Valeant Bears Get Some Satisfaction

ENLARGE

Bears on Valeant Pharmaceuticals International Inc. are getting their day —finally.

The drug company’s stock has been one of the best-performing this decade, and one of the most controversial.

At their peak closing price of $ 262.52 in early August, Valeant shares were up more than 1,000% over five years, trouncing the broader market’s 87% rise.

Along the way, naysayers have said Valeant’s business model, focused more on buying drug makers and marketing drugs rather than inventing them, was too reliant on growth via acquisitions.

Now skeptics, including hedge-fund manager James Chanos and market scribe James Grant, are enjoying a dollop of vindication. Valeant’s shares are down more than 30% since their August high, as policy makers and regulators have questioned drug makers’ moves to raise prices, although they ended up nearly 1% this week to $ 177.56 after a tumultuous few days.

Valeant said Wednesday it had received subpoenas from federal prosecutors seeking information related to how it prices drugs, distributes them and helps patients afford the medicines. Members of Congress also have raised questions about Valeant’s price increases.

Valeant Chief Executive J. Michael Pearson sent a letter to Sen. Claire McCaskill (D., Mo.) this week defending the Canadian company’s price increases on two drugs, by 525% and 212%, after acquiring the medicines in February, moves detailed in an April article in The Wall Street Journal. Mr. Pearson said that sometimes older drugs are “dramatically underpriced relative to their clinical value” and that appropriate pricing is important to the U.S. health-care system.

Investor anxiety is showing up in Valeant’s bonds. A bond maturing in 2025 recently traded to yield about 6.9%, or 4.86 percentage points more than the yield on comparable Treasurys. That is a sharp rise from the middle of September, when the same bond traded at a 5.6% yield, reflecting growing concerns about the company’s prospects.

The dust-up is only the latest for Valeant. Though the pricing issue has heated up lately, the company has also been bedeviled by questions over the viability of its business model and its accounting, even as its stock sprinted higher.

In March 2014, Grant’s Interest Rate Observer, where Mr. Grant serves as editor, published an article questioning the company’s strategy of growth through acquisitions and relatively low investment in research and development.

The publication at the time thanked Mr. Chanos, a well-known short seller, for the idea. In May 2014, Mr. Chanos said on television that Valeant was “playing aggressive accounting games” and criticized the company’s strategy of buying and rolling up smaller pharmaceutical companies. At a certain point growth via mergers would require bigger deals, which can be harder to do, he said.

Mr. Chanos, who said in that interview his firm had a bearish wager on the stock, declined to comment Friday.

Valeant has said that spending money building “large, fixed-cost research infrastructure” is inefficient and not necessarily the most productive model for the drug business. The company has said its merger-and-acquisition strategy helps it bring innovative drugs to patients and hospitals “more quickly and efficiently.” It has defended its accounting as sound. And Valeant has said its revenue growth is driven as much by sales volume as price increases, and that the company is shifting to an even heavier reliance on volume.

Valeant faced similar questions last year when it aligned with activist investor William Ackman to try to take over rival Allergan Inc., the Botox maker. Allergan insisted its investors should be wary of Valeant’s offer in part because they would be paid partially in Valeant stock.

The company logo of Valeant Pharmaceuticals at its headquarters in Laval, Quebec. The company’s share price has slumped in recent weeks. ENLARGE
The company logo of Valeant Pharmaceuticals at its headquarters in Laval, Quebec. The company’s share price has slumped in recent weeks. Photo: christinne muschi/Reuters

By taking Valeant’s stock and joining forces with the company, Allergan said in a presentation last year, its shareholders would end up with “anemic growth driven by what we believe are unsustainable price increases,” and a lower price-to-earnings multiple “driven by reduced growth prospects and increased uncertainty.”

Valeant has acknowledged market skepticism. Mr. Pearson last year said he thought teaming with Mr. Ackman, known for harsh scrutiny of companies and who gave Valeant his stamp of approval, would help put to rest other investors’ concerns. He ended up surprised, he said, that Mr. Ackman’s praise for Valeant didn’t quiet the detractors.

Ultimately, Allergan accepted another, higher offer from Actavis PLC, now called Allergan PLC.

Mr. Ackman, chief executive of Pershing Square Capital Management LP, praised Valeant’s stock and business during the Allergan battle, but at that time owned shares of Allergan, not Valeant.

Earlier this year, Mr. Ackman invested in Valeant and now owns nearly 6% of its shares, according to the most-recent regulatory filings. On Oct. 6 at an investor conference, Mr. Ackman said that a “very small part of Valeant’s business is repricing drugs” and called Valeant the most undervalued stock in his portfolio.

The activist investment fund ValueAct Capital Management LP is also a fan—and a winner—in Valeant’s stock. ValueAct first purchased shares in Valeant in 2006. Earlier this year, the fund sold some shares at prices ranging from $ 219 to $ 230.60 per share. The fund still holds a 4.4% stake in the company, according a person familiar with the matter, and has had a seat on Valeant’s board since 2007. The person said Valeant still enjoys ValueAct’s full support.

Write to Maureen Farrell at maureen.farrell@wsj.com


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