Was Tuesday capitulation day for shareholders of Valeant Pharmaceuticals International, which lost nearly half its value after cutting its revenue and earnings guidance for the rest of the year amid fears that it may default on its debt? Was this the day its longtime bulls finally surrendered and liquidated their positions in the beleagured Laval, Quebec–based drugmaker?
We probably won’t know for sure until mid-May, when hedge funds disclose their first-quarter holdings with regulators.
However, we did learn that at least two major shareholders are standing pat.
On Monday — on the eve of Valeant’s warning— San Francisco–based ValueAct Capital’s Jeffrey Ubben reaffirmed in an interview with CNBC his commitment to the stock and CEO J. Michael Pearson, stressing that his hedge fund firm will take “a much more proactive role at the company to protect and maximize the value of our investment.” He added that Pershing Square Capital Management vice chairman Stephen Fraidin is joining Valeant’s board.
William Ackman, New York–based Pershing Square’s founder and CEO, also released a statement that said: “We continue to believe that the value of the underlying business franchises that comprise Valeant are worth multiples of the current market price. Getting to those values, however, will require restoration of shareholder confidence in the management and governance of the company.”
A lot is riding on whether or not Pershing Square — the third-largest shareholder — and ValueAct — the fifth-largest — wind up being correct in the long run about Valeant. And that doesn’t apply to just the two high-profile investors.
Other managers who held on too long will also see their results hurt by the most recent sell-off — the stock is now down more than 85 percent to about $34 from its summer peak — and have a harder time handling losses in their funds. Their commitment to the stock could stir investor anger and lead to redemptions.
On the other hand, investors may well credit managers who got out early and stayed out.
Who were those managers?
Remember, Valeant’s stock peaked at $261 or so in early August. It began its precipitous decline, however, in late September when a number of politicians started to question its practice of jacking up prices on some of its drugs.
In late October, Citron Research accused Valeant of fraud, alleging that it had schemed with certain specialty pharmacies to inflate its revenue. Citron went so far as to compare Valeant to Enron Corp., the Houston energy company that went bankrupt more than a decade ago, in part because of a massive accounting fraud.
Valeant issued a press release that afternoon disputing Citron’s claims. However, the company has been unable to stem the slide of its shares as it absorbed a barrage of negative news.
Of course, hindsight is 20-20. But a number of hedge funds look prescient, smart or just plain lucky on Valeant. For example, in the first quarter, Jason Karp’s New York–based Tourbillon Capital Partners surged on the strength of Valeant and a couple of other drug stocks. The hedge fund firm then liquidated its entire Valeant position in the second quarter, shortly before the stock peaked and began its free fall.
Several other firms dumped their entire stakes in the third quarter.
Tiger Eye Capital, for example, unloaded more than 290,000 shares shortly after the initial issues started emerging at Valeant. The stock, which it started buying in 2011, was its second-largest U.S. long at the time. Tiger Eye founder Benjamin Gambill III, who generally avoids companies with regulatory issues, decided the pricing issues met this definition and bailed.
Barry Rosenstein’s Jana Partners, based in New York, also unloaded its entire position in Valeant sometime in the third quarter, selling more than 1.3 million shares.
On the flip side, Pershing Square acquired its initial stake of nearly 19.5 million shares in the second quarter. Other top shareholders at the time included ValueAct, which has been in the stock for nearly a decade and played a major role bringing in Pearson, and Greenwich, Connecticut–based Tiger Cubs Lone Pine Capital and Viking Global Investors.
In the third quarter Leon Cooperman’s New York–based Omega Advisors and Robert Citrone’s Discovery Capital Management, in South Norwalk, Connecticut, took new positions in the stock, while Lone Pine heavily boosted its stake.
Keep in mind that the stock, which Viking Global has held since 2010, was one of its five biggest winners in 2011 and 2013.
Viking Global added to its Valeant position in October and November after researching the factors that drove down Valeant’s stock — including controversies surrounding the Hatboro, Pennsylvania, mail-order pharmacy Philidor Rx Services. “We found the valuation attractive even with the operational disruption and the loss of revenue caused by the shutdown of the Philidor sales channel,” Viking explained in its fourth-quarter letter to investors. “We continue to believe that Valeant’s core product portfolio and its emerging drug pipeline will generate attractive organic growth for the foreseeable future, even in the absence of additional acquisitions or drug price increases.”
However, by year-end the stock was no longer among Viking’s ten largest longs.
Meanwhile, in the fourth quarter Jana got back into the stock, buying 1.56 million shares; Philippe Lafont’s New York–based Coatue Management took a new 1.67 million share stake; while Jonathan Auerbach’s Hound Partners, also headquartered in New York, boosted its stake by 25 percent.
As it turns out, Auerbach blamed Valeant and one unrelated stock for his firm’s first loss in its long-short fund since 2008 and losses in its two long-only funds after they played similarly major roles in the fund’s early-year surge.
“We feel pretty strongly that Valeant will continue to grow in 2017 and beyond,” Auerbach told investors in his year-end report.
By then we will know whether Auerbach and the other bulls will have the last laugh or wish they were as prudent as the gang that bailed out earlier.
