SHORT-SELLER "ANALYSIS" — REBUTTAL
' I have read the short attack on ProMetic Life Sciences ( OTCQX:PFSCF)(PLI.TO) by an anonymous author called Black Mamba on Seeking Alpha. I don't own any shares in PLI and don't know enough about the science to make this a full-blown rebuttal worthy of article status, but I know a clear lack of analytical integrity when I see it. I won't stand by idly and I will call out the pieces of that article that I know present extreme bias.
I am no stranger to writing short-biased articles on Seeking Alpha. On the last short article I did on Real Goods Solar (NASDAQ: RGSE), the stock is down over 90% in three months after it was published. Other successes of mine involving companies closer to home include calling the bankruptcy of Lightstream Resources Ltd. ( OTC:LSTMF)(LTS.TO) and the downfall of Valeant Pharmaceuticals (NYSE: VRX)(VRX.TO) when it was still trading over $100. I have a TipRanks rating that hovers around the top 10% of all 10,000 "experts" ranked with an average return of just under 10% and success rate of about 50%. I would say that my short calls have been more successful than my long calls (my Canadian microcap picks like PKK and KEK don't count in that ranking as they were blogs on Seeking Alpha, not articles). The point of mentioning all this is that I think I know when a company has signs of real trouble and I have a history to back it up. PLI doesn't look like a troubled company, it looks like a typical biotech.
When I did my short articles, I did them under my real name. A lot of people say that shorts have an incentive to be right in their research because they are leaving themselves out to excessive criticism even if they are right and possible lawsuits if they are wrong. Well, to me that only applies to people who actually write under their real name, not hide like cowards behind some pen name like Black Mamba. This user only has the PLI article under their belt; there is no history of success presented to suggest that they remotely know what they are talking about when it comes to stocks.
The first part of the Black Mamba article that I have extreme distaste for is this statement:
In ProMetic's 18-year history as a public company, it has only successfully commercialized one product line: a no-growth $20mm/year resins business. Over this time period, the Company has touted a variety of products that were in clinical development, all of which have gone nowhere. In fact, we count 18 development programs that have been mentioned over the Company's history, 15 of which are no longer discussed. Not a single one of these products has ever gotten beyond Phase 2 trials, let alone commercialized
The statement itself is not what I take issue with. I assume that it is factually accurate. What I take issue with is that it has been presented with absolutely no context. It is a well-known fact to anyone with any biotech investment experience that the vast majority of early-stage drugs fail. That's why so many companies with the "cure for cancer" trade at well less than $100 million market cap. Taken from the executive summary of bio.org's Clinical Development Success Rates 2006-2015:
This is the largest study of clinical drug development success rates to date. Over the last decade, 2006-2015, a total of 9,985 clinical and regulatory phase transitions were recorded and analyzed from 7,455 development programs, across 1,103 companies in the Biomedtracker database....The overall likelihood of approval (LOA) from Phase I for all developmental candidates was 9.6%, and 11.9% for all indications outside of Oncology.
Only around 10% of Phase I drugs get to the approval stage. If PLI has had past and present 18 development programs and three still remain, it sounds like the company is right there among the average of all companies. Going 0 for 15 with three chances remaining and one in-market product isn't great, but it also doesn't exactly make PLI an outlier either. Had the author any journalistic and analytical integrity, they would have at least mentioned that the vast majority of early drug candidates fail, and ProMetic has thus far not been any different than that majority. But the way it was portrayed it's as if ProMetic is led by these incompetents that fail at just about everything they do. Patrick Laine has 18 goals on 91 shots so far this NHL season, for a shooting percentage of less than 20%. He must be garbage, right? That's what someone who doesn't know anything about hockey might think until they are told that most goalies save over 90% of the shots they face, so he has a shooting percentage that's more than double of the league average. Presenting PLI's past development program as a failure is a red herring designed to sucker inexperienced investors who don't know biotech and who don't know the risks of biotech investing out of their shares. Actually, it might be to the company's benefit that these people are discouraged from investing in the stock if they are freaked out by that past failed drug pipeline.
The second big no-no against ProMetic according to Black Mamba had to do with all things financial - past guidance misses, penny stock promoters (at a time when PLI was actually a penny stock so it made sense) and capital raises. The share structure has grown from 25 million to 604 million over the years. All that stuff is fair and in the public domain, but again absolutely no context was provided. Biotech is a hungry beast when it comes to cash burn and revenues are notoriously hard to predict especially in a regulatory environment led by the FDA and Health Canada. Just look at the stories of ACADIA Pharmaceuticals Inc. (NASDAQ: ACAD) and Sarepta Therapeutics, Inc. (NASDAQ: SRPT) over the past three years as great examples of the struggles to get to market even with late-stage drugs that proponents (not just shareholders, but patients, their families and their doctors) have been banging on the FDA's door to approve.
PLI's "failure" thus far can be wrapped up in one neat little line item on its balance sheet. As of September 2016, the company has an accumulated deficit of $384 million. That sounds like a lot, right? Well reading the tone of the Black Mamba article you certainly would think so, and assume it's all going down the drain to fund management salaries. But let's take a look at the two companies I mentioned as an example. And keep in mind I didn't cherry-pick either. These are the first two pre-revenue biotechs I thought of that had valuations larger than PLI. I have written about both of them on Seeking Alpha in the past. ACAD has a whopping $855 million in accumulated deficit and SRPT's accumulated deficit is over $1 billion. ACAD just began prescription sales and SRPT recently had FDA approval (though insurance payers are pushing back) so they are much further along than PLI, but the point is that blowing a lot, and I mean A LOT of money is not unusual in biotech, it's the norm. With that norm comes aggressive sell-side analysts with lofty targets who may own shares and who may have had further business involvement, like setting up a company's IPO or being the lead bookrunner for secondaries. For anyone who questions the validity of Beacon's $10 target on PLI, I urge you to have a look at the coverage list of Wedbush and some of that firm's lofty targets on biotechs over the years.
The last part of Black Mamba's article was about questioning the science and I will defer to others who are more versed in this to challenge the claims made in that section. I'm not going to pretend to know enough about the science and frankly I don't care enough to do the hours of research it would take to do so, so I will forego the penny per hit I would get if I tried to submit this as an article and go with this incomplete rebuttal as a blog. Ultimately it's the science that is going to support this billion dollar plus market cap, which is quite heavy for a pre-revenue biotech. So the science has to prove to be something special and highly marketable and I am not in a position to prove or deny that. But hopefully people appreciate my efforts where they were in pointing out the obvious biased reporting in this short attack against PLI.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.'
Jim |
