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Nov 8, 2016

S3 BLACKLIGHT: Black Box Pharma Warning - Valeant Down 20%

Valeant Pharmaceuticals Intl (VRX US) reported weaker than expected 3rd quarter results and reduced 2016 full year guidance by over $1.00 from $6.70/$7.00 to $5.30/$5.50. CEO Joe Papa also poured salt on their own wounds by adding that 2017 “will be a down year.” Valeant posted a $1.22 billion loss, its main component being a write-off of their Salix business which Valeant is trying to offload this year. Rumors are that Takeda Pharma (4502 JP) is a potential buyer at $10 billion which is $4.5 billion less than what Valeant paid for the business. Valeant’s revenues fell 11% in the quarter to $2.48 billion which was slightly below analyst’s expectations. This revenue weakness highlights the fact that Valeant’s secondary business units are underperforming even though their main revenue generator, Bausch and Lomb, had revenues of $1.1 billion which was up almost 4% year on year.

Valeant’s short interest, which peaked at $2.5 billion in June 2014, is down significantly along with its stock price. Valeant’s short interest started the year at $1.2 billion and dropped to $474 million by the end of the 1st quarter. Since then short interest has been trading in a range that averaged $701 million in the 2nd and 3rd quarters. Short interest had dropped to $507 million by the end of October, but has been increasing since the first of November, rising $157 million, up 31%, to $664 million.

Valeant’s stock price is down 20% today, to $15.45, which is its year to date low and a level not seen since 2010. The stock is down 85% for the year and short sellers are not pausing to catch their breath with almost 3 million new short shares hitting the tape today. With this morning’s trading volume at over 70 million shares, or three times its monthly average, it looks like shorts are not the only ones selling stock.

Valeant has been in short sellers’ crosshairs before, but now they are facing a battle on two fronts - long shareholders who will be selling because of anticipated underwhelming revenue performance through 2017 and short sellers who are seeing this as a continuation, and hopefully culmination, of their 2015 race to $0.00. Declining sales, selling assets at steep discounts and multiple FDA and SEC inquiries into the firm’s accounting, pricing and manufacturing practices make Valeant a target of value, technical and fundamental traders. Add to that a $30.3 billion debt load, a B2/B credit rating and a corporate bond market which is shunning duration and credit risk in anticipation of a string of Fed Funds rate increases and we can see a possible cash crunch in their future. Bill Ackman of Pershing Square Capital and John Paulson of Paulson & Co own almost 41 million shares or 12% of the company and have taken a combined $150 million unrealized loss today. If they reduce their long exposure to Valeant, they would be the canaries in the coal mine and signal the race to $0.00 is on. 

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC     Ihor.Dusaniwsky@S3Partners.net

The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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