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Nov 18, 2016

S3 BLACKLIGHT: Shorts Reinvigorated as Valeant & Philidor Execs Arrested

Valeant Pharmaceuticals Intl (VRX US) is again in the news as federal prosecutors levied fraud charges and arrested one of its former executives and a Philidor Chief Executive. The U.S. Attorney alleges the two defendants created a multi-million dollar fraud and kickback operation within Valeant’s mail-order pharmacy division. The Department of Justice has been investigating Valeant for over a year and this may only be Act 1 in a multi act play stretching into price gauging, insurance fraud, Medicare and Medicaid fraud and improper financial reporting.

While Valeant’s stock price dropped over $1.20 on the initial news, it has rallied back into the black by the end of the trading day. Short sellers may not have prospered on today’s news but are hoping that further news will continue to validate their short positions.

Jim Chanos, of Kynikos Associates, has been a long term short of Valeant stock stating that the “$1 trillion long-short hedge fund industry has lost $40 billion being long Valeant”. Long shareholders such as Bill Ackman of Pershing Square Capital and more recently John Paulson of Paulson & Co own 41 million shares or 12% of the company and are hoping these arrests signal the end of the ongoing investigation. While long holders may have lost $40 billion in Valeant, short sellers saw greener pastures. Short sellers who initiated their short sales prior to Valeant’s takeover attempt of Allergan in the spring of 2015 and held them have made $2 billion in mark to market profits to date. Mark to market profits for short sellers in 2016 totaled over $1.1 billion.

Valeant short interest peaked in June of 2014 at $2.5 billion during the Valeant-Allergan-Actavis takeover dance and dropped to $1.2 billion by the end of 2015. With Valeant’s stock price down below $100 short sellers began to cover their positions to realize some of their profits. Short interest has been in a steady decline in 2016, with balances down to $532 million at the end of October. The recent news has reinvigorated short selling in November and short interest has been trending upward, increasing by $94 million, or 18%, to $626 million.

Valeant stock borrows are still at General Collateral levels, the cheapest borrow cost on the easiest to borrow stocks, and there is ample availability to borrow on the street.

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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