Thursday, September 25, 2014

Management Turnovers at Pharmacyclics (PCYC)

So someone told me about this company with a wonder drug. She loves the product but got this weird feeling about management. Maybe it’s the way management interacted with each other on the latest earning call, or the way they answered analyst questions. She could not put a finger on what it is.

She also told me they just got a new chief commercial officer but the chief medical officer (CMO) just left. So naturally I googled the CMO’ name. Multiple names popped up. Digging deeper here’s the summary timeline I found:

·         Dr. Ahmed Hamdy - appointed CMO March 2009
·         Eric E. Hedrick - interim CMO sometime around 2011
·         Lori Anne Kunkel - appointed Dec 2011; departed July 2013
·         Jesse Seton McGreivy  - departed Aug 2014

So you have 4 CMO’s in 5 years.  When a company’s CFO or Chief Accounting officer leaves, you worry there’s something wrong with the numbers. But how about when a biotech’s CMOs keeps leaving?  Do you worry that the product is fake?  Is it even possible to fake your way through FDA approval?

More research. What is wrong with Pharmacyclics, Why would top executives keep leaving?

·         Nothing positive in Caf├ęPharma. Let’s just say this is a highly entertaining board. You got threads  named “Pharma-stall-ics”, “Pharmasucklycs”, and “Pharmafuckyclics”.. .etc. Definitely some employee relationship issues here. There are also widespread mentions of wrongful termination suits.
·         A post on investor hub paints an unflattering picture of COO, and mentions former CMO Lori Kunkel.
·         Bloomberg  article. Lots of insinuation here when the article talked about Duggan’s association with fraudster Slatkin. The article spent almost no time on what Duggan did at Intuitive Surgical (which would have added to Duggan’s credibility).

Obviously all of the above could be written by people with agendas. The fact though, remains that you got 4 CMOs in 5 years at a biotech. I doubt CMOs leave due to “work life balance” issues because these are overachievers and probably workaholics to begin with. It’s also hard to explain this as CMOs asking for big pay raises because well, you should pay them.

I get the sense that this tight clique of Duggan, Zanganeh, and Erdtmann calls all the shots. Given the rampant turnovers and the colors above, I can only infer that at best that the top management are unpleasant dictators, at worst there’s something unethical going on.

But, they have an awesome product!

Does all this matter when you got a hot product like Imbruvica?  In general, when do management matter the most?

First, if this is a fraud then obviously all bets are off. Again, is it even possible to fake your way through FDA approval? Granted that EVP of Corporate Affairs Ramses Erdtmann is a Scientology Operating Thetan VIII, which according to Wikipedia gives him the power to "control others from a distance" and "create illusions perceivable by others", the probability of a fraud getting through FDA has to be pretty small.

Second.  If it’s not a fraud but top management are major tyrants, does that matter? I think it depends on context:

o   If the company’s valuation depends on the ability to keep innovating and create demand (think Apple and Steve Jobs), then management competence matters a lot, but management likability not as much (again Steve Jobs was known to be a bit of a dictator).
o   If this is a mature / growing company trading on say 15-20x earnings, management have to optimize revenue, control cost…etc. Clearly management matters a lot more.
o   In PCYC’s case though, the company is trading on vast market potential of a single product, Imbruvica. The patient demand already exists. The product is already there, theres no more innovation that’s needed. The science either works or it doesn’t, and there’s nothing management can do about it.

Ultimately, this comes down to how PCYC fits into your investment style. If you’re allocating to numerous small positions with catalysts for quick pops, then management matters less. If you’re trying to find that rare company that's built to last, then I'd say this is not the situation for you.

**** Updated 10/2/2014 (originally posted on Seeking Alpha Instablog)***

I normally don't like to dwell on management too much. In fact in my blog post here I concluded that management turns at PCYC can arguably be a secondary consideration depending on your investment style.

Then I learned that the drugs are made in China. Why would you do this? So you have a biopharma who keeps losing medical/science personnel; core executives couldn't answer questions about IMS data in their own presentations (and get yelled at by the Morgan Stanley analyst). And oh, by the way the drugs are made China.

I don't have the guts to outright short this company given strong reviews about Imbruvica, but at some point the red flags pile up and I stop looking further.

1 comment:

  1. Nice blog and some good original analysis. Interested to see a post on your general philosophy, background, etc.