Does Ackman's exit finally signal a bottom for Valeant?
Last summer, when Valeant Pharmaceuticals was trading at about $20 per share, I had an analyst at an investment firm tell me the stock had bottomed – I was a little more than skeptical at the time, and expressed my pessimistic view that the company still had further to fall.
He wrote me off, telling me we had seen all the bombshells – Philidor, drug pricing, Mike Pearson's sudden illness and rapid exit, the backlash to R&D – and that the stock was poised for a turnaround.
Fast forward nine months, Valeant is trading at just about half that, having hit its lowest price since 2009. But the latest (and maybe final) bombshell came this week when billionaire investor Bill Ackman finally dumped his stake in the beleaguered specialty pharma.
News broke Monday afternoon that Jefferies investment firm was selling Ackman's stake at $11.10 to $11.40 per share, unloading the remainder of Pershing Square Capital Management's stake in the company. Once Valeant's largest shareholder, the stock made up nearly 3% of Pershing's fund. As of December, the firm owned 18.1 million shares of Valeant and is estimated to have booked a $2.8 billion loss on the shares since then (likely a fraction of the total the hedge fund has lost on the investment).
Ackman's Pershing Square made its investment in Valeant public in March 2015, when Valeant was trading near $195 per share. The stock reached its high of nearly $260 per share shortly after that in July 2015.
This wasn't Ackman's first go-around with the company. Ackman publicly teamed up with Valeant to try to buy out Botox-maker Allergan (Ackman bought a stake in Allergan and promised to sway his shares in favor of the Valeant acquisition). Yet, the pair was thwarted when Allergan instead chose to be taken out by generics drug maker Actavis, becoming the Brent Saunders-led company we know today. Ackman and Valeant now face insider trading lawsuits over the failed acquisition attempt.
Ackman, for his part, has gone above and beyond that of a typical activist investor. The billionaire and his hedge fund have been particularly outspoken about the promise of Valeant, even hosting a multi-hour call for journalists and analysts in November 2015 defending the company.
Also in 2015, Ackman and Pershing Vice Chairman of Investment Management Steve Fraidin joined the board of directors at Valeant to help "stabilize and rebuild the company." Ackman and Fraidin will now vacate their seats on the board.
The rise and fall
This wasn't an overnight plummet from $262 per share to $10.50; it's been a long, slow death, even as CEO Joe Papa insists that Valeant is in the midst of transformation and turnaround.
Valeant started out a small U.S.-based firm with McKinsey & Co veteran Mike Pearson at its helm. The company made a handful of key bolt-on acquisitions, buying Coria Laboratories, Australia's DermaTech, Dow Pharmaceutical Sciences, Mexico's Tecnofarma and Aton Pharmaceuticals.
It wasn't until Valeant was bought out by Canada's Biovail in a $3.3 billion merger in 2010 that it really became the company we know. The new company incorporated in Canada – estimated to have a 10% to 15% corporate tax rate – and put Pearson in charge.
Pearson continued on his marathon deal spree, picking up PharmaSwiss, AB Sanitas, Afexa Life Sciences and Sanofi's dermatology unit. It also snagged dermatology drugmaker Medicis Pharmaceutical Corp for $2.6 billion in 2012. It closed one of its largest deals in 2013, picking up eye care maker Bausch & Lomb for $8.6 billion. And followed it with an even larger deal in 2015 — its $11 billion purchase of Salix Pharmaceuticals.
By 2014, Valeant was amongst the top 15 pharmaceutical companies by market cap and Pearson was making headlines by telling the world that Valeant would be a top five drugmaker by the end of 2015. Wall Street loved Valeant and the stock just kept going up.
While a few cynics criticized Valeant's approach to growth acquisition, investors were citing the company as the new model of pharmaceutical companies with the bare-minimum of R&D.
But the company had a slew of misses as well — losing a bid for Cephalon in 2011, failing to close a $13 billion merger with Actavis in 2013 and ultimately losing out on Allergan in 2014.
This is where things started to go wrong. Several funds began shorting stock, citing unclear business models and lack of transparency about earnings. Emails surfaced showing Morgan Stanley calling the company a "house of cards."
By September 2015, Valeant stock stopped climbing and began its descent — by mid-November, the stock would be down to $75 per share. During that time, scandal broke. Valeant was called in front of Congress to discuss the high price of two of its drugs. Then, reports surfaced that Valeant was using mail-order pharmacy Philidor to falsely inflate revenues.
In its 2015 annual report, Pershing Square Capital admits that its net asset value has fallen by 20.5%, compared to net returns of 40% in the year-prior. The decline was directly attributed to Valeant.
After an undisclosed health issue sidelines Pearson at the end of 2015, preventing him from answering for all of Valeant's wrongdoing, the CEO steps down and Perrigo CEO Joe Papa takes over in early 2016. The company has since sold off almost anything it can monetize in an effort to pay off its $30 billion in debt, reorganized business units and even upped its R&D.
Papa has been proclaiming for months that Valeant is turning around. The exit of its greatest champion and the still-declining share price say otherwise.
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