VRX - Valeant Pharmaceuticals International Inc.

[loganc]

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.

 

I haven't done any significant work on this particular deal, but I suspect that this is more like the purchase of a tail product (similar to what they have done in the past with Zovirax, for example) rather than a new platform for growth.  It appears that they are paying 1.3x sales for the assets and the main product (Provenge) is already FDA approved.  This would lead me to believe that VRX would simply massively cut the cost structure of DNDN and generate as much cash as possible from the assets.  If I recall correctly, I don't think they are selling Provence in Europe or that there is some opportunity to increase sales in Europe.  VRX is pretty well equipped with sales forces throughout Europe.

 

Again, I am not 100% sure about this, but I think that the deal can make financial sense.

[Liberty]

Apparently Marc Faber said on CNBC that VRX was close to a deal with Salix, which explains the price movement in both today.

 

Update: http://www.reuters.com/article/2015/02/20/salix-valeant-pharms-idUSL1N0VU16H20150220

 

Valeant Pharmaceuticals International Inc is close to a deal to acquire bowel drug maker Salix Pharmaceuticals Ltd for around $160 per share, according to a person directly familiar with the matter who requested not to be identifed as the matter is confidential.

 

An agreement could come as early as next week, the source said.

[wbr]

Apparently Marc Faber said on CNBC that VRX was close to a deal with Salix, which explains the price movement in both today.

 

Update: http://www.reuters.com/article/2015/02/20/salix-valeant-pharms-idUSL1N0VU16H20150220

 

Valeant Pharmaceuticals International Inc is close to a deal to acquire bowel drug maker Salix Pharmaceuticals Ltd for around $160 per share, according to a person directly familiar with the matter who requested not to be identifed as the matter is confidential.

 

An agreement could come as early as next week, the source said.

 

It's David Faber. Marc Faber is the angry old man. ::)

[Liberty]

It's David Faber. Marc Faber is the angry old man. ::)

 

You are correct. I half-consciously knew there was something wrong when I typed that name, but I didn't inspect that feeling more closely. There's a lesson in there :)

[Liberty]

http://www.bloomberg.com/news/articles/2015-02-21/valeant-agrees-to-buy-drugmaker-salix-for-10-1-billion

 

Valeant Pharmaceuticals International Inc. agreed to buy Salix Pharmaceuticals Ltd. for about $10.1 billion, a person with knowledge of the matter said, to add gastrointestinal drugs to its stable of offerings.

 

Valeant will pay $158 a share in cash for Salix, the person said, asking not to be identified because the company hasn’t announced the deal. Salix shares rose $7.11 to $157.85 on Friday, almost completely eliminating any premium in the purchase price.

 

Also: http://www.wsj.com/articles/valeant-approved-to-buy-dendreon-assets-for-495-million-1424460438

 

A bankruptcy judge Friday approved the sale of the assets of Dendreon Corp. , a troubled cancer drug maker, to Valeant Pharmaceuticals International Inc. for $495 million.

 

The sale underwent significant modifications as recently as Thursday night, adding an extra $95 million to the purchase price.

 

In addition to Dendreon’s flagship drug, Provenge, the deal now also includes $80 million in cash held by Dendreon as well as another product known as D-3263.

[Liberty]

http://www.nytimes.com/2015/02/23/business/dealbook/valeant-to-acquire-salix-for-14-5-billion.html

 

http://news.salix.com/press-release/valeant-acquire-salix-pharmaceuticals-15800-share-cash

[Liberty]

I thought this was supposed to come out Tuesday...

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-Pharmaceuticals-Reports-Fourth-Quarter-And-Full-Year-2014-Financial-Results/default.aspx

 

2014 Fourth Quarter Results

 

Total revenue $2.3 billion; an increase of 10% over the prior year despite negative foreign exchange impact of $113 million

Total Same Store Sales organic growth was 16%

Bausch + Lomb organic growth was 8%

Gain of $287 million, net of fees and out-of-pocket expenses, from Allergan investment, is excluded from Cash EPS and Adjusted Operating Cash Flow

GAAP EPS $1.56; Cash EPS $2.58 (excluding Allergan gain), an increase of 20% despite negative foreign exchange impact of $0.15 versus the prior year

GAAP Operating Cash Flow $816 million; Adjusted Operating Cash Flow $624 million (excluding Allergan gain)

Restructuring, integration and other acquisition related costs were down to $47 million in the fourth quarter 2014

Net debt reduced to $15.3 billion, with net leverage ratio approximately 3.5 times adjusted pro forma EBITDA

2014 Full Year Results

 

Total Revenue $8.3 billion; an increase of 43% over the prior year

Total Same Store Sales organic growth was 13%

Bausch + Lomb Organic Growth was 11%

GAAP EPS $2.67; Cash EPS $8.34, (excluding Allergan gain), an increase of 34%

GAAP Operating Cash Flow $2.3 billion; Adjusted Operating Cash Flow $2.5 billion (excluding Allergan gain)

2015 First Quarter Guidance

 

Expect Cash EPS of at least $2.30 per share

Expect Same Store organic growth of 10-15% for Total Company

Expect continued outperformance in U.S. to offset negative foreign exchange impact

 

Wow.

[Picasso]

Really quite stunning results.  Not only is the underlying business doing well but they acquired a sizable new business without using stock for consideration. 

 

Definitely seems like one of those long-term compounders if they continue to stay disciplined. 

[original mungerville]

I thought this was supposed to come out Tuesday...

 

http://ir.valeant.com/investor-relations/news-releases/news-release-details/2015/Valeant-Pharmaceuticals-Reports-Fourth-Quarter-And-Full-Year-2014-Financial-Results/default.aspx

 

2014 Fourth Quarter Results

 

Total revenue $2.3 billion; an increase of 10% over the prior year despite negative foreign exchange impact of $113 million

Total Same Store Sales organic growth was 16%

Bausch + Lomb organic growth was 8%

Gain of $287 million, net of fees and out-of-pocket expenses, from Allergan investment, is excluded from Cash EPS and Adjusted Operating Cash Flow

GAAP EPS $1.56; Cash EPS $2.58 (excluding Allergan gain), an increase of 20% despite negative foreign exchange impact of $0.15 versus the prior year

GAAP Operating Cash Flow $816 million; Adjusted Operating Cash Flow $624 million (excluding Allergan gain)

Restructuring, integration and other acquisition related costs were down to $47 million in the fourth quarter 2014

Net debt reduced to $15.3 billion, with net leverage ratio approximately 3.5 times adjusted pro forma EBITDA

2014 Full Year Results

 

Total Revenue $8.3 billion; an increase of 43% over the prior year

Total Same Store Sales organic growth was 13%

Bausch + Lomb Organic Growth was 11%

GAAP EPS $2.67; Cash EPS $8.34, (excluding Allergan gain), an increase of 34%

GAAP Operating Cash Flow $2.3 billion; Adjusted Operating Cash Flow $2.5 billion (excluding Allergan gain)

2015 First Quarter Guidance

 

Expect Cash EPS of at least $2.30 per share

Expect Same Store organic growth of 10-15% for Total Company

Expect continued outperformance in U.S. to offset negative foreign exchange impact

 

Wow.

 

What do you figure the price to 2015 owner earnings is - must be north of 15x at this point (ie market cap of close to $60 billion with owner earnings of less than $4 billion)?

 

Then there is the existing debt of around 15 Billion.

 

Now we are adding more debt to buy Salix - 14.5 billion because they are paying cash for the stock of $10 billion and assuming 4.5 in Salix debt - let's round that off to another 15 billion in debt. For that extra $15 billion, we are getting less than $1 billion in owner earnings: ie Salix profit before interest and income tax for 2014 was around $270 million and so for 2015 could be north of $300 million maybe $330 million or something, then Valeant is saying $500 million in synergies/cost reductions which brings that up to $830 million pre-tax for 2015. If we assume debt financing for the $10 billion had a cost of, I don't know, 4%, that $400 million is deducted so $830 becomes $430. Then there is Valeant tax of 5% on that, so let's call it $400 million. So $15 billion in debt for 0.4 billion in owner earnings - looks like a very very low 3% starting yield of return on Salix. Now the thing has growth apparently, but it seems like it is going to take a while to get to Pearson's target IRR of 20% (and this target is before any tax synergies) on this acquisition. I'll be very interested in the conference call on this and the details on the numbers. Is it just me or does it look a little odd in terms of valuation???

 

So now we will have a market cap of just under 60 billion plus just under 30 billion in debt or around $90 billion total enterprise value for Valeant, with earnings of less than $4 billion plus whatever Salix earnings bring to the table (0.4 billion?) - so round the total off to around $4 billion in owner earnings. Are we really at a 22x enterprise value multiple after this acquisition? Hopefully I have made some large mistakes in the above because all of a sudden, that is not looking cheap. 6 months ago, the stock was cheap, but with the run-up in price, and this curious acquisition with the $14.5 billion price tag (I am assuming I have something really wrong with my guesstimates and look forward to the morning conference call to set me straight), it has gotten really pricey really quick.

[original mungerville]

Really quite stunning results.  Not only is the underlying business doing well but they acquired a sizable new business without using stock for consideration. 

 

Definitely seems like one of those long-term compounders if they continue to stay disciplined.

 

They incurred $14.5 billion in debt to buy Salix. I have a lot of faith in Pearson being disciplined and assume he will show on the conference call how he gets his 20% target IRR (pre any tax efficiencies) out of this acquisition. Right now, I don't see it.

[Picasso]

Really quite stunning results.  Not only is the underlying business doing well but they acquired a sizable new business without using stock for consideration. 

 

Definitely seems like one of those long-term compounders if they continue to stay disciplined.

 

They incurred $14.5 billion in debt to buy Salix. I have a lot of faith in Pearson being disciplined and assume he will show on the conference call how he gets his 20% target IRR (pre any tax efficiencies) out of this acquisition. Right now, I don't see it.

 

The debt costs around 6% versus the returns on the equity of what has been and still appears to be 15-20% returns. 

 

I think of VRX as a public private-equity play.  They are issuing debt while the market allows it at low rates and builds up the business which so far has been pretty good at buying up higher returns. 

 

I too am curious on their Salix call.  I think if you value it on an owner earnings basis it looks expensive here.  But as a platform to take advantage of their cost of capital and expertise, I think it is probably around fair value.  But fair value on something that grows cash earnings at 15-20% is fantastic.

[original mungerville]

Really quite stunning results.  Not only is the underlying business doing well but they acquired a sizable new business without using stock for consideration. 

 

Definitely seems like one of those long-term compounders if they continue to stay disciplined.

 

They incurred $14.5 billion in debt to buy Salix. I have a lot of faith in Pearson being disciplined and assume he will show on the conference call how he gets his 20% target IRR (pre any tax efficiencies) out of this acquisition. Right now, I don't see it.

 

The debt costs around 6% versus the returns on the equity of what has been and still appears to be 15-20% returns. 

 

I think of VRX as a public private-equity play.  They are issuing debt while the market allows it at low rates and builds up the business which so far has been pretty good at buying up higher returns. 

 

I too am curious on their Salix call.  I think if you value it on an owner earnings basis it looks expensive here.  But as a platform to take advantage of their cost of capital and expertise, I think it is probably around fair value.  But fair value on something that grows cash earnings at 15-20% is fantastic.

 

I am probably Pearson's greatest fan, however this Salix price seems high at first blush. Maybe the current year's earnings of Salix (before interest and tax) on a standlone basis are thought to be much much higher than the $330 million I assumed. They have to be a hell of a lot higher though for this to make sense to me even if Salix grows at 20% organically for a few years. Pearson has stated his target IRR is north of 20% for acquisitions BEFORE including any tax benefits. Right now, I can't see him getting anywhere close to that with this deal. My Salix numbers must be totally off or something - just at first blush, the price seems very high. If you pay 30x for something growing 20%, its going to take quite some time to earn a 20% IRR before tax benefits or 25% IRR after tax benefits. With a starting yield of 3%, you have to double that 3x to get to 25% IRR. So at 20% growth, that'll take 12 years! Again, I must have some numbers really wrong somewhere - looking forward to the conference call.

 

[original mungerville]

Looking at it more simply, let us just look at the differentials in this deal.

 

Valeant is saying north of $500 million in synergies. For those synergies, they are taking on $10 billion in Valeant debt. They will have to finance that additional debt - for simplicity, let's assume at a 5% rate which means minus $500 million. So basically the synergies cover the debt financing costs and net out to zero.

 

So, we are left with two areas of value add: 1) tax synergies and 2) the price paid for Salix relative to its pre-acquisition earnings.

 

Pearson's stated target IRR for acquisitions is 20% pre tax synergies. We therefore take out 1). We are left with only 2).

 

For Pearson to get to his 20% IRR, that has to all come from the price paid for Salix relative to its pre-acquisition stand-alone earnings and the future growth of those earnings. He paid enterprise value of 14.5 billion, and the pre-acquisition after-tax earnings seem far less than 500 million.

 

Ya, I don't get this.

[giofranchi]

I had thought (and hoped) the plan was to withdraw from major acquisitions for more or less a year, to concentrate on the existing businesses, to let them show their strengths, and in the meantime to get a cleaner balance sheet, gradually reducing VRX debt… Then, to target a new large company as the possible next major acquisition.

 

I would have loved to see that plan being carried out!

 

Not because otherwise I doubt VRX might continue to be a fantastic success… I truly think it will! But simply because it would have rendered the whole picture easier for me to understand.

 

In other words, I am not comfortable with debt, and I am not comfortable with a serial acquirer… Unless I see the evidence that both debt can be reduced very quickly, if needed, and the company can grow solely through the earnings generated by its existing businesses, if needed.

 

I had hoped to gain that insight from 10-12 months without a major acquisition… but evidently Pearson doesn’t want to lose time! ;)

 

Imho a pity!

 

Gio

 

[Happy]

Maybe Salix earnings are depressed and they think they will boost even the normalized number a lot with their operating model. It seems very unlikely to me that Pearson has become undisciplined just after walking away from the Allergan deal. That's what I like about investing with great management, you can give them the benefit of the doubt.

[Christopher1]

The inventory issue is going to hurt 2015 EBITDA.

For 2016 SALIX EBITDA (as a standalone company, based on their management estimate) is going to be between approximately $865 million and $945 million.

 

http://news.salix.com/press-release/salix-pharmaceuticals-provides-updates-wholesaler-inventory-reductions-and-xifaxan-550

[Liberty]

Call starting now.

 

http://ir.valeant.com/files/doc_presentations/2015/20150218-Investor-document-4Q-Final2_v001_o9mo3t.pdf

[original mungerville]

What's weird is Pearson said he expects an IRR in line with past large acquisitions - WITHOUT giving details on how they are going to get there. The interest rate for the 10 billion roughly nets out the $500 million in synergies - that is simple, figured that out last night.

 

There was zero quantitative targets (ie no 20% IRR) or quantitative pathway on how they are going to get to the target. Am I missing something?

 

Compare the above on Salix versus the Dendreon investment where he clearly stated a 30% IRR and cash payback period below 5 years. It seems info on Salix is very very light. The Allergan roadmap was well laid out, not this - its like trust me, we will get our historical IRR.

 

...listening to Q&A now...hopefully we get more detail on the roadmap to 20% IRR (excluding the tax synergies).

 

 

[original mungerville]

Some smart guy at the 35 minute mark of the conf call asked how they are going to get their target IRR out of this. The answer: We have consistently said our IRR is 20% pre tax synergies, we have obtained this on small/medium acquisitions along with a max cash payback period of 6 years; however, for larger acquisitions like B&L, we expect numbers lower than this with a payback period in higher single digits, we expect something in line with the B&L acquisition.

 

Pretty fuckin' vague if you ask me (relative to Allergan, relative to Dendreon deals, etc).

[Liberty]

If anyone wants the audio:

 

https://www.dropbox.com/s/puwx5zl7uhzvwu9/2014-FY-VRX-Salix-Dendreon-CC-.m4a?dl=0

[original mungerville]

Its amazing nobody has called them on this more directly. All they have done is lay out $500 million in cost reduction which is netted out by interest paid on the additional debt assumed!! Other than that, pretty much zero quantitative details on how we get to a 20% IRR assuming a statutory tax rate relative to unlevered capital deployed! Its amazing!

 

All the analysts and the market seem to be focused on the fact his is 20% accretive to earnings per share...nobody calling for details on the long-term yardsticks that matters: what is the IRR and payback period, and give us at least something on how you plan to get there!

[Liberty]

Maybe Salix earnings are depressed and they think they will boost even the normalized number a lot with their operating model. It seems very unlikely to me that Pearson has become undisciplined just after walking away from the Allergan deal. That's what I like about investing with great management, you can give them the benefit of the doubt.

 

That's what it is. Salix's EBITDA is very depressed in 2014 compared to the real earning power. Once they work through the inventory issue, that should normalize. That's why they expect to be able to go from 5.6x to less than 4x in little more than a year.

[original mungerville]

I had thought (and hoped) the plan was to withdraw from major acquisitions for more or less a year, to concentrate on the existing businesses, to let them show their strengths, and in the meantime to get a cleaner balance sheet, gradually reducing VRX debt… Then, to target a new large company as the possible next major acquisition.

 

I would have loved to see that plan being carried out!

 

Not because otherwise I doubt VRX might continue to be a fantastic success… I truly think it will! But simply because it would have rendered the whole picture easier for me to understand.

 

In other words, I am not comfortable with debt, and I am not comfortable with a serial acquirer… Unless I see the evidence that both debt can be reduced very quickly, if needed, and the company can grow solely through the earnings generated by its existing businesses, if needed.

 

I had hoped to gain that insight from 10-12 months without a major acquisition… but evidently Pearson doesn’t want to lose time! ;)

 

Imho a pity!

 

Gio

 

Gio, your reasoning for not investing is still not working as Pearson has said he will disclose the Salix and Dendreon acquisitions as separate US business unit so people with your view can understand the underlying growth of the rest of the company well.

 

But as you can tell by my other posts, this Salix acquisition seems very murky to me in terms of the quantitative roadmap to returns, so maybe there should be no rush to buy in here at this price!!!

[Liberty]

Some smart guy at the 35 minute mark of the conf call asked how they are going to get their target IRR out of this. The answer: We have consistently said our IRR is 20% pre tax synergies, we have obtained this on small/medium acquisitions along with a max cash payback period of 6 years; however, for larger acquisitions like B&L, we expect numbers lower than this with a payback period in higher single digits, we expect something in line with the B&L acquisition.

 

Pretty fuckin' vague if you ask me (relative to Allergan, relative to Dendreon deals, etc).

 

Don't expect as much detail as for Allergan in most deals. From memory, you didn't get it for B&L either, and it turned out fantastic.

 

With Allergan, it was a public relations battle and they had to convince Allergan shareholders and arbs. Here, the deal was sealed without all that, so they don't have to reveal their models and do quite as much handholding.

[Liberty]

In other words, I am not comfortable with debt, and I am not comfortable with a serial acquirer… Unless I see the evidence that both debt can be reduced very quickly, if needed, and the company can grow solely through the earnings generated by its existing businesses, if needed.

 

I had hoped to gain that insight from 10-12 months without a major acquisition… but evidently Pearson doesn’t want to lose time! ;)

 

Imho a pity!

 

Gio

 

They are opportunistic. They won't let pass a chance to deploy this much capital just to give the market a few more clean quarters. But if you're looking for evidence, I think you got it. They rapidly went down to 3.5x, organic growth is super strong and would look even better without FX headwinds, GAAP was closing the gap (ha!) with adjusted, they brought to market new products (Jublia looks like a big hit), etc.