Valeant Pharmaceuticals shares slipped by more than 8% during regular trading hours today, falling as low as $86.56, following a very negative initiation report from Wells Fargo analysts. But there’s an interesting backstory involving the lead analyst on this bad report and a company Valeant acquired years ago.
Meanwhile it seems activist investor Bill Ackman just can’t get enough of the company he teamed up with in a failed landmark move to try to force a hostile takeover of Allergan.
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Wells Fargo starts Valeant at Underperform
Wells Fargo Senior Analyst David Maris has set a valuation range of $65 to $68 per share with his Underperform rating on Valeant Pharmaceuticals. He recently met with management to talk about some concerns he has but feels that they didn’t adequately answer his questions. He’s got quite a list of concerns: “management strategic direction, recent guidance, the mechanics of the Walgreen’s deal, the dramatic increases in gross-to-net revenue adjustments, the cause of the rise in days sales outstanding (DSO), and how changes to deferred tax assets and deferred tax liabilities may have affected earnings.”
The analyst disagrees with many of the decisions made by management and the board and thinks that both the business itself and its reputation are put at risk by those decisions. He disagrees with the widespread view that they created “a huge amount of value,” noting that Valeant’s market value has tumbled by about $60 billion from its peak with a current valuation of $30 billion.
Can Valeant adapt?
Maris does see some positive things in the drug maker, however, as he named a number of brands which are performing very well. Specifically, he names the Xifaxan brand, which he expects to bring in more than $1 billion in sales this year, and Valeant’s ophthalmology, dental and consumer brands. Further, he likes the broad diversification the company has.
Management recently announced a new business model for its pharmaceutical business, which relies on low-cost debt to make deals, plus cutting costs for acquired companies, increasing prices, and “specialty pharmacy practices that are now under scrutiny” according to media reports. Maris thinks that scrutiny might impede Valeant’s future growth and wonders whether the drug maker will be able to adapt to “the new environment.” As a result, he think the company’s stock is too risky.
Maris’ history with Valeant
Interestingly, Street Insider reminds us of Maris’ past with Biovail, which was acquired by Valeant after he blew the whistle on wrongdoing at the company in 2003. The story was covered in June 2011 by DealBook. At the time, he was employed by Bank of America, which fired him after he exposed the happenings at Biovail.
The analyst said it was ridiculous for the company to say that it missed earnings expectations because a truck carrying a large amount of its drugs crashed. Biovail sued Maris, Bank of America, SAC Capital and Gradient Analytics, accusing them of conspiring to push down its stock price. Eventually, however, Biovail settled with the Securities and Exchange Commission following allegations that it was actually the company itself and its management who were manipulating the stock price.
The lawsuit against Maris, Bank of America and the other firms was dropped, but the firm fired him later anyway. Bank of America said his firing didn’t have anything to do with what happened with Biovail.
Bill Ackman keeps buying Valeant
Valeant Pharmaceuticals has been a controversial stock for quite some time, with the new scrutiny involving drug pricing just being the latest hiccup of many. Nonetheless, Bill Ackman continues to like it,and he’s all-in on the drug maker now as he’s grabbed up some more shares.
Regulatory filings indicate that his firm Pershing Square Capital now holds a 9% stake in the company after snapping up almost 1 million more shares since the fourth quarter, including call options. As of Feb. 5, the firm had about 21.6 million shares plus 9.12 million unexercised call options. It marks a 30% bump in Pershing’s holdings in Valeant since the end of December although a 27% decline in options, notes Fortune‘s Lucinda Shen.
She adds that Ackman bought those shares after he apologized to investors last month in a letter, saying that he should have sold Valeant last summer when shares were higher than $200. The letter followed the worst year of returns in Pershing’s history as the firm lost 20.5% of net fees.