VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

original mungerville,

probably I have failed to express my thought correctly.

 

I am now trying again to do so quoting Bob Rodriguez:

IBD: It's been a really tough year to make money. Your flagship fund, FPA Capital Fund, which is closed to new investors, hasn't done all that well this year. I wondered why it's so hard to make money?

 

Rodriguez: They have a substantial exposure to energy, although they've reduced it by about half, but half is not sufficient given what has recently transpired. I would also hearken to say that the small- and midcap area of the market has been challenging and it's also very richly priced. From a value perspective, I look at the small-medium cap area as having very little value. In fact, when I run a value screen that I use, it had recovered to just 30 names from an all-time record low of qualifiers of just 27. To put that in perspective, when I got very cautious in May-June of 2007, the number of qualifiers was 35.

 

IBD: How many names would you have found on your screen if the stock market was depressed?

 

Rodriguez: I was asked that in '07, and I said typically, in a good market, over 300. But then I added in '07, in the conflagration that's coming that that number would go north of 400. In the first week of March '09, it hit 462. We are a far piece from that.

 

Please, note he is not talking about Shiller PEs, Q Ratios, Market Cap / GDP, etc. … He is talking about how many value opportunities he sees in this market! … And given the fact you are 70% in cash, I guess you might easily agree with him… Am I wrong?

 

Well then… It seems not plausible to me that Pearson is the only person on earth who might be able to discover investment opportunities so undervalued by today’s market as to yield an IRR of 30% in coming years… It is simply not the environment we are living in. Period.

 

If Pearson is truly to achieve such outstanding results, it should be because, after he has purchased a business, he will be able to implement changes which make that business leaner and therefore more profitable… Changes the market is not able to foresee today.

 

If organic growth bothers you, let’s just say the following: I would like to have a clearer view on how purchased businesses are faring and that VRX’s strategic changes are bearing their fruits as expected.

 

Take BH for example: even though Biglari is much disliked on the board, I guess no one can argue against the fact he is very clear about results and how his strategic initiatives to make SNS a better business are evolving and performing. Every quarter BH shareholders know how much the level of Same Store Sales has increased compared not only to the previous year, but also to each quarter since Biglari took control of the business. And that’s the track record I would like to see and that I am talking about: some kind of operating performance measure which could give me confidence in the fact that, even though I know little about the pharmaceutical industry, as I know little about the fast-food franchising business, Pearson is actually implementing the right changes and cutting the truly wasteful costs, just like Biglari imo has done and is still doing.

 

The problem is Biglari has concentrated basically on SNS only since 2008 (with a couple of other small purchases and one major stock market investment)… During the same 6 years VRX has instead acquired 10 to 20 businesses! And such a level of purchasing activity cannot but make things more difficult to be clearly understood… Sincerely, I would really like to see VRX concentrate on running the businesses it already owns and implementing all the improvements possible, cutting all the unnecessary costs. In the process bringing down its debt level, and showing GAAP EPS gradually converge to Adjusted EPS. Then, I would be very pleased to see VRX start its purchasing binge once again.

 

But I guess it is not going to happen that way, right?

 

Anyway, there is no escaping the fact that to get an IRR on their investments of 30%, they cannot rely on “value investing” alone… simply because, if the market is mispricing things today, it is mispricing them on the upside, not the downside!… Instead, to get a 30% IRR, VRX must implement very effective changes, after it has purchased any new business. Therefore, imo, you only have two choices: 1) either you wait for a clearer picture, one which shows Pearson truly is an “outstanding activist investor”; 2) or you simply decide to have trust in Pearson’s abilities.

 

Gio

Bob-Rodriguez-02Gen2015.pdf

[giofranchi]

Of course, what’s very difficult for me in this situation is that reading all VRX’s conference call transcripts of the last few years, I have come to appreciate Pearson’s business acumen and strategic vision very much! Therefore… I genuinely think I am making a mistake!

 

But, as I have always said, a very clear and great track record alone is not enough… A very sound business strategy for the future is not enough either… To feel confident and to pull the trigger, I always require both.

 

Gio

 

[Liberty]

Gio, if you look at the share price movement of Allergan since VRX announced interest, do you think that the asset was fairly valued before and is now extremely overvalued at the price that Actavis is paying for it, or do you think that Pearson had identified an undervalued asset (even though it is a very large public company that everybody else could look at)?

 

A lot of what Valeant buys is private companies in developing markets (indonesia, vietnam, etc) or assets that were part of larger companies. There are multiple trillions of those around the world. They are pretty much always the only bidder. I don't think running a screen (who knows what the criteria are) of US public companies necessarily tells you how many bargains Pearson and his team can find in these very different markets.

 

Sure it's nice to deploy a big chunk of capital all at once, but they have a long track record of doing dozens of these smaller deals that add up to real money. There's no hurry to do another big public company, they can do quite well just with lots of small bolt-ons and some mid-size deals like B&L once in a while while they wait for a fat pitch to come along. Especially if organic growth stays this high.

[original mungerville]

Of course, what’s very difficult for me in this situation is that reading all VRX’s conference call transcripts of the last few years, I have come to appreciate Pearson’s business acumen and strategic vision very much! Therefore… I genuinely think I am making a mistake!

 

But, as I have always said, a very clear and great track record alone is not enough… A very sound business strategy for the future is not enough either… To feel confident and to pull the trigger, I always require both.

 

Gio

 

I agree with you - you need both, that's for sure. And the good thing is you can't lose the money you don't invest.

 

But why are we talking about not being able to see the organic growth when Valeant already releases same store sales type data? 

[giofranchi]

But why are we talking about not being able to see the organic growth when Valeant already releases same store sales type data?

 

Probably for the reason I have tried to explain: when you make 10 to 20 acquisitions, small and large, in little more than 5 years, and you have levered up to make those acquisitions… the whole picture gets a little bit confused… or at least gets more difficult to see clearly…

 

If, instead, those acquisitions had been made through the use of VRX’s free cash alone, the situation would be much easier for me to understand, and I would feel much more confident today. Why? Because that free cash itself would be the only track record I’d require.

 

On the other hand, I am perfectly aware of the fact there is simply no way of closing so many deals in such a short period of time, relying solely on free cash flow… Yet, the uncertainty imo still remains…

 

Gio

 

[giofranchi]

Gio, if you look at the share price movement of Allergan since VRX announced interest, do you think that the asset was fairly valued before and is now extremely overvalued at the price that Actavis is paying for it, or do you think that Pearson had identified an undervalued asset (even though it is a very large public company that everybody else could look at)?

 

The answer is the same: if Actavis is successful in implementing very effective changes, in cutting unnecessary costs, and exploiting economies of scale the new organization will enjoy, their purchase of Allergan might turn out to be a good deal. Instead, as a passive investor only I believe they are overpaying for Allergan’s assets.

 

A lot of what Valeant buys is private companies in developing markets (indonesia, vietnam, etc) or assets that were part of larger companies. There are multiple trillions of those around the world. They are pretty much always the only bidder. I don't think running a screen (who knows what the criteria are) of US public companies necessarily tells you how many bargains Pearson and his team can find in these very different markets.

 

But that implies the healthcare private market is much more undervalued than its public counterpart… Of course I don’t know, because I know nothing about the healthcare private market, but it seems a bit strange to me that among publicly traded healthcare companies true bargains are rare, while they abound among private healthcare companies… Although I agree that EM might actually be another story and a much juicier opportunity!

 

Gio

 

[Liberty]

During the takeover battle, Mike & Bill said, that they have long list of potential takeover targets, which they start working right after AGN. To me it sounded like BS, but if it was not... why we haven't heard who's next?

 

I don't think it's BS. Why wouldn't they have a shopping list of companies that are a good fit? AGN wasn't the only company in the world with the type of assets that they want and with enough bloat to cut.

 

I think they've learned from the AGN experience and decided to wait a little bit to strengthen (just in the past year they went from 4.5x EBITDA to 3.5x despite doing 1.3bn of small bolt-ons, so it's pretty fast) the balance sheet and prove that GAAP moves in the direction of cash EPS without the restructuring charges, so that the next time they do this they can't be attacked with the same kind of claims and their stock is at a higher multiple, so they have to issue less of it.

 

They'll announce who's next when they're ready. No point in rushing anything.

[Liberty]

If anyone wants the audio of Valeant presenting at the JPM healthcare conference, here it is:

 

https://www.dropbox.com/s/lkukym6nhx03m4o/2015-jan-VRX-JPM-conf.m4a?dl=0

 

Howard Schiller and Ari Flescher present first, and then there's a Q&A where Pearson also participates.

 

Funny detail: At the end their left the mics open and you can hear journalists and analysts mob Pearson, and you get to be a kind of fly on the wall and listen in. One asks about animal health, and I think Pearson says that he certainly wouldn't buy Zoetis at today's valuation. I recorded that part too, it goes on for a while at the end.

 

Update: Pearson on CNBC earlier today: http://video.cnbc.com/gallery/?video=3000346116&play=1

[loganc]

If anyone wants the audio of Valeant presenting at the JPM healthcare conference, here it is:

 

https://www.dropbox.com/s/lkukym6nhx03m4o/2015-jan-VRX-JPM-conf.m4a?dl=0

 

Howard Schiller and Ari Flescher present first, and then there's a Q&A where Pearson also participates.

 

Funny detail: At the end their left the mics open and you can hear journalists and analysts mob Pearson, and you get to be a kind of fly on the wall and listen in. One asks about animal health, and I think Pearson says that he certainly wouldn't buy Zoetis at today's valuation. I recorded that part too, it goes on for a while at the end.

 

Update: Pearson on CNBC earlier today: http://video.cnbc.com/gallery/?video=3000346116&play=1

 

Thanks again for all of your efforts in recording these calls.  I am a digital pack rat, so I love having these things saved.

[Liberty]

You're very welcome :)

 

I started recording these a little while ago when I wanted to find an older recording of a presentation on a company's website and they had deleted it. And since it was a conference presentation, not a quarterly call, there was no transcript available anywhere. I found that very frustration since something very interesting had been said, and I wasn't sure I remembered it all.

[loganc]

You're very welcome :)

 

I started recording these a little while ago when I wanted to find an older recording of a presentation on a company's website and they had deleted it. And since it was a conference presentation, not a quarterly call, there was no transcript available anywhere. I found that very frustration since something very interesting had been said, and I wasn't sure I remembered it all.

 

I totally understand.  If you want to try to figure out a way to spread the load such that we each record different things, I am game.  We seem to run into each other in these threads.  As an aside, I am doing some work on TDG - wonderful business.

 

On the topic at hand (i.e. VRX), what monster guidance.  The Q4 growth blows my mind considering currencies.  I haven't read all of the arguments in thread about "organic growth" but look at the guidance for Q4 and FY15?  What is that growth other than organic given the closing date of B+L? 

[xtreeq]

If anyone wants the audio of Valeant presenting at the JPM healthcare conference, here it is:

 

https://www.dropbox.com/s/lkukym6nhx03m4o/2015-jan-VRX-JPM-conf.m4a?dl=0

 

 

Thanks for the audio Liberty. What program are you using to record the audio?

 

 

[Liberty]

I totally understand.  If you want to try to figure out a way to spread the load such that we each record different things, I am game.  We seem to run into each other in these threads.  As an aside, I am doing some work on TDG - wonderful business.

 

I have a bunch of TDG calls recorded. I tend to record most of the calls that I listen to for archival purposes. It's no extra work for me to post them, but if you also want to record some and share them here via dropbox links (or whatever other hosting works -- dropbox might block the public links if too many people download), I think that would work and I'm sure you'd record some that I don't record.

 

But then again, maybe you and I are the only people interested, so I'm not entirely sure it's worth it :)

 

On the topic at hand (i.e. VRX), what monster guidance.  The Q4 growth blows my mind considering currencies.  I haven't read all of the arguments in thread about "organic growth" but look at the guidance for Q4 and FY15?  What is that growth other than organic given the closing date of B+L?

 

Exactly. What if currencies had been flat, or if the USD had fallen vs. most others?

 

The restructuring charges are going away, GAAP and non-GAAP are converging in the right direction (GAAP going up to non-GAAP, rather than the opposite), and they're proving that the businesses grow AND that their one-off expenses really are one-offs. Where's everybody that was saying that the business was all smoke and mirrors and accounting tricks now?

[Liberty]

Thanks for the audio Liberty. What program are you using to record the audio?

 

You're welcome.

 

I'm using Audio Hijack Pro, a Mac app:

 

https://www.rogueamoeba.com/audiohijackpro/

 

I'm using the mono 16kbps AAC setting. I find the quality is still good enough, and it results in fairly small files.

[Liberty]

http://www.sec.gov/Archives/edgar/data/885590/000119312515011440/d852898dex991.htm

 

Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (TSX: VRX) announced today that it has launched an offering of approximately $1.0 billion aggregate principal amount of senior unsecured notes (the “Notes”). The net proceeds of the offering are expected to be used (i) to finance the redemption of all of the outstanding 6.875% Senior Notes due 2018 issued by the Company’s wholly-owned subsidiary, Valeant Pharmaceuticals International, (ii) to repay all or a portion of the amounts drawn under the Company’s revolving credit facility, and (iii) for general corporate purposes, including acquisitions. Concurrently with the pricing of the offering, Valeant Pharmaceuticals International intends to irrevocably call for redemption the remaining approximately $500 million aggregate principal amount of its outstanding 6.875% Senior Notes due 2018.

 

The Notes will be guaranteed by each of the Company’s subsidiaries that is a guarantor of the Company’s senior secured credit facilities.

 

The Notes will not be registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities law and may not be offered or sold in the United States absent registration or an applicable exemption from registration under the Securities Act and applicable state securities laws. The Notes will be offered in the United States only to qualified institutional buyers pursuant to Rule 144A under the Securities Act and outside the United States to non-U.S. persons pursuant to Regulation S under the Securities Act. The Notes have not been and will not be qualified for sale to the public by prospectus under applicable Canadian securities laws and, accordingly, any offer and sale of the securities in Canada will be made on a basis which is exempt from the prospectus requirements of such securities laws.

[Liberty]

http://www.newswire.ca/en/story/1479643/valeant-selected-as-lead-bidder-to-acquire-dendreon-and-its-leading-immunotherapy-treatment-provenge-sipuleucel-t

 

Could be the beginning of a new platform.

[wbr]

I doubt this will be a new platform for them. As they pointed out, this was an unusual opportunity to get into oncology without overpaying, which implies that usually it is too expensive. This condition will probably prevent them from building an oncology portfolio.

 

At first glance it looks more like a deep value investment. They pay 1x sales for Provenge + some other assets (PP&E?). The consensus seems to be that there are better treatments out there than Provenge, but 1x sales is so cheap that they can just extract as much cash as possible and get their investment back in 2-3 years. This asset is exactly one that other companies do not dare to touch, because it will likely be in terminal decline and hurt organic growth numbers (unless I am underestimating the ability of VRX to turn it around). This is why this opportunity exists.

 

I have read conflicting statements about NOLs which would be very valuable to acquire. Can someone confirm or decline with certainty whether Valeant gets them?

 

Edit: http://fortune.com/2015/01/31/valeant-acquire-dendreon/?xid=yahoo_fortune

 

"At that bargain price, Valeant will make money on the deal even if Provenge sales don’t increase at all, and still break even if sales decline, according to Evercore ISI analyst Umer Raffat. And because Provenge is just filtering into the European market, Raffat thinks Valeant could eventually reap more than $1 billion from the acquisition."

[Liberty]

Rumor that Valeant is looking at acquiring Salix...

 

http://www.bloomberg.com/news/articles/2015-02-03/valeant-said-to-weigh-takeover-of-salix-in-latest-pharma-contest

[Liberty]

They increased their bid for Dendreon to 400m:

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-Enters-Into-Amended-Agreement-To-Remain-Lead-Bidder-In-Acquisition-Of-Dendreon-And-Its-Leading-Immunotherapy-Treatment-PROVENGE-sipuleucel-T/default.aspx

[Liberty]

On February 4, 2015, as previously disclosed, the Debtors entered into an amended and restated acquisition agreement (the “Amended and Restated Acquisition Agreement”) with Valeant Pharmaceuticals International, Inc. (the “Purchaser”), pursuant to which the Purchaser agreed to acquire substantially all of the assets and certain liabilities of the Debtors for $400 million. On February 5, 2015, the Bankruptcy Court entered an order approving, among other matters, the rescheduling of the deadline for Qualified Bids to 5:00 p.m. (prevailing Eastern Time) on February 10, 2015 and the date for the auction (assuming receipt of other Qualified Bids) to February 12, 2015.

 

On February 10, 2015, the Company issued a press release, a copy of which is attached hereto as Exhibit 99.1, announcing that the deadline for Qualified Bids had expired without receipt of additional Qualified Bids. The Debtors will be filing a notice with the Bankruptcy Court stating that the Debtors have accepted the bid of the Purchaser for the purchase of substantially all of the Debtors’ assets and, as the Debtors did not receive any Qualified Bids by the bid deadline other than that submitted by the Purchaser, there is no need for the auction and the auction is therefore canceled. The date for the sale hearing to approve the sale of substantially all of the Debtors’ assets to the Purchaser is currently scheduled for February 20, 2015.

 

Item 8.01.    Other Events.

 

On February 5, 2015, the Bankruptcy Court entered an order (the “Order”) establishing certain deadlines for filing proofs of claim against the Debtors, including a General Bar Date (as defined in the Order) of March 16, 2015 at 4:00 p.m. (Eastern Time).

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-Pharmaceuticals-Announces-Expiration-Of-Bid-Deadline-In-Connection-With-Agreement-To-Acquire-Assets-From-Dendreon/default.aspx

 

LAVAL, Quebec, Feb. 10, 2015 /PRNewswire/ -- Valeant Pharmaceuticals International, Inc. (NYSE: VRX) (TSX: VRX) today announced that they have been advised by Dendreon Corporation that no additional qualified bids have been received by the bid deadline provided by the Court-approved bidding procedures for the sale of substantially all of Dendreon's assets. A hearing at which Dendreon and Valeant will seek the required Court approval of the sale is scheduled for February 20, 2015. Valeant expects to close the transaction by the end of February 2015.

 

Court documents and additional information are available through Dendreon's claims agent, Prime Clerk, at https://cases.primeclerk.com/dendreon or 844-794-3479.

[gfp]

Rumor mill says $150 / share SLXP offer coming from VRX

 

Rumor that Valeant is looking at acquiring Salix...

 

http://www.bloomberg.com/news/articles/2015-02-03/valeant-said-to-weigh-takeover-of-salix-in-latest-pharma-contest

[Liberty]

http://media.gotraffic.net/images/i2lc7w7F52GA/v17/1200x-1.jpg

 

I love that photo*. Some people are making fun of it on Twitter, but to me it reminds me of the Tom Murphy stories about painting only two sides of a building to save money, or Buffett's stories about liking managers who will count the toilet paper sheets to make sure they're not being ripped off, the stories about 3G, etc.

 

No money wasted on low-priority stuff here!

 

*No idea how old it is, though. Maybe it was taken right after the Biovail deal and it hasn't been like that since... It does show how the media doesn't seem to like Valeant, though, since there are many other photos of their HQ with real signs.

 

Update: Here's the new Bloomberg piece on the possible bid:

 

http://www.bloomberg.com/news/articles/2015-02-12/valeant-said-to-secure-salix-bid-financing-closing-in-on-offer

[Liberty]

Shire might jump in:

 

http://www.reuters.com/article/2015/02/12/us-salix-m-a-shire-exclusive-idUSKBN0LG33820150212

[Liberty]

Y tu, Endo?

 

http://www.reuters.com/article/2015/02/13/us-endo-m-a-salix-exclusive-idUSKBN0LH2C020150213

[ItsAValueTrap]

Ok can somebody explain to me how the Dendreon purchase makes sense?  Dendreon has always been bleeding a lot of cash.  It still seems to be a money pit.