It was his collaboration with former Valeant CEO Michael Pearson, the architect of Valeant's price hike and acquisition-driven business model, that marked the point where Ackman should've thought twice about the company. In 2014, the two men appeared ...and more »
Ackman has sold out of one of his most controversial investments,
Bill Ackman has sold out of one of his most controversial
investments, Valeant Pharmaceuticals, after three years of
involvement with the company.
During that time, Valeant's stock fell from a high of about $257
to where it sits now, just under $11.
One might call it a teachable moment, in which hard, honest
self-reflection is required.
For his part, Ackman told
CNBC's Scott Wapner that he should've sold the stock 18
months ago, when the revelation of a secret pharmacy within
Valeant combined with government scrutiny over its drug-pricing
strategy began to drag the stock down.
Ackman also said he underestimated the damage that media coverage
and the falling stock price would have on the company, Wapner
As takeaways go, this is all wrong.
To understand why this is so wrong, you have to understand how
Ackman got into Valeant in the first place. It wasn't through a
purchase of the stock — at least not at first. It was by doing a
deal that The New York Times' Andrew Ross Sorkin called
"too clever by half."
It was his collaboration with former Valeant CEO Michael Pearson,
the architect of Valeant's price hike and acquisition-driven
business model, that marked the point where Ackman should've
thought twice about the company.
In 2014, the two men appeared to devise a plan in which Valeant
and Pershing would quietly buy up shares of another
pharmaceutical firm, Allergan, using mostly Pershing's money.
Once Pershing Square amassed a stake of just under 10%, Ackman
and Valeant announced their intention to acquire Allergan.
If that sounds like insider trading to you, you're not alone. A
California court is pondering that very thing based on SEC Rule
14 e-3. It basically says that if company A is planning to take
over company B, anyone with knowledge of that bid can't trade in
company B if the deal is in motion but still a secret.
Of course during his
deposition for this case, Ackman said that this was not a
takeover at all — at least that wasn't his intention. It was a
merger. Very different.
Back to the 2014 deal. Allergan did not want to be sold to
Valeant, for various reasons, and argued that Valeant was not a
profitable company but a rollup that required acquisitions to
survive. That's when what Ackman called a "merger" quickly became
a "hostile takeover" and when a white knight saved Allergan by
Pershing Square made $2.6 billion anyway — a perfect Wall Street
"heads I win, tails you lose."
This angered a number of shareholders who didn't know about the
deal from the beginning. They make up the class of investors
suing Pershing and Valeant over insider trading on the deal. If
they win, Pershing stands to lose the $2.6 billion it made.
All this happened before Ackman owned a single share of Valeant
stock. He didn't disclose a stake in the drugmaker until March
It wasn't until October of that year that Valeant's real troubles
began. It was exposed that the company was using a secret
internal pharmacy called Philidor that has been accused of
committing insurance fraud. That's when Valeant's whole appeal to
Wall Street began to unravel.
Ackman says this is the point at which he should've sold out; but
he should actually have been the last person to be surprised by
this. He knew what kind of company Pearson was trying to build,
and how he was building it. More than that, Ackman had been
warned by others to stay away.
Legendary short-seller Jim Chanos warned Ackman that Valeant was
a problem. He even sent Ackman his research before Ackman
announced his collaboration with the company. Ackman responded to
that by saying on CNBC that Chanos had covered his short position
in the company. Chanos had not.
Legendary Berkshire Hathaway investor Charlie Munger had spoken
out about Valeant's acquisition rollup strategy, and its
drug-pricing practices repeatedly, at one point calling it
"a sewer." We know Ackman heard this, because he
emailed Munger after that — in April of 2015, long before the
specialty pharmacy was brought to light — to complain about the
In other words, Valeant's shadiness was apparent to plenty of
people: Munger, Chanos, and even the CEO who fought off an
arguably sketchy plan to acquire his company. Ackman, manager of
billions of other people's dollars, should've recognized that.
Ackman told Wapner Valeant was "a case where the company
destroyed its reputation and it caused a loss of talent and
It's not the only one.
This is an opinion column. The thoughts expressed are those of the author.
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