VRX - Valeant Pharmaceuticals International Inc.

[coc]

Munger would be the first person to admit that he (and Buffett) still make mistakes. Sitting in a room, having dozens of people ask you questions for hours about things you didn't know you should research ahead of time, you're bound to get a few things wrong, IMO.

 

He brought up Valeant unprompted.

[Alex.N.B]

I would venture to say that Munger has superior insights into businesses than most investors or people in general just because he has accumulated more knowledge and wisdom than most investors over his career. There is no need for him to have studied the company in depth to be able to make a judgement about something that he likes/ or doesn't about it. 

 

I think it's valid to question a business run by a former consultant whose strategy (part of it) involves making levered acquisitions to drive sales. So far, in a low interest rate environment, it has worked well but not so sure that he can keep going in the future.

 

Also, it's hard to make an acquisition in general because of qualitative factors such as integrating and creating a culture for the long term success of a business... who would possibly think that some guy can make an acquisition every six months and continue to do that forever and be successful.... wishful thinking.

 

In addition, coming back to Munger, there is probably some murky accounting going on and it's no secret that their financials are complex to understand. Don't think that's a good thing in general.

 

I think most of the money has been made in Valeant and I am pretty skeptical for the future...

 

 

 

 

[Liberty]

Munger would be the first person to admit that he (and Buffett) still make mistakes. Sitting in a room, having dozens of people ask you questions for hours about things you didn't know you should research ahead of time, you're bound to get a few things wrong, IMO.

 

He brought up Valeant unprompted.

 

Certainly doesn't mean he can't get things wrong, or that he looked deeply into Valeant. Heuristics that work the vast majority of the time can misfire; something that looks like ITT on the surface when you read the Wall Street Journal can be quite different in reality.

[Liberty]

I would venture to say that Munger has superior insights into businesses than most investors or people in general just because he has accumulated more knowledge and wisdom than most investors over his career. There is no need for him to have studied the company in depth to be able to make a judgement about something that he likes/ or doesn't about it. 

 

I think it's valid to question a business run by a former consultant whose strategy (part of it) involves making levered acquisitions to drive sales. So far, in a low interest rate environment, it has worked well but not so sure that he can keep going in the future.

 

Also, it's hard to make an acquisition in general because of qualitative factors such as integrating and creating a culture for the long term success of a business... who would possibly think that some guy can make an acquisition every six months and continue to do that forever and be successful.... wishful thinking.

 

In addition, coming back to Munger, there is probably some murky accounting going on and it's no secret that their financials are complex to understand. Don't think that's a good thing in general.

 

I think most of the money has been made in Valeant and I am pretty skeptical for the future...

 

Sure, I give Munger tons of credit, he's one of my heroes. But in this case I think he's wrong.

 

As for Valeant, they just spent a long time without making significant acquisitions while the Allergan saga was going on and organic growth accelerated and non-GAAP financials converged to GAAP. They're not just some 60s-style conglomerateur that buys random stuff to pile it on (like Munger's example, ITT) and hide a deteriorating business with complex accounting. Valeant has complex accounting because they do a lot of acquisitions and restructuring, but they do everything they can to allow people to see what's going on, unlike companies that are trying to be obaque, and their non-GAAP adjustments are standard for the industry (as Ackman pointed out -- he knows a thing or two about accounting, as does ValueAct and Sequoia).

 

They have a very clear strategy, an area of expertise that they stick to, structural advantages, and a decentralized model that makes them closer to Capital Cities or TCI than to ITT.

[frommi]

What happens when every drug company in the world operates the way VRX is operating?

[giofranchi]

What happens when every drug company in the world operates the way VRX is operating?

 

frommi,

I hope you are not shorting something Ackman has just made 17% of his portfolio on the assumption you know the answer to that question better than Ackman...

It seems a very dangerous way to look for short candidates...

 

Gio

[giofranchi]

In other words, I think in a frothy market there should be much easier shorts to find! ;)

 

Gio

[jschembs]

What happens when every drug company in the world operates the way VRX is operating?

 

frommi,

I hope you are not shorting something Ackman has just made 17% of his portfolio on the assumption you know the answer to that question better than Ackman...

It seems a very dangerous way to look for short candidates...

 

Gio

 

I'd caution you in putting too much weight into that argument (see Klarman/OCN, Cooperman/ASPS, Ackman/JCP, etc).

 

[Liberty]

What happens when every drug company in the world operates the way VRX is operating?

 

What happens when Berkshire has bought all the companies in the world?

 

This is a pointless question, but I think I see what's your underlying criticism, and it's about the R&D, right?

 

Valeant says that big pharma isn't very good at R&D, and the numbers tend to show it. Small biotechs and smaller companies are better at that (less bureaucratic, more nimble, more focused, etc). It's a bit like how in mining there are juniors taking more risks and majors who buy juniors when they find something, providing more capital to develop/commercialize assets and an exit for shareholders.

 

Demand for drugs and cures isn't going away, and as long as there's demand, supply will try to meet it because that's a way to make money. That's not going away. What might change is the configuration of the industry. Who's best equipped to do what?

 

I think some big pharmas might want to specialize in R&D and keep doing it well (Allergan has a pretty good track record), or some that operate in certain therapeutic areas might need to keep cranking it because big blockbusters are needed all the time, but that's not where Valeant plays (skin creams and contact lenses, OTCs and branded generics). I think the capital that is being wasted on unproductive R&D at many big pharmas could be better used either in more productive R&D elsewhere in the industry (smaller companies or R&D specialists) or in other areas of the economy, and we'd all be better off with less wasted resources.

 

Another point is that Valeant isn't against R&D. They have a pretty full pipeline that compares well with many other companies. They just are much leaner about it; what matters is results, not how much money you spend creating them (f.ex. Allergan management was getting bonuses based on how much was spent on R&D rather than on R&D results).

[frommi]

frommi,

I hope you are not shorting something Ackman has just made 17% of his portfolio on the assumption you know the answer to that question better than Ackman...

It seems a very dangerous way to look for short candidates...

 

Gio

 

I have no problem with that. Ackman is up 50% in 3 months, maybe he is already out? Its just a small position, so don`t worry.

[giofranchi]

What happens when every drug company in the world operates the way VRX is operating?

 

frommi,

I hope you are not shorting something Ackman has just made 17% of his portfolio on the assumption you know the answer to that question better than Ackman...

It seems a very dangerous way to look for short candidates...

 

Gio

 

I'd caution you in putting too much weight into that argument (see Klarman/OCN, Cooperman/ASPS, Ackman/JCP, etc).

 

My point is very simple: Pearson and Ackman are probably working right now on some deal that will make VRX stock pop 15-20%... And before we know the answer to frommi's question, they might have closed 5 to 10 similar deals, and the stock price of VRX might have doubled...

 

Like I have said: there should be easier shorts out there! ;)

 

Gio

[AzCactus]

Like herbalife lol

[frommi]

 

What happens when Berkshire has bought all the companies in the world?

 

This is a pointless question, but I think I see what's your underlying criticism, and it's about the R&D, right?

 

Valeant says that big pharma isn't very good at R&D, and the numbers tend to show it. Small biotechs and smaller companies are better at that (less bureaucratic, more nimble, more focused, etc). It's a bit like how in mining there are juniors taking more risks and majors who buy juniors when they find something, providing more capital to develop/commercialize assets and an exit for shareholders.

 

Demand for drugs and cures isn't going away, and as long as there's demand, supply will try to meet it because that's a way to make money. That's not going away. What might change is the configuration of the industry. Who's best equipped to do what?

 

I think some big pharmas might want to specialize in R&D and keep doing it well (Allergan has a pretty good track record), or some that operate in certain therapeutic areas might need to keep cranking it because big blockbusters are needed all the time, but that's not where Valeant plays (skin creams and contact lenses, OTCs and branded generics). I think the capital that is being wasted on unproductive R&D at many big pharmas could be better used either in more productive R&D elsewhere in the industry (smaller companies or R&D specialists) or in other areas of the economy, and we'd all be better off with less wasted resources.

 

Another point is that Valeant isn't against R&D. They have a pretty full pipeline that compares well with many other companies. They just are much leaner about it; what matters is results, not how much money you spend creating them (f.ex. Allergan management was getting bonuses based on how much was spent on R&D rather than on R&D results).

 

Somebody has to do the R&D or we get no new drugs. When they grow at the current speed at some point Valeant is so big that it becomes the only meaningfull drug company. And drug R&D is from my understanding mainly trial & error, you can`t control the outcomes. The best drugs were found as by-products of other studies. But i am no expert in this field.

 

My thesis is that they can`t grow any longer at the current speed because of the same reasons Berkshire can`t grow fast anymore and that they don`t have a long term moat that protects the business outside of patents like every other drug company. And the organic growth was from price increases, but there are only so many dollars the average person can spend on healthcare drugs so  this growth is limited. Healthcare costs are already pretty high in the US, thats not good for society and at some point its possible that the government will intervene.

[frommi]

My point is very simple: Pearson and Ackman are probably working right now on some deal that will make VRX stock pop 15-20%... And before we know the answer to frommi's question, they might have close 5 to 10 similar deals, and the stock price of VRX might have doubled...

 

Like I have said: there should be easier shorts out there! ;)

 

Gio

 

What if he just took that position to create liquidity and a last pop so that every informed investor can get out?

[Liberty]

Somebody has to do the R&D or we get no new drugs. When they grow at the current speed at some point Valeant is so big that it becomes the only meaningfull drug company. And drug R&D is from my understanding mainly trial & error, you can`t control the outcomes. The best drugs were found as by-products of other studies. But i am no expert in this field.

 

My thesis is that they can`t grow any longer at the current speed because of the same reasons Berkshire can`t grow fast anymore and that they don`t have a long term moat that protects the business outside of patents like every other drug company. And the organic growth was from price increases, but there are only so many dollars the average person can spend on healthcare drugs so  this growth is limited. Healthcare costs are already pretty high in the US, thats not good for society and at some point its possible that the government will intervene.

 

So many things wrong here. Anyway, think what you want.

[rpadebet]

 

Somebody has to do the R&D or we get no new drugs. When they grow at the current speed at some point Valeant is so big that it becomes the only meaningfull drug company. And drug R&D is from my understanding mainly trial & error, you can`t control the outcomes. The best drugs were found as by-products of other studies. But i am no expert in this field.

 

My thesis is that they can`t grow any longer at the current speed because of the same reasons Berkshire can`t grow fast anymore and that they don`t have a long term moat that protects the business outside of patents like every other drug company. And the organic growth was from price increases, but there are only so many dollars the average person can spend on healthcare drugs so  this growth is limited. Healthcare costs are already pretty high in the US, thats not good for society and at some point its possible that the government will intervene.

 

Assuming your reasons for shorting are valid, I am curious why "now" is the right timing?

Is it just because we are at all time highs?

[frommi]

Assuming your reasons for shorting are valid, I am curious why "now" is the right timing?

Is it just because we are at all time highs?

 

No. I count waves and look at investor behaviour. Sometimes i think timing is the only thing i am good at. But its still a game of probabilities, maybe i am wrong.

[rpadebet]

Assuming your reasons for shorting are valid, I am curious why "now" is the right timing?

Is it just because we are at all time highs?

 

No. I count waves and look at investor behaviour. Sometimes i think timing is the only thing i am good at. But its still a game of probabilities, maybe i am wrong.

 

Good to know. What is your level of conviction on this? % of portfolio basis.

[frommi]

Good to know. What is your level of conviction on this? % of portfolio basis.

 

2%, i don`t have the guts to size a short on a single company bigger.

[Happy]

I think Munger strongly dislikes VRX for its tax inversion. He said before that he views it as greedy, he wouldn't allow it and that they would never consider it for Berkshire even if it were possible.

[giofranchi]

I think Munger strongly dislikes VRX for its tax inversion. He said before that he views it as greedy, he wouldn't allow it and that they would never consider it for Berkshire even if it were possible.

 

+1

 

As I had already pointed out. ;)

 

Gio

[giofranchi]

What if he just took that position to create liquidity and a last pop so that every informed investor can get out?

 

I don’t get this… Ackman has participated in a raising of capital made by VRX to complete the purchase of Salix… Just a few days ago... Does that look like a strategy to “create liquidity and a last pop”?

 

Gio

 

[frommi]

No. Just ignore me, i am just a short term distraction in this thread. :)

[Liberty]

I think Munger strongly dislikes VRX for its tax inversion. He said before that he views it as greedy, he wouldn't allow it and that they would never consider it for Berkshire even if it were possible.

 

I guess he draws the line exactly next to all the things Berkshire has done over the years to pay as little tax as possible  ;)

 

The US tax code is broken, it's stupid to double-tax foreign income that has already been taxed elsewhere. If a wave of inversions helps push for reform, I'm all for it. It's entirely legal to merge with a foreign company, and companies that are already outside the US have all the benefits of an inversion, so it would be less fair if US companies couldn't move out.

[coc]

I think Munger strongly dislikes VRX for its tax inversion. He said before that he views it as greedy, he wouldn't allow it and that they would never consider it for Berkshire even if it were possible.

 

I guess he draws the line exactly next to all the things Berkshire has done over the years to pay as little tax as possible  ;)

 

 

I'm going to disagree with this. Berkshire could have legally done an amazing range of very logical things to avoid taxes over the years, up to and including inverting into a tax haven or taking on lots of tax deductible debt. Berkshire has taken advantage of things like long term capital gains and renewable energy tax credits (which are meant to encourage the very investments Berkshire is making) but in general, has more than paid its fair share. It would be ridiculous to indict Berkshire on not paying taxes, relative to what it would have had available to it.

 

So yes, that's exactly where they draw the line. Where the hell else would they draw it?