Billionaire activist Bill Ackman has had no shortage of self-proclaimed "worst" investments in the 12-year history of his hedge fund, Pershing Square.
In 2012, it was his 40% stake in flagging bookseller Borders. Then there were Ackman's 2014 laments over losses in J.C. Penney (JCP). Finally, last year saw dismal reports of his botched campaign to bring down Herbalife (HLF).
But as far as Ackman's flops go, Valeant Pharmaceuticals (VRX) really stands alone.
The beleaguered Canadian drugmaker thrashed Pershing Square and its 9% stake last year with a negative 20.5% return net of fees. And 2016 doesn't appear any better, with shares down 72% year to date as of Wednesday morning trading.
But aside from the steep, and unprecedented, troubles that Valeant wreaked on Pershing last year, the investment is also unique for Ackman in the sense that there is so far literally no way to properly account for the damages: By Valeant's own admission, its last several filings with the Securities and Exchange Commission should be considered null and void due to bookkeeping misconduct.
The $58 million in sales Valeant improperly booked for 2014 tied to its partnership with mail-order pharmacy Philador could have a spillover effect on other quarters and retroactively on 2015, the company said in a March SEC filing. And the oversight has contributed to ongoing investigations by the SEC and Congress.
And the murky bookkeeping surrounding Valeant has also delayed the filing of its annual 10-K. And kicking the can down the road for much longer could trigger covenant breaches on Valeant's debt -- one of the few accounting metrics shareholder's have a clear view on.
The $30.88 billion in debt that Valeant booked in the third quarter last year is nearly twice the $16.27 accounted for year over year. Meanwhile, the $526.8 million of net income filed with the SEC over Valeant's trailing four quarters is down from $947.5 million in all of 2014.
But the key to an overhaul, Ackman said last week in a letter to Valeant investors, will be reversing the negative media scrutiny the drugmaker seems incapable of shaking off.
Controversy surrounding Valeant's accounting and drug pricing most recently came to a head with the Senate issuing a subpoena to outgoing CEO Michael Pearson, who is set to testify about Valeant's drug pricing practices next month. And the company's pricing practices have also has been highlighted by the campaign of Democratic presidential candidate Hillary Clinton, who has alleged that Valeant is guilty of "gouging" patients with "predatory pricing."
"One of the greatest threats to the company's performance is the morale issues created by a collapsing stock price, constant attacks in the media, and the inherent uncertainty of the events of the last few months," said Ackman, who has newfound clout in the company given the ouster of Pearson and the recent appointment of Ackman and Pershing vice-chairman Steve Fraidin to Valeant's board.
"While trust and confidence can vaporize quickly, it also can be restored rapidly when appropriate governance, oversight, and management issues are addressed properly," he added. "We believe that when the 10-K is filed, new leadership is identified, and the market understands that Valeant has adopted a new approach to communicating with the public, investor confidence will be restored and the stock should trade at a price which better reflects its business fundamentals."
Prior to Ackman's engagement with Valeant, his former investment misadventures included the bankruptcy of Borders, a 40% equity stake of which Ackman began winding down in 2011 after booking about a $200 million loss, according to the Wall Street Journal. And the market cap of J.C. Penney has roughly halved since Ackman began buying shares of the apparel retailer in earnest in the fall of 2010. Meanwhile, shares of the nutrition products distributor Herbalife have climbed more than 125% since Ackman launched his short posiiton in December 2012, despite multiple Pershing presentations alleging Herbalife's central business model resembles a Ponzi scheme.