Valeant Pharmaceuticals: You Can’t Smooth The Lumps – RGA

This is source I found from another site, main source you can find in last paragraph

and Valeant) up to that point in time.

Here is the chart introducing Valeant in Ackman’s slide:


Valeant generated the 45x return for shareholders who held the company from February 1, 2008 to May 1, 2015. The stock continued to trade higher into early August 2015, before its chart turned into a cascading waterfall.

Here is what the Valeant chart looks like from May 1, 2015 through the end of Q1 2016:


Valeant Pharmaceuticals

Note that the stock is down 87.88% in the above timeframe. Much ink has been spilled over Valeant, and we could continue to write about this company and its stock ad nauseam. Since your time is sparse, we will focus on what we think is the important and broadly applicable take-away. Both the rise and fall in Valeant were directly related to the path dependency inherent to its business model. Leaving aside some of the secondary sources of growth, Valeant’s primary means for achieving its growth target was via acquisition. In order to finance these acquisitions, the company used a combination of equity and debt. As the stock price rose, Valeant had a growing “currency” in the form of its shares to use for acquisition financing. With a rising stock price, also came increased debt capacity. On its ascent, each acquisition by Valeant further boosted its share price. Each extra boost in its stock price created greater equity and debt capacity for financing future acquisitions. This enabled the company to make larger acquisitions every step of the way—as is evident on Ackman’s slide above highlighting the main events in Valeant’s history. As a result of its success, investors priced in growth premised on Valeant’s continued ability to make value-enhancing acquisitions.

For a variety of reasons, Valeant’s stock price started falling. It started slowly and subtly. The stock kept falling and the narrative and sentiment eventually started turning sour. A moment of truth occurred in October 2015 when Roddy Boyd of the Southern Investigative Reporting Foundation unearthed some unscrupulous practices happening at the company’s wholly owned, specialty pharmacy Philidor.[3] From that point on, it became clear that Valeant would be essentially incapable of completing another acquisition until it patched some holes in its trove of businesses.

The exposure of problems at the company alongside a falling stock price categorically changed the fundamentals of the business. This is important to grasp, for it was not the business that changed, thus pulling the stock with it—as is typical in the stock market. Instead, it was the stock dragging the business down. We think this would have happened to the company irrespective of what the precise catalyst was. Why? First, these problems precluded another acquisition, thus “pricing out” any potential growth via M&A from the stock. Second, they precluded the company from using its existing practices to squeeze out growth from their products. Third, all of these factors collectively forced doctors, patients and the other health system stakeholders to question whether they should even use Valeant’s treatments at all when safe alternatives were possible.

These factors all led to a second big moment of truth in March, when the company reported earnings and guidance that missed consensus estimates by a significant amount.[4] The forces at work here, whereby the stock price influences fundamentals and vice versa is something we covered with respect to MLPs, oil and ETFs. This relates back to George Soros’ notion of reflexivity and the prevalence of positive feedback loops, another physics concept adopted by finance to better understand financial markets. We are speaking about these concepts again here, because this quarter was exceptionally volatile in financial markets and Valeant is a widely covered story in the media. Both factors have created sympathy selling in our holdings that are in the same sector as Valeant—Teva Pharmaceuticals (NASDAQ: TEVA), Sanofi Aventis (NYSE: SNY) and Vertex Pharmaceuticals (NASDAQ: VRTX). None of these stocks share the features that have impacted Valeant on the way down and it is only a matter of time before the strong fundamental backdrop for our holdings reasserts itself.

What do we own?

Returns reflect US dollar denominated returns over our holding period.

The Leaders:

GrubHub Inc (NYSE: GRUB) +26.9%[5]

Priceline Group (NASDAQ: PCLN) +17.7%[6]

PayPal Holdings Inc (NASDAQ: PYPL) +6.6%

The Laggards:

Vertex Pharmaceuticals (NASDAQ: VRTX) -36.8%

DXP Enterprises (NASDAQ: DXPE) -23.0%

Exor SpA (BIT: EXO) -21.6%

Thank you for your trust and confidence, and for selecting us to be your advisor of choice.  Please call us directly to discuss this commentary in more detail – we are always happy to address any specific questions you may have.  You can reach Jason or Elliot directly at 516-665-1945.  Alternatively, we’ve included our direct dial numbers with our names, below.

Warm personal regards,

Jason Gilbert, CPA/PFS, CFF, CGMA

Managing Director

O: (516) 665-1940

M: (917) 536-3066

[email protected]

Elliot Turner, CFA

Managing Director

O: (516) 665-1942

M: (516) 729-5174

[email protected]





[5] Position commenced intra quarter

[6] Position commenced intra quarter

This is source I found from another site, main source you can find in last paragraph

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