William Ackman's Valeant Loss Is Short-Sellers' Gain -- WSJ
By Ben Eisen
William Ackman may be nursing losses over his investment in Valeant Pharmaceuticals International Inc., but short-sellers who bet against the company's stock are riding high.
They are up $2.8 billion since the stock peaked in August 2015, according to S3 Partners, a financial analytics firm. Shares have cratered by 96% to near $11 this week from their record high of $262.52.
Mr. Ackman's Pershing Square Capital Management LP sold its 8% stake in the company, taking a loss of about $4 billion, The Wall Street Journal reported this week. It capped a turbulent ride for the investment, which Mr. Ackman once compared to Warren Buffett's Berkshire Hathaway Inc. He predicted the shares could climb to $330.
Valeant had been a Wall Street darling known for buying up smaller rivals and jacking up drug prices until mid-2015, when questions surfaced about its accounting and business practices. Mr. Ackman took an active role in trying to restore investor confidence in the company, helping replace most of the Board of Directors and hire new executives to helm the firm.
A spokesman for Pershing Square declined to comment beyond a press release on its share sale. A spokeswoman for Valeant did not immediately return a request for comment.
Those who bet against Valeant -- and against Mr. Ackman -- made a hefty profit each year since the hedge fund manager began amassing his shares in 2015. Their total returns have amounted to 343% after the cost of financing short positions, according to S3 Partners.
Short sellers typically bet against a stock by borrowing shares from a securities lender and selling them. They look to buy back shares at a lower price and return them to the lender, hoping to collect the difference as profit. If the share price drops off dramatically, as happened with Valeant, short sellers can profit handsomely.
Still, short interest seemed to decline ahead of some of Valeant's biggest stumbles over the past few years, meaning those investors left some potential profits on the table, according to S3 Partners.
"The shorts probably didn't time Valeant as well as they could have," said Ihor Dusaniwsky, head of research at S3 Partners.
The number of Valeant shares being shorted has climbed as the stock price has fallen, reflecting, in part, the need to keep selling more shares short to maintain the same dollar amount of exposure. At the same time, the value of those shares has fallen, which means there's less money in play.
At the beginning of 2016, there were just over 12 million shares sold short, worth $1.1 billion. By mid-year, that had turned into 30 million shares, worth $609 million. By the end of 2016, that was 29 million shares, worth $422 million.
Recently, the value and number of shares sold short has been on the rise, particularly around the time Mr. Ackman exited his stake. Short interest climbed to 52 million shares, worth $583 million.
Evidently, some investors still see shorting Valeant as a profitable trade.