.  As for when it stops - well - that'll be some combination of rates, perceived creditworthiness (Which will mostly be a function of the underlying business performance) and M&A targets. 

 

I guess the thing that I can't get a handle on is how these deals actually perform.  I look at a business that at the end of 2010 was generating about 375 mil in CFO-capex( I did a really lazy PF on Biovail and Valeant off of the Q's in CapIQ) and on an LTM basis today has generated about 1100 in CFO-capex. Meanwhile GAAP Invested Capital has gone from 10 bil to 25bil - more like 27bil when you add back the non cash charges - so you got 725 mil in CFO-capex for like 16000-17000 in new invested capital.  I appreciate that I think I'm missing like a Q of B&L so lets round up to 900 mil? so like a mid 5's return on incremental capital?

 

I mean I think that's a super rough number and you could say its more like 1000 on 15000 - but I don't think the bull argument is that he's earning a long-term CoC on these deals.

 

Just food for thought. Not involved, not going to be involved.

 

Haha.  Don't you think you should at least pro forma the LTM CFO-capex for a full 12 months of B&L?  I mean...considering that your number would only include it from August and B&L represents more than half of the incrementally invested capital.

 

You could just annualize 1Q14 and get like 1.7B.  Plus, the 1.7B estimate is a lowball number because it includes like 100MM of B&L integration charges in 1Q14 that will likely be of negligible size by 4Q14.

 

well no

 

LTM CFO is 1271, LTM Capex is 160 right - so 1271 -160 = 1111. I was just looking at the incremental return compared to a proforma CFO-Capex# from biovail+valeant in '10= VRX/Fka Biovail reported 263 in CFO and 17 in Capex. The deal closed 9/28 per CapIQ so I assume consolidated from Q4, and we only have the data form old school valeant through Q2 on CapIQ - the LTM CFO on 6/10 was 231.8 and the capex was 19.5 - so 263-17+231-19.5 = 457 - except that's one extra Q'ish of OG Valeant. So  I knocked 100 off that because I couldn't be bothered to go look for a 10-Q for 3q'09 and then make a forecast for what 3q'10 would have been.

So 1111-350 = 761 and then I rounded that up to 900 to account for the lack of a full year of consolidation for B&L. B&L closed on August 5 so using a 1q14 LTM cashflow number I've got what? 8 months of B&L already in the number - so is 139 mil less than 4 months of CFO-Capex for B&L. Honestly I have no idea. I just eyeballed the y/y growth in cash flow and assumed the same run rate for the extra quarter.

 

Right so we've got 900 for our numerator and our denominator should be IC FY2010 0f 10.220 and IC 1Q2014 of 25.665 so 900/15440 = 5.83% -

Does that make sense?

 

I'm not excluding the cash restructuring charges because that represents IC as well.  If you paid 1000 for something and then spent 500 on fixing it you invested 1500 not 500.

 

But lets do that math anyway - we'll add back P&L charges from 10-1q14 and add back cash restructuring for the LTM -

 

1Q14 -139

FY 13 -185

of which 62 occured in 1Q13

so cash restructuring = 262

But then we also need to add the cash restructuring to my '10 number as well.

Weirdly I can't find a 3q number but

4q =44

2q Biovail 8, 2 from VRX

1q 1 from VRX

so 55 or a net of 207 assuming there was nothing in 3q.

 

 

so our 1111 becomes 1373, or we can just add the 207 to my SWAG guess on Incremental PF CFO-Capex of 900 and we've got 1107 on 15000 in or 7.48% - except that if we add back the cash restructuring we have to add off the write offs related to the mergers.

So -again all from CapIQ so may be mistakes et al.

Merger and related charges = 1639

Asset Write downs net of gains on sales = 1079

I have no idea what the 250 in legal settlements is from - so I won't include - but I'm guessing if I did I would.

 

So to our IC we need to add another 2.7 Bil. I'm not going to see if the Amortization number as corrected by CapIQ is correct - i.e. is it including identified intangible we should be including in our IC or not.  This is to VRX's benefit.

so our 15000 becomes 17700

1107/17700 = or 6.25% return on the incremental invested capital.

 

If we say the incremental amortization of intangibles should be added back there is another 2 bil in IC, or 1107/19700 or 5.62% - about the same as I got with my original  WAG. I got that by taking the FY10 Amortization number and subtracting that from amortization going forward and recapitalizing the sum of the 13 quarters since then.  Its probably not perfect but none of this.

 

So there's that.

 

How does this not include B&L? I mean how big per Q is CFO from B&L - is it double my 130 number? ok 1337/19700 = we're back to the high 6s. 

 

 

[loganc]

well no

 

LTM CFO is 1271, LTM Capex is 160 right - so 1271 -160 = 1111. I was just looking at the incremental return compared to a proforma CFO-Capex# from biovail+valeant in '10= VRX/Fka Biovail reported 263 in CFO and 17 in Capex. The deal closed 9/28 per CapIQ so I assume consolidated from Q4, and we only have the data form old school valeant through Q2 on CapIQ - the LTM CFO on 6/10 was 231.8 and the capex was 19.5 - so 263-17+231-19.5 = 457 - except that's one extra Q'ish of OG Valeant. So  I knocked 100 off that because I couldn't be bothered to go look for a 10-Q for 3q'09 and then make a forecast for what 3q'10 would have been.

So 1111-350 = 761 and then I rounded that up to 900 to account for the lack of a full year of consolidation for B&L. B&L closed on August 5 so using a 1q14 LTM cashflow number I've got what? 8 months of B&L already in the number - so is 139 mil less than 4 months of CFO-Capex for B&L. Honestly I have no idea. I just eyeballed the y/y growth in cash flow and assumed the same run rate for the extra quarter.

 

Right so we've got 900 for our numerator and our denominator should be IC FY2010 0f 10.220 and IC 1Q2014 of 25.665 so 900/15440 = 5.83% -

Does that make sense?

 

I think what you are doing makes sense, but I believe the numbers you are using understate the current run-rate FCF generation of the business.  Thus, clearly, the incremental ROIC numbers will look worse than they actually are.

 

For example, you add in a "fudge factor" to make up for the lack of a full year of B&L and that gets you to $1250MM OCF-CapEx.  But, OCF-CapEx for 1Q13 was $426.2MM (or $1704MM annualized).  Clearly there is a pretty big difference here and my number from Q1 includes the restructuring charges, which I think is correct to do.  Now, when we start to think about what FY14 is going to look like and consider the fact that $100MM+ of restructuring for B&L in 1Q14 is likely to tail off by the end of the year, I think the $1700MM number is probably going to be conservative.

 

So, I know you are looking at TTM numbers and I am looking at FY14 numbers, but you would have to admit that there is likely going to be a pretty large improvement in the performance of the business from the perspective of OCF-CapEx.  Therefore, I think your calculation of 5-6% ROIC really understates the situation.  Further, it is still going to take some time to fully integrate B&L.  I suspect there will be an additional bump in performance of the business in FY15 from an operational perspective, but I could be wrong about that.  Ultimately, it very hard to make a final judgement on B&L at this point. 

[topofeaturellc]

BTW I think "this company has a worse than expected incremental ROIC" is a terrible reason to be short something. My only point is for a business model predicated on being very good at doing deals its hard for me to see the evidence in the numbers as presented in the accounts.

 

Regardless of what anyone thinks - as long as Mgmt presents a plausible case for their earnings adjustments, and that number continues to go up the stock will probably work.  You see that the shorts know this as well.

 

So the shorts attack the earnings adjustment hoping they can convince the marginal buyer that GAAP is the right way to look at it.

 

It'll be interesting to watch it play out.

 

[topofeaturellc]

well no

 

LTM CFO is 1271, LTM Capex is 160 right - so 1271 -160 = 1111. I was just looking at the incremental return compared to a proforma CFO-Capex# from biovail+valeant in '10= VRX/Fka Biovail reported 263 in CFO and 17 in Capex. The deal closed 9/28 per CapIQ so I assume consolidated from Q4, and we only have the data form old school valeant through Q2 on CapIQ - the LTM CFO on 6/10 was 231.8 and the capex was 19.5 - so 263-17+231-19.5 = 457 - except that's one extra Q'ish of OG Valeant. So  I knocked 100 off that because I couldn't be bothered to go look for a 10-Q for 3q'09 and then make a forecast for what 3q'10 would have been.

So 1111-350 = 761 and then I rounded that up to 900 to account for the lack of a full year of consolidation for B&L. B&L closed on August 5 so using a 1q14 LTM cashflow number I've got what? 8 months of B&L already in the number - so is 139 mil less than 4 months of CFO-Capex for B&L. Honestly I have no idea. I just eyeballed the y/y growth in cash flow and assumed the same run rate for the extra quarter.

 

Right so we've got 900 for our numerator and our denominator should be IC FY2010 0f 10.220 and IC 1Q2014 of 25.665 so 900/15440 = 5.83% -

Does that make sense?

 

I think what you are doing makes sense, but I believe the numbers you are using understate the current run-rate FCF generation of the business.  Thus, clearly, the incremental ROIC numbers will look worse than they actually are.

 

For example, you add in a "fudge factor" to make up for the lack of a full year of B&L and that gets you to $1250MM OCF-CapEx.  But, OCF-CapEx for 1Q13 was $426.2MM (or $1704MM annualized).  Clearly there is a pretty big difference here and my number from Q1 includes the restructuring charges, which I think is correct to do.  Now, when we start to think about what FY14 is going to look like and consider the fact that $100MM+ of restructuring for B&L in 1Q14 is likely to tail off by the end of the year, I think the $1700MM number is probably going to be conservative.

 

So, I know you are looking at TTM numbers and I am looking at FY14 numbers, but you would have to admit that there is likely going to be a pretty large improvement in the performance of the business from the perspective of OCF-CapEx.  Therefore, I think your calculation of 5-6% ROIC really understates the situation.  Further, it is still going to take some time to fully integrate B&L.  I suspect there will be an additional bump in performance of the business in FY15 from an operational perspective, but I could be wrong about that.  Ultimately, it very hard to make a final judgement on B&L at this point.

 

I don't disagree - but I can be off by a magnitude on the quarterly profitability of B&L and you don't see this as being a great return business. Yet.

 

Another way to look at what the FCF/Q might be - 1q13 ex restructuring was 255+62-14=303 1q14 = 565 so 260 in incremental FCF but that assumes the base biz was flat.  It was up 4% in revenue terms.  so 50 mil in incremental sales at what? 70% cash margins? Whole biz is like 50%? so 35 mil in CFO from the base biz so like 230 in incremental cash from B&L per Q.  Assuming 260 the incremental return isn't so hot. 

 

I mean a lot of assumptions and totally disregarding seasonality.

[loganc]

I don't disagree - but I can be off by a magnitude on the quarterly profitability of B&L and you don't see this as being a great return business. Yet.

 

Another way to look at what the FCF/Q might be - 1q13 ex restructuring was 255+62-14=303 1q14 = 565 so 260 in incremental FCF but that assumes the base biz was flat.  It was up 4% in revenue terms.  so 50 mil in incremental sales at what? 70% cash margins? Whole biz is like 50%? so 35 mil in CFO from the base biz so like 230 in incremental cash from B&L per Q.  Assuming 260 the incremental return isn't so hot. 

 

I mean a lot of assumptions and totally disregarding seasonality.

 

The conclusion that I arrive to is that it is difficult to make a conclusion about the "success" or "failure" of the B&L deal relative to the types of returns that management is targeting.  If the incremental returns for B&L don't improve from my present estimate, I would certainly be disappointed.  Alternatively, I think it is fair to give VRX management more time to complete the integration of B&L.

 

Anyway, I appreciate your posts.  If you want to do more work on evaluating the acquisitions, I would suggest checking out the earnings slide decks for 2Q13, 3Q12, and 3Q11.  The information provided in these will give some information to help get started on evaluating the deals on case-by-case basis.

[topofeaturellc]

that's fair. It just seems to me like the business is being already priced like the market is already confident they are good at doing deals.

 

Look at something like DHR where we have the benefit of hindsight to show that they are really good at doing deals and integrating and cutting costs in businesses.

 

If you go back to the George Sherman days in like '00 to today the only years when they earned a less than DD rolling three year incremental ROIC were '07 to '09  - and that was even back when they were buying companies that required real tangible capital investment to run them.