Valeant Pharma Autopsy: Counting The Lost Billions

I have been a Valeant Pharmaceuticals (VRX - Analyst Report) stock investor on and off for over two years. But it wasn’t because I understood their business model very well.

Instead, I put my faith in several large investors who were buying millions of shares every quarter. I trusted their research and due diligence about the company’s growth, believing they trusted the strong sales and profit numbers the company was reporting every quarter.
 
Valeant also had a powerful business strategy that they believed in: the M&A “roll-up” machine. This strategy is as old as business itself whereby management aggressively uses debt to buy other companies and make them more profitable, whether through cost-cutting or raising prices.
 
Bill Ackman of Pershing Square Capital Management was such a believer in this strategy, he joined forces with Valeant CEO Mike Pearson to pursue potential takeover targets like Allergan (AGN - Analyst Report). 
 
Ackman bought 19.4 million shares of VRX in the first quarter of 2015 and has held on to every single one of them through the end of Q3 on September 30. In the video that accompanies this article, I go over in detail the big funds who owned VRX in 2015, and how much of it, and what happened next.
 
The Waterfall of VRX Shares
 
When Congress started to question the “price-gouging” practices of some pharmaceutical “roll-up” machines, Valeant quickly earned part of the spotlight. And when the subpoenas started flying in late September, VRX shares were quickly on their way from $230 to $160 in a week.
 
This means that many of the big fund managers I followed, like Jeffery Uben of ValueAct, Steve Mandel of Lone Pine Capital, and Andreas Halvorsen of Viking Global Investors, were beginning to give up some serious profits in a stock they had held for some time.
 
One fund in particular, owned nearly 10% of the company with their nearly 34 million shares. Ruane, Cunniff, and Goldfarb Inc. is better known by one of their funds that hold the Valeant shares, Sequoia.

Enter Stage Left: Citron
 
On October 21, when notorious short-seller Andrew Left of Citron Research published his second report on the Valeant machinery, Left’s suggestion that Valeant was the “pharmaceutical Enron” and guilty of massive fraud with specialty pharmacy Philidor made shares crash from $145 to under $90 before they bounced back to $120.
 
With VRX shares climbing back from a 52-week low near $70, my rough estimate of the open profits that evaporated for Sequoia is over $5.5 billion. That calculation is using the highest weekly closes in July and August near $250 and the price around noon today of $80. I multiplied that paper loss of $170 per share by approximately 34 million shares.
 
The funny thing is, the Sequoia fund managers appear to be handling the loss fairly well as they were among the few big holders actually buying more shares in November under $100. They added around 2 million shares to bring their haul to about 35.9 million. 
 
The Smartest Minds Who Just Watched Billions Evaporate
 
Get all the details of this Valeant “autopsy” and who else lost billions in my video that accompanies this article. This is a story that will be investigated and retold hundreds of times in the next few years.
 
I find it even more interesting than Enron because of the sizable brain power that either allowed itself to be fooled by Valeant or was simply blind to the risks in their own highly-concentrated investing.
 
John Paulson was clearly fooled as he bought nearly 7 million shares in Q2 and still had nearly 9 million at the end of Q3. And the biggest buyer in Q3 was Jeremy Grantham’s firm GMO which bought nearly 6.5 million shares.
 
And I was surprised to see that one of my favorite value investors, Jeff Uben of ValueAct, who sold 4.4 milliion shares of VRX in Q2, still held nearly 15 million when the bottom dropped out. Uben was the mastermind who bought $2 billion of Microsoft (MSFT - Analyst Report) when it was trading $25 in early 2013 and doubled his money. 
 
Who was truly smart in this saga? Barry Rosenstein’s JANA Partners was pure genius here, with a dose of luck. They sold their last 1.3 million shares in Q3, right before the bottom dropped. That was smart timing, with maybe a dash of luck. And the pure investing genius is how they were buyers before the bulk of the big move from below $100 in 2014 and then they were sellers all the way up above $200 in 2015.
 
Finally, be sure to watch the video to see which big funds were big buyers in Q3 of Mobileye (MBLY - Snapshot Report), the Israeli maker of Advanced Driver Assistance Systems (ADAS) for car safety. I’m very excited about that since I own MBLY shares for the Zacks FTM Trader portfolio and this company has embedded its superior “smart car” technology in dozens of models from over 20 different auto manufacturers.