Valeant Pharmaceuticals International Inc.

[GFG]

GFG

I, too, like distressed stories. Similarly, I've bought BP when it's down, Jap stocks after the tsunami, Stand Chart after it was whacked in the US, etc.

However, I baulk at VRX because I'm not sure I can understand the business model, especially with critical analysis like this: AZ Value

Thanks for pointing out this article, it's been fun to read.
If I could summarize, the main points of the post are that:
1) Valeant's presentations do not show figures to substantiate their growth rates, the time taken for cash flows to recover Valent's acquisition costs etc
2) In the "rare" event that a slide does show figures, the author compared it to total cashflows in the AR to show that the figures in the slides are overstated. (Most of the examples use only Sanitas as he could get the financials of Sanitas post-acquisition by Valenat)

The author also stated that the figures and data are only in the slides, and not given in the ARs, and he believes the reason is that anything in the AR is legally binding i.e. management could go to jail for falsifying figures in the ARs, but in the slides the figures are not "backed by law" as you could always say they are estimates/there's an error etc

Well, I did delve into the ARs earlier, and there is some important information that the author didn't include in his post. I'd also admit that I havent done a detailed comparison of EACH acquisition, probably not as detailed as him too. Yes, he is right in saying that they have not provided hard figures to show the revenue and earnings of EACH of their acquisitions post acquisition. The ARs tend to lump them into broad categories and to show performance as a group. There can be many many reasons for doing that, and even though I'm vested, I'd be the 1st to admit that at least part of it is shady. part of it could be due to the fact that there're simply too many acquisitions, too much data
And at least a substantial reason I believe, is because it is not in Valeant's interests to let it's competitors and regulators know in exact detail these figures. Think about it, if you are approached to be acquired by Valeant, and you know that just based on cashflow, and that if you cut off R&D, cut headcount, consolidate your distributorships or start utilising specialty pharmas to distribute etc, basically employ the strategies Valeant has been using, (and that everyone knows by now), you could cover the entire acquisition costs within 5,6 years?
Of course you'd either refuse to sell to Valeant, or expect a much higher multiple
Ditto for Valeant's competitors.
The other comment I'd made is that since the author says that the data in the presentations are garbage, and they're not included in the ARs (which are audited) for the sake of legal reasons, then why not accept the data in the ARs? Why doubt the revenue,cashflow etc in the AR and expect a detailed breakdown?
Again, I'd like to say that I do think that some of the things that Valeant did was not right morally. That's probably the reason why they had to go through all these loops to try to hide their shady business. eg. same employee using different names to work at Philidor etc.
But again, I reiterate, my investment thesis is that the price is factoring a doomsday scenario, giving too little credit to the wide variety of assets in its portfolio. They will get a big fine, get negative publicity for a long while to come, but like all things, with time it will disappear.
Which is why I said I am less optimistic than Ackman (of course he has to generally appear much more optimistic to his investors).
I did my own calculations based on cashflow, and a very conservative growth rate (much lower than Pearson's guidance), and looping off a huge MOS to account for potential fines, shareholder lawsuits blah blah and at current $100, I still think it's wide off the mark. even if it recovers to just $150 within a year, that's a 50% ROI.

OK just want to add the latest comments by Charlie Munger pretty up sums up what I feel: may not be right, may not be moral, but no, it's not going to be the end of the road for Valeant just yet.

http://www.bloomberg.com/news/articles/2...lding-nose

Add to that, the fact that the short sellers or panic sellers at least, are basing their decisions on reports from this guy:
http://www.wsj.com/articles/valeant-shor...1446417120

I really wonder why the press doesn't talk about better researched articles like AZ's and instead there's so much focus on this 1 man show Left. With a dismal track record too.

[greengiraffe]

• Nov 3 2015 at 2:23 PM 
  

World's best value investors deal with moral dilemmas

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[img=620x0]http://www.afr.com/content/dam/images/g/g/u/2/9/9/image.related.afrArticleLead.620x350.gkp7ur.png/1446528424281.jpg[/img]Berkshire Hathaway chairman and CEO Warren Buffett, right, alongside vice chairman Charlie Munger. Nati Harnik
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by Jonathan Shapiro
If Shakespeare was an analyst he'd be writing furiously about the events unfolding at Valeant Pharmaceuticals, the Canadian drug company that embodies all that is good and evil about the stock market. As the company's fortunes unravel as quickly and spectacularly as they rose, Valeant's cast of heroes and villains provide a tale of morality and value investing. 
For those that haven't been following the saga; here's a very brief primer. Valeant was just another drug company until it fell into the hands former McKinsey healthcare consultant Michael Pearson.
Pearson had a belief that big pharma's value wasn't in discovering wonderful new drugs but distributing and marketing proven ones. They shouldn't waste money on research and development but leave it to the smaller nimbler biotech firms, which the big guys should buy before cutting their research budgets, lifting drug prices and marketing the drugs aggressively to grow sales and earnings.
This was the future of pharma. But none of his clients wanted anything to do with it. So he did it himself, creating an acquisition machine that grew exponentially from a $US20 billion company to $US90 billion, doubling in less than a year.
[img=620x0]http://www.afr.com/content/dam/images/g/k/p/7/y/h/image.imgtype.afrArticleInline.620x0.png/1446520516264.png[/img]Valeant's share market fallhas been as spectacular as its rise as $US60bn has been wiped off its value since August. Thomson Reuters
To some, including many of the world's most esteemed investors, Pearson is a "genius". To others he is a "crazy cowboy" playing a reckless game in an industry that's all too important to our welfare.
Valeant's frenetic debt-funded acquisition strategy is called a "platform company", in the US. Here we tend to call them a "roll-up" and we've seen a fair few unravel on the Australian Securities Exchange after the mere whiff of doubt.
That is what is happening at Valeant. 
First, presidential candidate Hillary Clinton threatened to crack down on pharma price hikes. Then, an obscure short seller's report exposed a litany of questions relating to Valeant's dealings with a specialist pharmacy (that Valeant sort of owns). These online pharmacies, some believe, are vital in ensuring that Valeant's more expensive drugs are prescribed above cheaper generic versions, at a cost to insurers.


Questions send stock price plummeting
The besieged stock is down by almost two thirds since August and Bill Ackman, one of the biggest names in the hedge fund world and a big loser thanks to Valeant's slide, recently made a four-hour presentation to defend his stake in the company.
Ackman is one of many successful "value" investors schooled in the ways of Warren Buffet and Charlie Munger.
So one can only wonder what he makes of Munger's utter disdain for Valeant and its model, the likes of which he's said he's seen a few times in his 90-odd years. Munger again expressed his view of Valeant at the weekend, describing the company's "price gouging" as "deeply immoral".

Munger, perhaps the greatest living investor, believes morality and investing are "deeply intertwined".
"I don't think that investing should be divorced from reality," he said. 
There's universal revelling in Valeant's comeuppance. But is it all warranted? Emotions are the enemy in investing, so is there a danger Valeant's detractors are getting caught up in the morality of it all? 
What role do "values" play in "value" investing?

To begin to answer, let's explore Warren Buffett's approach. While many business moguls have relied on cunning and ruthlessness, Buffett has proved you can get even richer with far more wholesome qualities, such as his modest, well-to-do approach to finding good businesses with capable and honest management teams. And he deplores Wall Street and its financial engineering, and isn't afraid to call it out. 
Grey areas in value investing
But there are several inconsistencies. For example, he recently invested in Clayton Homes, which some have criticised for predatory lending.
He also owns stock in a multi-level marketing firm called Pampered Chef. MLMs - or pyramid marketers as they are unfairly called - have come under scrutiny largely because Ackman shorted the shares of Herbalife, drawing attention to the issue. In publicly betting against the the nutrition products maker, he has claimed he's on a moral crusade against a company that preys on the poor.  Australian hedge fund manager John Hempton argued the opposite; that Herbalife's selling schemes are creating communities and sense of worth and purpose for its buyers and sellers. 
Back to Buffett and Munger. Lately he's been doing some deals that not everyone would find favour with. They involve aggressive debt-funded acquisitions and the ruthless slashing of costs. His new best business partner is Brazilian private equity juggernaut 3G, run by the equally earnest and admired Jorge Lemann. Berkshire has invested alongside 3G in the mega takeovers of Kraft and Heinz. For one, these are billion dollar investments in junk food. That wouldn't bother Buffett, who functions on a diet of candy and Cherry Cola, but could irk a growing army of diet do-gooders. 
More directly, the 3G model involves ruthless cost cutting and "zero cost budgeting".  Almost 10,000 have lost their jobs in these food giants. 
Investments defended
Buffett and Munger have repeatedly defended their co-investments. "I don't think we have ever had a policy that loves over-staffing", Munger dryly noted at the 2013 annual general meeting.
The morality of 3G's slash and burn approach is half the story. Just like Valeant, one could question the economic sustainability of its aggressive model.
As one fund manager explained, 3G has targeted industries like US food where there is no growth.  With no revenue or "top line" growth it must cut costs at a quicker pace to grow profits. If it cuts advertising and marketing, it would add to the earnings boost but could over time threaten the sustainability of the brands as more money is squeezed out.  An aggressive debt-funded acquisition strategy adds an extra element of danger. 
That 3G's model might not work is not a widely held belief. The firm are perceived as corporate innovators and with Buffett's backing 3G's model is the subject of business school case studies. Bill Ackman is one of their biggest fans.
But Ackman's portfolio is living proof that "value" investing is highly subjective; "values" investing even more so.

[GFG]

What about the reports from:

- Wall Street Journal,
- Southern Investigative Reporting Foundation,
- and Bronte Capital?

None of the issues they raised are a concern to you? Or are they like you said, factored in the price?

VRX showing a very strong recovery.
I mentioned earlier I think it'd take at least 6 months, but it seems like the bottom is over.
Again, as i mentioned earlier, IMHO these reports only make it look bad temporarily and were factored into the share price.
Just 1 month later... 
now WSJ is reporting favorably, Citron is basically out and complete radio silence, just a mere Citi favorable recommendation can cause a 10%+ rise in a single day.
Someone private messaged me about VRX to ask for advice. It seems like he's sitting on an even nicer gain than me now (% wise). 

I think the recovery is only in its infancy. The fall was sharp and horrendous. Now the correction (upside!) should be equally as brutal.

vested - 2000 shares

[GFG]

Interesting stuff. Anyone else following this drama?

A nice article by Matt Levine: When ownership is not ownership...

If I were a PWC partner, I might request for early retirement...

IMHO, Valeant probably would get a big heavy fine from regulators, business model would have to change, revenue would probably be impacted.
BUT at current prices, it's a steal. Everyone is running for the exits.
At <$100, there's tremendous upside when all this blows off.
It always seem darkest just before sunrise.

<vested - 2000 shares>

Just 6 weeks ago, this is what was being discussed

"IMHO, Valeant probably would get a big heavy fine from regulators, business model would have to change, revenue would probably be impacted."

Now, with yesterday's investor conference over, here's a review:
- a big heavy fine from regulators
Hasnt happened yet, and wont be anytime soon. I might even be wrong (hopefully), and valeant doesnt get any fine at all.


-  business model would have to change
True.
Distribution is now transparent, "orthodox" and in fact, wider than before with walgreen distribution pact
FCF will be used to pay down debt
Freeze on acquisitions in the near future
Business model is definitely different

- revenue would probably be impacted
True as well.
VRX has cut its earnings projection for 4Q2015 to $2.55-$2.65, sharply lower than before, and even lower than what the general consensus is before the investor conference.
Full year 2016 is now $13.25-$13.75, which again is actually even LOWER than what general consensus is.

Yet share price has recovered from it's low of $70 to now around $118
Of course, nobody can catch the low, but it's still an eye popping 69% return in 6 weeks!
Like i said earlier, "At <$100, there's tremendous upside when all this blows off."
Even now, it's still a far way from what is fair value IMHO.

[HitandRun]

An awful day for VRX shareholders:

51% Plunge

[lilvestor]

Interesting stuff. Anyone else following this drama?

A nice article by Matt Levine: When ownership is not ownership...

If I were a PWC partner, I might request for early retirement...

IMHO, Valeant probably would get a big heavy fine from regulators, business model would have to change, revenue would probably be impacted.
BUT at current prices, it's a steal. Everyone is running for the exits.
At <$100, there's tremendous upside when all this blows off.
It always seem darkest just before sunrise.

<vested - 2000 shares>

I hope you got out before yesterday's crash.

[GFG]

Interesting stuff. Anyone else following this drama?

A nice article by Matt Levine: When ownership is not ownership...

If I were a PWC partner, I might request for early retirement...

IMHO, Valeant probably would get a big heavy fine from regulators, business model would have to change, revenue would probably be impacted.
BUT at current prices, it's a steal. Everyone is running for the exits.
At <$100, there's tremendous upside when all this blows off.
It always seem darkest just before sunrise.

<vested - 2000 shares>

I hope you got out before yesterday's crash.

No I didn't unfortunately
Had the chance to get a nice return n possibly re enter now but I didn't
I never was much of a trader anyway
I did sell several call options to hedge but there's no hedging a near to 50% crash.

Haven't gone through in detail the results yesterday, but I did listen to the earnings call.
It's currently a perfect storm of lowered earnings guidance + potential infringement of debt covenents
It's likely to b v rocky for the next 3mths until the next earnings release
Still vested

[specuvestor]

As per my herbalife comment, Ackman is a really smart guy but over his head with too much ego... most investors don't keep talking about their positions, even for activist / vulture funds, from Daniel Loeb, Howard Marks, Paul Singer, Soros, Tudor to Einhorn, Klarman, Bill Miller or Buffett.

http://www.valuebuddies.com/thread-2808-...l#pid75043

[GFG]

As per my herbalife comment, Ackman is a really smart guy but over his head with too much ego... most investors don't keep talking about their positions, even for activist / vulture funds, from Daniel Loeb, Howard Marks, Paul Singer, Soros, Tudor to Einhorn, Klarman, Bill Miller or Buffett.

http://www.valuebuddies.com/thread-2808-...l#pid75043

Yes his ego is huge
But I guess u do need this kind of ego to stomach his type of bets
Rem he stood steadfast with his bet against MBIA for 3yrs before the world realised he's right
Without that kinda ego, how does one bet against the world for 3years?!
I do view his involvement with valeant as positive though
He is charismatic and knows how to use the media, something that valeant is sorely lacking

[lilvestor]

As per my herbalife comment, Ackman is a really smart guy but over his head with too much ego... most investors don't keep talking about their positions, even for activist / vulture funds, from Daniel Loeb, Howard Marks, Paul Singer, Soros, Tudor to Einhorn, Klarman, Bill Miller or Buffett.

http://www.valuebuddies.com/thread-2808-...l#pid75043

Yes his ego is huge
But I guess u do need this kind of ego to stomach his type of bets
Rem he stood steadfast with his bet against MBIA for 3yrs before the world realised he's right
Without that kinda ego, how does one bet against the world for 3years?!
I do view his involvement with valeant as positive though
He is charismatic and knows how to use the media, something that valeant is sorely lacking

I think Ackman's ego will destroy him this time round. I cannot see how VRX is a buy, its been burning cash for the last 6 years, has no FCF and it has a huge debt pile. 

VRX way overpaid for companies like B+L and Salix, it would have been justified if there was any real synergy but there is none. All they did was buy them out and raise prices on the drugs they were selling. Now the market is pushing back and they are losing market share to competitors, the whole strategy is failing pretty badly and investors are rushing for the exits.

Blow ups like these are common in the hedge fund industry, this is why long term outperformance is almost impossible, a hedge fund manager is only as good as his last trade.