By David Benoit
William Ackman's Pershing Square Capital Management LP sold its stake in struggling drugmaker Valeant Pharmaceuticals International Inc., taking a roughly $4 billion loss and bringing to a close one of the most tortured sagas in hedge-fund history.
The sale ends Mr. Ackman's quest to rescue the worst bet of his investing career. Valeant, once beloved by investors for its strategy of buying smaller rivals and boosting their drugs' prices, has lost more than 95% of its value in less than two years following questions about its accounting and business practices.
Mr. Ackman once predicted Valeant would be the next Berkshire Hathaway Inc., saying its shares could hit $330. The stock closed Monday at $12.11.
At that price, the 8% stake Mr. Ackman parted with would be worth about $330 million, down from what had once been worth about $5 billion and more than wiping out the roughly $2.2 billion he made by joining with Valeant in 2014 for a hostile attempt to buy the maker of Botox, Allergan Inc.
The Valeant saga illustrates the risks of Mr. Ackman's strategy of placing big bets on only a handful of companies at the same time. While his funds have generated substantial returns over the years, Mr. Ackman has drawn criticism for some high-profile flops. Losses on retailer J.C. Penney Co. and his long-running bet against supplement maker Herbalife Ltd. have offset big gains on Canadian Pacific Railway Ltd. and once-bankrupt mall developer GGP Inc.
The loss of its biggest backer is another hit for Valeant, which is trying to regain investor confidence while contending with a roughly $30 billion debt load and raft of government investigations. The stock dropped 10% in after-hours trading Monday following a CNBC report that Pershing Square had sold its stake.
Valeant didn't immediately respond to a request for comment.
Mr. Ackman sold the stake after concluding that he couldn't recover his losses on the stock, according to people familiar with the matter. The investment, once Pershing Square's largest, had fallen to less than 3% of the firm's portfolio but was taking up considerable time and resources, the fund said.
In a little over a year on the board, Mr. Ackman and Pershing Square Vice Chairman Stephen Fraidin helped replace the majority of Valeant's directors, install a new chief executive and chief financial officer and sell assets. Messrs. Ackman and Fraidin won't stand for re-election at the company's next annual meeting, Pershing Square said in a press release Monday.
While his portfolio has struggled, Mr. Ackman wasn't moving to meet redemptions of investor money with the sale, the people said.
"We elected to sell our investment and realize a large tax loss which will enable us to dedicate more time to our other portfolio companies and new investment opportunities," Pershing Square said.
Mr. Ackman's long history with Valeant traces back to early 2014, when he was introduced to then-Chief Executive Michael Pearson. Shortly after, the two men teamed up to make an unusual bid for Allergan. Mr. Ackman bought a large stake in Allergan before he and Valeant disclosed they were trying to buy the company for $46 billion.
Allergan rejected the approach and waged a hostile fight and attacked Valeant's business model, calling the company a "house of cards." Allergan ultimately sold itself to Actavis PLC for $66 billion, upending Valeant's bid but delivering Mr. Ackman and Valeant $2.6 billion in profit on Pershing Square's Allergan stake.
Mr. Ackman then bought a stake in Valeant itself in early 2015, a bet on Mr. Pearson's ability to buy up companies and squeeze profit out of them. The stock kept rising, boosting his portfolio broadly.
By the fall, the company was under siege.
A short seller questioned if Valeant had an accounting issue and brought attention to a little-noticed mail-order pharmacy the company was using to increase sales.
The confidence Wall Street had in the operations quickly evaporated. In early 2016, Mr. Ackman faced a choice of whether to sell or double down amid the concerns. Believing the company still had valuable assets and that the market was missing the true story, he joined the board and bought more stock.
Mr. Pearson was fired, and Joseph Papa of rival drug company Perrigo Co. was named CEO. The stock rallied.
But earnings have failed to materialize and asset sales that have been discussed haven't come through, as Wall Street has turned its attention to Valeant's $30 billion pile of debt. The company doesn't have much debt coming due in the near future.
Valeant is anticipating declines in 2017 revenue and adjusted earnings before interest, taxes, depreciation and amortization compared with last year.
Valeant's cash flow worsened last year, compared with a year earlier, according to Wells Fargo Securities. The company is counting on increasing sales of irritable-bowel drug Xifaxan, for instance, but it faces heavy competition and a patent challenge.
It has tried to sell Xifaxan and other assets but hasn't been able to seal a deal so far. The company last week refinanced billions of dollars of its shorter-term debt, buying more time to right itself.
"Valeant's business appears to be even weaker than we had suspected and the future of the company appears to be in question more than ever," Wells Fargo's David Maris, a Valeant critic, wrote in a research note March 6.
--Michael Rapoport and Jonathan D. Rockoff contributed to this article.
Write to David Benoit at [email protected]