- Reuters/ Allen Fredrickson
Billionaire activist investor Bill Ackman, founder of Pershing Square Capital, just wrapped up a four-hour long call defending his large investment in Valeant Pharmaceuticals.
“This is a complicated business,” Ackman began. “Any business that has grown quickly is complicated.”
Here is a summary of the key points from the call:
The company has smart investors – The investor base is a “sophisticated” one, comprised of a “who’s who of kind of so-called smart money.” It is a victim of bad PR – Ackman said the company under invests in public relations and government relations. “They need help on the PR side,” he said. He later went on to slam the PR firm hired by Valeant. He said that Sard Verbinnen has done a “fabulous job” for Herbalife and a “horrible” job representing Valeant. Ackman added they may be “too distracted” by Herbalife. Ackman is famously short Herbalife. Mike Pearson is still the right man to be CEO –Ackman said that he hasn’t lost confidence in Valeant’s CEO Michael Pearson. He said: “Mike comes across as very gruff, very business like. People describe him as a bit of an introvert. He doesn’t look like you’re typical CEO. That’s not a good reason not to invest in a company.” Life will go on – Ackman expects negative press reports and scrutiny from regulators and politicians in the next several months. He also expects that investigations will conclude in four years. “Life will go on for Valeant. While this has been a very damaging moment for the company…. We think the Valeant business is quite robust.”The stock is set to go higher – Ackman said that the stock now is “tremendously undervalued” and that it has an “89% upside.” He added that investors are forgetting the “rest of Valeant’s business.” He said that he expects Valeant’s share price to be worth $448 in three years. The stock price is currently down about 11% at $99.63.Specialty pharmacies are ‘good for America’ – Ackman believes that patients and doctors like specialty pharmacies. “Specialty pharmacies help patients get the drug their doctor prescribed and reduce administrative burden. Patients receive their medication quickly by mail, sometimes before claim has been adjudicated,” his presentation said.
He added that other companies such as Allergan and Novartis use specialty pharmacies too. He said that the media has missed the point that subsidizing copays is actually “good for America” as opposed to something that is “somehow insidious.”
3 key questions
Ackman later noted that Valeant didn’t mention Philidor, the specialty pharmacy it had worked with, until last week. He felt like it should have been disclosed sooner.
Ackman said that his fund strives to be transparent. He felt like Valeant failed to adequately three key questions on the company’s conference call this week addressing Citron’s allegations.
He added that he would have “appreciated more color” from Valeant’s management as opposed to a scripted conference call.
- Pershing Square
A stock under pressure
Since taking a position beginning in February this year, Pershing Square has likely lost more than $1.5 billion on paper on Valeant, the fund’s largest stock holding.
Ackman said they did a “fair amount of due diligence” on the company in early 2014. At the time, Pershing Square and Valeant teamed up together to pursue a takeover of Allergan. Their attempts were unsuccessful, but Pershing Square made a great deal of money after Allergan did a deal with Actavis.
Pershing Square became a shareholder in February of this year.
Valeant’s share price came under pressure after it had been criticized for its drug pricing. The company has also been compared to Turing Pharmaceuticals, a biotech start up run by controversial CEO Martin Shkreli.
In late September, Democrats on the House Oversight and Government Reform Committee sent a letter to the committee’s chairman, Jason Chaffetz (R-UT), asking him to subpoena Valeant for documents related to price increases of acquired drugs.
The Citron report
Shares of Valeant 40% since last Wednesday after Citron Research, the California-based short selling research firm led by Andrew Left, published a report asking whether Valeant was operating an Enron-like fraud.
Citron’s report focuses on the company’s relationship with Philidor, a specialty pharmacy that distributes prescription drugs for Valeant.Valeant is the only supplier to Philidor, and it also has an option to buy the company. On Wall Street, no one had really heard of Philidor until earlier this month.
Citron has accused Valeant of using Philidor to create “phantom sales” of its products.
Ackman said that he does not think Valeant engaged in deceptive accounting.
He did add that he does “think some of Philidor’s numbers are exaggerated.”
Valeant has categorically denied the allegations in the Citron report.The company hosted an all-hands call Monday morning to address the allegations.
On the call, Ackman said that he agreed with Pearson’s assessment that Citron’s Left “yelled fire in a crowded theater.” Ackman pointed out that Left hasn’t disclosed his position.
Valeant drops Philidor
On Friday morning, Valeant said it was “severing all ties” with Philidor, which had represented 6.8% of Valeant’s total revenue in the third quarter.
Valeant’s CEO Michael Pearson said in a statement they have “lost confidence in Philidor’s ability to continue to operate in a manner that is acceptable to Valeant and the patients and doctors we serve.”
He continued: “We understand that patients, doctors and business partners have been disturbed by the reports of improper behavior at Philidor, just as we have been. We know the allegations have also led them to question Valeant and our integrity, and for that I take complete responsibility.”
Valeant also appointed former Deputy Attorney General of the United States Mark Filip of Kirkland & Ellis LLP to advise the committee in its review of allegations related to Valeant’s business relationship with Philidor.
On Thursday afternoon, CVS and Express Scripts also terminated their relationships with Philidor.
What’s at stake for Ackman?
Ackman’s Pershing Square Capital Management owns 21,473,933 shares of Valeant, including 2 million shares Ackman bought during last Wednesday’s sell-off.
He bought his original shares at an average price of $198. The new shares were bought at around $108.
Pershing Square is Valeant’s third-largest shareholder. The stock is Ackman’s largest investment, making up a percentage of his portfolio that’s in the “high teens.” The losses have dragged down his fund’s performance.
Pershing Square Holdings, the fund’s publicly traded vehicle, is down 15.9% this year through Tuesday, October 27.