1. NYSSA 26th Annual High Yield Bond
Conference and Master Class
© 2016 Vicki Bryan,
Gimme Credit LLC

2. Vicki Bryan
Gimme Credit LLC
 30 years of experience in the
investment industry with 22 years
covering high yield and distressed
 Last 9 years with Gimme Credit LLC,
premiere independent bond research
since 1994
 High Yield Industry Coverage:
Airlines, Healthcare, Homebuilding,
Building Products, Transportation,
Trucking OEMS, Food & Restaurants,
Construction Machinery
 Previously: Management Consultant;
Partner/Vice President/Sr. Analyst
with AIM Investment Management
(now Invesco)
© 2016 Vicki Bryan,
Gimme Credit LLC

3. Valeant Stock June 2010-2016
 Traded above $22 since Aug 2010
 High 8/15/15 @ U.S. $262.52
 Recent: $22.04 6/17/16 – down 92% vs peak
© 2016 Vicki Bryan,
Gimme Credit LLC

4. By 5/1/14 – Valeant was “hot”
 Consensus on Stock as of 5/1/14; stock price was $138
with average target at $167 (per Bloomberg):
18 Buy
2 Hold
0 Sell
 Consensus as of 9/30/15; price $178
with average target at $280 (per Bloomberg):
20 Buy
2 Hold
1 Sell (Veritas Investment Research, 7/23/14)
 Bill Ackman (a.k.a “Smart Money”) didn’t buy in until
3/9/16 at $204.69, just below $262 peak
© 2016 Vicki Bryan,
Gimme Credit LLC

5. Gimme Credit “Sell” 5/1/14
5.625% Sr. Notes due 2021
 High @ 104, 5/1/14
 Recent 83 (8.6% ytw), 6/20/16
© 2016 Vicki Bryan,
Gimme Credit LLC

6. Gimme Credit “Sell” 5/1/14
6.375% Sr. Notes due 2020
 High @ 107.375, 5/1/14
 Recent 87.75 (9.7% ytw), 6/20/16
© 2016 Vicki Bryan,
Gimme Credit LLC

7. The Skeptic
 AGN bid rich @ 7.3x 2013
revs, 22x EBITDA
 VRX acquis-fueled revenue
growth not sustained; core
revs & margins down;
“horrendous” charges
 Leverage already 7.6x after
loading up debt to buy poor
quality assets
 Persistent net losses since
2007 = “value destruction”
 VRX stock “precariously
inflated,” then $138
 Expect AGN bid will fail
 REC: SELL
© 2016 Vicki Bryan,
Gimme Credit LLC

8. Far from consensus…
Vicki Bryan, Senior High Yield Analyst, Gimme Credit in
“Valeant Debt-Loaded Deal Binge Casts Doubt on
Strategy: Real M&A.”
Bloomberg, May 27, 2014
“Valeant’s strategy depends on people continuing to drink this
Kool Aid it’s serving… They have to keep buying at a heavier
and heavier and more expensive pace to keep this up. What
happens when they can’t? There’s no inherent growth, and the
debt side of this is a very big part of the story that the stock
market is ignoring.”
source: Allergan press release 6/16/14
© 2016 Vicki Bryan,
Gimme Credit LLC

9. But not alone either…
John Hempton, Chief Investment
Officer, Bronte Capital in Bronte Capital
Blog, June 13,2014
“There is a possibility that the whole Valeant
exercise is something from the Wizard of
Oz. Profits are going up nicely if you pay no
attention to that man behind the curtain -
the man being the large restructuring and
one-time items.”
David Horn, Managing Director,
Investment Banking Division
(Healthcare), Morgan Stanley in Email
to Jeff Edwards, May 18, 2014
“Valeant is a house of cards and your
investors should not want to take their
stock.”
source: Allergan press release 6/16/14
Jim Chanos, President and Founder,
Kynikos Associates on CNBC Fast Money
Halftime Report, May 15, 2014
“We think Valeant is playing some very
aggressive accounting games when they buy
companies, write down the assets…A roll up
is a roll up and you have to analyze a
company that’s not growing organically and
has to deliver value by doing bigger and
bigger acquisitions, and usually the
companies do an acquisition too far.”
Matthew Herper, Senior Editor for
Pharma and Healthcare, Forbes, June
12, 2014
“…[Valeant’s] treatment of figures relating to
the industry’s R&D productivity is so
indefensible as to beg the question of
whether its executives can really command
the facts they are using, or whether they
really understand the trends on which they
say they are basing their business.
© 2016 Vicki Bryan,
Gimme Credit LLC

10. Red flags were not hard to see…
 Disclosure remained consistently oblique, inconsistently and/or
inadequate
 It takes a page of footnotes to explain “organic growth”
 Top 10, 20, and 30 lists are moving targets, but consistently show
significant weakness and/or inconsistent trends in sales y/y and
sequentially
 Presentations of key revenue categories frequently changed and
historic comparisons not provided, e.g. Bausch & Lomb reported
with and then without generic impact
 Management claimed revenue fueled by volume growth when
clearly revenue was mostly price-driven, at the expense of
volumes and market share
 “Nonrecurring” charges remained excessive and persisted years
after acquisitions close
© 2016 Vicki Bryan,
Gimme Credit LLC

11. And more red flags…
 Most of Medicis products--poorly performing for Valeant--sold
in July 2014 to Nestle SA for $1.4 billion to raise cash for Allergan
bid; Valeant paid $2.6 billion for Medicis in Dec 2012 – first hint
at increasingly overstated asset values on balance sheet
 Primary Medicis product Solodyn kept but has never achieved
revenue projected in 2012 at $250-275 million; e.g. 2015 revs $214
million, little changed y/y
 Former golden Valeant stock becomes weak link as currency for
Allergan bid, not to mention stunning $40 billion in PF debt
 Allergan defense highlighted Valeant’s questionable reporting,
oblique/inadequate disclosures, and excessively aggressive
acquisition-driven growth strategies, falling market share
 Valeant’s hostile line-by-line rebuttals of any and all critical
analysis only emphasizes its own disingenuous disclosure
© 2016 Vicki Bryan,
Gimme Credit LLC

12. Banks began to balk…
 Sale of derma products in July 2014 seemed to have been
“encouraged” by increasingly wary banks to pay off bank debt
ahead of expensive $20 billion planned financing for its $50
billion+ bid for Allergan
 Corresponded with subsequent slump in revenue and profits +
reduced guidance for 2014 ahead of August anniversary of
expensive Bausch & Lomb acquisition, which also continues to
underperform
 Banks took inordinate time to amend credit facility with
covenants relaxed sufficiently to accommodate heavy borrowing
to fund the $13 billion Salix deal--leverage jumps to 6.5x
 Revised terms significantly more expensive & more restrictive
 Valeant actually pulled proposed $1 billion term loan due to
unfavorable terms offered by the banks and sells stock instead
© 2016 Vicki Bryan,
Gimme Credit LLC

13. 2015 Acquisitions mostly failures
 February: Dendreon (Provenge) and Marathon (Nitropress & Isoprel). Both
seriously expensive and underperforming. Now for sale likely at a loss.
 April: Salix. Seriously weakened credit quality; boosted debt back to 7x.
“Growth” in 2015 mostly from normalizing stuffed channel. All products now
underperforming. Primary product Xifaxin (50% of Salix revenue) well below
targets and facing serious and increasing competitive threats
 October. Eqypt-based Amoun Pharmaceuticals. Primary drug Ammonul
dropped off Top 30 product sales list after weak revenue in Q415 post purchase;
now for sale—also likely at a loss, that is if it can find a buyer. It had been
shopped for years before Valeant took the bait.
 October. Saving the worst for last: Addyi, Valeant’s $1 billion baby, its most
expensive single drug acquisition ever (and brought to Valeant by Bill Ackman,
Sprout investor). Questionable efficacy, serious risks to patients. Launch plans
abandoned within months and staff fired. Pushed debt up further in troubled
Q116 to pay $500 million balance due while Addyi’s prospects remain dim.
 Total 2015 acquisitions: $16 billion net cash spent, virtually all funded by debt
which more than doubled to $31.1 billion.
© 2016 Vicki Bryan,
Gimme Credit LLC

14. Operations showed continued
underlying weakness in 2015
 Most acquired assets underperform;
 Revenue excluding acquisitions flat; excluding
projected $500 million in product launches revenue
was down more than 6%
 If history holds, revenue bump with new product
launches will continue to fade
 Gap between reported $5.4 billion EBITDA, including
generous adjustments for “nonrecurring” mostly
acquisition-related charges, widens to $1.3 billion vs.
GAAP EBITDA–amount nearly half as much as total
SG&A and 4x R&D
© 2016 Vicki Bryan,
Gimme Credit LLC

15. But 2015 mostly defined by:
 Glaringly public revelations about years of egregious
pricing increases; triggers Senate investigations
 Revelation in U.S. comes a year after Canada, which
pushed back; e.g. 13-fold increase in Suprine
 Philidor dibacle was the final straw, revealed by
Valeant’s own efforts to destroy a critic
 Devastating management and Board sidesteps and
missteps destroy investors’ confidence
 “Cue The Next Detonation” (GC report 12/3/15). Let the
government investigations and lawsuits begin
© 2016 Vicki Bryan,
Gimme Credit LLC

16. The most calamitous failure: Philidor
 Tiny, obscure Philidor went from near nothing to generating nearly 7%
of Valeant’s sales in 9 months of 2015
 Explained otherwise mysterious boosts in sales; e.g. Solodyn, Retin-A,
Clindagel, Jublia
 Yet Valeant deliberately concealed this key distribution channel, which
was tracking equivalent revenue as top 9% customer in 2014, massive
Cardinal Health
 Same store revenue down 6% ex Philidor in Q315; down 21% in Q415
and down 17% in Q116
 Philidor purchase strategy, management, and collaboration seemed
deliberately designed to deceive
 Suddenly a major weakness in payer system was revealed; major PBMS’s
deleted Valeant drugs from formularies
 Myriad of government investigations have resulted, U.S. & Canada,
plus lawsuits. Department of Justice named 21 times in long overdue
2015 10K, when it finally was filed at the end of April
 Valeant has not reserved yet what could be hundreds of millions in
fines and settlements
© 2016 Vicki Bryan,
Gimme Credit LLC

17. Aftermath
 Culpable CEO ousted (with generous package); Board
revamped though still seems more interwoven than
“independent”
 Valeant was critically late in filing financial statements,
triggering defaults in its bond covenants
 Valeant nevertheless ignored its bondholders
 Already wary banks took what I estimated was more than
six months to agree to amend its credit facility with
sufficient covenant relief to manage into 2017—but new
terms are understandably much more costly and restrictive
 Valeant reported dramatically weaker earnings for Q415
and Q116 and reduced 2016 guidance three times
© 2016 Vicki Bryan,
Gimme Credit LLC

18. New CEO: Joseph Papa
They got the best…that they could get?
 Comes with weak track record as longtime CEO at chronically
underperforming Perrigo
 …but few others were likely willing to take on Valeant’s horrific
problems
 Still, concerned that Valeant’s Board just wanted a more agreeable
version of previous management to pursue existing strategies, e.g. high
pricing, acquisitions; even less convincing is indicated ability to create
strongly competitive traditional pharma company
 Attributed initial goodwill following management change may already
be fading; e.g. select “discounts” to select parties have not been
honored as promised, suggests lack of conviction on price
rationalization; campaigning that Valeant’s main problem is more
“image” and “access”; advertising that Valeant is an industry leader in
product development (really?)
 Recent “leaks” of assets for sale at potentially sizable losses +
acknowledgement that even Bausch & Lomb could be for sale – with
roughly 2 weeks until the second quarter closes – hints more at
increasing desperation © 2016 Vicki Bryan, Gimme
Credit LLC

19. Down They GoValeant Pharmaceuticals
Vicki Bryan
6/13/16
amounts in millions LTM FY FY FY FY
Actual Results: 3/31/16 Y/Y Chg 12/31/15 Y/Y Chg 12/31/14 Y/Y Chg 12/31/13 Y/Y Chg 12/31/12 Y/Y Chg
Total Reported Revenue 10,648 25% 10,447 27% 8,206 42% 5,770 66% 3,480 43%
Revenue from acquisitions 2,562 58% 2,210 -3% 2,280 -8% 2,467 137% 1,040 -14%
Same State Revenue 8,171 -4% 8,237 0% 5,857 2% 3,303 -5% 2,395 -1%
7,671 -10% 7,737 -6% ex projected product launches
Est "same-state" increase mostly on price hikes & Philidor; shows incremental boosts from acquisitions and newproduct launches are not sustained
Adj Gross Profit 8,060 26% 7,968 26% 6,315 47% 4,301 64% 2,623 45%
Total Revenue - COGS, Cost of alliance R&D and service revs ex unusual
SG&A 2,939 39% 2,700 33% 2,026 55% 1,305 73% 756 32%
R&D 382 59% 334 36% 246 57% 157 98% 79 20%
Reported EBITDA 5,246 23% 5,366 33% 4,033 36% 2,974 54% 1,928 47%
GAAP EBITDA, before adjustments 3,996 -1% 4,077 8% 3,764 144% 1,543 44% 1,074 16%
Interest Expense 1,692 66% 1,563 61% 971 15% 844 75% 482 45%
EBT (704) -155% (155) -115% 1,054 -180% (1,314) 233% (394) 2090%
Cash Flow from Operations 2,267 -1% 2,200 -4% 2,295 120% 1,042 59% 657 3%
CFFO less $287 gain from sale of Allergan stock Q414 10% 2,008 93%
CAPEX (259) -49% (303) -36% (471) 154% (185) 2% (181) -53%
Free Cash Flow 2,008 12% 1,897 4% 1,824 113% 857 80% 475 87%
Net cash spent on Acquisitions (14,680) (15,526) (1,282) (5,323) (3,559)
Proceeds from sales of assets 9 13 1,568 41 92
Stock Issued 0 1,433 0 2,307 0
Stock Repurchased (50) (72) 0 (56) (281)
Effective FCF (12,713) (12,255) 2,111 (2,173) (3,272)
cumulative net cash spent on acquisitions since 2009 (28,648) (28,622) (13,124)
cumulative acquisition related charges since 2009 11,596 11,596 8,055
Net Change in Debt since 2009 31,652 30,762 14,903
Cash and Cash Equivalents 1,310 -30% 597 85% 323 -46% 600 -35% 928 444%
Total Debt 31,979 23% 31,088 104% 15,229 -12% * 17,368 58% 11,016 66%
Net Change in Debt y/y 5,958 15,860 (2,139) 6,352 4,365
*2014 debt reduction likely "encouraged" by banks, with cash from derma products sold to Nestle to raise cash for failed Allergan bid
Shareowners' Equity 5,656 -12% 5,911 12% 5,279 3% 5,119 38% 3,717 -5%
issued stock
Ratios and Margins:
Adj Gross Margin 75.7% 76.3% 77.0% 74.5% 75.4%
SG&A/Revenue 27.6% 25.8% 24.7% 22.6% 21.7%
R&D/Revenue 3.6% 3.2% 3.0% 2.7% 2.3%
EBITDA Margin 49.3% 51.4% 49.1% 51.5% 55.4%
GAAP EBITDA margin 37.5% 39.0% 45.9% 26.7% 30.8%
EBT/Revenue nm nm 12.8% nm 10.9%
Cash Flow from Operations/Revenue 21.3% 21.1% 28.0% 18.1% 18.9%
ex gain from sale of Allergan stock 0.0% 0.0% 24.5%
Free Cash Flow/Revenue 18.9% 18.2% 22.2% 14.9% 13.7%
ex gain from sale of Allergan stock 16.2% 15.4% 18.7%
EBITDA/Interest 3.1X 3.4X 4.2X 3.5X 4.0X
Debt/EBITDA 6.1X 5.8X 3.8X 5.8X 5.7X
Debt/GAAP EBITDA 8.0X 7.6X 4.0X 11.3X 10.3X
Debt/Revenue 300% 298% 186% 301% 317%
Debt/Capital 85% 84% 74% 77% 75%
Liquidity
Cash and Cash Equivalents 1,310 -30% 597 85% 323 -46% 600 -35% 928 444%
Revolver Avail. 50 -96% 1,250 50% 835 -17% 1,000 122% 450 718%
Total 1,360 -57% 1,847 60% 1,158 -28% 1,600 16% 1,378 511%
Interest coverage very tight vs 2.75x limit per Credit Facility--risk of breach
Source: Analyst Estimates; Company reports
includes Salix; Dendron, Marathon,
others acquired 2015
Numerous Small, Mid-sized
Acquisitions
ACQ BAUSCH & LOMB AUG
2013 + VARIOUS
ACQ MEDICIS DEC 2012
FOR $2.7 BILL + VARIOUS
DEC 2012
 Core revenue
margins in sharp
decline;
 Margins lower on
spiking costs; back
to pretax loss
 Interest costs up
60%+ vs total
revenue up < 30%
 Total debt now
nearly $32 billion;
leverage 6.1x
© 2016 Vicki Bryan,
Gimme Credit LLC

20. Risks going forward
 Q4, Q1, and even Q2 results are not indicative of forward
trends; revenue still is falling, costs are rising, the Salix
acquisition has lapped
 2016 guidance seems ambitious; EBITDA must increase by
average 27-31% next three quarters vs. $1 billion in Q116
 Serious weakness in sales of virtually all top selling drugs;
e.g. Xifaxin. Top 30 contributed 54% Q116 revenue
 Little confidence in material contribution from pipeline;
have doubts about successful recruiting; will likely take
years to create convincing R&D program
 Likely continued losses in market share; most products
were underperforming when acquired and have trundled
along for years without supporting investment
© 2016 Vicki Bryan,
Gimme Credit LLC

21. “Access” Problem? More like
critically weak bargaining leverage
 Why should payors make deals favorable to Valeant?
 Its promised pricing reductions, discounts have been
limited or haven’t appeared
 The Walgreens distribution agreement is proving
significantly unfavorable, but realized pricing and
potentially volumes likely to remain weak – can see no
reason for Walgreens to negotiate a better deal for Valeant
 Other payors/PBMs likely to want similar pricing/terms as
Walgreens – or even more simple – just not sell Valeant
drugs. Most can find comparable and cheaper alternatives
© 2016 Vicki Bryan,
Gimme Credit LLC

22. Serious credit quality risks remain
 Interest coverage covenant limit (2.75x through March 2017) already tight and could be
breached if EBITDA falls short of guidance, which seems likely
 Valeant debt payoff already less than advertised since debt “reduction” in Q1 was largely
offset by $1.2 billion in additional borrowing—leverage increased to 6.1x and tracking
6.8x by yearend
 Suggested asset sales at likely heavy discounts; e.g. Obagi Medical, Amoun
Pharmaceuticals, Provenge; Marathon, Dermatology products etc. imply potentially
substantially lower asset value versus book
 If so, cash raised from debt reduction could be much lower than expected, compounded
by lower than expected FCF if operating performance disappoints as we expect
 Asset value already overstated since most acquisitions were purchased dearly at high
multiples—and mostly debt funded—using overly ambitious targets for sales and profits
 Which then threatens collateral value backing secured bank debt, impairing Valeant’s
ability to sustain willing bank support
 Asset quality problematic even before value write-downs; 84% of total assets = $49,95
billion total intangibles (net intangibles $22.3 billion; $18.6 billion goodwill)
vs.$32 billion total debt
 Total intangibles = Net intangibles (mostly intellectual property) $22.3 billion and $18.6
billion goodwill
vs. $12.7 billion secured debt.
© 2016 Vicki Bryan,
Gimme Credit LLC

23. Our estimates as of 6/13/16
 2016 revenue down 6% to $9.87
billion, with falling volumes
offsetting acquisition
contributions, and EBITDA
down 13% to $4.65 billion--a 47%
margin
 If so, this also implies Valeant
may fall short of meeting
minimum interest coverage of
2.75x as required by CF
 Without meaningful debt
reduction via faltering free cash
flow plus asset sales, leverage
also is indicated even higher at
6.8x.
 Continued weakness in 2017,
with revenue up 3% and EBITDA
up 2%, leverage little improved
at 6.5x even with perhaps $670
million in debt repayment from
free cash flow also drained
increasingly by higher costs for
legal expenses, fines, and
settlements.
© 2016 Vicki Bryan,
Gimme Credit LLC
Projections FY 2016 Y/Y Chg FY 2017 Y/Y Chg
Revenue 9,872 -6% 10,168 3%
2016 up entirely on acquisitions; offset by core revs down 5-15%; 2016-2017 revs could be lower on asset sales
Adj Gross Profit 7,305 -8% 7,451 2%
expect substantial spike in costs, meaningful pressure on volumes & pricing, accelerating legal exps
SG&A 2,665 -1% 2,745 3%
R&D 415 24% 427 3%
EBITDA 4,651 -13% 4,744 2%
Interest Expense 1,700 9% 1,667 -2%
Cash Flow From Operations 1,974 -10% 2,034 3%
CAPEX (371) 22% (382) 3%
Free Cash Flow 1,603 -15% 1,652 3%
Net cash spent on Acquisitions 0
Last Pmt due to Sprout for Addyi + Milestone Pmts (900)
Guidance for Debt repayment (1,700)
Effective FCF (997) nm 1,652
2016 FCF Insufficient to pay off projected $1.7 bill in debt without sizable asset sales
2017 FCF Mostly for debt repayment + escalating legal expenses/fines/settlements
Gross Margin 74.0% 73.3%
SG&A/Revenue 27.0% 27.0%
R&D/Revenue 4.2% 4.2%
EBITDA margin 47.1% 46.7%
UnadJ EBITDA margin 0.0% 0.0%
Cash Flow from Operations/Revenue 20.0% 20.0%
Free Cash Flow/Revenue 16.2% 16.2%
Debt 31,636 2% 31,019 -2%
up on borrowing for acquisitions (mostly final pmt for Sprout)
Debt/EBITDA 6.8X 6.5X
EBITDA/Interest 2.74X 2.85X
Interest coverage tight vs 2.75x limit per Credit Facility
Source: Analyst Estimates; Company reports

24. Stakes remain high—for years
 Valeant’s “image” problems not easily remedied
 New “Valeant” inherently weaker market player
 Debt reduction could be slowed/impaired by
potentially serious legal fines/settlements
 Best case, Valeant continues to limp along for years
with disappointingly weak revenue and profits
barely sufficient to support painfully slow reduction
in debt
 If not and Valeant breaches covenants, already
skittish banks are unlikely to be generous.
 The clock is running and investors remain wary—
bank debt has been trading below par since
September and traded lower after Q1 results
© 2016 Vicki Bryan,
Gimme Credit LLC

25. Benchmark Term Loan: BF1; PIK
 Issued @ 99; High at 100.9 shortly after issue
 Traded below par since Sept 2015
 Recent: 97.75
© 2016 Vicki Bryan,
Gimme Credit LLC

26. Failure is an option
 If deterioration becomes severe—still possible at this
point--banks will make sure they remain covered and will
continue to pressure for lower exposure
 Bondholders have even fewer alternatives given limited
asset coverage, and company has demonstrated no concern
over threats created for bondholders
 However, to accelerate debt reduction or avoid default it’s
possible Valeant may pursue debt restructuring outside of
bankruptcy; e.g. seek to exchange existing debt for new
bonds at significantly less than par to reduce debt
 Dreadfully unfavorable to bondholders, but ”tantamount to
default” still is better than bankruptcy.
© 2016 Vicki Bryan, Gimme Credit LLC