Valeant Pharmaceuticals seems to have inadvertently drew the Securities and Exchange Commission’s attention to itself, according to media reports. The company itself is keeping a firm official lid on the story, although management attempted to reassure sell-side analysts on Tuesday, and another analyst has downgraded its stock, commenting, “The silence is deafening.”
Meanwhile Bill Ackman is watching millions of dollars drain out of his Pershing Square Capital Management as Valeant shares plummet, although today the stock is edging higher. Shares climbed by as much as 2% to as high as $68.76 in morning trades today.
Canaccord Genuity downgrades Valeant Pharmaceuticals
The drug maker has received several downgrades and price target cuts since disclosing that the SEC is investigating it and that it is facing numerous other probes by other agencies as well. The latest downgrade comes from Canaccord Genuity analyst Neil Maruoka, who’s moving from Buy to Hold on the company’s stock and slashing his price target from $125 to $75 per share.
The analyst said the investigations have “been a long time coming” and that he is still not convinced that “anything nefarious or fraudulent has gone on.” His problem with Valeant Pharmaceuticals is management’s tight-lipped behavior, the decision to delay the filing of the 10-K and the potential restatement of earnings.
Interestingly, CEO Mike Pearson, who just returned from a two month-long medical leave during which he battled severe pneumonia, actually called sell-side analysts on Tuesday to ask for more time to understand the drug maker’s performance, according to Bloomberg. Nomura analyst Shibani Malhotra and UBS analyst Marc Goodman described the conversations in their notes. Both rate Valeant Pharmaceuticals as a Buy.
Valeant said to accidentally trigger SEC probe of itself
During that phone call, management apparently provided more details on the investigation. Reuters reports that unnamed sources claim Valeant asked the SEC to investigate allegations made by short-seller Andrew Left, who founded Citron Research. Left demanded a probe of Valeant’s relationship with embattled specialty pharmacy Philidor, alleging that the drug maker used that relationship to book some false revenues.
Unfortunately for Valeant Pharmaceuticals, the SEC also turned its attention to its operations following the call to investigate Left’s allegations. Reuters’ sources also reportedly said that the probe into Salix Pharmaceuticals, which Valeant acquired last year, is continuing separately from the new investigation.
Bill Ackman feeling the pain from Valeant
As shares of the drug maker plunged further and further, activist investor Bill Ackman is watching his investment into the company go up in smoke. He started purchasing shares about a year ago, reports MarketWatch, and at that time, he paid two to three times what they’re worth now. The media outlet estimates the hedge fund manager’s loss on his investment at about $2 billion based on this week’s prices. In just a single day, he lost $321 million on his investment, according to Bloomberg News.
MarketWatch reports that regulatory filings show Ackman’s Pershing Square first purchased Valeant shares in the first quarter of 2015, ending the quarter with 19.5 million shares, which was a new position. At that time, the stock was trading at around $200, and FactSet data indicates that the volume-weighted average price then was $177.37.
Valeant Pharmaceuticals saw a record closing high in August 2015 at $262.52, but Ackman stayed in although at that time he could have racked up profits of $1.66 billion. The trouble started in Fall 2015, however, when Congress began looking into the huge drug price increases the company has made over the years. Also Democratic presidential candidate Hillary Clinton continues to target it on the campaign trail, vowing to take it down, and the Philidor controversy started around that time as well.
However, Ackman waded further in by grabbing up another 2.1 million shares in October at a price of about $112.75. He sold approximately 5 million shares in December for tax purposes but bought them back in February at a price of $94.77 each on average.
