Valeant Pharmaceuticals Intl Inc. (VRX US & VRX CN) reported 4th quarter sales down 10% year-on-year and a 2018 forecast that was lower than analysts’ expectations. After reducing their outstanding debt load by 20% over the last two years by jettisoning underperforming assets, CEO Joe Papa stated that VRX is the their “final phase of our strategic plan.” With Bausch & Lomb revenue growth slowing, several of their mainstay drugs hitting generic status soon, and its dermatology business fading, investors reacted negatively to their quarterly results pushing VRX’s stock price down 11% in late afternoon trading.
VRX is the 20th largest short in the US/Canadian Pharmaceutical Sector, a significant decrease from holding the 10th spot at the end of 2017. Shorts had been covering some of their positions as VRX’s stock slid 11% in January. After $340 million in mark-to-market losses in 2017, some short sellers were looking to exit their trades after recouping a small piece of their losses. Short exposure declined by 25% in January with 5.9 million shares, or $192 million, bought to cover.
With VRX’s stock price stabilizing in February, short sellers began to rebuild their exposure in anticipation of continued weakness in VRX’s stock price. Short interest increased by 13% in February, with 4 million more shares shorted, or $74 million, bringing total VRX short exposure up to $651 million.
Shorts were up 8.6%, or $59.2 million, in year-to-date mark-to-market profits prior to today’s price move and shorting more stock prior to VRX’s earnings announcement. Today’s 11% decline in VRX’s stock price earned short sellers another $75 million of mark-to-market profits, bringing their year-to-date total to $134 million in profits, up 19.5% for the year.
Short sellers made back over a third of last year’s losses and should be looking to add to their exposure. But we have not seen an exorbitant amount of short selling today and with today’s trading volume triple VRX’s year-to-date average trade volume, it appears that most of the selling was done on the long side. Long shareholders, who are down over 20% in 2018, may be looking to get out of their positions and realize whatever is left of last year’s 33% gain.
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Managing Director Predictive Analytics, S3 Partners, LLC
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