Valeant Pharmaceuticals Business Office Xii: The Rolling Solvency Calculation
I am brusk Various parts of the Valeant working capital alphabetic quality construction too long a few K seat contracts.
This is a bet that is levered to terrible outcomes at Valeant. It is non quite a bet on insolvency - but it is a bet on fiscal stress.
It is a real non-consensus bet. Valeant is considered extremely profitable. Bill Ackman gave a presentation that explained but how profitable Valeant is compared to average pharmaceutical companies too the numbers are breathtaking.
If Bill Ackman's assertion is right (and it may be) too hence my bet is guaranteed to lose money.
--
That said the enormous profitability of Valeant is not evident inwards the audited accounts.
Valeant's audited accounts exhibit large an increasing cumulative losses.
The divergence betwixt the GAAP earnings too Valeant's cash earnings estimates are large restructuring too other charges which Valeant administration assert are one-off results of acquisitions.
The declaration is that if the acquisitions halt these one-off expenses volition also halt too hence the GAAP earnings volition ascension to converge amongst the so-called "cash EPS".
--
The occupation amongst this declaration is that the one-off costs which are to a greater extent than than 100 per centum of profits are non audited inwards that no auditor asserts that they are genuinely "one off".
You receive got to accept management's discussion for it.
Some of these costs I receive got managed to verify are genuinely 1 off. In 1 instance I receive got verified the reverse, yet that 1 instance was trivially small.
So you lot are really left amongst management's word.
At the halt Valeant is a "trust me" story. The sole enquiry is practise you lot trust administration too inwards item their gauge of non-recurring costs. If you lot practise you lot run across a good run society at 10 times earnings.
If you lot don't trust administration too hence alas the society becomes very hard to value because in that place is clearly or hence truth inwards the administration assertion of "one-off costs" too the truthful underlying earnings are somewhere betwixt GAAP EPS too management's "cash EPS". Alas that is an enormous gap.
If eighty per centum of the one-off costs are genuinely one-off my brusk is also a bad idea. Valeant would non live on trading at 10 fourth dimension truthful earnings - but it would non live on expensive.
For my brusk to live on right I involve a substantial proportion of the one-off costs to really live on recurring.
Genuinely this is an assessment I can't make.
--
Still against GAAP cash flows Valeant looks insolvent. GAAP cash period of time from operations over the past times iv quarters sums $1.3 billion too internet debt is nigh $16.8 billion. There is also or hence compulsory working capital alphabetic quality expenditures which involve to live on funded out of cash from operations.
Consider this against personal finances: someone amongst debt to a greater extent than than 10 times their cash period of time is non patently refinanceable. H5N1 society is to a greater extent than refinanceable than the somebody because a somebody needs to agree a fair fleck dorsum but to eat. The society tin dedicate most of its cash period of time to servicing debt. But this is edge-of-refinanceable whatever you lot desire to count.
On the pure GAAP numbers this society looks specially hard especially every bit much of their debt needs to live on refinanced starting inwards 2017.
Linked here is a Google Spreadsheet amongst the quarterly numbers for Valeant (and legacy Biovail) going dorsum to the March quarter of 2007. The raw numbers come upwardly from CapitalIQ. The starting fourth dimension 3 pages of the spreadsheet are my calculations from the raw numbers. [You tin reconstruct the information if you lot wish.]
In this tabular array - from 2011 only - I receive got listed
(a). the GAAP cash from operations,
(b). the marrow of the GAAP cash from ops over the final 4 quarters
(c). the internet debt at the halt of the quarter
(d). the internet debt averaged over the final iv quarters
too (e) a calculation of the average debt divided past times the cash from operations over the final iv quarters.
The final calculation inwards appropriate for an acquisitive society every bit it accounts for the rising cash period of time given acquisitions.
Note that debt is 12.5 times GAAP cash flow. On the GAAP numbers the society looks extraordinarily difficult.
--
It is fifty-fifty worse when you lot regard the GAAP cash period of time has to fund or hence stay-in-business working capital alphabetic quality expenditures. Valeant is known for cutting working capital alphabetic quality expenditures to a minimum hence this is non a large consideration but hither is or hence other tabular array amongst the GAAP cash flows less working capital alphabetic quality expenditure compared to average debt.
On this mensurate the average debt is right away 15.5 times the available cash flows to service it. There is a discussion for that: stuffed.
In other words if you lot believe the GAAP numbers this society is hence dead it is pushing upwardly daisies.
--
The society yet should non live on dead if what the administration says is correct. The administration receive got continuously asserted that in that place are (literally) billions of dollars of non-recurring costs too that when in that place are no to a greater extent than acquisitions the operating cash period of time volition ascension past times billions of dollars.
If that is the illustration too hence the solvency calculations to a higher identify are exclusively moot. All volition live on good for the company.
--
Strangely the solvency mensurate deteriorated sharply lately - rolling average debt is right away 15.5 times trailing twelve calendar month available cash period of time - too that is despite it being more than a year since the mega-acquisition of Baush + Lomb closed. The society has done many modest deals since - but the plausibility of one-off costs associated amongst former mega-acquisitions is declining.
--
If you lot believe administration vis the one-off costs incurred past times Valeant too hence the solvency mensurate to a higher identify - average debt to trailing cash flows - is going to amend dramatically over time.
My plan: to proceed updating this post until either (a) the cash flows amend every bit administration guides or (b) the society loses all credibility too perchance dies.
The whole procedure could accept years. I am patient. I promise my clients are too. And every bit e'er I could live on exclusively wrong.
This is a bet that is levered to terrible outcomes at Valeant. It is non quite a bet on insolvency - but it is a bet on fiscal stress.
It is a real non-consensus bet. Valeant is considered extremely profitable. Bill Ackman gave a presentation that explained but how profitable Valeant is compared to average pharmaceutical companies too the numbers are breathtaking.
If Bill Ackman's assertion is right (and it may be) too hence my bet is guaranteed to lose money.
--
That said the enormous profitability of Valeant is not evident inwards the audited accounts.
Valeant's audited accounts exhibit large an increasing cumulative losses.
The divergence betwixt the GAAP earnings too Valeant's cash earnings estimates are large restructuring too other charges which Valeant administration assert are one-off results of acquisitions.
The declaration is that if the acquisitions halt these one-off expenses volition also halt too hence the GAAP earnings volition ascension to converge amongst the so-called "cash EPS".
--
The occupation amongst this declaration is that the one-off costs which are to a greater extent than than 100 per centum of profits are non audited inwards that no auditor asserts that they are genuinely "one off".
You receive got to accept management's discussion for it.
Some of these costs I receive got managed to verify are genuinely 1 off. In 1 instance I receive got verified the reverse, yet that 1 instance was trivially small.
So you lot are really left amongst management's word.
At the halt Valeant is a "trust me" story. The sole enquiry is practise you lot trust administration too inwards item their gauge of non-recurring costs. If you lot practise you lot run across a good run society at 10 times earnings.
If you lot don't trust administration too hence alas the society becomes very hard to value because in that place is clearly or hence truth inwards the administration assertion of "one-off costs" too the truthful underlying earnings are somewhere betwixt GAAP EPS too management's "cash EPS". Alas that is an enormous gap.
If eighty per centum of the one-off costs are genuinely one-off my brusk is also a bad idea. Valeant would non live on trading at 10 fourth dimension truthful earnings - but it would non live on expensive.
For my brusk to live on right I involve a substantial proportion of the one-off costs to really live on recurring.
Genuinely this is an assessment I can't make.
--
Still against GAAP cash flows Valeant looks insolvent. GAAP cash period of time from operations over the past times iv quarters sums $1.3 billion too internet debt is nigh $16.8 billion. There is also or hence compulsory working capital alphabetic quality expenditures which involve to live on funded out of cash from operations.
Consider this against personal finances: someone amongst debt to a greater extent than than 10 times their cash period of time is non patently refinanceable. H5N1 society is to a greater extent than refinanceable than the somebody because a somebody needs to agree a fair fleck dorsum but to eat. The society tin dedicate most of its cash period of time to servicing debt. But this is edge-of-refinanceable whatever you lot desire to count.
On the pure GAAP numbers this society looks specially hard especially every bit much of their debt needs to live on refinanced starting inwards 2017.
Linked here is a Google Spreadsheet amongst the quarterly numbers for Valeant (and legacy Biovail) going dorsum to the March quarter of 2007. The raw numbers come upwardly from CapitalIQ. The starting fourth dimension 3 pages of the spreadsheet are my calculations from the raw numbers. [You tin reconstruct the information if you lot wish.]
In this tabular array - from 2011 only - I receive got listed
(a). the GAAP cash from operations,
(b). the marrow of the GAAP cash from ops over the final 4 quarters
(c). the internet debt at the halt of the quarter
(d). the internet debt averaged over the final iv quarters
too (e) a calculation of the average debt divided past times the cash from operations over the final iv quarters.
The final calculation inwards appropriate for an acquisitive society every bit it accounts for the rising cash period of time given acquisitions.
| For the Fiscal Period Ending | Cash from ops | Cash from ops - trailing iv quarters | net debt | net debt - averaged final 4 Qs | Average annual debt/cash from ops |
| 3 months | |||||
| 3 months Q1 Mar-31-2011 | 86.3 | 304.8 | 4,310.3 | 2,569.7 | 8.4 |
| Restated 3 months Q2 Jun-30-2011 | 190.7 | 386.5 | 4,304.9 | 3,611.9 | 9.3 |
| 3 months Q3 Sep-30-2011 | 173.7 | 449.3 | 4,969.4 | 4,194.9 | 9.3 |
| 3 months Q4 Dec-31-2011 | 189.8 | 640.5 | 6,480.6 | 5,016.3 | 7.8 |
| 3 months Q1 Mar-31-2012 | 167.2 | 721.4 | 6,671.9 | 5,606.7 | 7.8 |
| 3 months Q2 Jun-30-2012 | 254.6 | 785.3 | 7,161.3 | 6,320.8 | 8.0 |
| 3 months Q3 Sep-30-2012 | 166.8 | 778.4 | 7,382.2 | 6,924.0 | 8.9 |
| 3 months Q4 Dec-31-2012 | 67.9 | 656.6 | 10,110.1 | 7,831.4 | 11.9 |
| Restated 3 months Q1 Mar-31-2013 | 255.3 | 744.6 | 10,203.4 | 8,714.2 | 11.7 |
| Restated 3 months Q2 Jun-30-2013 | 305.1 | 795.1 | 8,254.7 | 8,987.6 | 11.3 |
| 3 months Q3 Sep-30-2013 | 201.7 | 830.0 | 16,808.4 | 11,344.1 | 13.7 |
| 3 months Q4 Dec-31-2013 | 279.9 | 1,042.0 | 16,779.4 | 13,011.5 | 12.5 |
| 3 months Q1 Mar-31-2014 | 484.3 | 1,271.0 | 16,787.4 | 14,657.5 | 11.5 |
| 3 months Q2 Jun-30-2014 | 376.0 | 1,341.9 | 16,763.1 | 16,784.6 | 12.5 |
Note that debt is 12.5 times GAAP cash flow. On the GAAP numbers the society looks extraordinarily difficult.
--
It is fifty-fifty worse when you lot regard the GAAP cash period of time has to fund or hence stay-in-business working capital alphabetic quality expenditures. Valeant is known for cutting working capital alphabetic quality expenditures to a minimum hence this is non a large consideration but hither is or hence other tabular array amongst the GAAP cash flows less working capital alphabetic quality expenditure compared to average debt.
| For the Fiscal Period Ending | Capital expenditure | Free cash (ie cash from ops less capex) | Free cash, trailing twelve months | net debt - averaged over final 4Qs | Average internet debt/cash from ops |
| 3 months | |||||
| 3 months Q1 Mar-31-2011 | (21.5) | 64.8 | 270.1 | 2,569.7 | 9.5 |
| Restated 3 months Q2 Jun-30-2011 | (12.5) | 178.2 | 342.2 | 3,611.9 | 10.6 |
| 3 months Q3 Sep-30-2011 | (9.6) | 164.1 | 396.4 | 4,194.9 | 10.6 |
| 3 months Q4 Dec-31-2011 | (15.0) | 174.8 | 581.9 | 5,016.3 | 8.6 |
| 3 months Q1 Mar-31-2012 | (11.1) | 156.1 | 673.2 | 5,606.7 | 8.3 |
| 3 months Q2 Jun-30-2012 | (13.6) | 241.0 | 736.0 | 6,320.8 | 8.6 |
| 3 months Q3 Sep-30-2012 | (57.1) | 109.7 | 681.6 | 6,924.0 | 10.2 |
| 3 months Q4 Dec-31-2012 | (25.9) | 42.0 | 548.9 | 7,831.4 | 14.3 |
| Restated 3 months Q1 Mar-31-2013 | (14.0) | 241.3 | 634.0 | 8,714.2 | 13.7 |
| Restated 3 months Q2 Jun-30-2013 | (12.8) | 292.3 | 685.3 | 8,987.6 | 13.1 |
| 3 months Q3 Sep-30-2013 | (24.9) | 176.8 | 752.4 | 11,344.1 | 15.1 |
| 3 months Q4 Dec-31-2013 | (63.6) | 216.3 | 926.7 | 13,011.5 | 14.0 |
| 3 months Q1 Mar-31-2014 | (58.1) | 426.2 | 1,111.6 | 14,657.5 | 13.2 |
| 3 months Q2 Jun-30-2014 | (113.5) | 262.5 | 1,081.8 | 16,784.6 | 15.5 |
On this mensurate the average debt is right away 15.5 times the available cash flows to service it. There is a discussion for that: stuffed.
In other words if you lot believe the GAAP numbers this society is hence dead it is pushing upwardly daisies.
--
The society yet should non live on dead if what the administration says is correct. The administration receive got continuously asserted that in that place are (literally) billions of dollars of non-recurring costs too that when in that place are no to a greater extent than acquisitions the operating cash period of time volition ascension past times billions of dollars.
If that is the illustration too hence the solvency calculations to a higher identify are exclusively moot. All volition live on good for the company.
--
Strangely the solvency mensurate deteriorated sharply lately - rolling average debt is right away 15.5 times trailing twelve calendar month available cash period of time - too that is despite it being more than a year since the mega-acquisition of Baush + Lomb closed. The society has done many modest deals since - but the plausibility of one-off costs associated amongst former mega-acquisitions is declining.
--
If you lot believe administration vis the one-off costs incurred past times Valeant too hence the solvency mensurate to a higher identify - average debt to trailing cash flows - is going to amend dramatically over time.
My plan: to proceed updating this post until either (a) the cash flows amend every bit administration guides or (b) the society loses all credibility too perchance dies.
The whole procedure could accept years. I am patient. I promise my clients are too. And every bit e'er I could live on exclusively wrong.
John
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