Investor Ackman defends Valeant in 4-hour conference call

31 Oct 2015 | Author: | No comments yet »

Bill Ackman: Valeant Could Have Handled Pharmacy Relationship Better.

The brash billionaire activist investor, best known in California for his scorched-earth campaigns against Herbalife Ltd. and the management of drugmaker Allergan Inc., staged a high-stakes conference call to defend his latest cause: his huge investment in Valeant Pharmaceuticals International Inc. Pfizer Inc. and Allergan Plc are making progress on the year’s biggest acquisition and are working toward agreeing on a deal as early as next month, people with knowledge of the matter said. In a matter-of-fact tone, Ackman spent more than four hours mostly defending the high-flying Canadian pharmaceuticals giant against allegations ranging from price gouging to presiding over an interrelated web of companies that resembles, in the word’s of a short-seller, “Enron part deux.” “Even with very reputable companies, stuff happens,” said Ackman, who runs Pershing Square Capital Management. “The best thing about a company that goes through a scandal means they’re going to be that much more careful about this kind of thing going forward.” Amid much fanfare nearly three years ago, Ackman alleged publicly that Herbalife, a Los Angeles nutritional products company, was operated as a pyramid scheme and that its shares would fall to zero. The drugmakers are keen on a friendly deal and hope to agree on the terms of the takeover, including who will lead the combined company, by Thanksgiving, the people said, asking not to be identified as the discussions are private.

The Laval, Que.-based drug manufacturer severed ties to Philidor Rx Services LLC on Friday amid reports that the U.S. mail-order pharmacy acted improperly when it filled and refilled prescriptions. — Valeant Pharmaceuticals faces years of legal challenges despite cutting ties with a U.S. pharmacy at the centre of a controversy about how Canada’s largest publicly traded drug firm conducts its business, say industry observers and the company’s second-largest shareholder. The news failed to stem Valeant’s sliding share price, which lost another 12 percent on Friday even after Bill Ackman, whose hedge fund owns a 6.3 percent stake in Valeant, told investors the shares were “tremendously undervalued.” Valeant said it would bolster its internal investigation into the matter by adding to the team an outside lawyer who once worked in the U.S.

Once a beloved company among many investors and analysts, Valeant is now under siege from short sellers, who have criticized its accounting and sales tactics. Valeant bought the right to own Philidor for $100-million (U.S.) last year, but that investment appears to be lost after the pharmacy said Friday that it would shut down operations. Valeant has faced harsh criticism that began earlier this fall when lawmakers in the United States raised red flags over price increases in the drug industry. The drugmaker’s move comes amid growing pressure from investors after Valeant disclosed two weeks ago that it was under investigation by the U.S. government over its patients’ assistance program and drug pricing and distribution.

Ackman repeatedly argued Valeant’s case, conceding that the company may have made missteps but ultimately it was sound, would pay fines if necessary and move on. Allergan is expecting to get more than $350 a share from Pfizer, though talks have not yet gotten into specifics, one person close to the target company said. Influential short-seller Citron Research was one of the first critics to call the company out on Philidor in an Oct. 20 report, saying Valeant was using the pharmacy set-up to inflate revenue. Pershing Square walked away with a reported gain of more than $2 billion. “Unfortunately we have a great amount of experience in dealing with activist short-sellers,” said Alan Hoffman, an Herbalife executive vice president. “We’re happy to give Ackman some advice if he needs it.” In his long talk, Ackman answered nearly 200 questions sent by email from investors and reporters. Some 10,000 listeners tuned in to hear the presentation, which was interrupted by technical glitches, hold music and even a bathroom break for the billionaire investor.

Now, with Philidor – which accounted for roughly 7 per cent of Valeant’s revenue – out of the picture, concerns are mounting that the company’s broader business could encounter a hard new reality. Valeant also announced Friday the appointment of former U.S. deputy attorney general Mark Filip to advise a committee it has struck to investigate allegations in a report from Citron Research. Pfizer also sees the deal as a way to accelerate the break up of the company and may pursue a sale of its generics business as part of the agreement, said the people.

Doing so would follow Allergan’s lead, after the company agreed in July to sell its generic-drug business to Israeli rival Teva Pharmaceuticals Industries Ltd. for about $40.5 billion. The debt-rating agency noted that alleged wrongdoing at Philidor “weakens Valeant management’s credibility, further harms the company’s already tarnished reputation, and that these developments exacerbate potential legal, regulatory, and reputational headwinds for the company.” “Pharmaceutical companies deal in a sensitive industry. The largest U.S. drugmaker said Thursday it’s in “preliminary friendly discussions” about combining with Allergan, which had a market value of $113 billion the day before the talks were announced. Reputation is very important,” said David Kaplan, primary credit analyst at S&P. “The company has a lot of salespeople that market directly to doctors … and when that reputation is tarnished, how does that affect the salespeople’s ability to influence doctors?” Uncertainty over Valeant’s business model has shaken investor confidence. Valeant shares have plummeted since the company disclosed this month that it controlled Philidor, a drug distributor engaged in potentially illegal practices.

Later Thursday, three top U.S. drug benefit managers, who administer prescription medicine benefits for health plans, said they would no longer work with the pharmacy. Left’s previous accusations were “completely untrue.” In a statement, the company added: “We have no doubt that he will continue to mislead investors about our business, and we will be ready to respond accordingly.” Valeant declined to comment on Mr. While he continues to have faith in Pearson and recently met with company employees at a town-hall meeting, Ackman said Valeant and its CEO have done a poor job communicating, being transparent and quickly responding to damaging accusations. Longtime Ackman-watchers said the conference call — so mobbed by investors and financial reporters that the call-in system suffered technical snafus — was emblematic of a high-risk, high-wire career made up of big bets punctuated by a series of dramatic public confrontations. Ackman’s investing style, while often riveting, is also source of frustration for his investors, said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “There are two Bill Ackmans,” he said. “The public sees him as a guy who’s obstinate to the point of ridiculous.

Without Philidor, she said, Valeant could face a big hole in its revenue generation that can’t be filled immediately by quick acquisition or further drug price hikes. Ackman remained unbowed during a four-hour conference call, even advising Jeff Bezos, Amazon’s chief executive, to get into distributing drugs by mail as an up-and-coming business.

Their aggravation comes when they think about whether he could make them a lot more money if he wasn’t so obstinate.” The Valeant fracas is part of a wider debate over Wall Street’s so-called activist investors who use large stakes in public companies to influence their direction, often through noisy publicity campaigns. Bloomberg reported on Thursday that Philidor has altered doctors’ orders to wring more payment out of insurers, according to former employees and an internal document, which details how to proceed with a prescription for certain Valeant drugs after they have been rejected.

Claire McCaskill (D-Mo.) , the ranking member of the Senate Aging Committee, has sent letters demanding information about the Laval, Quebec, company’s business practices. The latest flurry of bad news was sparked by an Oct. 19 investigative story into Valeant’s related-party deals by the Southern Investigative Reporting Foundation. CVS Health Corp. and UnitedHealth Group Inc. also said their divisions that design and administer prescription-drug benefit plans for insurers and employers would sever ties with Philidor. He claims Valeant lacked meaningful control over Philidor, and any fine it may be compelled to pay for involvement in the distributor’s dealings would be manageable. Ackman said Valeant’s business is fundamentally strong, investors have overreacted and the drug company’s stock is “tremendously undervalued.” He said Valeant shares could more than triple in the next few years if the company reduces its leverage, buys back stock and improves its credit rating.

Losing the support of pharmacy-benefit managers, which manage some drug-purchase agreements for their corporate clients as well as process prescriptions and approve payments, was a blow to Philidor. The company’s business model was based on offering patients with private insurance discounts to order their medication through the mail. “We know the allegations have also led them to question Valeant and our integrity, and for that I take complete responsibility.

Its abrupt slide from market darling to a company under fire has weighed heavily on ValueAct Partners and Pershing Square, two well known U.S. activist funds. Returns of Pershing Square’s closed-end mutual fund, seen as a proxy for Ackman’s overall hedge fund operation, were off 15.9% for the year through Oct. 27. The 49-year-old New York area native started his first investment firm with a partner shortly after graduating from Harvard Business School in 1992, then started Pershing Square in 2004.

He became known for placing a few out-sized bets based on meticulous financial research, often backed by political-style campaigns to sway other investors to his side. One of his biggest successes involved a years-long campaign in the mid-2000s against most of the rest of Wall Street, warning that the $2.5 trillion bond-insurance industry was a catastrophe waiting to happen. As a result, Valeant says it plans to increase research and development, limit further price increases and stop paying for acquisitions with its stock. And with hefty fines, a crushing debt load and further revelations of unsavory behavior still possible, the prognosis may be too negative for even Mr.

Ackman began speaking Friday, an Herbalife spokesman released a statement comparing the Valeant investment to some of Pershing Square’s previous money-losing bets. His attack on Herbalife sparked heated arguments among hedge fund managers, such as Carl Icahn, who took the opposite position and began buying shares as he clashed with Ackman in several televised interviews. Ackman has scored big wins at Canadian Pacific Railway Ltd., where the share price has nearly doubled since Pershing Square won a board fight in 2012, and Air Products & Chemicals Inc., where a CEO supported by Mr. At one point during Friday’s call, a Pershing Square lawyer made the case that even if Valeant did something wrong, it probably won’t cost the company too dearly.

The pharmacy, which helps fill prescriptions and obtain insurance reimbursements, is under scrutiny for using aggressive tactics to ensure that pharmacy-benefit managers pay for Valeant drugs, rather than lower-cost alternatives preferred by insurers.

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