Price-Gouging the Sick to Grow Your Endowment Turns Out to Be a Bad Bet

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Valeant

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May 6, 2016; Dallas Morning News, “Biz Beat Blog”

NPQ has often written about the way endowments are invested. Recent struggles have included those who to try to persuade universities and foundations to divest from fossil fuels and private prisons. At the same time, universities are being assailed by those who believe that their endowments should be more liberally spent on, say, education, and if not spent, they should be taxed.

Valeant Pharmaceuticals International has been under investigation for its tendency to buy tried-and-true, inexpensive medications only to hike the prices sky-high. The company is something of a poster child for out-of-control pharmaceutical pricing. Should it surprise us, then, that the nonprofit investment fund for University of Texas, whose endowment stands at $24 billion, was invested in the firm, albeit indirectly through hedge funds ValueAct Capital Management LLC and Viking Global Investors LP?

The university’s nonprofit investment management company is blaming Valeant, whose shares have lost 85 percent of their value since August, for an overall investment loss of 4.3 percent in the six months that ended February 29th, attributing more than half of that loss to declines in the share price of the pharmaceutical company.

Speaking only to the university’s losses from the investment, Amanda Hopper, a senior director overseeing public equity at the University of Texas Investment Management Co. (UTIMCO), told endowment board directors that it could have been even worse: The university had already trimmed its exposure to Valeant by pulling some money from the fund managers, even while it benefited from the run-up before the stock price collapse.

The losses sparked a debate at UTIMCO’s annual meeting about the concentration of its portfolio. Bruce Zimmerman, UTIMCO’s chief executive officer, said that the top-performing university endowments tend to place bigger bets than the University of Texas.

As reported, the rest of the conversation focused only on the financial performance of the endowment, with no squeak about mission alignment.—Ruth McCambridge