The Wall Street Journal’s Monica Langley has a terrific behind the scenes account of Bill Ackman’s exchanges with executives at embattled pharma giant Valeant Pharmaceuticals.
Ackman, the founder of Pershing Square Capital Management, is the third largest shareholder of Valeant. In the last month, he’s lost around $US2 billion on paper after Citron Research, a short-selling firm led by Andrew Left, issued a report two weeks ago asking if the company was running an Enron-like fraud. Before that, the company had been scrutinised for drug price increases, which has become a hot-button issue in Washington, D.C.
On Tuesday, October 27, the day after the embattled Canadian drug company hosted an all-hands call address the short seller’s allegations, Ackman sent a strongly worded email to CEO J. Michael Pearson.
“Your reputation is at grave risk. Valeant has become toxic. Even we are very concerned,” Ackman wrote in an email sent at 6:52 a.m., according to the Wall Street Journal’s report.
Almost an hour before he had hit send, Pershing Square sent out a press release that it would be hosting a call of its own with investors to discuss its investment in Valeant.
‘If Mike hides…he can’t be CEO’
Later that morning, Ackman called into Valeant’s board meeting telling them that they need “come clean” and host another conference call that day, the WSJ report said.
That didn’t happen.
On his own call last week, Ackman said that he would have “appreciated more colour” from Valeant’s management on its all hands call as opposed to a “scripted” conference call. He also noted that his fund strives to be “transparent” and he wanted Valeant to do the same. He felt like Valeant failed to adequately some key questions on its call.
A comment from Ackman made to a board member that day also made it sound as if Pearson should be ousted.
“If Mike hides in his bunker on this, he can’t be CEO,” Ackman told the company’s lead director, Robert Ingram of Hatteras Venture Partners.
His point, though, was that Pearson shouldn’t hide. Instead, he should get out there and answer everything, unscripted.
A four hour call
On Friday, the last trading day in October, Ackman spent nearly four hours defending his Valeant investment. More than 9,000 people were listening, Langley reports.
On the call, Ackman said that he expects that Valeant will have to deal with 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.” he said.
Ackman thinks the stock is “tremendously undervalued” and that it has an “89% upside.” He added that investors are forgetting the “rest of Valeant’s business.”
He also noted that Valeant needs to do better public relations and government relations. He also said Pearson is still the right person for the job.
“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.”
Pershing Square’s performance has been badly bruised by the Valeant decline.
Pershing Square Holdings, the publicly traded vehicle led by hedge fund titan Bill Ackman, is down 19% year to date, according to a performance update. The fund fell 7.3% in October. Most of the losses lately though have come from Valeant, the fund’s largest holding, comprising percentage of Pershing’s portfolio in the “high teens.”
Last year, Pershing Square was the best performing hedge fund, returning just over 40%. A large part of those returns were a result of his profitable stake in Allergan.
In 2014, Ackman teamed up with Valeant to pursue a hostile takeover of Allergan. All of Ackman and Valeant’s offers had been rejected. Actavis came in and bought Allergan in a $US66 billion deal.
Even though Valeant was unsuccessful in its takeover attempt, Ackman still got a massive payout from his huge stake in Allergan.
He didn’t buy Valeant until February of this year. He couldn’t own the stock while they were working on a takeover.
The Citron report
The day the Citron report came out Pershing Square loaded up on 2 million more shares of Valeant with an average purchase price of $US108.
The Citron report focused on the company’s mysterious 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. No one on Wall Street had really heard of Philidor until a few weeks ago.
Citron has accused Valeant of using Philidor to create “phantom sales” of its products.
Valeant has denied the allegations in the original Citron report.
On Friday morning, Valeant also said that it would sever “all ties” with Philidor, noting that it accounted for only about 7% of its revenues.
A stock under pressure
Before the Citron report, Valeant’s share price had already come under pressure after it had been criticised for its drug pricing. The company has also been compared to Turing Pharmaceuticals, a biotech startup run by controversial CEO Martin Shkreli, who increased the price of a critical drug from $US13.50 to $US750 overnight.
In late September, Democrats on the US House Oversight and Government Reform Committee sent a letter to the committee’s chairman, Rep. Jason Chaffetz (R-Utah), asking him to subpoena Valeant for documents related to price increases of acquired drugs.
On Wednesday, the US Senate launched a bipartisan investigation into pharmaceutical companies raising the prices on acquired drugs. The first hearing will take place in December.
On Thursday, Valeant’s share price was last down more than 10% at $US81.93. The stock has fallen around 40% in the last two weeks.
Here’s a one-year chart of Valeant:
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