VRX - Valeant Pharmaceuticals International Inc.

[wbr]

Interesting how far bad faith is assumed to go at Allergan... Who owns Allergan, the board, or the shareholders?

 

I think Pyott owns Allergan, shareholders are merely providing him with capital.

[muscleman]

Anyone betting big on this? I haven't had a position yet. But this seems interesting. :)

 

[Liberty]

http://dealbook.nytimes.com/2014/09/18/allergan-valeant-fight-holds-lessons-for-all-corporate-shareholders/

[muscleman]

I am still unable to fully understand VRX here. Cash EPS is net income + D&A + Restructuring costs, which is pretty aggressive.

The key here is how much D&A can be actually added back and how much cannot?

It seems like the D&A is very real for a pharma company. Pearson is making small R&Ds to extend the life of these assets, but do you know how effective is this?

For example, do we have data like this drug was acquired for 100 Million, can be used for the next 15 years, but after spending 10 Million in R&D, it can now be used for 20 years?

I think that would justify putting part of the D&A back.

[muscleman]

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.

 

You assumed 10% organic growth per year. How about 2% growth or -2% growth? :) I think this may match the reality of their pro forma revenue disclosure more, right?

[Liberty]

The plot thickens..

 

http://online.wsj.com/articles/actavis-made-offer-for-allergan-in-august-1411422949

 

http://dealbook.nytimes.com/2014/09/22/botox-maker-allergan-said-to-be-in-talks-to-acquire-salix/

 

Apparently AGN is closer to a deal with Salix, and Actavis has tried to buy Allergan but that offer has been rejected (for now).

 

They'll write a book about this someday...

[mankap]

I am guessing that VRX price will take a hit on the news. WSJ says that AGN offer is all cash so that they do not need Board approval.

I am thinking of adding VRX at less than $100.

 

I think that VRX can drop to way below $100 if the market gets a feeling that AGN acquisition is failing.

But I think failure to buy AGN should not hurt VRX's existing franchise.

 

How does the board view VRX without AGN

[original mungerville]

I think VRX goes up say 60% if they acquire Allergan. If they don't, I think VRX goes up 10% anyway. Their share price was higher before this Allergan drama!

 

I think this year has been OK for Valeant regardless. They probably needed a breather from the debt fueled acquisitions because their debt/adjusted earnings ratio was getting quite high. A one year pause trying to acquire Allergan is not the worst thing that could have happened to Valeant.

 

If they just use their adjusted earnings going forward to buy companies (say $1 to 5 billion dollar acquisitions) and restructured them at a 15% IRR, their earnings can grow via acquisitions at 15% compounded (excluding organic growth from the existing business which we might assume is 5% - I'm not an optimist when it comes to projections) so earnings growth of 20%, and this will double earnings in 4 years and cut the debt/adjusted earnings ratio in half while delivering a nice return to shareholders.

 

So I think this thing jumps 10% on no Allergan deal and then starts compounding at 20% annually. On that note, maybe I need to buy more...

[TonyG]

Is there any relevance to Allergan having to hand over their "business strategy" docs to PS/Valeant? What exactly does this mean or is this just a non-event? If this Salix deal does actually come through within the next week or so I hope the shareholders sue this board into the stone age.

[Liberty]

Is there any relevance to Allergan having to hand over their "business strategy" docs to PS/Valeant? What exactly does this mean or is this just a non-event? If this Salix deal does actually come through within the next week or so I hope the shareholders sue this board into the stone age.

 

Looks like that might be the case :

 

http://dealbook.nytimes.com/2014/09/23/ackman-threatens-to-sue-if-allergan-proceeds-with-salix-deal/

[wbr]

At least we know the lawyers and the investment bankers will win.

[muscleman]

If VRX drops to $80, will this be a good buy? Based on cash EPS, yes, but is depreciation real in Pharma industry?

[loganc]

At least we know the lawyers and the investment bankers will win.

 

BREAKING: Pfizer Said to Have Approached Actavis About Possible Takeover

 

LOL.

[Liberty]

At least we know the lawyers and the investment bankers will win.

 

BREAKING: Pfizer Said to Have Approached Actavis About Possible Takeover

 

LOL.

 

So Pfizer has approached Actavis who has approached Allergan who has been approached by Valeant before approaching Jazz and Salix.

 

???

[original mungerville]

The only thing that bugs me about Valeant is the debt load. No matter how much the stock declines, the debt is still there ensuring enterprise value relative to current adjusted earnings remains high.

 

The stock may be at an attractive p/e given the growth potential, but the damn debt keeps the enterprise value so high.

[muscleman]

The only thing that bugs me about Valeant is the debt load. No matter how much the stock declines, the debt is still there ensuring enterprise value relative to current adjusted earnings remains high.

 

The stock may be at an attractive p/e given the growth potential, but the damn debt keeps the enterprise value so high.

 

The cash EPS includes D&A. Is this ok? In Pharma world, how real is depreciation of the drugs? Can anyone give me some insight?

[peter1234]

The only thing that bugs me about Valeant is the debt load. No matter how much the stock declines, the debt is still there ensuring enterprise value relative to current adjusted earnings remains high.

 

The stock may be at an attractive p/e given the growth potential, but the damn debt keeps the enterprise value so high.

 

The cash EPS includes D&A. Is this ok? In Pharma world, how real is depreciation of the drugs? Can anyone give me some insight?

 

In Pharma, I think amortization and depreciation are accounting entries that have little relation to reality.

(For example, customer relationships that they amortize do not become less valuable).

 

That said, what is very real is competition from drugs going off patent, similar drugs, etc.

 

These real economic cost you will not find in the financials until they happen suddenly. (Eg new generic destroying a key drug).

 

Maybe some Pharmas might capitalize some R&D and then amortize these costs over the expected life of the drug. Here you would have some matching but still there is the assumption of an expected life of the drug.

 

Also when they acquire a company, they might capitalize acquired in process R&D and later amortize if drug is successful or write-off if drug is not successful (similar effects as above).

 

Hope this helps.

 

;)

 

[giofranchi]

Valeant Provides Update On Third Quarter Results And Sends Letter To Allergan CEO And Lead Independent Director

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2014/Valeant-Provides-Update-On-Third-Quarter-Results-And-Sends-Letter-To-Allergan-CEO-And-Lead-Independent-Director/default.aspx

 

 

Gio

[Liberty]

http://nypost.com/2014/09/24/allergan-must-prove-it-isnt-thwarting-acquistion-expert/

 

“Allergan cannot buy another company to make themselves a less attractive takeover target for the sole purpose of thwarting this bid,” said Jonathan Macey, a law professor at Yale University.

 

On Tuesday Ackman — the company’s biggest shareholder with a 9.7 percent stake — said he will sue Allergan if it attempts to acquire Salix without a shareholders vote.

 

“By undertaking an acquisition without a shareholder vote, with the purpose and desired effect of frustrating a Valeant transaction, you are breaching your commitment that shareholders would have a vote on the value proposition offered by Valeant,” he wrote in a letter to the Allergan board.

 

http://dealbook.nytimes.com/2014/09/24/valeant-switches-to-sugar-but-allergan-still-not-biting/?smid=tw-dealbook&seid=auto

 

Mr. Pearson invited Allergan to the bargaining table once more and even suggested Valeant might consider paying more. “It may be too late, but I believe we still have an opportunity to take the temperature down and come together to see if we can begin a conversation that could lead to even more value for your stockholders, while still being the right transaction for ours,” he said. “We are open to seeing any information you may have that would show that there is more value for your company.”

 

Mr. Pearson wasn’t all carrot and no stick. He also said Valeant was prepared to follow through with his hostile takeover attempt if Allergan refused to engage. “We are committed to this transaction,” he said. “While we would much prefer avoiding a three-month proxy contest, we will pursue it if we need to.”

[Liberty]

As if this thing wasn't complex enough already, there's now some whispers that Actavis could go directly against Salix, which would pull the carpet from under Allergan:

 

LOS ANGELES (MarketWatch) -- Actavis PLC /quotes/zigman/22587972/composite ACT +2.19% reportedly is in talks to purchase Salix Pharmaceuticals Ltd. /quotes/zigman/87125/composite SLXP -0.73% , in a move that would undermine Allergan Inc.'s /quotes/zigman/217110/composite AGN +3.75% plans to buy Salix in order to fend off a takeover attempt from Valeant Pharmaceuticals International Inc. /quotes/zigman/122461/composite VRX +7.70% CNBC reported Wednesday that Actavis, itself the target of a takeover by Pfizer Inc. /quotes/zigman/238207/composite PFE +1.00% , was looking to take Salix out from under Allergan. If completed, an acquisition by Actavis would be its third major purchase in a year, following the buyouts of Warner Chilcott and Forest Laboratories.

[original mungerville]

I think VRX goes up say 60% if they acquire Allergan. If they don't, I think VRX goes up 10% anyway. Their share price was higher before this Allergan drama!

 

I think this year has been OK for Valeant regardless. They probably needed a breather from the debt fueled acquisitions because their debt/adjusted earnings ratio was getting quite high. A one year pause trying to acquire Allergan is not the worst thing that could have happened to Valeant.

 

If they just use their adjusted earnings going forward to buy companies (say $1 to 5 billion dollar acquisitions) and restructured them at a 15% IRR, their earnings can grow via acquisitions at 15% compounded (excluding organic growth from the existing business which we might assume is 5% - I'm not an optimist when it comes to projections) so earnings growth of 20%, and this will double earnings in 4 years and cut the debt/adjusted earnings ratio in half while delivering a nice return to shareholders.

 

So I think this thing jumps 10% on no Allergan deal and then starts compounding at 20% annually. On that note, maybe I need to buy more...

 

Liberty,

 

I agree - very complex: a bunch of merger arbitrage calculations based on various possible combinations and probabilities. Hard for a long-term value investor to be comfortable betting on an outcome.

 

This is why I think framing the situation as in the quote above makes sense: ie even if Allergan does not go through, Valeant should rise over time - to the tune of 20% annualized (or more if their long-run organic growth is higher than the 5% assumed above). The negative is the debt load is a negative option in this scenario - it could somehow disrupt either the 20% growth or the value that investors will receive from the 20% growth (ie should VRX not be able to refinance that debt at an appropriate rate, they will have to delever by slowing inorganic growth).

 

Allergan going through would be huge option value from two perspectives: 1) depending on how it is financed, it takes away the above noted negative option because it would be a delevering transaction, and 2) it accelerates the 20% growth with a one-time jump in growth coming from Allergan being digested/restructured by Valeant. 

 

In any case, I think the key is to start to view the Allergan deal as a huge "bonus", and if you can get comfortable with Valeant without that huge bonus, then it makes sense to have a chunk of the portfolio allocated to it.

[muscleman]

The only thing that bugs me about Valeant is the debt load. No matter how much the stock declines, the debt is still there ensuring enterprise value relative to current adjusted earnings remains high.

 

The stock may be at an attractive p/e given the growth potential, but the damn debt keeps the enterprise value so high.

 

The cash EPS includes D&A. Is this ok? In Pharma world, how real is depreciation of the drugs? Can anyone give me some insight?

 

In Pharma, I think amortization and depreciation are accounting entries that have little relation to reality.

(For example, customer relationships that they amortize do not become less valuable).

 

That said, what is very real is competition from drugs going off patent, similar drugs, etc.

 

These real economic cost you will not find in the financials until they happen suddenly. (Eg new generic destroying a key drug).

 

Maybe some Pharmas might capitalize some R&D and then amortize these costs over the expected life of the drug. Here you would have some matching but still there is the assumption of an expected life of the drug.

 

Also when they acquire a company, they might capitalize acquired in process R&D and later amortize if drug is successful or write-off if drug is not successful (similar effects as above).

 

Hope this helps.

 

;)

 

I am saying the patent's depreciation is real, no? When you spend a huge amount of R&D, and get a 10 year or 15 year patent, eventually your patent expires and your competitors can make generic version of "botox" or so with low cost. Please let me know if I am wrong about this.

[peter1234]

The only thing that bugs me about Valeant is the debt load. No matter how much the stock declines, the debt is still there ensuring enterprise value relative to current adjusted earnings remains high.

 

The stock may be at an attractive p/e given the growth potential, but the damn debt keeps the enterprise value so high.

 

The cash EPS includes D&A. Is this ok? In Pharma world, how real is depreciation of the drugs? Can anyone give me some insight?

 

In Pharma, I think amortization and depreciation are accounting entries that have little relation to reality.

(For example, customer relationships that they amortize do not become less valuable).

 

That said, what is very real is competition from drugs going off patent, similar drugs, etc.

 

These real economic cost you will not find in the financials until they happen suddenly. (Eg new generic destroying a key drug).

 

Maybe some Pharmas might capitalize some R&D and then amortize these costs over the expected life of the drug. Here you would have some matching but still there is the assumption of an expected life of the drug.

 

Also when they acquire a company, they might capitalize acquired in process R&D and later amortize if drug is successful or write-off if drug is not successful (similar effects as above).

 

Hope this helps.

 

;)

 

I am saying the patent's depreciation is real, no? When you spend a huge amount of R&D, and get a 10 year or 15 year patent, eventually your patent expires and your competitors can make generic version of "botox" or so with low cost. Please let me know if I am wrong about this.

 

Yes, patents do depreciate over time but you will not usually see it as depreciation in the financials as R&D is usually expensed as incurred. Meaning you incur the expenses before you have and sell the drug.

 

[dwy000]

Thanks Peter.  What happens if someone acquires that drug?  Given the purchase price is almost entirely goodwill would they amortize the goodwill over the remaining life of the patent acquired?

[peter1234]

Thanks Peter.  What happens if someone acquires that drug?  Given the purchase price is almost entirely goodwill would they amortize the goodwill over the remaining life of the patent acquired?

 

That is where it gets tricky and I am not sure how much leeway there is under GAAP or IFRS. There is a thing called in-process R&D that you can capitalize and amortize.

 

For finished drugs, maybe you can assign the Goodwill to something like 'Intangibles with finite life' and depreciate it.

 

I think it is hard to generalize.

 

Probably need to drill down into specifics. For an acquired drug portfolio, you will probably not find the details for individual drugs.

 

For a roll-up like Valeant to drill down further is likely impossible.

 

;)