• ValueAct's Mason Morfit rejoins company he helped shape
  • SEC rules likely prevent ValueAct from adding shares for now

ValueAct Capital Management helped make Valeant Pharmaceuticals International Inc. what it is today -- and now the activist fund is stepping up to defend its creation.

Nine years ago, ValueAct invested in a small biotech company known as Valeant, then trading below $30 a share. The fund’s second-in-command, Mason Morfit, joined the company’s board in 2007 and in short order helped turn the drugmaker from a firm looking for long-shot cures to one buying brand-name and promising medicines and cutting research costs. From Morfit originally joining the board to a recent market peak in August, Valeant’s shares soared about 10-fold.

Now the stock is in shambles, and while it may seem like an opportunity to add shares for a longtime believer in the drugmaker, ValueAct can’t under U.S. regulations. To restore the luster to the drugmaker it helped shape, the investor is instead having to work behind the scenes, with Morfit back on the board after a hiatus.

Things began taking a turn for the worse at Valeant about two months ago. A market enthusiastic over the company’s marriage of drugs and deals has turned sour as political attention in the U.S. pivoted to rising pharmaceutical prices, and the approach Morfit helped pioneer turned from Valeant’s strength to its weakness. Pressure on Valeant piled up from the U.S. Congress, the Department of Justice, and short-seller attacks. The stock has lost more than half its value since its Aug. 6 peak.

On June 11, before that selloff, ValueAct disclosed it had sold 4.2 million Valeant shares, because the investment had grown to more than 20 percent of the funds’ assets. Valeant was trading at about $230 at that time. The stock was at $111.02 at 1:54 p.m. Tuesday in New York, up less than 1 percent for the day.

Ackman’s Purchase

The share price collapse and the growth of ValueAct’s fund mean its Valeant stake now accounts for a much smaller portion of its holdings -- a seemingly opportune time to buy more, as investor Bill Ackman last week said he had.

But unlike Ackman’s Pershing Square Capital Management, ValueAct has had representatives on Valeant’s board since at least 2007, and is subject to insider trading restrictions. Under the U.S. Securities and Exchange Commission’s 16-B rules aimed at preventing insiders from profiting from non-public information, ValueAct probably can’t acquire additional Valeant shares until almost the end of this year.

SEC Rules

Specifically, SEC regulations require a disgorgement of profits if someone on the board or any other insider sells and buys the company’s shares within a restricted period. That in ValueAct’s case is likely mid-December, based on the June disclosure.

So instead, the fund has sent back Morfit, its president. He left the board in May 2014, in part to enable ValueAct to sell part of its stake. Valeant on Monday said Morfit was rejoining the board and would be part of an ad hoc committee the company had assembled to review the drugmaker’s relationship to mail-order pharmacies it works with, which have been the subject of criticism from short-sellers’ reports.

If history is a guide, ValueAct may well buy more Valeant shares, should the stock still be battered when the SEC restrictions lift in December.

ValueAct, which typically campaigns for shareholder-rewarding changes behind the scenes, hasn’t publicly discussed the short-seller criticism of Valeant that led to the selloff. ValueAct Chief Executive Officer Jeff Ubben became a Valeant director during the takeover fight for Allergan Inc. last year, then handed the board seat to partner D. Robert Hale in August. Hale remains on Valeant’s board. ValueAct declined to comment.

Activist History

As an activist fund, ValueAct has influenced the direction of public companies including Microsoft Corp. -- where Morfit is a board member -- Gardner Denver Inc., Reuters Group Plc, Adobe Systems Inc. and Sara Lee Corp. The San Francisco-based firm, which manages more than $19 billion, last month negotiated a board seat at Twenty-First Century Fox Inc., and in August disclosed a new core activist stake in Rolls-Royce Holdings Plc.

The firm also owns large stakes in companies including Willis Group Holdings Plc, a U.K. insurance company in the process of merging with consultant Towers Watson & Co., and is championing the announced merger of oilfield-services giants Halliburton Co. and Baker Hughes Inc., with substantial investments in both.

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