VRX - Valeant Pharmaceuticals International Inc.

[Jurgis]

You realize that you'll be crucified by Valeant bulls?

 

Good luck

[Liberty]

Oh my sweet sweet Lord...

 

I turned away for a minute and yall went and made Valeant the most expensive stock on the TSX. Good Lord.

 

Alright.

 

First, hi everybody. I hope everybody is doing fine.

Been away for a few months because life gets crazy sometimes, and for some it gets crazier than for others.

 

So here's the deal. I will begin publishing my work on Valeant today. I'm gonna post the link for the first episode right away just to get you started (warning - it's fairly long), and then I'll come back and add a bit of commentary to explain a few things and how I will go about publishing the rest throughout the weekend  and how I'll discuss Valeant.

 

Alright here's the link. Enjoy, I'll keep talking below for a bit and then get back to getting the rest of the work ready for publication.

 

$VRX: A Detailed look inside a dangerous story well told http://bit.ly/1IToUFt . Cheers

 

Glad to be back.

 

AZ

 

Thanks AZ. I've been asking you for this for a long time, so I appreciate you taking the time to write it all down and publish it.

[AZ_Value]

Oh my sweet sweet Lord...

 

I turned away for a minute and yall went and made Valeant the most expensive stock on the TSX. Good Lord.

 

Alright.

 

First, hi everybody. I hope everybody is doing fine.

Been away for a few months because life gets crazy sometimes, and for some it gets crazier than for others.

 

So here's the deal. I will begin publishing my work on Valeant today. I'm gonna post the link for the first episode right away just to get you started (warning - it's fairly long), and then I'll come back and add a bit of commentary to explain a few things and how I will go about publishing the rest throughout the weekend  and how I'll discuss Valeant.

 

Alright here's the link. Enjoy, I'll keep talking below for a bit and then get back to getting the rest of the work ready for publication.

 

$VRX: A Detailed look inside a dangerous story well told http://bit.ly/1IToUFt . Cheers

 

Glad to be back.

 

AZ

 

Thanks AZ. I've been asking you for this for a long time, so I appreciate you taking the time to write it all down and publish it.

 

 

Well, Liberty my friend I'm doing this for you. So you will be to blame for whatever happens to me.

 

I'm not even kidding, I'm just getting back to normal life and a few of the things I missed are these tweets from you from months ago:

 

Liberty ‏@Liberty8988

@AZ_Value and I don't mean because of the stock price, but because of the past few quarters without big deals..

 

Liberty ‏@Liberty8988

@AZ_Value Just curious to know if you've changed your opinion of VRX since we last discussed it?

 

I'm sorry I missed them. BTW, DM me next time on Twitter, that notifications tab can go unchecked for months with me. But a DM I know it's from someone I follow so I check that :)

 

 

 

Alright, so here's how I'm gonna go about it. I'm short on sleep and will need time to make everything ready to be published. My notes are numerous and span years, many years. I didn't start following VRX recently, I already pretty much knew all I needed to know by the time of last year's big stage drama with Ackman.

 

I spent last night reading over this thread, I stopped following it last summer. When people start getting heated and insulting each other, I lose interest immediately. But that's not fair and I apologize for that, if we're gonna put together a community to share on stuff like this, then you can't have folks like me just take themselves out of discussions where they obviously have something to share. But I'll explain it all later.

 

As far as the Valeant story goes. This is just the first episode. More to come. Much more actually. So I will hold my own comments back until everything is out there; and it'd be best for you to also wait to read everything.

When I'm done I'll come back and add color commentary that will be directed to Liberty, because he's a gentleman and won't start insulting my mother or something. But the commentary will be applicable to everybody.

There are many things that go wrong in investing and on boards like CBF and I've been here for many years and have witnessed a lot so we'll talk about all that here and hopefully we'll all get better.

 

Good investing everybody,

 

AZ

[loganc]

You realize that you'll be crucified by Valeant bulls?

 

Good luck

 

I don't agree.  AZ_Value has obviously done a lot of work here and I look forward to reading everything he is willing to post.

[rpadebet]

You realize that you'll be crucified by Valeant bulls?

 

Good luck

 

I don't agree.  AZ_Value has obviously done a lot of work here and I look forward to reading everything he is willing to post.

 

+1

 

looking forward to a solid bear case.

Until now this one has potential. I always love detailed takedowns like these instead of just over the air accusations.

 

 

[original mungerville]

You realize that you'll be crucified by Valeant bulls?

 

Good luck

 

No, we only crucify comments which are not substantiated by analysis.

[original mungerville]

I am looking forward to AZ's work so we can all understand this situation in greater detail.

 

 

[100 Shares]

Oh my sweet sweet Lord...

 

I turned away for a minute and yall went and made Valeant the most expensive stock on the TSX. Good Lord.

 

Alright.

 

First, hi everybody. I hope everybody is doing fine.

Been away for a few months because life gets crazy sometimes, and for some it gets crazier than for others.

 

So here's the deal. I will begin publishing my work on Valeant today. I'm gonna post the link for the first episode right away just to get you started (warning - it's fairly long), and then I'll come back and add a bit of commentary to explain a few things and how I will go about publishing the rest throughout the weekend  and how I'll discuss Valeant.

 

Alright here's the link. Enjoy, I'll keep talking below for a bit and then get back to getting the rest of the work ready for publication.

 

$VRX: A Detailed look inside a dangerous story well told http://bit.ly/1IToUFt . Cheers

 

Glad to be back.

 

AZ

 

AZ thank you for posting this. It is definitely enlightening and educational (from a Valeant perspective and general investing knowledge perspective) and I enjoyed reading it.

 

I know there is more to come, but what is unclear to me is which of the following two ways would be the best way to characterize your feelings. I understand that Valeant is hard to analyze to begin with due to acquisitions and then further complicated by exchange rates and reorganizations and lack of reporting. But, is the bottom line that 1) you don't like the transparency and you'd exercise caution/stay away or 2) that after all your research you think Valeant is downright fraudulent like Enron?

[Jurgis]

You realize that you'll be crucified by Valeant bulls?

 

Good luck

 

No, we only crucify comments which are not substantiated by analysis.

 

Like most of the bull cheerleading?  ::)

[Guest Schwab711]

Oh my sweet sweet Lord...

 

I turned away for a minute and yall went and made Valeant the most expensive stock on the TSX. Good Lord.

 

Alright.

 

First, hi everybody. I hope everybody is doing fine.

Been away for a few months because life gets crazy sometimes, and for some it gets crazier than for others.

 

So here's the deal. I will begin publishing my work on Valeant today. I'm gonna post the link for the first episode right away just to get you started (warning - it's fairly long), and then I'll come back and add a bit of commentary to explain a few things and how I will go about publishing the rest throughout the weekend  and how I'll discuss Valeant.

 

Alright here's the link. Enjoy, I'll keep talking below for a bit and then get back to getting the rest of the work ready for publication.

 

$VRX: A Detailed look inside a dangerous story well told http://bit.ly/1IToUFt . Cheers

 

Glad to be back.

 

AZ

 

Fantastic piece!!! I really look forward to the rest. I don't really care about VRX, but I just learned a hell of a lot about investing!! This might be worth reading periodically to remind myself to always look deeper.

 

I'm especially glad to see you didn't waste this wonderful research by stating any major conclusion that will allow others to shift the focus away from the piece as a whole. I felt it was more powerful to leave it to the reader to decide what is all meant.

 

Your PSA was awesome by the way.

[KCLarkin]

Fantastic research. You know a writer is a clear thinker when just the outline is enough to tell the story.

 

I own VRX but I am not a bull. Having lived through Nortel, I am very worried about this one. But then I see the 13Fs and think I am missing something.

[valueyoda]

The bull thesis is obvious. However, this seems to be the mother of all crowded hedge hotels, given that almost every manager has allocated a significant portion of their AUM to Valeant or for that matter Allergan. I think that once Valeant starts to dissapoint in terms of acquisitions and earnings growth, there could be a significant dislocation in the stock. Every analyst report I've read, and any bull thesis assume solid revenue growth and cash flow growth in the coming years, in addition to potential large acquisitions. What if that revenue and cash flow growth doesn't materialize? What if the value accretion becomes too negative, given the high multiples in the specialty pharma space?  It seems to me that investors have decided that biotech and specialty pharma companies are flawless and will execute without fail.

[Gamecock-YT]

Oh my sweet sweet Lord...

 

I turned away for a minute and yall went and made Valeant the most expensive stock on the TSX. Good Lord.

 

Alright.

 

First, hi everybody. I hope everybody is doing fine.

Been away for a few months because life gets crazy sometimes, and for some it gets crazier than for others.

 

So here's the deal. I will begin publishing my work on Valeant today. I'm gonna post the link for the first episode right away just to get you started (warning - it's fairly long), and then I'll come back and add a bit of commentary to explain a few things and how I will go about publishing the rest throughout the weekend  and how I'll discuss Valeant.

 

Alright here's the link. Enjoy, I'll keep talking below for a bit and then get back to getting the rest of the work ready for publication.

 

$VRX: A Detailed look inside a dangerous story well told http://bit.ly/1IToUFt . Cheers

 

Glad to be back.

 

AZ

 

I don't have a dog in this fight, but this was very well done. Major props to you. A great read. You should write more often.

[original mungerville]

I started by reading the FFH review as I am more familiar with FFH than Valeant. I wanted to get a sense of the quality, etc before I get into the Valeant analysis. It was pretty good overall, although I would say I disagree with most but not all of the points. They spent very little on the deflation bet and have studied that issue for some time given their consistently correct long-bond bets over the past 15 years and intense relationship with Hoisington, they aren't just necessarily pissing away money on macro calls with little analysis; the record is close to Berkshire over the past 15 years, but I think it does a disservice to FFH to take measure at the top of the market which is pretty much where we are likely at now...of course we can't know for sure where we are...my point being FFH looked better if you take those numbers in 2008/9 and they look a lot worse now so something in the mid-point of the cycle - say 2011 or so - as an end point would be more fair (not necessarily in relation to BRK but just for absolute returns over past 5, 10, and 15 years); the hedges were not timed correctly that's for sure, they looked like genius in 08/09, reasonable in 10/11 and really stupid now by 2014/15, they may start to look more reasonable in a year or two (not genius, I think the timing was so off they can't get to genius, but reasonable may be likely - comes back to taking these measures at the end of an asset cycle versus the mid point). I do agree, however, about the lame excuse given re Blackberry share offer. This point is hard to argue against.  Now to the Valeant analysis.

[berkshire101]

Any thoughts on all the hedge funds (like valueact and persian who are highly respected with solid track record) on the board?  The bulls are basically riding off their insights. 

[Patmo]

Oh my sweet sweet Lord...

 

I turned away for a minute and yall went and made Valeant the most expensive stock on the TSX. Good Lord.

 

Alright.

 

First, hi everybody. I hope everybody is doing fine.

Been away for a few months because life gets crazy sometimes, and for some it gets crazier than for others.

 

So here's the deal. I will begin publishing my work on Valeant today. I'm gonna post the link for the first episode right away just to get you started (warning - it's fairly long), and then I'll come back and add a bit of commentary to explain a few things and how I will go about publishing the rest throughout the weekend  and how I'll discuss Valeant.

 

Alright here's the link. Enjoy, I'll keep talking below for a bit and then get back to getting the rest of the work ready for publication.

 

$VRX: A Detailed look inside a dangerous story well told http://bit.ly/1IToUFt . Cheers

 

Glad to be back.

 

AZ

 

I don't have a dog in this fight, but this was very well done. Major props to you. A great read. You should write more often.

 

Seconded, I very much enjoyed both pieces. Points well backed  by evidence, but just as importantly, very clearly and convincingly presented. I can't wait for the Valeant part 2.

[original mungerville]

Any thoughts on all the hedge funds (like valueact and persian who are highly respected with solid track record) on the board?  The bulls are basically riding off their insights.

 

and Sequoia Fund's largest position by far, and a large Lou Simpson position...so also very well-respected long-only longterm value investors, not just hedge funds.

[jay21]

Any thoughts on all the hedge funds (like valueact and persian who are highly respected with solid track record) on the board?  The bulls are basically riding off their insights.

 

and Sequoia Fund's largest position by far, and a large Lou Simpson position...so also very well-respected long-only longterm value investors, not just hedge funds.

 

We can do a lot of digging to put together a rough idea of what the business/acquistions actually looks like but no matter what information we find, Jeff can just ask a pointed question at a Board meeting and get way more information than us. Also, I believe that Mason was involved heavily in the due diligence of all early acquisitions.

 

I know the counter to this point (and respect it), but the information asymmetry makes me trust their analysis over whatever I can do on my own. However, I have no position.

[Guest Schwab711]

Any thoughts on all the hedge funds (like valueact and persian who are highly respected with solid track record) on the board?  The bulls are basically riding off their insights.

 

and Sequoia Fund's largest position by far, and a large Lou Simpson position...so also very well-respected long-only longterm value investors, not just hedge funds.

 

We can do a lot of digging to put together a rough idea of what the business/acquistions actually looks like but no matter what information we find, Jeff can just ask a pointed question at a Board meeting and get way more information than us. Also, I believe that Mason was involved heavily in the due diligence of all early acquisitions.

 

I know the counter to this point (and respect it), but the information asymmetry makes me trust their analysis over whatever I can do on my own. However, I have no position.

 

 

Buffett bought and sold XOM/COP in less than a year, both times buying at high oil prices and selling at decade-lows. He admitted another major mistake with Tesco. Lots of value investors completely missed the housing bubble and bought WAMU days/weeks before bankruptcy (including Parabai). And, of course, the mighty Hank Greenberg managed to destroy a 6+ decade long reputation by being mislead by CCME. Everyone makes mistakes, they just make far fewer. However, even Buffett still regularly makes major mistakes.

 

I don't understand the hero worship in the face of conflicting evidence just because they are presumably experts. It's CNBC-syndrome to me. I think we'd all agree that Lou Simpson or collectively, Sequoia, are better investors on the whole than AZ_Value (without knowing anything about AZ). However, it seems possible that AZ_Value is the expert on this extremely specific topic. I don't mean to pick on you personally, just a pet-peeve about relying on expert opinions when their actual expertise is more broad and only partially related. Lou Simpson may be an expert in capital allocation and equity valuation. We have no idea and it's almost impossible to know if that expertise extends to VRX's business, regardless of his investment status.

 

http://brontecapital.blogspot.com/2011/03/what-demise-of-china-media-express-says.html

[jay21]

Any thoughts on all the hedge funds (like valueact and persian who are highly respected with solid track record) on the board?  The bulls are basically riding off their insights.

 

and Sequoia Fund's largest position by far, and a large Lou Simpson position...so also very well-respected long-only longterm value investors, not just hedge funds.

 

We can do a lot of digging to put together a rough idea of what the business/acquistions actually looks like but no matter what information we find, Jeff can just ask a pointed question at a Board meeting and get way more information than us. Also, I believe that Mason was involved heavily in the due diligence of all early acquisitions.

 

I know the counter to this point (and respect it), but the information asymmetry makes me trust their analysis over whatever I can do on my own. However, I have no position.

 

 

Buffett bought and sold XOM/COP in less than a year, both times buying at high oil prices and selling at decade-lows. He admitted another major mistake with Tesco. Lots of value investors completely missed the housing bubble and bought WAMU days/weeks before bankruptcy (including Parabai). And, of course, the mighty Hank Greenberg managed to destroy a 6+ decade long reputation by being mislead by CCME. Everyone makes mistakes, they just make far fewer. However, even Buffett still regularly makes major mistakes.

 

I don't understand the hero worship in the face of conflicting evidence just because they are presumably experts. It's CNBC-syndrome to me. I think we'd all agree that Lou Simpson or collectively, Sequoia, are better investors on the whole than AZ_Value (without knowing anything about AZ). However, it seems possible that AZ_Value is the expert on this extremely specific topic. I don't mean to pick on you personally, just a pet-peeve about relying on expert opinions when their actual expertise is more broad and only partially related. Lou Simpson may be an expert in capital allocation and equity valuation. We have no idea and it's almost impossible to know if that expertise extends to VRX's business, regardless of his investment status.

 

http://brontecapital.blogspot.com/2011/03/what-demise-of-china-media-express-says.html

 

As mentioned above, I understand the counterpoint and respect it.

 

I should probably clarify (or re-emphasize) my point. There is an inherent information asymmetry between passive investors and mgmt/the Board. Whatever, information you can find, they will have more.

 

To use VRX, as an example, the thesis rests on their ability to perform high IRR acquisitions. You need product level information to evaluate their performance. ValueAct has this information; you do not. In my own case, I respect ValueAct as good investors AND they have more information than me; therefore if I had to bet I would bet with them. Fortunately I don't need to bet.

[no_free_lunch]

Thanks for the post AZ, looking forward to part 2.

[ZenaidaMacroura]

This is a very thorough write up and a lot of time time spent/no detail spared in comparing the decks from quarter to quarter.  Looking up the Sanitas filings was pretty smart.  Valeant isn't the most transparent company and I originally intended to take a position but Charlie Munger's off-the-cuff comment dissuaded any such action (call me chicken-hearted).

 

I think many of the smoking guns in the first 2 sections are due to commingling sources -take the Medicis section for example:

In 2011, all 3 analysts had Solodyn sales at roughly $370M. Their estimates for 2012 sales ranged from $322M to $330M and for 2013 the average of the 3 estimates was $358M and sales were expected to rise thereafter.

It's rationalized that "The product that made up 50%+ of Medicis sales collapsed by $130M, another one went generic and somehow sales still managed to grow.  There simply wasn't any way Medicis could have made up the Solodyn collapse by growing another product."  The 2013 slide that provided Medicis revenue figures from 745mm to 753mm was a forecast right?  They never updated the ultimate contribution of Medicis for FY2013.  They only say in a much later slide in 2014 that the impact was "minimal" but there's not a smoking gun there that they enhanced the numbers.  Additionally, if they originally expected 250-275mm as they represented in the deck - and they realized 200mm in sales I would argue that in terms of corroborating their forecast, sales only collapsed $50million.  They didn't project 2011 sales forward so the shortfall between Solodyn sales and segment contribution should be measured in terms of Valeant expectation not slide decks provided by a trio of investment banks.

 

It's annoying they don't go back and highlight each segment or breakdown whether they met individual product guidance (especially when one product is a 1/3 of the expected sales), but alone it's not condemnable.

 

EDIT: also the product that you mentioned went generic ended up being extended to 2016 right?  So that's probably an unexpected upside if you're referring to Ziana.  I actually have some experience with a derm very aggressively pushing Ziana haha.

[Guest Schwab711]

You're right Jay21, I apologize, I jumped to a conclusion too quickly. Back to investing :)

[Guest wellmont]

 

Buffett bought and sold XOM/COP in less than a year, both times buying at high oil prices and selling at decade-lows. He admitted another major mistake with Tesco. Lots of value investors completely missed the housing bubble and bought WAMU days/weeks before bankruptcy (including Parabai). And, of course, the mighty Hank Greenberg managed to destroy a 6+ decade long reputation by being mislead by CCME. Everyone makes mistakes, they just make far fewer. However, even Buffett still regularly makes major mistakes.

 

I don't understand the hero worship in the face of conflicting evidence just because they are presumably experts. It's CNBC-syndrome to me. I think we'd all agree that Lou Simpson or collectively, Sequoia, are better investors on the whole than AZ_Value (without knowing anything about AZ). However, it seems possible that AZ_Value is the expert on this extremely specific topic. I don't mean to pick on you personally, just a pet-peeve about relying on expert opinions when their actual expertise is more broad and only partially related. Lou Simpson may be an expert in capital allocation and equity valuation. We have no idea and it's almost impossible to know if that expertise extends to VRX's business, regardless of his investment status.

 

http://brontecapital.blogspot.com/2011/03/what-demise-of-china-media-express-says.html

 

there is no mistake by the long term owners of vrx. even if it drops 50% from here. some of them have 10 baggers and more of LT cap gains. even today they have billions invested. when you have billions invested like that you are pretty careful about what you put your money in. you watch it carefully. you put a lot of brain power on that idea. I assure you those guys read the blog post over the weekend and are talking about it today. some of them have been watching pearson for a decade or more. ackman did massive due diligence on the accounting before he invested billions at around $200. many have been monitoring the accounting for a decade or more. the stock has almost doubled in a year and sequioa has barely sold a share.

 

although I admire anybody that puts a lot of work in forming a report, I put way more weight on people (who themselves have top tier paper trails that span decades) who have billions of dollars of their own money at stake, than I do in blog posts talking about arcane accounting points. that angle was tried last year by another blogger and the stock doubled after that. real money trumps anonymous blog posts for me. vrx may well have aggressive accounting and there may be something lurking out there. I would be surprised though. we shall see in the fullness of time.

[Picasso]

While AZ value is anonymous, I'm more on his side than investors on the board with billions at work.  Seriously, how do they put on a non-weighted CAGR on acquisitions?  If you can't trust them to do the right thing then it opens up the door to many other problems. 

 

I own a lot of VRX stock, but I am going to look at hedging it out with put protection.  That silly slide alone makes me nervous about waking up one morning with a nasty accounting fraud issue.