Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Are federal probes bad news? Depends on who's being probed. 

That is likely the attitude of Pershing Square CEO Bill Ackman, whose most famous recent bets have taken an ironic turn on him. He's known for his staunch defense (and 6.33 percent ownership) of Valeant Pharmaceuticals, which disclosed on Monday it was the target of an SEC investigation. He is also known for his dogged quest to drive nutritional supplement company Herbalife into a regulator-dug grave.

Valeant's news crushed its stock. Herbalife shares, meanwhile, soared last week on news it may resolve a FTC investigation into its marketing practices.

Getting Closer....
Ackman foe Herbalife's shares are on the rise as Ackman favorite Valeant plunges.
Source: Bloomberg

According to a statement to CNBC, Ackman is "delighted" Valeant CEO Mike Pearson is healthy and returning to helm the company after his medical leave and expects uncertainty about the company to be resolved in the next few weeks. He does concede at least that Valeant's public and investor relations could use a bit of a revamp. It’s an understated take from the usually voluble hedge-fund manager. The company's PR and IR performance recently has been farcical, and its problems are much bigger than its communications strategy.

Valeant announced Pearson's return Sunday evening and sent investors into a frenzy with the same press release by withdrawing forward guidance and canceling its recently scheduled fourth-quarter earnings release. By Monday evening, it had arranged then canceled a private call with analysts after discovering the media and the public might actually be interested; been put under review for a downgrade by Moody's; and revealed the SEC investigation. 

The bad-news cocktail sent Valeant shares down 18 percent on Monday, costing Ackman more than $300 million. The bad news continued into Tuesday: Analysts suspended coverage of the stock. Hillary Clinton released a campaign ad calling the company out by name. Quebec's Autorité des marchés financiers said it was "concerned" over allegations against Quebec-based Valeant, but would not confirm or deny a specific probe. Shares were down another 7 percent Tuesday morning, sending them back to where they were in 2013.  

Down the Stairs
Earnings and guidance uncertainty, concerns about the business, and communications missteps have crushed Valeant shares.
Intraday times are displayed in ET.

It was a slow-motion communications trainwreck -- one that likely looked familiar to Ackman. Valeant's disastrous PR performance last October and November, when it was confronted with allegations about its specialty pharmacy dealings, prompted Ackman to essentially take over as the company's chief defender for a time. But PR flubs wouldn't matter as much if there were not more fundamental issues. Valeant isn't the company Bill Ackman fell in love with, and it may never be again. 

His extreme fondness for the company focused largely on what set it apart. He argued its approach to pharma -- which included slashing R&D budgets of acquired companies and finding underpriced drugs -- gave it a fundamental advantage and Himalayan stock-price ceiling. He saw it as a "platform," a launch point for serial acquisitions and everlasting growth.

Now the company's platform potential has been erased for the foreseeable future by its massive debt pile, slumping share price, and a slew of open questions about its accounting. It hasn't proved it can sustain sales growth without M&A and massive price increases. Its two best-selling drugs as of September -- gastrointestinal drug Xifaxan and foot-fungus treatment Jublia -- are under threat by generic competition and access restrictions, respectively. 

It's hard to imagine the uncertainty around the company will vanish as rapidly as Ackman might like. In the next few weeks, the company may issue results that aren't too disastrous, update forecasts without docking them too much, and file a 10-K that investors can read without wincing. But that will be only the start of the minefield.  

The company is finally starting to test the patience of sell-side analysts, which have been nearly Ackman-esque at times in their rose-tinted visions of Valeant's prospects.

Revisions
Analysts have begun to sour on Valeant somewhat; 11 of 24 of them tracked by Bloomberg have a hold or sell rating on the company.
Source: Bloomberg

The investigations may be long-lasting challenges. The SEC probe is fairly new; the subpoena only came in the fourth quarter of 2015. And there are other previously disclosed probes underway by the U.S. Attorney's offices in Massachusetts and the Southern District of New York. Until these are resolved, they'll create a forbidding overhang and a constant reminder of Valeant's most questionable behavior as it tries to convince the world it has reformed.  

Ackman clearly believes the worst about Herbalife. Nobody's asking him to take a similar attitude toward Valeant. But he does need to realize PR is only the start of its problems. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net