market folly

We're posting up notes from the Invest For Kids Chicago conference 2015.  Next up is James Flynn of Deerfield Management who talked about Horizon Pharma (HZNP) and Valeant Pharma (VRX).


James Flynn's Invest For Kids Chicago Presentation

•    Deerfield is a healthcare firm and biotech across private and public markets.
•    Everyday something new in headlines on distribution of drugs and pricing. All of the pharma stocks he lists are down, in some cases in excess of 50%.
•    Issues to consider – use of specialized forms of distribution to combat managed care barriers pricing, offshoring of drug profits, leverage and sustainability of biz models.
•    Distribution – thinks people are spending too much time on it. Managed care makes it hard for physician to prescribe high priced drugs, while pharma cos want the drug to have easy access. 10-20 years all types of back and forth. It’s an appropriate game for each biz model and nothing nefarious about it.


•    Valeant (VRX) pushes everything to the financial limit and got caught speeding. Thinks it’s more about Valeant vs specialty pharma.
•    Pricing – thinks this is more important. Started in 1993 as a debate, where pharma companies would raise prices 3x inflation. 1993 ultimately led to a decrease in price expansion and drug companies agreed to price with inflation.
•     In 1993 five drugs singled out such as Tenex (15%), Azmacort (15.6%), etc all in the 15% price increase range.
•    Valeant- 85 drugs at 36% price increases, net increased in 24% so contextual this is historic, outrageous and not in industry standard. Also an annual occurrence, happening for many years. Actual price increases in the 100%.
•    This won’t be going away (investigations on these actions).
•    Argument that saved pharma in 93 was that developing drugs was risky and expensive. When in market the drugs cut costs for system.
•    Valeant acquires drugs and spends very little on development or discovery. Argument on their end is weak.
•    Taxes – VRX rate is 5%, by merging with Biovail assumed the Barbados 5% tax status.
•    Tax dollars coming in help the government purchase of those drugs. Increasing costs to the system while decreasing revenue.
•    Will this go away or stay in headlines? Think it's staying.
•    The worst for Valeant. Acquire old tiered products in steep decline and raise prices. Some have no or limited patent life. Products eroding dependent upon price.
•    Margins can only go one way – invests no r&d, very little spend. Forced out of the acquire/raise biz, hard to own.
•    Leverage is a issue - $30B of debt and makes them vulnerable to interest rates.
•    Bull case – VRX pays down debt in 4 years and is trading at 4-5 earnings. Sounds attractive but can think of just as many variable that can make it bankrupt. 


•    Lot of other companies fell – what about those?
•    Likes Horizon Pharma (HZNP). Shares some similarities with VRX. Difference is that targeted products into pharma-physician sales, all growing and some synergies and good growth products. Low leverage/growing product base.
•    Horizon – without heroic price or acquisitions can pay back debt in one year and buy itself back in 5 years. Compelling given business model/products (long patent life/growing).


Check out the rest of the presentations from Invest For Kids Chicago 2015.