Wallace Weitz (Trades, Portfolio), founder of $5 billion Weitz Investment Management, told investors yesterday via his website that they had jettisoned their entire position in Valeant Pharmaceuticals (VRX, Financial).
“While we don't usually comment on individual portfolio holdings intra-quarter, we have received questions regarding Valeant Pharmaceuticals,” The Weitz Funds statement on Valeant said. “Valeant was a very profitable investment for our funds over the past four years. As of the September quarter-end we had significantly reduced our positions. Recent developments about the company’s pharmacy relationships, pricing policies and business practices led us to sell our remaining shares in late October. We no longer own Valeant in our client portfolios or mutual funds."
Weitz has become the latest investment house with a stake in the beleaguered company to address the position to shareholders after a short-seller report sent its price down by more than half, joining Bill Ackman (Trades, Portfolio) and Ruane Cunniff. The latest official filings from the June second quarter show Weitz with 716,730 shares of Valeant, a 0.21% piece of the company worth 4.5% of his shares outstanding. But in a letter dated Oct. 27, Weitz said he had “significantly trimmed” his position in the third quarter and became a buyer again in October after several years at below $170 per share.
The shareholder report blasting Valeant that managers referred to accused the company of selling product to pharmacies it had an option to own to inflate revenue and profits, comparing it to Enron.
Ruane Cunniff, a guru firm and the company’s largest shareholder, defended Valeant in an Oct. 28 statement, saying its author, Andrew Left of Citron Research, “exploited the negative sentiment surrounding Valeant” for substantially raising prices on drugs it acquired. With almost 35.9% of the fund invested in 9.9% of Valeant, the stock’s freefall “caused an extraordinary level of pain,” managers said, especially because its central allegation “is false.”
“Our belief has always been that [Valeant CEO J. Michael] Pearson is honest and extremely driven. He does everything legally permissible to maximize Valeant’s earnings. One lesson of recent events is that sometimes doing everything legally permissible to maximize earnings does not create shareholder value. All enduring businesses must strive to earn and maintain a good reputation,” Ruane Cunniff said.
Even influential investors who did not own Valeant shares have spoken publicly about the company. Notably, Charlie Munger (Trades, Portfolio), Warren Buffett (Trades, Portfolio)’s business partner at Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), the second-largest holding of Ruane Cunniff, said he instead viewed the company’s sizable profits as not enticing considering its strategy for making them.
The price gouging the company has engaged in is “deeply immoral” and “similar to the worst abuses in for-profit education,” Munger said in an interview with Bloomberg Sunday. As a value investor, he also called its method of acquiring companies and raising prices a “phony growth record.”
Bill Ackman (Trades, Portfolio) of Pershing Square, an admirer of Buffett and Munger, published a 40-page report defending Valeant last week. He also seemed eager to increase his stake, ending it with the famous Buffett quote to “be fearful when others are greedy” and vice versa. At second quarter-end Ackman was Valeant’s third largest shareholder with 5.69% of shares.
At close on Tuesday Valeant’s shares had declined 2.68% for the day to $97.86 per share, down from their 52-week peak of $263.81. Because he started buying the stock in late 2011, long before its multi-year run, Weitz’s cost for all of the shares he bought over the years averaged $51, leaving him with a total estimated gain, including previous trades, of around 166%.
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