Bill Ackman: Valeant Is 'Enormously' Undervalued

• Shares of Valeant Pharmaceuticals Intl Inc VRX have gained more than 45 percent over the past month but are still lower by around 24 percent since the start of 2015.
• Valeant's stock crashed to a multi-year low of $69.33 following scathing allegations from Citron Research, statements from prominent politicians regarding drug prices, and subpoenas from regulators.
• In a letter to investors, Bill Ackman said that Valeant's stock is ‘enormously' undervalued.

Valeant's business model came under attack from multiple fronts including: 1) short selling firm Citron Research that called the company the "Pharmaceutical Enron," drug pricing, 2) prominent politicians proposing changes to drug pricing policies, and 3) subpoena requests calling on the company to open its books and business practices. Valeant's stock hit a new multi-year low of $69.33 following the multi-pronged attack, but activist investor and Valeant shareholder Bill Ackman remained bullish on the stock and optimistic on its prospects. On Tuesday, Ackman wrote a letter to investor in which he explained why his fund bought additional shares in Valeant at a time when it was tumbling. "Before we increased our position, we did substantial due diligence by re-underwriting our investment in the company, In particular, we reviewed all of the short sellers' allegations, the potential political and regulatory risks, the impact of the shutdown of Philidor, and the company's capital structure, debt covenants, and overall financial risk," Ackman wrote. Related Link: Ackman To Investors: Hard Times will Pay Off Ackman continued that his research indicated that the risk of bankruptcy or financial distress was "de minimis" for three reasons: 1) the "highly" cash-flow-generative nature of the company's business model, 2) a "minimal" amount of debt maturities over the next few years, and 3) the company's "highly diversified" product portfolio. Ackman noted that once he determined that any risk of financial default was "extremely small," he concluded that the stock was trading at an "enormous" discount to intrinsic value. As such, an incremental long position in Valeant offered a "compelling reward for the potential risk." Finally, Ackman stated that his fund bought European-style put options with a $60 strike price and bought American-style call options with a $95 strike price. If Valeant's stock rises to $165 per share or more by January 2017, Ackman's fund will profit more than 10 times its net investment over the period.