This Valeant (VRX) story is far from done. For those that thought the volatility in the stock was brought on solely by some shadowy short biased research house, think again. The WSJ set its sites on the specialty pharma in an article posted Sunday night; Valeant and Pharmacy More Intertwined Than Thought, which further scrutinized the curious relationships brought up by Citron Research last week. And this morning, Joe Nocera of the New York Times asks; Is Valeant Pharmaceuticals the Next Enron?. These rags asking those question have those like me who were only mildly interested in the story, very interested. It sure seems something fishy is going on.
The economics of the relationships between specialty pharma companies, and specialty pharmacy companies is well above my pay-grade. You can even call into question the motives of Citron Research, I have no idea how they get paid. Do they take their own positions? Do they write for the benefit of their clients? I have no clue, but to make the sort of claims they did in the manner in which they did last week, I have to assume they know full well the repercussions if they were to make completely unfounded assertions (As Valeant suggests they have).
As for the stock itself, the inability for it to rally yesterday after a fairly exhaustive conference call, accompanied by a 90 page slide deck is pathetic (closed down 5.25% on the day, but well off of its opening lows down about 10%). The massive swings that we saw last week may be abating… a bit. We know that VRX’s third largest shareholder, Bill Ackman of Pershing Square bought 2 million shares last Wednesday, adding to his 19.5 million share position, and if his persistence in past holdings like Target (TGT), JC Penny (JCP) or his short in Herbalife (HLF) are any indication he is not likely to turn tail (yet).
The stock is trading up a few percent this morning on the announcement that Ackman will host a conference call on Friday to discuss his views on VRX and answer questions from other investors. Ackman obviously does not think VRX management did a good job yesterday.
On another note, this story is interesting to me not because I am considering a trade in either direction, but because there seem to be so many similarities to Ackman’s high profile short position in HLF and the charges Ackman has made against that company and specifically its business model, that he deems to be at least an illegal pyramid scheme, and possibly a fraud. I am not sure how a rationale thinker could look at his claims that HLF is a pyramid scheme run by sordid managers and not see the similarities in VRX?? Ackman, as usual, will say that he has spent millions in resources vetting these ideas and is very confident in the target investments strategy. He said the same in JCP until he gave up his board seats in August 2013 and hate sold his 18% stake (equaling 39 million shares) at $12.90 (30% higher than current levels).
Once again its seems that Bill Ackman is in a do or die situation with a large out-sized high profile position and I suspect much like JCP in 2013, and HLF in 2014 the louder he is the worse the investment will be for him and the harder it will be for him to manage risk if he is not correct. The other problem Ackman has is that when it appears he is listing there are few willing to throw him a lifeline. It appears that there are no shortage of market participants and in the financial press who would like to see this guy blow up once and for all.
As for options in VRX, (probably the only spot I can add any value in this discussion) prices are through the roof as one would expect. The at the money straddle (the call premium plus the put premium) one month out is priced at about $28 (stock price $110), or 25% of the underlying stock price. If you bought that you would need a move above $138, or below $82 to make money. With the way the stock has been moving since the start of October ($175 to $89 and now at $110), the straddle seems fair (ish) as it got jacked on yesterday’s close. But for longs, the idea of capping upside with call sales to take advantage of high implied volatility may not be the best idea given the stock’s decline and the hope for a bounce back. One idea for those considering a new long (which is NOT our view) could be the idea of selling an out of the money put and using the premium to buy a call spread. This is in lieu of buying stock here. This strategy could obligate you to buy stock at a lower level as the result of the naked put sale, and offers the potential profitability between strikes of the call spread, and it sure beats buying the stock at $110 and watching it drop $10 at a clip the way it has of late in the event of further unexpected negative news.
This one is an adult swim and I would add that I am not sure that even with the stock cut in half in month the risk is worth the potential reward.
Oh and if you want some real analysis on this story, check out Linette Lopez at Business Insider (see all her stories here), she has been killing it. And of course Matt Levine at Bloomberg, I really enjoyed his view yesterday: Valeant’s Pharmacy Relationships Were Complicated