Buying Spree

The analyst, who joined Veritas from Ernst & Young in 2006, continued to raise questions about the company over the next two years as Valeant went on an acquisition spree and the stock price soared above $100.

“Valeant’s underlying business is deteriorating,” he wrote in November 2013, without giving a rating. “Most importantly, in our view, the recent results offer a glimpse into the future, if and when the acquisition music stops.” The stock kept rising.

On July 23, 2014, Khmelnitsky issued his first sell call, with a target price of $112. The stock had closed the previous day at $122.54, with 17 analysts rating the shares buy and three hold, according to data compiled by Bloomberg. Valeant at the time was pursuing Botox-maker Allergan Plc -- a deal it lost out to Actavis Plc.

“Investors need to solely rely on management, as it is near impossible to independently confirm the results of most of the company’s acquisitions,” he wrote in a note titled “Desperately Seeking Allergan.” “An investment in Valeant was and remains a matter of faith.”

Activist Investors

Valeant -- which counts Ackman’s Pershing Square Capital Management, activist investment firm ValueAct Capital Management and hedge fund Paulson & Co. amid its biggest shareholders -- is currently the only company on which Khmelnitsky has a public recommendation. He says he doesn’t cover a set number of stocks and that his accounting analysis encompasses various industries. The analyst, who focuses primarily on Canadian companies, writes extensively about issues like pension deficits, tax structures and the quality of key non-GAAP metrics.

Changing Tone

Khmelnitsky reaffirmed his rating on Valeant 10 times before the stock’s peak in August of last year. Then, in October, Valeant was asked about its relationship with a mail-order pharmacy, Philidor Rx Services, that raised questions about the drugmaker’s business practices. The stock started to fall, dropping as the Philidor news dragged on, Congress started investigating its soaring drug prices, and Chief Executive Officer  Mike Pearson went on sick leave in late December. Valeant eventually cut ties with Philidor, citing concerns raised about the pharmacy’s business practices. It plans to restate some earnings related to sales through the pharmacy.

Yet until about two weeks ago, when David Maris of Wells Fargo initiated his coverage of the stock at underperform, Khmelnitsky remained alone in his analysis of the stock.