Pershing Square, the third largest shareholder of Valeant Pharmaceutical, continues to hold on to its investment even as Valeant fell 51.5 per cent the day it lowered its 2016 profit outlook and announced the possibility of loan agreement breaches if its annual report is not submitted on time.
Valeant crossed $34 on March 15, a huge drop from the $260 level it was trading at last 2015.
This displays the jump from about $750 million to $900 million in losses for Pershing Square on the same day. This has resulted with Pershing Square also suffering a drop in share price meaning it is down 26.4 per cent this year. The company trades at a discount greater than 10 per cent of its estimated $15.5 NAV.
Bill Ackman, founder of Pershing Square, insists that Valeant is many times worth its current market price. Ackman has a relationship with Valeant as they tried to take over the maker of Botox, Allergan, in 2014.
Ackman concedes that to be able to realize its value Valeant must be able to regain the trust of the stockholders. Pershing Square hopes to execute this by taking a more pro-active role and installing its vice chairman, Stephen Fraidin, into Valeant’s board.
Pershing maintains its 9 per cent share in Valeant, even as Ackman admits that Pershing had lost on the opportunity to cash in when the stock rode high on the $200 levels. However, the company was restricted from trading at that time as it was privy to a large deal Valeant was involved in.
Pershing Square is coming off its worst year in 2015 when it posted a net loss of 20.5 per cent. Ackman intends to correct the loss by implementing more risk measures on its portfolio. It cut down 20 million shares on another stock, Mondelez, for portfolio management purposes that prevent the stock from dominating Pershing’s portfolio and becoming its biggest exposure. Mondelez has also suffered a 7 per cent loss in value this year.
Pershing Square still owns 5.6 per cent of the maker of Oreo.
Valeant’s recent announcement displays the many woes that have followed the company recently. Valeant had been under public scrutiny earlier for its pricing and distribution strategies. Even Hillary Clinton had caught wind of this controversy and promised to scrutinize the company if she wins the elections.
Valeant also had to restate earnings, face shareholder lawsuits and, for its link to a mail-order pharmacy, undergo board committee investigation.
The possible delay in the filing of its financial statements is caused by the discovery of improper accounting and might trigger a default on a $30 billion debt.
Before all these, Valeant flew high in the market by attracting investors with the strategy of exploiting the near zero interest rate policy to borrow and acquire undervalued drugs. Not having to undergo the long and expensive process of research and drug development, it concentrated on cost reduction and increasing prices.
Other investors also lost big on Valeant. Ruane Cunniff & Goldfarb, its biggest shareholder at 10%, is estimated to have lost $1.25 billion. T. Rowe Price’s paper losses are estimated at $776 million. Jeff Ubben’s ValueAct also suffered from this round but the fund had cashed in a year ago and appears to still net a gain on the investment.