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Jonathan Poland
Jonathan Poland
Articles (248)  | Author's Website |

Ackman on Valeant Pharma: The Next Berkshire Hathaway?

May 18, 2015 | About:

Valeant Pharmaceuticals International Inc (VRX) is a specialty pharmaceutical and medical device company that develops, manufactures, and markets a range of generic and branded generic pharmaceuticals, over-the-counter products and medical devices. Under the control of CEO Michael Pearson, Valeant’s aggressive new acquisition strategy has been executed close to perfection.

Valeant just completed its acquisition of Salix Pharmaceuticals on April 1 after a failed attempt to buy Allergan last year. An un-Berkshire-esque bidding war left VRX paying $15 more per share for the company, despite Salix’s Xifaxan gastrointestinal drug, which many analysts believe has blockbuster potential. How much will they overpay next time?

Guru's Are Betting Big On VRX

Bill Ackman (Trades, Portfolio) has 25% of his assets under management in this one stock. Ruane Cunniff (Trades, Portfolio) has 35% of his AUM in Valeant. Glenn Greenberg (Trades, Portfolio) of Brave Warrior Advisors has 36% of his $3.2 billion in AUM in VRX. Jeffrey Ubben of ValueAct Capital has 21% of his $18 billion under management in VRX. Even Joel Greenblatt (Trades, Portfolio), Lou Simpson (Trades, Portfolio), John Paulson (Trades, Portfolio), and George Soros (Trades, Portfolio) have bought shares in the stock.

Only Ackman has the audacity to call VRX the next Berkshire Hathaway (BRK.B). See the presentation here. It’s been hard to bet against Ackman, who’s holdings have risen from $1.9 billion in Q1 2009 to north of $15 billion in Q1 2015.

Yet, when you look at VRX from a financial point of view and see that in the last decade the company reported a net loss 3 times, it’s hard to compare it to a steady cash generator like Berkshire. This doesn’t take anything away from the company’s future - it just calls into question whether an investor should overpay for the stock right now.

Valeant’s management plans to invest the majority of its free cash flow in acquisition - similar to BRK’s - but the concept looks to be very different.

1. Large Acquisitions - Traditional pharma and device makers with bloated cost structures and unproductive R&D spending. I doubt Berkshire thought of its BNSF investment in this light. Typically, good acquisitions are those that do not need much work to integrate into the conglomerate.

2. Small “Bolt-on” Acquisitions - Products that can easily be placed into Valeant’s distribution system, including “declining products neglected by other companies that can return to growth with promotion.” Again, turnarounds are really hard to orchestrate and as Buffett has said, they “seldom turn, and that the same energies and talent are much better employed in a good business purchased at a fair price than in a poor business purchased at a bargain price.”

These two factors alone would call into question the acquisition process, which is overseen by Mike Pearson himself, and who has done a fantastic job at the helm, helping the company grow sales by 10x and net income by 5x since joining in 2008.

That said, VRX is not a baby Berkshire Hathaway. It doesn’t need to be to make investors money. However, at the current price of $224, a price to book of 11, price to earnings of 80, and as Ackman’s own presentation states - a price that is up 45x in 6 years - it’s not one a value investor should look to buy into, yet.

If the company keeps bidding up potential acquisitions, investors will at somepoint be crushed by a poorly executed deal.

About the author:

Jonathan Poland
Thanks for reading! I'm a former money manager and financial publisher who has helped investors produce market beating results for more than 15 years.

Visit Jonathan Poland's Website


Rating: 5.0/5 (1 vote)

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Comments

Jonathan Poland
Jonathan Poland - 2 years ago    Report SPAM

Since posting this article, the stock is down 50%. And I'll be looking to see if it makes sense to buy in soon for investors. As I said, it wasn't time to buy, yet. Hope you listened.

Jonathan Poland
Jonathan Poland - 3 months ago    Report SPAM

Considering this was prophetic two years ago, I think I am well deserved to give it a 5 star vote.

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