Valeant Pharma has been accused by Andrew Left’s Citron Research, a short-seller, of doctoring its books and showing bogus revenue in the same way that Enron did before its collapse.
In the wake of these allegations, Valeant Pharma has lost 72% of its value in the past three months. The loss in the last one month is 54%. The loss in the last five days is 32%. The loss today is about 17.36%.
Bill Ackman’s Pershing Square, the largest shareholder of Valeant Pharma, has lost more than $2 Billion in the meltdown of the stock price. It has nearly 20% of its AUM invested in Valeant. The fund has severely underperformed the S&P and its peers owing to the concentrated position in Valeant.
Ruane, Cunniff & Goldfarb Inc, a large hedge fund, has invested 35.9% of its assets in 9.9% equity of Valeant Pharma.
Ruane Cunniff’s letter to its investors makes for interesting reading. It talks of the “extraordinary level of pain” suffered by the fund but says that the “most serious allegation leveled against Valeant – that it set up specialty pharmacies as a way to create fraudulent sales and inflate its reported growth rate – is false”.
How Ruane Cunniff is able to conclude that the allegation is “false” is not clear because it itself points out that Valeant has set up an internal Board committee to examine the issue and the report is awaited.
Ruane Cunniff also compliments J. Michael Pearson, Valeant’s CEO, who is in the eye of the storm, for doing a “masterful job”. It also calls him “a value investor in pharmaceuticals” and praises him for being “honest and extremely driven”. It also claims that he “does everything legally permissible to maximize Valeant’s earnings”. It does, however, cryptically add that “sometimes doing everything legally permissible to maximize earnings does not create shareholder value” implying that Valeant “aggressive behaviour” in the past and lack of “good reputation” are responsible for its woes.
However, Bill Ackman was not as impressed with Michael Pearson’s conduct as Ruane Cunniff is. According to BI, Bill Ackman attacked Pearson for “hiding in the bunker” and not “coming clean” with respect to the concerns voiced by investors.
Other investors have also lost confidence in Valeant and are busy dumping the stock. Weitz Investment Management issued a terse update stating that “As of the September quarter-end we had significantly reduced our positions. Recent developments about the company’s pharmacy relationships, pricing policies and business practices led us to sell our remaining shares in late October. We no longer own Valeant in our client portfolios or mutual funds.”
Interestingly, Charlie Munger, Warren Buffett’s partner, who is normally mild-mannered in his talk, was savage in his criticism about Valeant Pharma. He said he is “holding his nose” and called its “price gouging” tactics “deeply immoral” and “similar to the worst abuses in for-profit education.” Munger also warned that the “price gouging” tactics are not a sustainable business proposition.
While the way in which the Valeant crises will play out cannot be predicted, the meltdown of fortunes should serve as a pointer about the risks that a concentrated portfolio carries!