A Not So Valeant Effort by ValueAct

The amount of monetary and mental pain being absorbed by Bill Ackman and his Pershing Square investors due to Valeant’s current free fall has been well documented.

But what about other hedge funds who have stayed overnight in this hotel? Articles have been disseminated that have scrutinized Sequoia’s oversized position.  As a side note, Sequoia’s fund managers were supposedly Buffett disciples.  Nothing about Valeant screams a typical Uncle Warren investment.

This brings me to another large hedge fun, ironically named ValueAct, which as of its most recent 13F filing manages around $14.5B and has a 10.5% position in Valeant. This, by any and all measures, is a very important, successful, and massive hedge fund that has the ability to move markets.

I say ironically named because there are minimal fundamental financial metrics or strategic and operational catalysts related to Valeant’s, past, present, and (highly questionable) future.

While Valeant has seen greater than 10% YOY revenue growth in each quarter since Q4 2010, partly due to controversial price hikes, earnings have been erratically bipolar due to cost-trimming initiatives, as well as Red Bull fueled acquisitions leading to massive amounts of leverage and debt payments.

Relating to the strategic and operational paradigm of Valeant’s, despite a handful of their commercialized products that deserve praise, others aren’t necessarily giant leaps for mankind; including toe nail fungus relief, contact solution, and acne medicine.

Moreover, their polemic pipeline doesn’t scream massive innovation, with glaucoma treatment being the brightest star. Notice how R&D hasn’t been mentioned, merely the lack of it is implied.

Turning the attention back to ValueAct, if attractive financial ratios and business catalysts are not present, what other “value” drivers do they see? Maybe it can be found in their February 4^th investor letter, wherein Jeff Ubben alludes to one of their investing strategies:

“We look for opportunities where a company can remove intermediaries that distribute, resell, install, service and maintain their products. In the case of a company with diffused customers and limited internal resources, the “middlemen” can be extremely helpful.

However, this help comes with a cost as the middlemen need to get paid, extracting economics from the industry.”

Fair statement and clever approach, except that Valeant has become the poster child for middlemen via specialty pharmacy Philidor. Then, Ubben goes into saying this about Valeant and their management team:

“At Valeant, we will continue to help the company navigate out of the storm of pundit criticism, short seller allegations, and management turmoil. Today, with CEO Mike Pearson on medical leave and the ongoing board investigation of Philidor, a lot seems uncertain.

However, we believe much of this will be resolved in 2016 as the team delivers operating results and cash flows. The Ad Hoc committee will report the facts, the crisis will move behind us, and the company will chart a new path, having learned lessons from the events of 2015.”

2016 hasn’t necessarily gone off without a hitch. This is what the public knows (with more surely to come): Valeant withdrew earnings forecast last night, delayed the 2015 10-K filing, suspiciously their CEO J. Michael Pearson came back from a three month hiatus of pneumonia, and canceled an analyst call that was to be scheduled after yesterday’s close, but canceled it after the media discovered it.

Shout out to Bluestar who wrote about Valeant and shorted this, and caught the next potential misdeed- discussing 2016 operations with a limited amount of investors and not in the public domain. Read his Valeant posts if you haven’t yet.

This post shouldn’t be interpreted as bashing ValueAct, Pershing Square and Ackman, Sequoia, or any of the other powerful hedge funds. More so, it should be a warning and reminder to all of us that individual stocks can be freaking dangerous.

Say what you want about them, but you cannot doubt that these are all brilliant people, with all the financial resources and quant brainiacs at their disposal, whose success we all hope to achieve. That’s the scary part of Valeant heading off a cliff like that dude on his horse in The Revenant.

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