Many investors like to copy the trades of other popular and successful investors. Mutual funds and hedge funds with assets over $100 million are forced to disclose all of their US-listed stock positions on a quarterly basis. And in some cases, funds will also disclose stocks that they are shorting, that is, that they’re betting against.
This brings us to Bill Ackman, famed hedge fund investor and founder of Pershing Square Capital. He’s had a good deal of success over the past decade, famously calling the implosion of MBIA (MBI), a former blue-chip financial institution among other victories.
As his fame and stature have grown, more and more investors have taken to copying his trading ideas, often without doing their own analysis.
When Ackman made a rather convincing pitch against nutritional supplements seller Herbalife (HLF) several years ago, the stock immediately fell by more than a third.He acted so confident that he would be victorious that he promised to donate profits to charity.
But after the initial drop, Herbalife recovered, as other hedge funds took positions in the company. As more and more hedge funds went long Herbalife, shares started to spike, as more and more investors, notably included the famed Carl Icahn got involved sending the stock higher and higher, and causing Ackman mounting losses.
Now Ackman has gotten himself into another tight jam. He went long shares of Valeant, a specialty pharma company awhile back. His average cost basis was $174/share, which originally didn’t seem like a problem. Shares would trade to as high as $250 over the summer.
However, problems have mounted with the company’s business model. The company, unlike most pharma and biotech operations, does very little in-house research. It predominately buys already approved drugs from other companies, and then typically raises the selling price, often drastically.
This practice has come under fire after a former hedge fund manager turned biotech CEO jacked the price of an AIDS drug up by several thousand percent. Hillary Clinton went on the offensive, making regulation of drug pricing a key issue in her campaign.
Valeant, being one of the chief price raising pharmas, immediately came under heavy selling pressure. Its woes have mounted in recent days, as various journalists and short sellers have exposed some seedy business inside of Valeant.
Valeant was running, among other things, a specialty pharma called Philidor that they carefully structured so that Philidor would appear to be independent of Valeant.
Using this under-the-radar pharmacy, it appears that Valeant was able to engage in various questionable practices, including filling prescriptions without a copay (often considered insurance fraud), refilling prescriptions that customers hadn’t asked for, and rerouting prescriptions to yet more Valeant controlled shadow pharmacies if an insurance provider rejected Philidor’s claim.
Through another related pharmacy, R&O, it appears Valeant sold drugs in California without that state’s permission. California had denied Philidor a license to operate there. There are also claims, to this point still unconfirmed, that Valeant was using its chain of so-called phantom pharmacies in order to inflate its stated revenues.
Today, Valeant stopped doing business with Philidor after major health care providers including UnitedHealth and CVS cut ties with Philidor. While this alone won’t be a huge hit to the company, Philidor doesn’t account for a large portion of the company’s sales, it is a terrible blow the company’s image. With the government already investigating, every additional bit of bad PR makes a tough situation worse.
The stock price has crumbled, falling back under $100/share, far below where Ackman purchased. Ackman gave a long presentation to attempt to defend the company Friday morning, but it appears it wasn’t well-received by the market.
Ackman, despite being one of the most notable and acclaimed investors of our time managed to make a crusade out of calling Herbalife a fraud company, yet Herbalife still survives years later. On the other hand, Ackman’s biggest bet was on Valeant, a company that actually appears to be a fraud.