In case you didn’t know, today is Back to the Future Day. That of course would be October 21, 2015, the fateful date to which Marty McFly and Doc Brown time-travel in 1989’s Back to the Future Part II to save Marty’s children.
On a related note, our hunch here at Hedgeye is combative hedge fund manager Bill Ackman wishes he could hop in Doc Brown's DeLorean and travel back in time to a date well before his hedge fund, Pershing Square Capital disclosed its mammoth 5.7% stake in Valeant Pharmaceuticals (VRX) which incidentally constitutes a whopping 19% of Pershing Square’s portfolio.
(Continue reading below for our Healthcare analyst Tom Tobin’s detailed report on VRX.)
The stock is getting absolutely hammered today — it’s down as much as 40% — after Citron Research released a note comparing the drug maker to Enron. Ackman has lost billions on his Valeant bet.
Now, we’re just speculating here... but we wager Ackman would also like to take back some words he let slip back in May at the Sohn Investment Conference . That’s where he called Valeant “a very early-stage Berkshire [Hathaway].”
How dare he insult Mr. Buffett’s legacy!
We’ve long been skeptical about the stock and had considered reshorting earlier in the year, but clearly missed that opportunity when the stock was trading closer to $300. We issued our Valeant Black Book on July 22, 2014 laying out the short case and calling out what we considered to be an unsustainable business model.
That said, we’re proud our Healthcare analysts alerted subscribers to the many “underappreciated risks” we saw in the stock.
From the report:
“Valeant is operating what we believe is an unsustainable business model of serial acquisitions and underinvestment, fueled by debt, that will continue to lead to deterioration in the ongoing business.”
Here's a brief update on our thinking from Hedgeye Healthcare analyst Andrew Freedman:
“It was only a matter of time before Valeant’s debt-fueled acquisition binge would come to an end. If you look at what the underlying assets are worth and subtract the debt, you get an equity value that is closer to $20.
We spent the better part of six months researching Valeant, and there were no shortage of red flags. To name a few: Alternative pharmacy channels, inventory accounting on the Aesthetics assets, FDA investigations, price increases and questionable organic growth rates…
Trying to reconstruct the financials of Valeant’s business was near impossible given the acquisitions/divestitures and number of reclassifications… a huge part of the long thesis was a “Trust Me” story with management and that didn’t cut it with us.”
CLICK HERE to access Tobin's institutional research report on Valeant.
(If you’d like to learn more about our institutional research offerings please ping firstname.lastname@example.org.)