BioDelivery Sciences - A Money Losing Opioid Company Founded By The Bankruptcy Experts

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About: BioDelivery Sciences International, Inc. (BDSI)
by: Fuzzy Panda Shorts
Summary

BDSI was founded by Frank O'Donnell who has a 30 year history of public company bankruptcies, shareholder lawsuits, and SEC investigations into companies he was the Chairman of.

Insiders are Selling (Frank O'Donnell & Broadfin Capital).

BDSI pays doctors with questionable history and engages in other questionable business practices like co-pay cards for free opioids.

BDSI is an unprofitable opioid company with high cost 12.5% debt.

10-K disclosure shows that generic Belbuca (BDSI's only growing drug) could be coming sooner than management has indicated.

We are short BioDelivery Sciences International (BDSI), a money losing opioid manufacturer that was co-founded by Dr. Frank O’Donnell, Jonnie Williams’ long-time business partner. Dr. O'Donnell and Jonnie Williams are two individuals whose companies have a 30-year history of stock wipeouts (Source) and shareholder lawsuits for providing misleading information (Source). The SEC charged Williams with a fraudulent stock promotion scheme of Spectra Pharma where he agreed to a permanent injunction and to disgorge profits (Source); O'Donnell was Spectra's co-founder with Williams according to the Boston Globe. Another company, Lasersight, which O'Donnell was chairman of had SEC charges brought against the CEO for embezzlement (Source). Jonnie Williams has even admitted to bribery of the former governor of Virginia (Source). Frank O’Donnell has been prominently involved in BDSI, initially as one of the co-founders and CEO and recently as the Chairman of the Board. Through our work, we discovered that Jonnie Williams has been involved in BDSI as a significant shareholder throughout the years.

BDSI borrows business practices from the Insys & Purdue Pharma playbooks (two notorious opioid manufacturers) that resulted in DOJ convictions of doctors and company representatives. BDSI’s questionable business practices involve both the paying of questionable doctors and providing of co-pay cards allowing consumers to get access to free opioids. However, BDSI has an important difference, which is that they lose money hand over fist. They burnt through $6.5 million of FCF from operations in the last quarter Q3-2018, $30 million over the last 12 months, and have a $344 million accumulated shareholder deficit (Q3-18 pg 1 & 4).

The background of the highest paid doctors from BDSI are questionable (ProPublica – Doc Dollars; CMS OpenPayments Database). Their top-paid docs include doctors who:

  • Dr. Ralph Reach who had their home & business raided by the DEA (no charges have been filed as of publication but the DEA seized hard-drives & cell phones - Source) and had previously lost their medical license for substance abuse (cocaine, opiates, and alcohol).
  • Dr. Guarino who received high amounts of Insys kickbacks while prescribing high levels of Insys’ Subsys drug and was named in Senate documents for doing so.
  • Dr. Soper who committed medical malpractice (Source).
  • Dr. Pergolizzi who used false credentials (Pergolizzi – LA Times Story)

Another major red flag is that Cherry Bekaert (of MiMedx fame) is BDSI’s long-time auditor. MDXG is currently attempting to restate their last 5 years of financials for which Cherry Bekaert had given unqualified financial opinions and approved. Additionally concerning as it relates to oversight is the fact that the “independent director” that is the head of BDSI’s audit committee is on the board of another Frank O’Donnell OTC company, HedgePath Pharmaceuticals (HPPI:OTC).

Insiders are voting with their wallets. Importantly, Frank O’Donnell has consistently been selling shares, which based on his 30-year track record of shareholder wipeouts, is a good indication that it is time to sell. Broadfin Capital, a 17% owner of BDSI that was in charge of the recent overhaul of the Board of Directors has also filed to sell 100% of their shares at prices below today’s market price. (Source) We think that the Broadfin sale will occur shortly after Q4 results are released due to them being on the board and restricted from selling currently.

We are short BDSI because (1) Frank O’Donnell and Jonnie Williams are involved; (2) it is a money losing business at the center of the opioid crisis; (3) management engages in questionable business practices such as paying doctors with bad reputations and providing reimbursement cards for the co-pays on opioids; and (4) insiders are selling their stock.

Dr. Frank O’Donnell - The Key Figure at BDSI Involved in 30 year History of Shareholder Wipeouts & SEC Investigations.

Before diving into BDSI's fundamentals we want to introduce investors to Dr. Frank O’Donnell. Dr. O'Donnell and his business partner Jonnie Williams have a 30-year plus investment history of public company wipe-outs. However, the deals have been profitable for O'Donnell and Williams because they have historically been able to sell out before the stocks collapse and pay themselves exorbitant salaries along the way. O'Donnell is best described as the puppet-master behind the scenes.

Frank O’Donnell is one of the founders of BDSI and is currently a director of the company. He served as the CEO (until 2005), on the Board of Directors (2002-present), and was Chairman of the company (2002-May 2018). Importantly, Frank O’Donnell has been selling a lot of shares. Jonnie Williams does not have a role at BDSI but we discovered that he has shown up as a significant investor in past filings.

BDSI has paid Dr. O'Donnell $9.95 million over the last 5 years ($1.77 million in cash and awarded $8.2 million in stock & options) (Source 2013-2017 proxies). The average compensation for other directors during this time period was $58k cash and $201k all-in per year. O'Donnell has been paid ~990% more than the average director for his board service at BDSI as he oversaw $179 million of FCF burn during that time.

Frank O’Donnell is Jonnie Williams’ Long-Time Business Partner:

Companies that Dr. O'Donnell and Williams have been involved in together have a colorful history. Two of their enterprises ended with SEC investigations: (1) Spectra Pharmaceuticals (and Williams) were charged for a pump & dump – profits were disgorged without admitting wrongdoing (1994) and (2) While O'Donnell was Chairman, Lasersight’s CEO was charged with fraud by the SEC (O'Donnell had previously been the CEO). Another company, Star Scientific, ended with the Virginia Governor being found guilty of corruption after Williams admitted to paying the governor bribes to promote their product (2013). Additionally, O'Donnell & Williams were involved in 10+ complete shareholder wipeouts.

Even Dr. O'Donnell's own ex-wife, Katie O’Donnell, accused him of marital FRAUD and the courts agreed with her (Source – Line 8). O'Donnell was found to have transferred assets in order to hide them from his wife and remove them from their estate.

Newsweek described Dr. O'Donnell and Mr. Williams investment strategy in the following words (Source):

“They would take over a medical-related product or service company, proclaim it had developed a medical breakthrough without providing reliable data to prove it, pump up the stock price with those false claims, pay themselves generous salaries and options out of proceeds from stock offerings, then sell their shares before leaving behind a company that collapsed in financial ruin.”

~Newsweek – January 23, 2014

This is nothing new. O'Donnell & Williams have been up to this for a long-time. While Frank O’Donnell is less well known than his long-time and notorious business partner Jonnie Williams, The Boston Globe did an exposé on the two of them all the way back in 1988 (Source).

Old proxies show that Jonnie Williams has been involved in BDSI

We found Jonnie Williams hiding within the BDSI capital structure within a shell investment company, Hopkins Capital Group II. Hopkins Capital Group has mysteriously been able to stop reporting their interest levels in BDSI too. In 2004 Jonnie Williams showed up as a 16.5% owner of BDSI via owning 1/3 of Hopkins Capital Group II, LLC, which owned 44% of BDSI when it went public (2004 Proxy Pg 3 & 4 note 2 – see below). In 2007, BDSI stopped disclosing who beneficially owned Hopkins Capital Group II, LLC only stating that Frank O’Donnell controls the stake and was partial owner, allowing Jonnie Williams to hide from public eye within the capital structure.

Hopkins Capital Group fully disappeared from the public eye in November 2016. Hopkins Capital Group stopped disclosing stock sales because Frank O’Donnell removed his name as “Manager” from the investment company and disclaimed his interest in his shares. This move apparently resulted in Hopkins Capital Group no longer being required to report share sales to the SEC and investors can see how they disappeared from the cap table between 2016 & 2017 (2016 Proxy pg 43 vs 2017 Proxy pg 52). The last Form 4 we have shows that Hopkins Capital still owned 1.28 million shares of BDSI (Form 4), and the fine print on the form 4 shows O'Donnell disclaiming his interest causing Hopkins Capital's sales to no longer be reported. Additionally, Jonnie Williams’ family trust shows up in the 2011 filings as owning shares directly in BDSI, which was reported because Frank O’Donnell was the trustee of the “Jonnie R. Williams Trust” (2011 Proxy pg 86 Footnote 3).

The Bankruptcy Experts - A Brief History of All of Frank O’Donnell’s and Jonnie Williams Past Companies:

We are briefly going through all of O'Donnell & Williams' past deals so investors can see the common theme of a great idea that could be a big business but instead shareholders end up losing 100% and the companies go bankrupt. Additional resources for more information are the previously mentioned Boston Globe exposé or this Newsweek one.

CME-SAT (1983)Business Idea: Training videos for medical specialists.

Shareholder results: -100% (Bankruptcy) (Source - Newsweek)

O'Donnell’s Position: Chairman of Board & Medical Director

Lawsuits/Regulatory Involvement: Court records show universities & teaching hospitals threatened to sue and withdrew support of CME-SAT when the universities realized they had been deceived by O'Donnell and Williams in multiple ways (see Globe article).

O'Donnell and Williams results: According to Newsweek they made more than a million through stock sales; reportedly also paid themselves high salaries.

Spectra Pharmaceuticals (SPTPQ) – (1985)Business Idea: Vitamin A enriched eye lubricant that claimed to cure wrinkles and dry eyes.

Shareholder results: -100% (Bankruptcy) - (Source - Boston Globe Article)

O'Donnell’s Position: Co-Founder and 10% owner (Source - Boston Globe Article pg 2)

Lawsuits/Regulatory Involvement: The SEC and Massachusetts Securities Division separately charged Jonnie Williams with fraud for doing a pump & dump with Spectra (Source). SEC also alleged that Spectra distorted the truth about the benefits of their eye solution. Williams agreed to a disgorgement of $294,844 of profits with SEC and a $100,000 penalty with Massachusetts Securities Division (see newsweek article). (SEC vs Jonnie Williams et al; 93-12789JLT, D Mass)

O'Donnell and Williams results: O'Donnell and Williams made more than $1 million according to the Boston Globe. The SEC complaint shows they sold shares while Williams paid for “seemingly independent” research reports touting Spectra stock that were mailed out by a company owned by O'Donnell and Williams. (Source - Boston Globe and SEC vs Jonnie Williams)

Other Sources – CBS Article; NY Times Article on Spectra;

Eye Technology (merged into Star Tobacco – later Star Scientific) – Money-losing optical lens manufacturer according to Forbes (Source).

Shareholder results: -100% (Ultimately a bankruptcy) - Star Scientific/Star Tobacco was reverse merged into the Eye Technology shell in 1998 which later went bankrupt. (See Forbes Article)

O'Donnell's Position: O'Donnell and Williams brought the company public and were each 5% owners when it IPO’ed. (Boston Globe)

C.A. Blockers (1987-1990) – Manufactured “LungGuard” cigarettes that claimed to protect smokers from cancer-causing nitrosamines.

Shareholder results: -100% (Bankruptcy) (Source).

O'Donnell’s Position: Taken public by O'Donnell and Williams (each received 15% ownership) – (Source - Boston Globe pg 2).

Lawsuits/Regulatory Involvement: FDA orders C.A. Blockers to halt claims about “Safer” cigarettes (Source).

Lasersight (1991) – Lasers for ophthalmic applications that, according to competitors, defied the basic laws of physics as reported in newsweek (Source).

Shareholder results: -100% (Bankruptcy) (Source).

O'Donnell’s Position: Former CEO & Chairman of Board (Source).

Lawsuits/Regulatory Involvement: SEC charged Lasersight’s CEO, KC Wong, with embezzling from the company using fake consulting transactions; he also used sham transactions to circumvent Reg S requirements. Wong consented to an SEC order without admitting wrongdoing, O'Donnell was Chairman at this time. (SEC Settlement Order)

Star Scientific (1998-2016) (STSI) (AKA Star Tobacco, AKA Rock Creek Pharmaceuticals – RCPIQ) – Star Tobacco was started with defunct C.A. Blockers manufacturing facilities. It originally sold discount cigarettes and claimed to have less toxic tobacco (this was never proven)(Source). The FDA and Independent researchers found the claims to be bogus (Source), so the company pivoted from tobacco to dietary supplements. It later focused on a “miracle drug” dietary supplement called Antabloc, which supposedly alleviated ailments of Alzheimers and multiple sclerosis but no test data/clinical studies proving these claims were ever released. (Source)

Shareholder results: -100% (Bankruptcy) Rock Creek (formerly known as Star Scientific) finally filed for bankruptcy in 2016. (Source)

O'Donnell’s Position: O'Donnell was a board member of Star Scientific and O'Donnell and Williams owned 60% of the stock in 2000 (Source).

Lawsuits/Regulatory Involvement: Former Virginia Governor Bob McDonnell was found guilty of corruption as a result of Star Scientific’s Jonnie Williams bribing the governor in exchange for government favors for Star Scientific (Source – The Atlantic). Williams used the governor to help market the “miracle drug” and create a sense of credibility for the unproven product. Williams received immunity to secure his testimony against the governor.

Other Notes: O'Donnell had Star Scientific lease a private jet from him and Jonnie Williams from 2005 to 2009.

(Source- Bloomberg login required)

TEAMM Pharmaceuticals/Accentia Biopharmaceuticals (OTC:ABPI): (2002-2011) – Biopharma company focused on late-stage products in respiratory disease and oncology. (Source)

Shareholder results: -100% (Bankruptcy) (Source)

O'Donnell's Position: CEO of TEAMM/Accentia from 2011-2013; Chairman from 2002 to Dec 2011. (Source)

Lawsuits/Regulatory Involvement: Class Action lawsuits (see below under Biovest).

Biovest International (2007-2013) (BVTI:OTC) – Immunotherapies for non-Hodgkin’s lymphoma (it was majority owned by ABPI, which also went bankrupt).

Shareholder results: -100% (Bankruptcy) (Source).

O'Donnell’s Position: CEO & Chairman 2009-2011; Vice-Chairman from 2003-2009. (Article - Biovest files for Bankruptcy - Dr. Frank O'Donnell Out)

Lawsuits/Regulatory Involvement: Class action lawsuits against Accentia Biophama & Biovest for touting the success of their Phase III clinical trial when the trial results were negative and they had already received negative feedback from the FDA, lawsuit settled for $1.25m (Compliant, Settlement Notice)

HedgePath Pharmaceuticals 2014-present (HPPI:OTC) – Biotechnology company that focuses on cancer therapies for skin, lung, and prostate. ($30 million market cap currently)

Shareholder results: -60% since reverse merger onto OTC.

O'Donnell's Position: Executive Chairman, Controlling Shareholder and Director (pg 9).

Lawsuits/Regulatory Involvement: None.

Other Notes: W Mark Watson – another current Board Member of BDSI who is also on the board of HPPI (HPPI Board).

Insiders are Cashing out! Dr. O'Donnell and Broadfin Capital (17% owner)

If history tells us anything about a Frank O’Donnell company is that you should be selling when O'Donnell does! Dr. O'Donnell has been selling shares hand over fist. He has sold an estimated $958,610 of shares within the last year at prices as low as $2.14 and most recently on March 1, 2019 at $5.07. (Source)

(Source - Bloomberg Insider Sales for Francis O'Donnell)

During the last run-up in BDSI’s stock price in 2013-2015, O'Donnell successfully used the opportunity to sell a large amount of his & Hopkins Capital’s shares.

Additionally, after the close on the Friday evening of MLK weekend, Broadfin Capital, the other major insider, filed to sell $50 million of common stock (Source). That is 17.26% of the company and all of Broadfin’s stock! We think Broadfin can start selling as soon as Q4 results are released.

This is especially important because Broadfin Capital invested in the preferred Series B shares in May 2018 and joined the board. They have been a major part of the turnaround story that Wall Street is pitching. Instead, this shows that they want to completely sell out. Broadfin’s filing to sell all their shares does not give investors much confidence that Belbuca, the company’s only current growing drug, can take over the opioid market. We also place less credence in the Broadfin-led turnaround since the company has been a >5% shareholder of BDSI since 2013. This is a time period during which O'Donnell began his cash and stock pillage of BDSI.

Other insiders are selling too:

(Source - Bloomberg All Insider Buy/Sells)

BDSI – Dispelling the Bull Story:

BDSI has 3 drugs that have received FDA approval.

  • Belbuca a class 3 opioid that is currently successfully growing prescriptions. It was sold back to BDSI for $7.5m from Endo in Jan 2017 (Source).
  • Bunavail which has declining prescriptions and management has stopped marketing.
  • Onsolis which is not currently for sale and was pulled off the US market in 2012 (50 deaths connected according to FAERS)

The BDSI narrative used to be about using their BEMA solution (drug delivery film patch placed on inner cheek) to deliver Fentanyl in their drug Onsolis. Eventually the government pulled Onsolis from the market due to quality issues (source) and the FAERS database also showed lots of Onsolis patients were dying. Now Belbuca is the main story. Management have tried to pivot from being a cause of the opioid crises to saying that “Belbuca is the solution to the opioid crises.”

Belbuca Overview – The market is currently valuing BDSI as though Belbuca is worth $350m, even though BDSI bought back the Belbuca license from Endo for $7.5 million. Our analysis will show the drug is likely worth closer to the price at which Endo sold it.

Belbuca is a class III opioid narcotic which is carries lower risk of death via asphyxiation than class II opioids like fentanyl. Investors can learn more about Belbuca here. The delivery system is reliant on the patented BEMA delivery system whose major patent expired in 2016 but was extended to cover Belbuca. However, the FDA has given the drug a fairly small window of use by suggesting it should only be used when other immediate release opioids don’t work or can’t be tolerated.

The actual labeling says that it is only meant to be used for patients that not only have “pain severe enough to require daily around-the-clock, long-term treatment with an opioid” but also when “other pain treatments such as non-opioid pain medicines or immediate-release opioid medicines do not treat your pain well enough or you cannot tolerate them.” (Link to FDA Label)

Although Belbuca is still unprofitable after including marketing expenses prescriptions have grown significantly, allowing management to spin the tale that this could potentially be a $200-million-a-year sales drug. This impressive prescription growth has been due to a salesforce ramp-up, and we will show multiple reasons why if this drug is ever profitable that, it’s growth will collapse.

Growth in Belbuca Prescriptions thus far – Belbuca Rx’s have seen a solid growth which we believe is primarily due to a large increase in sales force. BDSI has increased their salesforce from 65 sales people in 2016 to 128 at the end of Q3 2018 and according to LinkedIn profiles, they have added at least 11 more in Q4. This growth led to 25% QoQ growth in scripts in Q3-2018 and an estimated 15% QoQ growth in Q4-2018.

Source – data from within Jan 2019 Company Presentation – Slide 14; 2016 estimates from Nov 9 2017 presentation; Endo marketed and sold Belbuca in 2016

Why we think growth could slow:

Reason 1 - Competition from Teva coming due to “Certain Circumstances” – Investors and analysts in BDSI should dig into the “certain circumstances” that allow Teva to get access to create generic Belbuca sooner than management has indicated to investors.

After extensive litigation with Teva, which was planning to apply for an ANDA to create a generic Belbuca, BDSI and Teva settled in early 2018. BDSI’s declared the settlement as a huge win and their press release highlights that Teva receives rights to produce generic Belbuca in 2027 (Feb 6, 2018 Press Release). However, in the 10-k (pg 51), BDSI lawyers qualify that Teva can also produce generic Belbuca under “certain circumstances.” One of those certain circumstances is:

"the occurrence of certain conditions regarding BELBUCA® market share"

We interpret this to mean that if BDSI successfully grows Belbuca market share above a certain percentage, then Teva will automatically be granted the license to create a generic. BDSI claims that Belbuca has a 31.1% market share of the buprenorphine patch market in Dec of 2018 (Slide 14 – Jan 2019 presentation). For example, we suppose that getting above specific market share number like 50% (just when BDSI finally might be profitable) it would kick in the Teva clause that allows them to produce a generic. We have asked management to clarify, but they have not responded. All we know for certain is that Teva will be able to produce a Belbuca generic much sooner than expected if Belbuca ends up gaining significant success.

Reason 2 – Other Competition - Defending the Patents - The main patent on the delivery system for Belbuca is BEMA (US Patent 6,159,498) and it expired in Oct 2016. The company received extensions of the BEMA patent for Onsolis (7,579,019), but that expires January 2020 and they received a further extension for Belbuca, which is on-patent (Source). We think that expiration of the BEMA patents already provides solid ground for generic companies to challenge the validity of BDSI’s Belbuca extension patent. The generic companies seem to think the patent portfolio is at risk, too. In addition to Teva mounting a challenge earlier in 2018, Alvogen has also filed an ANDA to produce generic Belbuca in Sept 2018 (Source) and Chemo Research did in March 2019 (Source).

Other competition in the buprenorphine space is coming from Purdue Pharma. Purdue Pharma is supposed to be the Belbuca partner in Canada. Instead they have recently patented their own fast acting form of buprenorphine. (Source)

The other major product that BDSI sells is Bunavail, which has seen this exact fate occur: its own Rx’s and sales numbers declined after Suboxone ANDA applications were approved. (Source)

Reason 3 – Patients Rate Belbuca Poorly

According to WebMD Reviews Belbuca receives extremely poor ratings from patients. It gets 2.5 stars for effectiveness, 2.5 for ease of use and 2.3 for satisfaction.

Reading the reviews you will find patients complaining of:

  • The drug being ineffective on their pain.
  • Lasting for only 2-3 hours (significantly less than the 12 hours claimed).
  • Taking a long time to dissolve in their mouth (some complained of up to 1.5 hours).
  • Difficulty with delivery (does not stick to cheek).

These are very bad reviews compared to other opioids:

Buprenorphine-Naloxone (Suboxone) – 4.3 starts effectiveness, 4.3 ease of use, 4.0 satisfaction

Butrans Transdermal Patch – 3.5 stars effectiveness, 4 ease of use, and 3.3 satisfaction

Growth Strategy Flawed – Purdue Pharma Being Sued by Massachusetts AG for Same Strategy

BDSI management is trying to convince investors that their growth strategy will win since they believe their salesforce can convince doctors that Belbuca is a safer opioid, which will get doctors to increase the patient dosage and thus increase price per existing prescription. If this strategy sounds eerily familiar, that is because this is the exact strategy the Massachusetts Attorney General accused Purdue Pharma of perpetrating in their lawsuit against the company (Source). One large difference between Purdue Pharma and BDSI though is that Purdue Pharma was wildly profitable while BDSI has an accumulated deficit of $344 million.

BDSI has a Free Opioids Program!

However, we think the growth isn’t just coming from an increased salesforce. It also comes from BDSI’s decision to give away opioids for free. BDSI has a $0 copay card which is very controversial considering a) risk of addiction and b) current government scrutiny of opioid manufacturers.

It shouldn’t be surprising that BDSI has been able to increase growth of Belbuca when they are willing to give the product away for free. Many drug companies have reimbursement programs, but we find this particular program very surprising, given the addiction and abuse warning that Belbuca carries (listed below) and also due to the crack down on opioids that includes Trump signing the recent Opioid Bill. (Source for warning label)

BDSI’s Other Drugs:

Bunavail – Bunavail is a buprenorphine/naloxone buccal film that is prescribed for treatment of opioid dependence. It also uses the BEMA technology (polymer film that sticks to your check) as its delivery mechanism. BDSI has said publicly in their conference calls that they no longer direct their salesforces efforts towards Bunavail Rx’s. The reason why is that Suboxone has always had a more significant market share and earlier in 2018 the FDA approved multiple Suboxone generics (Link) from both Dr. Reddy and Mylan. This will make it virtually impossible for Bunavail to effectively compete in the category and has already led to a drop-off in sales.

Bunavail still does a small but decent business, though, with $6 million in LTM revenue that has been declining at 25% YoY (avg rate for LTM) and estimated 40% margins (based on 2016 gross margins). A DCF on the future of Bunavail assuming that it continues declining at 25% YoY, has 40% gross margin, and no marketing expenditure results a net present value of $5.5 million for the drug.

Onsolis – We believe that Onsolis, BDSI’s 3rd approved drug, is currently worthless. Onsolis is a fentanyl product using the same BEMA delivery method that has a very limited use case. Its use case is basically the same as Insys’s Subsys, as it is only approved for breakthrough pain in cancer patients that are tolerant to around-the-clock opioid therapy for their cancer pain (FDA label).

BDSI’s recent drug partner Collegium terminated their license agreement in Dec 2017, which they signed in May 2016. No new player has since agreed to distribute it nor has BDSI attempted to sell it. The drug was pulled from the market in 2012 due to quality issues (Source) and even before the drug was pulled the FAERS system shows that a multitude of patient deaths—50—were connected to using Onsolis. For these reasons, we believe that the proper market valuation for Onsolis is currently 0, as it is unlikely that this drug will ever come back to market.

Unhappy & Underpaid Sales Reps = Future Growth will Slow:

Reading the CafePharma.com’s BDSI Sales rep board one realizes that the growth could also slow as numerous of their sales reps are unhappy about their current compensation and the company’s product positioning. Reps mention other employees stealing targets out of their territories by “promising kickbacks” and still others refer to BDSI as a “Second rate company” that pays below industry standard. Not only are they underpaid, overworked, and unhappy with benefits like car reimbursement, as some of the below quotes show, but many of them have resorted to taking on second jobs in order to pay their bills. Via extensive LinkedIn search, we have found some BDSI reps that presently list other jobs, but by far the saddest situation is the BDSI rep that has apparently resorted to prostitution in order to afford his/her lifestyle.

BDSI’s Top Paid Doctors – DEA Raids, Former INSY docs, Malpractice, and Fake Credentials:

Basic Google searches and state medical board reviews of the top-paid BDSI doctors reveal shocking details! The doctors who are received the highest cash payments from BDSI have recently been raided by the DEA (charges have not been filed), have appeared in Senate reports regarding Insys’s kick-back payment scheme, have committed malpractice, have abused significant others, have falsified their own credentials, and one has a degree more fitting for a cruise ship doctor’s than BDSI’s top rep.

The company currently pays doctors to promote their products, Belbuca & Bunavail. This practice is legal but the creation of the government’s Open Payments database (here) and ProPublica’s Dollars for Docs website allows investors to dig into who the company is paying honoraria ((cash)) in order to promote their products. In BDSI’s case, the results are shocking, as they are either purposefully choosing shady doctors or just haven’t bothered to research whom they are paying.

Raided by DEA + Substance Abuse Problems - Dr. Ralph Thomas Reach who is a top 5 payee by BDSI (106k) had his home & medical facilities raided by the DEA on May 2, 2018 (Source, Knox News). This was not a standard DEA inspection. Instead, they had a warrant to seize hard-drives, cell phones, and records (Source). The DEA has not filed charges but the investigation is considered on-going. Dr. Reach also had previously lost his medical license in Virginia due to cocaine, alcohol, and opiate abuse (VA Board of Medicine Report). Despite his history of drug abuse BDSI decided he’d be a great representative of their product and had paid him >$106,000 in order to promote their own opioid products. Perhaps they never bothered to do a background check or a medical board search.

Received large Insys kickbacks & appeared in Senate Report – A top 5 paid doc by BDSI in 2017 ($45k in 2017) is none other than Dr. Anthony Guarino. He became known as having been paid exorbitant sums by Insys Therapeutics in their kickback scheme ($106,000 from 2013-2015 and >$250,000 in 18 months in 2009/2010 – Insys Senate Report pg 19). According to the US Senate staff report on Insys (pg 22-27) this correlated with Dr. Guarino’s writing of a significant number of prescriptions for their Subsys fentanyl spray.

Negligent medical practice - Dr. Richard Soper, another top 5 payee by BDSI from 2013-2017 ($80k), was previously found to have engaged in grossly negligent medical practice and to have falsified his credentials and malpractice history to hospitals. (Tennessee Medical Board Docket No. 17.18-34-1337A).

More Insys Connections - Another top 5 payee in 2017 ($42k in 2017), Dr. Richard L Rauck was also previously connected with Insys, as he was the head author and researcher of multiple of the Subsys studies that were funded by Insys. (2014 Fentanyl Sublingual Spray Study, 2010 Subsys Trial Results).

Mislead about credentials in presentations - The top payee in 2017 (105k in 2017) was Joseph Pergolizzi, who was exposed in an LA Times OxyContin Story in 2016 for using false credentials when travelling the globe to try to convince foreign doctors to prescribe more opioids. They found that Dr. Pergolizzi had been claiming to be a faculty member at Johns Hopkins, Temple, and Georgetown Medical Schools. In reality, he hadn’t been affiliated with Georgetown since 2010, Temple since 2014, and is an adjunct professor at Johns Hopkins. A Temple spokesman said the university had “no reason to believe he will have any future relationship” with the school, and a Georgetown spokeswoman said, “We are not in discussions with that gentleman.”

Unfortunately, due to the fact that Belbuca was sold back to BDSI and relaunched in Jan 2017 we do not have the data to crosscheck recent doctor payments against the Medicare prescription database to figure out if the highest paid doctors are writing more prescriptions. (Medicare data is currently only available until 2016). However, this choice of doctors to represent BDSI shows some very questionable judgement at the very least.

BDSI’s Chief Medical Officer – Dr. Thomas B Smith’s History of Failed Companies + an Arrest

Before joining BDSI Thomas B Smith MD has his own checkered past of companies:

  • Mallinckrodt Pharmaceuticals - Chief Medical Officer at Mallinckrodt Pharmaceuticals from May 2012-Sept 2014. He was the CMO when Questcor was acquired in April 2014. Mallinckrodt is infamous for price-gouging Medicare on the drug Acthar which short-sellers allege is unproven and no insurance providers reimburse for it. If you are unfamiliar with the Questcor/Mallinckrodt story we suggest you visit Citron Research’s archives (Citron MNK Write-ups).
  • Ameritox – Chief Medical Officer - Oct 2014-Jan 2017 – Company ended up with an “asset sale and closure of all company operations and facilities” (Source)
  • Charleston Laboratories – Chief Medical Officer - Jan 2017 to July 2018 – FDA rejected their major opioid pain drug application in August 2017 and Daiichi Sankyo gave back all rights to it back to Charleston Laboratories. (Source, Charleston Lab Press Release)

Although we aren’t surprised that Thomas B Smith MD has had such a shaky history since his medical career seems to have started off with a run in with the law. While he was doing his medical internship in Indiana we found that he (or someone with his same name, approximate age, and in the same city) was arrested on an outstanding warrant. According to Dr. Thomas B Smith’s LinkedIn he received his Medical Degree at Indiana University in 1986 and did his internship in Indianapolis from 1986-1989. We asked management to clarify if this was Dr. Thomas B. Smith and what the warrant was for and they have not responded

Welcome to BDSI Dr. Smith, you will fit right in! (Dr. Smith joined July 30, 2018)

Source – (The Republic, Columbus, Indiana Newspaper – December 27, 1987)

Auditor Red Flag

Cherry Bekaert’s of MDXG Fame

In 2017 BDSI utilized some accounting magic and despite this were only barely able to record a net profit. BDSI reported an interesting $27.3 million bargain purchase gain on the $7.5 million deferred cash purchase of Belbuca from Endo. This was at a time when the company desperately need to raise capital and with this write-up they could only manage to report $5 million of net profit for 2017.

So who was the auditor responsible for allowing this large accounting write-up on a non-cash purchase? None other than Cherry Bekaert, which has served as their auditor since 2003 (FY-2017 pg F-3). You may be familiar with Cherry Bekaert as the auditors that were made infamous by MiMedx (MDXG), a company embroiled in DOJ, VA, and SEC investigations. MDXG also currently does not have an accounting firm to audit their financials. Cherry Bekaert was the last auditor to provide MDXG with an unqualified GAAP audit opinion in 2016 (FY2016 pg 49), which means they approved their GAAP accounting and had done so since 2008 (FY2008 pg 41). This is interesting and relevant because MDXG is currently in the midst of material financial restatements for FY 2012 through 2016 and their quarterlies from 2017, as they have been accused of channel stuffing, paying kickbacks, etc. MDXG’s most recent auditor, Ernst & Young, even quit, citing deficiencies in internal controls and that they could not trust management statements (MDXG 8-k).

If you haven’t followed the MDXG saga, then all you need to know is Cherry Bekaert’s recently received a scathing inspection by the PCAOB that identified a multitude of failures in their audit procedures (Source – Pg 5 & 6) and that Cherry Bekaert’s median market cap for their clientele is $22 million (list of clients here).

We have noticed that besides the large asset write-up that BDSI has some other questionable accounting practices. Notably, BDSI recently changed their revenue recognition accounting practices in January 2017 to recognize revenue on a sell-in basis rather than sell-through.

No R&D + High Debt = No Hope:

Lack of Research and Development - BDSI does not have any other major drugs in the pipeline so we value their future pipeline at $0. Their R&D spend has declined massively in 2018 showing that they are not hopeful for their pipeline either. For Q3-2018, it was a mere $699,000, and it amounted to only $4 million for the first 9 months of 2018 (10-Q3-2018 pg 2). This represents a large drop from 2017’s $13 million and 2016’s spend of $18.8 million. (2017 10-K pg F-5).

High Cost Debt – 12.5% – BDSI had $50.5 million of debt outstanding as of Q3-2018 at the absurdly high interest rate of 12.5% (10Q-2018 pg 12). The current cash burn of $6m per quarter doesn’t even include all the interest costs as BDSI is able to use their debts PIK feature to defer 3.5% of interest costs. Thus, the debt load continues to grow as their cash balance depletes. On top of the appropriately priced but usurious 12.5% annual interest rate BDSI has also agreed to pay a 9% final payment fee on the original loan amount.

While this expanding debt is not a near-term death sentence for BDSI it begins coming due in Sept 2021. It’s no wonder that the company currently has a $75 million equity shelf filing outstanding as they clearly need to raise a large amount of equity ASAP before Belbuca’s growth come to a halt.

Conclusion:

BDSI is a cash burning opioid company that was founded by serial failed entrepreneurs who have a long history that includes SEC Investigations of past companies, shareholder lawsuits, and even Jonnie Williams bribery of a Governor (resulting in the governor being sentenced prison time). We think BDSI’s opioids are bad for investors financial health.

Belbuca has enjoyed a brief moment of growth (also still unprofitable) by paying “consulting fees” to multiple suspect doctors, giving away their opioids for free, and by doubling their salesforce. Unfortunately, we don’t think that growth will last due to future pressure from generics, potential capped growth on Belbuca due to a “market share clause,” and an unhappy salesforce.

When company insiders like Frank O’Donnell and Broadfin Capital (17% owner) want to sell their shares, you should too! We are short BDSI.

Disclosure: I am/we are short BDSI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Fuzzy Panda and affiliates of Fuzzy Panda are short shares of BDSI as of the time of publication. Fuzzy Panda and possibly any companies affiliated with them and their members, partners, employees, consultants, clients and/or investors (the “Fuzzy Panda Affiliates”) have a short position in all stocks (and/or options, swaps, and other derivatives related to the stock) and bonds of companies covered in such reports and research. Fuzzy Panda and the Fuzzy Panda Affiliates intend to continue transactions in the securities of issuers covered on this site for an indefinite period after his first report on a subject company, and they may be short, neutral, or long at any time hereafter regardless of initial position and the views stated in Fuzzy Panda’s research. Fuzzy Panda does not claim any responsibility to update their report or their positioning in shares of BDSI at any future time. This article is our opinion and the result of extensive research on the company; investors are encouraged to do their own due diligence.

Additional disclaimers can be found at fuzzypandaresearch.com/...

We have contacted BDSI mgmt for comments and given them 1 week to reply to our questions and not received any answers. If they reply we will post their reply or update the article.