the definitive guide to valeant pharmaceuticals (nyse:vrx) · 2016-04-30 · against valeant.”...
TRANSCRIPT
This analysis is a summary of research material gathered together over a period of a few months. Readers should treat this document as a map which branches out to different sources of information. Links should be clicked for a more in-depth explanation of each summary point.
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Value investing guru Aswath Damodaran: “I did
read the half million piece (original article) and I
think does a very effective job marshaling a case
against Valeant.”
The Definitive Guide To Valeant
Pharmaceuticals (NYSE:VRX)
Timeline of Significant Events
Pre-2006, VRX was still an unknown
pharmaceutical company with a
waning pharmaceutical portfolio of
Hep C drugs, under threat by big
pharma, e.g. Johnson & Johnson.
Rumours about a possible hostile
takeover float around.
In 2006, Valeant finds a white knight
in Jeffrey Ubben of ValueAct Capital -
the famed activist investor who saved
Martha Stewart’s Omnimedia from
complete collapse when she was
charged with insider trading in 2003.
ValueAct takes a 10.6% stake in
Valeant and hires McKinsey & Co. to
turnaround the company, while
staving off takeover attempts.
True love strikes when they meet
McKinsey’s pharma director Mike
Pearson, who has spent the last 23
years advising pharma companies.
Over the years, Pearson made the
striking observation that despite
being the industry’s main revenue
source, pharma R&D only contributed
a measly ROI of 4.8%. He also noticed
that branded generics had strong
pricing power, despite being off-
patent and subject to an onslaught of
generic competition.
In 2007, VRX brings in Pearson as CEO.
Pearson makes the highly unorthodox
move to eschew a stable, rewarding
career at McKinsey’s to become
captain of a rudderless ship.
Pearson immediately lays out plans to
overhaul the entire company by
retrenching nearly all the R&D staff
over the next few years. By the end of
the exercise, R&D expense would be
less than 3% of revenue. (industry:
20% revenue)
He also starts acquiring rights to off-
patent “branded generics”, such as
Wellbutrin XL from GlaxoSmithKline,
and Acanya from Dow
Pharmaceuticals.
In 2010, Valeant pioneered the
pharma tax-inversion scheme by
merging with Canadian equal Biovail,
who at the time was embattled by
similar business struggles. By merging,
Valeant estimated it could reduce its
taxes by 30% for existing operations,
and as much as 70% for future
operations.
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Around this time, Sequoia Capital
starts accumulating Valeant shares.
Sequoia was founded by Bill Ruane, a
close friend of Warren Buffett who
started Sequoia to take on Buffett’s
former investors when the latter
closed his partnerships in 1969. It
would eventually become Valeant’s
largest shareholder.
In 2013, Valeant acquires eyecare and
contact lens giant Bausch & Lomb for
$8.7bn, nearly all of it with debt.
Around this time, renowned activist
investor Bill Ackman of Pershing
Square, whose fund holds a 9.7%
stake in rival pharma company
Allergan, discusses a possible hostile
takeover of Allergan with Pearson.
In 2014, Valeant partners with
Ackman and attempts a controversial
hostile takeover of Allergan. It
ultimately loses the bid to Actavis, but
walks away with $400m for its efforts.
In March 2015, Valeant acquires
another pharma rival Salix, mainly for
its IBS branded generic, Xifaxan. The
acquisition is contentious as Salix had
been battling SEC allegations of
channel stuffing over the past few
years. The move is widely seen as a
replacement for missing out on
Allergan.
Over the years, Valeant’s apparently
successful rollup strategy has
spawned many copycats, including
Turing Pharmaceuticals, Endo
Pharmaceuticals, and Mallinckrodt
Pharmaceuticals.
In Sep 2015, Turing Pharmaceuticals
courted controversy by hiking the
price of its branded generic Daraprim
by 5,000% overnight. Its flamboyant
CEO, Martin Shkreli, adds fuel to the
fire by being extraordinarily
unapologetic. He was later
subpoenaed by the SEC and arrested.
Shkreli’s antics draws unwanted
attention to predatory pricing
practices in the broader pharma
industry, prompting an industry-wide
selloff. Valeant’s share price drops to
$175 from a high of $260 in August.
In Oct 2015, famed short seller
Andrew Left of Citron Research
publishes a scathing report accusing
Valeant of channel stuffing through its
specialty pharmacy Philidor. Despite
holding a lengthy 3-hour investor call,
VRX sinks to $120. It would later be
revealed that the allegations were
unfounded.
However, the leading piece of
evidence used by Citron, an email
written to Valeant by the CEO of
This analysis is a summary of research material gathered together over a period of a few months. Readers should treat this document as a map which branches out to different sources of information. Links should be clicked for a more in-depth explanation of each summary point.
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Philidor affiliate R&O Pharmacy,
prompts further investigation by
analysts and journalists.
It was uncovered that Philidor was
actually not a subsidiary of Valeant,
but had been paid $100m by Valeant
for a call option to be acquired; this
had not been disclosed to investors.
In addition, Philidor employees were
found to have used fake names in
their emails, such as Peter Parker,
Jack Reacher and Brian Wilson –
names commonly found in popular
culture.
In Nov 2015, Valeant announces that
it will sever all ties with Philidor, while
accepting a new partnership with
Walgreens. Suspicions of wider
accounting fraud at the parent
company level causes the stock to
crash to $70. Pearson is faced with a
margin call and is forced to sell $100m
of his VRX holdings.
In Dec 2015, Mike Pearson contracts
pneumonia and announces a medical
leave of absence. A three-person
committee is established to
temporarily replace him. At the same
time, Valeant revises its guidance
downwards for 4Q 2015 and FYE 2016
. The stock finds a new equilibrium
around $90.
In early Feb 2015, Valeant announces
that the SEC is investigating it over
allegations that it engaged in
predatory pricing tactics. Andrew Left
covers his short around this time.
In late Feb 2016, Pearson returns
from his leave of absence. The
company announces that it might
have to further revise its previous
guidance for 4Q 2015 and FYE 2016.
The stock plummets to $65 in
response.
In Mar 2016, Valeant reveals the full
extent of its restatements. Owing to
the disposal of Philidor, $58m of
revenue or about 5.9% of total
revenue would have to be cut. In
addition, previously announced
guidance for 4Q 2015 and FYE 2016
was revised downwards even further.
Valeant also announced that it faces a
technical default on its bonds for
missing a filing deadline for its 10-K.
The stock nosedives to $33 overnight.
The following week, Valeant releases
an 8-K – announcing that Pearson
would be stepping down as CEO,
Ackman would become Chairman,
and which places the blame for
Philidor squarely on former CFO and
current board member Howard
Schiller. Howard vehemently denies
the allegations and refuses the
board’s request to step down.
In Apr 2016, Valeant announces that
its Ad Hoc Committee had completed
investigations into Philidor and
related accounting matters, and
concluded that no further
restatements were necessary with
respect to such matters.
It also sought an extension for the
filing of its 10-K to late May from its
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bondholders. In return, it agreed to
pay bondholders a one-time fee, and
increase interest rates by 1%.
The following week, the company
announced that it had received a
Notice of Default from different
bondholders of a $1bn tranche of
2023 bonds. The Notice of Default
sets a time limit for the filing of its 10-
K to June 11.
Valeant Business Strategy
Valeant’s operational strategy is the
brainchild of Pearson, hinging on a
simple reproducible concept. It buys
up pharma companies owning rights
to branded generic drugs, surgically
removes the low-return R&D division,
and periodically jacks up the prices of
its newly acquired drug portfolio.
The reason it can do that and get
away with it is multi-faceted, and will
be explored in greater detail later.
Firstly, ”branded generic” drugs have
durable pricing power, as patients
tend to prefer them despite having
access to cheaper competitor
substitutes.
Secondly, Valeant eschews the
traditional route of selling through
doctors, and instead sells directly to
customers through specialty
pharmacies. By sending discount
coupons directly to patients via mail-
order, specialty pharmacies bypass
the helpful doctor’s consultation and
encourages patients to place their
trust behind a well-known brand.
Thirdly, the company doesn’t collect
payments from its patients; it charges
the patient’s insurance provider
directly through the coupons instead.
This hides the true extent of its
exploitative price-raising from public
knowledge, and allows the company
to strong-arm insurance providers
away from the keen eye of regulators.
Valeant’s Tax Inversion Scheme
Valeant also pioneered the pharma
tax-inversion scheme, where the U.S.
company merges with an overseas
entity to avoid high U.S. taxes. It did
this with Biovail in 2010, and has since
spurred many competitors to emulate
this strategy – with the recent merger
failure between Allergan and Pfizer
being the latest high-profile attempt.
Valeant does this by transferring the
rights to its target drug portfolio to
the overseas entity. To prove an arm’s
length transaction and avoid charges
of tax evasion, it compensates the
U.S. entity with royalty payments
equal to the profits it used to make
before the transfer.
This allows all future profits made in
excess of the royalty payments to be
This analysis is a summary of research material gathered together over a period of a few months. Readers should treat this document as a map which branches out to different sources of information. Links should be clicked for a more in-depth explanation of each summary point.
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taxed at the much lower overseas tax
rate. As Valeant inflates its prices so
frequently, the spread quickly
becomes wide enough to result in
huge tax savings.
Further to the Bausch & Lomb
acquisition, Valeant devised a new
tax-saving initiative. It moved all
manufacturing operations to the
overseas location, which then sells
the drugs to the U.S. entity. This
relegates the U.S. entity to the role of
a distributor, rather than the head of
the value chain - significantly
narrowing the spread of profits which
are ultimately subject to the U.S. tax
code.
Valeant’s Capital Structure
Valeant famously avoids issuing
equity as far as possible, preferring
instead to stick to all-debt deals to
effect its acquisitions.
As a result, the debt on its balance
sheet has ballooned to $30bn, and its
D/E ratio is a staggering 4.87x. Debt
covenants limit the company to a
maximum D/E of 5.25.
However, this leverage has had a
profound effect on owner’s earnings,
as noted by the skyrocketing share
price in recent years.
In addition, it has the effect of further
reducing taxable profits, which are
frequently negative despite ample
free cash flow.
Valeant’s “buy-to-grow” strategy has
caused it to be compared to private
equity firms, resulting in hedge funds
piling into its shares. This has
prompted its description as a “hedge
fund hotel” by financial pundits.
Its pinpoint focus on shareholder
return has also earned it praise from
many renowned investors, such as
Outsider’s author William Thorndike
and Pershing Square fund manager
Bill Ackman. However, its predatory
pricing tactics has also garnered
scorn, most notably from legendary
value investor Charlie Munger.
Valeant has mostly been issuing high-
yield debt (i.e. junk bonds) to fund its
acquisitions, with interest rates in the
4%-6% range.
Valeant’s Pricing Tactics
Valeant has earned an undesirable
reputation for its exploitative price
gouging practices.
For instance, its toe-fungus medicine,
Jublia, sells for $500 for a 4mg bottle.
An NCBI study found that a home
remedy using Vick’s Vapour Rubs
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(costing $15 online) had the same
efficacy rate.
Its IBS drug Xifaxan sells for a shocking
$1,500 for a 2 month supply.
Valeant is able to do this because its
branded generic prescriptions have
implicit pricing power. There are
many anecdotal observations which
note the efficacy of established brand
prescriptions over their generic
counterparts.
In Wellbutrin XL’s case, a generic
(Budeprion XL 300) was found to have
released its ingredients 4 times faster
than the brand-name drug. This is
because while the active ingredients
of the generics are bioequivalent,
generics are allowed to use different
inactive ingredients.
This resulted in patients being
administered high doses early in the
morning, with an ensuing crash later
in the day. As a result, patients who
have had bad experiences with
generics tend to stick with the brand-
name drug, despite the higher cost.
Once Valeant acquires a drug, it will
consistently raise its price to
stratospheric levels. It is not
uncommon to see annual 100%-300%
price increases to its prescriptions.
This Harvard study lays out some of
Valeant’s worst offenses, with some
drug prices increasing by as much as
1,000% since acquisition.
Analysts are wary that Valeant’s off-
patent generics might not be able to
keep their high prices if the Valeant
brand is tainted. Contributions from
its top 5 drugs have already started
flatlining over the past few quarters.
Presidential candidates from both
sides of the Congressional divide have
been unanimous in decrying pharma
price gouging, promising “severe
consequences”.
At Valeant’s Q1 2015 earnings call,
Pearson responded to a question
about the contribution of price vs
volume to revenue growth, claiming
that “the majority of growth was from
volume”. Subsequent SEC
investigations revealed an email sent
from the CFO to Pearson stating that
price increases represented 60%-80%
of revenue growth.
In light of Pearson’s commitment to
abstain from future acquisitions, and
the company’s inability to hike prices,
it remains to be seen how Valeant
intends to fuel further growth.
Valeant’s Performance Measurement
As Valeant deliberately tries to reduce
taxable income, management is
justified in their assertion that profits
are not the best measure of
performance.
Management uses a pro-forma
measure called “cash IRR”, which is
basically a cash payback model. (i.e.
20% IRR = 5-6 year payback)
This cash payback approach is
benchmarked against their Deal
Model, which prescribes: i) a 20% ROI
on acquisitions after tax & ii) a 5-6
year target cash payback horizon.
To provide full transparency, the
above criteria factors in transactional
This analysis is a summary of research material gathered together over a period of a few months. Readers should treat this document as a map which branches out to different sources of information. Links should be clicked for a more in-depth explanation of each summary point.
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costs of the acquisitions, which can be
hefty (e.g. bank fees, compensation
for layoffs, etc.).
Management frequently brings up
their Deal Model at earnings calls and
analyst presentations, showing how
their acquisitions are performing
against expectations.
Valeant’s management compensation
structure is predicated on shareholder
wealth maximization – employees are
remunerated with restricted shares
based on the performance of the
share price over the past 3 years. The
company has since suggested that this
model may have created incentives
for aggressive practices.
The Philidor Debacle
Philidor was a specialty pharmacy
which operated as a marketing &
distributor arm of Valeant.
Specialty pharmacies have been
around since the 1970’s. They
primarily service patients with unique
drug needs which normal pharmacies
cannot fulfil, such as temperature-
controlled HIV drugs that require
special care during delivery.
A recent development at specialty
pharmacies is mail-order delivery,
which represents half of the industry’s
profits. This model solicits business by
sending coupons directly to the
patient, bypassing the doctor’s visit
where cheaper generics are generally
prescribed first.
A recent trend among specialty
pharmacies such as Philidor have
relegated them to nothing more than
marketing arms of the pharma parent.
Philidor’s existence was first brought
to light by Citron Research’s report,
which inaccurately suggested
Philidor’s role in channel stuffing on
behalf of the parent company.
The allegations carried weight partly
due to its unusual organizational
structure, where it was paid $100m
for an option to be acquired but
remained outside of Valeant. This
allowed Valeant to consolidate its
books but not disclose it as a
subsidiary.
Philidor employees were found to
have used fake names in their emails
with the company.
Eventually, the allegations proved
untrue. However, over time more
details began to surface.
In a lengthy forensic investigation
published by NYMag, it was revealed
that the email used by Citron
Research in its accusations came from
a tiny Californian pharmacy called
R&O Pharmacy.
Isolina, a Philidor subsidiary, first
engaged R&O’s CEO Russell Reitz for
his authority to sign off on
prescriptions. He agreed to sell R&O
to Isolina for $350,000. Isolina never
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disclosed its relationship with either
Philidor/Valeant to Reitz.
Reitz first began to suspect something
was amiss when he realized he was
sending checks to Philidor, rather
than Isolina. His requests for an
explanation was met with silence.
In addition, he was signing
prescriptions in far larger volumes
than Isolina should have been capable
of producing. Its prices were also
exorbitant compared to other
generics.
When routinely audited by a
pharmacy benefit manager, Reitz
discovered that his name &
pharmacist identification no. was
being used to dispense drugs to
patients he had never heard of living
in far-flung locations.
Reitz starts his own investigation, and
uncovers that Isolina had not
complied with a mandatory disclosure
that required it to disclose if more
than 10% of Isolina was owned by a
single shareholder (i.e. Philidor).
Meanwhile, Reitz’s name continues to
appear in more prescriptions.
Terrified of liability, Reitz resorts to a
last-straw attempt to coerce an
explanation. He refuses to send the
mail-order checks to Philidor, keeping
them in a safe deposit box.
He begins to get emails from Philidor
officials demanding payment,
including Philidor CEO Andrew
Davenport. Reitz refuses to comply
and escalates his complaints, until he
is eventually put in touch with Robert
Chai-Onn, chief legal counsel of
Valeant. Reitz finally has proof of
Philidor’s ties with Valeant.
Reitz sues Valeant in Oct 2015, where
Andrew Left discovers his emails,
eventually bringing to light Valeant’s
shady pricing practices. The suit was
eventually settled with Valeant in
March 2016.
Bronte Capital has done a similarly
fascinating amateur private
investigation into the Philidor-Valeant
ties.
AZValue’s Criticism of Valeant’s Accounting
Arguably the most popular criticism of
VRX is the blog post written by
amateur analyst AZValue, titled
Valeant: A Detailed Look Inside a
Dangerous Story. His analysis tears
down the entire cash-printing
machine thesis that Pearson has been
selling to investors, and basically
crucifies the company for misleading
investors.
His 1st blog post draws attention to
VRX’s suspect disclosure practices
over the years, as observed in the
notes to the financial reports.
These offenses include: i) the
consolidation of previously distinct
business segments for no apparent
benefit, ii) a significant gap between
stated performance and realistically
achievable performance, and iii) the
inability to reconcile the pre-
acquisition & post-acquisition figures
of various acquired subsidiaries.
He suggests that VRX has been
stretching the truth by fudging
figures, such as including debt
proceeds under Operational Cash
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Flow when measuring performance
under the Deal Model. He even goes
so far as calling the numbers used in
the Deal Model “imaginary”.
AZValue’s 2nd blog post, Valeant: A
Detailed Look Inside a Dangerous
Story Well Told – PART IV: The IRR
Fallacy, demonstrates how
management’s claims of successful
20% IRR for their acquisitions are
impossible to reconcile with actual
figures in their financial statements.
His 2nd blog post was not as
unanimously received as his 1st post,
with critics pointing out that the 20%
IRR should relate only to the
performance of the equity – since
Valeant funds its acquisitions with
mostly debt.
However, supporters have pointed
out that VRX is not a typical isolated
LBO enterprise, and that the recurring
acquisition activity necessitates
accounting for the debt portion of the
acquisition price, rather than just the
equity portion. (i.e. levered FCF vs
unlevered FCF)
They say that VRX should not be
classified as an LBO because it cannot
dispose of its assets to settle the debt
(as in a normal LBO), since it must use
the assets as collateral when taking
on future debt for acquisitions in
order to fuel the target 20% growth.
Since it cannot sell its assets,
management’s use of cash EPS, which
strips out the rather large
depreciation expense of $2.4bn from
FY2015 GAAP EPS, masks real returns
and should not be added back.
They also claim that the Deal Model
wrongly assumes perpetual debt
refinancing and zero bankruptcy risk –
two things which don’t go hand-in-
hand, since its debt load swells with
each new acquisition.
In this case, both sides of the
argument are right under their own
measures. Under the former measure,
VRX can safely meet the 20% IRR
threshold. However, under the latter
measure, IRR is only 3%-4%.
Valeant’s Depreciation Treatment
This article titled The Emperor Is 25%
To 65% Naked: Valeant, Salix, And
Cash EPS goes into great detail about
why management’s use of cash EPS,
which ignores the significant
depreciation charge of $2.4bn, might
mask true owner’s earnings.
Valeant argues that since its brands
will earn money ad infinitum (a la
Coca-Cola or Apple), the annual
depreciation/amortization charge
wrongly penalizes performance as the
brand’s earnings growth remains
unhindered.
However, its pharmaceutical products
are no Coca-Cola. While one could
argue such an appeal for the eyecare
products of Bausch & Lomb, Valeant’s
bestselling drug Xifaxan, for example,
will lose its patent in 2024.
On top of that, Xifaxan’s exclusivity is
protected under ‘orange book
exclusivity status’, which allows
competitors to challenge its
exclusivity with an ANDA filing as soon
as 2017. In fact, Allergan has already
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begun appealing to invalidate
Xifaxan’s exclusivity.
Valeant’s debtholders in its
acquisition of Salix (i.e. Xifaxan)
appears to have recognized this
possibility - by mandating a step-up in
interest payments in 2017; and
maturing debt in 2020, which is
shortly after an automatic 30-month
window given to respond to an ANDA
challenge expires.
As a result, ignoring depreciation
completely may be overstating true
cash EPS. The author claims that true
cash EPS after depreciation for
FY2015 should be $5.55-$7.55, in
contrast to management’s guidance
of $11.67-$11.87 at the time. This
guidance was later revised to $10.23-
$10.33 in December.
Valeant’s Accounting Issues
The Southern Investigative Reporting
Foundation found that inventory
numbers reported by Valeant’s
European subsidiaries don’t seem to
add up. This is a legacy of similar
inventory issues at Salix, which was
acquired in 2015.
James Grant of the reputable Grant’s
Interest Rate Observer states that he
is “confidently bearish” of VRX, having
been tipped off to accounting
machinations in the company by
legendary short seller Jim Chanos.
Bloomberg highlights how Valeant
uses aggressive add-back mechanisms
to keep their debt-to-equity ratio
from breaching debt covenants.
Marketwatch demonstrates how
Valeant mocked acquisition
accounting by failing to revise even a
single ‘measurement period
adjustment’ for any of its acquisitions
(which reduces Goodwill).
In 2014, Allergan cited possible
improper accounting as one of the
reasons for its refusal to merge with
Valeant.
In an unprecedented move, two of
Sequoia’s board directors Vinod
Ahooja and Sharon Osberg abruptly
resigned over disagreements about
the Sequoia Fund’s 2nd largest holding
in Valeant, citing business and
accounting concerns. Sharon Osberg
is a close bridge partner of Warren
Buffett.
Valeant has been known to pad
earnings using a variant of ‘big bath
accounting’ to boost Bausch & Lomb’s
post-acquisition profits.
Valeant’s Outlook vs Guidance
Following the scandal, Valeant has
committed to abstain from making
any further acquisitions until it has
paid off its debt.
In an effort to retain employees, it has
also promised not to sell off any core
assets and minimize widespread
layoffs.
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11 | P a g e
So far, Valeant’s price gouging tactics
have flown under the radar of the
insurance companies, as they tend to
focus on more expensive drugs (e.g.
Gilead’s $1,000/day Sovaldi). In light
of the political and PR environment,
insurance companies are expected to
scrutinize Valeant’s pricing to a much
greater degree.
This has raised concerns among
analysts, notably during the Q1
earnings call when Xifaxan sales came
in at $210m; versus projected Q4
sales of $390m and full year sales of
$1bn. As 60%-80% of sales growth is
contributed by price action rather
than volume, it remains to be seen
how Valeant plans to achieve its
forecasts.
Quarterly sales of its top drugs are
tumbling. Top drug Xifaxan’s quarterly
sales have been flat ever since the
scandal broke, while sales of its
second best-selling drug Jublia has
been flat since Q215. Quarterly sales
of its top 5 drugs show similar
patterns.
On top of that, Valeant recently
announced the resignation of its head
of U.S. Dermatology and
Gastrointestinal division, Deb Jorn.
Jorn was responsible for both Xifaxan
and Jublia.
Drugmakers and pharmacies are
increasingly distancing themselves
from Valeant to avoid the fallout from
the scandal. Pharmacy chains CVS &
Express Script have announced that
they plan to suggest cheaper generics
to patients before Valeant’s more
expensive choices.
The “orange book” exclusivity of
Valeant’s bestselling drug Xifaxan
could potentially face an ANDA
challenge from rival pharma company
Allergan. Experts say that the best
case scenario is that Valeant manages
to delay Allergan in court over the
next 3-4 years.
Valeant has already revised its FY16
guidance twice, following
disappointing Q1 earnings. Further
earnings depression in later quarters
may lead to even further revised
guidance.
There are also rumours that the firm
is seeing an employee exodus. With
past R&D spending coming in at only
3% of revenue, it remains to be seen
how the company plans to attract top
talent to stimulate organic growth via
R&D, when its current employees are
already looking for greener pastures.
Valeant’s Debt Repayment Schedule
Valeant has traditionally sought most
of its debt from a consortium of
lenders known as a CDO, rather than
an individual lender. This makes it
complicated to renegotiate debt
terms, as it has to renegotiate with
every single party to the CDO.
This analysis is a summary of research material gathered together over a period of a few months. Readers should treat this document as a map which branches out to different sources of information. Links should be clicked for a more in-depth explanation of each summary point.
12 | P a g e
Valeant has yet to make $6.2bn in
debt principal repayments for FY2015;
it currently only has $1.4bn of cash &
cash equivalents. In early April, it
successfully renegotiated debt
repayments with a $12bn tranche of
bondholders, in exchange for a one-
time fee and a 1% increase in interest
rates.
However, it also received a Notice of
Default from bondholders of a $1bn
tranche of bonds expiring in 2023.
This may serve as a playbook for other
Valeant bondholders to play hardball
in the future.
A slightly outdated debt schedule
from their 3Q15 quarterly report
shows that Valeant has to make a few
large looming principal repayments
over the coming years. Principal
repayments amount to $3.5bn in
2018, $4.7bn in 2020, $4.5bn in 2022
and $4.8bn in 2023.
Since revising their guidance in
March, their 2018 repayments have
increased to $4.3bn to include an
$825m revolving fund, which they had
originally intended to pay back during
their Dec ‘15 analyst call.
In a town hall meeting with
employees, Ackman has suggested
the possibility of an IPO to sell 10%-
20% of Bausch & Lomb. However, this
will only realize $2bn at most, which is
piddling next to its massive debt
obligations.
Most creditholders are assured that
Valeant’s debt is still creditworthy.
However, with projected cumulative
2016-2018 EBITDA coming in at only
$18bn, fulfilling its debt obligations
will have to come at the complete
expense of shareholders. (i.e.
negative FCFE)
It also pays to bear in mind that
Valeant procured most of its debt
(4%-6%) in a Fed-induced zero-rate
environment. As Valeant inevitably
refinances, interest payments are
expected to increase, further
depressing cash EPS.
This analysis was reproduced with
permission from
http://halfmillion.com/valeant