Author Topic: Valeant Pharmaceuticals & the Canadian Index  (Read 3757 times)

RichMoose

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Valeant Pharmaceuticals & the Canadian Index
« on: March 30, 2015, 07:42:31 PM »
As a Canadian, a decent portion of my total portfolio is invested in Canadian Index. Normally dominated by banks, railroads, integrated oil companies, pipelines, insurance cos, and telecoms I've been quite comfortable, but now there is a holding that's become the Canadian stock market darling: Valeant Pharmaceuticals (VRX) and maybe the start of another Nortel story. This company makes up 5.13% of the Vanguard FTSE Canada Index and quite frankly it's a stock that I would never invest in (if index funds did not exist). It's ridiculously overpriced, overhyped and the fundamentals are plain horrible. Currently VRX trades for $256/share on the TSX for a total market cap of $86.49B. Essentially VRX is a company that acquires patents and other companies and is almost a type of pharmaceutical holding co.

First let's look at earnings: Last year it earned $2.67/share so I'm paying almost 100x last years earnings. To make matters worse, it lost money in 2013 and 2012, a combined total of $-3.08/share over those two years. In 2011 it earned a piddly $0.49/share. It lost money again in 2010.

Next let's look at assets: Shareholder Equity currently sits at $5.31B. As far as assets goes, there is $9.34B in Goodwill alone. Intangible assets (patents etc.) sits at $11.25B. Then toss in the $15.23B in long term debt (up from $4B in 2010). This company buys overpriced assets by issuing debt and more common shares, constantly diluting whatever equity there is.

Have any other Canucks noticed this growing problem?

hodedofome

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #1 on: March 30, 2015, 09:00:43 PM »
This is the problem with market cap index investing. If you can get an equal weight index for cheap, go for it.

DavidAnnArbor

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #2 on: March 30, 2015, 09:35:08 PM »
Would investing in a Canadian small/mid cap index solve part of this problem ?

691175002

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #3 on: March 31, 2015, 08:48:34 AM »
Valeant is expensive, but the complexity of the business makes looking at unadjusted net earnings misleading.  As you pointed out, they have huge amounts of intangible assets which get expensed due to amortization.

If you look at cashflow or adjusted earnings things are less insane.  The company has been profitable for the past decade and the 2014 CFO/Adjusted NI is roughly $10.00/share.

phillyvalue

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #4 on: March 31, 2015, 08:56:22 AM »
Valeant is a great business trading at a price that reflects this. As the guy above pointed out, the complexity of the business and the acquisitions they've made means that looking backwards at past earnings doesn't tell you anything about the forward economics. It's not personally a stock I own, but I would not at all be concerned about having a small amount of my holdings in it as part of a broad index. Sequoia Fund thought highly enough of VRX to have 1/4 of the portfolio in it as of the end of the last year, and Ackman/Pershing just bought a large stake. I don't necessarily advocate cloning other people's portfolios but when those guys think highly enough of a company to own it, it does mean something.

PharmaStache

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #5 on: March 31, 2015, 01:44:06 PM »
I'm a canadian pharmacist and I've often thought the same thing. They barely have any drugs that aren't off patent- how are they making any money!  I barely ever dispense any valeant products.  Haven't heard anything about them coming out with anything new either. 

Retire-Canada

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #6 on: March 31, 2015, 05:04:05 PM »
I look at it like this:

- I'm 33% invested in CDN stocks
- Valeant is 4.2% of VCN
- so my exposure is ~ 1.4% of my portfolio [actually closer to 1% since I'm not invested in strictly VCN]
- my risk is reasonably low

I don't have the ability to effectively evaluate the company so I have to diversify over many companies.

-- Vik

innerscorecard

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #7 on: March 31, 2015, 08:45:27 PM »
If you invest in market-cap weighted index funds, you are investing on the premise that the efficient market hypothesis is correct. Thus, by this reasoning, the market knows more than you about the valuation of Valeant and you shouldn't worry about it.

scottish

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #8 on: March 31, 2015, 08:49:55 PM »
I don't think there's enough hype for Valeant to make it another Nortel.   I noticed iShares has a capped TSX composite index fund that would isolate you from another Nortel debacle, if this helps.

RichMoose

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #9 on: March 31, 2015, 11:08:18 PM »
Thankfully my Canadian exposure is in ZCN, a capped composite ETF. But VRX still makes about 4%.

@Pharmastache, that's quite interesting. Their big thing seems to be the Bausch&Lamb acquisition which is why they post some info on earnings adjusted for acquisitions. Still not very comforting because often acquisitions, especially stock-based, arent as successful as they are presented to be.

Also, I don't believe in EMH. I index invest because I don't believe I'm smarter than John Bogle and I'm a bit lazy in this regard. Don't forget, the market valued anything with a .com in its name for ridiculous sums in 1999, that's not very efficient in my books.

Thanks for the discussion, always brings out interesting thoughts.


MMMdude

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #10 on: November 01, 2015, 08:14:23 AM »
Well it sure makes up less of the index as of this date! I'm in the same boat with heavy on canadian index funds.  This thing stinks to high heaven i find the comment from the pharmacist in this thread very interesting.  Seems like one of their big drugs is jublia that has an 18% success rate to treat toenail fungus. They are charging insurance companies nearly $8000 per tube!

forummm

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #11 on: November 01, 2015, 05:07:25 PM »
Don't have so much home biased. Be more globally diversified and you'll decrease your exposure to any one Canadian stock. I think there are CAD denominated international index funds. Plus, Valeant should have been part of the index when it was much cheaper too, so you made money on the way up just as you are losing it on the way down. It evens out.

Retire-Canada

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #12 on: November 01, 2015, 05:27:21 PM »
Don't have so much home biased. Be more globally diversified and you'll decrease your exposure to any one Canadian stock.

Yes. Definitely. Canada is a great country, but it is small fry in the global economy.

VUN, VDU, VEE and VXC are all CDN denominated Vanguard International ETFs.

MMMdude

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #13 on: November 01, 2015, 06:14:25 PM »
Don't have so much home biased. Be more globally diversified and you'll decrease your exposure to any one Canadian stock.

Yes. Definitely. Canada is a great country, but it is small fry in the global economy.

VUN, VDU, VEE and VXC are all CDN denominated Vanguard International ETFs.

I've started buying VXC in the past year and now makes up about 10% of my portfolio. I'm 35% bonds then the rest Canada unfortunately but wanting to get into US/Foreign more.

Just seems like everything is bound to go down.  Bond rates rise, bonds will go down.  Oil/commodities will be in doldrums for years which will continue to constrain the TSX.  US markets are at all time highs.  Uggghh

Retire-Canada

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Re: Valeant Pharmaceuticals & the Canadian Index
« Reply #14 on: November 02, 2015, 07:31:06 AM »

I've started buying VXC in the past year and now makes up about 10% of my portfolio. I'm 35% bonds then the rest Canada unfortunately but wanting to get into US/Foreign more.

Just seems like everything is bound to go down.  Bond rates rise, bonds will go down.  Oil/commodities will be in doldrums for years which will continue to constrain the TSX.  US markets are at all time highs.  Uggghh

Quote
FACT: Since 1928, on average the S&P 500 index has hit a new high every 18 days.

I borrowed the quote above from another thread. It illustrates the point that waiting for markets to go down is typically a losing proposition. Pick an asset allocation and believe in it. Then follow it.

People have been predicting the demise of bonds for years and been wrong. But if you believe they are only headed down and want less bonds in your AA then now is a good time to sell and move to non-CDN stocks.

If you wait you may well end up buying US/Int'l investments at a new even higher all time high. Ultimately if markets didn't relentlessly go up we wouldn't give them our money in the first place.
« Last Edit: November 02, 2015, 09:18:06 AM by Vikb »