Investor War!

-By Josh S | [email protected]

Valeant Pharmaceutical's stock is down over 60% in the last 3 months and over 30% year to date. The stock plummeted last week when short seller Andrew Left published a report regarding the company. Famous hedge fund manager, Bill Ackman is known to be long this investment.

Left assumed that Valeant was fabricating sales by creating a batch of unconsolidated companies. His research added to an already building investor thesis that there was a peculiar relationship between Valeant and specialty pharmacies. As Valeant explained Left's error they exposed their actual relationship and possible fraud through its subsidiary Philidor - on Friday, Valeant said it cut ties with its specialty pharmacy over its questionable practices.

Left has criticized hedge fund billionaire Bill Ackman who publicly owns Valeant stock. Left said “how crazy is that?” regarding the fact that Ackman said he was not so familiar with the relationship with Philidor and added “that tells you he doesn’t know the business very well.”

Left criticized Ackman for not updating his financial projections but Left did not state how he derived his target price of $50 nor how much have an effect this scandal will have on Valeant's results. Left merely says it will have a big effect.

Sequoia Funds, one of the largest investors in Valeant said this about the company:

"We once described Pearson as a value investor in pharmaceuticals. He understood that developing drugs from scratch via in-house R&D had become a low-return proposition for many companies and that higher returns could be earned by acquiring products in attractive categories, using historically low interest rates to fund purchases with debt, and then taking out costs and utilizing lower tax domiciles to house intellectual property. He has been aggressive every step of the way and has attracted equally aggressive critics."



Ackman understood that Valeant operates its company as if it is a hedge fund. Valeant's structure is likely why Ackman has invested so much of his fund's capital into Valeant. Valeant spent approximately $100 M on R&D last quarter and had $2.8 B of revenue or 3.5% of sales. Pfizer's ratio was 14.2%, Merck was at 14.9% and GlaxoSmithKline was at 12%. What is even more alarming is that Valeant doubled its R&D spending over the year as it altered its strategy because its business practices have been questioned - last year only 1.4% of their revenues were spent on R&D. Manufacturing companies such Caterpillar and John Deere spent over 4% of their revenues on R&D. How is a drug company spending less on R&D than a manufacturing company?

Left correctly pointed out Ackman's contradiction as Ackman says his quest against Herbalife is to defend the little guy being taken advantage of by a large company. This viewpoint is completely in-congruent when it comes to purchasing Valeant stock.

Valeant's strategy of buying companies and slashing R&D is legal but it could be pressured by government officials going forward.

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