For most Americans, mid-February means Valentine's Day. For investors, mid-February means the filing of Form 13F by high-profile money managers with the Securities and Exchange Commission (SEC). Money managers who run funds with more than $100 million in assets under management are required to disclose their portfolio holdings every quarter. It just so happens that Valentine's Day was the deadline for 13F filings with the SEC for the fourth quarter of 2016.
On one hand, 13Fs have a natural limitation: they're backward-looking. By the time 13Fs have been filed with the SEC, roughly 45 days have passed since the sneak peek that money managers are providing.
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However, 13Fs can prove quite valuable, too. Understanding what some of the smartest institutional and hedge fund managers are buying can give clues to Joe and Jane Q. Investor as to what trends are gaining traction, and what companies may be overpriced or underpriced (in the eyes of these money managers).
Then again, they also expose some of the most boneheaded and brazen decisions.
These hedge funds are playing with fire (and probably got burned)
According to 13F data uploaded courtesy of WhaleWisdom.com, three hedge funds currently hold a combined 15.1% of the outstanding shares of Valeant Pharmaceuticals (VRX 4.12%), the embattled drugmaker that's seen its share price fall from $264 in the summer of 2015 to less than $16.
- Jumping into the largest holding position is Paulson & Co., which added 513,500 shares of Valent stock during the fourth quarter and pushed its ownership to 19,384,500 shares, or 5.58% of all outstanding shares. Paulson & Co. has been a Valeant shareholder since the first quarter of 2014.
- Closely behind Paulson & Co. is Bill Ackman's Pershing Square Capital Management, which disposed of 3,476,690 shares of Valeant stock during Q4 2016, but still owned 18,114,432 shares as of Dec. 31, 2016, good enough for 5.21% ownership.
- Finally, the lesser-known ValueAct Holdings, which has more than $17 billion in assets under management, owns 14,994,261 shares of Valeant, working out to 4.31% of outstanding shares. ValueAct didn't buy or sell any shares of Valeant stock during the fourth quarter.
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Valeant's vortex
Valeant is, for lack of a better word, a disaster. The drugmaker has been hit by a triple-whammy of issues that have seriously clouded its short- and long-term outlook.
To begin with, the company was caught red-handed by lawmakers after raising the prices for cardiovascular drugs Nitropress and Isuprel by 525% and 212%, respectively, after purchasing them from Marathon Pharmaceuticals in Feb. 2015. Price increases in the pharmaceutical industry aren't uncommon. But the fact that Valeant acquired two mature products and increased their prices so dramatically without any formulation or manufacturing process changes raised a stink among patients, hospitals, and eventually lawmakers. This pricing mistake has put all eyes on Valeant, and it's subsequently hurt the company's core businesses, some of which have seen sales fall by 50% (e.g., dermatology products).
Valeant is also dealing with legal issues stemming from its relationship with now-former drug distributor Philidor Rx Services (which was also a subsidiary). If lawmakers discover that Philidor wasn't acting as a neutral party between insurers and Valeant, and Valeant knew it wasn't, Valeant could be hit with fines and/or sales restrictions, which would be devastating.
But the biggest issue of all is Valeant's monumental debt load of $30.4 billion. Valeant grew for years by acquiring other businesses and products with debt-based financing. When the wheels fell off the bus, so to speak, and its core businesses began seeing significant sales declines, its creditors cut off its access to credit, forcing the company to consider selling assets to manage its debt.
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Baby steps, but a long road to go
The aforementioned three hedge funds have presumably been throttled over the past year and change, as Valeant has given up well over 90% of its value, but it doesn't look as if things are going to get any better anytime soon.
If there is a silver lining here, it's that Valeant Pharmaceuticals finally managed to make two smart non-core asset divestments after seemingly months of trying. In January, Valeant announced that it was selling three of its medicated skincare brands (AcneFree, Ambi, and CerAve) to L'Oreal for a cool $1.3 billion, or nearly eight times the annual sales of these drugs. Considering that Valeant wasn't in a position of strength at the bargaining table, to get 7.7 times annual sales is a pretty outstanding deal for Valeant.
Valeant also wound up selling its Dendreon assets for $819.9 million to Sanpower. The lone approved asset in Dendreon's portfolio was cancer immunotherapy Provenge, which treats advanced prostate cancer. Provenge has primarily been displaced by competing drugs, with its peak sales estimates now about a tenth (or less) of what they once were. Valeant wound up getting a very fair deal with this divestment as well.
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The problem is that it took Valeant months upon months just to sell $2.1 billion worth of non-core assets, and while it will allow the company to chip away at its $30.4 billion in debt, it needs to do much more to improve its financial flexibility and appease creditors, who have already eased some debt covenants (for a price).
Meanwhile, Valeant has no concrete plans on how it'll actually improve its core business. The company's new drug distribution deal with Walgreens Boots Alliance hasn't worked out thus far, and there's nothing that suggests the company's mature pharmaceutical portfolio will see any pick-up in sales, especially with regulators closely monitoring its pricing practices.
Frankly, these hedge funds are playing with fire, even with Valeant Pharmaceuticals more than 90% off of its highs.
