Shares of Valeant Pharmaceuticals International Inc. plunged on Monday after U.S. legislators targeted the company's drug price increases, triggering a sell-off in what briefly became the most valuable stock in Canada.
Congressional Democrats are pushing for subpoenas to force Valeant to turn over documents related to recent price increases, a move that triggered a decline in Valeant's stock of as much as 20 per cent in Monday's trading on the Toronto Stock Exchange. In the past week alone, $35-billion in Valeant market value has vanished.
"The problem with momentum plays is once they lose momentum, they can fall to the Earth rather quickly," said David Baskin, president of Baskin Wealth Management.
The company rose through the ranks of Canada's biggest publicly traded companies through a relentless campaign of acquisitions, such as the $11-billion (U.S.) purchase of Salix Pharmaceuticals that closed in April.
"It's a roll-up story taking advantage of low interest rates. They buy tertiary companies and raise their drug prices," said Patrick Horan, a principal at Toronto-based Agilith Capital.
Valeant quickly leapfrogged the slumping energy sector, which succumbed to the crash in oil prices. Then the company even surpassed Canada's big banks to become the single largest stock on the S&P/TSX composite index in July, its market capitalization peaking soon after at almost $120-billion (Canadian).
The stock's momentum almost single-handedly propped up the Canadian benchmark, driving two-thirds of the increase in value of the composite index over the two years up to mid-September. And when sentiment surrounding Canadian stocks turned negative, Valeant's performance kept the index from posting much larger losses.
Valeant has generated strong opinions on either side of the debate. Hedge fund manager Bill Ackman recently sunk $3.3-billion (U.S.) into the company, then speculated that Valeant could become the next Berkshire Hathaway, the conglomerate led by Warren Buffett.
Among Valeant's detractors are famous investors Jim Chanos and Jim Grant, the latter of whom called Valeant a "financialized pharma company," more concerned with its "towering share price" than with research and development.
Even many skeptical investors, however, found themselves unable to ignore the stock as it came to drive more value on the TSX than any other listing. Fund managers tracking the index may have found themselves dramatically underperforming their benchmarks if they chose not to own a stake in Valeant.
"Most funds out there are benchmark-related and they can only take a couple of quarters of underperformance at the most, then they've got to capitulate. So you had a pile-on," Mr. Horan said.
From the start of 2013, the stock increased almost sixfold over the next 2 1/2 years, peaking at $346.32 (Canadian) in early August. A shareholder over that period realized annualized returns of about 100 per cent.
Since that peak, however, Valeant's momentum has shifted. Selling pressure picked up last week after U.S. Democratic presidential candidate Hillary Clinton targeted the pharmaceutical industry for "outrageous" pricing. The issue came to the fore recently after Turing Pharmaceuticals said it would increase the price of a parasitic infection drug to $750 (U.S.) a pill from $13.50.
Then on Monday, all 18 Democratic members of the U.S. House committee on oversight and government reform urged their chairman to subpoena Valeant to force it to provide documents relating to price increases of 212 per cent and 525 per cent, respectively, for Isuprel and Nitropress, immediately after buying the heart drugs in February.
The regulatory attention triggered a single-day drop of 16.3 per cent in Valeant's shares. Over the past week, the company's share price has declined by 26.9 per cent, bumping the stock from its top spot in the stock index behind both Royal Bank of Canada and Toronto-Dominion Bank. That one-week decline was responsible for 40-per-cent of the fall in the composite index.
In a letter to employees quoted by Business Insider, Valeant chief executive officer Michael Pearson rebuffed the concerns that have dogged its stock over the past week.
"This is not the first time we have faced questions about our business model and strategy in the market, and it likely won't be the last," he wrote. "By continuing to focus on organic growth and execution, I am convinced we will continue to generate the best outcomes for our shareholders and the health-care community."