Is Bill Ackman right about Valeant Pharmaceuticals?

Valeant Pharmaceuticals (Valeant Pharmaceuticals Stock Quote, Chart, News: TSX:VRX), Canada’s largest and most recognizable healthcare company, has taken an incredible beating over the past month.

The company hit a 52-week low of $116 last week, just a month removed from regularly trading over $300. Many would argue that the healthcare sector was simply overheated, and companies like Valeant were due for a correction. However, the recent evaporation of wealth for Valeant’s shareholders is much more complicated than a simple sector correction, it started last month with implications of “price gouging” and has evolved into implications of potentially fraudulent behaviour.

Valeant’s problems arguably started in mid-September when the New York Times reported on the egregious drug pricing behaviour of a fellow specialty pharma company, privately held Turing Pharmaceuticals, run by an ex-hedge fund manager. Turing had increased the price in the U.S. for an orphan disease drug they recently acquired from $13.50 a pill to $750, not only drawing the attention of the Times, but also the ire of Democratic leadership candidate Hillary Clinton. In the days following the media coverage of Turing’s pricing decision, Clinton frequently made pharmaceutical price gouging and the need for drug pricing reform a key talking point, drawing even greater attention to the issue.

With political and media attention now squarely focused on drug pricing in the U.S., other companies known for aggressively raising prices were drawn into the debate. Valeant was one such company. Just a few months earlier, Valeant was all over the media, but in a positive light, as it surpassed RBC as Canada’s largest publicly traded company. With growth fuelled by a string of large acquisitions, and aggressive pricing behaviour, Valeant’s market cap surged to almost $120 billion. By late September, however, the company was squarely in the cross hairs of the drug pricing debate, with Democrats calling for the Republican led committee on oversight and government reform to subpoena Valeant for engaging in “a business strategy of buying old neglected drugs and turning them into high-priced specialty drugs.”

Ackman: “Valeant doesn’t need to improve its business model… What it needs is better PR.”

Valeant had quickly gone from TSX darling, to poster child for egregious drug pricing tactics, and things were about to get a lot worse. Last week, a well-known stock commentary, and short-focused, website, Citron Research, came out with a piece questioning the transparency of Valeant’s relationship to a U.S. specialty pharmacy, Philidor RX. The title of their piece, “Valeant: Could this be the Pharmaceutical Enron?”, sent shivers down investors’ spines. Citron raised serious questions about the company’s disclosure and accounting policies, and slapped it with a $50 price target. Valeant found itself implicated in something much more serious than price gouging, they were being implicated in fraud.

Yesterday, Valeant Pharmaceuticals held an investor call to try and quell investor concerns around the issues raised by Citron and others. During the call the company emphatically denied Citron’s “sensational” claims, calling them “completely untrue”, while also defending their relationship with Philidor as one that “enormously benefits both patients and physicians”. Based on how the stock performed, it seems they may have calmed some nerves for the time being. However even as Valeant was defending itself on its call, the Wall Street Journal was reporting new evidence of hidden employee connections between Valeant and Philidor. It seems clear the scrutiny on Valeant is not going to abate anytime soon.

Bay Street and Wall Street analysts certainly haven’t waived much in their support of Valeant. A majority of analysts that cover the company continue to have a “Buy” rating and a 12-month price target of $200 (CDN) or more. Then there is hedge fund mogul Bill Ackman of Pershing Square who last week in the face of the media storm purchased two-million shares of Valeant, increasing his fund’s total position to almost 21.5-million. Ackman recently said at a Bloomberg Conference, “Valeant doesn’t need to improve its business model… What it needs is better PR.” Let’s hope for the sake of investors that Ackman is right and the problems facing Valeant are more PR related and not something, as implied by Citron and others, more systemic.

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