Liberty Posted February 26, 2015 Share Posted February 26, 2015 Well, I apologize if I don't like the debt - it sure did not help Fairfax 10 years ago, I can tell you that. Sequoia doesn't seem to necessarily like all the debt either. Would I rather they issue equity or debt at that price, I don't know, good question. If all goes well, certainly their P/E will rise further as will the E, so the stock price should do very very well over the next 2 years. This is why the LEAPS are interesting, but you don't know anything about options and don't mind the debt because everything will work out perfectly. Do you think you will be able to see deterioration in the fundamentals before Wall Street? Don't like the debt? Don't buy the company. Problem solved. As for your strawman, I never said I knew everything would work out perfectly. I said that the most likely scenarios were quite fine with me and that I trusted management to be able to deal with problems if they arise, and that things don't have to work out perfectly because there's a margin of safety built in the plan. That's what investing is, it's making decisions under uncertainty with the best information and insights we can muster. If you're looking for a sure thing, go buy some T-bills (you'll be sure to lose money after inflation). And don't make me laugh about wall street pricing this company so efficiently... But what you're implying isn't what I was saying anyway. I'm saying that over years, if I see red flags like their process/model drifting, capital allocation discipline drop, etc, I'll consider selling. I wasn't talking about outfoxing the street by selling the day before earnings because I can successfully predict stuff that they can't. To me this is an investment. I expect this company to be worth a lot more in 10 years because they have a great model, great management, and great assets. If you're so scared of prices falling temporarily, or don't think the assets/model/management are good, then don't invest. Link to comment Share on other sites More sharing options...
giofranchi Posted February 26, 2015 Author Share Posted February 26, 2015 Salix Pharmaceuticals Investors Should Now Walk Away With Their Heads Held High http://seekingalpha.com/article/2952896-salix-pharmaceuticals-investors-should-now-walk-away-with-their-heads-held-high?app=1&auth_param=7i5hb:1aeuahp:83c70f79c8270b6a1362cbbf099811e6&uprof=25 Gio Link to comment Share on other sites More sharing options...
giofranchi Posted February 26, 2015 Author Share Posted February 26, 2015 Just to be clear: I couldn’t care less about what people say regarding every single acquisition of VRX! Obviously, I trust Pearson much more than anyone else! ;) The only point I’d like to make is that not always acquisitions are riskless… And statistically, if you do lots of them, the chances one or two go wrong might not be negligible. Nothing too worrisome with that, anyone can make mistakes and yet go on with a great business, except for the fact that debt makes this eventuality a bit more complicated to deal with… Gio Link to comment Share on other sites More sharing options...
original mungerville Posted February 26, 2015 Share Posted February 26, 2015 Well, I apologize if I don't like the debt - it sure did not help Fairfax 10 years ago, I can tell you that. Sequoia doesn't seem to necessarily like all the debt either. Would I rather they issue equity or debt at that price, I don't know, good question. If all goes well, certainly their P/E will rise further as will the E, so the stock price should do very very well over the next 2 years. This is why the LEAPS are interesting, but you don't know anything about options and don't mind the debt because everything will work out perfectly. Do you think you will be able to see deterioration in the fundamentals before Wall Street? Don't like the debt? Don't buy the company. Problem solved. As for your strawman, I never said I knew everything would work out perfectly. I said that the most likely scenarios were quite fine with me and that I trusted management to be able to deal with problems if they arise, and that things don't have to work out perfectly because there's a margin of safety built in the plan. That's what investing is, it's making decisions under uncertainty with the best information and insights we can muster. If you're looking for a sure thing, go buy some T-bills (you'll be sure to lose money after inflation). And don't make me laugh about wall street pricing this company so efficiently... But what you're implying isn't what I was saying anyway. I'm saying that over years, if I see red flags like their process/model drifting, capital allocation discipline drop, etc, I'll consider selling. I wasn't talking about outfoxing the street by selling the day before earnings because I can successfully predict stuff that they can't. To me this is an investment. I expect this company to be worth a lot more in 10 years because they have a great model, great management, and great assets. If you're so scared of prices falling temporarily, or don't think the assets/model/management are good, then don't invest. Liberty, I was not trying to make you laugh when I said that I thought if something went wrong with Salix, Wall Street might know before us. I am just trying to explore the idea of buying LEAPS instead of the stock at a point in time when leverage is at a temporarily high level. Continuously rolling LEAPS is also a way of investing for the long-term which can provide significant upside relative to downside in certain situations - and this might be one of those situations. I am trying to make sure I right-size this investment for my portfolio because its a potentially important / rare opportunity. For example, if I feel comfortable with 10-20% of the portfolio in the stock, I might feel equally comfortable with call LEAPS referencing notional of 2 to 5x those percentages as this may provide more upside relative to downside (the danger of using LEAPS relative to stock becomes apparent when the stock doesn't move much either way over a long period and you have to roll them at an ongoing annual cost). I would be very interested in your view of where you think owner earnings could be in 2016 (I have mid 15s per share based on what management seems to be alluding to going forward including Salix). What type of multiple do you see in your baseline view say when we get to 2016 (at which point, if all continues as in past we will be looking forward to higher 2017 earnings from another acquisition(s)? Link to comment Share on other sites More sharing options...
EliG Posted February 27, 2015 Share Posted February 27, 2015 I'm reading Morningstar analyst report on VRX. I'd like to get some feedback on the two points below. Anyone willing to comment? To give proper context, the analyst is quite bullish on the Salix deal. It's not a bear speaking. #1 Valeant's large debt load includes some floating rate loans, which leaves the firm exposed to larger interest expenses if rates rise. #2 Salix and the gastrointestinal market as a whole carry some of the attributes Valeant has historically been attracted to, such as being an undertreated market, minimal generic competition, and low Big Pharma presence, but it lacks many of important attributes that have been a key component of Valeant’s strategy. The deal takes a step backward on its shift toward durable and cash pay products. Salix's portfolio is entirely insurance- or government-reimbursed products, and although GI products tend to be tougher for generic manufactures to replicate, the branded products are ultimately reliant on limited duration patents for protection. Link to comment Share on other sites More sharing options...
giofranchi Posted February 27, 2015 Author Share Posted February 27, 2015 I am just trying to explore the idea of buying LEAPS instead of the stock at a point in time when leverage is at a temporarily high level. Continuously rolling LEAPS is also a way of investing for the long-term which can provide significant upside relative to downside in certain situations - and this might be one of those situations. I am trying to make sure I right-size this investment for my portfolio because its a potentially important / rare opportunity. For example, if I feel comfortable with 10-20% of the portfolio in the stock, I might feel equally comfortable with call LEAPS referencing notional of 2 to 5x those percentages as this may provide more upside relative to downside (the danger of using LEAPS relative to stock becomes apparent when the stock doesn't move much either way over a long period and you have to roll them at an ongoing annual cost). original mungerville, just a thought: I try to never use a strategy that depends on what I think the behavior of the stock price might be in the future. I know little about options, but, if I have understood you correctly, LEAPS might be interesting whenever the stock price experiences great volatility, either up or down. Instead, equity is better when the stock price remains range bound for some time. Am I right? If so, I wouldn’t make use of LEAPS. Instead, I would gradually build a significant but not too large position in VRX, which is exactly what I am going to do, if you are not comfortable with an high level of debt. Or I would establish right away a very large position in VRX, if you are comfortable with an high level of debt. By the way, I don’t think VRX’s debt is at a temporary high level… As long as there are opportunities for growth, its debt will always stay at high levels… Maybe it will come down a little, getting below the 4x EBITDA threshold for a while, just to spike up again at the first large acquisition that becomes available… ;) Gio Link to comment Share on other sites More sharing options...
giofranchi Posted February 27, 2015 Author Share Posted February 27, 2015 I'm reading Morningstar analyst report on VRX. I'd like to get some feedback on the two points below. Anyone willing to comment? Personally, of course I don’t like #1, while I am not really worried about #2: Pearson said during the conference call that Salix’s products have a favorable reimbursement status with payers. Its branded products may rely on limited duration patents for protection, but the fact GI is a lower priority for most other pharmaceutical companies, and the fact Pearson is not going to reduce Salix’s specialty sales forces or hospital, key account and field reimbursement teams, because he thinks those customer-facing roles have played and will play a huge role in the success of the company, make me think patents are not all that matters. Gio Link to comment Share on other sites More sharing options...
original mungerville Posted February 27, 2015 Share Posted February 27, 2015 I am just trying to explore the idea of buying LEAPS instead of the stock at a point in time when leverage is at a temporarily high level. Continuously rolling LEAPS is also a way of investing for the long-term which can provide significant upside relative to downside in certain situations - and this might be one of those situations. I am trying to make sure I right-size this investment for my portfolio because its a potentially important / rare opportunity. For example, if I feel comfortable with 10-20% of the portfolio in the stock, I might feel equally comfortable with call LEAPS referencing notional of 2 to 5x those percentages as this may provide more upside relative to downside (the danger of using LEAPS relative to stock becomes apparent when the stock doesn't move much either way over a long period and you have to roll them at an ongoing annual cost). original mungerville, just a thought: I try to never use a strategy that depends on what I think the behavior of the stock price might be in the future. I know little about options, but, if I have understood you correctly, LEAPS might be interesting whenever the stock price experiences great volatility, either up or down. Instead, equity is better when the stock price remains range bound for some time. Am I right? If so, I wouldn’t make use of LEAPS. Instead, I would gradually build a significant but not too large position in VRX, which is exactly what I am going to do, if you are not comfortable with an high level of debt. Or I would establish right away a very large position in VRX, if you are comfortable with an high level of debt. By the way, I don’t think VRX’s debt is at a temporary high level… As long as there are opportunities for growth, its debt will always stay at high levels… Maybe it will come down a little, getting below the 4x EBITDA threshold for a while, just to spike up again at the first large acquisition that becomes available… ;) Gio Thanks Gio. I agree debt will not likely come down that much as it will likely spike up again. And maybe some LEAPS and some stock makes sense for me (half and half). The LEAPS are not that dependent on the timing of the stock price movement as long as you are resolute in rolling them every year and fully prepared to take the pain of bearing the costs for many years (worst case) as you wait for the stock to move. Its like value investing frustration squared. I just don't think we will have to wait that long here for the stock to move. From your portfolio perspective, given that debt profile (ie its likely to remain high over time), do you think gradually building a portfolio makes sense? Does this somehow mitigate risk as the value of the company, at any point in time, would drop significantly (say 40%) if a large acquisition went wrong. So averaging in now, even if the stock moved up 70% over the next 2 years, if they made a bad acquisition, those gains would be wiped out. I am asking because maybe an initial position with the LEAPS followed by averaging in makes sense for me as well. Link to comment Share on other sites More sharing options...
original mungerville Posted February 27, 2015 Share Posted February 27, 2015 Morningstar: In November, management issued initial guidance for 2016 adjusted earnings per share of $12.05. With the business' recent outperformance, plus the acquisitions of Dendreon and Marathon Pharmaceuticals, we believe Valeant was already poised to significantly exceed this guidance. Now with the addition of greater than 20% accretion from this Salix acquisition, we believe Valeant is positioned for $15.50-$16.00 of EPS in 2016. Even at $200, Valeant's shares are trading at just 12.5 times 2016 earnings, which seems low to us. Valuation remains interesting (on the assumption Salix works out as planned which it should). a) If the 12.5 times multiple based on 1 year forward earnings holds, the stock could increase in line with earnings - which I project can grow 25% annually. b) We could also get a bit of multiple expansion beyond 12.5 times forward earnings - say 15x. So, if all goes well (I'll put 70-90% odds on it), stock price by mid 2016 could be between a) 12.5 X $16.00 X 1.25 = $250 and b) 15 X 16.00 X 1.25 = $300. This is why the LEAPS are interesting to me. If things go well, stock price should be up a lot in about 15 months or less. Its a pretty binary situation. There may however be some room for the stock to tread water for a year or two but it seems unlikely. Link to comment Share on other sites More sharing options...
giofranchi Posted February 27, 2015 Author Share Posted February 27, 2015 From your portfolio perspective, given that debt profile (ie its likely to remain high over time), do you think gradually building a portfolio makes sense? Does this somehow mitigate risk as the value of the company, at any point in time, would drop significantly (say 40%) if a large acquisition went wrong. So averaging in now, even if the stock moved up 70% over the next 2 years, if they made a bad acquisition, those gains would be wiped out. I am gradually building a position, because when I don’t see things clearly enough, I usually get in a “watch from the sidelines and see what happens” mode… After I have witnessed how VRX resisted the ferocious attacks to its business model in 2014, I think I am comfortable enough to start again a small position, which I have done. At the same time, though, doubts have not utterly evaporated... Therefore, I believe the process of gradually building a larger position might give me more time to watch the company, while getting more and more comfortable with its business model. Of course, the issue of a high level of debt still remains, and will probably always remain… And I will probably never get 100% comfortable with that… It is the reason why I think I will never let VRX become more than 10% of my firm’s portfolio. As I have said, large enough to be significant, should everything turn out all right; yet not too large to cause great pain, if something bad and unexpected occurs. Gio Link to comment Share on other sites More sharing options...
original mungerville Posted February 27, 2015 Share Posted February 27, 2015 From your portfolio perspective, given that debt profile (ie its likely to remain high over time), do you think gradually building a portfolio makes sense? Does this somehow mitigate risk as the value of the company, at any point in time, would drop significantly (say 40%) if a large acquisition went wrong. So averaging in now, even if the stock moved up 70% over the next 2 years, if they made a bad acquisition, those gains would be wiped out. I am gradually building a position, because when I don’t see things clearly enough, I usually get in a “watch from the sidelines and see what happens” mode… After I have witnessed how VRX resisted the ferocious attacks to its business model in 2014, I think I am comfortable enough to start again a small position, which I have done. At the same time, though, doubts have not utterly evaporated... Therefore, I believe the process of gradually building a larger position might give me more time to watch the company, while getting more and more comfortable with its business model. Of course, the issue of a high level of debt still remains, and will probably always remain… And I will probably never get 100% comfortable with that… It is the reason why I think I will never let VRX become more than 10% of my firm’s portfolio. As I have said, large enough to be significant, should everything turn out all right; yet not too large to cause great pain, if something bad and unexpected occurs. Gio This makes sense to me. I too am not fully comfortable with the debt load, and so am looking for a way to have larger exposure while keeping my downside limited. Simply: The more debt, the more binary the outcome. The more binary the outcome, the more LEAPS make sense relative to stock given their greater upside and more limited downside. Link to comment Share on other sites More sharing options...
Liberty Posted February 27, 2015 Share Posted February 27, 2015 If at 200 they're trading at 12.5x 2016 (and that might be conservative if history is any guide), imagine if they had issued equity at 150-160... Madness. Not for nothing they were talking about buybacks a few months ago. You don't buy and then issue. But now if their stock rises and markets sees the AGN attacks were BS, they might attempt another merger of equals at some point (2-3 years?) and use more equity for that. Link to comment Share on other sites More sharing options...
giofranchi Posted February 27, 2015 Author Share Posted February 27, 2015 Simply: The more debt, the more binary the outcome. The more binary the outcome, the more LEAPS make sense relative to stock given their greater upside and more limited downside. Yes, of course! But you must then feel comfortable about the mechanics of options trading… I already run two businesses, and I manage a stock portfolio (at least I try to do the best I can!)… Sincerely, I don’t know when I’ll find the time to practice enough with options! ;) Gio Link to comment Share on other sites More sharing options...
Liberty Posted February 27, 2015 Share Posted February 27, 2015 Even Jim Cramer, who attacked Valeant and repeated a lot of the Allergan accusations a few months ago, now praises the company: http://www.thestreet.com/story/13056503/1/jim-cramer-on-valeant-this-is-an-amazing-pharmaceutical-firm.html No sure what to think of this. Oh well, it's not because the village idiot says the sky is blue that it's not blue... Link to comment Share on other sites More sharing options...
Guest wellmont Posted February 27, 2015 Share Posted February 27, 2015 i really don't get the debt concern. this is a company that will earn around $15 a share AFTER debt service. and they will be able to pay down enough debt in 1 year that they will be at comfortable debt ratios that make even moodys happy. further, it is a non cyclical company, extremely stable, and the CEO owns over $1b of equity, which would go "poof" if this company imploded due to debt. blackstone kkr apollo get rich because of debt. not in spite of it. Link to comment Share on other sites More sharing options...
Guest wellmont Posted February 27, 2015 Share Posted February 27, 2015 Even Jim Cramer, who attacked Valeant and repeated a lot of the Allergan accusations a few months ago, now praises the company: http://www.thestreet.com/story/13056503/1/jim-cramer-on-valeant-this-is-an-amazing-pharmaceutical-firm.html No sure what to think of this. Oh well, it's not because the village idiot says the sky is blue that it's not blue... basically this is such an amoral business (wall street) that your enemies become your friends if they can make you a buck. examples are everywhere. third point and BID/yahoo. and just look how quickly and easily pershing square embraced the agn/act merger. notice as much as he praised vrx he never invested. he was paid to say good things about it. although ceo of vrx would say he didn't say enough of them. Link to comment Share on other sites More sharing options...
Liberty Posted February 27, 2015 Share Posted February 27, 2015 Even Jim Cramer, who attacked Valeant and repeated a lot of the Allergan accusations a few months ago, now praises the company: http://www.thestreet.com/story/13056503/1/jim-cramer-on-valeant-this-is-an-amazing-pharmaceutical-firm.html No sure what to think of this. Oh well, it's not because the village idiot says the sky is blue that it's not blue... basically this is such an amoral business (wall street) that your enemies become your friends if they can make you a buck. examples are everywhere. third point and BID. and just look how quickly and easily pershing square embraced the agn/act merger. notice as much as he praised vrx he never invested. he was paid to say good things about it. although ceo of vrx would say he didn't say enough of them. True. I think Ackman was genuine, though. He tried to put 30% of his fund (or something like that) in VRX and staked his credibility very publicly defending their model and management after spending months doing due diligence and having daily calls with VRX. I don't think he was just talking his book for a quick hit like so many others are. I wouldn't be surprised if the next time there's a bump in the road and VRX stock drops significantly we learn in the next 13F that Ackman took a big position. Link to comment Share on other sites More sharing options...
Guest wellmont Posted February 27, 2015 Share Posted February 27, 2015 all that I agree with. ack was presented with an asymmetrical situation by ceo of vrx where he could invest a ton, and make a ton, with very little chance of losing a dime. all that said, he just raised a lot of money and vrx has just risen $50-$60. He knew it was cheap because he studied it and understood it more than anybody else. what this confirms for me though is that I will continue to watch what they do and take what they say with a grain of salt. Link to comment Share on other sites More sharing options...
Liberty Posted February 27, 2015 Share Posted February 27, 2015 SkelCap on twitter had some interesting comments after a meeting with Actavis management. ACT is likely to divest some assets from AGN. Of course they won't sell the crown jewels, but probably stuff where they aren't leaders, or stuff that isn't the most profitable. VRX could be a good buyer (they still have their model and tax advantage over most other buyers), so some value could be created there. We'll see. Link to comment Share on other sites More sharing options...
merkhet Posted February 27, 2015 Share Posted February 27, 2015 I believe Ackman was asked about why he hasn't invested in VRX, and he mentioned that he felt there was a conflict of some sort -- unclear what it was, but he mentioned that he was studying ACT to see if he would hold his shares or sell them. Link to comment Share on other sites More sharing options...
Liberty Posted February 27, 2015 Share Posted February 27, 2015 I believe Ackman was asked about why he hasn't invested in VRX, and he mentioned that he felt there was a conflict of some sort -- unclear what it was, but he mentioned that he was studying ACT to see if he would hold his shares or sell them. Good point. He had insider access for his DD, so if he bought and then something happened (big M&A, etc), he could be accused of having had non-public info, etc. After some time has passed, the appearance of conflict should go away. Not sure if there are formal rules on this. Link to comment Share on other sites More sharing options...
giofranchi Posted March 2, 2015 Author Share Posted March 2, 2015 i really don't get the debt concern. this is a company that will earn around $15 a share AFTER debt service. Yes! As I have said, this is what I call the “everything goes according to plan” scenario. But if you believe that in business something might go wrong, I think you should also get the debt concern… blackstone kkr apollo get rich because of debt. not in spite of it. That's one of the reasons I prefer Oaktree to Blakstone, KKR, and Apollo... Gio Link to comment Share on other sites More sharing options...
giofranchi Posted March 3, 2015 Author Share Posted March 3, 2015 Valeant's Bad Acquisition Of Salix Is Now Supported With Numbers http://seekingalpha.com/article/2967326-valeants-bad-acquisition-of-salix-is-now-supported-with-numbers?source=email_rt_article_readmore&app=1&auth_param=7i5hb:1afaqon:ab712a4e310091da6be222144cc29601&uprof=25 Just some food for thought about why the “everything goes according to plan” scenario might not be the only scenario, and about what might go wrong. Gio Link to comment Share on other sites More sharing options...
Liberty Posted March 3, 2015 Share Posted March 3, 2015 I don't think that blogger knows anything that Valeant didn't when they bought. Link to comment Share on other sites More sharing options...
giofranchi Posted March 3, 2015 Author Share Posted March 3, 2015 I don't think that blogger knows anything that Valeant didn't when they bought. +1 I agree 100%. That's why I am happy to be a VRX shareholder again! :) Gio Link to comment Share on other sites More sharing options...
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