Valeant: The Bad News Trifecta

If Valeant Pharmaceuticals was trying to prove to worried investors that the company was running on an even keel and that all was well, it has failed to do so in spectacular fashion.

To recap, earlier this week, within a 48 hour period, the company did the following;

  • Retracted a financial forecast
  • Deferred an announcement of its results for Q4 2015
  • In response to media questioning, admitted to being the subject of a probe by the US Securities & Exchange Commission (better known as the SEC), something which it had not formerly made public.

The first two by themselves wouldn’t necessarily be as bad if the company was in a strong position – it’s certainly not unknown for companies to change their forecasts or even defer their quarterly results announcement. But Valeant is most certainly not in a strong position – 2015 was a disastrous year for Valeant, when it came under fire for alleged nefarious practices.

And when you put the first two things together with the last, then this goes from being a highly uncomfortable situation to being a potentially disastrous one.

Valeant’s stock is worth less than a third of what it was a year ago. Then the stock was hovering just above the 200 mark at around 202. At the time of writing, the share price is at the 67.5 mark, having suffered a further drop after the revelations earlier this week after news broke of the SEC probe into the company.

Ackman’s Folly

Hedge fund manager Bill Ackman has been almost as vocal a defender of Valeant as he is a critic of Herbalife. But the outspoken Billionaire investor has certainly put his money where his mouth is. A year ago Pershing Capital, Mr Ackman’s fund, purchased 19.5 million shares in Valeant, a stake that, with the upward trajectory of the stock price until a high point of $262.52 on the 5th August, seemed like a good move.

But things began to shift in September, when Congress started asking questions about certain pharmaceutical company practices. Ackman could have sold then, instead, he doubled down, buying a further 2 million + shares in October. He sold 5 million shares for tax reasons in November, only to buy them back in early February. With the series of slumps in Valeant’s share price, at this point Ackman is billions in the red as a result of his trading.

Ineptitude or Malevolence?

Last year Valeant was accused of intentionally obfuscating its finances and breaking the law. The main defence against these accusations was that none of this was deliberate – in other words, ineptitude rather than malevolence. Yet the instances of such apparent ineptitude have not decreased since these accusations were made. If anything, they are increasing – to such an extent that both the markets in general and investors in particular are starting to show some suspicion that there might be something more. Can such a constant level of apparent ineptitude truly be possible, or is there something more sinister here? The outcome of the SEC’s probe may tell us more.