Good News for Valeant Stock
Valeant Pharmaceuticals Intl Inc (NYSE:VRX), of which Bill Ackman is a major shareholder, crashed. Ackman, one of the most emblematic figures of Wall Street, held nine percent of Valeant stock though his Pershing Square Holdings hedge fund, according to SEC filings dated March 9. (Source: “Bill Ackman Says Valeant Will Be Fine,” Fortune, March 1, 2016.)
Bill Ackman, the second-largest shareholder of the group with nine stakes via its fund Pershing Square, has promised to revive the company personally. Last Tuesday, he lost more than $1.0 billion as VRX stock nosedived. Some observers have justifiably wondered if he has lost the magic touch that propelled him to the top of the shareholder activism hit parades. Valeant makes prescription dermatology drugs and consumer products like “Bausch & Lomb” eye care.
Billionaire Ackman can begin turning the company’s fate around by influencing who will replace Michael Pearson as CEO. Pearson led Valeant for the past eight years; he will remain in office only until a successor is appointed. This is perhaps the most important thing that Ackman can do for Valeant. (As chairman of Valeant’s board of directors, Ackman lacks executive power.)
Pearson’s departure may prompt some to argue that Valeant could break up under new leadership. (Source: “Ackman still doesn’t see Valeant clearly,” Bloomberg, March 22, 2016.) However, rather than break up the company in core assets ahead of a sale, Ackman sees value in Valeant remaining whole. Instead, Ackman wants to fix the company’s governance and reputation, beginning with a new CEO.
Ackman could face opposition, even if he does find a suitable replacement CEO. Valeant has grown through acquisitions, spending more than $30.0 billion buying more than 40 companies operating in such areas as toe fungus treatments to cancer drugs and antidepressants. Valeant’s top sellers apply to six different areas of medicine. (Source: Ibid.)
This makes Ackman’s task of replacing Pearson more difficult than investors realize. Nevertheless, it does highlight just how influential Ackman has become. Activist investors are great at criticizing and influencing. Now, Ackman has to face more responsibility than he signed up for when he started buying up millions of Valeant stock.
One of the aspects that makes the choice of the company’s next CEO so difficult is the crisis that emerged between Valeant and Howard Schiller, the embattled former CFO. Plunged into turmoil since last summer on suspicion of manipulation, Valeant has yet to complete its 2015 accounts. Valeant must publish its 2015 audited accounts before the end of March or risk defaulting on certain debt lines. This period may be extended by 30 days, until the end of April.
Standard & Poor’s has already indicated that it will lower its rating on VRX because it believes that after the end of April, the group’s creditors may claim reimbursement of their loans.
Don’t forget that Valeant also has to confront the U.S. Department of Justice accusations of gouging consumers over the prices of its drugs.
Bill Ackman has a difficult task ahead. He must choose a new CEO who will rebuild Valeant’s reputation while stimulating growth. That last part is important consider that just last August, Valeant’s market capitalization was $91.0 billion, but today, it stands at $10.0 billion.
Ackman appears confident about a turnaround for Valeant. The market does as well; VRX stock bounced back almost 10% on March 21. It continued to move up on March 22, gaining about eight percent.
Investors and Ackman himself are confident about Valeant’s ability to stage a comeback. Unlike other activist hedge funds—the prototype for which might be Starboard Value—Bill Ackman has not threatened Valeant’s managers. (Source: “Ackman Gets More Involved at Valeant After $764 Million Loss,” Bloomberg, March 15, 2016.)
Ultimately, Bill Ackman has to believe in Valeant’s turnaround. He stands to lose in the hundreds of millions if he can’t find a fix. Investors may appreciate the direct role he has taken by jumping on (the) board.
Yet Ackman’s prescription for Valeant focuses too much on executive changes rather than operational ones. He needs the company to remain intact. This means that Ackman could end up clashing with other board members and with the very CEO he will help appoint, who may have a less committed relationship with Valeant stock.
Still, Ackman’s entry has helped to lift VRX out of the pits. So far, he’s had a good influence on Valeant.