Monday, July 21, 2014

Valeant Pharmaceuticals Part VIII: product sales distribution from the department of "really".

A key part of the Valeant bull case is that they are extremely diversified as to their product mix and that diversification reduces the risk of competitor products or patent cliffs.

Indeed this slide (data originally from Valeant but slide from the Bill Ackman presentation) projects the top ten and the next ten products as a percentage of total sales:

The top ten products - according to this slide - are 18 percent of sales. The next ten 12 percent of sales. This is much less concentrated than traditional pharma: at Merck and Pfizer the top ten products supposedly represent approximately 50 percent of revenue.

But like all stock market numbers I like to put them through the plausibility test.

What we are saying is the top ten products average 1.8 percent of sales each. The next ten average 1.2 percent.

Now lets just - for the sake of argument suggest that the top product is 3 percent of sales. And the next four average 2.3 percent. Well then the first five are 12.2 percent of sales - and the next five can only be 5.8 percent of sales (or they average 1.16 percent of sales).

But oops, that is too much concentration - because we know the next ten average 1.2 percent of sales. In fact it is far too much concentration as product number 11 needs to be more than 1.2 percent of sales.

I have fiddled with these numbers and they imply a distribution of sales flatter than I have ever seen in any product or category. In order to make the numbers work the differences between product sales have to be trivial all through the first fifteen products.

And remember these products treat a wide variety of ailments. Products injected in a dermatologist's office have a different sales profile to say acne cream or psoriasis treatment or the treatment for cold sores or herpes simply because there are different prevalence of these conditions in the real world and a different willingness of people to pay for product.

The real world is has skew.

Except that at Valeant everything is as flat as a pancake. Far more perfectly even than almost any real world distribution I have seen for a variable with as wide an underlying diversity as medical ailments.

Color me skeptical.


Sorry for the absence. Travel for work and holidays intervened.

PS. Cycling holidays in Croatia (call Dejan from Red Adventures) is an almost perfect solution for what to do with a teenage son who needs adventure and exercise and a wife who wants great food and historic places to explore. I cannot recommend this more highly. Oh, and if the wife wants an electric bike Dejan will organize that too. We island hopped through the Dalmatians and finished in Dubrovnik. This is an off-the-scale good trip and doesn't break the budget. Just do it.

Alas the Islands of Hvar and Korcula have more hills than Valeant's product distribution.


CrocodileChuck said...

Vilafredo Pareto turns (in disbelief) in his grave.

Tsachy Mishal said...

What is it that you are suggesting?

Unknown said...

Glad to hear of your Croatian trip, John - a terrific place for a summer holiday!

Anonymous said...

it's probably right. i mean, can you even name their top product? solodyne?

Anonymous said...

John, you're an Australian based and educated person, yet you are "colored skeptical".

Colour me disappointed.

Anonymous said...

Having a bunch of 4% and 3% products and all the rest < 1% would strike me as being pretty diversified. In fact more diversified than almost every other big pharma company out there.

In fact, you had a stock portfolio with a similar distribution you would be labelled a closest indexer. What's the point of this post?

Anonymous said...

I don't understand the point you are tying to make. The sales composition is flat and diversified - that's what management says. I want to understand your point, I just don't know what it is. Is it that you are generally sceptical? I know this point, I follow the blog! best regards

Phil said...

Presumably the point is that a random selection of (say) 100 pharma products is very unlikely to result in the sales profile claimed by Valeant. I have no idea whether it's true or not, but I'd guess that the sales of most pharma company portfolios follow a power law with a few blockbuster products making the majority of sales.

Of course, Valeant's portfolio is not entirely random - it results from acquisitions of products already at the point of being marketed, so perhaps that skews the results different to those experienced by companies who do their R&D in house?

Anonymous said...

This is interesting. The closest dataset I could find for comparison, is

The top ten drugs combined sold 80% more than then next ten. Valeant is claiming a flatter 50% difference for their portfolio. Given that Valeant doesn't do blockbuster drugs and can't afford to buy them, perhaps their distribution is a bit flatter.

As much as I dislike Valeant's management, distrust their growth numbers, and believe the debt load will crush them, I'm not sure this is the smoking gun you'd like it to be.

Anonymous said...

"And remember these products treat a wide variety of ailments. Products injected in a dermatologist's office have a different sales profile to say acne cream or psoriasis treatment or the treatment for cold sores or herpes simply because there are different prevalence of these conditions in the real world and a different willingness of people to pay for product."

Perhaps the way that pharma pricing works is that it is somehow (negatively) correlated with quantities sold? I.e. a drug that is used and bought rarely (rare brain disease) is more expensive than a drug for cold sores that is sold frequently?

levi said...

If almost all of their products are unpatented, then wouldn't it be entirely sensible that they have no/few blockbuster products as competitors would quickly enter the market for any product that was making outside profits?

Especially if their R&D strategy is to just reformulation and variation of existing products -- none of those are going to set the market on fire, but would just get them an incrementally higher market share in a specific segment instead.

Is not your expected R&D driven pharmaceutical company but still sounds plausible to me.

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