Valeant Pharmaceuticals (VRX.TO)

This is a company that is not creating anything or coming up with new products. All it does is buy bigger companies in the healthcare space, pulls out all the R&D so it dries up margins, and puts it through their sales force.

Chart shows it peaking in February and then descending to below its 200 day moving average. Chart also shows a high followed by a lower high. Not a good place to enter and if you own, consider reducing.

This has been beating the group for some time. Has done very well, but has been underperforming recently, and has just broken down out of a pretty significant price pattern. He would be very careful on this. It is sitting on the 200 day moving average, and if it breaks down through this, it could get hit pretty hard.

(A Top Pick Oct 9/13. Up 23.04%.) Basically a tax arbitrage opportunity. Acquired Biovale, which had a very efficient tax structure, and allowed them to have an edge when making acquisitions. US government is looking at this type of tax advantage indicating that it might be over by the end of this year. Extremely cash flow positive. Their ability to acquire companies that don’t need a lot of care is extremely good. Thinks there are still lots of growth opportunities ahead.

Their acquisition looks like it will go hostile. VRX is executing a strategy that is working – accretive acquisitions, but eventually it will hit a wall and won’t be able to find any more. The formula is working, however. Thinks this deal gets done. Their debt level scares him and if there earnings slip on any quarter, he would go for the exits.

Trying to acquire Allergan, and have raised their price. He thinks they are going to get the company.

A lot of people are concerned that this is an acquisition machine and they need the acquisitions to continue to grow. He has a little exposure. This is a hard one because it is a different model. Why spend time and money in research and development, instead just Buy your way in. This works on a deal by deal basis but the question is, how does is play out longer-term. If they reach the point where they stop doing M&A, what is the organic growth capability?

Trying to acquire Allergan (AGN-N). This is a fantastic company. When it comes to pharmaceuticals, he feels they are doing everything correctly. They are buying companies that are not under any kind of FDA approval. He has an issue the way this has been done, where someone goes in and buys options in the company and then goes to another company to get them to buy it.

This is not his kind of thing. History shows that over time, mergers and acquisitions is a very dangerous business. A very large percentage of mergers fail. There are problems with culture, clashes and integration of products, people and plants. This company has grown solely through acquisitions. A very expensive stock.

Finance acquisitions via debt. If rates start to go higher it does not take much for their expenses to go up and profits to go down. A difficult name to hold.

Stock is undergoing correction here, not because of any specific situation, but is just responding to what is happening in the US, where that whole group has been under tremendous pressure. Management is talking about doubling the company and becoming one of the largest companies in North America and are still looking at mergers. Thinks there is a lot of growth ahead.

He would stay away from this. Growth by acquisition story and these kinds of stories typically end up bad. There is a very high component multiple to it. It has been riding a biotech pharma play in Canada and this has been a favourite conduit to many managers. Nosebleed levels in terms of valuation.

Acquiring like crazy. It could be an execution risk and so the stock will be volatile. Holding depends on your risk tolerance.

Growth by acquisition. Before their acquisition of Bausch & Lomb, they had made 40 acquisitions in the previous 2 years, 400 different products, none of which was over 10% of revenue. Sold his holdings at $118 thinking he was a genius, and yet here it is at $152. He could never buy it at this price but would buy it on a pull back.

They make acquisitions nonstop and continue to dilute shareholders to make these acquisitions. When the dance is over, Watch Out. Hasn’t checked the balance sheet lately so doesn’t know what they are using to fund their acquisitions.