Has Valeant Pharmaceuticals Lost Both Its Unwavering Pillars – Pearson and Ackman? – Bidness ETC

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) had a particularly tumultuous 2015. Under intense political pressure over the company's controversial business model, the stock crashed by over 62% between September and November. Share prices dropped to barely $ 89 apiece by the end of November, from an August high of more than $ 263. December saw the drug-maker's shares recoup over 26% in value, but the momentum gained was short-lived.

In the last week of December, Valeant CEO Michael Pearson was hospitalized with severe pneumonia, leaving a hurriedly appointed three-man office in charge of the ill-fated company until his return. The office includes Robert Rosiello, the company’s CFO, Robert Chai-Onn, General Counsel and Chief Legal Officer, and Ari Kellen, Manager, US Dermatology and Contact-lens units. The news sent Valeant's stock crashing by over 10% in trade, as investors feared how the company will be managed at its most crucial juncture, without its 8-year long chief executive.

On Thursday, the last trading day of 2015, Valeant investors were hit with another set of bad news. Billionaire investor William Ackman sold about 5 million Valeant shares, cutting the stake of his hedge fund, Pershing Square Capital Management, in the company to 8.5% from 9.9%. In a regulatory filing made after markets closed on Thursday, he claimed the shares were sold to "generate a tax loss" for investors. The fact that Mr. Ackman, one of the biggest investors and a vocal supporter of Valeant throughout its crash, has reduced stake in the company will not be taken well by the market.

Is Ackman Bailing On Valeant?

Pershing Square’s investment in Valeant was first revealed in March 2015; the fund held a 5.68% stake in the drug-maker, as of September 30, consisting of nearly 20 million shares. Mid-October, a short-selling firm called Citron published a report accusing Valeant of an Enron-like fraud. The report sent the company's shares crashing by 20% in a single day, but Mr. Ackman's faith in Valeant remained unfazed. He responded by increasing his stake in the company by 2.1 million shares, worth an estimated $ 232 million. In the days that followed, Mr. Ackman conducted two conference calls defending Valeant's position – setting a rather unique precedent of an investor speaking on behalf of a company. In his four-hour call about Valeant in October, he said: "Our only disappointment was unfortunately we didn’t have lot of money going around. We are fully invested at Pershing Square and we scraped together a couple of hundred million dollars to buy those shares."

In a November 9 conference call, he said about Valeant, "This business model is one we believe in," and publicly backed Mr. Pearson, as investors began to lose confidence in his leadership. In the following weeks, Mr. Ackman further boosted his stake in the company by nearly 12.5 million shares to 9.9% – the maximum practical stake limit an activist hedge fund can own in a company. Given this, Mr. Ackman's latest move stands in stark contrast to his past statements and claims regarding Valeant.

Mr. Ackman failed to comment on the filing, and neither was a company spokesman available for a statement. To be fair, however, 2015 turned out to be the worst year ever for the activist investor, mostly driven by Valeant's losses. One of his funds posted a 19.7% loss through December 29, which, when compared to last year's 40% reported gain, helps put things in perspective. Feeling a bigger responsibility to his funds' investors, Mr. Ackman finally decided to make a move in their favor.

At the same time, note that much of Mr. Ackman's 2014 gains were made through his relationship with Valeant. Last year, the two teamed up to buy a 10% stake in Allergan. Soon after, Valeant – allegedly under Mr. Ackman's advise – extended a takeover proposal to the drug-maker. Meanwhile, Mr. Ackman used his own stake in Allergan to try and pressure its board to the merger. Although the deal did not come to be, with Allergan accepting a competing offer from Actavis instead, Mr. Ackman and Valeant ended up making a lot of money in the process. The two now face an insider trading lawsuit into their Allergan bet of last year.

Valeant Without Its Two Pillars

Valeant is currently at its most crucial turning point. The company is undergoing federal investigation into its drug pricing and distribution practices, with several court hearings lined up for 2016, including potential testimony hearing from Mr. Pearson. Presidential candidates, including Hillary Clinton and Bernie Sanders, have brought immense public attention to an infamous strategy used by drug-makers, led by Valeant, of buying proven, undervalued assets and boosting their prices overnight.

Moreover, the company's balance sheet is overloaded with debt, since Mr. Pearson achieved much of Valeant's growth since 2008 through M&A financed by debt. Citron has also brought to light Valeant's shady distribution practices, particularly through a fraudulent mail-order pharmacy called Philidor, which dealt exclusively in Valeant's products. Valeant was accused of inflating sales of its dermatology products, by producing phony prescriptions through Philidor. In November, Valeant succumbed to pressure and ended ties with Philidor, leaving its dermatology business at risk.

Last month, the drug-maker began pulling together, instilling new hope in investors. Valeant signed a 20-year distribution deal with Walgreen Boots Alliance Inc. as a replacement to Philidor. Mr. Pearson also held an investor day for the company late in December, in which he promised double-digit, same-store organic growth from the business to continue from next year, fueled by volume sales. He also cut the fourth quarter and 2015 earnings guidance for Valeant and announced 2016 earnings estimate, which analysts considered "reassuring". However, overhangs still remain on the stock.

The company desperately needs a stable leadership to execute the Walgreens deal, which already has some complications attached to it, and to make good on the guidance for upcoming quarters. Valeant also needs continued support of activists like Mr. Ackman to convince investors of its transparent and fair business practices, especially when the extent and size of the Philidor-like controversy still remains unclear.