Pershing Square Capital Management has flung off the albatross of Valeant Pharmaceuticals Intl Inc (NYSE:VRX(, selling its shares in the embattled drug company at a massive loss. Coming a month to the day after a litigation agreement relating to the attempted acquisition of Allergan, Bill Ackman’s decision to cut and run raises the prospect of more time to dedicate to new investments, and handy tax losses, should the fund return to profitability. It’s hard to say what the dalliance with Valeant, which fired its CEO after fighting Ackman’s addition to the board as secrets of its business model were unveiled, has cost the activist. At least $3.1 billion, plus funds plowed into M&A and putative relaunches, not to mention time and opportunity and reputational costs. Meanwhile, activists have jumped back into Pharmaceuticals. Ackman’s Valeant stake quickly became the sacrifice to enable others to live.
The above excerpt comes from Activist Insight amid news that Bill Ackman sold his entire stake in the company.
What do analysts say?
Analysts from BMO think the sale by Bill Ackman is bad news for Valeant Pharmaceuticals shareholders. They opine:
We were surprised that Pershing Square, VRX’s largest shareholder, decided to sell its entire investment (27.2mm shares, ~8%) at this time. Understanding Pershing’s need to manage its portfolio as it deems appropriate and considering its public endorsement of VRX’s new management team that it helped put in place, we still think it’s hard to interpret Pershing’s decision at this time as anything but a realization that this turnaround situation may end up taking a lot more time and perhaps have greater challenges than originally anticipated. The timing of this decision is particularly noteworthy since new management is just beginning to implement a number of its strategic initiatives, including asset sales to help pay down debt, pipeline approvals and new launches, and a primary care effort behind key product Xifaxan to accelerate that product. This was a time when it would have been more ideal for the top shareholder to continue to support these efforts rather than “throw in the towel” when the stock is so depressed.
And furthermore, they state:
Considering all of Pershing’s efforts to create a turnaround situation with the new management team, we believe this “throwing in the towel” at these levels sends a poor signal regarding the road ahead for VRX.
The analysts at BMO have cut their price target on Valeant Pharmaceuticals from $19 to $15.
Canccord Genuity analysts mostly agree with BMO, stating in a report titled “Ackman throws in the towel”:
This brings to a close Pershing’s relationship with Valeant that began with a concerted but failed effort to acquire Allergan in 2014. According to reports, Pershing felt that its investment in Valeant required a disproportionate amount of effort and it was unlikely that Pershing would recoup its losses. We believe Pershing’s move underscores our concerns about Valeant’s lower growth and challenges associated with its asset divestiture strategy. We expect the stock will come under pressure today with elevated concerns around Pershing’s decision given its insider position. Given the recent increase in leverage and the consistently lagging growth, we are lowering our target price to US$12.00 (from US $17.00).
On the other hand, analysts at Stifel Nicholas dismiss the sale by Ackman and point to an improving balance sheet.
VRX has since rebuilt its management team, pursued asset sales to simplify the business, strengthened the balance sheet, and has refocused investment into growth assets and R&D. Despite this, the stock has continued to decline and Ackman is finally capitulating and taking the tax loss, with VRX representing ~$300mn (or <3% of its capital) down from what was a multi-billion dollar investment. This will be another sentiment hit to VRX shares, only a day after agreeing to terms on the restructuring of its Term Loan facilities and upsizing a bond financing that extends a good portion of its 2018-2020 obligations. Though the overhang of its most urgent debt maturities have been removed,
Valeant Pharmaceuticals remains committed to its debt repayment target by early-2018, of which half remains to be satisfied through cash flow and additional divestments.
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