There's arguably been no bigger story in US financial markets over the past couple weeks than Valeant Pharmaceuticals.
Valeant has been in the spotlight for several reasons, not least of all because it had been one of the more extreme examples of a high-flyer from the soaring pharmaceutical and biotech industry.
Roughly six weeks ago, Valeant stock was priced around $240 per share with many expecting that this Canadian standout was going even higher.
Fast forward a handful of weeks and it's as if one of the deranged psychos from a popular Halloween movie franchise took a machete to the Valeant (VRX) stock price.
In recent trading, VRX bottomed out at the sub-$90 handle before bouncing back to around $100 at the start of November trading.
Financial media and a great many market participants have taken a close interest in the Valeant story because it marks the convergence of several lightning rod issues within the investments industry.
One of the original reasons the story caught fire was due to the fact that some well-known holders of Valeant stock had taken some hard hits during the swoon. It's been reported by numerous media sources that Bill Ackman's Pershing Square Capital has suffered losses that amount to nearly $2 billion due to Valeant.
And apparently where there's smoke there is indeed fire because Citron Research recently added fuel to the Valeant flames by suggesting the pharmaceutical company may be guilty of outright fraud. In another recent volley, Citron also revealed that Valeant has been charging outrageous prices (hundreds of thousands of dollars) for treatments that are often priced around $100 in other regions of the world.
The topic of exorbitant pricing had of course already been on the radar as a result of another popular thread involving Martin Shkreli of Turing Pharmaceuticals, whose company had similarly raised the price of a treatment from $13.50 to around $750 per pill. Throw in the fact that Presidential candidate Hillary Clinton even weighed in on the Shkrelli matter only makes the developing Valeant story that much more compelling. The fear of course being that politicians would reach the tipping point and try to pass legislation that limited the profits in the industry.
The shock waves produced by Valeant during its free fall have therefore only amplified these issues due to the broader implications for the entire pharmaceutical and biotech industry.
Headline risk for a stock can be dicey but that gets exacerbated exponentially when pricing and regulatory questions drift into public awareness. In sum, this means that the entire sector of the market has been shifting around the axis that is Valeant.
VRX is currently the poster child for volatility given the wide-ranging movements of the underlying stock and the many parties trying to influence its direction and ultimate landing spot. It should be noted that over the course of the last week there's been further news that Ackman's Pershing Square increased their stake in Valeant while another well-known investor exited his.
While the relative value of VRX stock is obviously up for debate at this time, it is helpful to look at past history when assessing Valeant as a trading opportunity.
Fortuitously, a recent episode of You've Gotta Be Kidding Me on tastytrade has done just that. This timely feature takes a deep-dive into the subject of “activist” investors and examines some statistics from the past that help shed light on the relative attractiveness of “activist stocks” in a portfolio.
Hosts Tom Sosnoff and Tony Battista kick off the show by giving background about activist shareholders and the way they typically try and invade and affect the companies they target.
Generally speaking, activists take large stakes in the underlying stock of the targeted company with the intention of securing a seat at the Board of Directors table. Such a position then allows the activist investor(s) to influence corporate decision-making through actions that they believe will help increase the company's value. The intended result of course being an appreciation in their stake.
A question that pops immediately to mind is therefore how well these so-called "activist stocks" have performed under such conditions. The answer to this question is precisely what Tom and Tony endeavor to find on the You’ve Gotta Be Kidding Me episode called “following activists.”
We hope you will watch the show in its entirety to get the best possible understanding of Tom and Tony’s discussion on this intriguing subject.
Beyond activists, the Valeant story has also affected the broader pharmaceutical and biotech segments of the trading universe because rising prices for specialty drugs is such an important topic for investors and patients alike.
These additional market relevant factors make the Valeant story one that should be closely watched moving forward because of the potential ripple effects for the entire industry and broader market.
If you have questions or comments about any of the subjects discussed today, please don’t hesitate to follow up with us at email@example.com.
As always, we want to thank you for being a part of the tastytrade community.
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.