Valeant's Slide a Reminder of Canada's BlackBerry, Nortel Legacy

Valeant Shares Under Pressure: Why Ackman Doubles Down
  • Canadian giants dominated the market and then plunged rapidly
  • Valeant drops as much as 39% after short seller comments

The dizzying rise and rapid fall in the shares of drugmaker Valeant Pharmaceuticals International Inc. is eerily familiar to Canadian investors still smarting from the last time a small market was dominated by single stocks -- BlackBerry Ltd. and Nortel Networks Corp.

Valeant, briefly the largest stock in Canada’s benchmark Standard & Poor’s/TSX Composite Index this year, plummeted as much as 39 percent Wednesday after a stock-commentary site run by a short seller accused it of an Enron-like sales accounting strategy. The setback was the latest for the Laval, Quebec-based company, which has seen more than half its market value evaporate after reaching a record in August amid intense scrutiny from U.S. lawmakers over its pricing practices.

Short-seller accuses drugmaker of recording fake sales
Short-seller accuses drugmaker of recording fake sales

“When a company shoots for the moon, you have to ask that question: Is it value, or is it just momentum?” said Som Seif, chief executive officer of Purpose Investments Inc. in Toronto. His firm manages about C$1.4 billion ($1.1 billion). Risks associated with companies rapidly acquiring global recognition is “one of the biggest concerns we have” in an undiversified stock market.

Valeant’s slide comes in the wake of BlackBerry, formerly known as Research In Motion, and Nortel, which both ascended to the global stage while dominating the Canadian market, only to crumble rapidly when problems exposed them to harsh investor scrutiny. BlackBerry has not recovered since losing its dominance in the smartphone market while Nortel filed for bankruptcy protection in 2009.

“Do we have a business here that’s ultimately run effectively, can it hunker down, survive and build a great business?” Seif said. “We don’t know yet. Obviously that didn’t work out for RIM and for Nortel.”

Autorite des Marches Financiers, the Quebec securities regulator, said in an e-mailed statement Thursday the allegations about Valeant are “worrisome” and is checking to see if Valeant didn’t run afoul of regulations. Valeant shares extended losses a fourth day in Toronto, falling 12 percent to C$135.24 at 9:57 a.m. in Toronto.

Ackman Investment

Valeant in a statement called the short seller’s report that it used a strategy of recording fake sales to phony customers “erroneous” and defended its relationship with specialty pharmacies that distribute its drugs. Bill Ackman, chief executive of hedge fund Pershing Square Capital Management and one of Valeant’s largest investors, said he bought 2 million shares of Valeant. Those developments helped pare the stock’s decline to 19 percent at the end of the day Wednesday.

Valeant has been one of the most influential stocks in the S&P/TSX in the past five years as Chief Executive Officer Michael Pearson pursued an aggressive growth-by-acquisition strategy, aiming to make the drugmaker one of the top five largest in the world by 2016. In May, as Valeant marched toward an all-time high, the stock’s 12-month advance to that point accounted for 60 percent of the overall index’s gains.

The company climbed past Bank of Nova Scotia in February after surpassing others including Canadian National Railway Co., Enbridge Inc. and Bank of Montreal over the past 12 months.

Valeant, along with BlackBerry and Nortel, are products of a Canadian equity market too concentrated in individual names and industries, said Shailesh Kshatriya, director of Canadian strategies at Russell Investments in Toronto. Canadian investors tend to have a pronounced home bias toward domestic stocks, making them especially vulnerable when an individual stock rapidly shoots to the top of the index.

“It’s an issue we’re all aware of as Canadians but we all kind of put aside,” Kshatriya said in a phone interview. Russell manages about C$344 billion. “Especially in a market like this, we tend to lose sight of that. You feel most comfortable in your own environment and it turns into country bias.”

Growth Yardstick

A good yardstick is to contrast the rapid growth of companies such as Valeant with more stable institutions such as Royal Bank of Canada, the largest lender in the nation, said Brandon Snow, a fund manager at Cambridge Global Asset Management, a unit of CI Investments Inc.

“If a company in Canada gets larger than Royal Bank you have to watch out,” Snow said in a phone interview. His firm manages about C$15 billion. “This again shows an inefficiency in the Canadian market due to lack of depth and diversity. Time and time again, segments of the market get overly excited and frothy, and large losses ensue.”

Valeant briefly overtook Royal Bank as its market value climbed to C$112.6 billion on July 23, ahead of Royal’s C$109 billion market capitalization at the time. Valeant’s market cap is now C$52.6 billion, while Royal Bank remains the largest company.

Smartphone maker BlackBerry, along with fertilizer producer Potash Corp. of Saskatchewan Inc., combined for about 10 percent of the total market capitalization of the S&P/TSX at their peak in June 2008. BlackBerry has since plunged 94 percent from its peak as competitors Apple Inc. and Google Inc. overtook the struggling smartphone maker.

Yet these companies trail the impact of Nortel, which once had a market value of C$366 billion and accounted for as much as 35 percent of the index by weight in August 2000, according to data from TMX Group Ltd. Nortel, the telecommunications-equipment maker founded in 1895, had annual revenue of $28 billion at its peak in 2000, with 93,000 employees in more than 150 countries. It filed for bankruptcy protection in 2009 after incorrectly booked revenue, inflating sales and restating earnings back to 1999.

“It’s short-term memory,” Russell’s Kshatriya said of Canadian investors getting caught up in stocks such as Valeant and Nortel. “Three is a trend. Hopefully this will be the last of it, but I doubt it.”

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