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Sequoia Fund Investor Day Notes

August 31, 2012 | About:

The Sequoia team goes through much of their portfolio during a question and answer session with investors. Companies discussed include:

- Valeant (NYSE:VRX)

- Goldman Sachs (NYSE:GS)

- Advance Auto (NYSE:AAP)

- First Solar (NASDAQ:FSLR)

- Expeditors (NASDAQ:EXPD)

- Berkshire Hathaway (NYSE:BRK.A)

Bob Goldfarb:

I would like to introduce our team of analysts. On the dais to my left is Rick Cunniff who, most of you know, is the co-founder of our firm. On my right is Greg Alexander and to Greg's right is Joe Quinones, who runs the operations of our firm as well as those of Sequoia. To Rick's left are David Poppe, President of our firm and co-manager of Sequoia, Jon Brandt, and Greg Steinmetz. Finally I would like to introduce the rest of our team who are seated in the front of the room. In alphabetical order, they are Girish Bhakoo, Jerry Feng, John Harris, Jake Hennemuth, Arman Kline, Trevor Magyar, Will Pan, Terence Paré, Rory Priday, Chase Sheridan — Stephan van der Mersch is traveling and cannot be with us today but hopefully we will see him next year. I would also like to introduce Jon Gross, who is our director of client services, and in the front row are four of the five outside directors of Sequoia: Roger Lowenstein, Bill Neuhauser, Sharon Osberg, and Bob Swiggett. We are going to follow the same format that we have in the last few years, which means that we are going to respond to your questions from now until 12:30. We have to vacate the room by one o'clock, but we will be around between 12:30 and 1:00 to meet you and respond to any questions you may still have for us. With that we are ready for the first question.


Why do you have so much invested with a pharmaceutical company?

Rory Priday:

Just to preface, when we first bought Valeant, it was a smaller position; it was probably a 6% to 7% position. The fund has grown quite a bit since then, but the stock has more than doubled. That is the reason it's closer to a 10% position in Sequoia and maybe 15% in some of the private accounts. More money has come into Sequoia than into the separate accounts. It’s outsized to some degree just because the stock has gone up a lot.

The reason that we still like Valeant is the reason we liked it in the first place. It is a pharmaceutical company that does not really function like a traditional pharmaceutical company. By that I mean most pharma companies, if you look at how much they spend on research and development might spend 10%, 15% or in the high teens as a percentage of sales on research and development. Last year Valeant did about $2.3 billion in sales and it spent

$66 million on R&D, which is about 3% of sales. So instead of spending money on R&D, it spends money acquiring whole companies and/or products and other assets. And what it does is restructure those assets. So we think of it as a value investor in other companies or in the assets of other companies which are available for purchase.

The reason that Valeant can do that is that it has a good team at the top led by Mike Pearson, who has been an extraordinary and very aggressive manager. The types of returns that Valeant can generate by acquiring another company and cutting costs can be in the 15% to 20% range. Just to give you an idea of that, when Valeant merged with Biovail, Biovail was doing a billion dollars in sales, and management cut out — the year-end synergy target this year is $300 million to $350 million. Valeant is eliminating costs that represent 35% of sales. Because of the company’s tax structure, it pays taxes at very low rates. So a lot of that $350 million is going to flow through to the bottom line. You can generate huge returns if you do those kinds of deals. Last year Valeant acquired Ortho Dermatologics, Dermik, Sanitas, PharmaSwiss and a few other companies. In aggregate, these companies added another billion dollars in sales and the synergy target is $250 million. Again, a lot of that is going to fall through to the bottom line. So Valeant is generating really high returns by acquiring other businesses in the pharmaceutical industry.

One of the most attractive things about the company is that it is going to generate $1.3 billion in cash earnings this year and there are not many companies that can retain that amount of money and reinvest it at a rate of return of 15% to 20%, and we could potentially see Valeant doing that for a number of years. You can get a huge amount of growth if you can reinvest that amount of earnings at those rates of return. That is the main reason that we are excited about it.


I'm concerned about the banking system and the fact that the banks are going through a crisis now. I think banks have to take risks one way or another. But the government wants to intervene. Now we have this thing that is going on with JP Morgan. It lost $3 billion, which is nothing because it is such a rich company. So what is the future of the banking system in this country?

Link to entire transcript: http://www.sequoiafund.com/Reports/Transcript12.htm

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