Valeant Pharmaceuticals’ stock has hit a two-year low of $74 and falling.
The stock is down over 17% in Thursday’s trading session after also closing down 6% on Wednesday.
The sell-off may be due to Wednesday’s news that Senators Claire McCaskill (D-MO) and Susan Collins (R-ME) are launching a bipartisan investigation into Valeant — and other pharmaceutical firms — for price gouging.
In her comments on the investigation, McCaskill specifically outlined her issues with Valeant’s acquisition-driven business model.
“Some of the recent actions we’ve seen in the pharmaceutical industry — with corporate acquisitions followed by dramatic increases in the prices of pre-existing drugs — have looked like little more than price gouging,”McCaskill said.
Here’s Valeant over the last two years:
It is this business model that has become the central focus of the controversy surrounding the company now that it has severed ties with Philidor, a specialty pharmacy that distributed products almost exclusively for Valeant.
Philidor’s existence was a company secret until last month, when Valeant was forced to reveal the relationship after several articles from the Southern Investigative Reporting Foundation and the New York Times questioned the pharmacy’s practices with insurance companies.
A suit between Philidor and a member of its “network” of pharmacies was also the central focus of short-seller Citron Research’s accusations that the company was using shell pharmacies to book “phantom” revenue.
Hedge fund parking lot
This is an incredibly dramatic turn of events for a company that was once ranked No. 10 on Goldman Sachs’ stocks that “matter most” to hedge funds list for the second quarter. According to Goldman, 32 funds had the stock as one of their top-10 stock holdings.
Hedge funds and Wall Street analysts alike lauded Valeant’s acquisition based, low R&D spending business model. CEO Mike Pearson, they said, was bringing his McKinsey know-how and creativity to an industry that is by nature risky and expensive.
Valeant’s third largest shareholder is billionaire Pershing Square founder Bill Ackman. On Wednesday he told the Wall Street Journal that he urged Valeant to be more clear with investors after a conference call it held the week before sounded “scripted.”
Last year Ackman helped Valeant with its attempt to acquire another pharmaceutical company, Allergan. It was a hostile takeover, as Allergan’s concerns with Valeant’s business model echoed that of short-seller Jim Chanos, who announced a short position in the stock almost two years ago.
“Valeant’s strategy runs counter to Allergan’s customer focused approach,” said Allergan CEO David Pyott back in May of 2014.
“In particular, we question how Valeant would achieve the level of cost cuts it is proposing without harming the long-term viability and growth trajectory of our business. For those reasons and others, we do not believe that the Valeant business model is sustainable.”
Growth
At issue here is whether or not Valeant actually grows organically as a company, or needs to use acquisitions and aggressive accounting to hide the fact that it’s losing money.
That’s called a roll-up, and that’s what famed short-seller Jim Chanos, one of Valeant’s early detractors, has always said.
Ackman attacked Chanos for that directly last year at the Grant’s Interest Rate Observer conference in New York City.
Grant asked the same questions about Valeant-Allergan that critics have been asking for months — “Does the company actually make money?” “Does Valeant overpay for its acquisitions?” “Doesn’t it need to spend money on R&D?” — Ackman started to bristle a bit.
Suddenly, he turned toward Grant. “Are you short because your daughter is working for Jim Chanos?” he asked pointedly.
Chanos was sitting in the crowd at the time. And at the time, Valeant stock was enjoying a beautiful run, fueled by hedge fund cash.
Now it seems that run has ended, at least for now.
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