Ackman Is ‘Profoundly’ Sorry for $4 Billion Valeant ‘Mistake’By and
In letter to investors, billionaire explains lessons learned
Ackman thinks prior management overpaid for Salix deal
In his annual letter to investors in his publicly traded fund Pershing Square Holdings Ltd., Ackman in part blamed Valeant’s overpaying for Salix Pharmaceuticals in 2015 for the drugmaker’s downfall. But he also took blame for misjudging the company’s management and its aggressive strategy.
“Clearly, our investment in Valeant was a huge mistake,” the money manager wrote in the letter. “We deeply regret this mistake, which has cost all of us a tremendous amount, and which has damaged the record of success of our firm.”
That error has cost him dearly as Valeant’s stock lost more than 95 percent of its value since an August 2015 peak. On March 13, Ackman’s activist hedge fund Pershing Square Capital Management said it had shed its stake, taking about $4 billion in losses. The investment was the biggest contributor to Pershing Square Holdings’ 13.5 percent loss in 2016 and 20.5 percent loss in 2015 -- a reversal of fortunes from its 40.4 percent gain in 2014.
Valeant acquired Salix for $11.1 billion and got what has become a key franchise of gastrointestinal drugs. Yet the products haven’t sold as well as expected, and Ackman said that it now looked like Valeant “substantially overpayed for Salix, and it has not yet achieved the results anticipated by prior management.”
A spokesman for Valeant declined to comment.
In the letter, Ackman said he had learned lessons, including that “a management team with a superb long-term investment record is still capable of making significant mistakes” -- presumably a reference to ousted Valeant CEO Mike Pearson, who left the drugmaker in May after failing to reassure investors that he could turn around a company besieged by scandals involving its pricing practices and distribution network. Pearson was the mastermind of Valeant’s meteoric rise, orchestrating a years-long acquisition spree that ultimately left the company with around $30 billion in debt.
Ackman says he also learned a lesson in politics -- how outside factors like political scrutiny over drug prices can help take down a company. He also, he said, was mistaken in relying so much on Valeant’s past management to get things right.
“The highly acquisitive nature of Valeant’s business required flawless capital allocation and operational execution, and therefore, a larger than normal degree of reliance on management,” Ackman said in his letter. “In retrospect, we misjudged the prior management team and this contributed to our loss.”
Valeant is now run by CEO Joe Papa, and the company has been refinancing its debt to give it more time to pay off lenders.
“We have grown to admire Joe Papa and the new, extremely hard-working, Valeant management team,” Ackman said in his letter. “We believe that Valeant has been stabilized and now has sufficient resources to enable it to recover to its full potential.”
Ackman decided to sell because even a significant rebound in the share price wouldn’t be enough to make up for the amount of effort the ongoing investment would have taken, he said.
Ackman and colleague Stephen Fraidin joined Valeant’s board a year ago, vowing a turnaround to salvage their investment. As the stock declined, the hedge fund continued to double down. But instead of buying shares outright, Pershing Square began relying on a combination of put and call options that increased its exposure while minimizing additional capital outlays.
Valeant may go down in history as a stock that tarnished the reputation of a number of prominent investors. In addition to Ackman, hedge fund manager John Paulson and managers of the Sequoia Fund, a storied mutual fund started by a friend of Warren Buffett’s, saw billions of gains evaporate in 2015 and 2016 on a business they believed had found a new model for a drug company. Activist ValueAct Capital Management remains one of Valeant’s biggest holders after first investing in mid-2006 in what was then a small experimental-drug developer.