Valeant Pharmaceuticals (VRX, Financial) has been on a wild ride over the past several years. It was once the stock market darling when its stock price jumped from $40 per share in 2012 to $250 per share in July last year. Then it plunged to only $87 at the time of this writing. Investors have been in doubt about the company’s business model and accounting practices. However, value investors such as Lou Simpson (Trades, Portfolio) and T Rowe Price Associates have been buying its shares. Should we follow them into this stock? Let’s dig deeper.
In October last year, Citron released its bearish research on the company. Citron focused on the company’s relationship with Philidor and R&O Pharmacy. It pointed out that Philidor and R&O Pharmacy were the same company with the same toll-free number to reach the privacy officer. Citron also compared the company with infamous Enron, the company with hot stock and fraudulent accounting in 2001. Before joining Enron in 1990, Jeff Skilling had no experience running a business, having spent 11 years working for McKinsey. Michael Pearson, Valeant's ex-CEO, also worked for McKinsey for 23 years before joining Valeant. Citron thought that when others discovered Philidor, Valeant said the company had purchased an option to acquire Philidor in late 2014. In the report, Citron lowered their target price to $50 per share.
In August last year, AZ Value’s posts had a deep look into Valeant’s filing in the period of 2011 to 2013 about the company’s disclosure of acquisitions over the years, the change in revenue due to acquisitions and how the company reclassified their business operating segments. The very bearish posts detailed the comparison with the sales and growth numbers that Valeant reported and the analysis reports of companies before they get acquired by Valeant.
Under the leadership of Michael Pearson, Valeant has grown its business rapidly by acquisitions. Charlie Munger (Trades, Portfolio) has also considered the company as “too aggressive in ignoring moral considerations in the way it did business.” Compared to both American Express (AXP, Financial) and Enron, Munger said “American Express was defrauded. They were stupid. They weren’t immoral… Valeant is not as good as American Express was, and is not as bad as Enron.”
Munger also compared the Valeant case to ITT: “Valeant is like ITT and Harold Geneen come back to life, only the guy is worse this time.” ITT, or International Telephone & Telegraph, also replied on acquisitions to grow its business. Harold Geneen, its chief executive, had bought around 350 businesses in 80 countries with different industries including rented cars, insurance, hotels, baked bread, etc.
Lou Simpson (Trades, Portfolio), former GEICO CIO, has added Valeant to his portfolio in the fourth quarter. He bought more than 745,000 shares in the company, increasing his stake by 38% at the average price of more than $112 per share. Now Valeant has become a 9.09% position in his fund. Indeed, Valeant might be overvalued at $250 per share, but it is still the pharmaceutical conglomerate generating increasing cash flows. Its fundamentals are still good and it seems like the company has been hurt enough from the bad news.
