VALEANT:DAMAGEDGOODSORDEEPLYDISCOUNTEDDRUGCOMPANY?

AswathDamodaran

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Valeant:ThePriceHistory

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Valeant:Myfirsttry(November2015)

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Valeant:ASecondTry(inApril2016)

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Valeant:Backagain(inNovember2016)

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TheNewNumbers(inMarch2017)

201610K 201510K %Change

Revenues $9,674.00 $10,442.00 -7.35%

OperatingincomeorEBIT $3,105.46 $4,550.38 -31.75%

Interestexpense $1,836.00 $1,563.00 17.47%

Bookvalueofequity $3,258.00 $6,029.00 -45.96%

Bookvalueofdebt $29,852.00 $31,104.00 -4.03%

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Ackman’sExit:EffectsonInvestment

¨ BillAckman,longthecompany'sbiggestinvestorandcheerleaderandformuchofthelasttwoyears,apowerfulboardmember,hasadmitteddefeat,sellingthesharesthatPershingSquare(hisinvestmentvehicle)hasheldinValeantforabout$11pershare,representingastaggeringlossofalmost90%onhisinvestment.

¨ Asaninvestor,Ihavetomakemyownjudgmentsonwhetherastockfitsinmyportfolioandfollowingothers(nomatterhowmuchregardIhaveforthem)isme-too-ism,destinedforfailure.

¨ ItispossiblethatAckman'spresenceinthecompanyandthepotentialvetopowerthathemighthavebeenexercisingoverbigdecisionsmayhavebecomemoreofanimpedimentthanahelpasthecompanytriestountangleitselffromitspast.

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ThreePathsforward

1. GoingConcern:Byassumingthatrevenueswouldcontinuetodrop2%ayearandmarginswillstaydepressedat2016levelsforthenext5yearsandthatrevenuegrowthwillstayanemic(3%ayear)afterthat,withamoderateimprovementinmargins,thevaluepersharethatIgetis$13.68.

2. AcquisitionTarget:IamafraidthattheValeanttaintsostronganditsstructuresoopaqueandcomplexthatveryfewacquirerswillwanttobuytheentirecompany.Iseelittlechanceofthisbailingmeout.

3. Sumoftheliquidatedparts:NowthatAckmanisnolongeratthecompany,isforValeanttoopenitsbookstopotentialacquirersandsellitsassetsindividuallytothebestpossiblebuyers.Notethatthisliquidationvaluewillhavetoexceed$29billion,theoutstandingdebt,forequityinvestorstogenerateanyremainingcash.

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MyValeantDecision

¨ Thetest: Icannotreversetheconsequencesofmyoriginalsin(ofbuyingValeantat$32)inApril2017andthesecondarysin(ofdoublingdown,whenValeantwastradingat$14)bysellingnow.Thequestionthenbecomesasimpleone.WouldIbuyValeantattoday'sprice?Iftheanswerisyes,Ishouldholdandiftheanswerisno,Ishouldfold.

¨ Thedecision:Attoday’sprice,Iwillholdbecausethevalueishigherthantheprice(thoughmuchlowerthanmyaveragecostpershare).

¨ Selfdelusion? IamawarethatImightbejustrationalizingaverycommoninvestmentmistake:theunwillingnesstoselllosers.Ihopenot,butyouarealwaysthelastpersontoseeyourownblindspots!