The Sick Economist's Blog, page 2
October 14, 2024
MASTERING THE PROXY STATEMENT PART IV: PAY FOR PERFORMANCE…?
By The Sick Economist
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Another area of the proxy statement where “anything goes,” is executive compensation. Of course, large, publicly traded corporations are notorious for large pay packages. So it would be wrong to look at the bulk compensation packages just to gawk at their size. Rather, we just want to make sure, roughly, that the corporate compensation plan makes sense, for all shareholders. In other words, it’s advisable to review the compensation discussion in the Proxy Statement not to scrutinize every penny, but rather, just to make sure there are no obvious red flags. Remember, an executive pay package can consist of anything as long as the information is disclosed. And most investors have no idea where that information is disclosed, and if so, they have no idea what it all means.
Again, this is an area that seems complicated at first, but in reality, is quite simple. About halfway through the Proxy Statement, there will typically be a section entitled, “certain matters related to executive compensation.” There can be many pages of flowery discussion, accompanied by charts that would make a Harvard Business School professor blush.
But there is always, ALWAYS, a one page chart that discloses the total compensation of each executive and member of the board of directors. Furthermore, the chart will typically break down what form that compensation takes, adding up each column, until on the far right of the chart, the total number is disclosed.
Great news. You don’t need to be an expert in corporate compensation or a PhD in finance to be a successful investor in a publicly traded company. Rather, you are just simply going to review this ONE PAGE document to see if any anomalies stick out. As the page is mandated to be displayed in a standardized format, anomalies are usually easy to identify.
What would be an example of a “red flag” on the compensation chart?
-If the CEO makes much much more than the rest of the “Named Executive Officers”
-If too much of the pay comes in the form of cash, or cash up front, as opposed to compensation that vests over time.
-If someone else in the C-Suite seems to make much more than everybody else.
-If the compensation package seems unbalanced. In most cases, your “Named Executive Officers” receive a mix of cash salary, cash bonus, stock, and stock options. There can be variation in the proportions, but if all of the compensation falls into one column or another, this would bear more investigation.
-If the total compensation of all of the “Named Executive Officers” seems out of proportion for the size of the company. There is never ending media hype as to how much top corporate executives get paid these days. And, on a gross basis, they do make an awful lot. But, the general rule of thumb is, the entire executive team, together, takes home less than 2% of the total profit of the company. And the bigger the company, the lower the percentage. So, for example, If your company earned $10,000,000,000 last year (Not uncommon for giant publicly traded corporations) all of your named executive officers, together, should be taking home $100 million or less. Geez, that is a lot of money. But it’s just 1% of the corporation’s total profit, so no problem. But if you are looking at a corporation that made “just” $500,000,000, and the executive team is still taking home one hundred million, then something is not kosher. The proportions are out of whack.
Other Items of Note
There are few other items that are worth checking on the Proxy Statement before you decide whether or not you want to become an owner in this corporation.
Along with discussions about ownership and executive compensation, the proxy statement will also describe the members of the board of directors. Now remember, the Board are, theoretically, the ultimate bosses of a publicly traded corporation. The Board is elected directly by shareholders to represent the broad interests of ownership. They theoretically hire and fire the CEO, and they conduct very high level supervision.
But why do I use the term “theoretically?” Because there have been notorious abusive cases where a board can be “packed.” This is when an abusive or manipulative CEO finds ways to “stock” the board with his friends or even relatives so that who is actually supervising the CEO is … .nobody. In cases like Meta, it doesn’t matter who is on the Board, because as we discussed above, former boy genius Zuck owns everything anyhow. However, it is much more common for CEO’s who do not own controlling shares to use their considerable powers of persuasion and strategy to rig the system in their own favor. Notorious examples are the board of General Electric who did nothing while CEO Jeffery Immelt drove the company into the ground, or the absurd shenanigans at Disney related to a non-existent CEO succession plan.
Legendary investor Warren Buffett has quite a few colorful comments related to public companies and their boards. Ultimately, a certain amount of drama is inevitable when big money is at stake. But there are a few simple questions to ask when reviewing your Board of Directors in the Proxy Statement
Firstly, and mostly obviously, are these people directly related to the CEO, either by blood, or through some obvious connection? A surprising number of public companies are actually just jumbo sized family run companies, meaning that one, or several family members are on the board of directors (Walmart and Ford come to mind). That might be just fine, but it’s a decision you would have to make as an investor. Do you want to invest in a family business ?
Secondly, just on a basic level, do these people seem qualified to supervise this company? No, you do not have to be an expert in corporate governance, or any other arcane subject. But do these directors, as presented, pass the “common sense” test? For example, if you are looking to invest in a biotech company, do the board members at least have a background in science and technology? Do any have advanced science or medical degrees? Have they run science based businesses before?
You might be surprised by what you find. Another common way of “packing” a board is to hire individuals who have big names, but really don’t know anything about the relevant business. One notorious example was erstwhile blood testing company Theranos, which hired George Schulz to act as a corporate director on its board.
Schulz had a very accomplished career in Federal Government, holding prestigious positions such as Secretary of the Treasury and even Secretary of State under various Republican presidents. But Schulz was almost 90 years old at the time of his appointment to the Theranos board, and he had no background in medicine or biology.
Unfortunately, it was later revealed that Theranos was a total fraud; investors lost millions and millions and several Theranos ex-executives went to jail.
The point here is not to pick on a poor old man, who himself may very well have been a victim of fraudsters. But rather to simply point out that you want to make sure that your company’s directors are roughly appropriate for the job. Do they have relevant qualifications, and are they physically and mentally fit to supervise a multi-billion dollar corporation? The information is all right there in the Proxy Statement; 95% of inventors never bother to look.
The last major “item of interest” would be to look out of disguised ownership. Again, there is no one particular ownership arrangement that is an automatic red flag, but you want full information before making the decision to invest, or not.
One thing to look out for is misdirection in terms of ownership. The proxy statement must list all major owners in the corporation….but what if some of the owners aren’t even….people?
That is right, some major corporations are not even owned by individual people. Rather they are owned by legal entities, typically LLC’s. This is somewhat rare, but not unheard of. If this is the case, the LLC will be listed right there on the proxy right along with other individuals who own a meaningful percentage of the corporation.
Even this is not necessarily a “red flag,” but rather just something to be further investigated. There are lots of potential reasons why a person, or people, might want to hold their corporate ownership interest through an LLC. But this complex ownership structure often obscures the true control of a corporation, and you want to know who you are in business with.
If this feels like another splitting investment headache, don’t worry! What is the law? Disclose, Disclose, Disclose. Very often, when an LLC is listed as a major shareholder in a corporation, you will see a tiny little footnote attached to the listing. The tiny, little footnote will often refer to an explanation of the arrangement, often in tiny, little letters at the bottom of the page. It’s right there for you to read, if you make the effort. 95% of investors don’t! Even in the rare case where there is no explanatory footnote, typically you can Google the name of the LLC and ample public records will pop up. You usually don’t have to be Sherlock Holmes to understand the ownership and control structure of a publicly traded corporation. If you do feel like you need a detective’s cap and a 19th century pipe, then simply don’t invest.
By now, you should feel very well armed to scour a Proxy statement and ask the questions that need to be answered before you choose to buy into a publicly traded firm. But perhaps a few of the concepts still feel vague or fuzzy? In part five of this post, we will tie all of our learning together in a real world example. We will look at two companies that look very similar on the surface, but are quite different when we review the Proxy Statements.
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October 13, 2024
IONIS PHARMACEUTICALS: THE LITTLE BIG PHARMA?
What, exactly, separates a biotech company from a “Big Pharma” company? What are the attributes that make each kind of company attractive to certain kinds of investors? Most importantly, can a company only fit into one of these two categories? Can an investor capture the best of both worlds?
By The Sick Economist
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Corporate giants like Pfizer and Johnson&Johnson are the stuff of legend. They have each existed and thrived for well more than a century, churning out thousands of drugs that have altered the very fabric of American culture (Eli Lilly’s insulin breakthroughs extended life for millions of Americans, and Pfizer’s Viagra may well have made those longer lives more pleasurable).
Investments in these titans of commerce have also changed the financial lives of millions of Americans. $10,000 invested in Johnson&Johnson in 1995 would equal $161,000 today.
But we are not in 1995. The criticism that a lot of these behemoths face is that they have grown so large, that perhaps their best days of growth are behind them. With dozens of medicines on the market, billions and billions in revenue, and a very high Wall Street profile, some investors might question whether the next thirty years will produce the same kind of growth that the last thirty years produced.
But what if I told you that it is possible to identify TOMORROW’s Eli Lilly, TODAY?
What if you could buy the equivalent of today’s Eli Lilly back around 1900 when it was just getting started? What might be your long term growth prospects then?
Ionis pharmaceuticals just might be that opportunity. Although today the company fits firmly into the category of “biotech,” there are indications that the company could evolve into a stalwart of the pharmaceutical market at an advanced pace.
Before we label Ionis as “tomorow’s Big Pharma” let’s examine exactly what determines which label a company wears. What makes a company either a “biotech” or a “Big Pharma” company, and what are the pros and cons of each?
BIOTECH, DEFINED
Both Big Pharma and Biotech companies deal in science based products and services that aim to improve human health. But that is typically where the similarities end.
A biotech is typically small. There are hundreds of publicly traded biotech companies with a market capitalization below $1 billion dollars. While that certainly may not seem small to your average investor, in the corporate world, that kind of company would be considered a minnow. In fact, any company with a market capitalization less than $20 billion dollars could actually be considered a biotech company, rather than an established pharmaceutical firm. For the sake of comparison, Eli Lilly, the biggest of the big, is currently valued at an eye popping $700 billion dollars.
I used the phrase “could be considered” because the market capitalization of a company is only one consideration. There is another critical distinction between Big Pharma and Biotech. Big Pharma companies have very steady revenue, and can be relied upon to churn out profits, positive cash flow, and dividends, year after year, decade after decade. Of course, nothing is fool proof, and there are examples of large, established pharmaceutical firms floundering financially, but in those cases, management was promptly shown the door. Investors expect that names like Pfizer, Eli Lilly, and J&J will always be profitable with a high degree of cash flow.
Investors in biotech often expect the opposite. Many of the companies with sub $1 billion valuations are so new, they don’t even have revenue, let alone profit. And many of the “more established” biotech companies with higher market valuations do have revenue from viable active products, but the company still may not yet be profitable.
The difference comes down to different cultures and different management decisions. Biotech companies are expected to be cradles of innovation, and new medicines created with new science takes lots of capital and many years to gestate. Because this new science is so expensive in money and time, many biotechs only have one or two new agents; either these agents work, and the value of the business sky rockets, or they fail, and formerly valuable stock can be worth nothing. Plainly stated, biotech firms are in the risky business of innovation, and its winner take all.
Big Pharma firms are much more cautious. They typically have dozens of different products across different stages of development with another dozen products actively being sold on the market. This diversification makes them much safer. Rather than betting everying on innovation, Big Pharma companies typically return some portion of profits to sharehiolders in the form of reliable dividends and stock buybacks. As we stated above, this approach is a tried and true method of producing impressive long term financial returns for shareholders….but the whole process is like watching paint dry. Johnson and Johnson may have generated a 1,600% return for investors over thirty years, but it was a long, slow, process. Biotech moves much faster, and a company can double in price overnight, or, (often) the exact opposite.
Enter, Ionis: The Little Big Pharma
In this context, Ionis pharmaceuticals really stands out as a small biotech with big ambitions. The company is currently valued around $6 billion dollars, which puts it firmly in the “middle of the pack,” in the world of biotech.
Additionally, the company boasts robust revenue from several products that are already actively sold on the commercial market. (Spinraza is the most well known). What the company DOES NOT feature is profit. Despite almost ¾ of a billion dollars in revenue, the business posted an operating loss of $270 million.
$700 million in sales, somehow producing a quarter of a billion dollars in losses? Well, that certainly would not sound appealing to your average Big Pharma investor. In fact, it might not sound appealing to any investor. But the appeal of Ionis comes down to two words: “Pipeline” and “Cash.”
You may remember, that one of the defining characteristics of a biotech company, as highlighted above, is an over reliance on just one or two potential products. Ionis is the dead opposite. The company is currently hemorrhaging money because management is going “pedal to the metal,” creating an impressive pipeline of inventive new treatments.
Leveraging breakthroughs in RNA based medicine the company has created a monster pipeline with no less than SEVENTEEN medicines in either phase II or phase III testing. These medicines fall into a wide array of diseases, addressing crippling, nightmarish diseases like ALS, Alzheimer’s and rare diseases.
The latest good news to come out of Ionis is a recent phase III triumph for its investigational drug Olezarsen. The trial was conducted in patients afflicted with familial chylomicronemia syndrome, a rare but deadly disease that creates abnormal triglyceride levels. With this data in hand, its very likely that the drug with be approved to treat this rare disease, but a much larger market beckons for millions of Americans who struggle to control their triglycerides, which can be critical for heart health. If Ionis were able to broaden the approval over time to included general treatment for high triglycerides, the company’s valuation could easily double or triple.
In short, Ionis is currently losing money because it is investing hundreds of millions of dollars to advance its robust pipeline. Management is not worried about making money today; rather they are investing to make much more money tomorrow. If they are successful in advancing just half of their 17 advanced stage drugs, just a few years from now they will have a very diverse and profitable world of revenue streams, just like the far larger Eli Lilly or Pfizer. Effectively, they will be a small Big Pharma.
Even with though management’s master plan is clear, it still takes a strong stomach to shake off losing more than $270,000,000 in a year. After all, one of the other hallmarks of a Big Pharma company is financial stability. Lilly or JNJ may have a bad year, or even couple of bad years, but investors sleep soundly knowing that they have plenty of cash and credit to back them up.
Amazingly, so does Ionis. They currently have more than $2 billion of cash in the bank. So, Ionis can afford to just keep building out their pipeline without worrying about keeping the lights on today. It will be many years before the firm has a hard time paying the bills. Ionis is an opportunity for patient investors to buy into a company churning out scientific discovery, without going through the heartburn typical of this field.
Evolution at Warp Speed
In the biotech world, one of two things typically happen to companies as their new drug pipelines move from theoretical to commercially viable. The most common, is that the owners sell the company to a Big Pharma; the patents and technology remain, but the formerly hard charging, experimental entity ceases to exist. Or, less commonly, formerly “one trick ponies” slowly diversify into more and more new areas, and over a period of decades they evolve into new Big Pharmas. The original biotech legends such as Amgen and Gilead are good examples of this phenomenon. Vertex Pharmaceuticals may be going through this process, right now.
Ionis may represent a rare opportunity to leapfrog this entire slow process in favor of radical transformation at warp speed. Right now, Ionis has just a few commercial products on the market. But with her latest phase III success, and much, much more in the advanced pipeline, Ionis could triple or quadruple revenue in just a few years. According to research published by the NYU Stern School of Business, companies in this sector often trade for 6.5 times revenue. So, if Ionis were able to triple it’s revenue by launching many new products, the company could easily leap in value to $13.5 billion, representing a share price gain of almost 150%. This would all be achieved by forging a durable, diverse pipeline with multiple growing revenue streams.
Many investors long for the growth of the biotech sector, but they can’t stomach the “all or nothing” nature of the game. Ionis sports an advanced, widely diversified pipeline and a strong cash position. This could mean a whole lot of upside, with less risk. Finally, a bet that seems appealing to both Biotech and Big Pharma investors.
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October 8, 2024
MASTERING THE PROXY STATEMENT, PART III: Q&A
By The Sick Economist
Book A Personalized Consultation Directly With The AuthorIn parts I and II, we explored the meaning and relevance of the Proxy Statement, and separated the critical parts of the statement from the fluff. Now, let’s determine exactly how to ask the right questions, and identify which items need scrutiny…
If You Don’t Ask the Right Questions……
In part II, I revealed that I might have been one of the only kids in America that actually learned something from watching GI Joe cartoons. Fortunately, I also had a lot of other positive influences in my youth, and one of them was my grandfather and even my great grandfather. Both were accomplished business people who had eventually found success in the rough and tumble world of 20th century small business. They taught me the following saying, “If you don’t ask the right question, you don’t get the right answer.”
If you read part one of this post, by now, you should know where to look to find some clean, simple, honest answers. But, answers to what? Data on a page doesn’t mean anything unless we know how to ask the relevant questions.
Again, this is the point where too many average investors get intimidated and give up. Formulating smart questions can be a lot tougher than you would imagine especially if you don’t have a lot of experience! But don’t worry. There are only a few core, “starter” questions that you should always be asking, every time. Once you get used to asking these basic core questions, the answers themselves will cause you to formulate organic, unique follow up questions, and the whole exercise will become as routine as brushing your teeth. With practice, you will learn how to tear apart a big, bad proxy statement in twenty minutes flat, and you will easily come to your own conclusions about what constitutes a smart investment.
The very first question I always want to answer is: “Who really owns this company?”
Ownership Means Control
The title means everything. The point of the exercise is not to calculate the often vast wealth of the company’s primary shareholders (although, you will be able to do that with this information.) Rather, the point is to figure out who really controls a massive, publicly traded corporation (if anyone). The most simple way to think about it is the following. Unless you happen to be very, very rich, your modest share purchase will entitle you to an economic stake in a publicly traded corporation. But it probably won’t entitle you to control that corporation. So, before you essentially become an economic partner in this business, wouldn’t you want to know who, exactly, you are partnering with? If you owned 33% of a dry cleaning business, you would want to know more about your other partners, right? Very same principle if you own .00033% of a much larger business.
You also want to understand the control dynamic before you join the venture. The vast majority of retail investors believe that the workings of a publicly traded company is quite straight forward. The CEO makes all management decisions, and the board of directors supervises him. Everybody votes on very key, “big picture” matters, and whoever gets the most votes, wins. Right?
Wrong. What I just described above is how it works, sometimes, but NOT all of the time. Remember when I said that, the three legal rules of a publicly traded corporation were simply, disclosure, disclosure, disclosure? Well, there are actually no legal rules about who controls corporations or how voting works. Those rules are actually set by the corporation itself. The only legal rule is: the corporation must disclose the voting arrangement and the control arrangements to the general public, and then each potential investor can decide for herself whether or not she finds the arrangement to be acceptable.
But what if I told you that the vast majority of investors have no idea what the actual voting arrangement is before they invest? Under the hundreds and hundreds of pages of disclosures, typically the only place where true ownership and control is disclosed is in the proxy statement, on that little table that lists the corporation’s major shareholders.
For example, did you know that Mark Zuckerberg, and Zuckerberg alone, controls the internet behemoth Meta? This is because Meta actually has two different classes of stock. One class of stock is for the general public, and carries no votes. But Zuck has a special class of ownership stock, reserved just for him, whereby he controls all major decisions at the company. The board of directors controls nothing. They could get together quarterly, and talk about the weather, or baseball. It doesn’t matter, former boy genius Mark Zucherberg runs Meta as an absolute dictatorship.
Most people have no idea that Zuck and Kim Jong Un have so much in common. They simply assume that, because Meta has all of the standard titles and features of publicly traded companies (a board of directors, a COO, lots of Vice Presidents) that voting functions like a standard publicly traded company. It doesn’t. And this information is clearly disclosed on page 62 of the 2022 Proxy Statement. This tiny disclosure makes this dictatorial arrangement fully legal. But if you don’t know where to look, and you don’t know what to ask, you wouldn’t know. Millions and millions of investors don’t know. But now, you do.
Some people find a dictatorial ownership and control arrangement to be just fine. After all, shareholders still have an economic interest in the company, they just don’t have a voting interest. After all, even non-voting Meta shareholders have enjoyed a shocking compounded annual growth rate of 21.2% per year over the last ten years, transforming a $1,000 investment into $7,000 in just ten years.
Under that set of circumstances, you might be perfectly happy to know that Zuck will always be the unchallenged captain of the Meta ship. But you should at least know. The more you know about your investment, the bigger advantage you will have over other investors.
The Meta example is an extreme example. The most common arrangement is just one class of shares for everybody, with one share equaling one vote. So, if the CEO owns 7% of the shares, he gets 7% of the votes. In this case, the CEO can be outvoted, and he can even be fired by the board of directors.
There is a huge variety of arrangements out there. For example, Ford corporation is effectively controlled by the Ford family, but that means dozens of different Ford family members have input, as do common shareholders. At the Walt Disney corporation, the Disney family are still shareholders, but they lost control of the company years ago, and now they don’t have much more influence than anyone else.
In the world of biotech, it’s shockingly common for top executives and managers to own little of the corporation and for “silent” investors to be the real “power behind the throne.” For example, the CEO may own as little as 1% of the company, but a hedge fund that backed the whole venture owns 20% of the company. Remember, when it comes to ownership and ultimate control of a publicly traded corporation, “anything goes,” as long as the arrangement is disclosed. And the only place where that disclosure really happens is in the proxy statement.
In the next part of the series, we will address everybody’s favorite topic……pay days! When you own shares in a publicly traded corporation, you are an owner in that business. The business’s C-Suite executives work for you, managing the company that you own. Wouldn’t you want to know exactly how your employees are paid? We will discover right where to look in part IV of this series.
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September 11, 2024
MASTERING THE PROXY STATEMENT, PART II: CLARITY
In part I of this six part series, we defined the problem that many investors face: a lack of clear, concise and honest data about their potential investment in a publicly traded company. In part II, we will learn more about how the annual proxy statement works: a standardized SEC document that can help you cut through the noise and the misleading clutter that often surrounds publicly traded corporations.
By: The Sick Economist
Book A Personalized Consultation Directly With The Author
In the 80’s my bookish parents scorned any time watching Saturday morning cartoons, swearing that I would never learn anything that way. I’m proud to report, they were wrong. G.I Joe taught me the phrase, “Knowing is Half the Battle.” Turns out that, at least in the world of investment, G.I. Joe was right. Once you know where to look for clean, clear, standardized investment data, it gets a lot easier to make good decisions.
Luckily, the SEC mandates the availability of certain reports on an annual, quarterly or occasional basis that cut through all the clutter and hype. By law, these reports can be found on every publicly traded company’s website, usually under the tab entitled “investors.” Once you reach the page dedicated to investors, you will usually find a sub page entitled “financials” or, even better “SEC Filings.” The most common format is to find a chronological list of recent fillings, submitted to the Federal Government in a standardized format, with scary names like “10Q” or “10K.”
Although these kinds of dry, technical sounding names turn off many newbie investors, your reaction really should be the opposite. The fact that these are government mandated forms, with specific, mandated presentation of standardized data, should beckon to you like an oasis of honesty in a desert of hype.
The key about these government forms is that they are required, standardized, and straightforward. In terms of the general presentation of information on a public firm’s website, there are few laws about what data needs to be emphasized, or how the data is to be illustrated. This allows the “creative juices” of a deceptive management team to flow like a river of deceit. However, there are no fun and games allowed with the mandated SEC forms. By law, the data must be presented in a standardized format. This means that you could go to the websites of ten different publicly traded companies and find the relevant data presented in much the same way on all ten sites. This makes honest comparison and analysis much easier!
The other benefit of the SEC mandated forms is that they are plain Jane. No embellishments with fancy, distracting charts. No selective presentation of only the most favorable data. The most fluff you will find will be a warm “welcome” letter from management, but even then, those are typically limited to just a few explanatory paragraphs, instead of the flowing, overly optimistic prose that management often presents elsewhere on the website.
Unfortunately, many, many mainstream investors are scared off from these forms because they are scared of “hard’ data. But, with practice, it’s the farthest thing from hard! Analysis of these forms is actually easier because you don’t have the machinations of a deceptive CFO working against you. Just plain, clean information about the performance of the company over the last year, or the last quarter. This is why most professional analysts carefully analyze forms 10Q and 10K.
But there is another form, one that is often overlooked even by professional investors. That’s because there is a fundamental misunderstanding about what information is contained in the form.
The annual proxy statement, a standardized form that all American publicly traded companies must disclose, really separates business owners from mere traders and stock analysts. Mastery of this form will greatly aid you in accumulating long term stock market wealth.
HOW TO USE THE PROXY STATEMENT AS A TOOL
Even though the proxy statement is one of the most straightforward and honest documents out there, the name is a bit misleading. Because a proxy statement does, in fact, include, “proxy materials,” which is one critical element of the document, but the name does not even mention a lot of other critical information that is contained in every proxy statement. In fact, the truncated name, “proxy statement” is actually what causes many, many investors to miss out on the real “good stuff.”
So what, exactly does the proxy statement document contain? For starters, it does contain “proxy” materials. But what the heck are those?
The proxy process is the process by which the owners of a corporation vote on big decisions that affect the whole corporation. If you own even one share in a publicly traded company, then you are one of the owners. Therefore, each and every shareholder has access to these materials one time per year. In the old days, this used to mean that you would receive fancy paperwork in the mail, where you would get all of the required SEC documents (10Q, 10K, Proxy Statement, and other stuff) in one giant mailer. If you owned stock in ten or more companies, as many people do, this meant a dining room table piled high with paper. In fact, even in today’s digital world, you still have the option of having these hard copies sent to your house. But more and more shareholders prefer to simply peruse the digital version, which, as we mentioned before, can be found under the “investors” section on the website of every publicly traded company.
The proxy voting process is the process by which, you, as a shareholder, may offer your vote, by proxy, in this year’s pressing corporate matters. “By proxy” means your vote counts, even if you are not at the shareholders’ meeting in person. (Just for reference, major brand name corporations can have thousands of shareholders, so most people just vote by proxy instead of physically showing up at the annual shareholder’s meeting).
Probably the first 50% of the pages are dedicated to the process of proxy voting. Each corporate issue of the year will be described in detail, with pros and cons listed, and an indication as to whether company management supports the proposal. All corporations have different by laws that set different requirements for just how a shareholder proposal winds up being voted on at the annual meeting.
The main reason why the proxy statement is often ignored by investors, is because a lot of these proxy votes are often lame and irrelevant. For example, every year, the shareholders must ratify the contract of the company’s financial auditor. Yawn. The shareholders must vote on the employment contracts of various members of the board of directors. In some cases this can become a hotly contested topic, but typically, corporate directors are nominated or re-nominated without drama. Often there are all kinds of ceremonial or tangential questions that get put to a vote. (I can remember where a group of Catholic nuns, who were shareholders, requested ethical audits of corporate activities. Also, various kinds of environmental advocacy groups are often putting up questions for a vote). Usually, this stuff is quite boring and routine, with the real important corporate questions being resolved between the Board of Directors and CEO behind closed doors. Therefore, to the untrained eye, the proxy statement can seem like page after page of irrelevant bureaucratic dribble.
But you have to know where to look for the good stuff! The proxy statement is also the place, typically the only place, where the actual ownership of the corporation is disclosed, and executive pay is discussed in detail. These two data points, contained in maybe just ten pages amongst hundreds of pages of fine print, can really, really make a difference in an investment decision.
Geez. No wonder average folks just hire money management professionals and forget about it all. But remember GI Joe! ‘“Knowing is half the battle.” And now, you know this: Each proxy statement comes with a table of contents in the front. You can use this table of contents to instantly identify the pages that are of interest to you, and easily filter out the voluminous pages of corporate dreck that discourage less educated investors.
Typically the sections of the Proxy Statement that will interest you are located about halfway through the .PDF document. You are looking for the words “ownership” and “executive compensation.” These pages are typically about halfway through the document, and halfway down the list of the table of contents.
But it’s even easier than that! If you don’t like tables of contents, or you can’t find it for some reason, you can quickly scroll through the pages and find what you want. Isn’t this like looking for a needle in an information haystack?
Not really, because the pages that contain the golden information will look different, visually. The compensation pages will be the only pages that contain significant amounts of numbers, and will often contain some very stripped down, basic charts.
Even more importantly, the ownership information is usually displayed as a chart or a list. They will typically list all members of senior management and the whole board of directors, and next to their name they will indicate how much of the corporation they own, expressed as a percentage. Other large shareholders will also be named, even if they have no role in management.
While the format is standardized so that most proxy reports look roughly the same, you will be shocked by what you find when you review the ownership and compensation charts. You could look at ten different proxy reports, and see ten different situations. And ownership matters.
In part III of this post, we will reveal tips on what to look for, pitfalls to avoid, and the implications of the different kinds of ownership and compensation information that you may find in the proxy statement.
The post MASTERING THE PROXY STATEMENT, PART II: CLARITY appeared first on Sick Economics.
September 9, 2024
THE ANNUAL PROXY STATEMENT: AN OVERLOOKED TREASURE TROVE FOR THE SAVVY INVESTOR
By The Sick Economist
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Quick Quiz: What is the key difference between a large, well known privately held company, and a large, well known publicly traded company? After all, companies like Space X and Mars Incorporated are almost household names, and they are often in the media. Just like a publicly traded company, they may have a full slate of owners, investors and lenders. Just like a public company, they may well offer products and services that touch the general public in a number of ways.
One of the biggest differences is: disclosure. We know that Space X has multiple owners, but we don’t exactly know who, or how much each shareholder owns. We know people who work there get paid a lot, but the compensation information is private, and not available to the general public. One of the biggest differences between a prominent privately held company and a prominent publicly traded company boils down to just one word: disclosure.
Unlike Space X, we know exactly who owns Tesla, and how much of the company they own. We know exactly how much the executives get paid, and what incentive systems are utilized. Bottom line? We know that Elon Musk is a key player for both Tesla and Space X, and both companies are in the media a lot, but the general public knows a lot more about the details of Tesla’s financing, ownership and operations, because, as a publicly traded company, the firm is legally required to disclose this information.
But what if I told you that millions of investors don’t know nearly as much as they should? Or actually that they know too much, while at the same time, the average investor doesn’t know enough of the critical information that they should know?
Most investors are simply looking in the wrong places, and therefore being fed the wrong information. The annual proxy statement is a key document that every investor should peruse before purchasing shares in a publicly traded company, and a strong understanding of this document helps the investor cut right through the media hype and misdirection. Let’s explore the key attributes of this standardized SEC document, in a bid to become more informed investors.
THE PROBLEM
The core problem is that, human beings with dishonesty in their hearts, will always find some way to scam. In the case of publicly traded companies, it is highly illegal to simply make data up. The wholesale invention of data is fraud. But bending the truth a little, simply emphasizing certain favorable details, while passively obscuring certain less favorable details? Well, that’s legal and as American as Apple Pie. Whatever legal rule is created, inherently dishonest people will always find a way around it.
In the case of Wall Street, dishonest people don’t want to commit a crime through lack of disclosure. So they often seek to cover up certain critical details by burying them in a landslide of disclosure. The simple law is that publicly traded companies must disclose key data and metrics. So, they do disclose. And disclose, and disclose, and disclose, until critical, unfavorable facts can be harder to find than a diamond in a mountain of coal.
This barely honest disclosure comes in several forms. The most common is media hype. Clever entrepreneurs and smooth executives know how to manipulate the financial media so that they only report on the good aspects of a certain new product offering or quarterly report. Questionable CFO’s invent non-official “non-GAAP” metrics that the media often embraces because they can be easier, on the surface, to understand than traditional GAAP accounting.
The tsunami of deception may not get much better when you arrive at the company’s website. Remember, the SEC regulates the data that a publicly traded company must disclose, but nobody regulates the data that a company may disclose if they feel like it. So, on each publicly traded company’s website, typically under the tab labeled “investors,” you will find a mix of relevant, clear, simple information, and ornate, unnecessary dreck designed to obfuscate and bamboozle. The relationship between these two kinds of information could be expressed as a percentage. On the website of a well managed company with honest executives, an investor is likely to find 75% relevant, straightforward data, and 25% puffery. On a website of a company with more questionable management, the percentage will be exactly reversed. Remember, as long as the publicly traded company discloses that legally mandated, formulaic information, somewhere, then they have complied with the law.
But it’s easy to bury relevant information under pages and pages of corporate speak gooblegook non-sense. Warm, welcoming letters from management, fancy graphics with very official sounding statistics. The aforementioned “Non-GAAP” financial measurement, which CFO’s often make up out of thin air. Amongst hundred and hundreds of pages of disclosure, the honest, direct, unfiltered information is there, somewhere. But where?
THE SOLUTION
In the 80’s my bookish parents scorned any time watching Saturday morning cartoons, swearing that I would never learn anything that way. I’m proud to report, they were wrong. G.I Joe taught me the phrase, “Knowing is Half the Battle.” Turns out that, at least in the world of investment, G.I. Joe was right. Once you know where to look for clean, clear, standardized investment data, it gets a lot easier to make good decisions.
Luckily, the SEC mandates the availability of certain reports on an annual, quarterly or occasional basis that cut through all the clutter and hype. By law, these reports can be found on every publicly traded company’s website, usually under the tab entitled “investors.” Once you reach the page dedicated to investors, you will usually find a sub page entitled “financials” or, even better “SEC Filings.” The most common format is to find a chronological list of recent fillings, submitted to the Federal Government in a standardized format, with scary names like “10Q” or “10K.”
Although these kinds of dry, technical sounding names turn off many newbie investors, your reaction really should be the opposite. The fact that these are government mandated forms, with specific, mandated presentation of standardized data, should beckon to you like an oasis of honesty in a desert of hype.
The key about these government forms is that they are required, standardized, and straightforward. In terms of the general presentation of information on a public firm’s website, there are few laws about what data needs to be emphasized, or how the data is to be illustrated. This allows the “creative juices” of a deceptive management team to flow like a river of deceit. However, there are no fun and games allowed with the mandated SEC forms. By law, the data must be presented in a standardized format. This means that you could go to the websites of ten different publicly traded companies and find the relevant data presented in much the same way on all ten sites. This makes honest comparison and analysis much easier!
The other benefit of the SEC mandated forms is that they are plain Jane. No embellishments with fancy, distracting charts. No selective presentation of only the most favorable data. The most fluff you will find will be a warm “welcome” letter from management, but even then, those are typically limited to just a few explanatory paragraphs, instead of the flowing, overly optimistic prose that management often presents elsewhere on the website.
Unfortunately, many, many mainstream investors are scared off from these forms because they are scared of “hard’ data. But, with practice, it’s the farthest thing from hard! Analysis of these forms is actually easier because you don’t have the machinations of a deceptive CFO working against you. Just plain, clean information about the performance of the company over the last year, or the last quarter. This is why most professional analysts carefully analyze forms 10Q and 10K.
But there is another form, one that is often overlooked even by professional investors. That’s because there is a fundamental misunderstanding about what information is contained in the form.
The annual proxy statement, a standardized form that all American publicly traded companies must disclose, really separates business owners from mere traders and stock analysts. Mastery of this form will greatly aid you in accumulating long term stock market wealth.
HOW TO USE THE PROXY STATEMENT AS A TOOL
Even though the proxy statement is one of the most straightforward and honest documents out there, the name is a bit misleading. Because a proxy statement does, in fact, include, “proxy materials,” which is one critical element of the document, but the name does not even mention a lot of other critical information that is contained in every proxy statement. In fact, the truncated name, “proxy statement” is actually what causes many, many investors to miss out on the real “good stuff.”
So what, exactly does the proxy statement document contain? For starters, it does contain “proxy” materials. But what the heck are those?
The proxy process is the process by which the owners of a corporation vote on big decisions that affect the whole corporation. If you own even one share in a publicly traded company, then you are one of the owners. Therefore, each and every shareholder has access to these materials one time per year. In the old days, this used to mean that you would receive fancy paperwork in the mail, where you would get all of the required SEC documents (10Q, 10K, Proxy Statement, and other stuff) in one giant mailer. If you owned stock in ten or more companies, as many people do, this meant a dining room table piled high with paper. In fact, even in today’s digital world, you still have the option of having these hard copies sent to your house. But more and more shareholders prefer to simply peruse the digital version, which, as we mentioned before, can be found under the “investors” section on the website of every publicly traded company.
The proxy voting process is the process by which, you, as a shareholder, may offer your vote, by proxy, in this year’s pressing corporate matters. “By proxy” means your vote counts, even if you are not at the shareholders’ meeting in person. (Just for reference, major brand name corporations can have thousands of shareholders, so most people just vote by proxy instead of physically showing up at the annual shareholder’s meeting).
Probably the first 50% of the pages are dedicated to the process of proxy voting. Each corporate issue of the year will be described in detail, with pros and cons listed, and an indication as to whether company management supports the proposal. All corporations have different by laws that set different requirements for just how a shareholder proposal winds up being voted on at the annual meeting.
The main reason why the proxy statement is often ignored by investors, is because a lot of these proxy votes are often lame and irrelevant. For example, every year, the shareholders must ratify the contract of the company’s financial auditor. Yawn. The shareholders must vote on the employment contracts of various members of the board of directors. In some cases this can become a hotly contested topic, but typically, corporate directors are nominated or re-nominated without drama. Often there are all kinds of ceremonial or tangential questions that get put to a vote. (I can remember where a group of Catholic nuns, who were shareholders, requested ethical audits of corporate activities. Also, various kinds of environmental advocacy groups are often putting up questions for a vote). Usually, this stuff is quite boring and routine, with the real important corporate questions being resolved between the Board of Directors and CEO behind closed doors. Therefore, to the untrained eye, the proxy statement can seem like page after page of irrelevant bureaucratic dribble.
But you have to know where to look for the good stuff! The proxy statement is also the place, typically the only place, where the actual ownership of the corporation is disclosed, and executive pay is discussed in detail. These two data points, contained in maybe just ten pages amongst hundreds of pages of fine print, can really, really make a difference in an investment decision.
Geez. No wonder average folks just hire money management professionals and forget about it all. But remember GI Joe! ‘“Knowing is half the battle.” And now, you know this: Each proxy statement comes with a table of contents in the front. You can use this table of contents to instantly identify the pages that are of interest to you, and easily filter out the voluminous pages of corporate dreck that discourage less educated investors.
Typically the sections of the Proxy Statement that will interest you are located about halfway through the .PDF document. You are looking for the words “ownership” and “executive compensation.” These pages are typically about halfway through the document, and halfway down the list of the table of contents.
But it’s even easier than that! If you don’t like tables of contents, or you can’t find it for some reason, you can quickly scroll through the pages and find what you want. Isn’t this like looking for a needle in an information haystack?
Not really, because the pages that contain the golden information will look different, visually. The compensation pages will be the only pages that contain significant amounts of numbers, and will often contain some very stripped down, basic charts.
Even more importantly, the ownership information is usually displayed as a chart or a list. They will typically list all members of senior management and the whole board of directors, and next to their name they will indicate how much of the corporation they own, expressed as a percentage. Other large shareholders will also be named, even if they have no role in management.
While the format is standardized so that most proxy reports look roughly the same, you will be shocked by what you find when you review the ownership and compensation charts. You could look at ten different proxy reports, and see ten different situations. And ownership matters.
In part two of this post, we will reveal tips on what to look for, pitfalls to avoid, and the implications of the different kinds of ownership and compensation information that you may find in the proxy statement.
The post THE ANNUAL PROXY STATEMENT: AN OVERLOOKED TREASURE TROVE FOR THE SAVVY INVESTOR appeared first on Sick Economics.
June 17, 2024
J&J: THE NEXT ELI LILLY?
By the Sick Economist
This wasn’t supposed to happen. It really shouldn’t be. Yet, somehow, it is. Eli Lilly, a formerly lumbering drug giant, founded in 1876 and still based in very uncool Indianapolis, Indiana, has skyrocketed in value as if it were some sexy Silicon Valley tech stock. In the last five years, the stock has catapulted from $110 per share to a lofty $837 per share. The shares are valued at a P/E ratio of 127, which is simply unheard of in the world of Big Pharma. As exciting as this development is, in reality, most investors have already missed this boat. If you weren’t smart enough, or lucky enough, to buy a few years ago, the company looks awfully expensive today. But you may get another chance. Johnson and Johnson, a company almost as stodgy and ancient (founded, 1887) displays many of the same ingredients that caused Lilly to explode in value.
Could humble J&J be the next Eli Lilly?
To find the next Eli Lilly, first we must understand the factors that transformed this staid, stale household name into the stock market beast of the 2020’s. It may feel like magic, but it isn’t. There are a few obvious factors to the company’s meteoric rise.
The first factor that made Lilly’s run possible was it’s modest valuation before the surge of the last few years. Lilly performed just like most other Big Pharma companies, which is to say, well, but not sensational. In the year 2000, the shares were priced at $62.75, and in the year 2020, the shares had climbed to $110.89. If we included the dividends, investors received a total return of 208% over twenty years, turning a $10,000 investment into $35,000. Certainly nothing to sniff at, but quite modest compared to legends like Apple, which enjoyed a mind numbing 11,000% return over those same years, turning a $10,000 investment into $110,000. It seemed like the “slow but steady” world of Big Pharma simply couldn’t compete with names like Apple, Google and Nvidia, which enjoyed “life in the fast lane.”
But that modest valuation made a big difference when Lilly started to roll out the hits. It means that the valuation had room to run. If you unleash a drug, or drugs, that are smash hits, it’s easier for a company to jump from a valuation of 20 times earnings to 90 times earnings, than it is for an already richly valued company to jump from 90 times earnings to 180 times earnings. If you were to buy into Lilly at today’s stratospheric P/E of 127, you would basically be hoping that the company can keep pumping out the same level of growth when your grandchildren reach retirement age. It’s a lot easier to reap gains when the company starts off lower.
Secondly, Lilly brought to market at least two mega blockbusters with a very broad TAM, or “Total Addressable Market.” Despite the many well documented shortcomings of the American Healthcare System, our biotechnology sector is thriving. American society has pumped out more treatments and cures in the last ten years than in the previous millennium combined. No one wants to be sick, but if you had to be sick, now would be the best time in human history to battle a disease.
While this armada of new drugs is great for patients, it makes the pharmaceutical business an extra tough racket. If you were diagnosed with cancer, it’s likely that you would be offered multiple different treatment modalities. Faced with an acute healthcare crisis, not only did the biotech world craft one Covid vaccine on short notice, but several different options. This means that, for many disease states, the competition is fierce.
Lilly captured the imagination of the investment community by pioneering not one, but TWO different drugs that have massive TAMS and few competitors. The first disease state is diabetes and obesity. For decades prior to the launch of Mounjaro, barely anything worked. Treatment regimens for diabetes were bad, and for obesity, much worse. Mounjaro (branded as Zepbound for obesity) works shockingly well. This is one of those few drugs that comes around once in a generation that will visually, obviously change America.
Currently, Mounjaro’s only real competition is Wegovy by Novo Nordisk. There are other competitors rushing to push competing drugs onto the market, but these would-be contenders are years away from commercializing their offerings. Additionally, both Eli Lilly and Novo have a fusillade of “next generation” weight loss products ready to build on their current success. Lilly and Novo have effectively created a duopoly around diabetes and weight management, splitting countless millions of patients amongst just two companies.
But Lilly didn’t stop there. The company is also weeks away from approval for yet another novel medication aimed at a massive patient population with few options. Much like obesity, millions and millions of Americans have suffered from Alzheimer’s Disease with few treatment options. This may all change in the next few weeks with the approval of Donanembub. This would be the second drug approved to treat Alzheimer’s disease. Much like the situation with obesity, Lilly would be establishing a duopoly in soft competition with Biogen. The two would be offering similar drugs to a desperate patient population with few options. Both companies have improvements and “2.0” formulations in the works, and competitors are years behind. With 10,000 Baby Boomers per day getting Medicare cards, Donanembub could be just as big as Mounjaro. And that is how you transform a once forgotten pharmaceutical concern into a raging Wall Street monster with the same characteristics as the titans of Silicon Valley.
Johnson & Johnson: The Sleeper Candidate?
Thus, we can see that Lilly did not go supernova by accident. Although the company has achieved an unprecedented level of success, there was a very specific set of circumstances that allowed this to happen. They caught lightning in a bottle, which is difficult to copy. Difficult, but not impossible.
Today, Johnson and Johnson displays many of the same characteristics that Lilly did five years ago.
First, J&J sports a modest valuation of just 22 times earnings. While many would consider this to be richly valued, in today’s super pumped up stock market, J&J’s price tag is quite reasonable considering the firm has handed in 150 years of solid performance. Put another way, even if Johnson and Johnson were to double in price over the next few years, and arrive at a P/E of 40, that would still look modest next to Lilly’s extreme valuation. So, in a way, Lilly has cleared the way for other titans to rise, as well.
Second, J&J is also working on novel treatments for patient groups with colossal TAMs. One of J&J’s most exciting new candidates is Posdenimab, which targets Alzheimer’s disease. The reason why this drug is extra exciting, despite pre-existing competition from Lilly and Biogen, is that it targets the disease from an all new angle. While Lilly and Biogen’s agents target Amyloid plaques, J&J is targeting TAU, another toxic brain protein closely associated with the devastating cognitive decline of Alzheimer’s. Although Lilly and Biogen have blazed a path by offering the first effective Alzheimer’s treatments, their overall results are still suboptimal, and leave much room for improvement. Posdenimab may just be that improvement. The drug is currently in phase II trials with data readout expected sometime over the next 12 months. Additionally, J&J has other, more experimental Alzheimer’s treatments in its pipeline. It’s worth noting that Lilly’s stock price started to take off just after the world started to learn about promising results in phase II trials. With some luck, J&J could be just the same.
Much like Lilly, J&J is far from a one trick pony. Another realm of deeply unmet needs is MDD, or Major Depressive Disorder. Although there are already many medicines on the market, this disease remains notoriously difficult to treat. Many treatments fail to deliver relief for specific subsets of patients, and most “new” drug launches over the previous decades have just been small tweaks to existing science. J&J is bringing three different, novel agents to this market (Seltorexant, Aticaprant and the recently approved Spravato) the company could easily see Lilly-like revenue gains in the coming years. There are still millions of clinically depressed patients out there, and J&J is ready to offer much needed help.
Downside Risk
Legendary investor Warren Buffet is famous for quipping, “The first rule of an investment is: don’t lose money. And the second rule of an investment is: don’t forget the first rule. And that’s all the rules there are.” So, we would be remiss if we didn’t consider the risks of an investment in Johnson&Johnson.
Most of the medicines discussed in J&J’s pipeline are in stage II or stage III testing. This means that some, or all, of the medicines could still generate disappointing results. The further along in testing, the less risky an asset is considered. However, the jewel in the crown, Donanemub for Alzheimer’s, is still in phase II. Efficacy is not guaranteed, and many yet fail in the quest to treat this dread disease.
That being said, J&J is substantially less risky than most high octane biotech stocks. Since 2014, the firm has grown operating income from $17 billion per year to $20 billion. During that same time, the company has grown it’s annual dividend from $1.99 to $4.75. Currently it sports $171 billion in assets versus just $100 billion in liabilities. This is not a fly-by-night, entrepreneurial venture that could disappear tomorrow. Given the company’s reasonable current P/E of 22, it would be hard for an investor to lose too much money on this bet.
J&J has been the target of a host of lawsuits regarding it’s sale of talcum powder, a product that allegedly caused cancer. While this litigation created a cloud over the company for the years, the fireworks are now winding down. J&J has implemented several strategies to limit risk to the company while still meeting all of it’s legal obligations. The market has had a long time to digest all of the news about these legal wranglings, so any litigation risk is likely baked into today’s J&J share price.
Limited downside, while offering potentially unlimited upside potential. This is what the sophisticated investor calls an “asymmetric bet.” In other words, the chances of reward are much greater than the risk of failure. For most people, this is probably a much safer investment than chasing Eli Lilly at today’s rich valuation. Everybody wishes they had a time machine, where they could go back to 2020 and buy today’s wonder biz. If you find a time machine somewhere, you know what to do. If not, you might just invest in J&J: it could be the next best thing.
The post J&J: THE NEXT ELI LILLY? appeared first on Sick Economics.
June 5, 2024
3 HOT NEW BIOTECH LAUNCHES FOR YOUR SWELTERING SUMMER
By the Sick Economist
The mercury is high and you could fry an egg on the sidewalk. No doubt, we have a long, hot summer in front of us. But 2024 also promises to be a hot summer for biotech stocks. After crashing to a devastating low of $61 in 2023, XBI, a biotech index that represents the galaxy of biotech start ups and innovators, has rebounded to trade in the mid $80’s. Advances in genomics and AI have drawn all new interest in the biotech sector. And many exciting new medicines are getting ready to make it past the “approval” finish line.
Below find three hot stocks for the summer of 2024. These are companies that are finally seeking clinical approval for their new drugs, after years or even decades of painstaking research. If they gain approval, this means these small companies will cross the threshold from research projects into actual revenue generating businesses. This milestone often represents a good entry point for investors looking to beef up their biotech holdings.
1. Verona Pharma
Imagine trying breath through a straw. Sadly, this is what you may experience if you suffer from COPD, a progressive lung disease that could effect up to 30 million Americans at any time .
Unfortunately, there is currently no cure for COPD; only medications that help manage the symptoms. Many patients never achieve an adequate level of comfort and security and are forced to endure a suboptimal lifestyle with a slow, chronic decline in their ability to breath. Into this grim world charges Verona Pharma, a small startup with a brand new method of treating COPD.
Ensifentrine will not cure COPD, but data demonstrates that it may represent a powerful new option in the management of the disease. Ensifentrine could be the first novel mechanism available for the maintenance treatment of COPD in more than a decade if approved by the FDA, with a PDUFA target date of June 26, 2024.
The company is well financed, having recently secured access to an additional $650 million to help launch the product. Adding this to the company’s pre-exising cash pile of $255 million, and we see that the company now has access to cash that equals its current stock market valuation of $950 million. You read that right. Verona has cash resources that equal it’s stock market valuation. This would imply that all of it’s intellectual property, all of it’s scientific equipment and connections in the scientific community are worth $0. An investor who chooses to buy into Verona today, gets access to $950 million in cash, and the fortune in intellectual property comes for free.
Somehow, the market has missed the value in Verona. These are the kinds of mismatches that the astute biotech investor lives for.
2. Madrigal Pharmaceuticals
This is a much more high profile biotech company, because it is currently launching an approved product for a very widespread, common condition. As we speak, Madrigal is the only company that has won approval to sell a remedy for NASH, a common, chronic condition of the liver. As many as 25% of all adult Americans suffer from NASH, which is closely associated with obesity and diabetes.
Madrigal currently sports a market cap of $4.7 billion, which is relatively low for a company launching an approved product for a condition that effects countless millions. Has the market overlooked another gem?
One reason for Madrigal’s restrained valuation is the competitive market place. As GLP-1 weight loss drugs have stormed upon the scene, Madrigal’s star has dimmed somewhat. Recent data from Eli Lilly demonstrated that a high percentage of Tizeperatide patients will see great improvements of their NASH metrics as they lose weight. (Here, the disease is listed as MASH instead of NASH, but the two diseases are very close cousins).
The apparent success of GLP-1 in treating NASH may render Madrigal a niche player. But still, even a niche in market that effects 20% of American adults could be very, very profitable. Madrigal may not necessarily be a case of the market missing an opportunity, but rather misunderstanding an opportunity. You don’t have to be a genius to make money in biotech. You just have to understand a little bit more than the general market. This may be one of those situations.
3. Moderna Therapeutics
Moderna could be a good bet for an investor who likes a good comeback story. Everybody knows that Moderna burst on the scene in 2020, emerging from the obscure world of mRNA based cancer research to pioneer and launch the Covid vaccine. It was the first time in history that a vaccine had been conceived, researched, and launch so quickly, and tsunamis of cash rolled in for this formerly nascent biotech.
But the good times couldn’t last forever. As America moved past Covid, revenue fell from $7.1 billion in Q4, 2021, to just $167 million in the lastest quarter. The company went from minting money to losing money. Despite a very promising pipeline of novel cancer drugs, Moderna is currently burning cash. The simple question is: can the company successfully launch a new product that will generate enough revenue and profit to stop the financial bleeding while their oncology pipeline matures?
Management is optimistic. They boldly predict the company will generate $4 billion in sales in 2024, due the upcoming launch of their new RSV vaccine. This vaccine will use similar technology to the Covid vaccine, and may eventually be combined into a “triplet” shot for senior citizens that would help to ward of Covid, RSV and the Flu, all at once. This is the vision that compels the company to predict that they will once again be in the black by 2026. (An mRNA flu vaccine is also in the works).
But smooth sailing is not guaranteed for Moderna. Unlike the mad rush of Covid, they would be launching into competitive markets. Other major players are also launching RSV vaccines, and, as you may well know, various types of Flu vaccines already exist.
In it’s most recent financial report, the company had roughly $8.5 billion in cash on hand, after burning through roughly $1 billion in cash over the last year. Launching new drugs into a competitive market will not be cheap, but it seems unlikely that the company will go broke anytime soon. The new RSV drug just gained approval; the rollout will be a gradual process over the remainder of 2024. Lastly, with a market capitalization of $56 billion, Moderna is much cheaper than it used to be, but still, not cheap. If they have short term success with their new respiratory vaccines, but the long term oncology pipeline flubs, the shares won’t be a good investment. However, Merck, a leader in the world of cutting edge oncology, is currently valued at over $300 billion dollars, indicating a potential 500% upside for the patient and brave Moderna investor.
Moderna is a company with a story. It involves a young biotech ingenue’s rocket ride to fame, oceans of cash, and a fall from grace. If you think that the next chapter of our biotech soap opera could be big oncology success, then you might take a gamble on $MRNA. If you prefer less drama, then other companies may be for you.
For most people, “summer” means barbecues, days at the beach, and baseball. But the dedicated biotech investor never stops looking for sizzling deals. The three names above might just fall into that category.
The post 3 HOT NEW BIOTECH LAUNCHES FOR YOUR SWELTERING SUMMER appeared first on Sick Economics.
April 22, 2024
IONIS PHARMACEUTICALS: THE LITTLE BIG PHARMA?
What, exactly, separates a biotech company from a “Big Pharma” company? What are the attributes that make each kind of company attractive to certain kinds of investors? Most importantly, can a company only fit into one of these two categories? Can an investor capture the best of both worlds?
By The Sick Economist
Corporate giants like Pfizer and Johnson&Johnson are the stuff of legend. They have each existed and thrived for well more than a century, churning out thousands of drugs that have altered the very fabric of American culture (Eli Lilly’s insulin breakthroughs extended life for millions for Americans, and Pfizer’s Viagra may well have made those longer lives more pleasurable).
Investments in these titans of commerce have also changed the financial lives of millions of Americans. $10,000 invested in Johnson&Johnson in 1995 would equal $161,000 today.
But we are not in 1995. The criticism that a lot of these behmouths face is that they have grown so large, that perhaps their best days of growth are behind them. With dozens of medicines on the market, billions and billions in revenue, and a very high Wall Street profile, some investors might question whether the next thirty years will produce the same kind of growth that the last thirty years produced.
But what if I told you that it is possible to identify TOMMORROW’s Eli Lilly, TODAY?
What if you could buy the equivalent of today’s Eli Lilly back around 1900 when it was just getting started? What might be your long term growth prospects then?
Ionis pharmaceuticals just might be that opportunity. Although today the company fits firmly into the category of “biotech,” there are indications that the company could evolve into a stalwart of the pharmaceutical market at an advanced pace.
Before we label Ionis as “tommorow’s Big Pharma” let’s examine exactly what determines which label a company wears. What makes a company either a “biotech” or a “Big Pharma” company, and what are the pros and cons of each?
BIOTECH, DEFINED
Both Big Pharma and Biotech companies deal in science based products and services that aim to improve human health. But that is typically where the similarities end.
A biotech is typically small. There are hundreds of publicly traded biotech companies with a market capitalization below $1 billion dollars. While that certainly may not seem small to your average investor, in the corporate world, that kind of company would be considered a minnow. In fact, any company with a market capitalization less than $20 billion dollars could actually be considered a biotech company, rather than an established pharmaceutical firm. For the sake of comparison, Eli Lilly, the biggest of the big, is currently valued at an eye popping $700 billion dollars.
I used the phrase “could be considered” because the market capitalization of a company is only one consideration. There is another critical distinction between Big Pharma and Biotech. Big Pharma companies have very steady revenue, and can be relied upon to churn out profits, positive cash flow, and dividends, year after year, decade after decade. Of course, nothing is fool proof, and there are examples of large, established pharmaceutical firms floundering financially, but in those cases, management was promptly shown the door. Investors expect that names like Pfizer, Eli Lilly, and J&J will always be profitable with a high degree of cash flow.
Investors in biotech often expect the opposite. Many of the companies with sub $1 billion valuations are so new, they don’t even have revenue, let alone profit. And many of the “more established” biotech companies with higher market valuations do have revenue from viable active products, but the company still may not yet be profitable.
The difference comes down to different cultures and different management decisions. Biotech companies are expected to be cradles of innovation, and new medicines created with new science takes lots of capital and many years to gestate. Because this new science is so expensive in money and time, many biotechs only have one or two new agents; either these agents work, and the value of the business sky rockets, or they fail, and formerly valuable stock can be worth nothing. Plainly stated, biotech firms are in the risky business of innovation, and its winner take all.
Big Pharma firms are much more cautious. They typically have dozens of different products across different stages of development with another dozen products actively being sold on the market. This diversification makes them much safer. Rather than betting everying on innovation, Big Pharma companies typically return some portion of profits to sharehiolders in the form of reliable dividends and stock buybacks. As we stated above, this approach is a tried and true method of producing impressive long term financial returns for shareholders….but the whole process is like watching paint dry. Johnson and Johnson may have generated a 1,600% return for investors over thirty years, but it was a long, slow, process. Biotech moves much faster, and a company can double in price overnight, or, (often) the exact opposite.
Enter, Ionis: The Little Big Pharma
In this context, Ionis pharmaceuticals really stands out as a small biotech with big ambitions. The company is currently valued around $6 billion dollars, which puts it firmly in the “middle of the pack,” in the world of biotech.
Additionally, the company boasts robust revenue from several products that are already actively sold on the commercial market. (Spinraza is the most well known). What the company DOES NOT feature is profit. Despite almost ¾ of a billion dollars in revenue, the business posted an operating loss of $270 million.
$700 million in sales, somehow producing a quarter of a billion dollars in losses? Well, that certainly would not sound appealing to your average Big Pharma investor. In fact, it might not sound appealing to any investor. But the appeal of Ionis comes down to two words: “Pipeline” and “Cash.”
You may remember, that one of the defining characteristics of a biotech company, as highlighted above, is an over reliance on just one or two potential products. Ionis is the dead opposite. The company is currently hemorrhaging money because management is going “pedal to the metal,” creating an impressive pipeline of inventive new treatments.
Leveraging breakthroughs in RNA based medicine the company has created a monster pipeline with no less than SEVENTEEN medicines in either phase II or phase III testing. These medicines fall into a wide array of diseases, addressing crippling, nightmarish diseases like ALS, Alzheimer’s and rare diseases.
The latest good news to come out of Ionis is a recent phase III triumph for its investigational drug Olezarsen. The trial was conducted in patients afflicted with familial chylomicronemia syndrome, a rare but deadly disease that creates abnormal triglyceride levels. With this data in hand, its very likely that the drug with be approved to treat this rare disease, but a much larger market beckons for millions of Americans who struggle to control their triglycerides, which can be critical for heart health. If Ionis were able to broaden the approval over time to included general treatment for high triglycerides, the company’s valuation could easily double or triple.
In short, Ionis is currently losing money because it is investing hundreds of millions of dollars to advance its robust pipeline. Management is not worried about making money today; rather they are investing to make much more money tomorrow. If they are successful in advancing just half of their 17 advanced stage drugs, just a few years from now they will have a very diverse and profitable world of revenue streams, just like the far larger Eli Lilly or Pfizer. Effectively, they will be a small Big Pharma.
Even with though management’s master plan is clear, it still takes a strong stomach to shake off losing more than $270,000,000 in a year. After all, one of the other hallmarks of a Big Pharma company is financial stability. Lilly or JNJ may have a bad year, or even couple of bad years, but investors sleep soundly knowing that they have plenty of cash and credit to back them up.
Amazingly, so does Ionis. They currently have more than $2 billion of cash in the bank. So, Ionis can afford to just keep building out their pipeline without worrying about keeping the lights on today. It will be many years before the firm has a hard time paying the bills. Ionis is an opportunity for patient investors to buy into a company churning out scientific discovery, without going through the heartburn typical of this field.
Evolution at Warp Speed
In the biotech world, one of two things typically happen to companies as their new drug pipelines move from theoretical to commercially viable. The most common, is that the owners sell the company to a Big Pharma; the patents and technology remain, but the formerly hard charging, experimental entity ceases to exist. Or, less commonly, formerly “one trick ponies” slowly diversify into more and more new areas, and over a period of decades they evolve into new Big Pharmas. The original biotech legends such as Amgen and Gilead are good examples of this phenomenon. Vertex Pharmaceuticals may be going through this process, right now.
Ionis may represent a rare opportunity to leapfrog this entire slow process in favor of radical transformation at warp speed. Right now, Ionis has just a few commercial products on the market. But with her latest phase III success, and much, much more in the advanced pipeline, Ionis could triple or quadruple revenue in just a few years. According to research published by the NYU Stern School of Business, companies in this sector often trade for 6.5 times revenue. So, if Ionis were able to triple it’s revenue by launching many new products, the company could easily leap in value to $13.5 billion, representing a share price gain of almost 150%. This would all be achieved by forging a durable, diverse pipeline with multiple growing revenue streams.
Many investors long for the growth of the biotech sector, but they can’t stomach the “all or nothing” nature of the game. Ionis sports an advanced, widely diversified pipeline and a strong cash position. This could mean a whole lot of upside, with less risk. Finally, a bet that seems appealing to both Biotech and Big Pharma investors.
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April 15, 2024
FOR BLOOD AND MONEY: A BIOTECH BOOK REVIEW
By the Sick Economist
How, exactly, does one get filthy rich in the biotech business?
For Blood and Money, Billionaires, Biotech, and the Quest for a Blockbuster Drug answers just that question. The book recounts the real life tale of the discovery and commercialization of a new class of drugs for blood cancer. It’s a gripping real world account with more twists and turns than a mystery novel, but principally, the book’s narrative serves as a sharp educational tool for any aspiring biotech investor.
Biotech for BeginnersThe book’s author, Nathan Vardi, is an experienced financial journalist who writes the book starting with the assumption that the reader knows nothing about the world of biotech. This rudimentary starting point is really what makes the book such a valuable learning experience. Vardi takes nothing for granted; while constantly striving to paint captivating portraits of the book’s main characters and add life to high stakes financial gambits, he never jumps to conclusions or leaves readers wondering about basic principals or concepts. The author does a masterful job of weaving together clinical explanations with bare knuckles business tactics, which is exactly what any successful biotech investor does on a daily basis.
Conflict and CompetitionThe biology behind biotech can sometimes seem dry or bewildering to the casual observer. That is why this is not just a book about biology. While Vardi doles out an impressive quantity of biological knowledge, he makes sure that the story is really about people.
He focuses on the real life power players that built twenty first century hematology/oncology. But you might be surprised by who has had a hand in those miracle therapies that have been curing lymphoma patients for more than a decade now.
Vardi draws a sharp contrast between the scientists and the business people who work together, and sometimes against each other, to give birth to new medicines. We are introduced to Robert Duggan, a mercurial “jack of all trades” business man whose previous experience consisted of cookie shops and medical devices before he decided to take a big gamble in the world of biotech. Another character on the business side of the ledger is Joseph Edelman, a high flying Wall Street money manager who decides to bet everything on an unproven molecule he bought for pennies at the biotech discount bin.
Contrasting against these non-technical, non-scientist movers and shakers are an array of Phd’s , MD’s and thought leaders in the world of cancer. The two very different types of players are forced to form an uneasy alliance to move their drug forward. Unsurprsingly, these two very different kinds of executives bring different viewpoints and ideas to the table, and that dynamic tension drives Vardis’s narrative.
The scientists and the rough and tumble entrepreneurs could be described, at best, as “frenemies.” But when push comes to shove, who will get their way? Who will walk away with the lion’s share of the profit? The scientists with decades of clinical experience whose vast scientific knowledge led directly to the breakthroughs, or the hard nosed business people who somehow manage to find hundreds of millions of dollars to fund these studies and slow research projects?
The answer wil teach the reader a lot about the world of business, and the world of biotech in particular. The reader will be both entertained and informed, two words that rarely go together in the same sentence.
Q & AMostly, the book is invaluable because it answers so many nagging biotech questions. If you are a true biotech rookie, you don’t even know what questions to ask, but the information offered will help start you off on the right foot. However, if you already have some biotech experience, then the book will be even better, because the narrative will hit on questions you may already have. Questions such as:
Why is it that biotech founders often end up owning less than 5% of the company that they founded? What are the different stages of drug development, and what are the pitfalls and promises of each stage?What are the considerations in the design and execution of a clinical trial? What are the challenges that must be overcome to run a successful clinical trial? What are the clinical and business considerations a biotech management team faces when formulating a commercialization strategy for a drug? How do partnerships work between small biotechs and major pharmaceutical giants? When, why, and how do small companies get sold? How is it possible for biotech entrepreneurs to make so much money from a drug that hasn’t even been approved yet?These are only a few of the topics that Vardis addresses as his narrative winds through the long and complicated history of a new blockbuster drug. Rather than running an MBA class or a technical manual for PhD’s, the author always keeps it interesting by focusing on people, purpose and conflict; he keeps his yarn fresh by ramping up the suspense around risk and reward.
For Blood and Money might be the closest the average biotech investor ever gets to being inside of the laboratories and board rooms where medical innovation is forged. Think of this book as “Game of Thrones: Biotech Edition” with a few covert science lessons from Mr. Wizard baked into the drama. Once you start, you may not be able to put it down. I certainly couldn’t.
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December 12, 2023
HOT BIOTECH STOCKS FOR 2024: THE YEAR WHERE CASH IS KING
1. Ionis Pharmaceutcals
2024 is the year where we will likely see poorly funded biotechs dropping like flies. Ionis investors can feel confident that their company will survive and thrive long into the future.
The company seeks to leverage RNA technology to help patients with unmet needs. Ionis sees itself as a “platform company,” meaning that the emphasis is on proprietary RNA technology, as opposed to any one particular disease state. This has lead to a diverse and advanced pipeline of commercially viable drugs.
As we write this, Ionis has no less than eleven drugs in phase three trials. Given that drugs in phase 3 trials make it to commercial launch more than 50% of the time, this means that investors can expect some serious revenue growth in the near future.
Additionally, Ionis has partnered with powerful pharmaceutical giants like Roche, Astrazeneca and Biogen to insure that the products receive a proper commercial launch.
Lastly, the company is sitting on more than $2 billion in cash and marketable securities. In the last nine months, they went through approximately $340 million in cash while advancing their research pipeline. This means that, even if, somehow, all of their phase three products flopped, they would still be well funded for at least 6 six more years. Ionis is in a solid financial position.
If you are looking for a company with a maturing research pipeline, and a hearty balance sheet, this would be your firm.
2. Abcellera Biologics
Abcellera is a company dedicated exclusively to the discovery and creation of new antibodies. These are proteins that act as “seek and destroy” agents in the human immune system. In effect, Abcellera is pioneering technology to soup up the human immune system so that you can more effectively destory unwanted invaders in your body.
Abcellera is another “platform” company. In other words, they focus on creating the most viable antibodies for a wide range of diseases, and they then partner with larger pharmaceutical companies who will carry the research to completion.
You could think of Abcellera as a gardner that is strategically planting seeds. In order for the investors to one day reap fruit from these sprouts, Abcellera must survive long enough to see the seeds grow. Abcellera is pursuing a patient, long term startegy, and they have the funding to match.
The company has $786 million in cash on their balance sheet, and they only burned $25 million during the past nine months while advancing their research. They have 110 active partnerships on antibodies they discovered. These partnerships span the entire pharmaceutical universe, involving big name players such as Gilead, Eli Lilly and Regneron. Even if it takes several more years for these partnerships to yield commercial products, Abcellera should be able to continue with their research unhindered.
Abcellera is only a good purchase for the patient investor. They are delving deep into the world of biological innovation, and their financial situation is optimized for this purpose. But it may take a while…..
3. Crispr Therapeutics, Inc.
Crispr is the definition of a company that is “turning the corner.” The company specializes in a kind of gene editing technology called CRISPR, which allows scientists to actually fix diseases directly at their genetic root. Up until now, most medicine is oriented towards treating symptoms of a disease, or temporarily surpresing it. CRISPR actually seeks to cure disease, once and for all, by fixing what is broken in a patient’s DNA.
That being said, its been a very long haul. When the technology burst on the scene ten years ago, it was immediately hailed as revolutionary. Crispr Therapeutics saw their stock rocket from $40 a share to $199 per share.
However, investors can be a fickle bunch. Like anything good, the technology took longer to perfect than many had anticipated. Investors grew impatient, and the stock price crashed.
Just this month, the company received full approval for its first commercial product, Casgevy. This is a one time treatment that cures sickle cell disease. Crispr is partnered with Vertex on this product. The smaller biotech will be entitled to an immediate, one time $200 million payment, and 40% of any ongoing profits. Some analysts calculate that the annual revenue for Casgevy could be over $2,000,000,000. This would yield a very nice haul for Crispr Therapeutics, which is only valued at $5 billion right now.
But Casgevy should be just the beginning. The company also has clinical stage products in the fields of oncology, diabetes and cardiology. Even if it takes years for the pipeline to further mature, the company is well funded. They have roughly $1.7 billion of cash on their balance sheet, but only burned $164 million over the last nine months. This means that the company can comfortably advance their research pipeline for years without having to worry about a cash crunch.
If Crispr Therapeutics were an airplane, they would just be leaving the ground, with every intention of flying high….
Every biotech investor knows that the last few years have been tough for unprofitable, fledgling ventures. 2024 looks like the year when many weaker, poorly funded ventures will fall by the wayside. While many small companies will be merely struggling to survive, these three firms look ready to thrive.
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