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Summary

  • Retrophin's press releases sugarcoat and hide negatives.
  • Retrophin has taken on debt at high rates, which suggests the company is a bankruptcy risk.
  • In addition to the high rates, the loans are dilutive, as warrants were issued, and some of the debt is convertible to equity.
  • Retrophin announced it's selling another company's drug, but at financial terms that suspiciously aren't disclosed.
  • The CEO made up a new "non-non-non-GAAP" financial accounting term: Earnings Power Per Share. Aggressive use of Non-GAAP measures are a red flag.

Martin Shkreli, CEO and founder of Retrophin (NASDAQ:RTRX), is treating biotech investors like little kids by misleading them and sugarcoating news, and having the attitude of "it doesn't matter what my company is worth, what matters is what it's PERCEIVED to be worth". Last Friday, this attitude was apparent in the company's two press releases.

I understand what Mr. Shkreli's mindset probably is. Before he started Retrophin, he was running a biotech hedge fund. He often shorted highly overvalued microcap biotech companies. One day, while he was watching one of those biotech companies he was short rise up on him on a BS press release, he probably realized it would be much easier to run his own smallcap biotech company than try to short them.

Evidence of this is on May 23rd, when asked if he still actively trades, he tweeted:

"no. THANK GOD"

And so Retrophin began.

Analyzing The Press Releases

First off, before the press releases were published, earlier that day Shkreli tweeted:

"Everyone having a nice day?"

Then, when he was asked how his day is, he replies: "this is one of the best days of my life!" I can't find the tweet now, so he must have deleted it, but it's explained in a Bloomberg article.

By tweeting this when Retrophin did release the news, it gave everyone the go-ahead to feel excited about it. This indicates that Mr. Shkreli thought biotech investors need this kind of assurance that the news is good. Otherwise, if Shkreli didn't tweet that, then they might take it as bad news and the stock could have just as easily dropped, instead of going up.

In the first PR, Retrophin announced that it entered into a license agreement for the drug Thiola from Mission Pharmacal. In the PR, it says:

"Financial terms of the agreement were not immediately disclosed."

Why didn't Retrophin release the financial terms? I have to assume because they aren't very flattering. If the financial terms were good, I'm sure they would've been disclosed.

Also in the PR, it says:

"Thiola marks Retrophin's first deployment of a salesforce."

Thiola treats cystinuria, a rare disorder which can cause kidney stones, an extremely painful affliction. If it is a successful treatment, then why does Retrophin need a salesforce to sell it? Why does it have to convince doctors who have patients who are writhing in pain to give the treatment?

Further in that PR, Retrophin raises revenue guidance. It also uses a term that thestreet.com biotech guru Adam Feuerstein tweeted:

"Congrats @MartinShkreli for making up a new non-non-non-GAAP financial accounting term: Earnings Power Per Share."

In the PR, Retrophin defines "earnings power per share" as:

"This press release also refers to projected earnings power per share. This measure reflects non-GAAP projected earnings per share adjusted to exclude certain projected expenses, including research and development expenses, public company related expenses, interest expense and taxes on projected earnings at the Company's anticipated effective tax rate."

That excludes just about every expense except COGS. Are we supposed to value biotech companies at price over earnings power per share multiples now?

In the next PR of the day, RTRX announced that it is borrowing $80M, with $40M of it at high rates. Notice that RTRX issued this release in conjunction with the Thiola license agreement. Probably not a coincidence.

The first loan is $40M, at an 11%+ interest rate. This is an extremely high, distressed rate, and investors should take note that this high rate suggests the possibility that Retrophin will face bankruptcy down the road. Also, Retrophin gives this same lender 300K shares of warrants at an exercise price of $13.93 per share.

Then, the PR also explains that the company is issuing $40M of senior convertible notes at a 4.5% rate. These notes are convertible at a price of $17.41 per share. So that's another potential dilution of a whopping 2.3 million shares, if the stock goes above $17.41.

In the PR, it's quoted:

"We were pleased to obtain non-dilutive financing," said Martin Shkreli, Founder and CEO of Retrophin.

How on earth are these loans not dilutive financing, Mr. Shkreli?

Are the loans a good deal for the lenders? The lenders are taking quite a bit of risk, but the rewards make up for it. The first $40M lender is charging distressed rates of 11%+, and is getting warrants. Just the fact that this lender received all that from Retrophin should give stock investors pause about the long-term risk they are taking.

The second $40M loan is senior to the other one, so its rate is smaller, but it can still convert the entire amount into shares at a price not much higher than what the stock is trading now.

Retrophin acquired Manchester Pharmaceuticals, which it bought for $62.5M. That company has drugs on the market, so it can be sold to repay part of the debt in the case of a bankruptcy. RTRX can also undertake more share dilution if its earnings aren't good enough, which it likely will at some point in the future. It wasn't disclosed if the debt deal includes earnings covenants.

High CEO Salary

An additional note, Mr. Shkreli receives a $1.48M salary, as shown on Yahoo Finance. That's a lot more than what he was making running his sub-$100M hedge fund. And he doesn't even have to show real, metric results anymore.

Conclusion

As much of RTRX's value has been bid up by hype in the past, I think investors are more wary now. With the pullback in biotech, investors are looking for value instead of hype. I think the intrinsic value of RTRX is likely much lower; please look at this article for a deeper, bearish analysis of its value.

Disclosure: I am short RTRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Retrophin's Press Releases Have A Lot Of Sugarcoating