Allergan: After Allergan's previous merger with Actavis they gutted the R&D department to cut costs to justify the merger. They layed 70% of their discovery team, including all but one of their med chemist.
This team and company were not bloated either: They had consistently produced promising drugs over a period of 60+ years. The stock had risen by 500% in five years and posted atleast double digit returns for a decade. Most unfortunate is that Allergan had several promising drugs in the pipeline, but the majority of early phase development got canned. It really was a unicorn that was destined for great things, but got consumed by the latest craze of "don't do R&D just buy companies and raise drug prices by 1000%". Also, recall that the company did not want to merge, but was forced to by the hostile takeover attempt by Valeant. Interesting to see Valeant stock plunge: The new Allergan CEO (Brent Saunders) and the Valeant CEO (Michael Pearson) have similar philosphies and used to work at the same consulting agency. I think Allergan will still do well, but long term they are going to miss out on massive growth potential. IE: Short term cuts to appease shareholders that limit long term growth.
Valeant: Okay the price is currently low, but this correction is after riding a 700% wave fueled by short term decisions. If you are massively in debt and your only growth vectors are creative accounting, buying ever larger companies, and raising your prices, the writing is on the wall.
It's easy to sagely dissect the past and identify the mistaken decisions.
The hard part, though, is identifying a company that today has a share price that is artificially high based on the company having destroyed its long term value. I.e. before the stock tanks.
But if they're a shockingly high number of them, shouldn't they be easy to identify, and short?
Yes it is hard to find them, but looking for companies with a high short ratio [1] is a good place to start. Looking at the top 50 short ratio US companies, MannKind jumps out at me as a stock I would not want to hold [2].
This team and company were not bloated either: They had consistently produced promising drugs over a period of 60+ years. The stock had risen by 500% in five years and posted atleast double digit returns for a decade. Most unfortunate is that Allergan had several promising drugs in the pipeline, but the majority of early phase development got canned. It really was a unicorn that was destined for great things, but got consumed by the latest craze of "don't do R&D just buy companies and raise drug prices by 1000%". Also, recall that the company did not want to merge, but was forced to by the hostile takeover attempt by Valeant. Interesting to see Valeant stock plunge: The new Allergan CEO (Brent Saunders) and the Valeant CEO (Michael Pearson) have similar philosphies and used to work at the same consulting agency. I think Allergan will still do well, but long term they are going to miss out on massive growth potential. IE: Short term cuts to appease shareholders that limit long term growth.
Valeant: Okay the price is currently low, but this correction is after riding a 700% wave fueled by short term decisions. If you are massively in debt and your only growth vectors are creative accounting, buying ever larger companies, and raising your prices, the writing is on the wall.