The Valeant Soap Opera Continues — Bret Jensen

The saga of the decline of once mighty Valeant Pharmaceuticals (NYSE:VRX) got even stranger Thursday. An article in the Wall Street Journal ran in the morning where noted hedge fund manager and billionaire Bill Ackman who has some $2 billion in paper losses on his stake in Valeant seem to question the company’s leadership. Mr. Ackman then sent an email to the company’s CEO Mike Pearson that was made public at just over 2pm EST that stated Mr. Ackman’s full faith in company’s management. By then, it was too late to save the stock as shares fell another 15% on the day.


I have no position in Valeant either in my portfolio or that of the Biotech Forum portfolio but I am watching this drama play out with some trepidation for three separate reasons.

First, the high profile implosion of Valeant is inviting increasing congressional scrutiny as drug price “gouging” is a popular populist topic in an upcoming election. On Wednesday, democrats within the House of Representatives yesterday launched the Affordable Drug Pricing Task Force to combat soaring drug prices and are requesting subpoenas to be sent out to Valeant.

In addition, the Senate’s Special Committee on Aging announced that it was launching a bipartisan investigation into Valeant and three other pharmaceutical companies regarding their drug prices. This has the potential to put a headwind in place on pharma for the near term. Politicians are going to play this up for all its worth in coming months. Sticking up for the “little guy” is a time honored election theme.

Second, every time Valeant gets hit it casts a pall on both pharma stocks and to a lesser extent the biotech sector. This happened again today and took down many of the largest names in the industry like Teva Pharmaceuticals (NYSE:TEVA) and Mylan (NASDAQ:MYL).

Finally, I worried about the possible fallout in the credit markets if Valeant does turn out to be a “Pharmaceutical Enron” as short seller Citron Research has dubbed it. Although I think that is hyperbole at this point in time, Valeant did take on some $30 billion in debt to finance its serial acquisitions. What are the impacts to credit markets if Valeant does indeed implode like WorldCom or Enron?

I took advantage of the recent pullback in Endo International (NASDAQ:ENDP) today which has been almost cut in half as some investors think is a Valeant Light. However, its debt to market value is about one third that of Valeant and its price to sales ratio is much, much lower as well. The company also easily beat both top and bottom line results today and reiterated guidance.

In addition, the company’s Dublin domicile could make it an attractive partner as I continue to believe M&A activity will be very robust in the sector as I recently detailed in a free 30 page report. A director purchased some $200,000 worth of shares at much higher prices this summer and the stock now sells at under nine times forward earnings despite the company’s strong growth. I am willing to start to accumulate a small stake betting this pullback is an overreaction that in hindsight hopefully will turn out to be a great long term entry point.

In the meantime, the soap opera that Valeant has become will continue to play out to at least until yearend if not beyond.

Bret Jensen

Thank You & Happy Hunting

Bret Jensen

Editor/Manager, Biotech Forum

Disclosure: I am/we are long ENDP.

For more information on Bret’s core investing strategy that is hugely successful in the lucrative biotech sector, consider Bret Jensen’s exclusive investment service, The Biotech Forum on Seeking Alpha.

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