It is that net income line at the end that sort of gets you. There are losses in all years except 2011 and large and increasing cumulative losses. The $866 million loss in calendar 2013 is a surprising number.

The losses are not quite so bad on an EPS basis because of a massively increasing share count, but these are hardly typical of a company with such a rapidly increasing stock price.

The losses however are net of vast "merger and restructuring charges", "asset writedowns" and "legal settlements" - so called "one-offs".

In 2013 merger and related costs were $923 million, asset write-downs a further $783 million and legal settlements were $192.5 million. These amounts constitute well over 100 percent of the loss recorded.

Net of these costs earnings are going up very nicely. The company actively encourages you to look at it this way - and the market has adopted that guidance (as reflected in the stock price).

Moreover this is precisely how they present it in analyst conference calls. Here is a slide from the 4Q 2013 conference call:



Note that the cash EPS reported ($6.24 per share profit) is considerably more attractive than the GAAP EPS (a loss of $2.70 according to the press release or Capital IQ).

And herein is the rub. Do you want to believe the GAAP EPS (in which case this company is a loss-making disaster) or do you want to look through the GAAP EPS and see what management directs you to, their definition of "cash EPS"?

In other words do you believe in the GAAP accounts or some non-GAAP accounts?

There is another way of saying this. To believe in the GAAP accounts you need to believe that the "one-off" charges are reasonable and truly one-off. [They are truly vast - so this matters.]

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.

It would be an awful for investors if Valeant made its ferociously profitable budgets by putting any unwanted expenses (recurring or otherwise) into the "one-off" bucket.

And this is where we will start our long examination of Valeant. We want to work out whether the one-off charges are reasonable (in which case this is a great company) or whether they are inflated (in which case this is a Wizard-of-Oz-style con-on-the-market).

Till next time.





John