U.S. stock market have endured wild swings over the past few months, and some may wonder what has been driving equities so violently. William Ackman of Pershing Square Capital Management believes that leveraged exchange traded funds, or the so-called ETFs, high-frequency trading and other kinds of leveraged strategies stand behind the recent market volatility. He also asserted at the Bloomberg Markets Most Influential Summit in New York that “there is a huge amount of money that moves without regard to long-term economic fundamentals”. It is worth pointing out that the reputable hedge fund manager is just one of the many who blame high-frequency trading for the wild swings in stock markets. However, the following article will discuss Ackman’s view on the pharmaceutical space; his stances on Valeant Pharmaceuticals Intl Inc. (NYSE:VRX), and his thoughts on Nelson Peltz’s activist stake in General Electric Company (NYSE:GE). Most importantly, the last paragraph of this article is reserved for William Ackman’s prediction on the 2016 presidential race.
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William Ackman’s views on the pharmaceutical industry did not change after democratic presidential candidate Hillary Clinton announced her intentions to cut back drug costs and hold the pharma industry accountable for the high cost of medicine. He believes that it is of crucial importance that this “doesn’t lead to regulation that cuts back on innovation in any way”. Ackman reckons that there is a “self-fulfilling prophecy of more and more innovation” within the pharmaceutical industry, which should not be stopped. Moving on to his thoughts on Valeant Pharmaceuticals Intl Inc. (NYSE:VRX), the reputable investor considers that “Valeant has made a massive contribution to drug development”. He believes that acquirers of drugs like Valeant have spurred research and development activities and have propelled investors to pour in more capital into the industry. Most importantly, Pershing Square Capital Management’s CEO and Portfolio Manager outlined that Valeant Pharmaceuticals Intl Inc. (NYSE:VRX), which represents the largest position in his firm’s portfolio with 19.47 million shares, is the most undervalued stock from his portfolio and has the most attractive risk/reward potential.
Fundamentally Ackman is making a very simple point. Research oriented drug companies spend too much money on R&D projects most of which don’t generate any meaningful revenue. And when they come up with successful drugs (by the way this happens less than 10% of the time), they don’t charge enough money. Valeant noticed this fact and has been acquiring these companies above prevailing valuations and is able to do this because it can increase the drug prices and cut unproductive R&D expenses.