VRX - Valeant Pharmaceuticals International Inc.

[giofranchi]

Liberty,

I guess we have another lesson here on the nature of the market: everything fluctuates, always. Therefore, you should never be in a hurry to buy anything. Even something that seems to go nowhere but up and up like VRX. Instead, you should always be patient and disciplined: your opportunity to average down will come. With Mr. Chanos and Mr. Grant on the bear camp I would be surprised if VRX stock price wouldn’t decline more in the days ahead.

 

This being said, it is imperative that you know what you own. Because, without the belief you have understood VRX well, you won’t be able to muster the confidence necessary to average down in the coming days.

 

As long as Mr. Pearson and his team don’t commit serious mistakes, VRX will be fine. And what to look at, to judge the quality of their decisions? Sales. If sales keep increasing at a satisfactory rate, Cash EPS will almost surely follow. And VRX will keep on creating shareholders’ value. Last year sales were up more than 40%.

 

Gio

 

[Phaceliacapital]

Our largest holding, Valeant, had an outstanding year. Full year numbers have not been reported yet, but we believe that cash earnings per share should exceed $6, well ahead of last year’s result. The big news of the year was the acquisition of Bausch & Lomb for nearly $9 billion in August. The deal should be highly accretive and, together with modest organic growth in its other operations, enable cash earnings per share to increase significantly in 2014. The integration of Bausch & Lomb appears on track with cost synergies, originally estimated by management at around $800 million, now expected to be over $850 million.

 

Cash earnings per share have probably more than tripled over the last four years. While we do not expect this growth trajectory to continue at such a rapid pace in the future, we do believe the company can continue to produce positive organic growth supplemented by ongoing acquisitions that will enable Valeant to grow cash earnings per share at an above-average rate.

 

We like Valeant’s approach to the pharmaceutical business. It has acquired a diverse stable of branded, generic and OTC drugs and, more recently, medical devices including dermal fillers and contact lenses. Many of its products are steady sellers in specialty categories like dermatology and ophthalmology. In our view, Valeant is essentially a value investor in health care products.

[giofranchi]

Our largest holding, Valeant, had an outstanding year. Full year numbers have not been reported yet, but we believe that cash earnings per share should exceed $6, well ahead of last year’s result. The big news of the year was the acquisition of Bausch & Lomb for nearly $9 billion in August. The deal should be highly accretive and, together with modest organic growth in its other operations, enable cash earnings per share to increase significantly in 2014. The integration of Bausch & Lomb appears on track with cost synergies, originally estimated by management at around $800 million, now expected to be over $850 million.

 

Cash earnings per share have probably more than tripled over the last four years. While we do not expect this growth trajectory to continue at such a rapid pace in the future, we do believe the company can continue to produce positive organic growth supplemented by ongoing acquisitions that will enable Valeant to grow cash earnings per share at an above-average rate.

 

We like Valeant’s approach to the pharmaceutical business. It has acquired a diverse stable of branded, generic and OTC drugs and, more recently, medical devices including dermal fillers and contact lenses. Many of its products are steady sellers in specialty categories like dermatology and ophthalmology. In our view, Valeant is essentially a value investor in health care products.

 

Phaceliacapital,

who wrote that?

 

Thank you! :)

 

Gio

[rijk]

http://www.gurufocus.com/news/250010/sequoia-funds-discussion-of-valeant-pharmaceuticals

 

regards

rijk

[giofranchi]

http://www.gurufocus.com/news/250010/sequoia-funds-discussion-of-valeant-pharmaceuticals

 

regards

rijk

 

Thank you! :)

 

Gio

[Phaceliacapital]

Full letter (found it in the sequoia topic in the general discussion section):

 

http://www.sec.gov/Archives/edgar/data/89043/000114420414013665/v367083_ncsr.htm

[Liberty]

Liberty,

I guess we have another lesson here on the nature of the market: everything fluctuates, always. Therefore, you should never be in a hurry to buy anything. Even something that seems to go nowhere but up and up like VRX. Instead, you should always be patient and disciplined: your opportunity to average down will come. With Mr. Chanos and Mr. Grant on the bear camp I would be surprised if VRX stock price wouldn’t decline more in the days ahead.

 

This being said, it is imperative that you know what you own. Because, without the belief you have understood VRX well, you won’t be able to muster the confidence necessary to average down in the coming days.

 

As long as Mr. Pearson and his team don’t commit serious mistakes, VRX will be fine. And what to look at, to judge the quality of their decisions? Sales. If sales keep increasing at a satisfactory rate, Cash EPS will almost surely follow. And VRX will keep on creating shareholders’ value. Last year sales were up more than 40%.

 

Gio

 

Agreed, of course, Gio. I'm assuming you're using the general 'you' here and not addressing this specifically at me, correct?

 

Here's a quick rebuttal of the main points of the recent short thesis:

 

http://seekingalpha.com/article/2073923-why-chanos-and-grant-are-wrong-on-valeant

 

Everything here should be very obvious to anyone who took the time to understand the business and business model. I guess there are still tons of people who don't, so they scare easily (chartists and momentum guys and such).

 

I don't mind. Volatility can be good. Worst case, Valeant has a 1.5b buyback program that they can use (though probably not after just a small drop like this -- after all, one of their goals is to take their leverage down -- but in general it could be a possibility if there was a lot more downward volatility).

[giofranchi]

Agreed, of course, Gio. I'm assuming you're using the general 'you' here and not addressing this specifically at me, correct?

 

Yeah! Of course! I think those are general ideas.

I wrote to you just because a few days ago we discussed about how to invest in great compounding machines. My idea was to always be invested in great businesses, but not necessarily to be “all in” at “all times”… If in the days ahead VRX stock price declines further, and gets closer to $110 - $120, I guess I will be proven correct! ;)

 

Gio

 

[Liberty]

http://www.bloomberg.com/news/2014-03-19/valeant-ceo-seeks-acquisitions-in-high-growth-health-care.html

 

Valeant Pharmaceuticals International (VRX) Inc., Canada’s largest drugmaker, said it is seeking acquisitions in opthalmology, dermatology and dentistry.

 

These areas “are growing faster than the overall growth rate of health care,” Chief Executive Officer Mike Pearson said in an interview on Bloomberg Television today.

[giofranchi]

Valeant Targets Corporate ‘Fat’ in Push for Big Leagues

 

http://www.bloomberg.com/news/2014-03-20/valeant-targets-corporate-fat-in-push-for-big-leagues.html

 

 

Gio

[Liberty]

Thanks Gio, I was wondering when the whole interview would surface.

[giofranchi]

FDA approves Metronidazole - 7:10 AM

•Actavis (ACT) and Valeant Pharmaceuticals (VRX) report that the FDA approved Metronidazole 1.3% Vaginal Gel for the treatment of bacterial vaginosis. Actavis acquired the rights to the product last April.

•Valeant will receive as much as $57M in upfront payments plus certain guaranteed royalties during the first three years of commercialization. Actavis will pay additional royalties after the three-year term.

 

 

Gio

 

[fareastwarriors]

Contrarian Legend Jim Grant Presents His Killer Case Against Valeant Pharmaceuticals

 

https://businessincanada.com/2014/03/06/jim-grant-bearish-case-on-valeant-pharmaceuticals/

[giofranchi]

Contrarian Legend Jim Grant Presents His Killer Case Against Valeant Pharmaceuticals

 

https://businessincanada.com/2014/03/06/jim-grant-bearish-case-on-valeant-pharmaceuticals/

 

Thank you for posting… but very bad article!

It is Cash EPS which adjust for integration costs and other expenses related to the acquisition of external businesses. Imo it is Cash EPS that should be compared to VRX share price.

A “financialized pharmaceutical company”? Just because it purchases products already developed by someone else, which have long life cycles and require little more spending in R&D? Mmm… Call it as you prefer, it remains a business model I like! If some synergies might be found and exploited, I like it even more.

Sorry to say this, but I have come to expect much more from Mr. Grant…

 

In the end, either Mr. Pearson is buying good quality assets cheaply, or he isn’t. If you are a bear on VRX, show me why Mr. Pearson overpaid for poor quality assets. ;)

 

Gio

 

[constructive]

In the end, either Mr. Pearson is buying quality assets cheaply, or he isn’t. If you are a bear on VRX, show me why Mr. Pearson overpaid for poor assets. ;)

 

Isn't it possible that VRX has acquired companies at good prices, yet VRX is overpriced?

[giofranchi]

Isn't it possible that VRX has acquired companies at good prices, yet VRX is overpriced?

 

Yes! But not as overpriced as fcf might suggest! Costs related to the acquisition and integration of new businesses are real cash outflows, and cannot be added back in calculating cash from operations. Yet, they indisputably are one time charges. And they might sometimes be as large as the amortization of goodwill, which instead is rightly added back.

 

Gio

[Liberty]

One way I think about it is, if Valeant was to stop acquiring today, it would not grow nearly as fast (though it's organic numbers are still pretty decent), but within a year or two all acquisitions would be fully integrated and all the one-time costs related to M&A would fall to zero. That would be a way to maximize current owner's earnings vs. growth.

 

That seems like a bad strategy at the present time since there are lots of M&A opportunities, interest rates are low, Valeant has a tax advantage and appears better at operating efficiently compared to others (kind of like how Capital Cities got more out of a TV station than other operators because they cut the fat). What matters is that a dollar invested in growth return more than a dollar of value.

 

But if someday all that changes and management can't find businesses that meet its hurdle rate, they could redirect capital to organic growth (more R&D? more small bolt-ons rather than big ones? organic expansion into new markets? etc) and capital returns (dividends, buybacks) and still do well. But until we reach that point, I don't see why they should change a strategy that seems to be working superbly at creating value.

[constructive]

One way I think about it is, if Valeant was to stop acquiring today, it would not grow nearly as fast (though it's organic numbers are still pretty decent), but within a year or two all acquisitions would be fully integrated and all the one-time costs related to M&A would fall to zero.

 

But the real costs of goodwill amortization would remain. Drug values peak a few years after launch and then decline over time as they face new competition.

[Liberty]

One way I think about it is, if Valeant was to stop acquiring today, it would not grow nearly as fast (though it's organic numbers are still pretty decent), but within a year or two all acquisitions would be fully integrated and all the one-time costs related to M&A would fall to zero.

 

But the real costs of goodwill amortization would remain. Drug values peak a few years after launch and then decline over time as they face new competition.

 

Indeed, which is why the selection of the assets is so important. My understanding is that some are more durable than others and can more easily be extended with reformulations and slight improvements, and others are just branded generics anyway. Others are more valuable to Valeant than to the acquiree because of valeant's global sales, giving it ability to leverage an under-marketed product. VRX certainly isn't trying to go into the highly competitive areas, both geographically and product-wise (if you listen to the calls, Pearson mentions this a lot, how they're staying out of certain markets because there's too much competition or they don't have the economies of scale yet).

 

They release data on their patent cliffs as % of their revenues, and on any year for the foreseeable future, it's very low single digits.

[giofranchi]

Imo, and it doesn’t count much!, the last two posts by Liberty show a very good understanding of VRX business model. Any bear should think about those posts and see if he/she can figure out something wrong with their logic. I cannot. :)

 

Gio

 

[giofranchi]

Isn't it possible that VRX has acquired companies at good prices, yet VRX is overpriced?

 

Mr. Pearson answering if Valeant is going to use its stock as currency for future acquisition:

And as we’ve always said, we think that our stock is our most valuable asset. And we are going to be very, very careful using it because we think it’s extremely undervalued, given our growth prospects.

--Q4 2013 Earnings Call February 27, 2014

 

Gio

 

[lu_hawk]

From that Grant's short piece, he quotes the CEO as saying that he wanted to make Valeant "one of the top-five most valuable pharmaceutical companies as measured by market cap by the end of 2016.  This equates to roughly $150 billion in market cap." 

 

I don't know, but do you ever want to see a CEO make a proclamation like this?

[Liberty]

From that Grant's short piece, he quotes the CEO as saying that he wanted to make Valeant "one of the top-five most valuable pharmaceutical companies as measured by market cap by the end of 2016.  This equates to roughly $150 billion in market cap." 

 

I don't know, but do you ever want to see a CEO make a proclamation like this?

 

If that was the only thing he said, absolutely not.

 

But if you listen to all that he's saying and not just one thing out of context, you'll see that he's absolutely not an empire builder. He repeatedly talks about how their first criteria for anything is financial, and if a deal doesn't hit their return targets (and they are conservative with those, giving no value to future products, extra synergies, etc), they won't do it even if it's strategic, otherwise attractive, or if everyone else is doing it. They said that they're agnostic about markets and products and don't feel they have to be in anything, and that they only do deals when they are the only ones at the table, they don't participate in auctions or bidding wars. Management is compensated on long-term per-share metrics and gets not benefit from growing unprofitably.

 

Basically, growth for growth's sake is bad. But profitable growth is very good, so I'm glad that they have big ambitions while staying disciplined.

[lu_hawk]

From that Grant's short piece, he quotes the CEO as saying that he wanted to make Valeant "one of the top-five most valuable pharmaceutical companies as measured by market cap by the end of 2016.  This equates to roughly $150 billion in market cap." 

 

I don't know, but do you ever want to see a CEO make a proclamation like this?

 

If that was the only thing he said, absolutely not.

 

But if you listen to all that he's saying and not just one thing out of context, you'll see that he's absolutely not an empire builder. He repeatedly talks about how their first criteria for anything is financial, and if a deal doesn't hit their return targets (and they are conservative with those, giving no value to future products, extra synergies, etc), they won't do it even if it's strategic, otherwise attractive, or if everyone else is doing it. They said that they're agnostic about markets and products and don't feel they have to be in anything, and that they only do deals when they are the only ones at the table, they don't participate in auctions or bidding wars. Management is compensated on long-term per-share metrics and gets not benefit from growing unprofitably.

 

Basically, growth for growth's sake is bad. But profitable growth is very good, so I'm glad that they have big ambitions while staying disciplined.

 

Yes, the quote may be out of context.

 

But I wasn't talking about growth for growth's sake.  More that, compared to the baseline CEO, a CEO that would make that kind of statement is about 100x more likely to be fudging the numbers or doing something else nefarious.  Maybe it is out of context and doesn't mean anything, but that line popped out at me more than anything else I read in Grant's.  Maybe he is the Buffett of biotech, but Buffett wouldn't say something like that.

[Guest wellmont]

From that Grant's short piece, he quotes the CEO as saying that he wanted to make Valeant "one of the top-five most valuable pharmaceutical companies as measured by market cap by the end of 2016.  This equates to roughly $150 billion in market cap." 

 

I don't know, but do you ever want to see a CEO make a proclamation like this?

 

I definitely want to see a CEO that is a proven shareholder value creator making a proclamation like that. that usually means your wallet gets too heavy to carry.