VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

I've been studying this one lately and would just like to thank everybody who contributed to this thread, especially Gio.

 

i've been looking at higher quality businesses lately and trying to see if I have enough conviction in their models and management to pay up for the quality (Transdigm is another example of this). Haven't done anything yet on these two, but will follow them and keep learning.

 

Trivia: I was surprised to see the company is HQ'ed in Laval, the city where I was born.

 

Liberty, it is my pleasure! :)

Now I must dig deep into Transdigm, because I don’t know it yet!

 

giofranchi

 

[Liberty]

Now I must dig deep into Transdigm, because I don’t know it yet!

 

giofranchi

 

I think you might be interested. They basically do what valeant does, except with aerospace parts.

[no_free_lunch]

 

The key feature of Pearson’s pay package is a grant of 120,000 “performance share units,” which turn into common shares when they vest. But they only vest if Pearson delivers a 15% compound annual return over three years. If he doesn’t, the PSUs are worthless. If he delivers 30%, he’ll get twice the original allotment of PSUs. At 45%, he gets three times, and at 60%, four times. “Everybody told me and him we were crazy to do that, because it’s such a high bar in an era when stocks aren’t performing,” says director Mason Morfit, former chairman of the board’s compensation committee, and the main architect of the pay plan. “Most people would prefer to take the risk out of their compensation plan.”

 

Pearson is contractually bound to hold on to the vesting equity until the end of his term as CEO. That is supposed to deter him from making short-term moves to goose the stock: But, of course, it does nothing to protect shareholders if the company’s high-risk, debt-fuelled growth strategy hits turbulence.

 

http://www.theglobeandmail.com/report-on-business/rob-magazine/how-valeant-became-canadas-hottest-stock/article8889241/?page=all

[Liberty]

I looked at VRX when gio suggested it earlier this year at the $70's. I could not understand it, so I didn't invest. What is your thesis on that?

 

Sure, but keep in mind that I just invest as a hobby.

 

Basically it is a story stock.  You have a CEO who is very aggressive and yet very disciplined from a capital allocation perspective.  When he first came in he got rid of all businesses where he did not see a competitive advantage or room to build scale.  He started acquiring companies and lopping operational expenses down aggressively.  He merged with biovail (while maintaining his role as CEO) and as a result now has a 5% tax rate.  With the Bausch & Lomb transaction he bought a company with $700M EBITDA and has plans to "bump" that up to $1.5B with cost-cutting over the next year and a half.  There is also decentralized operations, a focus on avoiding competitive areas, geographical diversity, focus on businesses not subject to government regulations (e.g. the bausch purchase), non-traditional accounting (you need to focus on cash EPS), willingness to walk from deals (they walked from a huge one earlier this year), his compensation agreement, more that I just can't think of right now. 

 

If you read the outsiders and then start to study this company, it's like you're reading another chapter in the book.  The CEO is not that old either, there could be quite a future ahead.

 

As for the pesky details of what you are paying, I go out on a limb and trust the cash eps forecasts that management puts out.  You guys are probably trying to figure it out from the traditional statements and I commend you, but I didn't do that.  With their cash EPS they add back amortizations, stock-expenses and one-time costs.  It is a similar concept to owner earnings but probably a bit more aggressive than buffet would like.

 

Anyways, they are forecasting ~$2.05 for Q4 of this year.  However, the cost-cutting for bausch and lomb, plus other acquisitions will not be done by q4 of this year.  I crudely estimated that with their total announced cost-cuts they will probably be looking at $2.3-$2.4 per quarter by Q4 of next year, that will be their rough run-rate.  So around $9.5 per share cash earnings run rate in 15 months.  So you are getting them for around 11x cash earnings once the cost-cuts are in effect.  That is assuming that they stand still for 2014 and just cost-cut/pay down debt.  I doubt they will do that.  There will be more acquisitions / stock repurchases / a merger but something else will happen.

 

IV is a tough one.  I think it's more than you are paying now but probably not that much.  Some of the other major pharma companies are around 13-14 times earnings.  I think valeant deserves a bit more, maybe 14x.  I actually think my 14 multiplier is probably too low, should be more like 16-18 given what he has done and the businesses he is in but you also have to consider how lean they run R&D and that their are concerns about organic growth.  For that reason I pull it back to 14 as they will always need acquisitions.  So if they get to $9.5 that is only $133 and that's not for 15 months or so.  So I am buying a dollar a year from now for $.75.  Not a great bargain but not overly expensive either.  My view is that in a year they will be talking about 2015 earnings at $11-12 and the stock could be at $150. 

 

You really need to get comfortable with the CEO to buy into it.  It's not a huge bargain unless you believe he can continue to work his magic.

 

Thanks No Free Lunch!

 

(Copied from other thread because this makes more sense here)

[no_free_lunch]

I have done a complete 180 on VRX.  I decided that I really don't understand the impact of all of the cost cuts on their existing products.  It's all based on my experience trolling a message forum for Valeant employees.  I don't claim to be some guru and I don't claim that anything bad is going to happen to Valeant, it's just that it's increasingly clear to me that I don't understand the situation.  It is a strange thing, from a certain distance Valeant looks like the perfect company.  However, when you start to hear about the effects within the company: turnover, overworked employees, de-emphasis on R&D for existing products you have to wonder if trouble isn't brewing.  I thought it wouldn't be an issue given the relatively low patent profile but it sounds as though even the existing products require certain levels of R&D to remain competitive.  Everything has happened so fast that I just don't have enough data to properly asses the long-term impact of their strategy.

 

Given my uncertainty and with the stock up 8% in just a couple weeks (while the market has gone nowhere) I decided to pull out.  I didn't mean for it to be a trade but so be it.

[Liberty]

Thank you for the update, can you share the link to the forum?

[no_free_lunch]

Thank you for the update, can you share the link to the forum?

 

Certainly,

 

http://www.cafepharma.com/boards/forumdisplay.php?f=84

[no_free_lunch]

Specifically, if you go to the post, 'Mike Pearson is a Liar - Part 2' (I know, I know it sounds like a trash board but there are intelligent comments) I found this comment.  There are more, just keep reading.

 

Actually, some investors ARE listening. It was already pointed out to Pearson that one of Valeant's glaring weaknesses is his lack of a pipeline.

 

All the items he has received from Medicis, Dow, Obagi, B&L and other companies will be good for now and the immediate future. But what about in 2 years as things start to grow stale? Who will be there to create new packaging or slight twists on the product (like concentration increases or decreases) to extend the shelf life? And let's not even talk about developing any truly new products.

 

Pearson is really about "management - not R&D". R&D is expensive. This has been Pearson's motto for a while. That's fine, but constant buying leads to massive debt, which Valeant now has. It is a matter of time, IMO, that Valeant will collapse under its own weight due to huge debt and no new products. And at that point, Valeant won't be able to buy its way out of the situation.

 

While the share price is high now, I'd be very cautious about the future. A merger may occur, which may actually be the best option.

 

Again, I don't mean to claim that I can verify the pipeline will be an issue.  I am just not sure of the rate that things need to be replaced given the nature of the businesses they are in.  Since they don't have patents that removes one issue but there is still competition.

[Liberty]

Thank you for the link.

 

I guess the question is, is buying other people's late-stage R&D (more D than R at that point) equivalent to doing all that in-house product-wise.

 

For example, if they buy some small eye-care company and get B&L's big organization to brand its products and sell them worldwide, is it functionally the same as building something in-house (which might take longer, be costlier, and lead you up more blind alleys) and then selling via the same sales-force?

 

They seem to think that it's a viable model... Good question, though.

 

They don't cut R&D completely. Could it be they have enough to maintain existing products' competitive position, though not enough to build a whole new pipeline (which instead is acquired)? In other words, they keep the D and mostly outsource the R?

 

Have you contacted their IR department about this? I bet it's a question they get a lot.

 

One guy writes:

 

Pearson is really about "management - not R&D". R&D is expensive. This has been Pearson's motto for a while. That's fine, but constant buying leads to massive debt, which Valeant now has.

 

The real question is, for the same results, is it cheaper to buy than to do R&D? These people are obviously (very frustrated) R&D people, so they are a bit biased. But in the same sentence he both says that R&D is very expensive and that acquisitions are expensive. So it's not like there's a free path; you have to decide where you get the most value for your invested dollars.

[Liberty]

Reading some of the complaints in the forum makes me wonder if employees of variety stores would've written the same thing when Walmart and other discounters first came around. They were so used to big fat SG&A and now someone came around and cut it down because they had a more efficient model... To them it must've seemed impossible to operate a business without all those expenses!

 

I also wonder if these employees and ex-employees are thinking about it in a "business-like" fashion at all. If your job is to screen compounds or operate a DNA sequencer in the lab, what do you care about increasing FCF per share? If you're in R&D, your dream is probably to work on the next big blockbuster drug, not figure out which unexciting products have the best IRR over the longest period...

 

Not sure if it's a fair comparison, but it's a hypothesis that came to mind.  :-\

[no_free_lunch]

Liberty,

 

I think we are on the same page on this one.  I agree that there are a lot of bitter employees.  I do wonder what employees would have thought at the various malone subsidiaries or autozone or one of murphy's broadcasters.  Maybe morale was always horrible at these places. 

 

It is really more about the product life-time, as you have pointed out.  I think I just need to keep reading and analyzing until I get a better sense of a way to measure that.  Honestly time is the best way to do it, the longer we wait, the more organic numbers come in.  In the meanwhile there are other opportunities.

[giofranchi]

Bull Of The Day: Valeant Pharma

 

 

giofranchi

Oct142013-bull-of-the-day-valeant.pdf

[ItsAValueTrap]

If you go on glassdoor.com, you can see that many successful companies have low morale.  I don't think that there is a very strong correlation between morale and a company's performance.

 

Some of the biggest assholes in the world have run successful companies.  Steve Jobs' biography definitely highlights that.  Or watch any of Gordon Ramsay's TV shows.

[giofranchi]

I don't think that there is a very strong correlation between morale and a company's performance.

 

Agreed! Just think about Mr. Charlie Ergen! :)

 

giofranchi

[constructive]

I don't think that there is a very strong correlation between morale and a company's performance.

 

Agreed! Just think about Mr. Charlie Ergen! :)

 

giofranchi

 

Ergen is surely an example of a manager disliked by employees and former employees, but is he an example of an effective, high performance leader?

 

Satellite TV has been a fantastic business model. Why hasn't DISH performed as well as DirecTV?

[giofranchi]

Ergen is surely an example of a manager disliked by employees and former employees, but is he an example of an effective, high performance leader?

 

Satellite TV has been a fantastic business model. Why hasn't DISH performed as well as DirecTV?

 

Cannot really answer your question, because I have never closely followed DirecTV… Yes! I have missed that boat…! >:(

Anyway, as far as DISH is concerned, $1 invested on June 21, 1995, would be worth $31 today… That’s a 21% CAGR in the value of your initial investment over the course of 18 years… It is clearly a track record matched by only a very small number of equally rare and extraordinary businesses! ;)

 

giofranchi

 

[giofranchi]

Q3 2013 Results:

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2013/Valeant-Pharmaceuticals-Reports-2013-Third-Quarter-Financial-Results/default.aspx

 

LAVAL, Quebec, Oct. 31, 2013 /PRNewswire/ -- Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (TSX: VRX) announces third quarter financial results for 2013.

•Total Revenue $1.54 billion; an increase of 74% over the prior year ◦4% organic growth (same store sales) for the Developed Markets segment, excluding the impact from Zovirax franchise, Retin-A Micro and BenzaClin generic products

◦14% organic growth (same store sales) for the Emerging Markets segment

◦10% organic growth for Bausch + Lomb since close versus prior year

 

•GAAP EPS loss of $2.92; Cash EPS $1.43, an increase of 24% over the prior year; adjusting for pre-closing Bausch + Lomb financing costs of $0.09, Cash EPS would have been $1.51, an increase of 31% over prior year

•GAAP Operating Cash Flow $202 million; Adjusted Operating Cash Flow $408 million; an increase of 69% over the prior year

•Bausch + Lomb integration on track and Valeant expects to realize more than $850 million in synergies

•2013 Guidance for Cash EPS updated to $6.11 to $6.16

 

"Despite an unexpected early launch of a generic Retin-A Micro, significant headwinds this quarter from foreign exchange movements, and the demands of a major integration, we managed to beat expectations and position Valeant for a terrific fourth quarter and a strong 2014," stated J. Michael Pearson, chairman and chief executive officer.  "I thank our team, both at Valeant and our new colleagues from Bausch + Lomb, for their commitment, diligence, and focus on execution.  I am confident that our strategic focus on diversification, durable assets, key geographies, and low risk R&D will continue to benefit our shareholders as we look forward to continuing our track record of outperformance."

 

 

giofranchi

 

[fareastwarriors]

Valeant Pharmaceuticals: Stock Could Climb 42%

 

http://online.barrons.com/article/SB50001424053111903648004579167533195887744.html?mod=BOL_twm_da#articleTabs_article%3D0

 

Hefty research and development expenses, patent cliffs, and slow growth levels are well-known knocks against big pharmaceutical companies. They're all problems that Valeant Pharmaceuticals International (ticker: VRX) doesn't have.

 

Over the past five years CEO Michael Pearson has transformed the specialty pharmaceutical company with a series of savvy acquisitions, diversifying its product mix to lower patent and approval risk, and expanding in fast-growing emerging markets. Yet investors can still buy the stock for about 12 times forward earnings—on par or cheaper than other big drug makers.

 

Insiders appear confident about the company's prospects: Pearson owns nearly 2% of the shares outstanding, and during a five-week period beginning in mid-August, five insiders purchased more than $6.7 million in stock. The purchases came even as the stock was at multiyear highs and the health-care sector in general was slightly skewed toward executive selling, according to InsiderScore, which classified the moves as "an unusually aggressive buying streak."

[giofranchi]

Q3 2013 Conference Call

 

 

giofranchi

valeant-pharmaceuticals-conference-call-Q3-2013.pdf

[no_free_lunch]

Just got around to reading the 10-Q.  On page 18, they break out the pro-forma revenues, and actually show a 5.5% year over year decline.  That continues to be my concern with the business.  That without acquisitions, the existing business would slowly melt due to it's lean structure.  For now, it's just a single quarter and perhaps the result will be different next quarter but definitely something to keep in mind.

[Liberty]

Just got around to reading the 10-Q.  On page 18, they break out the pro-forma revenues, and actually show a 5.5% year over year decline.  That continues to be my concern with the business.  That without acquisitions, the existing business would slowly melt due to it's lean structure.  For now, it's just a single quarter and perhaps the result will be different next quarter but definitely something to keep in mind.

 

Couple questions:

 

1) You say it's a single quarter. Does it mean you've looked at past ones and pro-forma they were positive or at least neutral?

 

2) Not sure if you've read my comment earlier in this thread, but if you consider that some of the acquisition cost is just a substitute for R&D (possibly a more cost efficient and less uncertain way to refill the pipeline, since you know what you're buying and can pick good value out of many choices on the market, but you might not know what will come out of R&D), then that decline pro-forma doesn't quite seem as bad. It's just a different way to refill that pipeline. What matters in the end is FCF/share, not that there are no pro-forma revenue declines, no?

[no_free_lunch]

Liberty,

 

1) I looked at the first quarter and couldn't find the same breakout.  Their analysis does include past quarter and past 3 quarters, from that I can deduce that most of the losses were just the most recent quarter.  Or up until now it wasn't much of an issue.

 

2) The problem I have with acquisitions as substitution for research is we are not counting it against the earnings.  They back out ALL of the acquisition costs in calculating the cash EPS.  Also, they are taking on a lot of debt to do this.

 

I look at it as what would we have if they stopped acquiring.  With the BOL cost saving complete next year they will be earning say $9.50 / share, roughly $3.2B against a $35B market cap. If the earnings stay static, that gives you a PE of 11.  There is still a lot of debt but in this case it's not an issue.  That is not bad an earnings multiple, if they could pump out $9.50 / year indefinitely then it would be worth a lot more than current.  However, this isn't coke, there is real competition and at some point those earnings are going to start to slide, in my opinion.  Look at the larger pharma companies and how much they have to put into R&D just to stay current.  Maybe Valeant has some advantages without the patents but ultimately there will be competition.  A PE of 11 looks expensive if it's a melting ice cube.  At some point the debt would just kill it.

 

So the base case is the result of acquisitions.  That is how we got where we are.  So it seems reasonable that future cases will also resemble the base case.  Whatever logic we use here should apply to the new acquisitions as well. 

 

You also have some headwinds.  Interest rates will eventually climb.  Acquisitions prices are going up as the market climbs.  Endo is now cloning the strategy.

 

All that being said, in the very short-term it will probably go up!  I suspect Valeant will pull out another acquisition, analysts will pull out their calculators and the stock will be at $150 before you know it. 

[Liberty]

Those are good points. How much would you estimate the adjusted cash EPS numbers need to be discounted to compensate for that? Personally, I don't know, but I don't think it's much more than 5-15% (you could fiddle with it, add it to their current R&D spend and see how it compares to other pharmas with similar product mix, then decide if the acquisition approach is more capital-efficient or not, etc). Does it kill the thesis?

 

I think that what will make a huge difference over the long term is whether Pearson is right when he says that a lot of what they're cutting isn't providing good returns anyway (it's not like everybody's so great at capital allocation -- they mostly do what others are doing); they do marketing differently, with more emphasis on less expensive direct doctor-relationships, and they don't entirely cut R&D -- just most of the long-shot, blue sky stuff -- the question is, is what R&D remains enough to maintain the type of products that they have (not have that melting ice cube, or at least, melting slowly)? They aren't in the big blockbuster business. With their product mix, it seems to be about making a slightly improved formulation of some cream, or a slightly more comfortable contact lens, etc, not about making the next Viagra from scratch.

 

Other benefits that can offset this partially are the lower tax rate than US pharmas (making acquisitions de facto less expensive), the cross-selling opportunities (ie. you acquire a small pharma that had very limited reach because of its size, and you plug its product into the global Valeant sales force), and the ability to allocate wherever there are opportunities worldwide (ie. they seem disciplined about staying out of markets, geographically and product-wise, where expected returns are too low).

 

Do the pros of the approach more than compensate for the cons? Good question.

 

Management seems very smart, and has incentives that are fairly long-term (iirc). I wouldn't be surprised if they're very aware of this issue and feel that the approach addresses it. But that doesn't mean they're right... It's one of those "if you want to do significantly better than everybody, you have to do something different". Can I get the conviction that they are different and correct?  :-\

[no_free_lunch]

I have been doing some modelling of their acquisitions in excel and based on the results I decided to get back on the Valeant bus today.

 

The basic model I put together of their potential DCF from their acquisitions indicates that the deals are really quite lucrative.  More importantly, even using fairly pessimistic assumptions of growth, the results were reasonable.  Essentially, even with slow & gradual EBITDA loss, Valeant will still not only get their money back but make a reasonable rate of return.

 

Rather than upload my spreadsheet I am just going to post a few scenarios.

 

All assume that first year yields $0 EBITDA due to restructuring costs.  Following that, a starting point of $1.55B EBITDA (based on $720M EBITDA pre acqusition + $850M announced cost cuts).  I assume an 8% tax rate (which is unlikely since they neve seem to pay tax).  I then apply a growth multiplier each year, out to year 15.  At year 15, I assume the business is sold for 3 x EBITDA as opposed to the 12x that Valeant generally pays.  All results are not adjusted for inflation.  Note for comparison that Valeant payed $8.7B.

 

Scenario 1:

 

Growth of -5% per year, starting in year 3.

 

EBITDA 7%   8% 10% 12% 14% 16% 20%

Year 1 0

Year 2 1.426 1.345283019 1.32037037 1.296363636 1.273214286 1.250877193 1.229310345 1.188333333

Year 3 1.3547 1.205678177 1.1614369 1.119586777 1.079958546 1.042397661 1.006762782 0.940763889

Year 4 1.286965 1.080560631 1.02163431 0.966915853 0.916036267 0.868664717 0.824504003 0.744771412

Year 5 1.22261675 0.96842698 0.89865981 0.835063691 0.776995048 0.723887264 0.675240347 0.589610701

Year 6 1.161485913 0.867929841 0.790487796 0.72119137 0.659058299 0.603239387 0.55299856 0.466775138

Year 7 1.103411617 0.77786165 0.695336487 0.622847092 0.559022665 0.502699489 0.452886752 0.369530318

Year 8 1.048241036 0.697140158 0.611638576 0.537913398 0.47417101 0.418916241 0.370898633 0.292544835

Year 9 0.995828984 0.624795424 0.538015414 0.464561571 0.402198625 0.349096868 0.303753191 0.231597994

Year 10 0.946037535 0.559958163 0.4732543 0.401212265 0.341150619 0.290914056 0.248763389 0.183348412

Year 11 0.898735658 0.501849297 0.416288504 0.346501502 0.289368829 0.24242838 0.203728638 0.145150826

Year 12 0.853798875 0.449770597 0.366179703 0.299251297 0.245446774 0.20202365 0.166846729 0.114911071

Year 13 0.811108932 0.40309629 0.322102516 0.258444302 0.20819146 0.168353042 0.136641718 0.090971264

Year 14 0.770553485 0.361265542 0.283330917 0.223201897 0.176590971 0.140294202 0.111904855 0.072018918

Year 15 0.732025811 0.323775722 0.24922627 0.192765275 0.149786984 0.116911835 0.091646217 0.057014976

Sale @ 3X 2.196077432 0.916346383 0.692295194 0.525723477 0.401215136 0.307662723 0.23701608 0.142537441

 

16.80758703 11.08373787 9.840257068 8.811543403 7.952405519 7.228366708 6.612902239 5.629880531

 

In this scenario, Valeant would get's a rough 10% return on their money.  This isn't great but then with inflation running at say 2%, that assumes -7% real growth and a return of +8%.  This isn't by any means a worst case but in my mind it fits in the lower end of the main standard deviation.

 

 

Scenario 2:  0% growth

 

EBITDA 7% 8% 10% 12% 14% 16% 20%

Year 1 0

Year 2 1.426 1.345283019 1.32037037 1.296363636 1.273214286 1.250877193 1.229310345 1.188333333

Year 3 1.426 1.269134923 1.222565158 1.178512397 1.136798469 1.097260696 1.059750297 0.990277778

Year 4 1.426 1.197297098 1.132004776 1.071374906 1.014998633 0.962509382 0.913577842 0.825231481

Year 5 1.426 1.129525564 1.04815257 0.973977187 0.90624878 0.844306476 0.787567106 0.687692901

Year 6 1.426 1.065590155 0.970511639 0.885433807 0.809150696 0.740619715 0.67893716 0.573077418

Year 7 1.426 1.005273731 0.898621888 0.804939824 0.722455979 0.649666417 0.585290655 0.477564515

Year 8 1.426 0.948371444 0.832057304 0.731763477 0.645049981 0.569882822 0.50456091 0.397970429

Year 9 1.426 0.894690042 0.770423429 0.665239524 0.575937483 0.499897212 0.434966301 0.331642024

Year 10 1.426 0.844047209 0.713355027 0.604763204 0.514229896 0.438506327 0.374970949 0.276368353

Year 11 1.426 0.796270952 0.660513914 0.549784731 0.459133835 0.384654672 0.323250819 0.230306961

Year 12 1.426 0.751199011 0.611586957 0.499804301 0.409940924 0.337416379 0.278664499 0.191922468

Year 13 1.426 0.708678312 0.56628422 0.454367546 0.366018683 0.29597928 0.240228016 0.15993539

Year 14 1.426 0.668564446 0.524337241 0.413061406 0.326802395 0.259630947 0.207093117 0.133279491

Year 15 1.426 0.630721175 0.485497445 0.375510369 0.291787853 0.227746445 0.178528549 0.111066243

Sale @ 3X 4.278 1.78505993 1.348604014 1.024119187 0.781574606 0.59933275 0.461711766 0.277665607

 

24.242 15.03970701 13.10488595 11.5290155 10.2333425 9.158286714 8.258408332 6.852334393

 

Valeant is looking at 15%+.  Again, these are nominal figures, or you could say 15% post inflation, however you prefer.  Seems good to me.

 

Scenario 3:  Dare to dream that Valeant gets +3% returns:

 

EBITDA 7% 8% 10% 12% 14% 16% 20%

Year 1 0

Year 2 1.426 1.345283019 1.32037037 1.296363636 1.273214286 1.250877193 1.229310345 1.188333333

Year 3 1.46878 1.307208971 1.259242112 1.213867769 1.170902423 1.130178516 1.091542806 1.019986111

Year 4 1.5128434 1.270212491 1.200943867 1.136621638 1.07681205 1.021126203 0.969214733 0.875488079

Year 5 1.558228702 1.234263081 1.145344613 1.06429117 0.99028251 0.922596482 0.860595841 0.751460601

Year 6 1.604975563 1.199331107 1.0923194 0.99656355 0.910706237 0.833574015 0.764149755 0.645003682

Year 7 1.65312483 1.165387774 1.041749057 0.93314587 0.837524486 0.753141434 0.678512282 0.553628161

Year 8 1.702718575 1.132405101 0.993519934 0.87376386 0.770223411 0.680469892 0.602472113 0.475197505

Year 9 1.753800132 1.1003559 0.947523641 0.818160705 0.708330459 0.614810517 0.534953686 0.407877858

Year 10 1.806414136 1.069213752 0.903656806 0.766095933 0.651411047 0.555486695 0.47500198 0.350095162

Year 11 1.86060656 1.038952985 0.861820843 0.717344374 0.599065516 0.501887102 0.421769 0.300498347

Year 12 1.916424757 1.009548655 0.821921729 0.671695186 0.550926323 0.453459399 0.374501784 0.257927748

Year 13 1.9739175 0.980976524 0.783869798 0.628950947 0.506655458 0.409704545 0.332531757 0.221387984

Year 14 2.033135025 0.953213037 0.747579529 0.588926796 0.465942073 0.37017165 0.295265267 0.190024686

Year 15 2.094129075 0.92623531 0.712969366 0.551449636 0.428500299 0.334453333 0.262175194 0.163104522

Sale @ 3X 6.282387226 2.621420687 1.98047046 1.503953553 1.147768658 0.880140349 0.678039294 0.407761305

 

30.64748548 18.35400839 15.81330153 13.76119462 12.08826524 10.71207732 9.570035836 7.807775083

 

Should translate to 17-18% rate of return.

 

Scenario 4: Growth of 6%

 

EBITDA 7% 8% 10% 12% 14% 16% 20%

Year 1 0

Year 2 1.426 1.345283019 1.32037037 1.296363636 1.273214286 1.250877193 1.229310345 1.188333333

Year 3 1.51156 1.345283019 1.295919067 1.24922314 1.205006378 1.163096337 1.123335315 1.049694444

Year 4 1.6022536 1.345283019 1.271920566 1.203796844 1.140452464 1.081475542 1.026496064 0.927230093

Year 5 1.698388816 1.345283019 1.248366481 1.160022414 1.079356797 1.005582521 0.938005024 0.819053248

Year 6 1.800292145 1.345283019 1.225248584 1.117839781 1.021534111 0.935015327 0.857142522 0.723497036

Year 7 1.908309674 1.345283019 1.202558795 1.077191061 0.96680907 0.869400216 0.783250925 0.639089049

Year 8 2.022808254 1.345283019 1.180289188 1.038020477 0.915015727 0.808389675 0.715729294 0.56452866

Year 9 2.144176749 1.345283019 1.158431981 1.000274278 0.865997027 0.751660575 0.654028492 0.498666983

Year 10 2.272827354 1.345283019 1.136979536 0.963900668 0.819604329 0.698912464 0.597646726 0.440489168

Year 11 2.409196996 1.345283019 1.11592436 0.928849735 0.775696954 0.649865975 0.546125456 0.389098765

Year 12 2.553748815 1.345283019 1.095259094 0.895073381 0.73414176 0.604261346 0.499045676 0.343703909

Year 13 2.706973744 1.345283019 1.074976518 0.862525258 0.694812737 0.561857041 0.456024497 0.30360512

Year 14 2.869392169 1.345283019 1.055069546 0.831160703 0.657590626 0.522428476 0.41671204 0.268184522

Year 15 3.041555699 1.345283019 1.035531221 0.800936677 0.622362557 0.485766829 0.380788588 0.236896328

Sale @ 3X 9.124667097 3.80740477 2.876475613 2.184372756 1.667042564 1.27833376 0.984798073 0.59224082

 

39.09215111 22.64136703 19.29332092 16.60955081 14.43863739 12.66692328 11.20843904 8.984311479

 

Valeant is looking at 20%+ rate of return.  If we assume that they sell the company for 10x ebitda, still below what they paid, the return would be around 22%. 

 

 

Scenario 5: Growth of -10%

 

EBITDA 7% 8% 10% 12% 14% 16% 20%

Year 1 0

Year 2 1.426 1.345283019 1.32037037 1.296363636 1.273214286 1.250877193 1.229310345 1.188333333

Year 3 1.2834 1.142221431 1.100308642 1.060661157 1.023118622 0.987534626 0.953775268 0.89125

Year 4 1.15506 0.969810649 0.916923868 0.867813674 0.822148893 0.7796326 0.739998052 0.6684375

Year 5 1.039554 0.823424136 0.764103224 0.71002937 0.66065536 0.615499421 0.57413642 0.501328125

Year 6 0.9355986 0.6991337 0.636752686 0.580933121 0.530883772 0.485920595 0.445450671 0.375996094

Year 7 0.84203874 0.593604085 0.530627239 0.475308917 0.426603031 0.383621523 0.345608279 0.28199707

Year 8 0.757834866 0.504003469 0.442189366 0.388889114 0.342806007 0.302859097 0.268144354 0.211497803

Year 9 0.682051379 0.427927473 0.368491138 0.318182002 0.275469113 0.239099287 0.208043034 0.158623352

Year 10 0.613846241 0.363334647 0.307075948 0.260330729 0.221359108 0.188762595 0.161412698 0.118967514

Year 11 0.552461617 0.308491682 0.255896624 0.212997869 0.177877855 0.149023101 0.12523399 0.089225636

Year 12 0.497215456 0.261926899 0.213247186 0.174270984 0.142937562 0.117649817 0.097164303 0.066919227

Year 13 0.44749391 0.222390764 0.177705989 0.14258535 0.114860541 0.092881434 0.075386097 0.05018942

Year 14 0.402744519 0.188822347 0.148088324 0.116660741 0.092298649 0.073327448 0.058489213 0.037642065

Year 15 0.362470067 0.16032086 0.123406937 0.095449697 0.074168557 0.057890091 0.045379562 0.028231549

Sale @ 3X 1.087410201 0.480962581 0.37022081 0.286349092 0.222505672 0.173670272 0.136138686 0.070578872

 

12.0851796 8.491657742 7.675408349 6.986825454 6.400907028 5.898249099 5.463670971 4.739217559

 

In this scenario, they are still looking at a 7% return.  I think that is roughly the rate on their debt, so if it was a fully financed deal they would basically break even I think.

 

I also ran the same spreadsheet but with the Medicis acquisition.  Medicis had slightly worse numbers but still very attractive.  In the end it is just a matter of the ratio of acquisition price to EBITDA, nothing to complex.  It is interesting though, that they are looking at superior returns with an acquisition in April from what was done last year with significantly weaker financial markets.  I would have expected the opposite.

 

I am fairly new to this type of modelling, so interested in any feedback. 

 

EDIT: The formatting is horrible so I am just uploading my spreadsheet. 

Valeant.xlsx

[no_free_lunch]

The new owners of Bausch + Lomb will use a $39.5 million grant from the state of New Jersey to move the company’s headquarters out of Rochester.

 

The move will allow Valeant, whose international headquarters is in Quebec, to centralize its American administrative operations. The company will employ about 800 employees in Bridgewater, Turbowitz said. The company now has 274 employees in the township and plans to add about 550.

 

The Grow NJ $39,502,500 grant, which will be awarded over 10 years, was given by the state Economic Development Authority (EDA).

 

So Valeant will get paid $40M to move the B&L headquarters.  It's a rough move for the existing employees but might make good financial sense.  I think it just shows something about the culture, however you want to interpret it.  As a shareholder, it sounds like a net positive.