Some of the pain hedge funds have been feeling thanks to the sudden plunge in Valeant Pharmaceuticals’ stock price abated today as the drug maker’s share price rallied. The stock climbed as much as 7.63% to $170.40 per share and kept rising in afternoon trades today, although it has a long way to go to reach this month’s high of more than $240 per share.
Pershing, ValueAct, Sequoia lose on Valeant
Valeant and other drug makers’ share prices have been dramatically impacted by comments in the presidential race about placing restrictions on drug pricing. Valeant was hurt even more than other companies in the space, as Democrats sought a subpoena to force the company to release more details on the recent price increases on two of its drugs.
Walter Schloss isn’t a name many investors will have heard today. Schloss was one of the great value investors who trained under Benjamin Graham and specialized in finding cheap stocks. His track record was outstanding. In Warren Buffett’s 1984 essay, the Super Investors of Graham-and-Doddsville, he noted that between 1956 and 1984, Schloss’s firm returned Read More
Healthcare stocks have drawn in some big names in the hedge fund industry because they have been a bright area in an otherwise difficult market. Miles Johnson of the Financial Times reported that three of the highest profile hedge funds which have taken a beating this week because of the size of their stakes in Valeant Pharmaceuticals are Jeffrey Ubben’s ValueAct Capital, Bill Ackman’s Pershing Square Capital Management, and John Paulson’s firm Paulson & Co.
Almost a third of Pershing in Valeant
Ackman is known for allocating his portfolio to just a relatively few number of stocks, and regulatory filings indicate that Pershing had 30% of its capital in Valeant shares. Indeed, there is great reward in picking winning stocks, and Ackman has a strong track record, with his fund gaining nearly 40%last year alone to be one of the year’s best-performing hedge funds. However, Valeant’s dive of 39% since its peak last month illustrates how much risk can be involved in this strategy as well.
Filings with the Securities and Exchange Commission indicate that at the end of the second quarter, Pershing Square’s stake in Valeant Pharmaceuticals was worth $4.3 billion. In other words, if Ackman hasn’t trimmed his position since the end of June, his firm could have lost as much as $1.6 billion on its Valeant stake. That would erase all the paper gains Pershing won from the stake it snapped up during the first quarter.
Other funds losing on Valeant too
Of course Ackman’s not the only hedge fund manager who practices this strategy. According to the Financial Times, Tiger Ratan, a fund operated by Tiger Cub and Brave Warrior Advisors probably both lost quite a chunk of change over the last month or so. Both funds’ latest regulatory filings indicated that they each had more than one-fifth of their assets in Valeant Pharmaceuticals.
Earlier this week, Bloomberg calculated that Sequoia Fund lost approximately $1.2 billion on paper from its stake in Valeant. The fund held 28.5% of its assets in the company and made a strong positive case for it earlier this month. Filings also indicated that Paulson had a 2.6% stake in Valeant worth $2 billion as of the end of June.
ValueAct has also had a significant stake in Valeant, actually holding a position in the drug maker since 2006. Since Ubben’s firm accumulated that stake, the company’s share price has skyrocketed, so the good news for him is that even if he hasn’t sold any of the firm’s position, he’s still in the black on that investment. In fact, as of June, ValueAct had seen a whopping 2100% return on its Valeant investment.
We already know that ValueAct sold 4.2 million shares of Valeant in June, although Ubben said at the time that the fund’s stake in the company would “continue to be well in excess of” $3 billion and still one of their largest investments.
More volatility ahead for Valeant
The pain relating to Valeant Pharmaceuticals probably won’t end any time soon, believes Bank of America Merrill Lynch analyst Sumant Kulkarni. He warns investors to brace for continued volatility in the drug maker’s stock, but he reinstated coverage of it with a Buy rating and $290 per share price objective. That represents an upside potential of about 80%, and he said he likes the risk-reward profile here, noting that Valeant shares have plummeted 40% since hitting their 52-week high on Aug. 6.
The analyst said he likes the diversification of the company’s product portfolio, its “sticky” asset base,” and continued growth. He said Valeant gets about 70% of its revenue in the U.S. and about 30% internationally and covers several attractive areas like ophthalmology, dermatology, consumer health and gastroenterology. He describes these areas as “sticky” assets because typically the products are used for longer durations.