Valeant Takes Tough Punches as Ackman Cuts Stake to 8.5%

Valeant Pharma Takes Tough Punches as Ackman Cuts Stake to 8.5%
January 4, 2016
By Mark Terry, BioSpace.com Breaking News Staff

Canadian drug company, Valeant Pharmaceuticals International, Inc. feels a little bit like a boxer taking punch after punch, but still standing … barely. The last year is not going to look good on the company’s balance sheets, and the most recent news that the company’s biggest investor, William Ackman’s Pershing Square Capital Management, sold about 5 million Valeant shares on the last trading day of 2015 only underscores the company’s problems.

Valeant’s business model has largely been based on acquiring other companies, with more than 108 deals since 2008, with eight or more of them in 2015 alone. But the company’s troubles are lengthy and it has undergone a great deal of scrutiny lately.

In April 2014, Valeant and Pershing Square made a hostile takeover bid of Allergan . Pershing Square had bought up about 10 percent of Allergan’s stock in March. In April when Valeant and Pershing announced their joint bid, the stock jumped 15 percent, which gave Pershing about $1 billion in gains. Allergan responded with a lawsuit accusing the companies of insider trading, which brought in a U.S. Securities and Exchange Commission (SEC) investigation. In November, a judge ruled that Bill Ackman will have to face the insider trading lawsuit.

Valeant is also being investigated by the U.S. government over drug pricing and distribution practices. The company, due to its acquisition record, is, according to Bidnessetc, “overloaded with debt, since Mr. Pearson (company chief executive officer) achieved most of Valeant’s growth since 2008 through M&A financed by debt. Citron has also brought to light Valeant’s shady distribution practices, particularly through a fraudulent mail-order pharmacy called Philidor, which dealt exclusively with Valeant’s products.”

Citron Research, formerly StockLemon.com, wrote a scathing report in October comparing Valeant to Enron and, among many things, accused it of “channel stuffing.” Channel stuffing, in this case, refers to using specialty mail-order pharmacies that Valeant controls to make it, according to CNBC, “prop up sales of its high-priced drugs and to keep patients and their insurance companies from switching to less costly generics.”

In December, Valeant unloaded Philidor, and inked a 20-year distribution deal with Walgreen Boots Alliance Inc. as a replacement.

To further complicate issues, Valeant’s chief executive officer, Michael Pearson, was hospitalized with severe pneumonia in the last week of December. The company is being run by three people, Robert Rosiello, the chief financial officer, Robert Chai-Onn, general counsel and chief legal officer, and Ari Kellen, manager, US Dermatology and Contact-lens units.

So why did Ackman unload 5 million shares? Ackman claims he sold them to “generate a tax loss” for investors. The sale cut his stake in Valeant from 9.9 percent to 8.5 percent. Bidnessetc notes that 2015 was a very bad year for Pershing Square, mostly driven by Valeant’s stock losses. “One of his funds posted a 19.7 percent loss through December 29, which, when compared to last year’s 40 percent gain, helps put things in perspective. Feeling a bigger responsibility to his funds’ investors, Mr. Ackman finally decided to make a move in their favor.”

Valeant is definitely having troubles. Shares traded on March 10, 2015 for $201.48, rose to a 2015 high of $262.52 on Aug. 5, 2015, and plunged to $70.32 on Nov. 17, 2015. Shares are currently trading for $97.32.

Seeking Alpha wrote, “Ackman’s sales of Valeant stock are a strategic move to lower taxes, and have nothing to do with a changed investment thesis. … In any case, Pershing Square’s tax loss selling is a painful reminder that 2015 will be one of the worst years in Pershing Square’s performance history.”

It’s been noted, however, that 2015 was a rough year for hedge fund managers. USA Today observed that David Einhorn’s Greenlight Capital and Carl Icahn had double digit losses. And according to data tracker Hedge Fund Research, the average hedge fund was down 3.5 percent at the end of the year.

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