It has now been three weeks since CitronResearch.com accused Valeant (VRX: NYSE) of being Pharmron (Pharma + Enron). Ever since then, I’ve read a bunch of articles and tried to find an actionable angle. When there are rumors, innuendo and allegations of fraud, there’s a potential for opportunity. However, the deeper I dug; something increasingly struck me as rather odd about Valeant. At its peak, why was it so overvalued?
Valeant has spent approximately $34 billion on acquisitions after subtracting for dispositions, since 2010. Much of this acquisition spree was paid for with borrowed money or overvalued shares. How did this company with a net acquisition value of $34 billion trade up to an enterprise value of $120 billion only a few months ago? No one is that smart of a buyer. There are dozens of pharma companies looking for accretive acquisitions—the odds that Valeant got amazing deals through hotly competitive bidding wars is unlikely. It isn’t like there’s anything exceptionally proprietary about Valeant’s “platform” either—outside of the ability to increase revenues through questionable billing practices.
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Does this meteoric rise in valuation have anything to do with the $703 million in investment banking fees paid to financial institutions since 2010 (according to the Wall Street Journal)? Excluding financial institutions, only General Electric, Verizon and Kinder Morgan have paid more in fees over the past five years. I guess that buys you a lot of “strong buy” recommendations and “focus list” mentions. It gets brokers to push extra hard to get clients to buy shares. Even more importantly, it ensures that analysts refrain from asking difficult questions when they’re doing due diligence.
Now, I’m not against roll-ups. There have been some great success stories of guys buying cheap assets, creating synergies, reducing costs and building huge value for shareholders. Some of these stocks deserve to trade at sizable premiums to the cost of their recent acquisitions. However, $34 does not equal $120, no matter who is running the show—especially as these aren’t small companies that you can ramp up rapidly—Valeant was buying mature pharma plays and paying full prices for them.
For us investors, there’s a lesson here; when Wall Street is pushing a product at you—watch out!!
Disclosure: I have no positions in Valeant