When we purchased Valeant at an average price of $196, we bought the company at a modest discount to intrinsic value as represented by the company’s existing portfolio of products and businesses, but at a very substantial discount to fair value in light of its acquisition track record, the large number of potential targets, and its competitive advantages which include its low-cost operating model and favorable tax structure. When the stock price rose this summer to the mid-$200s per share, we did not sell as we believed it was probable the company would likely complete additional transactions that would meaningfully increase intrinsic value. In retrospect, this was a very costly mistake.
Our failure to sell stock wasn’t entirely an unforced error as we found ourselves largely restricted from trading during this period. During the summer, we were made aware of a large potential transaction that Valeant was working on, and as a result, we were restricted from trading at a time when it would have been prudent to take some money off the table. In retrospect, in light of Valeant (NYSE:VRX)’s leverage and the regulatory and political sensitivity of its underlying business, we should have avoided becoming restricted to preserve trading flexibility, or alternatively, we should have made a smaller initial investment in the company.
From Bill Ackman (Trades, Portfolio)'s Pershing Square Annual Investor Letter 2015.
