Bill Ackman's Pershing Square hedge fund just can't seem to catch a break with regulators.
On one hand, Herbalife (HLF) -- the company Pershing shorted for about $1 billion in December 2012 -- skyrocketed as much as 18% in early trading Friday, on news that the FTC has finally concluded the nutrition-products distributor is not what Ackman has alleged: namely, an illicit pyramid scheme.
And on the other, Valeant Pharmaceuticals (VRX) -- Pershing's biggest long flop to date -- dipped about 2% in morning trading as one of a trio of key drugs under Food and Drug Administration review appears to be encountering newfound hurdles.
The Federal Trade Commission's investigation into Herbalife began in earnest in March 2014, after Pershing's own probes into the company prompted a thorough look at Herbalife's compensation structure for vendors, who Ackman alleges very rarely turn a profit, are encouraged to rope new members into the so-called "scheme" rather than selling nutrition products, and are often run into debt after being pushed to start Herbalife franchises under the promises of million-dollar payouts.
But shares have since climbed 153% since their December 2012 trough, partially because of Ackman's feud with rival activist Carl Icahn, whose Icahn Associates unveiled a bullish bet in Herbalife that quickly accumulated into 13% of Herbalife's market cap just two months after Ackman's 2012 short was announced.
And as part of his longstanding battle with Herbalife -- in which Herbalife has sometimes fired back, calling Ackman a "Wall Street gambler" who made a "reckless bet" -- Ackman has long encouraged investors not to underestimate the gravity of the FTC probe.
Investors "appear to ignore the fact that the company may not be able to settle with the FTC, and instead, will be sued by the FTC for being a pyramid scheme," Ackman said in a May letter to Pershing shareholders.
Ackman most recently unveiled the 18th video of a Pershing-sponsored Web series focusing what he calls Herbalife's "victims." The videos are often cast against black backdrops with ominous music, as former Herbalife vendors recount financial and social collapses that they attribute to misinformation and pressure levied by Herbalife. On Thursday's CNBC "Halftime Report," Ackman also said in a phone interview that Herbalife shares remain substantially undervalued.
The findings of the FTC probe, rolled out Friday, are that Herbalife will have to pay a $200 million fine (which Herbalife has anticipated), a $3 million settlement with the Illinois Attorney General, and requests to reorder segments of its business model.
Herbalife also announced Friday that its agreement with Carl Icahn now allows him to raise his investment in the company by 15 million shares to his current position of 17 million.
"I have always believed in Herbalife's strong fundamentals and am pleased the Board has decided to increase my ownership limit from 25% to 34.99% of the Company's outstanding shares. A significant part of my investment success is directly tied to our in-depth investment research and understanding of often complex and unique issues facing companies," Icahn said in a statement.
And taking away all the "short-sell fireworks," Herbalife should trade more on an earnings-adjusted level with Vitamin Shoppe (VSI) , now that it is free of the pyramid-scheme image, Real Money's Jim Cramer said in a Friday report.
"My take: You pay up to $66 and then after that you are just speculating on Ackman vs. Icahn and how much they hate each other, and I think the answer is not enough to rely on anything but the earnings to get you past this analysis," Cramer added.
As for Valeant, all eyes have been on how the debt-laden drugmaker can shore up new cash to cope with a roughly $31 billion debt stack and Friday's announcement that a key pipeline drug, psoriasis treatment Brodalumab, appears to be struggling to obtain FDA approval. That decision is slated for later this month. The drug may pose a risk for suicidal thoughts among users, the FDA said in a Friday report.
Brodalumab was projected to contribute about $500 million in added sales to Valeant, and at hefty margins, due to its easy integration with Valeant's dermatology businesses, Rodman & Renshaw managing director Raghuram Selvaraju said in a Thursday interview with Real Money.
But Valeant still has two other pipeline drugs slated for approval this month, each of which could pull in about $500 million in new annual sales as soon as the fourth quarter, Selvaraju said. One, glaucoma treatment Latanoprostene bunod, could easily integrate into Valeant's Bausch & Lomb businesses, and fellow pipeline drug Relistor Oral would fit well with Valeant's Salix brand, which it acquired last April for $11 billion, he added.
Both of the remaining drugs will "almost certainly" be approved this month, said TD Securities analyst Lennox Gibbs in a Thursday report.
