VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

Valeant Pharmaceuticals Agrees to Acquire Solta Medical for $2.92 Per Share in Cash

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2013/Valeant-Pharmaceuticals-Agrees-to-Acquire-Solta-Medical-for-292-Per-Share-in-Cash/default.aspx

 

 

Gio

[giofranchi]

RBC ups target on Valeant - 9:39 AM

•RBC has reportedly hiked their price target on Valeant Pharmaceuticals (VRX +0.8%) to $120 from $117.

 

 

Gio

 

[giofranchi]

Valeant 2014 guidance in line with the Street - 8:54 AM

•Valeant Pharmaceuticals (VRX +2.3%) forecasts 2014 adjusted EPS of $8.25-8.75, in line with consensus of $8.71.

•Revenues are pegged at $8.2-8.6B vs $8.28B.

•Expects growth across all its business units.

•Q4 EPS seen at $2.05-2.10 and revenue at $2B, unchanged from prior guidance.

•Valeant's plans for 2014 include: achieving annual run-rate synergies of over $900M from the acquisition of Bausch + Lomb; closing at least one significant deal; launching several products; and cutting its leverage ratio to below 4x adjusted pro forma EBITDA.

 

 

Gio

VRX_Guidance_presentation_Jan_2014_Final.pdf

[fareastwarriors]

nice pop today.

 

 

http://www.fool.com/investing/general/2014/01/07/why-valeant-pharmaceuticals-intl-inc-shares-popped.aspx

[fareastwarriors]

 

 

Valeant's Ambitious 2016 Goal Excites Investors

 

While guidance for 2014 meets expectations, Valeant sets its sights on becoming a top-five global pharmaceutical company.

 

http://news.morningstar.com/articlenet/article.aspx?id=630021

[abitofvalue]

I have been digging in on this one for a few days - one thing I am struggling with is how they are able to pay such a low rate on taxes. 

 

I understand that they based in Canada with intellectual capital in a Bermuda subsidiary. Since Canada doesn't charge for foreign income and neither does Bermuda they pay effectively a 0% tax rate on most of their intellectual capital. Intellectual capital is the key value add in pharma so a majority of VRX's income doesn't seem to be taxes.  But Valent's intellectual capital comes through acquisition not in-house. Which means they are buying assets that used to be U.S. domiciled and need to be transferred overseas to pay the lower rate going forward.

 

As far as I can tell, the rules governing such transactions require the foreign subsidiary pay fair market value to the U.S. sub for these asset transfers. The U.S. sub then has to pay capital gains on this sale. How is Valent able to circumvent this rule? If it's so easy to do why doesnt every major pharma company do a similar deal?

 

The reason I think this is important is that Valent is very acquisitive and its cash EPS uses an extremely low tax rate.  It's important that this be sustainable and not subject to restatement.  As long as the tax rate can be maintained it makes all the sense in the world to acquire more company's. The tax arbitrage alone will make most acquisitions accretive (even before any synergies).

 

But I haven't been able to figure out how they are able to keep the rates so low and why couldn't other companies do this?  How can the structure possibly work for them and no one else? 

[accutronman]

From WSJ in 2012:

 

Pharmaceutical company Valeant will use a tax structure it inherited from a 2010 merger to shave millions of dollars off the tax bill of its latest target, Medicis.

 

Medicis, located in Scottsdale, Ariz., had an effective tax rate of 41.6% in 2011, compared to “less than 5%” for Montreal-based Valeant, according to a person close to Valeant. After completing the proposed $2.6 billion acquisition, Valeant will treat Medicis as a subsidiary subject to Canadian tax law.

 

Valeant could reap $150 million in tax savings by doing so, in addition to the $225 million it anticipates saving from cost cuts after completing the merger, according to Susquehanna analyst Gary Nachman.

 

The benefit is a direct result of Valeant’s deal for Biovail two years ago, in which then California-based Valeant took on Biovail’s tax structure and established its corporate base in Canada.

 

At the time of the deal, Biovail held many of its intellectual property patents in a Barbados subsidiary, which allowed the company to pay low taxes on income from licensing the patents and avoid paying Canadian tax on that money.

 

Under Canadian tax law, companies can repatriate dividends from subsidiaries in countries with which Canada has tax treaties without paying domestic taxes.

 

In July, Valeant moved its IP patent holdings to Bermuda, but doesn’t expect to pay higher taxes because the structural advantages still apply, said the person close to Valeant.

 

“Biovail was a great transaction all around,” said tax expert Robert Willens, adding that it was expected Valeant would use its new tax structure to make future deals more profitable. “Once they were able to accomplish that deal, the feeling was that this sort of thing would go on pretty regularly.”

 

There will be some upfront costs for Medicis to obtain the tax advantage, because Valeant must record a sale and pay taxes on any gains when it moves Medicis’ patents to its offshore subsidiaries. However, Willens said any upfront payment will be much smaller than the long-term benefit from the tax strategy.

 

“It’s not even a close call,” he said.

[abitofvalue]

From WSJ in 2012:

 

There will be some upfront costs for Medicis to obtain the tax advantage, because Valeant must record a sale and pay taxes on any gains when it moves Medicis’ patents to its offshore subsidiaries. However, Willens said any upfront payment will be much smaller than the long-term benefit from the tax strategy.

 

 

 

 

So this is what I was talking about in not understanding how they are structuring these deals and why others couldn't do the same -- At the time of this deal they had said they would have to make a payment to take Medicis offshore and have a one-time tax hit.  This is what I would expect and the reason I don't think others do this. The point of the law is that the one-time payment basically takes away most of the upside if the offshore subsidiary pays fair price.

 

In Valent's case, they said there would be a one-time tax hit too. However the one-time tax hit never seems to have taken place as far as I can tell.  So either Valent has outsmarted the IRS and taken it off-shore for a relatively minor payment. Which is great for shareholders though I am not sure how sustainable it is - as they get bigger its bound to draw more scrutiny from the IRS.  The alternative is they still haven't taken it off-shore and that they are either paying U.S. taxes or depleting their U.S. NOL's which means investors need to model a one-time tax hit in the future.

 

I think research analyst's are just accepting management's premise that taxes will remain low in perpetuity. I just think this is hard to accept without first understanding how this is currently achieved.  How do you judge if it's sustainable if you don't know how they do it.

 

[Bagehot]

From WSJ in 2012:

 

There will be some upfront costs for Medicis to obtain the tax advantage, because Valeant must record a sale and pay taxes on any gains when it moves Medicis’ patents to its offshore subsidiaries. However, Willens said any upfront payment will be much smaller than the long-term benefit from the tax strategy.

 

 

 

 

So this is what I was talking about in not understanding how they are structuring these deals and why others couldn't do the same -- At the time of this deal they had said they would have to make a payment to take Medicis offshore and have a one-time tax hit.  This is what I would expect and the reason I don't think others do this. The point of the law is that the one-time payment basically takes away most of the upside if the offshore subsidiary pays fair price.

 

In Valent's case, they said there would be a one-time tax hit too. However the one-time tax hit never seems to have taken place as far as I can tell.  So either Valent has outsmarted the IRS and taken it off-shore for a relatively minor payment. Which is great for shareholders though I am not sure how sustainable it is - as they get bigger its bound to draw more scrutiny from the IRS.  The alternative is they still haven't taken it off-shore and that they are either paying U.S. taxes or depleting their U.S. NOL's which means investors need to model a one-time tax hit in the future.

 

I think research analyst's are just accepting management's premise that taxes will remain low in perpetuity. I just think this is hard to accept without first understanding how this is currently achieved.  How do you judge if it's sustainable if you don't know how they do it.

 

There are several things at play here. First, VRX is a Canadian firm subject to Canadian tax law. Canadian tax law, unlike US tax law, doesn't provide for a worldwide taxation system. Therefore VRX can freely repatriate any money earned in other jurisdictions to Canada without paying tax. The chance that Canada would change this law is definitely a risk factor for VRX, but as of now there is no proposed legislation in place to do so. Further, it isn't clear how much VRX really needs to repatriate anyway, since Canada isn't really their target market for further investment. Nonetheless, if Canada were to adopt a system more like the US's, it would not be a positive for VRX.

 

As for US taxes, the way it works is VRX loads up their US subs with debt to shield basically all taxes. So they can issue debt in the US, use the proceeds anywhere in the world they want, and the interest shields most/all of the high US corporate tax. This is probably not something that is likely to change, the tax-deductibility of debt in the US comes up from time to time but there would be an immediate and well-coordinate outcry from all capital intensive industries if Congress ever really threatened to take away the interest deduction.

 

One additional related point is that VRX has ~$1B in NOLs available to shield the one-time gain on transferring IP from any businesses they buy.

 

Last, generally speaking VRX isn't looking to buy US businesses, maybe some tuck-ins like the recent SLTM deal, but they are much more focused on emerging markets. Since they are subject to Canadian tax law and generally speaking EM countries have poorly developed tax codes and/or low absolute tax burdens, the sustainability of their tax arbitrage isn't highly dependent on US tax policy.

 

Hope this helps!

[cubsfan]

From WSJ in 2012:

 

There will be some upfront costs for Medicis to obtain the tax advantage, because Valeant must record a sale and pay taxes on any gains when it moves Medicis’ patents to its offshore subsidiaries. However, Willens said any upfront payment will be much smaller than the long-term benefit from the tax strategy.

 

 

 

 

So this is what I was talking about in not understanding how they are structuring these deals and why others couldn't do the same -- At the time of this deal they had said they would have to make a payment to take Medicis offshore and have a one-time tax hit.  This is what I would expect and the reason I don't think others do this. The point of the law is that the one-time payment basically takes away most of the upside if the offshore subsidiary pays fair price.

 

In Valent's case, they said there would be a one-time tax hit too. However the one-time tax hit never seems to have taken place as far as I can tell.  So either Valent has outsmarted the IRS and taken it off-shore for a relatively minor payment. Which is great for shareholders though I am not sure how sustainable it is - as they get bigger its bound to draw more scrutiny from the IRS.  The alternative is they still haven't taken it off-shore and that they are either paying U.S. taxes or depleting their U.S. NOL's which means investors need to model a one-time tax hit in the future.

 

I think research analyst's are just accepting management's premise that taxes will remain low in perpetuity. I just think this is hard to accept without first understanding how this is currently achieved.  How do you judge if it's sustainable if you don't know how they do it.

 

There are several things at play here. First, VRX is a Canadian firm subject to Canadian tax law. Canadian tax law, unlike US tax law, doesn't provide for a worldwide taxation system. Therefore VRX can freely repatriate any money earned in other jurisdictions to Canada without paying tax. The chance that Canada would change this law is definitely a risk factor for VRX, but as of now there is no proposed legislation in place to do so. Further, it isn't clear how much VRX really needs to repatriate anyway, since Canada isn't really their target market for further investment. Nonetheless, if Canada were to adopt a system more like the US's, it would not be a positive for VRX.

 

As for US taxes, the way it works is VRX loads up their US subs with debt to shield basically all taxes. So they can issue debt in the US, use the proceeds anywhere in the world they want, and the interest shields most/all of the high US corporate tax. This is probably not something that is likely to change, the tax-deductibility of debt in the US comes up from time to time but there would be an immediate and well-coordinate outcry from all capital intensive industries if Congress ever really threatened to take away the interest deduction.

 

One additional related point is that VRX has ~$1B in NOLs available to shield the one-time gain on transferring IP from any businesses they buy.

 

Last, generally speaking VRX isn't looking to buy US businesses, maybe some tuck-ins like the recent SLTM deal, but they are much more focused on emerging markets. Since they are subject to Canadian tax law and generally speaking EM countries have poorly developed tax codes and/or low absolute tax burdens, the sustainability of their tax arbitrage isn't highly dependent on US tax policy.

 

Hope this helps!

 

Excellent explanation - thanks much!

[abitofvalue]

Thanks this is helpful.  If they are truly not going to buy U.S. business' then their tax position could be an advantage.

 

To be clear, my point isn't if Canada or U.S. change their policy. I understand what they say they are doing - and how Canadian law is different than U.S. law.  I just don't understand how it works on their U.S. acquisitions. If I could see the Medicis one-time tax come through (as a one-time increase in tax rates, or a significant reduction in NOLs) that would be helpful. I would expect the one-time payment to be pretty substantial.  That they could have transferred the I.P. offshore without a large payment / reduction in NOLs would be very surprising. My point is I have no idea how / what happened to Medicis I.P.  Is it currently in the U.S. sub or in the offshore sub?  If it's in the U.S. - i need to account for a future hit. If it's overseas - then it isnt an issue.

 

I think at current prices, you need to be convinced that this business has an enduring competitive moat. Far as I can tell Valent does two things really well - pay low taxes and cut costs. I am trying to get comfortable that low taxes are truly enduring.

[Bagehot]

Thanks this is helpful.  If they are truly not going to buy U.S. business' then their tax position could be an advantage.

 

To be clear, my point isn't if Canada or U.S. change their policy. I understand what they say they are doing - and how Canadian law is different than U.S. law.  I just don't understand how it works on their U.S. acquisitions. If I could see the Medicis one-time tax come through (as a one-time increase in tax rates, or a significant reduction in NOLs) that would be helpful. I would expect the one-time payment to be pretty substantial.  That they could have transferred the I.P. offshore without a large payment / reduction in NOLs would be very surprising. My point is I have no idea how / what happened to Medicis I.P.  Is it currently in the U.S. sub or in the offshore sub?  If it's in the U.S. - i need to account for a future hit. If it's overseas - then it isnt an issue.

 

I think at current prices, you need to be convinced that this business has an enduring competitive moat. Far as I can tell Valent does two things really well - pay low taxes and cut costs. I am trying to get comfortable that low taxes are truly enduring.

 

I can't answer on the Medicis deal specifically. But they aren't required to move the IP offshore, they only do it if it makes economic sense. They can still shield US taxes and maintain their ~5% tax rate by levering up more in the US on the increased EBITDA Medicis provides.

 

As to the moat point, I view the special asset at Valeant to be Pearson. He has 20 years of experience understanding the pharma industry landscape due to his time at McK. While the stock has gone up a bunch, it still trades at only ~15x 2014 Cash EPS midpoint of $8.50. Operating margins are in the 40s, patent risk is minimal, as is reimbursement risk because much of the portfolio is cash pay, and disease and geographic profiles are very diversified. 15x doesn't sound like too much to pay for that when the Shiller PE is at 25. And thrown in free you get one of the best capital allocators of the past decade who is incentivized with one of the most shareholder-friendly pay packages I'm aware of. Some people say that it'll be hard for Pearson to add as much value now that VRX is so much bigger than they were, but VRX currently has ~$8B in revenue versus an industry that is >$1T. Now clearly not all of that market would be attractive to VRX, but they are conservatively 80 bps of the entire market, and lower than that if you include devices. So it seems like there's still plenty of scope for value to be created via capital allocation.

 

All that said, I agree that the low tax rate is a big part of the story. But interestingly the synergies VRX reports for deals, like the $850M for B&L, don't include tax savings. Management has stated on multiple occasions that their deal models have to show a >20% IRR before considering any tax synergies. So low taxes are an added benefit of VRX's value-creation, not the central component. Lets say Canada adopts a worldwide income sourcing tax policy like the US. Assuming management isn't lying, they'll still be able to generate 20%+ IRRs on deals without the tax benefit, which I think anyone would agree should still be very value-accretive. And second, VRX has a bunch of foreign income, so it isn't like their tax rate would go to 35%. So lets pick a number, say 20%. VRX is assuming a ~5% tax rate this year and the midpoint of their cash EPS guidance is $8.50. That translates to a pre-tax EPS of ~$8.95. If the rate went to 20%, VRX would earn ~$7.15 in 2014, making the current PE multiple about 18x. More expensive, obviously, but not catastrophic and certainly an acceptable "downside scenario" outcome for a likely low probability event (ie no one is talking about international corporate tax reform in Canada, at least no one I'm aware of).

 

Sorry this is so long-winded, hope it's helpful!

[Cunninghamew]

Just the messenger here... don't shot

 

http://www.thestreet.com/story/12242187/1/will-valeant-overdose-on-acquisitions.html?puc=tsczacks&cm_ven=TSCZACKS

[Liberty]

Thanks Cunninghamew.

 

It's really the crux of the matter, isn't it?

 

Is their model a gimmick that falls down after a while, or is it a sustainable way to create value.

 

Are they more like Capital Cities or other 'Outsider' companies, or more like one of the failed rollups mentioned in the piece?

 

One important aspect is the tax structure. I'm not a tax expert, but even if I was, I doubt I could have a completely definitive negative opinion against the structure because obviously Valeant hires competent high-priced tax experts who think it works. What I find reassuring is that a lot of global companies with valuable IP do similar things (Google, Apple), so it's very likely to be ok under the current law. That law could change, and that's one of the major risks for the model, but all businesses have specific risks and we have to ask ourselves if we can live with them.

 

Just my 2 cents, for what it's worth (and since they're Canadian cents, they're worth a lot less lately...).

[giofranchi]

Valeant Pharmaceuticals Announces New $1.5 Billion Securities Repurchase Program

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2014/Valeant-Pharmaceuticals-Announces-New-15-Billion-Securities-Repurchase-Program/default.aspx

 

 

Gio

[giofranchi]

Valeant Pharmaceuticals Announces Approval of Retin-A Micro® Microsphere 0.08% 01/31/2014

 

LAVAL, Quebec, Jan. 31, 2014 /PRNewswire/ -- Valeant Pharmaceuticals International, Inc. (NYSE: VRX and TSX: VRX) announced today that it has received approval from the Food and Drug Administration (FDA) for its  Supplemental New Drug Application (sNDA) for Retin-A Micro (tretinoin) Gel microsphere 0.08% for the topical treatment of acne vulgaris.

 

"We are very pleased that the FDA has approved our new strength of Retin-A Micro® as this gives health care providers and patients a new option for the topical treatment of acne vulgaris," stated J. Michael Pearson, chairman and chief executive officer.  "This new strength will provide physicians and patients another effective treatment and should be a welcome alternative to current strengths. We look forward to launching 0.08% Retin-A Micro® in the near future."

 

 

Gio

 

 

[giofranchi]

Valeant Pharmaceuticals to Acquire Precision Dermatology for $475 Million

 

LAVAL, Quebec, Feb. 3, 2014 /PRNewswire/ -- Valeant Pharmaceuticals International, Inc. (NYSE: VRX and TSX: VRX) today announced that it has entered into a definitive agreement under which Valeant will acquire PreCision Dermatology, Inc. for $475 million in cash, plus an additional $25 million payable upon the achievement of a sales-based milestone.  PreCision develops and markets high quality dermatology products with leading products such as Locoid, Hylatopic, Clindagel, and BenzEFoam.  PreCision expects to have approximately $130 million in revenue in 2014.  The transaction is expected to close in the first half of 2014 and Valeant expects the transaction, once completed, to be immediately accretive to Valeant's cash earnings per share.

 

"PreCision Dermatology has a wide range of medical dermatology products, treating a number of topical disease states such as acne and atopic dermatitis, and should bring tremendous value to Valeant's medical dermatology portfolio," stated J. Michael Pearson, chairman and chief executive officer of Valeant.  "Furthermore, PreCision's diversified portfolio of products enjoys high physician loyalty, premium product quality and lifecycle management opportunities that will enhance our future growth strategies. We believe this acquisition will strengthen Valeant's product portfolio and solidify our position as a leader in dermatology." 

 

"We are very excited for the opportunity to be part of the fast growing Valeant organization. The combined resources of both companies will create a strengthened competitor, poised to contend with the leading companies in the dermatology market," said Bob Moccia, chief executive officer of PreCision Dermatology.

 

PreCision operates in two key segments: Onset Dermatologics, which focuses on prescription therapies, and PrecisionMD®, which focuses on physician dispensed products. The Company is based in Cumberland, Rhode Island and has approximately 175 employees.

 

 

Gio

 

[fareastwarriors]

Actavis-Forest Bid Shines Light on Valeant Next

 

http://www.bloomberg.com/news/2014-02-19/actavis-forest-bid-shines-light-on-valeant-next-real-m-a.html

[Phoenix01]

VRX seems to have a lot of fans on this board.  I do not see the value beyond the management smoke & mirrors.

 

As of 2013Q3 they raised $25.5 B in debt & capital that was used to purchase $25.5B of Goodwill, Intangibles, Receivables & Inventory.  They did manage to generate $592M via their operations that they hold as cash.

 

They generate $1B in free cashfow, however that is mostly due to the depreciation being added back.

 

How can anyone justify a market cap of $49B ???

[giofranchi]

VRX seems to have a lot of fans on this board.  I do not see the value beyond the management smoke & mirrors.

 

As of 2013Q3 they raised $25.5 B in debt & capital that was used to purchase $25.5B of Goodwill, Intangibles, Receivables & Inventory.  They did manage to generate $592M via their operations that they hold as cash.

 

They generate $1B in free cashfow, however that is mostly due to the depreciation being added back.

 

How can anyone justify a market cap of $49B ???

 

Basically, I look at Revenue and Cash EPS growth: both are expected to be 40% higher in 2014 than in 2013. The average Cash EPS is expected to be $8.5, which at yesterday closing price translates into a multiple of around 17x. Certainly not cheap, but given the growth rate of both Revenue and Cash EPS, not wildly expensive either.

 

As far as debt is concerned, their goal is to reduce it to <4x adjusted pro forma EBITDA. Furthermore, it always depends on who is handling the debt… I mean, if debt were always wrong, not matter who is handling it, you would have missed to Mr. Malone story completely… And probably Mr. Malone would not have achieved such an incredible success in business. If management is to be trusted, I think now is the time to take advantage of low interest rates, making use of debt in order to build scale.

 

Of course, you don’t seem to trust management. You say “the management smoke & mirrors”…

Well, I would suggest to read VRX’s conference call transcripts, to get better acquainted with Mr. Pearson’s strategic views and actions. Personally, I have found many things that I like and agree with.

 

Gio

 

[giofranchi]

Valeant Pharmaceuticals Reports Fourth Quarter And Full Year 2013 Financial Results

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2014/Valeant-Pharmaceuticals-Reports-Fourth-Quarter-And-Full-Year-2013-Financial-Results/default.aspx

 

LAVAL, Quebec, Feb. 27, 2014 /PRNewswire/ -- Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (TSX: VRX) announces fourth quarter financial results for 2013.

 

Fourth Quarter 2013

•2013 Fourth Quarter Total Revenue $2.1 billion; an increase of 109% over the prior year 

◦2% organic growth (same store sales) including impact from genericized products; 6% organic growth (pro forma) for total Company

10% organic growth for Bausch + Lomb in Q4 and since close

◦13% organic growth (same store sales) for the Developed Markets segment, excluding the impact from certain generic products

◦7% organic growth (same store sales) for the Emerging Markets segment

 

•2013 Fourth Quarter GAAP EPS of $0.36; Cash EPS $2.15, an increase of 76% over the prior year

•2013 Fourth Quarter GAAP Operating Cash Flow $280 million; Adjusted Operating Cash Flow $607 million 

 

Full Year 2013

•Total 2013 revenue was $5.8 billion; an increase of 66% over the prior year 

◦9% organic growth (same store sales) for the Developed Markets segment, excluding the impact from certain generic products

◦11% organic growth (same store sales) for the Emerging Markets segment

◦10% organic growth for Bausch + Lomb since the close

 

•Total 2013 GAAP EPS loss of $2.70; Cash EPS $6.24, an increase of 51% over the prior year

•Total 2013 GAAP Operating Cash Flow $1.0 billion; Adjusted Operating Cash Flow $1.8 billion

 

"Our dedicated team of professionals continued to deliver strong top line and bottom line results," stated J. Michael Pearson, chairman and chief executive officer.  "We are particularly pleased with the outperformance of the Bausch + Lomb businesses, coupled with the fact that the Company returned to positive organic growth. Valeant's focus on cash pay businesses, diversification, durable assets, key geographies, and lower risk R&D will continue to benefit our shareholders as we look forward to continuing our track record of outperformance in 2014."

 

 

Gio

 

 

[Packer16]

This is interesting but I would be careful.  I spoke with the former top executive of Bausch and Lamb (before the LBO) and described to him the Valeant strategy and he was skeptical that it could work in the vision/eye care business.  He knows B&L's business very well and thinks the R&D "light" approach of Valeant will result in significantly lower cash flows over the LT in part due to competition.  I don't have a horse in this race but if the stock is not cheap and there is a risk that there traditional strategy will not work for B&L, I would be careful here.

 

Packer

[Phoenix01]

Gio,

 

Is management trying to run the business for the long term or are they stock promoters?

 

They raise debt & equity to buy companies but have shown very little ability to generate value.  The management have promised a wonderful future, but I am reluctant to drink their coolaid based on their track record.

 

What happens if they are no longer able to raise more debt or issue more equity at these elevated prices?

[giofranchi]

This is interesting but I would be careful.  I spoke with the former top executive of Bausch and Lamb (before the LBO) and described to him the Valeant strategy and he was skeptical that it could work in the vision/eye care business.  He knows B&L's business very well and thinks the R&D "light" approach of Valeant will result in significantly lower cash flows over the LT in part due to competition.  I don't have a horse in this race but if the stock is not cheap and there is a risk that there traditional strategy will not work for B&L, I would be careful here.

 

Packer

 

Thank you Packer,

it seems a bit strange that Mr. Pearson, who is so focused on a R&D “light” business approach, had invested so much to buy a company which instead requires high R&D expenses to keep generating cash… ???

Anyway, this is certainly an issue to watch closely!

 

Gio

 

[giofranchi]

Gio,

 

Is management trying to run the business for the long term or are they stock promoters?

 

They raise debt & equity to buy companies but have shown very little ability to generate value.  The management have promised a wonderful future, but I am reluctant to drink their coolaid based on their track record.

 

What happens if they are no longer able to raise more debt or issue more equity at these elevated prices?

 

Well, I think almost any acquisition they have made has proved Cash EPS accretive right away. Imo that translates into creating a lot of value. And I think their strategy is right: get levered, while doing so is reasonably affordable, and build scale, or simply buy as much cash generating assets as you can. Then, should debt cease to be cheap, use the free cash generated by all those assets to reduce the debt load and to continue growing Cash EPS through aggressive cost cutting and shrewd capital allocation.

You might not like it. But I do. I always like something, when I realize I would do exactly the same thing, if I were in their stead.

 

Gio