On Friday afternoon, in addition to the endless Bill Ackman conference call which pushed the stock lower the longer it dragged on, the stock of troubled pharma Valeant was hit with a double whammy when Citron's "short-seller" Andrew Left tweeted that he planned a new report on Valeant on Monday, following his Oct. 21 report that accused the company of using specialty pharmacies for “phantom sales” to inflate its financial results. In the tweet Friday, he said Citron would “update full story,” adding: “Dirtier than anyone has reported!!”
He may have exaggerated, because as the WSJ reported overnight [9]Left since "pulled back on hints that he would unleash new bombshell revelations Monday about the drug company."
A bigger problem for Valeant [10], however, emerged today when none other than Warren Buffett's right hand man Charlie Munger in an interview with Bloomberg "tore anew into the besieged drug company, calling its practice of acquiring rights to treatments and boosting prices legal but “deeply immoral” and “similar to the worst abuses in for-profit education.” In his role as chairman of Good Samaritan Hospital in Los Angeles, Munger said, "I could see the price gouging.” And speaking as a storied value investor, he said, its strategy isn’t sustainable: “It’s deeply wrong.”
As Bloomberg adds, "Munger’s stance has extra significance, because some of the drugmaker’s largest shareholders follow the style of investing that he and Buffett, 85, popularized. Ackman frequently expresses his admiration for their firm, Berkshire Hathaway Inc. And Valeant’s largest investor, Ruane Cunniff & Goldfarb, which runs the Sequoia Fund, shares a decades-long history with Buffett."
Munger, 91, brought up Valeant in March, before an audience of about 200 people assembled to hear him at the annual meeting of Daily Journal Corp., where he is chairman. He was discussing a passage in Buffett’s recent letter.
Companies like ITT Corp., Munger said, made money back in the 1960s in an “evil way” by buying businesses with low-quality earnings then playing accounting games to push valuations higher. Investment managers looked the other way. And worse, he added, it was happening again.
“Valeant, the pharmaceutical company, is ITT come back to life,” Munger said at the gathering. “It wasn’t moral the first time. And the second time, it’s not better. And people are enthusiastic about it. I’m holding my nose.”
In other words precisely what we said on Friday [11]: the biggest problem for Valeant is not whether or not the Philidor accusations lead to criminal charges, but that its roll-up strategy, which served Wall Street and especially Goldman, as much as it served VRX shareholders, is now finished with both the stock plunging and its bond yields soaring.
And perhaps to prove just how much clout Munger does indeed have, moments ago the most important Wall Street bank, Goldman Sachs, downgraded Valeant to Neutral from Buy, cutting its share price target from $180 to $122. From GS:
We downgrade VRX to Neutral from Buy and lower our 12-month DCF-based price target to $122 from $180. Since being added to the Buy List on 11/30/14, VRX is -36% vs. S&P +1%. Given the events that have transpired very rapidly in recent weeks that have raised many questions about certain aspects of VRX’s business model, we have less confidence the market will reward the stock anytime soon without clarity as to the path forward. We move to the sidelines until there is further visibility on how management will repair the reputational damage to the company, as well as grow its business effectively in this increasingly challenging environment.
And continues with its current view:
Current view
We continue to believe that longer term VRX’s fundamentals could justify a much higher valuation, but risk/reward in the stock in the near-to-medium term is less clear. We expect a much longer road than we previously thought for the dust to settle and for VRX to be able to regain enough investor confidence to attract a sufficient amount of new money into the stock. Key factors prompting our downgrade now: 1) We were surprised VRX’s decision to sever ties with Philidor wasn’t received better and it indicated to us investors remain very concerned that VRX’s troubles could potentially spill over into other areas of the business. 2) We’re more concerned about potential business risk for VRX with physicians, patients and customers as a result of all the recent developments; we think it’ll take at least a couple of quarters of execution to have a better sense of that. 3) With healthcare out of favor and biopharma having contracted so much, we believe there are other stocks for investors to choose from with attractive valuations and not the same overhangs VRX has if new money returns to the sector.
We lower revenue/EPS estimates: 5%/9% in 4Q15 and 6-7%/11-12% in 2016- 2019E mostly to reflect the impact from terminating Philidor, as well as more conservatism on pricing, and modestly higher opex to improve VRX’s profile as a pharma company. Our lower PT is driven by lower estimates and terminal multiple (7x from 8x) due to higher execution risk given recent uncertainties. Key risks are pricing concerns, subpoenas, execution without Philidor, pace of M&A.
This is the same Goldman which we profiled as making hundreds of millions in Valeant-related fees in "Tying The Valeant Roll-Up Together: Presenting The Goldman "Missing Link [11]""
Gun to head: the Valeant bottom may well be in.
