Sequoia Fund Ruane, Cunniff & Goldfarb Investor Day

Bob Goldfarb:

Good morning and welcome to our investor day. We will take questions until 12:30. We have to vacate the room by 1 o’clock, but we will be around between 12:30 and 1:00 to answer any questions you might still have. Before we begin, I would like to introduce our team. On my right are Greg Alexander and Greg Steinmetz. On my left are David Poppe, who is the president of our firm, and Jon Brandt. The rest of our team is seated in the front of the room. In alphabetical order, they are Saatvik Agarwal, Girish Bhakoo, John Harris, Jake Hennemuth, Arman Kline, Trevor Magyar, Will Pan, Terence Paré, Rory Priday, Chase Sheridan, Michael Sloyer, Stephan van der Mersch and Marc Wallach. I would also like to introduce Jon Gross who is our director of client services. In the front row are the directors of Sequoia Fund: Roger Lowenstein, Bill Neuhauser, Sharon Osberg and Bob Swiggett. With that, we are ready for questions.

sequoia fund
sequoia fund

Question:

Thank you for doing such a great job, and thanks for once again closing the fund. As you so correctly noted at last year’s meeting, Valeant has a hard time consummating deals with publicly held companies. Is its growth-by-acquisition business model flawed? Can it reinvest cash at 15% or 20% if it cannot do bigger public company deals at reasonable prices even with the aid of hedge fund managers? And since everything you said about Valeant at last year’s meeting and in the annual report was so correct, would you hazard a guess as to whether the Allergan deal will eventually be consummated?

Bob Goldfarb:

We are not going to hazard a guess on the latter. We are not in the risk arbitrage business.

Rory Priday:

Right now Valeant is zero for two in the public arena in terms of trying to acquire companies when it is hostile. I think that Valeant is going to have a difficult time with Allergan. As Bob said, I do not think that we should make any projections about the outcome. But I do not think that Valeant needs to acquire big public companies to keep growing at decent rates. Mike Pearson, Valeant’s CEO, said earlier this year that there were a lot of privately held companies that management is looking at. Our impression of the market is that there are not many of those companies that have revenues in excess of a billion dollars or so. Usually companies that big go public at some point. So Valeant will probably have a hard go of it at some time in the future. But at this stage, the company can probably still grow at a decent rate by acquiring private companies. But if Mike cannot find companies to acquire, he will probably do something else. Obviously with the Allergan deal, Valeant is being pretty creative at trying to find ways to consummate transactions. That is the one thing that stands out about Valeant — Mike sets very ambitious goals, and he gets criticized for that sometimes. But I do not think he sets them without having a path in mind to get there. I do not want to opine on whether it is right or wrong to set big audacious goals. But he has a path in mind, and he has been pretty creative in the past. Inversions are in the news a lot today, but Mike did one four years ago with Biovail.

Mike and his team are creative enough to do things before other people think of doing them, and you see a lot of followers. So I think that he will try to be creative in growing the company even if he cannot consummate a big public deal.

Question:

What gives you such great confidence in Mike Pearson? Ackman puts him in a league with Tom Murphy and Dr. Henry Singleton. Sequoia once invested with Tom Murphy. Is Mike Pearson in a league with those people and the other great CEOs whom William Thorndike wrote about recently in The Outsiders?

Rory Priday:

I was not around when Sequoia invested with Tom Murphy. But I try to read everything I can about people like him. There are some good videos on YouTube with Tom Murphy. There is one three hours long in which Murphy talks about the evolution of his company. So you try to learn about people like Tom Murphy. My impression is the team at Valeant is as focused on creating shareholder value as the people that you mentioned. I have always felt that one of the challenges Mike Pearson faced was that legacy Valeant was both undermanaged and in some businesses that were not as good as the ones Tom Murphy was in. So Mike had to get rid of the weak businesses. The Biovail merger brought a number of products that were subject to genericization, but that was still a good deal because of the tax inversion. In the past, Valeant bought companies cheaply that had some products that were losing patent exclusivity. Subsequently, Mike has focused on acquiring better businesses with more durable products and less vulnerability to genericization. One of the trends you are seeing is that Valeant has been spending more money on companies that have better assets. You saw that with Bausch + Lomb and you are seeing that with Allergan. Allergan has some really good assets.

Full transcript below and in scribd

Sequoia Investor Day

Bob Goldfarb:

Good morning and welcome to our investor day. We will take questions until 12:30. We have to vacate the room by one o’clock, but we will be around between 12:30 and 1:00 to answer any questions you might still have. Before we begin, I would like to introduce our team. On my right are Greg Alexander and Greg Steinmetz. On my left are David Poppe, who is the president of our firm, and Jon Brandt. The rest of our team is seated in the front of the room. In alphabetical order, they are Saatvik Agarwal, Girish Bhakoo, John Harris, Jake Hennemuth, Arman Kline, Trevor Magyar, Will Pan, Terence Paré, Rory Priday, Chase Sheridan, Michael Sloyer, Stephan van der Mersch, and Marc Wallach. I would also like to introduce Jon Gross who is our director of client services. In the front row are the directors of Sequoia Fund: Roger Lowenstein, Bill Neuhauser, Sharon Osberg, and Bob Swiggett. With that, we are ready for questions.

Question:

Thank you for doing such a great job, and thanks for once again closing the fund. As you so correctly noted at last year’s meeting, Valeant has a hard time consummating deals with publicly held companies. Is its growth-by-acquisition business model flawed? Can it reinvest cash at 15% or 20% if it cannot do bigger public company deals at reasonable prices even with the aid of hedge fund managers? And since everything you said about Valeant at last year’s meeting and in the annual report was so correct, would you hazard a guess as to whether the Allergan deal will eventually be consummated?

Bob Goldfarb:

We are not going to hazard a guess on the latter. We are not in the risk arbitrage business.

Rory Priday:

Right now Valeant is zero for two in the public arena in terms of trying to acquire companies when it is hostile. I think that Valeant is going to have a difficult time with Allergan. As Bob said, I do not think that we should make any projections about the outcome. But I do not think that Valeant needs to acquire big public companies to keep growing at decent rates. Mike Pearson, Valeant’s CEO, said earlier this year that there were a lot of privately held companies that management is looking at. Our impression of the market is that there are not many of those companies that have revenues in excess of a

billion dollars or so. Usually companies that big go public at some point. So Valeant will probably have a hard go of it at some time in the future. But at this stage, the company can probably still grow at a decent rate by acquiring private companies. But if Mike cannot find companies to acquire, he will probably do something else. Obviously with the Allergan deal, Valeant is being pretty creative at trying to find ways to consummate transactions. That is the one thing that stands out about Valeant — Mike sets very ambitious goals, and he gets criticized for that sometimes. But I do not think he sets them without having a path in mind to get there. I do not want to opine on whether it is right or wrong to set big audacious goals. But he has a path in mind and he has been pretty creative in the past. Inversions are in the news a lot today, but Mike did one four years ago with Biovail.

Mike and his team are creative enough to do things before other people think of doing them, and you see a lot of followers. So I think that he will try to be creative in growing the company even if he cannot consummate a big public deal.

Question:

What gives you such great confidence in Mike Pearson? Ackman puts him in a league with Tom Murphy and Dr. Henry Singleton. Sequoia once invested with Tom Murphy. Is Mike Pearson in a league with those people and the other great CEOs whom William Thorndike wrote about recently in The Outsiders?

Rory Priday:

I was not around when Sequoia invested with Tom Murphy. But I try to read everything I can about people like him. There are some good videos on YouTube with Tom Murphy. There is one three hours long in which Murphy talks about the evolution of his company. So you try to learn about people like Tom Murphy. My impression is the team at Valeant is as focused on creating shareholder value as the people that you mentioned. I have always felt that one of the challenges Mike Pearson faced was that legacy Valeant was both undermanaged and in some businesses that were not as good as the ones Tom Murphy was in. So Mike had to get rid of the weak businesses. The Biovail merger brought a number of products that were subject to genericization, but that was still a good deal because of the tax inversion. In the past, Valeant bought companies cheaply that had some products that were losing patent exclusivity. Subsequently, Mike has focused on acquiring better businesses with more durable


Ruane, Cunniff & Goldfarb Investor Day St. Regis Hotel, New York City – May 16, 2014

products and less vulnerability to genericization. One of the trends you are seeing is that Valeant has been spending more money on companies that have better assets. You saw that with Bausch + Lomb and you are seeing that with Allergan. Allergan has some really good assets.

Bob Goldfarb:

It would be a huge mistake to underestimate Mike Pearson. Do not bet against him. He had a different vision of the pharmaceutical industry from that of anyone of whom I am aware. And he has executed that vision very successfully to date. You see a lot of fast followers. Greg, did anybody before him do an inversion in the pharmaceutical industry, do you know? David? He may have been the first one. It is very controversial right now, this practice of acquiring a company in a low tax domicile. But Mike made it clear from day one when he merged with Biovail that the main purpose of the deal was to secure the competitive advantage of having the lowest tax rate of any pharmaceutical company in the world.

You saw some of the smaller guys following him this year and Perrigo, which is one of our holdings, was one of them. Now you see Pfizer trying to buy AstraZeneca. So the big guys are starting to pay attention. I may have said this last year — he identified the sweet spots in the pharmaceutical industry both in terms of product category and in terms of geography. That is the reason why Allergan is his first choice to do a merger of equals because it is just a terrific fit with his existing businesses. He recognized that ophthalmology and dermatology are two of the best businesses in the pharma space. He is a leader in dermatology at this point. In ophthalmology, where is he right now, Rory, number three?

Rory Priday:

Number two. And, if you exclude some of the biologics, Valeant is probably number three in prescription pharmaceuticals after Alcon and Allergan.

Bob Goldfarb:

And if he is not successful with Allergan, as he disclosed at the initial meeting after the announcement of his proposal, he has a list of nine other companies, and he will go right down that list. It is not easy to do a hostile acquisition, particularly using stock as the principal currency. So it is very possible that he will not succeed with Allergan. But it is certainly worth trying when the businesses are so complementary, and Allergan has very significant

costs that he can take out of the business, cost synergies primarily in the areas of research and development and SG&A. If you compare Valeant’s R&D and SG&A ratios to revenues with those of Allergan, Valeant is just a much leaner company.

I know some of you were at the Berkshire annual meeting, and there was some discussion of 3G, the Brazilians who have been extremely successful. Anheuser-Busch InBev is their biggest success, but 3G has had others. I do not think that the Valeant playbook is that different from the 3G playbook. There may have been other pharmaceutical companies that cut costs and ran lean the way Valeant does, but I could not name one. Mike spent 23 years at McKinsey and wound up as the head of its global pharmaceutical practice. In those 23 years, he learned how you could maximize shareholder value in a pharmaceutical company, and

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