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An Epic Winning Streak On Wall Street — Then One Ugly Loss: (SEQUX)
FYI: The financial whizzes cocooned in the serene offices of the Sequoia Fund atop one of New York’s iconic office buildings seem far removed from the noise of the city far below.
At its peak Valeant wasn't anything close to being a value stock or a safe one. It was a debt laden ethically compromised company with nosebleed valuations. Amazon, though a strong business, can hardly be called a value stock either by any stretch of the imagination at today's price.
Also this desire to "hit a home run" in today's elevated market is disturbing. I understand the need for Sequoia's managers to redeem themselves, but reaching for returns by swinging for homeruns instead of consistent singles and doubles may not be so wise today. This isn't exactly a "fat pitch" environment.
@shostakovich That depends on how you define legit. There are a lot of activities a business can engage in that are perfectly legal that are still signs of bad corporate governance and mismanagement. Much of Valeant's business I think is legal. The constant M&A activity done via leverage, the absence of R&D, the laying off of staff and jacking up drug prices were probably all legal, but not a sustainable or ethical business model. The activity with mail-order pharmacy Philidor is probably illegal and could prove a real avenue for prosecution. But this is a real business for the most part that is now dangerously overleveraged. If they could pay down a significant amount of that debt and its valuation stayed where it was now, it would now be a legitimate value investment worthy of owning if an investor doesn't care about ethics.
The thing is how does a fund reach Sequoia's level of concentration in a highly priced overleveraged stock with lots of governance problems without its money managers recognizing those risks and either reducing the position or selling it outright. If it was just a small 1% position in a 100 stock portfolio it wouldn't have been a big deal. But Sequoia allowed Valeant to grow to be in excess of 25% of the fund, and added to the position as these scandals broke. How can any manager claim to have done full due diligence on a position of this size and not recognized these risks posed a threat? And how can any manager claim at the time it was a good value stock? In 2015 when Sequoia's ownership of it peaked, the stock had a p-e ratio of 58, a price-book ratio of 5.5 and price-cash flow of 14.3. Those valuations were all in excess of double the average stock's in the S&P 500. And it was highly leveraged at the time and remains so. Today it's price-cash flow is 2.1. If it can get out from under its debt load, it will be a great value stock.
Much of what Philidor did was to serve as the preferred pharmacy for Valeant's drugs. That meant that you could take a Valeant coupon to Philidor and get a brand name drug for a small copayment. I should know - I got a drug that goes for around $1200 for about $35 there.
While this is common practice among drug companies, the federal government considers it a kickback, and prohibits the use of coupons if you're covered by Medicare. Thus Valent (and other drug providers) add the footnote:
"This offer is not valid for any person eligible for reimbursement of prescriptions, in whole or in part, by any federal, state, or other governmental programs, including, but not limited to, Medicare (including Medicare Advantage and Part A, B, and D plans), Medicaid, TRICARE, Veterans Administration or Department of Defense health coverage, CHAMPUS, the Puerto Rico Government Health Insurance Plan, or any other federal or state health care programs. "
Here's an article in Modern Health Care about these coupon programs, how they work, and how they're actually raising the cost of drugs to all of us.
Comments
Also this desire to "hit a home run" in today's elevated market is disturbing. I understand the need for Sequoia's managers to redeem themselves, but reaching for returns by swinging for homeruns instead of consistent singles and doubles may not be so wise today. This isn't exactly a "fat pitch" environment.
The thing is how does a fund reach Sequoia's level of concentration in a highly priced overleveraged stock with lots of governance problems without its money managers recognizing those risks and either reducing the position or selling it outright. If it was just a small 1% position in a 100 stock portfolio it wouldn't have been a big deal. But Sequoia allowed Valeant to grow to be in excess of 25% of the fund, and added to the position as these scandals broke. How can any manager claim to have done full due diligence on a position of this size and not recognized these risks posed a threat? And how can any manager claim at the time it was a good value stock? In 2015 when Sequoia's ownership of it peaked, the stock had a p-e ratio of 58, a price-book ratio of 5.5 and price-cash flow of 14.3. Those valuations were all in excess of double the average stock's in the S&P 500. And it was highly leveraged at the time and remains so. Today it's price-cash flow is 2.1. If it can get out from under its debt load, it will be a great value stock.
Once Philidor closed down, Valeant moved its program to Walgreen's. Hardly a fly-by-night pharmacy.
http://www.valeantaccessprogram.com/
While this is common practice among drug companies, the federal government considers it a kickback, and prohibits the use of coupons if you're covered by Medicare. Thus Valent (and other drug providers) add the footnote:
"This offer is not valid for any person eligible for reimbursement of prescriptions, in whole or in part, by any federal, state, or other governmental programs, including, but not limited to, Medicare (including Medicare Advantage and Part A, B, and D plans), Medicaid, TRICARE, Veterans Administration or Department of Defense health coverage, CHAMPUS, the Puerto Rico Government Health Insurance Plan, or any other federal or state health care programs. "
Here's an article in Modern Health Care about these coupon programs, how they work, and how they're actually raising the cost of drugs to all of us.