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Bill Ackman’s Letter to Investors, Part I: Valeant, Air Products and Short Herbalife Bet

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It has been known for a while that activist billionaire Bill Ackman had some rough time, as some of his biggest bets are not showing the expected results. In a recent letter to investors, Pershing Square Holdings said that it lost over 25% during the first quarter, but managed to recover slightly last month and following a gain of over 10% registered in April, the fund currently has a negative return of 17% year-to-date. In this way, Pershing’s gross return since inception in 2012 stands at 13.2%, considerably lagging behind major indices. The letter added that the only significant contributor to Pershing’s returns during the first quarter was Air Products & Chemicals, while among the main detractors were Valeant Pharmaceuticals and Mondelez International , followed by Herbalife Ltd. (NYSE:HLF) and Platform Specialty Products Corp (NYSE:PAH). In this article we are going to take a closer look at Bill Ackman’s comments regarding some of his long and short bets.

The holding that has kept Bill Ackman in the spotlight lately is Pershing’s 9% position in Valeant Pharmaceuticals Intl Inc (NYSE:VRX), which contains over 30.0 million shares of the company and which detracted its gross returns by over 26% in the first three months of 2016. In March, Ackman joined Valeant’s board as the company had been struggling for months to overcome a string of negative developments. Since Pershing Square added Valeant Pharmaceuticals Intl Inc (NYSE:VRX) to its equity portfolio back in March, 2015, the stock has lost over 80%, so it’s not surprising that Ackman decided to take the matter into his own hands. In this way, soon after Ackman joined the board, the company announced the appointment of new CEO and Chairman, Joe Papa, who previously was the Chairman and CEO of Perrigo.

“We believe that Joe is an ideal choice for Valeant as he has extensive senior leadership experience in all aspects of the pharmaceutical industry, a strong reputation for integrity, and an excellent track record at Perrigo as reflected by the company’s 24% compounded annual return to shareholders during his tenure. Joe is passionate about the opportunity for value creation at Valeant, and we are excited to have him on board.” Ackman said in the letter.

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) filed a delayed 10-K report on April 29, which didn’t contain any significant changes, except for the restatement of $58 million in revenue it booked prematurely in the fourth-quarter of 2014. The report was filed on time to avoid the company’s default on debt and provided investors with some relief.

“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 noncore assets. 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. It will take time for Valeant to regain its stakeholders’ trust. We believe that this will occur over time as the company delivers several new quarters of results and continues to fulfill its commitments to shareholders, patients, doctors, and the community at large. Over time under Joe’s leadership, we expect the market to rerate Valeant to a substantially higher valuation reflective of its underlying business,” Ackman added.

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