Several days after appointing an investment committee and new holding restrictions in response to substantial losses on Valeant Pharmaceuticals (VRX, Financial), the Sequoia Fund sold a substantial portion of its investment in the company.
The filing from a week ago and made public Tuesday afternoon documented a 47% reduction in the Sequoia Fund’s Valeant position, to 16.1 million shares from 30.3 million shares. It also shrank the fund’s ownership of the company to 4.7% from 8.8%.
The previous Friday, Ruane, Cunniff and Goldfarb, the fund’s managers, had informed clients of their plan to form a committee to oversee all investments and their weightings in the portfolio. They also changed their guidelines to limit the value of a single holding to 20% of the portfolio’s assets under management, with the exception of Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial)
Valeant was the largest position in Ruane Cunniff (Trades, Portfolio)’s portfolio since at least June 2011. The holding grew past 20% in the third quarter 2013, and management continued to buy until it reached its peak weighting of 36% in the second quarter 2015. By September, accounting missteps and short-seller accusations sparked Valeant’s 90% loss of market value over the past 10 months that dragged the typically disciplined, outperforming Sequoia Fund to a loss of 28%, compared to a 6% rise in the S&P 500.
The negative impact led to the retirement of Ruane Cunniff (Trades, Portfolio)’s CEO, Robert Goldfarb, though the firm said in the April client note that its investment philosophy – finding companies’ intrinsic values through intense research and letting management create value – would remain intact.
Valeant’s price fell a further 15% Tuesday when it lowered full-year guidance for 2016 in its first quarter financial statement after missing the deadline for filing early in the year. The revenue guidance range dropped to between $9.9 billion and $10.1 billion, from between $11 billion and $11.2 billion, and adjusted non-GAAP earnings per share to a range of $6.60 and $7, from $8.50 and $9.50.
Valeant, which has drawn criticism for its growth strategy of absorbing smaller drug companies and raising the price of their drugs, also increased its commitment to research and development 85% to $103 million. Most of the capital channeled to its dermatology portfolio.
Another substantial stakeholder, Bill Ackman (Trades, Portfolio), has maintained his position as it contributed to an 18.6% loss for his Pershing Square hedge fund for the year through May. Last year, it led his firm’s holdings to a 20.5% loss, the worst in its history. As a Valeant board member since March, Ackman, who has a 9% stake, has opted to work with the company to fix its problems and helped recruit Joe Papa of Perrigo (PRGO, Financial) to succeed Michael Pearson as chairman and CEO.
“There is much work to do at Valeant, which, among other issues, includes restoring the dermatology business to growth while working out transition issues with its new Walgreens distribution arrangement, accelerating the growth of Salix, Valeant’s gastrointestinal business, and reducing the company’s debt through free cash flow generation and the potential sale of non-core assets,” Ackman said.
“We believe that Valeant has some of the best and most durable assets in the pharmaceutical industry, which do not require aggressive pricing in order to generate growth and substantial free cash flow.”
In the first quarter, Berkshire A-shares replaced Valeant as the top holding in the Sequoia Fund’s portfolio, as Valeant fell to fourth place, behind TJX Companies (TJX, Financial) and Fastenal (FAST, Financial). This week’s sell dropped Valeant closer to the fund’s tenth largest position in a portfolio of 133 stocks.
The stock closed Tuesday at $24.66 per share, down from its one-year high of $263.81. It has a forward price-book ratio of 2.7, P/B ratio of 1.4 and P/S ratio of 0.94.
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