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Bill Ackman's Strange Defense Of Valeant

Bill Ackman is standing by Valeant Pharmaceuticals (NYSE: VRX), yet he I’ve been unimpressed by his conviction. His defense of the company has been feeble at best and somewhat wavering, especially in his public versus private comments. 

When things first started going sour in mid-Oct., Ackman sent an email to VRX CEO - Mike Pearson - noting, “Your reputation is at grave risk” ... “Valeant has become toxic” ... “ Even we are very concerned.”

Ackman has said that privately that Pearson might have to go and even considered dumping his stake.

However, a few slick words from Pearson and Ackman is still in VRX. Note that Ackman got to know Pearson during the Valeant-Allergan bid and battle. 

On the pricing increase scrutiny - Pearson told Ackman that the two drugs in question were small parts of expensive surgeries and deserved more profit from the procedures. Ackman bought it.

On accounting fraud and Philidor, Ackman asked Pearson, “Mike, is there any fraud going on at the company?” Pearson said he didn’t know of any fraud.

Still - Ackman has privately said that if Pearson hides in the bunker, he can’t be the VRX CEO. Ackman knows that VRX needs a leader to repair instill confidence and repair its reputation, which will include testifying before Congress. Ackman notes - “these are not Mike’s best skills.”

These are all things that Ackman said in private while VRX was tumbling. Now he’s vehemently backing Pearson.

Ackman even revealed an email he sent to Pearson on Thursday. The subject line: You; and in it he calls Mike “the most shareholder-oriented CEOs I know.”

Dear Mike,

In light of recent press reports, I thought it would be helpful for me to communicate my thoughts on your leadership of Valeant. We share the board’s confidence in you and your leadership.

While I have strong views on Valeant’s communication strategy and would have taken a different approach, you and the board should not interpret this as a negative reflection on my view of you as the CEO of the company. I understand that the company’s counsel and the board may have different views on what can be communicated in light of regulatory scrutiny. This is indeed a judgment call, and I respect the board’s decision in this regard.

You are one of the most shareholder-oriented CEOs I know. You have assured me that you and the rest of the board are considering any and all alternatives that would benefit shareholders and other stakeholders.

That is very comforting to us.

Sincerely,

Bill

Other tidbits from Ackman on Pearson:

“We share the board’s confidence in you and your leadership.” -Ackman

“While I have strong views on Valeant’s communication strategy and would have taken a different approach, you and the board should not interpret this as a negative reflection on my view of you as the CEO of the company.” -Ackman

Pearson’s reassurance that VRX isn’t a fraud and VRX ending its relationship with Philidor has been enough for Ackman.

One issue - and perhaps one that Ackman realizes - is that the prospect of not having Pearson as CEO would be even more troublesome for investors.

A lot of people point to the stock price growth and M&A strategy to Pearson personally, Jeff Ubben in all likelihood included among them, who helped recruit Pearson and structure the pay package that paid big for aggressive M&A and drug pricing.

Ackman worries that Pearson can’t manage the political and PR issues, but knows that without him the long-term vision of the company would be in question. A similar story played out at Ocwen with Bill Erbey. If Ocwen-Erbey is any inclination, It’s always better to get out in front of these things.

Ackman, with his close to $200 a share cost basis is now hinting at a sale or VRX, noting that the board has conveyed to him that they are considering any and all alternatives to benefit shareholders. If it’s sold, Ackman will far from break-even. Expecting a buyer when there’s still the uncertainty of the U.S. Senate committee’s investigation is also questionable on Ackman’s part.

I think Ackman would love to be out of this name. He's can't afford to take such a huge loss at this point and will wait (hope) for an exit point. The key being, he doesn't believe it's a fraud but understands that the required change in VRX growth strategy (ending of M&A), Pearson's reputation stained and potential regulation hurdles/investigations will put a lid on VRX's share price for many years.  

Surprisingly, Whitney Tilson says it best - “With so much at stake for Bill financially and reputationally, there’s the feeling that Bill is trapped with this big Valeant bet and can’t get out.”

One fund that did get out was JANA Partners. Despite VRX only being its 20th or so largest holding, Barry Rosenstein felt the need to offerer up near full page expose on the fund’s ability to avoid the VRX carnage by using Martin Shkreli as a sell signal. Nonetheless, still a good case study on changing your thesis/viewpoint when the facts change. That’s what I’ll end with:

When the facts do change, we react. A case in point is Valeant Pharmaceuticals International. We established our position in the fourth quarter of 2014, and closed out the position in September. Year to date, Valeant has been the biggest positive contributor to performance. The situation for Valeant changed dramatically in September, when its drug pricing practices were called into question by Hillary Clinton. Valeant had been under scrutiny for months, and in retrospect we should have been more acutely attuned to the importance of the inquiry into the price increases on certain Valeant's drugs by Senator Sanders and Representative Cummings that surfaced in August. We had reduced our Valeant position meaningfully earlier in the spring and summer as it approached our price target, and we felt more comfortable with our smaller position. When Valeant's business practices were conflated with those of Turing, whose founder painted himself and his company (and by extension Valeant) as a nearly political target, we recognized that Valeant's business model would be forced to change in ways we could neither anticipate nor forecast and decided to exit completely, thereby avoiding an approximately 40% further drawdown in the stock.

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