Ruane Cunniff Analyst Who Helped Champion Valeant Left With CEOby and
Pair most closely associated with Sequoia's No. 1 holding gone
CEO Poppe vows `back to basics' focus on low-debt companies
The plunge in Valeant Pharmaceuticals International Inc. continues to take a toll at Ruane, Cunniff & Goldfarb, as the analyst who followed the firm’s largest holding has left.
A day after Robert Goldfarb announced his retirement as chief executive officer, new CEO David Poppe said the analyst who covered the stock has chosen to depart as well. Poppe declined to name the analyst in an interview Thursday, but Rory Priday, who worked at Ruane Cunniff, fielded questions about Valeant at the money manager’s annual investor days since 2011.
Poppe and Goldfarb jointly managed the $5.6 billion Sequoia Fund to a stellar record over most of the past decade, only to see performance dragged down by the 88 percent decline in Valeant shares since August. Goldfarb was an early backer of former Valeant CEO Michael Pearson and admired his drive and dynamism, according to Poppe.
“I didn’t see it as clearly, but we were co-managers of the fund so I can’t distance myself from the investment,” Poppe said. Pearson resigned earlier this week as activist investor Bill Ackman joined the board.
Robert Swiggett, an independent director of the Sequoia Fund, confirmed that Goldfarb was a strong Valeant backer.
“Bob Goldfarb was primarily the shot caller, and had a lot of confidence in Mike Pearson,” Swiggett said in a telephone interview. Goldfarb and Priday became close to Pearson as the position grew, according to Swiggett.
At Ruane Cunniff’s 2011 investor day, Priday was asked how the firm came to be a Valeant investor the previous year. Priday said the firm found the investment by researching company filings and online news, and through a "fund manager whom we knew," according to a transcript of the meeting.
"We saw that the CEO, Mike Pearson, appeared to be pretty extraordinary," Priday said. "Fortunately, we were able to meet him about a week after we came across the company."
Attempts to reach Priday by phone and e-mail weren’t successful. Goldfarb also didn’t respond to requests for comment.
Sequoia, which has beaten the benchmark Standard & Poor’s 500 Index by a wide margin since it was created in 1970, lost 11 percent this year through March 23 and 7.3 percent in 2015. The fund trails more than 99 percent of its peers over the past year, according to data compiled by Bloomberg.
The fund’s mushrooming Valeant position spurred two independent directors to quit last year, and its weakening performance triggered an estimated $835 million in outflows in the five months through February, according to data compiled by Bloomberg.
“A lot of our clients are frustrated and don’t understand how this happened to us,” Poppe said in the interview. “Our message is we will get back to basics, owning best-of-breed companies with lower levels of debt.”
Valeant is struggling with $31 billion of debt, much of it raised to support a growth model fueled by acquisitions. The company’s debt level has eclipsed its stock market value as the shares have tumbled.
Valeant, which grew to more than 30 percent of Sequoia’s portfolio at its peak, has been targeted by short-sellers who say the drugmaker used a mail-order pharmacy to inflate sales figures. Last week, Valeant lost more than half its market capitalization in one day after it cut its 2016 forecast and said it risked breaching some of its debt agreements.
At Sequoia, the size of the Valeant position was a matter of concern to the fund’s directors for more than a year, according to Swiggett, who said the board was pressuring Goldfarb to scale back the holding. Two of Sequoia’s five independent directors, Vinod Ahooja and Sharon Osberg, quit in October.
At a board meeting last week, the directors realized that “we were at an untenable situation” because of Goldfarb’s “inability or unwillingness to sell the position,” Swiggett said.
He declined to comment on whether the board forced Goldfarb to retire. Poppe said Goldfarb made the decision on his own, “and it was the right decision for everyone.”
As the firm regroups, it will involve more professionals in the process of building and monitoring the Sequoia portfolio, according to Poppe. While the fund will still focus on its best bets, he said, “We will take a hard look at how much concentration will be enough. Clients don’t have an appetite for too much concentration.”