Yesterday was a bad day for Valeant. (NYSE: VRX) The stock plummeted 51% yesterday after the company slashed guidance and said that they're in danger of defaulting on some of their debt. Epic drops like this might happen with small cap stocks but not a $23 billion company.
If you follow Wall Street news, you know that this is a story fit for a TV movie. Valeant found itself on the radar of well-known activist investor Bill Ackman and outspoken short seller Andrew Left of Citron Research.
On September 28, 2015 Citron published a report accusing Valeant of price gouging and arguing that the company engaged in the practice of substantially raising prices of numerous drugs. They argued that if you thought Martin Shkreli is bad, Valeant has been doing the same thing for years. Citron later said that Valeant’s business model is unsustainable and their financial disclosures were questionable.
Wall Street largely laughed off Citron’s accusations but after the company’s announcements yesterday, Citron is looking vindicated. Much of what the reports said appear to be true. You can find all of their reports at citronresearch.com.
But what about activist investor Bill Ackman who’s hedge fund, Pershing Square Capital, penned $1.1 billion in paper losses? He sent a note to share holders doing his best to defend the company saying, in part, “Last week, Steve Fraidin, our Vice Chairman, joined the board. We are going to take a much more proactive role at the company to protect and maximize the value of our investment. We continue to believe that the value of the underlying business franchises that comprise Valeant are worth multiples of the current market price.”
Some argue that at this point Ackman has no choice but to continue defending the company. Others argue that he’s probably not as long the stock as the disclosure indicate. He could have a large amount of put options hedging is bet that he doesn’t have to disclose.
The four major investors in the company lost a combined $3.66 billion on paper just on Tuesday.
Why the Surprise?
But why were investors so shocked? How could a stock of this size lose half of its value in a day? Valeant isn’t some small, one-trick-pony biotech stock that got a rejection letter from the FDA. It’s a multibillion company. First, remember that Valeant’s 52-week high is $263.81. To say investors were completely caught off guard isn’t true judging by the stock price.
Any investor holding a long position in Valeant will say that Tuesday’s announcement was shocking. The mean analyst price target still sits north of $163 according to Zack’s and most ratings range from buy to hold. Expect a slew of analyst downgrades.
Short of firms like Citron who look for companies that may not be telling their investors the full story, analysts publish recommendations based largely on company disclosures. If Valeant did mislead investors, the pain for the company, and its stockholders is just getting started.