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.

Valeant Pharmaceuticals Inc. investors have a tendency to grasp at any perceived scrap of good news, usually to their detriment. 

The latest ray of hope is Monday's news that John Paulson, manager of the Paulson & Co. hedge fund, Valeant's largest shareholder, is joining the company's board. Shares are up 5.7 percent Monday afternoon, but this shouldn't be cause for much celebration. 

Paulson, famous for his prescient bets on credit default swaps ahead of the financial crisis, has also made big bets on pharma, but these have covered him in much less glory.

What Goes Up
Valeant shares have been unable to mount any kind of recovery after plunging from dizzying heights in the second half of 2015
Source: Bloomberg

Paulson has been investing in pharma for some time. Health care -- particularly specialty and generic pharma -- makes up an outsize part of Paulson's portfolio, accounting for nearly 50 percent of his holdings, according to Bloomberg data.  

But interest does not appear to align with insight, in this case. Many of Paulson's picks have either gotten mired in pricing scandals, suffered from generic-drug price deflation, become weighed down by debt for questionable acquisitions, or all of the above.

In specialty pharma, Paulson has largely bet on the wrong horses with particularly awful timing. Looking at Bloomberg's estimate of his fund's average cost basis per share, only one of his nine biggest health-care positions is above water: 

Rough Ride
Health care has been a tough sector for John Paulson's hedge fund, with debt-laden specialty pharma firms like Valeant and Endo causing particular grief
Source: Bloomberg
*Bloomberg estimate

His Valeant investment has been a particularly miserable experience, though his other pharma bets have struggled, too. Health-care failures help account for why his fund manages a fraction of the money it once did -- most of which comes from Paulson himself, rather than outside investors. 

Devaluing Valeant
The value of Paulson's Valeant stake is down more than $1 billion since its peak, and he's added about 10 million shares since June 2015
Source: Bloomberg

Hedge-fund involvement in Valeant generally has not been constructive. Hedge funds helped push the stock to massive heights, encouraging the company's risky strategy of piling on debt for acquisitions and jacking up drug prices, with little of the due diligence or skepticism you'd hope would come from such high-profile investors. They cheered as Valeant took on more than $30 billion in debt, bought what turned out to be poor assets and used questionable sales, pricing, and accounting tactics. 

The idea of a nearly R&D-free, tax-inverted, ever-growing specialty pharma platform was so great that few bothered to question its sustainability. At the peak of Valeant-mania in the second quarter of 2015, 13F filers disclosed more than $60 billion in Valeant holdings. 

Among them were Paulson, whose fund started buying stock in the firm in 2014; Bill Ackman, who has since famously exited his position; and ValueAct Capital, currently the second-biggest Valeant shareholder. The latter two funds have had board seats, to relatively little effect recently. Ackman's tenure was short, but ValueAct has been on the board almost continuously since before 2010. 

Valeant's issues aren't something one board member or investor can do much to fix. The company has made some progress at chipping away at its debt mountain, which currently stands at $28.5 billion, but there is still an enormously long way to go. And the company's core business has shown little sign of improving. Valeant's problems are on the pharma side, or with the excesses of financial wizardry, not a lack thereof. 

If Ackman is any guide, what Paulson sees from the inside may end up driving him out. 

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