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Sequoia M&A: Valeant Pharmaceuticals Intl Inc (VRX) In Focus

Sequoia M&A: Valeant Pharmaceuticals Intl Inc (VRX) In Focus by Stock Pucker

The thing about Sequoia is 28.5% of its fund is invested in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) (TSE:VRX), which is a recent Bill Ackman and Pershing Square target and former Jeff Ubben and ValueAct Capital target. It’s been a great rags to riches story in pharma, growing with an aggressive M&A strategy. One of the big questions surrounding Valeant is their accounting - more on that here via AZ Value.

Here are the best Valeant questions and answers the conference [the full 23 page transcript is here]

Question: If I could ask about Valeant as well.... Being students of the family of Berkshire, can you discuss your views and perhaps comment on what Mr. Munger insinuated about Valeant recently?

Bob Goldfarb: My guess, when I saw the comments, was that Charlie might have been targeting Valeant’s accounting. If I were going to question the accounting, the principal issue I would have would be with the accounting for the restructuring charges after Valeant makes a large acquisition. The company and the analysts who follow it add back these restructuring charges to derive the company’s cash earnings. What we do is add back the restructuring charges to the purchase price; so that if Valeant buys a company for $9 billion and there are $500 million of after-tax restructuring charges, the company effectively paid $9.5 billion rather than the $9 billion that it announced initially.

If you deduct the restructuring charges associated with significant acquisitions from a given year’s earnings, I do not think that is accurate accounting even though it does conform to GAAP. When we look at a company’s reported earnings in a given year, we are always searching for a sense of what the true earning power of that company is relative to the stock price. If you deduct the large restructuring charges in a given year, you are not going to get an accurate number for the earning power.

Question: In terms of Valeant, it has no R&D, I think. Given that any drugs that it has on patent will eventually go off patent, what is Valeant’s moat?

Rory Priday: Valeant does spend on...