tag:blogger.com,1999:blog-8152901575140311047.post6665246302661296254..comments2024-03-29T02:52:00.870-04:00Comments on Musings on Markets: Checkmate or Stalemate? Valeant's Fall from Investing GraceAswath Damodaranhttp://www.blogger.com/profile/12021594649672906878noreply@blogger.comBlogger17125tag:blogger.com,1999:blog-8152901575140311047.post-49405703634487467012015-12-28T16:04:40.630-05:002015-12-28T16:04:40.630-05:00Any new thoughts about Valeant?
VRX has disaster ...Any new thoughts about Valeant?<br /><br />VRX has disaster written all over it.<br /><br />EVERYTHING VRX does is overly complex. Its entire business model depends on gimmicks. For example 1) the use of Philador ( a company they paid for but did not take ownership) as middle man to raise prices and extract more from insurance companies 2)The new deal with Walgreens where the pharmacy is simply a distributor and does not have control of pricing 3) the new 6 person team to fill in for the ailing CEO 4) no investment in R&D or product pipeline but relies solely on raising prices of existing rolled up drugs.<br /><br />Nothing this company does is normal or standard when there really is no reasonable rationale other than it is house of cards trying to hide its true nature. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-78514279880623066622015-12-06T12:12:30.819-05:002015-12-06T12:12:30.819-05:00Having read the Outsiders, I can also understand w...Having read the Outsiders, I can also understand why many of these value focused fund managers liked Valeant so much. I also find it hard that the company was able to do accounting manipulations. However you have correctly mentioned that hiking drug prices is something that people would frown upon. Really loved this post of yours. <br /><br />Asif KhanAsif Khanhttps://www.blogger.com/profile/03373488688456474028noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-90141673565278524472015-11-15T12:00:05.368-05:002015-11-15T12:00:05.368-05:00Hi Professor, being a fan: one more time again &qu...Hi Professor, being a fan: one more time again "chapeau bas" for this masterpiece analysis. Astonishing blend of numbers and narrative. By and large, to me, Valeant Mgmt have done a great job: the tax inversion, the serial acquisitions, the re-pricing arbitrage etc. are "coups de maitre". I have 2 questions for you:<br /><br />1) Being a regular reader of your blog, for my sake, I would like to understand the rationale behind the ongoing bashing of acquisitions; in that specific case, why Valeant should dismiss an acquisitive business model that created so much value over the last 5 years and focus on an R&D centric model that seems to have reached its limitations (ref. to the ratio of revenue growth to R&D as a % of sales). My understanding is that there are no more slam dunks R&D wise in the pharma space;<br /><br />2) Ref. to the piecemeal path, I do not understand why your labelling it as a SOTP; to me, it is more of a liquidation value.<br /><br />Many thanks.<br /><br />Cheers,<br />Othmane Anonymoushttps://www.blogger.com/profile/08287893630100047446noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-52366830603832056842015-11-13T15:19:46.189-05:002015-11-13T15:19:46.189-05:00The NYU server was hacked and went down for severa...The NYU server was hacked and went down for several hours. That is why the spreadsheets would not download.Aswath Damodaranhttps://www.blogger.com/profile/12021594649672906878noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-7566608737710770382015-11-13T13:18:49.716-05:002015-11-13T13:18:49.716-05:00It seems the links to your valuation models are br...It seems the links to your valuation models are broken?Anonymoushttps://www.blogger.com/profile/00919331163186863312noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-48009502228547588122015-11-12T16:39:03.965-05:002015-11-12T16:39:03.965-05:00Definitely not Enron but the assets it has are imp...Definitely not Enron but the assets it has are impaired. <br /><br />Break up value - considering the price paid for acquisitions was in an environment of pricing power (which probably led VRX to pay more than value ie Turing and Diapram) what do you estimate the pieces are worth now. Will the pieces have litigation exposure from VRX?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-48579289379745147472015-11-12T16:16:28.621-05:002015-11-12T16:16:28.621-05:00I would be curious if you apply the same valuation...I would be curious if you apply the same valuation methods (adapted for company specifics like R&D pipeline) how far apart are the valuation and the market price for the big players. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-5745256639101907792015-11-12T11:33:25.013-05:002015-11-12T11:33:25.013-05:00Dr. Damodaran,
The problem, in my view, is not am...Dr. Damodaran,<br /><br />The problem, in my view, is not amortization of goodwill. It is amortization of intangibles. Rather than expensing R&D on the income statement, R&D is instead acquired; this is why Valeant gets away with 3% of revenues -- because it's a different line item. The aggregate purchase cost incorporates prior R&D in the form of intangibles. In economic terms, the sticker price on an acquisition is equivalent to capitalizing prior R&D. What difference does it make whether you expense R&D immediately or capitalize it during an acquisition? Economically, none. But in accounting terms, a lot.<br /><br />There is no way to justify Valeant's valuation during the time Sequoia/Ackman purchased it, unless you add amortization back in. Unfortunately, amortization is a real expense. It's a false belief that EBITDA, EBITA, or any variant of "-A" represents cash available to investors. It is cash in accounting form, but not in economic fact. This is analogous to how depreciation is cash in accounting form, but not in economic fact.<br /><br />Demonstrated below is "Cash EPS" as reported by management, a metric deeply cherished by management that dictates compensation. In parentheses is the % of cash EPS that is actually amortization:<br /><br />2011: $2.93 (amortization $1.82 = 62%)<br />2012: $4.51 (amortization $3.04 = 67%)<br />2013: $6.24 (amortization $5.68 = 91%)<br />2014: $8.34 (amortization $4.61 = 55%)<br /><br />As you can see that this is the single biggest thing to understand in interpreting Valeant, because amortization is the biggest component of the earnings.<br /><br />Readers on this forum would benefit from careful scrutiny of accounting standards for capitalization and amortization of software companies' R&D, and a thorough evaluation of how these parameters may be stressed/broken. Valeant, through purchase accounting, has managed to capitalize R&D and amortize it in a similar fashion.<br /><br />Respectfully,<br /><br />JathinAnonymoushttps://www.blogger.com/profile/15112278620436918675noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-62098713013557077132015-11-12T05:55:59.911-05:002015-11-12T05:55:59.911-05:00-- Your baseline figure depends on the company rep...-- Your baseline figure depends on the company reporting those "acquisition-related charges" correctly. For a serial acquirer, it's too easy and lucrative to bury normal operating expenses in here. Lucrative because the market then disregards these costs, awards the company a higher valuation than deserved, and thus enables even more debt- or equity funded acquisitions in the future.<br />-- Instead of assuming a 3 percent revenue growth over, what, the next 20 years, I think it's not unreasonable to expect a DECLINE of 5-10 percent per year. Why? Because Valeant will gradually lose all that pricing power on exisiting products while the company cannot get new products due to inability to do new acquisitions and the lack of R&D. <br />-- Many of Valeant's products already have generic competition and Philidor was a way around that. Insurers will stop that "specialty pharmacy" loophole (now sooner rather than later), requiring a generic prescribed in all channels if available. Generic competition will only increase going forward with no new business to replace it.<br /><br />---> Bottom line: Any valuation that implies that insurers will pay thousands of dollars for some cream that is not more effective than a $10 generic CONTINUOUSLY over the next 20 years - contradicts common sense. Valeant's revenue base is simply unsustainable.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-14418985943988997392015-11-12T02:29:42.479-05:002015-11-12T02:29:42.479-05:00According to what Valeant themselves say, their re...According to what Valeant themselves say, their revenue growth is driven more by sales growth than price increases. No mention of sales growth in your post though. Is it because you think they are simply lying when they say that this is the more significant driver of their revenue growth? <br /><br />Given your dislike of companies that grow through acquisitions I guess you must have a real problem with publishers. These are the most purely acquisition-based companies of all, making all their money by buying up and selling the works of others (authors). Yet the publishing industry is hugely profitable…<br /><br />To my mind, Valeant is like a publisher in the pharma world. Its business model is and will continue to be successful for the same reason that publishing businesses in general are successful. <br />(In some regards it is also like the budget airline of the pharma world – another very successful business model.) <br />random itinerantnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-592417051670170082015-11-11T20:13:18.202-05:002015-11-11T20:13:18.202-05:00The model here is unrealistic. The problem is you ...The model here is unrealistic. The problem is you are assuming no generic competition - or that is the implication in your terminal value DCF and, seperately, your growth scenario. For example, given the companies business model, they are unlikely to continue growing organically in the long run since they have no accumulated R&B base. Further, given their approach to pricing, it is likely that they are encouraging generic competition in the medium term. Furthermore, growing inorganically might also be an issue - see the market price of their bonds. Both of these negate the ability to use a terminal value DCF, especially one with perpetual growth. <br /><br />As you will recognize, that means the valuation presented here is, perhaps, overstated. Of course, I would argue that we also need a small risk adjustment for the considerable political risk here. This is good practice in many situations (e.g., liquidity discounts) and almost always results in more accurate analysis. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-89333511799260603712015-11-11T18:56:38.728-05:002015-11-11T18:56:38.728-05:00Dr.Damodaran,
What different knowledge bases did...Dr.Damodaran, <br /><br />What different knowledge bases did you use for this analysis? I'm a new student to finance and looking to get into valuation, buy side m/a. <br /><br />Just trying to break down classes used in this... Example financial accounting knowledge, corp finance knowledge, biotechnology economics , valuation.. etc. <br /><br /><br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-9232383889900977622015-11-11T18:38:03.303-05:002015-11-11T18:38:03.303-05:00Great post title! I am not as optimistic regardi...Great post title! I am not as optimistic regarding the value of the company as you might be as your intrinsic value appears to infer a EV/Sales multiple higher than the industry average. Your numbers i believe would translate in to a 5.4 multiple and the industry avg appears to be lower at 4.7x with some middling mediocre companies as low as 3.3x.<br /><br />In light of some of what has been written about the company pushing prices of acquired product lines or companies, the accountants at year end will have an interesting challenge regarding goodwill impairment. Without looking at specifics it is hard to conclude the extent of any impairment, but based on headline news it is hard for me to see how the accountants will not require write downs. That of course does not affect your intrinsic value estimate, but it will cause "mood and momentum" investors to sell the stock pushing the price down further.stevenoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-812233920768375802015-11-11T16:05:18.793-05:002015-11-11T16:05:18.793-05:00If Valeant is nothing more than a "middling&q...If Valeant is nothing more than a "middling" drug company, and something i would agree with, then I think your intrinsic valuation may actually be on the optimistic side. An examination of trading multiples for middling drug companies would put a price upon the stock of closer to $50.<br />Supporting the view that the company may be middling is that it appears that they are not the "top dog" in many areas where the generate lots of sales such as Dermatology and Opthamology, at least here in the US. It may be there is greater value in some of their overseas business which would provide greater support for a DCF valuation vs. an estimation of Price via industry multiples.<br />I see no reason to buy a company that is not an industry leader in any category, constrained by a debt load and does no reinvestment. Better to buy stock of a drug company whose stock has gone no place, but has a nice dividend in place, a buyback program, and a degree of optionality via its pipeline of drugs in the hopper that may prove meaningful such as the PCSK-9 cholesterol drugs and PD-11 cancer drugs.<br />stevenoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-72660516497138976652015-11-11T12:44:42.319-05:002015-11-11T12:44:42.319-05:00The obvious question would be whether VRX is worth...The obvious question would be whether VRX is worth more as a sum of the parts valuation for sale to strategic bidders.<br /><br />There are highly motivated active investors involved who can sway or remove current management, which doesn't seem extremely entrenched through shareholdings. <br /><br />One would surmise they won't be satisfied with the current market price, however well-founded in the current environment.CurmudgeonlyTrollhttps://www.blogger.com/profile/02004282752334460717noreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-79245980325254895672015-11-11T12:32:46.700-05:002015-11-11T12:32:46.700-05:00Excellent piece. Thank you.
However, Valeant d...Excellent piece. Thank you. <br /><br />However, Valeant doesn't have to be a zero, with the undisclosed entities being purely shells to qualify as "Enron-like, in my opinion. <br /><br />If you read the PBM contracts with pharmacies, you will see that a huge amount of the prescription volume pushed through the "Philidor network" is going to be charged back as refunds, with penalties. Don't think for a minute that Valeant is going to be legally insulated from Philidor for the legal liabilities of these. Too interlocked on too many levels for that to be possible. <br /><br />Once the costs of Philidor's illegal prescription reimbursement activity is fully quantifiable, and the consequences flow back to Valeant's bottom line, you will reconsider this point. <br /><br />Yes, Valeant has assets that are valuable. Lest we not forget, Enron bought Portland General Electric. However, without a massive reliable, durable cash-generating revenue stream, its debt burden on overpriced acquisitions will encumber it for years. As Valeant's existing portfolio erodes, with pushback coming from multiple directions, including generic competition, adjustment of the marketplace (see pop-and-drop stories), impossibility of getting arms-length specialty pharmas to be as aggressive as captive Philidor was, anti-Trust and political pressure, etc., their earning power will continue to erode. <br /><br />Let's not forget they don't own a pipeline of new drug candidates. They have no way to replace revenue losses except by more acquisitions. And there won't be any more of those either. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8152901575140311047.post-73355697163050416622015-11-11T10:50:22.619-05:002015-11-11T10:50:22.619-05:00Great article Aswath. I suggest that you sign up o...Great article Aswath. I suggest that you sign up on Seeking Alpha and post your article there so that it reaches a wider audience. NNRhttps://www.blogger.com/profile/08345483796563363346noreply@blogger.com