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Pershing Square’s Bill Ackman Writes Letter of Apology to Investors, Regrets Investing so Heavily into Valeant

Written by: | | Dated: Thursday, January 28th, 2016

In a 13-page letter to clients, Pershing Square Capital Management’s Bill Ackman apologized for the debacle of 2015 and, in a not-quite-a-mea-culpa, takes responsibility for some bad decisions. One of the key mistakes he takes credit for is not selling Valeant Pharmaceuticals International (VRX) stock when its share price rose over $200 in the summer.

On the last trading day of 2015, Pershing Square unloaded about 5 million Valeant shares, pretty much a case of cutting your losses. Ackman claimed at the time that he sold them to “generate a tax loss” for investors. The sale cut his stake in Valeant from 9.9 percent to 8.5 percent. Pershing reported a 2015 loss of about 20.5 percent of all fees, which underperformed the S&P 500’s 1.4 percent total return.

At times, Ackman’s letter seems to be trying to avoid coming right out and saying, “We screwed up.” At one point he writes that there was a “missed opportunity to trim or sell outright certain positions that approached our estimate of intrinsic value.” Which is a rather roundabout way of saying that Pershing didn’t sell when the stocks were at the top.

He does, however, say, “The first place to look for an explanation is mistakes we made in 2015, and we did make some important mistakes.”

The big one probably being to not sell Valeant stock when he could have. “Our failure to sell [Valeant] stock wasn’t entirely an unforced error as we found ourselves largely restricted from trading during this period.”

Essentially, Ackman owns about $1.7 billion of animal health company Zoetis, Inc. (ZTS). There were rumors last summer that Valeant had plans to acquire the company, which was valued at about $25 billion. Apparently because of that ownership and possible accusations of insider trading if he did, Ackman couldn’t, as Business Insider writes, “sell as Valeant made its approach to acquire the company. And so when your hands are tied—presumably because Ackman had information regarding the sale that could have prompted questions regarding insider trading were he to move either the Valeant or Zoetis position during deal talks—you’re stuck with what Ackman (an avid tennis player) would call an ‘unforced error.’”

And it’s possible that Ackman was being very cautious regarding this, in that he’s been tangled up for over a year with U.S. Securities and Exchange Commission (SEC) investigations and lawsuits by Allergan Inc. (AGN) over possible insider trading with Valeant. In March 2014, Pershing acquired over 10 percent of Allergan’s stock. A month later, Valeant and Pershing Square announced a joint hostile bid for Allergan. The stock jumped by 15 percent, with Pershing gaining $1 billion almost overnight.

Another area Ackman regrets is not selling parts of Pershing’s stake in Canadian Pacific (CP) when it was trading at $240 per share. Pershing acquired additional shares in Platform Specialty Products (PAH) at $25 per share to assist the company in financing an acquisition.

Canadian Pacific stocks are currently trading for $117.39 per share.

Valeant stock is currently trading for $91.42 per share. Valeant had a troubled 2015. The company’s business model is mostly based on acquiring other companies, with more than 108 deals since 2008, and more than eight of them last year alone.

In addition to the hostile takeover investigation with Pershing, Valeant is also being investigated by the U.S. government over drug pricing and distribution prices. Citron Research, formerly, wrote a scathing report in October that compared Valeant to Enron, and among many things, accused it of “channel stuffing.” Channel stuffing, in this case, refers to using specialty mail-order pharmacies that Valeant controls to make it, according to CNBC, “prop up sales of its high-priced drugs and to keep patients and their insurance companies from switching to less costly generics.”

The company also got caught up in the criticism over drug pricing, exacerbated by it being a national election cycle. The company acquired rights to two cardiac drugs, Nitropress and Isuprel, when it bought Salix Pharmaceuticals, Ltd. (SLXP). Valeant then increased the prices for those drugs by 212 percent and 525 percent, respectively.

Despite the issues over the hostile bid for Allergan, Pershing made quite a bit of money off that deal when Allergan was acquired by Actavis (ACT) (but before the Pfizer (PFE) deal). He then took much of the billions Pershing acquired from the Allergan-Actavis deal, and invested it into Valeant at $200 per share. Antoine Gara, writing for Forbes, says, “He thought of Valeant as a ‘platform’ to acquire other drug makers and wrench out major cost and tax synergies Initially the trade worked; Valeant shares surged to over $260 a share, helping Pershing to gains as high as 10 percent by the summertime.”

Then the drug pricing scandal hit and investigations began into its Philidor Rx channels. Valeant stock plunged from top to bottom by 73 percent.

In his letter, Ackman wrote, “In retrospect, in light of Valeant’s leverage and the regulatory and political sensitivity of its underlying business, we should have avoided becoming restricted to preserve trading flexibility, or alternatively, we should have made a smaller initial investment in the company.”


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Source: BioSpace

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