Bill Ackman is a smart, successful and experienced investor. So are David Poppe, Robert Goldfarb, Glenn Greenberg and Jeffrey Ubben. While known as value investors, they differ meaningfully in style, focus, industry and expertise, leading to different portfolios. Periodically there will be overlap, but these are not the kind of investors who look over their shoulder for guidance. There is no “keeping up with the (Dow) Joneses” problem in this group.
The nature of probability allows for the odds-on favorite to sometimes finish last, or the 100 to 1 long shot to win the race. While it is rare for a group like this to be both heavily invested and wrong on the same situation, rare doesn’t mean never. That is how these five iconoclastic investors found themselves together in a mess called Valeant Pharmaceuticals.
The best, the brightest, the most successful investors all have blind spots. There are things that they miss — it’s inevitable. And the same is true of those of us who look out at a situation like Valeant and try to draw lessons from it — try to explain what it means.
Most commentary portrays Valeant as an outlier: an extreme case of predatory pricing, excess leverage, creative, perhaps even fraudulent, accounting and who-knows-what-else. Led by heartless, unprincipled and amoral executives who discovered an opportunity they could exploit for very large profits, they were ultimately done in by their own greed.
On the other hand, if we consider the nature of what passes for normal business practices in the health care world, Valeant might be just the tip of the iceberg: one of many health care companies that appear to be more concerned with their profits than their customers’ well-being.
Ideal vs. Real
In the best of all possible worlds, a medical company’s R&D identifies a potential new drug (or device). An independent entity designs and run double-blind trials to ensure that the drug or device is safe and more effective than existing alternatives. Every aspect of the process has the transparency needed to foster good science: the very science without which the health care industry could not exist.
So it is not a little ironic to find the health care industry knowingly placing obstacles directly in the path of scientific progress — holding back meaningful advancements that otherwise would be advancing both science and our well-being.
Conflicts of interest between businesses and their customers are built into the landscape of commerce: businesses seek profits, and customers seek value. The free market system allows the tension of that interaction to create its own solution, and companies that succeed typically strike the best balance between those competing needs.
As successful and robust as it is, the free market system has a long history of being periodically manipulated to the benefit of one side or the other. More importantly, not every commercial interaction is perfectly suited to a free market environment.
Six years ago I had a routine hernia repaired at the outpatient surgery center of a large hospital here in Los Angeles. After multiple requests, I finally received an itemized bill. What stood out among the many charges was the cost for a 250 ml bag of saline solution: $766.00.