In July 2014, Dimitry Khmelnitsky advised investors to advertise Valeant Pharmaceuticals International Inc. then watched the stock double each year.
“It absolutely was very painful,” Khmelnitsky, an analyst at Veritas Investment Research Corp., said in an telephone interview from his office in Toronto. “A few things i felt was pain.”
Khmelnitsky was the lone analyst having a sell rating on Valeant for 25 months, staying with his recommendation using the bull market as star hedge-fund managers including Bill Ackman piled in. Now that Valeant has plummeted almost Seventy five percent since its August 2015 peak of US$262.52 – as scrutiny intensified over its soaring drug prices, accounting and controversial distribution system – the downturn has vindicated his research. The analyst, an accountant los angeles by training plus a former soldier within the Israeli army, doesn’t notice by doing this.
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“It had been an assorted feeling of being justified within our prior analysis, but obviously I used to be feeling pain for anyone investors who jumped into Valeant,” Khmelnitsky said.
Veritas, a study firm, started covering Valeant greater than Four years ago, of a year carrying out a drugmaker relocated to Laval, Que., through its purchase of Biovail Corp.
Organic revenue
In December 2011, Khmelnitsky issued his first report, “A Valiant Story.” He wrote that Valeant’s methodology to calculate organic revenue – which excludes acquisitions – didn’t result in apples-to-apples comparisons, and boosted the reported growth.
“Management guides investors towards the Company’s non-GAAP metrics for assessing its business prospects and evaluating current performance,” he explained. “However, our review highlights the unreliable nature of those avowed metrics.”
Although Khmelnitsky didn’t give a rating across the shares during those times, he ended the note with “BUYERS BEWARE.” The stock was exchanging the $40s at the time.
A Valeant spokeswoman declined to comment.
Buying spree
The analyst, who joined Veritas from Ernst & Young in 2006, continued to boost queries about the company next Few years as Valeant continued an acquisition spree and the stock price soared above US$100.
“Valeant’s underlying customers are deteriorating,” he wrote in November 2013, without giving a rating. “Most of all, in our opinion, the present results provide a glimpse towards the future, assuming buying music stops.” The stock kept rising.
On July 23, 2014, Khmelnitsky issued his first sell call, having a target price of US$112. The stock had closed yesterday at US$122.54, with 17 analysts rating the shares buy and three hold, based on data published by Bloomberg. Valeant during those times was pursuing Botox-maker Allergan PLC – an offer it lost to Actavis PLC.
“Investors need to solely depend on management, since it is near impossible to independently browse the outcomes of many of the company’s acquisitions,” he wrote in the note titled “Desperately Seeking Allergan.” “An investment in Valeant was and stays determined by faith.”
Activist investors
Valeant – which counts Ackman’s Pershing Square Capital Management, activist investment firm ValueAct Capital Management and hedge fund Paulson & Co. among its biggest shareholders – is actually the only real company on which Khmelnitsky features a public recommendation. Based on him he doesn’t cover a group volume of stocks which his accounting analysis encompasses various industries. The analyst, who focuses on Canadian companies, writes extensively about issues like pension deficits, tax structures as well as the quality of key non-GAAP metrics.
Changing tone
Khmelnitsky reaffirmed his rating on Valeant 10 times before the stock’s peak in August of the past year. Then, in October, Valeant was inquired about its relationship having a mail-order pharmacy, Philidor Rx Services, that raised queries about the drugmaker’s business practices. The stock began to fall, dropping because the Philidor news dragged on, Congress started investigating its soaring drug prices, and leader officer Mike Pearson went on sick leave at the end of December. Valeant eventually cut ties with Philidor, citing concerns raised in regards to the pharmacy’s business practices. It offers to restate some earnings associated with sales with the pharmacy.
Yet until about a fortnight ago, when David Maris of Wells Fargo initiated his coverage from the stock at underperform, Khmelnitsky remained alone in the research into the stock.
Valeant has since plunged further, after it surprised investors Sunday night by withdrawing its financial forecast, delaying fourth-quarter results and announcing Pearson’s return from medical leave. The drugmaker also disclosed a brand new U.S. Filing probe on Monday afternoon. The stock is becoming trading almost 75 percent below your buck in August, and closed Tuesday at US$65.45.
Some sell-side analysts began to change their stance. Now, RBC Capital Markets cut its rating round the stock to sector perform, Canaccord Genuity cut its rating with a hold, Jefferies lowered its target price, and Deutsche Bank suspended its rating.
“There’s lots of soul searching,” Khmelnitsky said of that time period while he was alone utilizing a negative rating. “You start questioning yourself. I deducted that my analysis was right i stayed while using call.”
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