dimanche 8 septembre 2019

The little story of a tragic investment

In 2013, I was a shareholder of Questcor Pharma, a controversial company selling Acthar Gel, a drug that was very expensive, but very profitable for the company. 
But even if Questcor was aimed by Citron Research, the stock did mostly well and I managed to about double my money with it. Then, in 2014, Questcor was bought by Mallinkrodt. 

I kept my shares for a few months after the sale, but, soon, things looked not so good anymore, so I decided to sell all my shares, with an interesting profit. 

Things looked so-so for the last few years, but in 2019, things got awful. There's a big scandal now around several pharma companies which are blamed for their marketing practices which downplayed the risk of addiction from opioid-based drugs. Theses companies boosted the use of their drugs even if they knew that there was risks. And Mallinkrodt is one of them.

The scandal and the financial impact on Mallinkrodt are so important that the price of the stock decreased like crazy this year. For instance, on march 1st, 2015, a share of Mallinkrodt was sold for 126$.

These days, you can buy a single share of MNK for about 1,90$. 

A drop of more than 99% over the last 4 years and a half. Is that a good example of value destruction? Very few people could have done worse than that.
Some time ago, while the stock was much more expensive, Citron Research wrote that Mallinckrodt was heading to zero. It looks like they were right. 
The pharma sector looks like a sick and immoral place to invest money.  A lot of stocks have collapsed over the last 5 years, some from bad management, some from immoral decisions, some from bad conjecture and some from a mix of all that : Valeant, Concordia, Mallinkrodt, Allergan, Lannett, Teva…  Just take a look at a chart to see how bad it's been for all of them. 
I retain two lessons : 1- Avoid this industry (said that before, but I maintain my opinion) and at least, listen to Citron Research. Sometimes, they’re wrong, but, they are right slightly more often. 
I think I will build a hall of shame for all the greatest value destructors of the last 10 years. Please submit names. It would be a service to society to let that list be visible on my website.
On that list, there surely would be Mike Pearson (Valeant) and Mark Thompson (Concordia). Feel free to suggest some names.

4 commentaires:

  1. Nice post and I agree with all but 1 statement, "trust Citron research". Man those guys/girls are slimeballs. They have been wrong sooo many times, I'd love to see stats because I think they are wrong more than they are right. Look how many times they have put out short reports on Shopify, they've lost their shirts on that short.

    1. I don't really like the style of Citron: too much sensationalism. However, they may bring something interesting to our opinion about a specific stock.

      After reading your comment, I went to see their success rate and you're right. They're not right that often (about 53% of the time, at least on a financial level). I've changed my post a bit. Thank you for your comment.

  2. value destructors
    : snc lavallin: with its corruption issues, and its inability to manage his business when it cannot cheat to win contract anymore. bombardier with his big bet on cseries, its too wide diversification and its heavy debt forcing selling of protifable units over the years at the cheap. aimia with its obsolete business model struggling. yellow pages, already dead but does not know it

  3. CPH - Cipher Pharmaceuticals - I am down over 91% after their failed venture into US which destroyed a ton of equity, market capitulation on pharma multiples due to regulatory concerns, and their failure to diversify and launch new products despite of looming loss of exclusivity for current products with decreasing revenues. Failed launches from Canada to US (often through overpriced M&A) are quite common value destroyers for TSX companies. Recently, there was a management harakiri and no news on what is going on. IR and management ignore inquiries from investors and keeps retail investors in dark. It is trading at book value and around 4x cash flow. My market value is just 44 so it is not worth selling and I have trust issues with board/management and do not understand the vision / future business model to buy more.

    I also have a lot of bad energy service names like BDI - Black Diamond Group - which rents out modular buildings and has had their work camp occupancy drop down to high teen during the oil drilling downturn after a massive debt fuelled expansion. Their assets are also rapidly depreciating and they have destroyed a lot of equity by selling off assets "over book value" in the midst of the oil downturn at bottom dollar to pay down debt. I have bought two dips on this one and am still down 71%.

    Both of the above examples have aggressive insider buying and are very attractive from value side but I am not sure I trust the leadership due to broken promises, fickle management, and continued multi-year poor financial results. If they keep trading low, I might reevaluate them in January since they are in my TFSA.

    Other failed, overlevered M&A done by selfish, greedy management which I got burned on include CXR (essentially total write off after "business firing on all cylinders" BNN interview by mr. lamborghini), VRX/BHC (still 64% loss and no sight of actual profit after several years of stabilization/"growth"), ALA (38% loss on subscription receipts; Altagas tried to buy a US utility and mismanaged financing so much that the company was forced to sell/spin out a lot of assets sometimes at less than 1/2 fair value to not go under; despite of throwing the shareholders under the bus, the company as a whole is now a lot less diversified and has a much more cyclical earnings and a ton more debt - ie everyone is worse off except for the management with their golden goodbyes and investment bankers/lawyers), HLF (this was discussed by Penetrator before), etc.

    A common thread among a lot of these examples is poor incentive structure for the management, which motivates them to take risks and grow at any price rather than be motivated by improving the quality and long-term sustainability / moat of the earnings and overall shareholder returns. Many Canadian CEOs also seem to try to boost their egos by buying US companies and corporate jets etc to try to pretend to be more successful than they are. Why do any CEOs need corporate jets these days? After my experiences, I do not trust any management and am very suspicious of the numbers they report since they are often not accurate and sometimes restated months later. We need more Mark Leonard's out there to be CEOs … to focus on doing the right thing rather than their next bonus.

    Straight our liars with convenient margin calls in the carribean who drive under billion dollar companies should also have to face consequences for their intentionally reckless actions rather than be allowed to live happily ever after and enjoy the spoils of their bad behaviour. Going out of their way to mislead others into a burning ship while taking steps to profit out of their misfortune and minimize any losses to themselves is not ethical, even if it is not properly regulated in Canada. You will be a celebrated businessman when you steal millions in Canada while you will be arrested if you steal a potatoe or piss on the street.