VRX - Valeant Pharmaceuticals International Inc.

[cubsfan]

Gio

 

ValueAct takes large concentrated positions in companies they understand well - and that they can get board seats in to effect change.

ValueAct was instrumental in replacing the Valeant CEO and recruiting Michael Pearson for the rollup strategy. They own around 7%

of company and have been buying up large amounts of stock for last few years. As a firm, they typically have around 10 holdings

and VRX is their 2nd largest holding. They establish a constructive dialog with other board members before effecting change.

They know their companies inside out and will not attempt to get a control position and board seats unless management/board are

willing to change. When they do become involved, they are active in CEO compensation and insist the correct financial metrics

are implemented - ROE and capital allocation in regards to M&A and growth.

 

Just look at the recent influence they have had on Microsoft (now their largest holding) since becoming involved. They are extremely

well respected and influential  in the institutional money management business - and are widely suspected of helping to force out Balmer.

 

They know VRX inside out and Michael Pearson is their handpicked CEO - they are not short timers looking for a quick flip.

They are hard core value investors that build longterm value.

 

http://www.marketwatch.com/story/ubbens-latest-move-another-acquisition-2011-03-30

 

Great! ;)

 

Thank you very much!

 

Gio

 

I've owned VRX for a few years now. And I think if you want to understand Pearson's actions, you need to understand

how ValueAct operates behind the scenes to force value creation. If interested, watch these 2 short interviews with

ValueAct Founder:

 

http://www.gurufocus.com/news/227330/jeffrey-ubben-the-evolution-of-the-active-value-investment-style-

 

 

[giofranchi]

I've owned VRX for a few years now. And I think if you want to understand Pearson's actions, you need to understand

how ValueAct operates behind the scenes to force value creation. If interested, watch these 2 short interviews with

ValueAct Founder:

 

http://www.gurufocus.com/news/227330/jeffrey-ubben-the-evolution-of-the-active-value-investment-style-

 

Thank you very much once more! :)

 

Cheers,

 

Gio

[frommi]

They are in this investment now for 5 years and it has gone tenfold for them, don`t you think they will exit it someday?

[cubsfan]

They are in this investment now for 5 years and it has gone tenfold for them, don`t you think they will exit it someday?

 

At some point, yes, if they can't grow it.

But their playbook for value creation is in their historical record with other companies.

They increase their position, they grow the company, they buy back massive amounts of stock.

 

Where they are right now, I am not sure - but it doesn't look like they are done yet.

If you listen to Ubben's views on the big pharma business, he views the sector as MASSIVELY

wasteful and full of poor capital allocators - pouring large amounts of cash down the R&D toilet.

That's how he characterized the VRX opportunity to compete. So it looks like they think they can still grow the company.

 

[no_free_lunch]

They are in this investment now for 5 years and it has gone tenfold for them, don`t you think they will exit it someday?

 

At some point, yes, if they can't grow it.

But their playbook for value creation is in their historical record with other companies.

They increase their position, they grow the company, they buy back massive amounts of stock.

 

Where they are right now, I am not sure - but it doesn't look like they are done yet.

If you listen to Ubben's views on the big pharma business, he views the sector as MASSIVELY

wasteful and full of poor capital allocators - pouring large amounts of cash down the R&D toilet.

That's how he characterized the VRX opportunity to compete. So it looks like they think they can still grow the company.

 

 

I agree with this part.  They can definitely still grow.  Bausch & Lomb's primary business is eyecare which I doubt even qualifies as pharma.  So they have already expanded outside of their core sector and their is plenty of room to grow. 

[giofranchi]

They are in this investment now for 5 years and it has gone tenfold for them, don`t you think they will exit it someday?

 

At some point, yes, if they can't grow it.

But their playbook for value creation is in their historical record with other companies.

They increase their position, they grow the company, they buy back massive amounts of stock.

 

Where they are right now, I am not sure - but it doesn't look like they are done yet.

If you listen to Ubben's views on the big pharma business, he views the sector as MASSIVELY

wasteful and full of poor capital allocators - pouring large amounts of cash down the R&D toilet.

That's how he characterized the VRX opportunity to compete. So it looks like they think they can still grow the company.

 

 

I agree with this part.  They can definitely still grow.  Bausch & Lomb's primary business is eyecare which I doubt even qualifies as pharma.  So they have already expanded outside of their core sector and their is plenty of room to grow.

 

Not only! I think Mr. Pearson has studied Mr. Malone’s playbook very well, and he knows there are many ways to create shareholders value. Growth is what makes more sense right now, so that’s the way they are going for some more years. But, when it finally ceases to be the most rational choice, there will be other aces in Mr. Pearson’s sleeve: spin-offs and share repurchases among them. I guess mostly spin-offs: how to grow very big and subsequently scale down, always creating shareholders value. Wash, rinse, and repeat! ;)

 

Mr. Pearson is shrewd and young enough to do this very successfully and for a very long time to come. :)

 

Gio

 

[giofranchi]

http://www.gurufocus.com/news/227330/jeffrey-ubben-the-evolution-of-the-active-value-investment-style-

 

I have just finished listening to the interview.

I didn’t know Mr. Ubben, but his ideas make a lot of sense to me. Great entrepreneurial spirit! ;)

 

Gio

 

[Liberty]

http://www.gurufocus.com/news/227330/jeffrey-ubben-the-evolution-of-the-active-value-investment-style-

 

I have just finished listening to the interview.

I didn’t know Mr. Ubben, but his ideas make a lot of sense to me. Great entrepreneurial spirit! ;)

 

Gio

 

Gio, check out Mason Morfit, the guy who's on the VRX board and who helped created Pearson's incentives:

 

 

Very impressive, as well as his partner.

[giofranchi]

Gio, check out Mason Morfit, the guy who's on the VRX board and who helped created Pearson's incentives:

 

 

Very impressive, as well as his partner.

 

Thank you very much! I will surely check it out! ;)

 

Gio

[lu_hawk]

Forgive me if any of  this has been asked.

 

If I add up the total consideration that Valeant has paid in making its acquisitions, I come to about $26bn.  VRX has a current market cap of $39bn and an EV of $57bn.  Is VRX really buying assets for less than 50% of their value, such that $26bn in acquisitions can yield a $57bn EV?  Especially when the whole company has been mostly built in the past 5 years through M&A? 

 

And the company has $18bn in debt now, with annual interest expense of over $1bn.  For the sake of argument, say the company stopped making acquisitions right now.  And then you model out reasonable decline assumptions for the cash flows as drugs went generic, etc, compared to future interest expense and debt maturities.  Has anyone tried to do that, and if so, what does it say for the value of the stock?

 

I would note that VRX is rated junk (BB-) by S&P, so that may indicate where they came out on the question of what happens to the debt in various scenarios.

 

I know that everyone expects the deals to keep coming, but I think a important piece of the analysis here is that the debt markets are just about as compliant as they were in 2007.  If conditions tighten then a reduced pace of deal-making may be forced on VRX, or at least the deals will be less attractive because the debt financing will cost more and have worse terms.  If you believe a large part of the value is predicated on future dealmaking, then that could prove to be a risky assumption, considering the deals can only be done if the credit markets are willing.  This isn't like Berkshire with a near-unlimited amount of internal funds.

 

 

[kmukul]

Hi Cubsfan and other gurus :) . I have been reading about valueact and I am also very impressed by them. Thanks a lot for these lessons.

I think at this point of time for people like me who have learnt about them now may be it will make more sense to focus on their newer holdings if they can do a turn around in one of them it might be much more profitable. if you don't mind sharing can you please share your insights on the newer holdings may be like ALSN? Thanks a lot for your inputs I think MSFT is too big and very complicated and very smart competitors

[jch548]

Grant's has had a couple of negative pieces on Valeant. One point raised was that in a recent quarter interest expense exceeded operating profits.

[no_free_lunch]

lu_hawk,

 

You bring up a lot of good questions and I can't answer all of them.  However regarding the valuation of the acquisitions, look at the details behind the B&L purchase:

 

It was an $8.7B purchase price for $700M EBITDA.  With cost-cuts they are projecting EBITDA of $1.55B!  You then have the tax rate which I understand is in the 7-10% range.  So between the cost cuts and the lower tax rate it seems that they will achieve significantly greater than 2x the EBITDA, maybe 3x against a company with a 35% tax rate.  As I keep saying, this part of the analysis looks great so it really just comes down to the sustainability of the purchases.  In their most recent quarter they had organic growth of 2% and even then that was taking into account some generication which *should* be a one time item.  So far, they haven't fallen off the tracks operationally but that is the concern here.

 

If the debt markets tightened, they have a PE of something like 13-14 right now so they could use those earnings to fund future growth.  If they can continue to make acquisitions that double earnings, then with an earnings yield of 6-7% , times 2 due to cost reductions that would be 12-14% growth + say 2 % organic.  That's not bad at all.

 

I know I keep saying this but it really comes down to the decline rate in their existing businesses.  If they can even just keep it level, they should be allright.

[lu_hawk]

I know I keep saying this but it really comes down to the decline rate in their existing businesses.  If they can even just keep it level, they should be allright.

 

For the branded products, isn't it certain that sales will decline once the products become generic?  And aren't the vast majority of revenues from branded products?  Not a rhetorical question, I am actually wondering if there is a way that a portfolio of branded drugs will not see sales declines as time goes on.  If so, then I do not understand what I am talking about.

 

Has any shareholder tried to do an analysis of what happens in terms of cash flows vs interest and debt maturity in a steady-state (i.e., assuming no further acquisitions are made)?  IMO, this can only be a value investment (safe + cheap) if a conservative steady-state model shows that the equity really is worth at least $40bn more than the debt.

 

And this may not be a popular opinion, but I think it is too early to draw any conclusions as to the value created through the acquisitions here.  The company has been built by using easy credit and by significantly increasing the share count.  Lots of cash and shares have gone out the door, but it hasn't come back yet.  And sure, if they are creating value as it is supposed then that is not a bad thing, but the debt holders only accept cash payments, they cannot be paid in"adjusted cash EPS," so the cash does have to come back in at some point in order for this to work.  It seems that no one really knows if the cash will come back (and on time), and so I don't understand this as an investment.

[Liberty]

For the branded products, isn't it certain that sales will decline once the products become generic?  And aren't the vast majority of revenues from branded products?  Not a rhetorical question, I am actually wondering if there is a way that a portfolio of branded drugs will not see sales declines as time goes on.  If so, then I do not understand what I am talking about.

 

It depends on the product, and many branded products are branded generics.

 

You might be able to slightly reformulate or improve a skin cream or contact lens and get a new patent on it, extending the protection. We're not talking about blockbuster drugs that are responsible for billions in revenue per drug and that have massive R&D costs if you want to improve them; that attracts the mother of all competition from generics for sure.

 

You can look at their disclosure on patent cliffs and read management transcripts to get a better idea of their product positioning.

 

And this may not be a popular opinion, but I think it is too early to draw any conclusions as to the value created through the acquisitions here.  The company has been built by using easy credit and by significantly increasing the share count.  Lots of cash and shares have gone out the door, but it hasn't come back yet.  And sure, if they are creating value as it is supposed then that is not a bad thing, but the debt holders only accept cash payments, they cannot be paid in"adjusted cash EPS," so the cash does have to come back in at some point in order for this to work.  It seems that no one really knows if the cash will come back (and on time), and so I don't understand this as an investment.

 

If you want simple to understand, this is certainly not the company for you. Like Malone, they focus first on value creation, and if that means some leverage and complexity, that's what they do (though they don't go as far as Malone -- no tracking stocks, spinoffs, and weird derivatives yet :) ). Certainly not for everyone.

 

But unless you don't believe the acquisition integration costs are one-time (and you can look at how past acquisitions were integrated), it's pretty easy to look at both their organic growth numbers and their adjusted cash without those integration costs to get a good idea of what they could earn within about a year if they stopped acquiring. That's real money that could be used to pay the debt, dividends, buybacks, etc. It's just that they seem to believe that that money is better used for more M&A because they think their model creates value, and I happen to agree with them, along with Sequoia and ValueAct. Now maybe they would always need a certain amount of "maintenance" bolt-on acquisitions to get new products in the pipeline and replace declining ones that can't easily be revived, but as long as the money spent there yields better returns than what it would cost in R&D to do the same, it's a good deal.

 

The share count hasn't been growing much compare to the cash coming in, btw, and I think it actually went down in 2012 compared to 2011 (from memory) and been relatively stable for the past few years.

[Guest wellmont]

I know I keep saying this but it really comes down to the decline rate in their existing businesses.  If they can even just keep it level, they should be allright.

 

For the branded products, isn't it certain that sales will decline once the products become generic?  And aren't the vast majority of revenues from branded products?  Not a rhetorical question, I am actually wondering if there is a way that a portfolio of branded drugs will not see sales declines as time goes on.  If so, then I do not understand what I am talking about.

 

Has any shareholder tried to do an analysis of what happens in terms of cash flows vs interest and debt maturity in a steady-state (i.e., assuming no further acquisitions are made)?  IMO, this can only be a value investment (safe + cheap) if a conservative steady-state model shows that the equity really is worth at least $40bn more than the debt.

 

And this may not be a popular opinion, but I think it is too early to draw any conclusions as to the value created through the acquisitions here.  The company has been built by using easy credit and by significantly increasing the share count.  Lots of cash and shares have gone out the door, but it hasn't come back yet.  And sure, if they are creating value as it is supposed then that is not a bad thing, but the debt holders only accept cash payments, they cannot be paid in"adjusted cash EPS," so the cash does have to come back in at some point in order for this to work.  It seems that no one really knows if the cash will come back (and on time), and so I don't understand this as an investment.

 

the core business grows at mid to upper single digits. if the debt markets shut down, he would use prodigious free cash flows to first reduce debt, then repurchase stock, both acts that will create shareholder value. Not only is the CEO fantastic, the board and shareholder base is fantastic. it's a good situation to be in no matter what happens. the guys at sequioa own a lot of this POS. And they think it can earn around $8 a share. When I look at my screen and admire the symbol VRX bobbing about, it warms my heart that I am not looking at a representation of an expensive stock, given the talent and assets in place here. the company is run by an owner For owners.

[lu_hawk]

I know I keep saying this but it really comes down to the decline rate in their existing businesses.  If they can even just keep it level, they should be allright.

 

For the branded products, isn't it certain that sales will decline once the products become generic?  And aren't the vast majority of revenues from branded products?  Not a rhetorical question, I am actually wondering if there is a way that a portfolio of branded drugs will not see sales declines as time goes on.  If so, then I do not understand what I am talking about.

 

Has any shareholder tried to do an analysis of what happens in terms of cash flows vs interest and debt maturity in a steady-state (i.e., assuming no further acquisitions are made)?  IMO, this can only be a value investment (safe + cheap) if a conservative steady-state model shows that the equity really is worth at least $40bn more than the debt.

 

And this may not be a popular opinion, but I think it is too early to draw any conclusions as to the value created through the acquisitions here.  The company has been built by using easy credit and by significantly increasing the share count.  Lots of cash and shares have gone out the door, but it hasn't come back yet.  And sure, if they are creating value as it is supposed then that is not a bad thing, but the debt holders only accept cash payments, they cannot be paid in"adjusted cash EPS," so the cash does have to come back in at some point in order for this to work.  It seems that no one really knows if the cash will come back (and on time), and so I don't understand this as an investment.

 

the core business grows at mid to upper single digits. if the debt markets shut down, he would use prodigious free cash flows to first reduce debt, then repurchase stock, both acts that will create shareholder value. Not only is the CEO fantastic, the board and shareholder base is fantastic. it's a good situation to be in no matter what happens. the guys at sequioa own a lot of this POS. And they think it can earn around $8 a share. When I look at my screen and admire the symbol VRX bobbing about, it warms my heart that I am not looking at a representation of an expensive stock, given the talent in place here.

 

I guess I have to chalk it up to one of the many things in this market that flies way over my head.  I'm just not sure if it isn't flying over the head of some of the longs too.  I can't buy that the management team has proven themselves to be fantastic.  It's like saying someone is a great stock investor because they had great returns over the past 5 years; you just don't have enough information to make a true assessment of the skill level.  And that's doubly true here: when you build a big company on a big pile of debt, you don't know exactly what you have built until the tide goes out.  We're at the highest tide since 2007 right now.

 

And part of my concern about "the prodigious cash flows": I don't think we really know how prodigious those cash flows really are.  Because they've never had less than a huge amount of cash go out the door every year.  OK, CFFO - capex was $857mm in 2013.  Is that representative of steady-state FCF?  If so, is that worth $40bn + $18bn in debt?

 

The purpose of any business is to turn a dollar into another dollar.  You can only assess how successful this acquisition strategy is if the cash that comes back in after the investment is made is enough to make a good return.  The company is telling us that they are making a good return (if you use their adjusted numbers, at which VRX is trading at 20x that), but I really don't think anyone can know for sure, not until the tide goes out.

 

I'm really trying to understand here.  Has anyone actually figured this thing out without using the adjusted numbers the company gives us?  What is the DCF value of the current assets (in excess of the debt) and what assumptions do you use?

 

 

 

 

[Liberty]

lu_hawk, have you ever looked into the model used by Malone at TCI? You could have looked at the business at almost any time in its multi-decade history and said: "wow, they have no earnings, they're spending all their money on interest payments and M&A, they're under-investing in CAPEX compared to their competitors... why are they worth anything?" And interest rates were multiples of what they are now for most of TCI's run too...

 

You can wait for VRX to have a 15-year track record and to stop growing to be really sure they're good, but you pay a high price for that kind of certainty. On the other hand, it's absolutely fine to just chuck it into the 'too hard' pile if you can't get comfortable with it. That's where most businesses should go anyway...

 

But IMO it is possible to get confident today by looking at the model, at management, at the track record so far, and at the assets. The company is guiding 8.25-8.75 adj. cash EPS in 2014, and that's without new acquisitions or extra cost cutting (and they usually underpromise and overdeliver). So that's about a 14x forward multiple for a very shareholder-friendly company growing very quickly. I don't know what will happen in the next year, but I'd be very surprised if in 5 or 10 years the company wasn't worth significantly more than it is now. But it does require a different mental model to think about than, say, a slow-growing non-acquirer selling below book value like AIG (not dissing it, I own more AIG than VRX).

 

But hey, I could be wrong. I have been wrong many times in the past, so always take what I say with a grain of salt  ;)

[no_free_lunch]

I know I keep saying this but it really comes down to the decline rate in their existing businesses.  If they can even just keep it level, they should be allright.

 

For the branded products, isn't it certain that sales will decline once the products become generic?  And aren't the vast majority of revenues from branded products?  Not a rhetorical question, I am actually wondering if there is a way that a portfolio of branded drugs will not see sales declines as time goes on.  If so, then I do not understand what I am talking about.

 

Has any shareholder tried to do an analysis of what happens in terms of cash flows vs interest and debt maturity in a steady-state (i.e., assuming no further acquisitions are made)?  IMO, this can only be a value investment (safe + cheap) if a conservative steady-state model shows that the equity really is worth at least $40bn more than the debt.

 

And this may not be a popular opinion, but I think it is too early to draw any conclusions as to the value created through the acquisitions here.  The company has been built by using easy credit and by significantly increasing the share count.  Lots of cash and shares have gone out the door, but it hasn't come back yet.  And sure, if they are creating value as it is supposed then that is not a bad thing, but the debt holders only accept cash payments, they cannot be paid in"adjusted cash EPS," so the cash does have to come back in at some point in order for this to work.  It seems that no one really knows if the cash will come back (and on time), and so I don't understand this as an investment.

 

the core business grows at mid to upper single digits. if the debt markets shut down, he would use prodigious free cash flows to first reduce debt, then repurchase stock, both acts that will create shareholder value. Not only is the CEO fantastic, the board and shareholder base is fantastic. it's a good situation to be in no matter what happens. the guys at sequioa own a lot of this POS. And they think it can earn around $8 a share. When I look at my screen and admire the symbol VRX bobbing about, it warms my heart that I am not looking at a representation of an expensive stock, given the talent in place here.

 

I guess I have to chalk it up to one of the many things in this market that flies way over my head.  I'm just not sure if it isn't flying over the head of some of the longs too.  I can't buy that the management team has proven themselves to be fantastic.  It's like saying someone is a great stock investor because they had great returns over the past 5 years; you just don't have enough information to make a true assessment of the skill level.  And that's doubly true here: when you build a big company on a big pile of debt, you don't know exactly what you have built until the tide goes out.  We're at the highest tide since 2007 right now.

 

And part of my concern about "the prodigious cash flows": I don't think we really know how prodigious those cash flows really are.  Because they've never had less than a huge amount of cash go out the door every year.  OK, CFFO - capex was $857mm in 2013.  Is that representative of steady-state FCF?  If so, is that worth $40bn + $18bn in debt?

 

The purpose of any business is to turn a dollar into another dollar.  You can only assess how successful this acquisition strategy is if the cash that comes back in after the investment is made is enough to make a good return.  The company is telling us that they are making a good return (if you use their adjusted numbers, at which VRX is trading at 20x that), but I really don't think anyone can know for sure, not until the tide goes out.

 

I'm really trying to understand here.  Has anyone actually figured this thing out without using the adjusted numbers the company gives us?  What is the DCF value of the current assets (in excess of the debt) and what assumptions do you use?

 

 

 

 

 

The problem with using 2013 numbers is the bausch and lomb transaction closed mid-way through the 3rd quarter.  It looks like it will roughly double free cash flow, maybe even a bit higher than that so it needs to be included.  I have them somewhere around a $2.5B free cash flow for 2014 assuming no acquisitions (and they've already done one) but is really just a rough estimate.  It will be much easier to estimate the 2014 earnings when the Q1 numbers come out.  Unfortunately the year end numbers that just released are fairly light on Q4, the tables are focused on full year figures which as I said are basically meaningless.  The q3 numbers, had all the restructuring costs and only partial revenue for the quarter.  So at this point it is tricky (but not impossible) to figure out the impact of Bausch and Lomb.

 

Beyond that, it doesn't look like anyone has the analysis you are looking for.  If you do model it we would sure be willing to help vet it.

[cubsfan]

Hi Cubsfan and other gurus :) . I have been reading about valueact and I am also very impressed by them. Thanks a lot for these lessons.

I think at this point of time for people like me who have learnt about them now may be it will make more sense to focus on their newer holdings if they can do a turn around in one of them it might be much more profitable. if you don't mind sharing can you please share your insights on the newer holdings may be like ALSN? Thanks a lot for your inputs I think MSFT is too big and very complicated and very smart competitors

 

Hi Kmukul - I think you can do ok by taking a close look at ValueAct's holdings. A few years ago, I picked up VRX and MSI this way, and have

done well. Still hold both of them. I have not spent any time on ALSN, but I did purchase WSH in the fall. It's an asset light business with

the sector trending toward an oligopoly - with perhaps increasing pricing power as a result. Some pension funding issues seem to be masking

the true profitability of the business. So I think there is a lot to like. ValueAct owns 11% and keeps increasing their ownership.

[lu_hawk]

lu_hawk, have you ever looked into the model used by Malone at TCI? You could have looked at the business at almost any time in its multi-decade history and said: "wow, they have no earnings, they're spending all their money on interest payments and M&A, they're under-investing in CAPEX compared to their competitors... why are they worth anything?" And interest rates were multiples of what they are now for most of TCI's run too...

 

You can wait for VRX to have a 15-year track record and to stop growing to be really sure they're good, but you pay a high price for that kind of certainty. On the other hand, it's absolutely fine to just chuck it into the 'too hard' pile if you can't get comfortable with it. That's where most businesses should go anyway...

 

But IMO it is possible to get confident today by looking at the model, at management, at the track record so far, and at the assets. The company is guiding 8.25-8.75 adj. cash EPS in 2014, and that's without new acquisitions or extra cost cutting (and they usually underpromise and overdeliver). So that's about a 14x forward multiple for a very shareholder-friendly company growing very quickly. I don't know what will happen in the next year, but I'd be very surprised if in 5 or 10 years the company wasn't worth significantly more than it is now. But it does require a different mental model to think about than, say, a slow-growing non-acquirer selling below book value like AIG (not dissing it, I own more AIG than VRX).

 

But hey, I could be wrong. I have been wrong many times in the past, so always take what I say with a grain of salt  ;)

 

Well, what I am saying is that cash eps should be irrelevant, because it's a number that the company makes up to make themselves look good.  In the final analysis, all that matters is real cash, not fictional cash, because you can only pay your creditors and your investors with real cash.  I was wondering if anybody had tried to do the independent analysis here, but perhaps it has not been done. 

 

Comparing this to TCI and Malone is not logical.  Out of the whole universe of examples, you can't pick one essentially random company that performed well despite having no earnings and doing a lot of M&A.  Because for every TCI there are 100 Worldcoms.  What is a typical path for companies that go from zero to big in a few years by making acquisitions using debt, have large cash outflows every year, and that supply investors with rosy non-GAAP numbers that may or may not bear a relation to economic reality?  That is a more relevant universe of experience to draw from.  Comparing this to TCI is like buying a lot of lottery tickets because you saw that guy on the news who won the Powerball.

 

This seems very dangerous to me, and it seems that the investment thesis here has mostly been "the stock has gone up, so it must be right."  I don't think it will be pretty when the tide goes out.

 

[Liberty]

I was just trying to point out that there are companies that can create a lot of value while not looking good on some traditional metrics, but what matters in the end is the value. They could look good by slowing down M&A and paying down debt, but that would also move them to a sub-optimal value creation path. But if that was my only basis for comparing those two, then you would be absolutely right, but it isn't. There are many other reasons to think that VRX is creating real value and well run.

 

I guess time will tell.

[Phaceliacapital]

How do Grant's analysts quantify that an acquired business starts performing worse and worse the longer it operates under the Valeant umbrella?

[giofranchi]

How do Grant's analysts quantify that an acquired business starts performing worse and worse the longer it operates under the Valeant umbrella?

 

I don't see any evidence of this. Organic growth might not be stellar, but it is not bad either.

 

Gio

[lu_hawk]

How do Grant's analysts quantify that an acquired business starts performing worse and worse the longer it operates under the Valeant umbrella?

 

This is how the conclusion was reached:

 

1) 2013 organic same-store sales growth, including generics, was -5.1%. Breakdown is -10.4% in developed markets, and +8.5% in emerging markets.

2) 2013 sales decline on a pro-forma basis, including generics, was -0.5%.

3) If same-store sales are declining faster than overall sales are declining, then the drugs that have been held longer are declining faster than the overall portfolio is declining. (and note that BOTH measures of sales are declining).

 

So for the conclusion, if same store sales includes only drugs held for more than a year, and that number is declining faster than overall sales are declining, then that means that drugs that have been held for more than a year are declining faster than drugs held less than a year. 

 

Grant's seems to imply that the deterioration in performance for drugs held longer may be caused simply because VRX now owns them.  That may be true, given that VRX likely employs a PE type management style (i.e., cut expenses to the bone now to make things look better in the near-term, even if it harms long-term value).  That may or may not contribute, and it may also be simply due to the decline profile of the drugs that VRX owns.