Valeant Just Bled 30%… in One Morning

When I told you yesterday that the stock of Valeant Pharmaceuticals International Inc. (NYSE:VRX) could hit $100 per share, I didn’t think it would happen within 24 hours. (Sometimes I even amaze myself.)

The stock fell from $148.00 at open today to as low as $98.35, losing more than 30%. [Update: As I write this, it’s traded down below $90/share, and trading may be halted.]

$16 billion – evaporated.

A lot of people just lost a lot of money. But if you’ve been reading Sure Money, you didn’t even blink.

I have been reporting how the company’s noxious business model of buying other drug companies with huge amounts of debt, firing their workers, and raising their drug prices was hitting serious resistance from politicians and investors. Recently, the company was subpoenaed by Democrats in Congress about its pricing practices.  Then Hillary Clinton piled on, trying to score points with voters. This news sent the stock into a tailspin.

Then on Monday, the company announced earnings that met expectations. But that didn’t calm investors because the company said it was going to radically change its business strategy. It would no longer make large acquisitions of other drug companies in order to get its hands on drugs to raise their prices. Nor would the company, which had increased prices by an average of 66% over the last five years, depend on hiking prices in the future to boost earnings. Instead, it anticipated that future price increases would be below 10%.

In other words, the Valeant business model that had pushed its stock up to a 52-week high of $263 per share was dead.

Investors greeted this news by running for the exits.  By the end of trading on Tuesday, the stock was down to $146.74.

But things were about to get much worse.

Today, short selling firm Citron Research piled on by claiming it had discovered a “smoking gun” related to the company. Citron has published several negative reports on Valeant in the past. Citron reported that VRX is using pharmacies related to a company called Philidor to store inventory and record the transactions as sales. Citron said that “Valeant/Philidor have created an entire network of phantom captive pharmacies” to create fake sales of drugs or to avoid the scrutiny of auditors. This is known as “channel stuffing” and is done to fraudulently inflate sales. VRX stock collapsed sharply on the report, down 50 points to $98.35 per share.

When a company like VRX loses the confidence of investors, it is very difficult to get it back. No doubt VRX will try to refute the Citron report, but serious damage has been done to VRX’s already battered credibility.

VRX’s predatory business model places it at a disadvantage with investors because it depends on inflicting harm on people to make money. That may sound like an odd thing to say about a pharmaceutical company, but this is no ordinary pharmaceutical company. VRX thinks R&D is a nuisance and would rather buy up other companies, fire people, hike the prices of their drugs and let the government, insurance companies and consumers pick up the tab. The company’s apologists point to subsidy payments that the company makes to certain patients, but that is just a cost of doing business that allows the company to prey on everybody else. Those apologists are largely Wall Street firms beholden to the company for investment banking and underwriting fees whose apologies are written in blood money.

Now that VRX has traded below my price target – that seemed extreme just 24 hours ago – what’s next? Citron, the firm that published the report, said $50. I say there is no way to tell. It’s better to wait a day or so and let the smoke clear in case it stabilizes.

The bottom line is that VRX is getting what it deserves. It won’t upset too many people that its largest shareholder is the activist investor Bill Ackman, who bought his stake in the company early this year after skirting insider trading laws trying to help VRX in its failed bid for Botox maker Allergan. Karma is a bitch.

8 Responses to “Valeant Just Bled 30%… in One Morning”

  1. I took your advice yesterday and bought 10 Nov 150 puts at $9.80 when the stock was around $150. I sold them this AM at $43.00 (maybe a bit too soon) after trading resumed from the first hold. Thanks for the great research and advice. I hope you’re correct about the SPY being similar. This latest S&P 500 run up took a chunk out of my account.

  2. Charles Rotsztajn

    I have been struggling to find a service that actually delivers as promised. So sick and tired of the constant barrage of services always offering amazing gains but rarely delivering. Yes, I do understand not every trade can be a winner but the claims are very rarely met. Mr Lewitt’s call on VRX was brilliant and the timing superb. In one day I regained everything lost in the past 3 months. I’m not a big experienced trader but I finally believe I’ve found someone who’s opinion I trust. Thanks heaps Mr Lewitt’s.

  3. After I read Mr. Lewitts report just yesterday I jumped in a little later than the previous posts did then sold that put option this morning for almost a 300% gain in less than 24 hours. That has never happen to me before! What a ride!! Thank you, thank you Mr. Lewitt

  4. gjc (north of the border)

    Many thanks for your excellent intel and stock price prediction regarding VRX. Followed my gut feeling that the drop would occur soon, I picked up 10 contracts of Nov $140 puts yesterday at $360 and closed them at over 1,100% this morning! Fantastic early Christmas present! These are the moments we option players dream of, and very much appreciate your good work in bringing the opportunity to our attention. It has also provided me a good example of how put options can provide insurance for my portfolio if there is a large “correction” in the market as you and others are predicting. I’m wondering if there was any reason why you hadn’t suggested an option play on this stock at the same time you published your prediction of it’s significant price drop. GC

  5. Steve,
    Your view of this company and our trades relating to it are completely distorted. Allow me to explain. You said in your post that we traders, “Were happy with Valeants noxious business practices and piled in to buy stocks”. The truth is we are not happy with Valeants business practices at all. And the more “sober approach” you speak of makes this company unable to sustain itself. The leadership of this company made a choice to engage in questionable business practices that handsomely enriched themselves at the expense of others ultimately backing themselves into paradox situation. Now the party is over and the ship is sinking. I would suggest you do some research on this before you condemn others. Like Lewitt said, “KARMA IS A BITCH”

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