The dizzying rise and rapid fall in the shares of drugmaker Valeant Pharmaceuticals International Inc is eerily familiar to Canadian investors still smarting from the last time a small market was dominated by single stocks — BlackBerry Ltd and Nortel Networks Corp.
Valeant, briefly the largest stock in Canada’s benchmark S&P/TSX Composite this year, plummeted as much as 39 percent on Wednesday after a stock commentary Web site run by a short seller accused it of an Enron-like sales accounting strategy.
Shares of Valeant dropped 19 percent, or C$154.21, at the end of the day. However, the setback was the latest for a company that has erased more than half its market value from a record in August amid intense scrutiny from US lawmakers over its pricing practices.
“When a company shoots for the moon, you have to ask that question: Is it value, or is it just momentum?” said Som Seif, chief executive officer of Purpose Investments Inc in Toronto.
Valeant’s slide comes in the wake of BlackBerry and Nortel, which both ascended to the global stage while dominating the Canadian market, only to crumble rapidly when problems exposed them to harsh investor scrutiny. BlackBerry has not recovered since losing its dominance in the smartphone market while Nortel filed for bankruptcy protection in 2009.
“Do we have a business here that’s ultimately run effectively, can it hunker down, survive and build a great business?” Seif said. “We don’t know yet.”
Valeant in a statement called the short seller’s report that it used a strategy of recording fake sales to phony customers “erroneous” and defended its relationship with specialty pharmacies that distribute its drugs.
The company has been one of the most influential stocks in the S&P/TSX in the past five years as chief executive officer Michael Pearson pursued an aggressive growth-by-acquisition strategy, aiming to make the drugmaker one of the top five largest in the world by next year. In May, as Valeant marched toward an all-time high, the stock’s 12-month advance to that point accounted for 60 percent of the overall index’s gains.
Valeant, along with BlackBerry and Nortel, are products of a Canadian equity market too concentrated in individual names and industries, said Shailesh Kshatriya, director of Canadian strategies at Russell Investments in Toronto. Canadian investors tend to have a pronounced home bias toward domestic stocks, making them especially vulnerable when an individual stock rapidly shoots to the top of the index.
“It’s an issue we’re all aware of as Canadians, but we all kind of put aside,” Kshatriya said in a phone interview. “Especially in a market like this, we tend to lose sight of that. You feel most comfortable in your own environment and it turns into country bias.”
A good yardstick is to contrast the rapid growth of companies such as Valeant with more stable institutions such as the Royal Bank of Canada, said Brandon Snow, a fund manager at Cambridge Global Asset Management, a unit of CI Investments Inc.
“If a company in Canada gets larger than Royal Bank you have to watch out,” Snow said. “This again shows inefficiency in the Canadian market due to lack of depth and diversity. Time and time again, segments of the market get overly excited and large losses ensue.”
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