Coverage: Valeant Pharmaceuticals drops 50 percent

Shares of Valent Pharmaceuticals fell by 50 percent on Tuesday after the drug company gave weak earnings guidance and warned that it might default on some of its debt.

Katie Thomas of The New York Times had the day´s news:

Just two weeks earlier, Valeant abruptly canceled its earnings release and its chief executive, J. Michael Pearson, returned from a two-month medical leave. Since then, investors had been eagerly anticipating the financial information released on Tuesday.

Speaking to analysts, Mr. Pearson acknowledged that the company had a credibility problem and needed to regain investors’ trust. “Our business is not operating on all cylinders, but we are committed to getting it back on track,” he said.

Six months ago, Valeant was a Wall Street darling, with a business model of acquiring drugs and aggressively raising their prices. Its stock traded at more than $250 a share.

Valeant stock closed Tuesday at $33.51 a share, giving the company a market value of about $11.4 billion, far less than its onerous $30 billion debt load.

Nathan Vardi of Forbes focused on the four investors who lost a combined $3.66 billion on Tuesday:

In total, the four major investors in Valeant—ValueAct, T. Rowe Price, Pershing Square Capital Management and Ruane Cunniff & Goldfarb, suffered a combined $3.66 billion in paper losses on Tuesday.

The investor that got stung hardest on Tuesday was Ruane Cunniff and its Sequoia mutual fund run by Robert Goldfarb and David Poppe. Ruane, Cunniff is Valeant’s biggest shareholder, owning more than 10% of its shares, and Ruane Cunniff experienced paper losses related to the position of $1.25 billion on Tuesday, SEC filings suggest. SEC filings show Ruane, Cunniff owned 34 million Valeant shares in September 2010 valued at $850 million. The investment firm has mostly maintained its stake through the years and recently owned 35 million shares that are now worth $1.2 billion.

Billionaire Bill Ackman’s Pershing Square hedge fund had about $1.1 billion in paper losses on Tuesday alone related to Valeant. Ackman’s hedge fund has only owned the stock for about one year—although its dealings with Valeant helped orchestrate Ackman’s hugely successful investment in Allergan, which pushed the hedge fund to its most successful year ever in 2014. But even though the stock has been falling, Ackman has been adding to his Valeant position in recent weeks and his hedge fund just got a board seat at the company.

T. Rowe Price is the other major investor in Valeant and its mutual funds hold the third-biggest stake in the company. The firm’s mutual funds appear to have lost a combined $776 million on Tuesday related to the Valeant position, SEC filings suggest. The firm’s biggest Valeant holders are its T. Rowe Price Growth Stock Fund, Blue Chip Growth Fund and Health Sciences Fund.

Gretchen Morgenson of The Times explored whether investors are capable of determining Valeant´s true value:

What is Valeant’s collection of businesses worth? That question has emerged as critical to the company’s future, given that its stock market value of $11.4 billion after the close of business on Tuesday was less than half of the $31 billion in debt the company carries.

Mr. Ackman has suggested that the company could sell some of the companies it has acquired to raise cash. But some analysts have their doubts.

“I’m not sure that the businesses are worth the debt,” said Michael Krensavage, a veteran health care analyst who now runs Krensavage Asset Management and has placed negative bets on Valeant.

“The value of the assets depended in part on Valeant’s ability to take price increases and get insurers to pay for these overpriced drugs. The assumptions they made when they acquired these businesses no longer apply.”