Ackman says goodbye to pharma-sector

After recording a profit of close to $3billion on the sale of Allergan to Actavis in 2014, Pershing Square subsequently lost all these profits on the collapse of Valeant between the summer of 2015 and early 2016. Last week the fund disclosed that the Valeant position has been fully sold, closing the chapter on Pershing’s pharmaceutical investments. The Valeant saga has no doubt been a huge blow to Ackman; still we believe there is a silver lining to the story.

Ironically, Ackman got seduced by Valeant when co-bidding with the firm for Allergan in the first place. This set the stage for a bidding war and the ultimate Actavis transaction. Ackman had gotten impressed with Valeant’s management and its capital discipline and decided to largely reinvest the Allergan windfall in Valeant. He was expecting to grow the company through other acquisitions. The rest is history well documented, for example here.

The Valeant investment has been responsible for Pershing’s poor returns in 2015 and 2016. If one includes 2014, the year of the Allergan transaction, Pershing Square has made a complete round trip, overall lagging the MSCI world a few percentage points, but still ahead of the average hedge fund. Allergan was Ackman’s first pharma investment, and we are quite sure that Valeant has been his last.

With Valeant out of Pershing’s book Ackman can now fully refocus on his other portfolio companies. The silver lining is that we can invest in this portfolio at a large discount to NAV through the listed vehicle, Pershing Square Holdings. We have made use of this opportunity, by gradually growing our position throughout the 4th quarter. The graph below shows the development of the discount to NAV over time. We believe the increase is largely due to the negative sentiment around the Valeant investment. As the fund’s results improve and positive catalysts at its underlying portfolio unfold, we expect the discount to shrink, providing an attractive additional return.

Pershing Square’s overall track record is still one of the best in the world. Since inception in 2004, the fund has achieved an annual net return of 14.2%, which compares very favorably with the MSCI World TR Index at 7.0%. Pershing Square also outperforms Berkshire Hathaway, the investment vehicle of Warren Buffett. In the graph below we compare the cumulative performance of Pershing Square, the MSCI World Index and Berkshire Hathaway, since the inception of Pershing Square on January 1st, 2004.