Tuesday, November 26, 2013

The Herbalife Hunger Games: Setting Fires

After surviving the 2012 Hunger Games, Ackness Nevergreen returned home to the far off and desolate reaches of District 211, CPW. On the eve that Ackness is scheduled to begin her powerpoint tour of Pay 'em, Ackness is visited by President MJ White, who explains that when Ackness defied the rules of capital by breaking the rules so that she and Pershing both survived the last Hunger Games of December 2012, she inspired rebellion in the hedgerow districts and now must continue to pretend to be in love with her short position or Pershing will be killed along with Dinneen and Indago to maintain the illusion that her actions were out of love for Hispanics, or risk that she incites a short squeeze. Just as she has returned home to her triumph, she finds herself thrust back into the spotlight to once again fight for her survival, but this time will be different; this time she is up against mature, professional killers.

Ackness had undoubtedly returned home to a different district. For months now, those residing in District 211 idolized Ackness for her hunting prowess and bravery. She was reportedly up as much as $260 million in her Herbalife trade and had she covered the position in early January she'd have walked away with a tidy profit of $340 million. Many have witnessed with their own eyes how she stealthily slid arrows out of her famed quiver and leveled them reliably at an unwitting investments. It's understandable that she'd been idolized. After nine months of hunting she did return to District 211 yielding an 8% return (never mind that had she just gone to the market she would have come home with 18%). We easily forget the shortcomings of our hero because she deftly proved herself in battle and she did it all for love and justice.  No one that had never fought in the games could ever appreciate how Ackness felt hearing that cannon's boom and seeing the faces of Target, JCPenney and Gotham Partners flash across the night sky. She'd sacrificed a lot to get here and people like me would simply never understand that burden.

After her victory, she'd left Pershing Square investors toiling in the mines under the false assumption that she was in love with THEM and not Latinos. While she was away at the capitol, rubbing elbows with investigators and investors, celebrating her triumph and apparent invincibility she had said time and again that her average cost was $50/share (and approximately 20 million shares), all the while secretly lobbying to support her true love, Latinos. In her letters and broadcasts  we began to see the lingering truth that Ackness slid the dagger into the heart of her own mystique. 

We had suspected for months that it was impossible for Ackness to remain faithful to her claims of $50/share and 20 million shares. It was not until a recent television appearance that we were certain she had been hiding the truth all these months. Aside from the Medusa-like eat shit and die eye daggers she occasionally shot at Stephanie Ruhle, shortly into Ackness's interview ( 00:45), she let slip that she has shorted Herbalife in the "mid to high forties". But how could this be? We've all know for months that the position had gotten away from her, but the difference between $50/share and "mid to high forties" quickly amplifies itself over twenty four million shares to become $100 million or more. And we are shaken again when in an aftershock of disbelief we comprehend that the phrase "mid to high forties" also means that our dear Ackness had realized a loss in September of almost a quarter billion dollars when she restructured her Herbalife trade.

We're betrayed. Using Herbalife's VWAP for Ackness's September duck and cover exercises, and her average cost of $46/share she realized a loss of $242 million in September and as of November 22nd's close has marked an additional $377 million in losses on the ~14M shares she is still holding short. That means that Nevergreen is $604 million underwater in Herbalife. She also carried 24.5 million shares short for three quarters with $0.30 dividends so to truly appreciate how deeply she has betrayed her District 211 compatriots we have to add another $22 million to her losses, as well as an absolute minimum of $22 million in the cost of borrow for all those shares, bringing Ackness to ~$650 million that her pretend romance has cost her district. Using market traded options as a spot surrogate for Ackness's OTC options expiring in January 2015, it would appear that Ackness notionally paid around $98 million for those puts, which are now valued at approximately $71 million today(or an additional $27 million loss). To subsidize a $242 million realized loss as well as to recoup the cost of the puts she purchased, and the cost of carrying the short, Herbalife shares would have to decline an additional $9/share beyond Ackness's average price of ~$46/share for Ms. Nevergreen to break even on the restructuring and prove that Pershing is her true love. This is an important consideration because it would require that Herbalife declines no less than $37 points to ~$34/share before she is able to claim that she does in fact love Pershing and is finished smooching for the cameras with Latinos

In watching the broadcast I am also slightly unnerved by the delusional confidence Ackness has about her. It makes me wonder if she has an ace up her sleeve. And then I catch a rare glimpse of her true self that infers to me she is holding no more cards; a Freudian slip in which she states that her short restructuring took the short thesis off the table(03:33). As unsettled as Ackness may seem in her interview as she fumbles, admitting her cost and subsequently pretending to not know what Herbalife shares were trading at ("high sixties, a number like that?"), she defiantly continues to extend herself further, offering to pay the legal fees of those that she claims to have been duped by Herbalife and promising to pay for the cost of auditing Herbalife retail sales for the past two years. It is in this moment I grasp that although she is mildly flustered she is flippantly defiant because she isn't playing with her own life, but the lives of others. It doesn't matter who she loves because she will not pay, it is the citizens of her district that will pay the price for her infidelity. Ultimately, Ackness will survive the Fiscal Third Quarter Quell because she'll sacrifice Pershing, despite her fiduciary promises to the contrary. 

And as Ackness traipses around pretending to love another, Pershing is dutifully back home reading the prospectuses left for him by Ackness, searching for any reassurance buried within her text that proves to him that he is the one she truly loves. After reviewing the 2/20 fee structure contained in Brochure A of the ADV, Pershing arrives at section C and shockingly rediscovers a passage he paid little attention to the first time he read it:

C. Additional Fees and Expenses
Each client bears its own expenses, including, without limitation ... expenses relating to regulatory or similar investigations, inquiries and “sweeps”, professional fees and expenses (including fees and expenses of investment bankers, appraisers, public and government relations firms and other consultants and experts), investment-related expenses (including research and expenses associated with activist campaigns (both long and short) such as expenses related to event hosting and production, public presentations, public relations, public affairs and government relations, forensic and other analysis and investigations, ... expenses relating to short sales (including dividend and stock borrowing expenses), ...payments or contributions to lobbying or not-for-profit organizations, which payments or contributions are expected to benefit a specific investment, the investment program or the operations or business of the Funds.
In rereading this passage Pershing shudders in horrific recognition that Ackness has betrayed him, and despite Ackness's gross infidelities she has every right to force Pershing to pay for her trysts with Herbalife. Even if Ackness fulfilled her promise to fight this battle to the ends of the Earth, she would only ever return to Pershing with a charred shadow of the love she promised him (less all appropriate fees, interest charges and various other expenses of course). She has simply set too many fires. Pershing understands that although Ackness probably loves him in some sort of weirdly dysfunctional codependent sort of way, her actions, her returns and her prospectuses tell a different truth. When Pershing fully appreciates that it will be a messy breakup requiring eight quarterly redemptions before he'll be able to cleanly split from Ackness Nevergreen, he wishes silently to himself that she would have just swallowed the fucking poison berries last year.

Fear not dutiful Pershing, you'll have your justice, although it may cost you your own life as well. The game's afoot and her fellow tributes are plotting the demise of Ackness Nevergreen.
(mockingjay song heard in the distance)

Friday, November 22, 2013

The Ten Ack Commandments

In case you don't know the original by heart, it's best to listen to an instrumental of DJ Premier's beat while you read along:

1, 2, 3, 4, 5, 6, 7, 8, 9
It's the ten Ack commandments, what?
Analysts can't tell me nothing about this short
Can't tell me nothing about this squeeze, my naked sale nibblers & fails to deliver,
Specialists on the floor I ain't forget you, my 20 cent spread knickerbockers

Been in this game for years, for 2 & 20 on the annual
There’s rules to this shit, I wrote Bill a manual
A step-by-step booklet for him to get
His shorts on track, not assets clawed back
Rule Nombre Uno: never let no one know
How much shares you holdin short cause you know
The borrow peeves zealously 'specially
If The Street is long, when your thesis is wrong
Number 2: never let 'em know your next move
Don't you know that Real Bears move in silence not alliance?
Listen to earnings guidance
I done scribed mad notes on calls to back out how their EPS falls
Number 3: never trust nobody
Einhorn’ll set that ass up, 5 mil short amassed up
On the call asked up, one question for fast bucks
Then ready to cover and go long while you play trains with your canucks
Number 4: Directly from the JCP Board
"Never get high on your own supply"
Number 5: never sell short then hold court
Don't care if its zero you’re target practice not a hero
Number 6:  If the company has credit, dead it
Or a leveraged recap will break your back so just forget it!
7: this rule is so underrated
Keep the NYPost and business completely separated
Realized loss and donated profit mix like Celarier and fake news tips
Find your book down like 600 sticks
Number 8: never keep no weight on you!
Why host your own site, why not Global Strategy Group?
Number 9 shoulda been Number 1 to me:
Once they’re done investigating stay the fuck from the SEC
PMs will see your letters and your snitchin, and call back what isn’t his’n,
Then watch you buy it back or go to prison.
Number 10: a strong word called "assignment"
Strictly for live men, not for freshmen
If Icahn’s shorting puts, buy it back, it's time to go
Cause he’s going turn the tables and call back all the float

Follow these rules and you'll have mad boards to shake up
If not, massive fines and like Gotham Pershing will break up
Redemptions hit AUM, losses you’ll have to make up
Soros should have been your wakeup, when he withdrew
Bought that five percent stake up, near 13-g
Bill Stiritz launched his blitz in the low sixties
Heard he blends protein well, and can run a break up

Or maybe go private, more Formula 1 to shake up, word up

Wednesday, November 20, 2013

For Hire: Bathroom Attendant; Fine Dining/Insider Trading Experience Required

Remember back when I told you that Pershing Square had restructured between 8M-9.8M shares they were short by switching to OTC puts expiring in January 2015, but how they did so under the false flag of publicly claiming on their website that their short position didn't use any options

Do you also remember when Gasparino reported that Ackman cried foul and was pressing the SEC to investigate Paul Sohn, George Soros and others over the manipulation of Herbalife's stock price because they were participating in "idea dinners"? As reported by Juliet Chung, Emily Glazer  and Gregory Zuckerman Ackman was across the table from Sohn and others at the very idea dinner he was complaining about. He wasn't just at the idea dinner noshing on wagyu, he was actively trying to convince them that Herbalife was a great short because it was an illegal pyramid. What was also reported in the WSJ article was that at that very dinner that Bill Ackman claims to have been the epicenter of the purported Sohn/Soros insider trading, Ackman was discussing a letter Representative Linda Sanchez had sent to the Chairwoman of the FTC, asking that Edith Ramirez investigate Herbalife. This was the ace hidden up Ackman's bespoke sleeve. The problem for Ackman and Rep. Sanchez is that Sanchez drafted and dated the letter as June 5th, but the FTC hadn't received that letter until June 7th at 8:32 am. It is unclear from the WSJ article whether Ackman received the letter on June 5th, but you can go to the Pershing website and see for yourself that Rep. Sanchez's letter was received by Pershing no later than the afternoon of June 6th, while the market was still open. Later that very day more than 12 hours before the letter was even stamped as received by the FTC's Special Congressional Correspondence Branch, much less actually given to Edith Ramirez, Ackman was shopping it around as a reason to short Herbalife. It wasn't until the morning of Thursday June 13th that Pershing took Sanchez's letter live on their site after Ackman's #besty over at the NY Post finally published an article about it. If Ackman was chided as a youth for having his elbows on the dinner table, I can only imagine what his mother would think of him using inside information as his dinner napkin. Aside from the generally poor form of lodging manipulation and insider trading complaints against the dinner companions to whom you just passed the bread sticks, one sure fire way to get a bottle of Palmer Margaux chucked at your head is to hurl insider trading complaints after dessert and digestifs. When most people would have at least been pretending to reach for their Amex while Dave Mazzullo emphatically insisted on picking up the tab, Ackman was probably contemplating how many of his dinner companions were going to borrow Herbalife shares in the coming days. A drooling half-wit groundling like myself can still easily conclude that Ackman and anyone that shorted Herbalife between June 5th and June 12th as a result of Ackman showing them this non-public letter from a member of the U.S. House of Representatives may have participated in activities that could constitute illegal insider trading and stock manipulation by forming what Pershing's Counsel would claim creates a "common group" under securities law (but only if you're long apparently) that was acting on non-public information.

It gets better for Ackman though. In Bill Stiritz's 13D filed yesterday there is an interesting passage under Item 4:
Purpose of Transaction.The Reporting Person has analyzed the Company and concluded that it has a sound business model, a strong distribution system and a positive outlook for long-term growth opportunities. The Reporting Person believes that the Company’s market capitalization is undervalued at this time. The Reporting Person plans to interact with Company management to offer them, for their consideration, his views, advice and counsel for ways of promoting and furthering the Company’s shareholder interests. The Reporting Person’s views, advice and counsel may address a wide variety of matters, including ways to further leverage the Company’s strong distribution system, potential financing and/or recapitalization strategies, potential stock repurchase programs, and potential strategies for confronting the speculative short position that currently exists in the Company’s stock and its attendant negative publicity campaign. The Reporting Person may, from time to time (i) acquire additional Shares and/or other equity, debt, or other securities of the Company, (ii) dispose of any or all of his Shares or any other such Company securities, and (iii) engage in hedging or similar transactions with respect to the Shares. (I added emphasis)
It is also interesting to note that in Bill Stiritz' 13D it states that he sold a variety of over the counter puts, including Jan 2015's. Wait a second! That's when Ackman's puts expire. I can't help but wonder if because back in September Stiritz was selling OTC Jan 2015 puts while Ackman was buying them (under the false flag of his disclaimer), whether or not Herbalife's largest individual shareholder has some sort of claim against Ackman with respect to manipulating the price of Herbalife stock as well as the OTC puts they were both dealing in? Maybe one potential strategy for "confronting the speculative short position" is to take a page right out of Ackman's playbook. Wouldn't that be a kick in the face if while Stiritz is taking Herbalife private he'll also write a nice long letter to Liora Sukhatme  in the SEC's NY Office that requests that she and her team investigate Bill Ackman, Pershing Square et al for manipulating the price of the Herbalife securities the two parties are currently linked by. If Ackman's year continues to play out as it has thus far, Herbalife and its shareholders may send him from running his attendant negative publicity campaign to bathroom attendant at Del Frisco's Double Eagle. Towel sir?

You're just as sane as I am

In a former post I had surmised that the EMA's Committee for Medicinal Products for Human Use (CHMP) would determine by year end whether or not they'd keep Iclusig in the European Market or if they'd attempt to drown it like the FDA was because they think ponatinib is a witch. It was my opinion that following the PRAC decision recommending to keep Iclusig on the market, that CHMP would deem Iclusig worthy of dying a noble death (13 years from now when its patent runs out) instead of swinging its adolescent feet from the deathly hallows or aspirating fetid pond water with its hands bound behind its back. Maybe being a witch isn't so bad though. Invisibility cloaks, flying cars, portals, horcruxes and whatnot. Not to mention butterbeer and gillywater with chipolatas in the Great hall. Where do I sign up?

After PACE and EPIC, it's unlikely that Iclusig will ever turn out to be Harry Potter, but maybe Iclusig is more like Luna Scamander (née Lovegood); "odd" but benevolent, open-minded, serene, and unique. Cast your stones at "Loony Lovegood." You can ridicule her and hide her things, but she knows her shoes will turn up again. She may not have many friends but she is very loyal to the few friends she has.

As it turns out, we may not have to wait until year end to find out whether the EMA still believes in witches. It appears that CHMP may have dusted off the Hogwart's sorting cap and is determining this week if Iclusig should reside with Ravenclaw, Slytherin or Surrey with Vernon Dursley. If I am correct, and CHMP is reviewing Iclusig at this week's meeting, we'll know a full four weeks in advance of the December meeting it would have been be reviewed at and give it some legs to run into ASH.

If that is indeed the case Ariad may cast a full corporeal Patronus (in the shape of a massive differentiating monocyte of course) as early as this Friday November 22nd, to protect it from the Dementors at the FDA's OHOP. As the Lethifolds hover threateningly above Iclusig, this Friday November 22nd CHMP will release the meeting highlights from their review, which is scheduled to conclude this Thursday, and Ariad may swish and flick an "Expecto Patronum".

The next three weeks should prove to be catalytic to say the least. With CHMP review likely hitting this Friday, and 46 abstracts for ponatinib at ASH (7 oral, 39 posters) it may be a good time to join Ariad's  Order of the Phoenix.

In the interim, Ariad just needs to remember that although people may not want to sit in the same compartment as Luna or that jokesters may steal her shoes, it doesn't bother her. Recent developments in the story of Iclusig have created a tremendous opportunity and I am happy to share a ride to Hogwarts or walk barefoot with Luna.

To quote Luna:

I think I'll just go down and have some pudding and wait for it all to turn up - it always does in the end.

Thursday, November 14, 2013

Honey Bunches of LBOats: Why Bill Stiritz is a Dirty Old Man

"The situation is pregnant for a recap or leveraged buyout of Herbalife, and I would be willing to participate."
Pregnant? Say what? With that one sentence the formerly wholesome looking grandfather convinced me that he is a dirty old man lusting after the cocoa bronzed flesh of the hottest Latina he'd ever seen. The moment he laid eyes on her was a thunderbolt. Beautiful skin, toned abs, athletic build, with a big juicy booty. She also had that amazing mixed look that is so hard to pin down. He was pretty sure that she was mostly Latina, but she also had some Asian, Black, and white thrown in the mix. She was the ice cream truck in the flesh.

He wasn't exactly sure how to approach her though. He was this soft spoken crusty old Midwesterner that looked more like Captain Stubing than Enrique Iglesias. Stiritz is rich, which works on a lot of girls, but this girl was different and it was obvious she had tons of her own money.  He heard she'd been dating guys on the street for years, plus he knew she already kind of moved in with this old Jewish guy while she was trapped in an abusive relationship with this crazy young Jewish stalker that kept harassing her, publicly humiliating her and going so far as to call the cops on her and her friends. The icing on the cake; she had recently broken up with Dan Loeb. Dan Loeb!?!? How the hell is he supposed to compete with looks like that? He'd seen her type before though and instantly recognized that to someone trapped in an abusive relationship that nothing was more important than security and security was one thing he could offer. The competition to woo her would be stiff, but ever the hopeless romantic, Bill Stiritz set in motion his plan to win over the nubile young hottie, by making her safe. 

For Stiritz, it wasn't just about a hook up either. She stirred something deep inside of him and he felt a deep connection lurking under his attraction for her. In his soul he knew they were previously connected in some way and that such a connection would help draw the two together. He just had to get her to notice him. 

He didn't want to screw this up either, so instead of approaching her directly, he started talking to her friends and asking them what she liked. He called around to her buddies in L.A. and New York. Over and over they all told him the same thing: the most important thing to her was the business she'd worked so hard to build. If you want to understand her, understand her business. In fact, she was consumed by her business and she often felt alienated from her peers because although deep in her core she knew who she was and how she was capable of changing the lives of so many people, very few people understood her. 

After some research and weeks of secretly buying her products and quietly investing in her company, Stiritz built up his cojones and decided to call her. Much to his surprise, the two hit it off and he eventually asked her to dinner. Just like he suspected she shared his feeling of deep connection and after dinner they went back to her place and stayed up all night talking while sharing a mango dulce-de-leche smoothie out of two straws like high school kids.  She'd even shared with him that even though she had never felt stronger and more sure of herself than she did now, her father's death damaged her so deeply she felt lucky to be here and that she almost didn't make it. Her shrink told her that the acute absence she felt as a result of her father's death is precisely why she dated older men, and that was probably why the wisdom, maturity and experience of Stiritz was compelling much of her attraction. Stiritz disclosed that he was already married, but that his relationship with his wife, had become rote and lost much of its spark. To be sure, the two were still in love, but they had always agreed that occasionally dating others was OK provided that it didn't jeopardize their marriage or their future plans. The two had had a long complicated relationship with each other;  he had been friends and business partners with his wife's ex husband and he had actually started dating her during the divorce while they were selling the business.

The date had gone so well in fact, that Stiritz in a moment of giddy pleasure accidentally disclosed that he had built up a 5% stake in her company. "Jimminy Cricket! I shouldn't have said that! I wanted it to be a surprise." Much to his relief, his slip up was warmly received and her embrace signaled the official start of their relationship. Tossing the blender full of smoothie into the fireplace, she beckoned toward the bedroom as Stiritz thought to himself, "Is this really happening? Is this going to happen? If this is a dream I had better act fast before I wake up and spoil it." He jumped up, ripping off his gold button navy blazer, and kicked his Topsiders to the foot of the bed as he watched her undress...

The next morning over bowls of Raisin Bran and Honey Bunches of Oats, the two lovers, still fuzzy and warm from their night together began to talk about the future. They were going to have to tell all their friends within the next ten days, so why wait? They were proud of each other and they both knew this was going to be a long lasting relationship, so they decided to tell everyone. Their first call was to the SEC, and their second call was to Bill's wife. Everything was hunky dory.

It's been a few months since their first date and things have gotten pretty serious. It goes far beyond Stiritz just trying to get some Herbalife-recap poon, he wants to be the baby's daddy and is going to do what he can to impregnate her. And after months of uncertainty, and previously failed attempts at conception (her OBGyn turned out to be a crook) she's ready to commit. She's given it a lot of thought and although she loves being single, now is a great time to make a baby.

And so began the story of our two star crossed lovers, Herbalife and William Stiritz. 

Stiritz's most recent comments to Bloomberg's Duane Stanford about an LBO combined with Herbalife's recent strength (rising in the face of Bill Ackman's impending Robin Hood diatribe), pricked up the hairs on my neck and got me thinking. Why now? If my girl's stalker started calling around to everyone we know and told them he was supposedly going do everything he could to embarrass her, publicly discredit her, humiliate her, and then kill her, what would my reaction be? Well, the first thing I'd do is warn him off. I know that a warning will do nothing to dissuade this guy; he's a delusional, self-righteous prick that parades himself around as a hero, so he'll never back down. The kind of guy that yelled at you through a loud horn how he was going to kick your ass and stomp your head into the ground as he slowly backs away from you and calls his weightlifting friends on his cellphone. In fact you are pretty sure your warning will only entice him further. It would be great if your warning manages to get him to back down because although you are a competent brawler, you really don't want to fight and prefer peace over war; the worst peace is better than the best war. If your warning doesn't get him to back down that's OK too because it will help draw him out. You don't want to fight, but have accepted the inevitable as you have been expecting a dust up for a while. If it's an inevitability, you may as well make sure you can knock him the fuck out and completely emasculate him in front of all his friends when he's got no where to run too. The entertaining aspect of personalities like Ackman's is that they can be so sure of themselves you can clearly and cogently delineate for them point by point how you are going to destroy them, but that only further convinces them that they are invincible and that their demise will never unfold as you've described for them.

And how would Stiritz KO Ackman? It's pretty simple and he already told Duane Stanford: LBO or recap. If you really want to do some damage you have to make sure he cannot run away because he is smaller and more agile than you are, so first you have to box him in. In one week Ackman is going to take the stage and deride Herbalife yet again. Average trading volume is shy of 3M, but current short interest would require at least 7 trading days to cover. Ackman can't cover his short before Robin Hood, so he's locked in. No where to run. Ackman, if he hasn't already realized, got caught trying to steal second and is now caught in a run down. The players cycling through the toss and tag are none other than Stiritz, Icahn, Soros, Michael Johnson, and Dennis Nally. Dennis Nally is perhaps the least appreciated player in the lineup but will time his throw just right to allow Johnson to tag out Ackman as he desperately scampers towards the safety of the bag.

Stiritz may not be much of a street fighter or a ballplayer, but he is a consummate deal maker. Much of his past deals were born out of relationships he had with other Board Members, so I started looking at his current board over at Post Holdings. You don't have to dig very deeply to find a plausible suitor for an Herbalife deal. Out of the 48 Board relationships that Stiritz has, two really jumped out at me for their potential: Gregory Curl (Temasek) and David Skarie (RH Financial). Skarie another dealmaker, was Co-CEO and President at Ralcorp while Curl was an investment banker and is President of Temasek Holdings, an investment company. The others seemed less plausible as they're spread across pet food, batteries, and similar such companies. You may be able to make an argument why a beverage company or a food company would want to buy Herbalife, but Stiritz did not say "takeover", he said LBO or recap. Skarie seems less likely than Curl, only because RH Financial Corp(which he is also a board member of) is a subsidiary of Waste Connections Inc, a recycling company. Recycling doesn't seem like it'd be much help to Herbalife unless Skarie plans to turn Ackman's PowerPoint handouts into tomorrow's newspaper. So Greg Curl stands alone. 

Here is where things get really interesting, Temasek is an investment company based in Singapore that is focused on two regions: Asia and Latin America. By their own admission this $225 Billion company's investment themes center on: 
"Transforming Economies; Growing Middle Income Populations; Deepening Comparative Advantages; and Emerging Champions."
Can you think of any company that primarily operates in the transforming economies of Asia and Latin America, in middle income populations with deep comparative advantages that is an emerging champion(i.e., #1 selling product in category)? I am pretty sure Bill Stiritz owns at least 5% of one.

If Temasek in fact wanted to initiate an Herbalife LBO, it wouldn't be too hard for them to raise the debt. Temasek has been assigned an overall corporate credit rating of Aaa by Moody’s and AAA by Standard & Poor’s for 10 consecutive years. Even if Herbalife wanted to self-finance a partial tender like I believe they could, there is very little doubt that Temasek has the rating and the wherewithal to successfully run an Herbalife buyout. 

And that brings us back to Ackman, now frantically running between 1st and 2nd base. As our hero Billy stutter steps and jukes his way back and forth between the bases, Stiritz, Johnson and Nally are patiently biding their time and calmly toss the ball back and forth to eachother as they creep closer and closer to Billy's pinstripes (he is no longer wanted at the Mets). And a couple days before he takes the stage at Robin Hood, Herbalife is handed their audited financials, courtesy of Dennis Nally and Johnson tags out Billy as he defiantly yells as the umpire that he was safe, even though he was 25 feet from the bag. Ackman is retired and Pershing takes the field. With Billy himself on the mound, and one man on, Temasek Holdings comes up to bat and knocks the skin off the first pitch by offering at least $65-$75 share for Herbalife. Game over, Herbalife wins and the season is finished for Wild Thing Bill. Poor Billy is never going to get the chance to hit that 9th inning, record breaking homer he's been telling everyone about since October. Worse yet, he lost the biggest game of his last season before becoming a free agent. 

Instead of standing at the plate and pointing to the fences like Ackman, Stiritz, Johnson and possibly Temasek are focused on keeping their eye on the ball and connecting for a solid base hit. I suspect a deal is in the works, otherwise Herbalife would have included share repurchases in 2014 guidance. How do you buyback what is no longer public? Sure $65-75 undervalues Herbalife (which is easily worth $90-$105), but it'd be first step in the right direction. An LBO or recap, enabled by PwC's impending re-audit, and shepherded by Temasek would undoubtedly be a solid double, and a game winning hit for everyone(except the shorts). In this game, Ackman has been the berating loudmouth jock constantly talking about how good he is and how he never strikes out, while the Herbalife team is following Billy Beane's playbook. I wouldn't be surprised if next week sees Ackman facing some stiff negotiations to stay in the majors, provided he doesn't get sent back to the minors.

Wednesday, November 13, 2013

The Bound Submersion of Ariad's Iclusig: Ponatinib is Not a Witch

If you think that Tyrosine Kinase is a reference to the “A Roshanda by Any Other Name” chapter in Freakonomics or that T315I is a rapper from Atlanta, stop reading. If you have any clue what I'm talking about, please continue.

Ariad Pharmaceuticals suspended sales and marketing of Iclusig (ponatinib) after an FDA review prompted safety concerns because of the risk of life-threatening blood clots and severe narrowing of blood vessels. The FDA cited their concern that 24 percent of patients using Iclusig in a mid-stage clinical trial experienced heart attacks, strokes and other serious vascular events. They also noted that 67 percent of patients in clinical trials experienced high blood pressure and 8 percent had heart failure, including fatalities. According to the CDC the age adjusted prevalence of hypertension in Americans is between 25-39%, depending on what state you live in (shame on you Bible Belt; your heart and your bible are both thumping). A 38-42% uptick in hypertension certainly seems substantial, and I could understand why the FDA would be concerned about CML patients without the T315I, but I have to wonder whether or not I'd care about that increased risk if I were a CML patient with the T315I mutation. Actually I don't have to wonder because I know that I probably would not care so much about that increased risk, nor would my doctor, because I really wouldn't have many other choices.

Sure, all the talk about the potential health risks sound scary and the FDA asked Ariad to temporarily suspend marketing and sales of Iclusig, but the drug will be back. After the termination of the EPIC trial, it will be back on a more limited scale than what everyone was hoping for 2 months ago, but not in the "break glass in case of emergency" role it has been recently characterized as destined to become.

The penetrance of the T315I mutation is as high as 20% of CML patients and for patients harboring this gatekeeper mutation there really is no other choice except Iclusig. To be precise, there are alternatives to Iclusig, but their benefit pales in comparison to that observed for this once daily oral drug. If you aren't on Iclusig, you go to transplant or get omacetaxine.
If you look at the recently updated Clinical Practice Guidelines (version 1.2014) released in September of this year The National Cancer Comprehensive Network actually gave mutation specific therapeutic recommendations for CML.  Ponatinib is by far the most effective therapy for CML patients harboring the T315I mutation. Within those same recommendations, the NCCN specificially discusses management strategies for ponatinib associated toxicity. Like the original FDA approval, the NCCN warns against the risks of severe thrombotic events as well as hepatotoxicity. In the patients that develop some of these severe toxicities, the NCCN recommends dose modification, dose interruption or discontinuation as the appropriate next steps. 

At the crux of it is a simple calculus: even though reduced intensity conditioning regimens for stem cell transplant candidates reduces treatment related mortality, 20-30% of patients still die from conditioning and following that conditioning regimen, three year survival rates for patients post-transplant are a little better than 70%. So we go from 100 to 80 and then 80 to 56, and that is with a lot of drugs and grueling hospital stays.
In the vacuum of not having clinical trial data that demonstrates that the risks associated with Iclusig are preventable by concomitant administration of some other drug like aspirin, Pradaxa etc., and assuming that 24% of patients will invariably suffer some serious event, patients on Iclusig will still have better survival outcomes and a higher quality of life than the alternative treatment routes for T315I patients. Aside from treating patients with another drug to manage their cardiovascular risk, there are a couple of very easy methods, like dose reduction and patient selection that permit successful toxicity management. For instance if a patient is not responding to Iclusig, why continue to expose them to increased risk of an adverse event if they aren't receiving any clinical benefit. I think that the FDA will come to the same conclusion and will make the same recommendation that physicians are already following. Additionally treating hematologists will work with their cardiologists to optimize management of cardiovascular risk in Iclusig receiving patients. If you completely restrict Iclusig to T315I patients receiving salvage therapy, there is at least 5000-14000 patients right now that would benefit from the drug, with that number growing by at least 500 patients annually. Sure, it isn't as large a market as the global CML market (~80,000) they were shooting for, but it is a substantial market with a proven benefit in an otherwise fatal indication. 

With Ariad's Section 382 Rights Agreement made on Halloween, you have to wonder who else is buying. Granted Ariad has had a lot on their plate since October 21st, but it is doubtful it took them 10 days to enact their poison pill, so I am doubtful it is a response to Camber or Sarissa. Some other shark is out there circling because Ariad is way oversold and they know it. It is crazy that at current levels you could buy the company for $500M, completely unwind the EPIC trial, and still have $300M in cash on the books. Even if they burn through $100M getting Iclusig back on track, after doing so they could easily sell $125M in the T315I market annually. Ponatinib's patent protection doesn't run out for another 13 years and the real estate this drug represents is just way to valuable to raze. It's getting treated like the Detroit of CML drugs, when in reality it is more like Kansas City. I don't want to live in either, but my chances of surviving KC are a hell of a lot better.

Of course this all hinges on the FDA allowing Iclusig to return to the market. I think that is even more likely following the EMA's Pharmacovigilance Risk Assessment Committee decision last week to keep ponatinib on the market, but with a warning about potential cardiovascular adverse effects. I think that the PRACs recommendation makes it all the more likely that the EMA's CHMP will approve Iclusig before year end. Stateside, I doubt the FDA won't allow it to return though because if the FDA does not allow Ariad to resume marketing and sales of Iclusig specifically for T315I CML patients, they are effectively sentencing the majority of them to succumb to their disease over the concern that 24% of these patients may succumb to something other than their leukemia. That is why I think both Ariad and T315I CML patients have longer lives ahead of them than it may currently appear.

For the T315I patients that would come off of ponatinib if the drug disappeared forever, they really don’t have any meaningful fallbacks; they’ll either go on omacetaxine (aka Synribo) which may buy them another 9 months or they'll go to transplant. Those options are better than nothing, but when you compare that to the long term efficacy observed with Iclusig you see why the NCCN prefers ponatinib (hair and all). That is because as of June 2013 the median duration of response in a study of Iclusing patients had not yet been reached although the median follow up time was three years.

You also have to keep in mind the way the NCCN works too. This is not some ivory tower of hematologists futzing around town on their honorariums deciding what drugs live and die by their recommendations. These are committed clinician/scientists that see patients in their clinical practice and are experts in their field. They use the experience gained in their own clinics to formulate the treatment algorithms and recommendations they put forth. So when they said on September 9th, 2013(one month before the clinical trial suspension) that ponatinib is their preferred treatment for T315I CML patients, they made that recommendation knowing full well they had likely seen thrombotic events and other complications in their own clinics and the clinics of their colleagues. Yet, they made those recommendations knowing full well that their patients stood a much better chance with Iclusig and it's risks than they did with Synribo or stem cell transplant. We can put on our actuarial hats and compare Iclusig (with all it's risks) to the alternatives available if we have to, but NCCN has already done that for us.

The FDA's recommendation isn't just bad for patients, it's bad for shareholders. Unfortunately for many shareholders, Ariad has experienced thrombotic events of it's own over the past month.  There has been some savvy buying along the way though too. On October 21, both Camber and Sarissa, acquired positions over 5%. Sarissa filed a 13D disclosing a 6.22% interest while Camber filed a 13G with a 5.4% stake. They probably both built toeholds during October 9th's collapse, adding to the position as it continued to trade down on worse news. With Ariad's recent collapse and shares trading as low as $2.15 the two funds were probably none too pleased and there was certainly hypertension in Boston and Greenwich. Hard to know without seeing the trades, but suffice it to say they were down anywhere at least 18% and could have been down as much as 118% on those positions during the harrowing Halloween lows. Even with Ariad's 12% move off its lows, they are probably still very unhappy with their marks. More recently, Fido filed a SC 13G/A on November 8th disclosing it had ramped up to a 14.8% position in Ariad with over 27M shares. It may have been difficult for Sarissa and Camber to add anymore to their position as it was already an 11% and 4% position for them respectively, but I hope for their sake they did because I think Ariad is one of the most compelling investment prospects in Oncology right now. The FDA's recent antics tied up Iclusig and threw it the water see if it was a witch. Hearkening back to Levitt and Dubner's book: 
Which is more dangerous: a gun or a swimming pool? 
The FDA better not throw T315I patients into the deep end. They may have hog tied Ariad and thrown them in the water, but its the patients that will drown if the FDA does not bring back Iclusig.