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Value investing guru Aswath Damodaran: “I did

read the half million piece (original article) and I

think does a very effective job marshaling a case

against Valeant.”

The Definitive Guide To Valeant

Pharmaceuticals (NYSE:VRX)

Timeline of Significant Events

Pre-2006, VRX was still an unknown

pharmaceutical company with a

waning pharmaceutical portfolio of

Hep C drugs, under threat by big

pharma, e.g. Johnson & Johnson.

Rumours about a possible hostile

takeover float around.

In 2006, Valeant finds a white knight

in Jeffrey Ubben of ValueAct Capital -

the famed activist investor who saved

Martha Stewart’s Omnimedia from

complete collapse when she was

charged with insider trading in 2003.

ValueAct takes a 10.6% stake in

Valeant and hires McKinsey & Co. to

turnaround the company, while

staving off takeover attempts.

True love strikes when they meet

McKinsey’s pharma director Mike

Pearson, who has spent the last 23

years advising pharma companies.

Over the years, Pearson made the

striking observation that despite

being the industry’s main revenue

source, pharma R&D only contributed

a measly ROI of 4.8%. He also noticed

that branded generics had strong

pricing power, despite being off-

patent and subject to an onslaught of

generic competition.

In 2007, VRX brings in Pearson as CEO.

Pearson makes the highly unorthodox

move to eschew a stable, rewarding

career at McKinsey’s to become

captain of a rudderless ship.

Pearson immediately lays out plans to

overhaul the entire company by

retrenching nearly all the R&D staff

over the next few years. By the end of

the exercise, R&D expense would be

less than 3% of revenue. (industry:

20% revenue)

He also starts acquiring rights to off-

patent “branded generics”, such as

Wellbutrin XL from GlaxoSmithKline,

and Acanya from Dow

Pharmaceuticals.

In 2010, Valeant pioneered the

pharma tax-inversion scheme by

merging with Canadian equal Biovail,

who at the time was embattled by

similar business struggles. By merging,

Valeant estimated it could reduce its

taxes by 30% for existing operations,

and as much as 70% for future

operations.

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2 | P a g e

Around this time, Sequoia Capital

starts accumulating Valeant shares.

Sequoia was founded by Bill Ruane, a

close friend of Warren Buffett who

started Sequoia to take on Buffett’s

former investors when the latter

closed his partnerships in 1969. It

would eventually become Valeant’s

largest shareholder.

In 2013, Valeant acquires eyecare and

contact lens giant Bausch & Lomb for

$8.7bn, nearly all of it with debt.

Around this time, renowned activist

investor Bill Ackman of Pershing

Square, whose fund holds a 9.7%

stake in rival pharma company

Allergan, discusses a possible hostile

takeover of Allergan with Pearson.

In 2014, Valeant partners with

Ackman and attempts a controversial

hostile takeover of Allergan. It

ultimately loses the bid to Actavis, but

walks away with $400m for its efforts.

In March 2015, Valeant acquires

another pharma rival Salix, mainly for

its IBS branded generic, Xifaxan. The

acquisition is contentious as Salix had

been battling SEC allegations of

channel stuffing over the past few

years. The move is widely seen as a

replacement for missing out on

Allergan.

Over the years, Valeant’s apparently

successful rollup strategy has

spawned many copycats, including

Turing Pharmaceuticals, Endo

Pharmaceuticals, and Mallinckrodt

Pharmaceuticals.

In Sep 2015, Turing Pharmaceuticals

courted controversy by hiking the

price of its branded generic Daraprim

by 5,000% overnight. Its flamboyant

CEO, Martin Shkreli, adds fuel to the

fire by being extraordinarily

unapologetic. He was later

subpoenaed by the SEC and arrested.

Shkreli’s antics draws unwanted

attention to predatory pricing

practices in the broader pharma

industry, prompting an industry-wide

selloff. Valeant’s share price drops to

$175 from a high of $260 in August.

In Oct 2015, famed short seller

Andrew Left of Citron Research

publishes a scathing report accusing

Valeant of channel stuffing through its

specialty pharmacy Philidor. Despite

holding a lengthy 3-hour investor call,

VRX sinks to $120. It would later be

revealed that the allegations were

unfounded.

However, the leading piece of

evidence used by Citron, an email

written to Valeant by the CEO of

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3 | P a g e

Philidor affiliate R&O Pharmacy,

prompts further investigation by

analysts and journalists.

It was uncovered that Philidor was

actually not a subsidiary of Valeant,

but had been paid $100m by Valeant

for a call option to be acquired; this

had not been disclosed to investors.

In addition, Philidor employees were

found to have used fake names in

their emails, such as Peter Parker,

Jack Reacher and Brian Wilson –

names commonly found in popular

culture.

In Nov 2015, Valeant announces that

it will sever all ties with Philidor, while

accepting a new partnership with

Walgreens. Suspicions of wider

accounting fraud at the parent

company level causes the stock to

crash to $70. Pearson is faced with a

margin call and is forced to sell $100m

of his VRX holdings.

In Dec 2015, Mike Pearson contracts

pneumonia and announces a medical

leave of absence. A three-person

committee is established to

temporarily replace him. At the same

time, Valeant revises its guidance

downwards for 4Q 2015 and FYE 2016

. The stock finds a new equilibrium

around $90.

In early Feb 2015, Valeant announces

that the SEC is investigating it over

allegations that it engaged in

predatory pricing tactics. Andrew Left

covers his short around this time.

In late Feb 2016, Pearson returns

from his leave of absence. The

company announces that it might

have to further revise its previous

guidance for 4Q 2015 and FYE 2016.

The stock plummets to $65 in

response.

In Mar 2016, Valeant reveals the full

extent of its restatements. Owing to

the disposal of Philidor, $58m of

revenue or about 5.9% of total

revenue would have to be cut. In

addition, previously announced

guidance for 4Q 2015 and FYE 2016

was revised downwards even further.

Valeant also announced that it faces a

technical default on its bonds for

missing a filing deadline for its 10-K.

The stock nosedives to $33 overnight.

The following week, Valeant releases

an 8-K – announcing that Pearson

would be stepping down as CEO,

Ackman would become Chairman,

and which places the blame for

Philidor squarely on former CFO and

current board member Howard

Schiller. Howard vehemently denies

the allegations and refuses the

board’s request to step down.

In Apr 2016, Valeant announces that

its Ad Hoc Committee had completed

investigations into Philidor and

related accounting matters, and

concluded that no further

restatements were necessary with

respect to such matters.

It also sought an extension for the

filing of its 10-K to late May from its

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4 | P a g e

bondholders. In return, it agreed to

pay bondholders a one-time fee, and

increase interest rates by 1%.

The following week, the company

announced that it had received a

Notice of Default from different

bondholders of a $1bn tranche of

2023 bonds. The Notice of Default

sets a time limit for the filing of its 10-

K to June 11.

Valeant Business Strategy

Valeant’s operational strategy is the

brainchild of Pearson, hinging on a

simple reproducible concept. It buys

up pharma companies owning rights

to branded generic drugs, surgically

removes the low-return R&D division,

and periodically jacks up the prices of

its newly acquired drug portfolio.

The reason it can do that and get

away with it is multi-faceted, and will

be explored in greater detail later.

Firstly, ”branded generic” drugs have

durable pricing power, as patients

tend to prefer them despite having

access to cheaper competitor

substitutes.

Secondly, Valeant eschews the

traditional route of selling through

doctors, and instead sells directly to

customers through specialty

pharmacies. By sending discount

coupons directly to patients via mail-

order, specialty pharmacies bypass

the helpful doctor’s consultation and

encourages patients to place their

trust behind a well-known brand.

Thirdly, the company doesn’t collect

payments from its patients; it charges

the patient’s insurance provider

directly through the coupons instead.

This hides the true extent of its

exploitative price-raising from public

knowledge, and allows the company

to strong-arm insurance providers

away from the keen eye of regulators.

Valeant’s Tax Inversion Scheme

Valeant also pioneered the pharma

tax-inversion scheme, where the U.S.

company merges with an overseas

entity to avoid high U.S. taxes. It did

this with Biovail in 2010, and has since

spurred many competitors to emulate

this strategy – with the recent merger

failure between Allergan and Pfizer

being the latest high-profile attempt.

Valeant does this by transferring the

rights to its target drug portfolio to

the overseas entity. To prove an arm’s

length transaction and avoid charges

of tax evasion, it compensates the

U.S. entity with royalty payments

equal to the profits it used to make

before the transfer.

This allows all future profits made in

excess of the royalty payments to be

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5 | P a g e

taxed at the much lower overseas tax

rate. As Valeant inflates its prices so

frequently, the spread quickly

becomes wide enough to result in

huge tax savings.

Further to the Bausch & Lomb

acquisition, Valeant devised a new

tax-saving initiative. It moved all

manufacturing operations to the

overseas location, which then sells

the drugs to the U.S. entity. This

relegates the U.S. entity to the role of

a distributor, rather than the head of

the value chain - significantly

narrowing the spread of profits which

are ultimately subject to the U.S. tax

code.

Valeant’s Capital Structure

Valeant famously avoids issuing

equity as far as possible, preferring

instead to stick to all-debt deals to

effect its acquisitions.

As a result, the debt on its balance

sheet has ballooned to $30bn, and its

D/E ratio is a staggering 4.87x. Debt

covenants limit the company to a

maximum D/E of 5.25.

However, this leverage has had a

profound effect on owner’s earnings,

as noted by the skyrocketing share

price in recent years.

In addition, it has the effect of further

reducing taxable profits, which are

frequently negative despite ample

free cash flow.

Valeant’s “buy-to-grow” strategy has

caused it to be compared to private

equity firms, resulting in hedge funds

piling into its shares. This has

prompted its description as a “hedge

fund hotel” by financial pundits.

Its pinpoint focus on shareholder

return has also earned it praise from

many renowned investors, such as

Outsider’s author William Thorndike

and Pershing Square fund manager

Bill Ackman. However, its predatory

pricing tactics has also garnered

scorn, most notably from legendary

value investor Charlie Munger.

Valeant has mostly been issuing high-

yield debt (i.e. junk bonds) to fund its

acquisitions, with interest rates in the

4%-6% range.

Valeant’s Pricing Tactics

Valeant has earned an undesirable

reputation for its exploitative price

gouging practices.

For instance, its toe-fungus medicine,

Jublia, sells for $500 for a 4mg bottle.

An NCBI study found that a home

remedy using Vick’s Vapour Rubs

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6 | P a g e

(costing $15 online) had the same

efficacy rate.

Its IBS drug Xifaxan sells for a shocking

$1,500 for a 2 month supply.

Valeant is able to do this because its

branded generic prescriptions have

implicit pricing power. There are

many anecdotal observations which

note the efficacy of established brand

prescriptions over their generic

counterparts.

In Wellbutrin XL’s case, a generic

(Budeprion XL 300) was found to have

released its ingredients 4 times faster

than the brand-name drug. This is

because while the active ingredients

of the generics are bioequivalent,

generics are allowed to use different

inactive ingredients.

This resulted in patients being

administered high doses early in the

morning, with an ensuing crash later

in the day. As a result, patients who

have had bad experiences with

generics tend to stick with the brand-

name drug, despite the higher cost.

Once Valeant acquires a drug, it will

consistently raise its price to

stratospheric levels. It is not

uncommon to see annual 100%-300%

price increases to its prescriptions.

This Harvard study lays out some of

Valeant’s worst offenses, with some

drug prices increasing by as much as

1,000% since acquisition.

Analysts are wary that Valeant’s off-

patent generics might not be able to

keep their high prices if the Valeant

brand is tainted. Contributions from

its top 5 drugs have already started

flatlining over the past few quarters.

Presidential candidates from both

sides of the Congressional divide have

been unanimous in decrying pharma

price gouging, promising “severe

consequences”.

At Valeant’s Q1 2015 earnings call,

Pearson responded to a question

about the contribution of price vs

volume to revenue growth, claiming

that “the majority of growth was from

volume”. Subsequent SEC

investigations revealed an email sent

from the CFO to Pearson stating that

price increases represented 60%-80%

of revenue growth.

In light of Pearson’s commitment to

abstain from future acquisitions, and

the company’s inability to hike prices,

it remains to be seen how Valeant

intends to fuel further growth.

Valeant’s Performance Measurement

As Valeant deliberately tries to reduce

taxable income, management is

justified in their assertion that profits

are not the best measure of

performance.

Management uses a pro-forma

measure called “cash IRR”, which is

basically a cash payback model. (i.e.

20% IRR = 5-6 year payback)

This cash payback approach is

benchmarked against their Deal

Model, which prescribes: i) a 20% ROI

on acquisitions after tax & ii) a 5-6

year target cash payback horizon.

To provide full transparency, the

above criteria factors in transactional

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7 | P a g e

costs of the acquisitions, which can be

hefty (e.g. bank fees, compensation

for layoffs, etc.).

Management frequently brings up

their Deal Model at earnings calls and

analyst presentations, showing how

their acquisitions are performing

against expectations.

Valeant’s management compensation

structure is predicated on shareholder

wealth maximization – employees are

remunerated with restricted shares

based on the performance of the

share price over the past 3 years. The

company has since suggested that this

model may have created incentives

for aggressive practices.

The Philidor Debacle

Philidor was a specialty pharmacy

which operated as a marketing &

distributor arm of Valeant.

Specialty pharmacies have been

around since the 1970’s. They

primarily service patients with unique

drug needs which normal pharmacies

cannot fulfil, such as temperature-

controlled HIV drugs that require

special care during delivery.

A recent development at specialty

pharmacies is mail-order delivery,

which represents half of the industry’s

profits. This model solicits business by

sending coupons directly to the

patient, bypassing the doctor’s visit

where cheaper generics are generally

prescribed first.

A recent trend among specialty

pharmacies such as Philidor have

relegated them to nothing more than

marketing arms of the pharma parent.

Philidor’s existence was first brought

to light by Citron Research’s report,

which inaccurately suggested

Philidor’s role in channel stuffing on

behalf of the parent company.

The allegations carried weight partly

due to its unusual organizational

structure, where it was paid $100m

for an option to be acquired but

remained outside of Valeant. This

allowed Valeant to consolidate its

books but not disclose it as a

subsidiary.

Philidor employees were found to

have used fake names in their emails

with the company.

Eventually, the allegations proved

untrue. However, over time more

details began to surface.

In a lengthy forensic investigation

published by NYMag, it was revealed

that the email used by Citron

Research in its accusations came from

a tiny Californian pharmacy called

R&O Pharmacy.

Isolina, a Philidor subsidiary, first

engaged R&O’s CEO Russell Reitz for

his authority to sign off on

prescriptions. He agreed to sell R&O

to Isolina for $350,000. Isolina never

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disclosed its relationship with either

Philidor/Valeant to Reitz.

Reitz first began to suspect something

was amiss when he realized he was

sending checks to Philidor, rather

than Isolina. His requests for an

explanation was met with silence.

In addition, he was signing

prescriptions in far larger volumes

than Isolina should have been capable

of producing. Its prices were also

exorbitant compared to other

generics.

When routinely audited by a

pharmacy benefit manager, Reitz

discovered that his name &

pharmacist identification no. was

being used to dispense drugs to

patients he had never heard of living

in far-flung locations.

Reitz starts his own investigation, and

uncovers that Isolina had not

complied with a mandatory disclosure

that required it to disclose if more

than 10% of Isolina was owned by a

single shareholder (i.e. Philidor).

Meanwhile, Reitz’s name continues to

appear in more prescriptions.

Terrified of liability, Reitz resorts to a

last-straw attempt to coerce an

explanation. He refuses to send the

mail-order checks to Philidor, keeping

them in a safe deposit box.

He begins to get emails from Philidor

officials demanding payment,

including Philidor CEO Andrew

Davenport. Reitz refuses to comply

and escalates his complaints, until he

is eventually put in touch with Robert

Chai-Onn, chief legal counsel of

Valeant. Reitz finally has proof of

Philidor’s ties with Valeant.

Reitz sues Valeant in Oct 2015, where

Andrew Left discovers his emails,

eventually bringing to light Valeant’s

shady pricing practices. The suit was

eventually settled with Valeant in

March 2016.

Bronte Capital has done a similarly

fascinating amateur private

investigation into the Philidor-Valeant

ties.

AZValue’s Criticism of Valeant’s Accounting

Arguably the most popular criticism of

VRX is the blog post written by

amateur analyst AZValue, titled

Valeant: A Detailed Look Inside a

Dangerous Story. His analysis tears

down the entire cash-printing

machine thesis that Pearson has been

selling to investors, and basically

crucifies the company for misleading

investors.

His 1st blog post draws attention to

VRX’s suspect disclosure practices

over the years, as observed in the

notes to the financial reports.

These offenses include: i) the

consolidation of previously distinct

business segments for no apparent

benefit, ii) a significant gap between

stated performance and realistically

achievable performance, and iii) the

inability to reconcile the pre-

acquisition & post-acquisition figures

of various acquired subsidiaries.

He suggests that VRX has been

stretching the truth by fudging

figures, such as including debt

proceeds under Operational Cash

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9 | P a g e

Flow when measuring performance

under the Deal Model. He even goes

so far as calling the numbers used in

the Deal Model “imaginary”.

AZValue’s 2nd blog post, Valeant: A

Detailed Look Inside a Dangerous

Story Well Told – PART IV: The IRR

Fallacy, demonstrates how

management’s claims of successful

20% IRR for their acquisitions are

impossible to reconcile with actual

figures in their financial statements.

His 2nd blog post was not as

unanimously received as his 1st post,

with critics pointing out that the 20%

IRR should relate only to the

performance of the equity – since

Valeant funds its acquisitions with

mostly debt.

However, supporters have pointed

out that VRX is not a typical isolated

LBO enterprise, and that the recurring

acquisition activity necessitates

accounting for the debt portion of the

acquisition price, rather than just the

equity portion. (i.e. levered FCF vs

unlevered FCF)

They say that VRX should not be

classified as an LBO because it cannot

dispose of its assets to settle the debt

(as in a normal LBO), since it must use

the assets as collateral when taking

on future debt for acquisitions in

order to fuel the target 20% growth.

Since it cannot sell its assets,

management’s use of cash EPS, which

strips out the rather large

depreciation expense of $2.4bn from

FY2015 GAAP EPS, masks real returns

and should not be added back.

They also claim that the Deal Model

wrongly assumes perpetual debt

refinancing and zero bankruptcy risk –

two things which don’t go hand-in-

hand, since its debt load swells with

each new acquisition.

In this case, both sides of the

argument are right under their own

measures. Under the former measure,

VRX can safely meet the 20% IRR

threshold. However, under the latter

measure, IRR is only 3%-4%.

Valeant’s Depreciation Treatment

This article titled The Emperor Is 25%

To 65% Naked: Valeant, Salix, And

Cash EPS goes into great detail about

why management’s use of cash EPS,

which ignores the significant

depreciation charge of $2.4bn, might

mask true owner’s earnings.

Valeant argues that since its brands

will earn money ad infinitum (a la

Coca-Cola or Apple), the annual

depreciation/amortization charge

wrongly penalizes performance as the

brand’s earnings growth remains

unhindered.

However, its pharmaceutical products

are no Coca-Cola. While one could

argue such an appeal for the eyecare

products of Bausch & Lomb, Valeant’s

bestselling drug Xifaxan, for example,

will lose its patent in 2024.

On top of that, Xifaxan’s exclusivity is

protected under ‘orange book

exclusivity status’, which allows

competitors to challenge its

exclusivity with an ANDA filing as soon

as 2017. In fact, Allergan has already

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10 | P a g e

begun appealing to invalidate

Xifaxan’s exclusivity.

Valeant’s debtholders in its

acquisition of Salix (i.e. Xifaxan)

appears to have recognized this

possibility - by mandating a step-up in

interest payments in 2017; and

maturing debt in 2020, which is

shortly after an automatic 30-month

window given to respond to an ANDA

challenge expires.

As a result, ignoring depreciation

completely may be overstating true

cash EPS. The author claims that true

cash EPS after depreciation for

FY2015 should be $5.55-$7.55, in

contrast to management’s guidance

of $11.67-$11.87 at the time. This

guidance was later revised to $10.23-

$10.33 in December.

Valeant’s Accounting Issues

The Southern Investigative Reporting

Foundation found that inventory

numbers reported by Valeant’s

European subsidiaries don’t seem to

add up. This is a legacy of similar

inventory issues at Salix, which was

acquired in 2015.

James Grant of the reputable Grant’s

Interest Rate Observer states that he

is “confidently bearish” of VRX, having

been tipped off to accounting

machinations in the company by

legendary short seller Jim Chanos.

Bloomberg highlights how Valeant

uses aggressive add-back mechanisms

to keep their debt-to-equity ratio

from breaching debt covenants.

Marketwatch demonstrates how

Valeant mocked acquisition

accounting by failing to revise even a

single ‘measurement period

adjustment’ for any of its acquisitions

(which reduces Goodwill).

In 2014, Allergan cited possible

improper accounting as one of the

reasons for its refusal to merge with

Valeant.

In an unprecedented move, two of

Sequoia’s board directors Vinod

Ahooja and Sharon Osberg abruptly

resigned over disagreements about

the Sequoia Fund’s 2nd largest holding

in Valeant, citing business and

accounting concerns. Sharon Osberg

is a close bridge partner of Warren

Buffett.

Valeant has been known to pad

earnings using a variant of ‘big bath

accounting’ to boost Bausch & Lomb’s

post-acquisition profits.

Valeant’s Outlook vs Guidance

Following the scandal, Valeant has

committed to abstain from making

any further acquisitions until it has

paid off its debt.

In an effort to retain employees, it has

also promised not to sell off any core

assets and minimize widespread

layoffs.

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11 | P a g e

So far, Valeant’s price gouging tactics

have flown under the radar of the

insurance companies, as they tend to

focus on more expensive drugs (e.g.

Gilead’s $1,000/day Sovaldi). In light

of the political and PR environment,

insurance companies are expected to

scrutinize Valeant’s pricing to a much

greater degree.

This has raised concerns among

analysts, notably during the Q1

earnings call when Xifaxan sales came

in at $210m; versus projected Q4

sales of $390m and full year sales of

$1bn. As 60%-80% of sales growth is

contributed by price action rather

than volume, it remains to be seen

how Valeant plans to achieve its

forecasts.

Quarterly sales of its top drugs are

tumbling. Top drug Xifaxan’s quarterly

sales have been flat ever since the

scandal broke, while sales of its

second best-selling drug Jublia has

been flat since Q215. Quarterly sales

of its top 5 drugs show similar

patterns.

On top of that, Valeant recently

announced the resignation of its head

of U.S. Dermatology and

Gastrointestinal division, Deb Jorn.

Jorn was responsible for both Xifaxan

and Jublia.

Drugmakers and pharmacies are

increasingly distancing themselves

from Valeant to avoid the fallout from

the scandal. Pharmacy chains CVS &

Express Script have announced that

they plan to suggest cheaper generics

to patients before Valeant’s more

expensive choices.

The “orange book” exclusivity of

Valeant’s bestselling drug Xifaxan

could potentially face an ANDA

challenge from rival pharma company

Allergan. Experts say that the best

case scenario is that Valeant manages

to delay Allergan in court over the

next 3-4 years.

Valeant has already revised its FY16

guidance twice, following

disappointing Q1 earnings. Further

earnings depression in later quarters

may lead to even further revised

guidance.

There are also rumours that the firm

is seeing an employee exodus. With

past R&D spending coming in at only

3% of revenue, it remains to be seen

how the company plans to attract top

talent to stimulate organic growth via

R&D, when its current employees are

already looking for greener pastures.

Valeant’s Debt Repayment Schedule

Valeant has traditionally sought most

of its debt from a consortium of

lenders known as a CDO, rather than

an individual lender. This makes it

complicated to renegotiate debt

terms, as it has to renegotiate with

every single party to the CDO.

This analysis is a summary of research material gathered together over a period of a few months. Readers should treat this document as a map which branches out to different sources of information. Links should be clicked for a more in-depth explanation of each summary point.

12 | P a g e

Valeant has yet to make $6.2bn in

debt principal repayments for FY2015;

it currently only has $1.4bn of cash &

cash equivalents. In early April, it

successfully renegotiated debt

repayments with a $12bn tranche of

bondholders, in exchange for a one-

time fee and a 1% increase in interest

rates.

However, it also received a Notice of

Default from bondholders of a $1bn

tranche of bonds expiring in 2023.

This may serve as a playbook for other

Valeant bondholders to play hardball

in the future.

A slightly outdated debt schedule

from their 3Q15 quarterly report

shows that Valeant has to make a few

large looming principal repayments

over the coming years. Principal

repayments amount to $3.5bn in

2018, $4.7bn in 2020, $4.5bn in 2022

and $4.8bn in 2023.

Since revising their guidance in

March, their 2018 repayments have

increased to $4.3bn to include an

$825m revolving fund, which they had

originally intended to pay back during

their Dec ‘15 analyst call.

In a town hall meeting with

employees, Ackman has suggested

the possibility of an IPO to sell 10%-

20% of Bausch & Lomb. However, this

will only realize $2bn at most, which is

piddling next to its massive debt

obligations.

Most creditholders are assured that

Valeant’s debt is still creditworthy.

However, with projected cumulative

2016-2018 EBITDA coming in at only

$18bn, fulfilling its debt obligations

will have to come at the complete

expense of shareholders. (i.e.

negative FCFE)

It also pays to bear in mind that

Valeant procured most of its debt

(4%-6%) in a Fed-induced zero-rate

environment. As Valeant inevitably

refinances, interest payments are

expected to increase, further

depressing cash EPS.

This analysis was reproduced with

permission from

http://halfmillion.com/valeant