tag:blogger.com,1999:blog-4815867514277794362.post5983786196534079313..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Valeant Pharmaceuticals Part III: Assessing the one-off charges from the Medicis mergerJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger34125tag:blogger.com,1999:blog-4815867514277794362.post-66237536693937780372015-11-17T00:37:16.510+11:002015-11-17T00:37:16.510+11:00"The author doesnt understand accounting for ..."The author doesnt understand accounting for business combinations. You dont "write off" or impair assets when purchasing a company, you allocate purchase price."<br /><br />You write assets and liabilities up (or down) to fair value which is used to allocate purchase price. The remaining unallocated balance goes to goodwill. What you missed and the author did not miss is the future expenses can be captured in liability provisions you write up on the balance sheet as part of the purchase price allocation. These are in essence, write offs.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-66858010921591646402014-06-17T00:32:56.723+10:002014-06-17T00:32:56.723+10:00The author doesnt understand accounting for busine...The author doesnt understand accounting for business combinations. You dont "write off" or impair assets when purchasing a company, you allocate purchase price. Also, there is no provision recorded in purchase accounting for restructuring charges (i.e. you didn't purchase that reserve), it is recorded after the combination.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-8972399746263891012014-06-13T15:55:22.673+10:002014-06-13T15:55:22.673+10:00P&G is growing faster than Valeant. Please don...P&G is growing faster than Valeant. Please don't insult P&G by comparing it to Valeant. <br /><br />P&G organic sales grew at 3% in the latest quarter - Valeant's organic sales growth was 1% in the latest quarter<br /><br />http://www.pginvestor.com/file.aspx?IID=4004124&FID=23316973<br /><br />http://ir.valeant.com/investor-relations/news-releases/news-release-details/2014/Valeant-Pharmaceuticals-Reports-First-Quarter-2014-Financial-Results/default.aspxAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-52550048752314812612014-06-13T14:30:32.796+10:002014-06-13T14:30:32.796+10:00John,
Always enjoy your blog. I can piece togeth...John, <br />Always enjoy your blog. I can piece together 1 large bucket of restructuring. On Page 93 of the proxy they detail the golden parachute comp for the top 5 Medicis execs - see here: http://www.sec.gov/Archives/edgar/data/859368/000119312512450354/d411935ddefm14a.htm Anyhow, the total expense is $62.2mm (cash + pension / nqdc + pension / benefits); the rest probably gets swept up into the pre-close stock comp related charges. If you assume the remaining 745 people let go earn $150k per year and are given 2 months severance, this amounts to an additional $18.6mm for a total cash severance payment of $81mm (of which $62.2mm is verified and $18.6mm a guess).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-28702522613317978922014-06-13T13:18:32.929+10:002014-06-13T13:18:32.929+10:00employees let go from Medicis may be as low as 319...employees let go from Medicis may be as low as 319 December 2012.<br /><br />The link is to a document that was dug up by a couple of different AZ journalists. This was a very big deal in AZ <br /><br />http://assets.bizjournals.com/phoenix/pdf/Medicis%20Employee%20Termination-Retention%20List.pdf<br /><br />Since Medicis closed Graceway on December 2 2011 they would have to include all employees in the 2011 10k. They don't have employee numbers in the Qs. Blogs discussing the bankruptcy buy of Graceway indicate Medicis made deep cuts in sales reps and some management at the time of the acquisition. So I would not be inclined to add 200 employees to the Medicis 10K count. If the document re: terminations is anywhere close to accurate, then VRX is overstating firings. <br /><br />BTW Medicis buying Graceway was insane and a total waste of cash. Medicis is lucky Valeant was there to bail them out. In turn Valeant got a load of rubbish in the Medicis deal. The best part of that acquisition was turning around and getting $1.4 billion for Dysport and Restalyne the only drugs Medicis had that were worth anything. <br /><br />Medicis' main money maker was Soladyn and they tried "valiantly' to create a market for useless dosages when Soladyn went ex-patent. They spent millions jury-rigging 5 mg increments for a drug that doesn't need that level of accuracy. Needless to say, Soladyn was lagging badly by their last quarter and the end was near. Not quite the derm empire we are led to believe was formed with the Medicis acquisition.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-34092558030126128652014-06-13T13:08:03.672+10:002014-06-13T13:08:03.672+10:00Bluntly Anonymous asks this:
Yes, but your thesis...Bluntly Anonymous asks this:<br /><br />Yes, but your thesis is kinda falling apart at the seams.<br /><br />If GAAP earnings is kosher and legit, then logically M&A-related charges is not fudged. Hence, that is why management would want to highlight non-GAAP earnings.<br /><br />If GAAP earnings are not kosher, then logically M&A-related charges are minimised. In this case, mgmt would still prefer non-GAAP earnings if non-GAAP earnings put mgmt in a better light.<br /><br />So, at the end of the day, is GAAP earnings kosher or not?<br /><br /><br />==<br /><br />I aruge the GAAP earnings are clearly kosher. If they are the beginning and end of the story - then Valeant is on a RAPID path to bankruptcy court. They have HUGE and INCREASING losses and 17 billion in debt.<br /><br />Management wants us to ignore the GAAP earnings. They argue some charges are one-off.<br /><br />The question is whether those charges are one-off.<br /><br />I do not think they are. Others differ.<br /><br />JohnJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-79371574913997972012014-06-13T13:08:03.076+10:002014-06-13T13:08:03.076+10:00Bluntly Anonymous asks this:
Yes, but your thesis...Bluntly Anonymous asks this:<br /><br />Yes, but your thesis is kinda falling apart at the seams.<br /><br />If GAAP earnings is kosher and legit, then logically M&A-related charges is not fudged. Hence, that is why management would want to highlight non-GAAP earnings.<br /><br />If GAAP earnings are not kosher, then logically M&A-related charges are minimised. In this case, mgmt would still prefer non-GAAP earnings if non-GAAP earnings put mgmt in a better light.<br /><br />So, at the end of the day, is GAAP earnings kosher or not?<br /><br /><br />==<br /><br />I aruge the GAAP earnings are clearly kosher. If they are the beginning and end of the story - then Valeant is on a RAPID path to bankruptcy court. They have HUGE and INCREASING losses and 17 billion in debt.<br /><br />Management wants us to ignore the GAAP earnings. They argue some charges are one-off.<br /><br />The question is whether those charges are one-off.<br /><br />I do not think they are. Others differ.<br /><br />JohnJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-458184815673896332014-06-13T12:56:01.626+10:002014-06-13T12:56:01.626+10:00Anon above asks:
"So, at the end of the day,...Anon above asks:<br /><br />"So, at the end of the day, is GAAP earnings kosher or not?"<br /><br />Yes - the GAAP earnings are kosher.<br /><br />It is HUGE GAAP losses. <br /><br />If you believe the GAAP earnings this company is on the path to bankruptcy.<br />John Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-79995458342620300882014-06-13T08:48:45.596+10:002014-06-13T08:48:45.596+10:00Where do you see the SEQUX sold out? Not in that ...Where do you see the SEQUX sold out? Not in that filing...Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-45024274659286425362014-06-13T08:45:20.288+10:002014-06-13T08:45:20.288+10:00Derek Lowe on Valeant:
http://pipeline.corante.co...Derek Lowe on Valeant:<br /><br />http://pipeline.corante.com/archives/2014/06/12/valeants_misleading_case.phpCrocodileChuckhttps://www.blogger.com/profile/10762442097044797842noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-29172055515064206212014-06-13T05:03:38.928+10:002014-06-13T05:03:38.928+10:00SEQUX appears to have sold out completely: http://...SEQUX appears to have sold out completely: http://www.sequoiafund.com/Reports/Quarterly/Mar14.htmBennoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-29142641420440156112014-06-13T03:26:23.077+10:002014-06-13T03:26:23.077+10:00The mental gymnastics that are being used are pret...The mental gymnastics that are being used are pretty amazing. You make allegations about the quality of the accounting and then proceed to refute your argument. Wittingly or unwittingly, I don't know. <br /><br />In the post-script, you quote the Valeant filing that said that total costs of $181.3mm have been taken (relative to the original $275mm and revised $250mm). <br /><br />Then you say "I wonder where in the P&L the difference between 250 million and $275 million appears. Whatever, both numbers seem very large to me."<br /><br />So they thought the "one-time" costs would be $275mm, then they revised them down to $250mm and now they're only supposed to be $180mm. It isn't like they're bleeding out a reserve - charges are taken as costs are incurred so fewer than expected costs are being incurred and hence LOWER charges. <br /><br />Ironically enough - and this is the proper usage of ironic - your point supports a more conservative view of VRX's accounting than what you're alleging. <br /><br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-34316783171263353792014-06-13T01:50:04.527+10:002014-06-13T01:50:04.527+10:00I think it's absurd to claim that if Valeant&#...I think it's absurd to claim that if Valeant's revenue profile is the same as P&G, it should trade at the same multiple. <br /><br />"P&G trades at 2x sales so that's where Valeant should trade..." yeah, if Valeant had a 50% gross margin like P&G instead of 80%, if Valeant had a 25% effective tax rate like P&G instead of 5%, if Valeant had an inefficient capital structure like P&G instead of one optimized to produce high ROE, and if it had a ho-hum management team like P&G instead of a relentlessly shareholder oriented management team...then yes it should trade at the P&G multiple (which by the way is 3x sales, not 2x sales)Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-21296069862091662382014-06-13T01:08:47.424+10:002014-06-13T01:08:47.424+10:00John, After reviewing it is really looking like yo...John, After reviewing it is really looking like you didn't do your homework on this. The most recent disclosure on restructuring costs are far lower than the originally estimated (and also conservatively estimated) $275m - actually $coming in at 183m. The $275m was never actually expensed (just "guided" do), so no way they could use the delta to juice future earnings. The $110m in actual severance expense for 750 employees seems high if it's truly 2 months of comp...but that's a dubious assumption anyway, ignoring the benefits, lawsuits, and the various termination bonuses that the more senior execs are "entitled" to. Seems entirely reasonable (even "cheap") expense relative to the headcount reduction if compared to other big restructurings in the sector<br /><br />In addition, you are evidently wrong about the Medicis employee count. Putting aside the fact that the employee counts in 10-K's are almost never "accurate" - some companies adjust for part time workers, some do not, some adjust for outside contractors, some do not, the numbers are not audited, etc - you appear to have missed the Graceway acquisition. <br /><br />In this case it looks like you are promoting a poorly researched tradeAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-88703115105476141092014-06-13T00:49:42.943+10:002014-06-13T00:49:42.943+10:00Brian
The end margin selling toothbrushes is unde...Brian<br /><br />The end margin selling toothbrushes is under 20% even if you have scale - see P&G. You sell at two times sales.<br /><br />$VRX is priced at 10 times historic, 8 times forward sales. If it is a consumer good company as per P&G it will trade at sub $20 a share one day. Debt is over two times sales.<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-9215883110450395832014-06-13T00:36:13.206+10:002014-06-13T00:36:13.206+10:00I was just thinking about the durability of VRX...I was just thinking about the durability of VRX's products. They claimed 85% of their revenue are durables which in their definition seems to be the product are not reliant on patents. Wonder you have any comments on that? Do you think their products are really durables like how it suppose to perform like any consumer staples business as advocated by Bill Ackman?Brian Chanhttps://www.blogger.com/profile/00876920893485955494noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-44456851044439641852014-06-12T23:57:31.178+10:002014-06-12T23:57:31.178+10:00There are a number of others besides RUANE, CUNNIF...There are a number of others besides RUANE, CUNNIFF & GOLDFARB who has a substantial % of their stock portfolio in VRX, including SQ advisors under Lou Simpson, ValueAct (but they may be reducing). <br />Brian Chanhttps://www.blogger.com/profile/00876920893485955494noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-40418136369827474862014-06-12T21:50:15.883+10:002014-06-12T21:50:15.883+10:00The thing that bugs me a bit about "anons&quo...The thing that bugs me a bit about "anons" $130m for exiting R&D partnerships/JVs is that partnerships of this size are the sort of thing that you announce to the market. Suppose there are $130m of cancellation fees - at most you'd commit to a couple of years of expected future expense as a cancellation fee, so this makes it a say $65mil/year expense. <br /><br />But all that said John all I think you've shown is that the numbers sound a bit toppy. Which is a distance from the substantial accounting fiddle that you're alleging.<br /><br />The other thing that gives me big pause is that Sequoia is very very long. Insanely long. And they're not dopes. To implicitly state that poppe, Goldfarb, etc are dopes - well it's a bit call. So best of luck. I will be watching this very carefully.<br />PSCnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-73386587662980438582014-06-12T21:20:19.481+10:002014-06-12T21:20:19.481+10:00Found something which you may be interested in fro...Found something which you may be interested in from pg36: https://www.sec.gov/Archives/edgar/data/859368/000119312512218847/d348533d10q.htm<br /><br />"The increase in personnel costs was primarily due to an increase in headcount (excluding research and development personnel) from 561 as of March 31, 2011 to 721 as of March 31, 2012."<br /><br />So excluding R&D headcount, it is 721 employees.Brian Chanhttps://www.blogger.com/profile/00876920893485955494noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-55345952428808668622014-06-12T21:16:39.393+10:002014-06-12T21:16:39.393+10:00Talking about the number of employees at Medicis p...Talking about the number of employees at Medicis prior to the acquistion by Valeant. Medicis 2010 10-K states that they had 679 employees. 2011 10-K says it's 646. Capital IQ estimates the number of Graceway employees at ~200. It looks pretty credible that Medicis' 2011 10-K failed to include Graceway employees, unless they fired all of them and then some.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-86894856816030425502014-06-12T20:53:01.629+10:002014-06-12T20:53:01.629+10:00Full time employees at Dec 2010 was 679. And 646 a...Full time employees at Dec 2010 was 679. And 646 at end of Dec 2011. So perhaps there is no employees for Graceway or the combination of the two also resulted in some form of redundancy of workforce?<br /><br />But interestingly, Medicis states that the increase in SG&A for 2011 was due to an increase in headcount.<br /><br />Also, interestingly, SG&A as a % of revenue is almost 50% in 2011. For the 9 months ended 2012, it is over 60%. In Ackman's presentation, VRX SG&A is 22% versus big pharmas of 29%.Brian Chanhttps://www.blogger.com/profile/00876920893485955494noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-30913600269462828772014-06-12T19:08:22.129+10:002014-06-12T19:08:22.129+10:00It's not true that Nestle is buying the main p...It's not true that Nestle is buying the main products. At least in 2011 the acne products drove twice the revenue of the cosmetics.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-69269936467408555942014-06-12T18:28:09.572+10:002014-06-12T18:28:09.572+10:00The commentator who said that the Graceway acquisi...The commentator who said that the Graceway acquisition was not included is wrong. That acquisition closed in 2011...<br /><br />http://globenewswire.com/news-release/2011/12/02/462958/239854/en/Medicis-Announces-Close-of-Graceway-Acquisition.html<br /><br />Now this is interesting because if the Medicis people (meaning Valeant) confirmed that it did not include Graceway to the anonymous commentator (as the anonymous commentator makes out) then they are telling porkies.<br /><br />But whatever.<br /><br />JohnJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-79150116933608045352014-06-12T16:49:02.174+10:002014-06-12T16:49:02.174+10:00"750 employees of the Company and Medicis&quo..."750 employees of the Company and Medicis" So Valeant cut employees from pre-existing employees at the company as well as Medicis employees. I don't see a problem there. <br /><br />I do agree with your point that 250-275MM in integration costs seems high. Joshnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-57668717655845132072014-06-12T15:41:33.227+10:002014-06-12T15:41:33.227+10:00In the 10Q the estimate is 200 M of which 109,2 M ...In the 10Q the estimate is 200 M of which 109,2 M employee termination cost (see table p 15 - http://www.sec.gov/Archives/edgar/data/885590/000088559014000039/valeantq12014.htm). As this restructuration is now finished the average cost per employee sacked would be 146K which will be roughly in line with the B&L average though here too doubts arise. <br />The filing does mention the termination of 750 employees of the Company and Medicis as a result of the acquisition (dito for B&L).gvnoreply@blogger.com