Why I sold some Retrophin yesterday (and why I still own some)

Tuesday, 15-April-2014

A few people have asked me to expand on why I sold some Retrophin (Nasdaq: RTRX) yesterday, and whether I thought the stock’s 15 percent drop was warranted.  For full disclosure, I’ve owned Retrophin since July 2013. While I am sufficiently concerned about the company to warrant dialing it back a little, I do still own a decent sized position.

 

Introduction

 

To understand why I sold, you have to know what my strategy has been from the outset with the stock. As a long-term investor, plain and simple, investing in Retrophin is a long-term bet on Martin Shkreli.  I’ve seen him present at conferences, and have personally spoken with him over the phone, and each time I have been very impressed. Martin has already accomplished some big things at a young age, and I think he has the chance to be real star one day.  I normally try to hold a stock for at least three years, but in a case like this with a young CEO starting a new company, five to ten is probably more like it if things really go well.

 

When I began buying the stock back in July, people asked me what in the world I saw in the company’s programs? My answer was that I am not even focused on it at this point.  Retrophin is young company and I expect it to go through a lot of iterations over time.  Sure enough, Martin has already done a couple of smart deals, and the company looks completely different than it did just a short time ago.  I am sure this is still only the first inning, so the same mindset continues to apply.

 

By far what is WAY more important to me than any individual program right now are the signals Retrophin sends about what kind of company it will be.  I’m looking for early signs about how professional they are, their strategy, and how trustworthy is the management.  It is the big picture that is important at this time, and those are the things that shape it.

 

So let’s fast-forward to the PKAN issue and I will explain why it is meaningful for the stock.  To be clear, the PKAN program itself would not ordinarily be very critical.  I view it as a tertiary program, and expect Martin and his team to come up with a lot of candidates like that in the future.  Probably nine out of ten will fail, but hopefully one will connect big one day.  I’m not going to obsess over any particular drug succeeding, especially the first one out of the gate.

 

With that being said, why this particular program actually is very important is because, being the first program developed completely within Retrophin, it sends important messages about the company’s overall knowhow and skill at drug development.  It is also an important reflection on other current and future programs.  With that being said, let’s see how they have done.

 

Progress

 

The first time I started paying close attention to the PKAN program was during this November 18th conference call where Martin said the trial would “begin enrolling in December 2013 or January 2014.”  Since that time he has publicly hinted that a start was imminent at least a handful of times.  They include this tweet on December 6th, this tweet on January 28th, this investment conference presentation on February 11th (I personally attended), and this quarterly conference call on March 27th.  I even had the following twitter conversation with him about it as recently as Friday afternoon:

As you can see, the timeline has drifted quite a lot since November.  Of course, everything culminated with this press release yesterday where the company announced that FDA has asked for more preclinical data before investigators are allowed to start dosing.  The new guidance is that a company-sponsored trial will start sometime this summer.

 

What signal does this send?

 

Given the way this story has unfolded, it creates two concerns for me as a potential long-term investor.

 

First, it does not speak very highly of the company’s ability to plan.  An obvious question would be: what made Retrophin so confident throughout time that a trial would start imminently?  While I have never personally worked with the FDA, I know from investing in companies who do that it is a very complicated process.  Furthermore, the experience of having been through it before counts a lot.  This setback makes me wonder if Retrophin was prepared at all for the types of things FDA was likely to require?

 

That’s an important question because it speaks to the company’s experience and ability to get things done in the future.  It might also reflect on current timelines of some of their other programs.  For example, when Retrophin first licensed the Syntocinon product from Novartis, they originally said it would be reintroduced to the market in the second quarter.  However, now the most recent guidance has changed to a third quarter launch. After the PKAN delays, it makes one wonder if the company is running into similar FDA issues with Syntocinon?  The problem is that from the outside, you’ll never really know so there has to be a big trust factor.

 

Second, the way this has unfolded has given me some concerns about how the company communicates its story to investors.  As you can see by things like the conversation above, I’m not sure I’ve always been dealt with as an investor in an entirely straightforward manner.  Another cause for concern stems from a family who has been publicly posting their version of these events on Facebook (they are hoping their sons will be first to try the PKAN drug).  I’ll be kind by simply saying what they’ve written hasn’t always matched Retrophin's guidance perfectly. However, oftentimes those things can be unreliable, so I guess there is no sense in focusing on it too much.

 

To be fair to Martin, investors have been putting a lot of pressure on him lately (a huge understatement).  You can bet people have been asking him for updates about these things constantly, and I completely understand how, in such a dynamic environment, it can be a challenge to keep up.  Personally, I think one of the neatest things about Retrophin is how open and interactive he is on twitter.  It is breath of fresh air compared to what most companies do, so I hope he keeps it up.  Considering all of that, I’m willing to go far to give Martin the benefit of the doubt on these things.  However, good communication is something that investors take very seriously, so the company must show improvement over time. 

 

Where do we go from here?

 

So let me say a few things about where that leaves us.

 

First of all, as much as I’d like the stock to go up, it absolutely makes sense that it sold off so much yesterday. Stock prices are about risk vs. reward.  The reason I sold some, and I’m sure other investors probably felt the same, is because you have to discount more execution risk into the stock after yesterday’s news.  I took a look at what type of company this might be, and there were some things that legitimately gave me pause.  However, they can be fixed.

 

To be clear, I’m still betting that the company’s future will be bright.  The reason I still own a decent amount of stock is because there is a lot to like here.  The company is focusing on therapies that have the chance to improve patients’ lives significantly.  Martin is very smart, and the deals he has done so far have been incredibly attractive. Also, for such a small company, it helps that it is nicely diversified and being run in a very efficient manner.  If only one of these programs hits it big, patients are going to benefit a lot and the stock should appreciate accordingly.  I have no doubt he can do it.

 

My advice to Martin and the company overall would be the following: I know he wants to hit the ball out of the park on his first swing, but you don’t have to be that aggressive.  For example, nobody would have cared about this PKAN delay if the guidance hadn’t been so definitive to begin with.  It’s just unnecessary.

 

Owning a significant piece of the company puts him in a unique position.  It means he doesn’t have to bow to some of the same short-term pressures that other biotech CEOs face.  I’d recommend that he just focuses on doing the job right and building lasting value over time.  Singles and doubles are just fine.  Take your time, learn from these things, and keep improving every day.

Who Am I?

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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