This story was originally published on The Deal on Tuesday, March 15.
Activist investor Bill Ackman (pictured) of Pershing Square LP on Tuesday said he planned to take a "proactive role" at Valeant Pharmaceuticals (VRX) after the drug company's stock price plunged following announcement that it might default on some of its debt.
Valeant's stock price dropped by more than 50% to around $35.09 a share -- significantly lower than its high of about $262 a share in August. Even before Tuesday's major stock drop the activist fund and its friendly investment in Valeant have helped drive Pershing Square to an abysmal -20.5% return net of fees for 2015 and a -19.7% in early 2016, according to a Feb. 29 report.
The initial stock price drop came after short-seller insurgent, Andrew Left of Citron Research, issued an eight-page note on the firm's website in October alleging that there was a secret relationship between Valeant, a mail-order pharmacy called Philidor Rx Services, and a Philidor customer, R&O Pharmacy LLC.
Ackman essentially has been doubling down on his investment in the drug company as the stock has dropped. Last month, Pershing reported hiking its Valeant stake by 5 million shares to 9% from 8.5%, accumulating shares between Feb. 1 and Feb. 5 at prices ranging from $93.25 a share to $97.70 a share. In October, Pershing hiked its Valeant stake to 6.3% from 5.7%. Last week, Valeant increased its board size and added three new directors, including Stephen Fraidin, who joined Pershing Square last year to become vice chairman under Ackman. As of Dec. 31, Pershing Square owned nearly 17 million shares of Valeant.
One activist investor noted Tuesday that Ackman has been making public statements about Valeant and increasing his investment in the hopes that others will rally to follow him into the drug company's shares. However, the investor noted, exactly the opposite has happened. He added that, at the very least, the investment will limit Ackman's ability to launch new insurgency campaigns in the coming months.
Pershing Square has already had to deal with some loss of talent. Partner Paul Hilal, Ackman's former college roommate, left the fund after a ten-year stint. Hilal was a key contributor to the fund and generated the thesis that eventually drove Pershing Square to a successful 2012 campaign against Canadian Pacific Railway Ltd. (CP)
It is unclear what will happen to Ackman's fund and his activist investments in the wake of the stock price drop. In 2014, Ackman, in an attempt to create permanent capital, conducted an IPO for an Amsterdam-listed, publicly-traded closed-end fund whose holdings mirror Pershing Square's portfolio. The investment vehicle, according to a person familiar with the situation, could help Pershing Square limit the damage from Valeant and any potential investor redemptions. A Pershing Square official declined to comment.
Nevertheless, the stock price will likely have a negative impact on the fund's existing insurgency campaigns. According to a February securities filing, as of Dec. 31, Pershing Square held large minority positions in eight companies, including Valeant.
It is possible Pershing Square may need to cut back on its investments and campaigns at some of the other shareholdings, including an insurgency at Zoetis (ZTS - Get Report) and investment in Mondelez (MDLZ - Get Report) . Mondelez has come under pressure to be sold by Nelson Peltz's Trian Management. Ackman is also a director and significant shareholder at Canadian Pacific (CP) , which filed a proxy statement recently with a proposal seeking to have Norfolk Southern (NSC - Get Report) engage in talks over CP's unsolicited $28 billion takeover attempt.
For some Pershing Square investors, the possibility of a default at Valeant carries a sense of déjà vu. Ackman in 2010 sought to fund a Borders buyout of Barnes & Noble Inc. that fell apart after Borders filed for bankruptcy in 2011.
Other funds are struggling with their Valeant investment as well, including at least two other activist-type funds, ValueAct's Jeff Ubben and John Paulson's Paulson & Co., who own large stakes. The investment firm Ruane, Cunniff & Goldfarb recently were accused of negligence for letting Sequoia Fund Inc. accumulate a large Valeant position.