Hedge Fund Chief Shkreli Juggles Ire for Biotech Missteps With Passion For Rare-Disease Startup Retrophin
On March 19, Martin Shkreli posted an article on the investing blog Seeking Alpha urging readers to “short” shares of San Diego-based Cytori (NASDAQ: CYTX)—essentially telling them they should bet that the company would falter and its share price would drop. Cytori is developing so-called regenerative treatments, using stem cells from fat, for example, to try to rebuild damaged heart tissue. Shkreli, who manages the MSMB hedge fund in New York, declared, “regenerative medicine is a meaningless and embarrassing buzzword that means nothing.”
Shkreli didn’t stop there. He criticized the company for its “meager sales” and losses, writing, “I believe management had a plan of benefitting from being associated with this growing field, and it backfired.”
Shkreli disclosed up front that his fund has a short interest in Cytori.
Cytori’s stock, which closed at $3.13 just before Shkreli’s post, has since fallen to $2.40, a 23 percent drop. Hedge funds don’t have to disclose details of their short positions, so it’s impossible to estimate how much MSMB has gained by shorting Cytori. Suffice it to say, Shkreli’s fund, which he founded in 2006, probably did all right on that bet.
It’s just such antics that have made 29-year-old Shkreli the target of angry life sciences executives, not to mention Washington watchdogs that are urging the SEC to investigate what they fear might be deliberate stock-price manipulation by an overzealous hedge-fund manager. But Shkreli embodies about as big a dichotomy as you’re likely to find in life sciences. That’s because in the midst of the storm of criticism that seems to follow him everywhere he goes, some physicians and notable Big Pharma veterans are hailing him as a hero for starting his own biotech company, Retrophin, which is pursuing treatments for rare diseases. The company launched earlier this year with $3 million in funding from MSMB and notable private investors, including Fred Hassan, former CEO of Schering-Plough.
In a meeting with Xconomy at his mid-town Manhattan office recently, Shkreli was as eager to talk up Retrophin as he was to sound off on life sciences companies that he thinks are on the wrong track. Shkreli, who raced through college and got his first job in finance at age 17, has been working in hedge funds his entire career. But he believes Retrophin is a better outlet for his skills. “The last 10 years of finance and swashbuckling stuff has been fun,” he says, “but I’m ready for a more interesting way of helping people and making money. Solving the world’s diseases one at a time is my new mission.”
Before we get to Retrophin, though, it’s worth taking a closer look at that swashbuckling. Shkreli, who considers himself to be an amateur biologist, is not shy about criticizing other companies’ scientific pursuits. Witness Cytori. In his 10-paragraph Seeking Alpha post, Shkreli reviews Cytori’s clinical-trial program in excruciating detail, comparing it with that of other companies pursuing cell therapies, before coming to a rather blunt conclusion: “Despite some diehard faith from Cytori investors and seemingly, management, there is limited clinical proof of concept for Cytori’s approach.”
Tom Baker, Cytori’s director of investor relations, isn’t amused. “I wonder how one could so summarily dismiss an entire field,” he says. “We’re very bullish on the whole stem cell sector. We don’t dwell on someone’s doubts.”
Some of Shkreli’s sparring has extended far beyond his blog posts, however. On Christmas Day 2010, Shkreli wrote a letter to 10 FDA officials urging them to reject an inhaled insulin product made by MannKind (NASDAQ: MKND), a Valencia, CA-based company founded by billionaire octogenarian and medical-device veteran Al Mann. A few weeks later, at the JP Morgan Healthcare Conference in San Francisco, Shkreli went to an investors’ meeting led by Mann and “asked a lot of questions that I think annoyed him,” Shkreli says.
Shkreli’s main problem with the product, he says, was “a very, very deficient clinical trial program.” Specifically, he says, the company redesigned the inhaler but didn’t run trials to prove it worked.
On January 20 of this year, the FDA issued a “complete response” letter to MannKind, requesting that the company run two trials of the new inhaler. The company’s stock has lost half its value in the past year and has been trading recently at about $2.45.
And yes, Shkreli freely admits he was shorting MannKind’s stock at the time of his battle with the company. “I thought it was important to bring attention to this idea that the company hadn’t done its trials in the way it should have. So I shorted the stock and made my position clear,” Shkreli says. “I think the short is one of the greatest investments we’ve ever made.”
MannKind declined to comment.
A more recent FDA correspondence has gotten Shkreli in hot water with a Washington, DC, outfit called Citizens for Responsibility and Ethics in Washington (CREW). After blasting Dublin, OH-based Neoprobe (AMEX: NEOP) in four Seeking Alpha postings, Shkreli wrote a petition to the FDA last June requesting that the agency not consider approving the company’s product, which is a radioactive agent used to detect lymph nodes. Shkreli suggested that the FDA should require the company to test its drug against another radioactive product that’s currently used in combination with blue dye for lymph node mapping.
On January 26, after months of collecting supporting documents from the FDA—and some from Shkreli himself—CREW sent a letter to the SEC asking the commission to open an investigation into Shkreli’s short-selling activities. The 60-page letter includes multiple examples of Shkreli’s correspondences with the FDA, and requests that the SEC require Shkreli to disclose MSMB’s holdings. CREW suggests in its letter that the SEC then compare Shkreli’s trading patterns with his attempts “to influence the outcome of the FDA’s approval process.”
Anne Weismann, chief counsel for CREW, says in an interview with Xconomy that her organization isn’t alleging Shkreli engaged in collusion, but rather demanding further investigation into his trading activities. “With hedge funds, there’s limited information publicly available,” Weismann says. Comparisons of Shkreli’s FDA petitions to his trades “should be done by someone who has greater access than we do.”
Shkreli was more than happy to help CREW with its investigation, sending the organization copies of some of his FDA correspondences, all the while contending that shorting stocks is perfectly legal. Weismann doesn’t dispute him on that point. “We’re not asking to ban hedge funds,” she says. “But there’s no transparency. That’s troubling.”
Neoprobe, which has since changed its name to Navidea Biopharmaceuticals, is expecting a verdict from the FDA later this year. The agency has not responded to Shkreli’s petition. Still, Navidea’s stock has been under pressure: Shares have fallen from $5.48 last June, when Shkreli started harassing the company on Seeking Alpha, to $3.29 today. Navidea did not respond to e-mail and phone requests for comment.
Shkreli has made ten short recommendations so far on Seeking Alpha, all of them accompanied by blistering comments. On Cambridge, MA-based Zalicus, (NASDAQ: ZLCS), which is testing anti-inflammatory drug, he declared: “This asset is worthless. It’s worse than worthless—it will eat up $10 to $20 million in cash as the [study] reads out in the next year.” Of Seattle-based Oncothyreon (NASDAQ: ONTY), he suggested that its experimental lung cancer vaccine “is not a well-designed drug and is likely to be inert in humans. “
Zalicus declined to comment in an e-mail to Xconomy. Oncothyreon, which raised $47 million in an underwritten stock offering on March 29, also declined to comment.
Because MSMB does not have to report every trade it makes, it’s hard to determine just how much the fund has made on Shkreli’s short bets. As a whole, MSMB returned 20 percent in 2011, according to an investor presentation obtained by Xconomy.
But Stephen Brozak, president of WBB Securities in Clark, NJ, believes MSMB’s returns are less important than the doubts Shkreli might be raising among other investors. “When you’re dealing with stocks that are not well known, perception can be devastating to the extreme,” Brozak says. “The biotech and medical device world is fragile. It requires the munificence of investors not for one quarter, not for one year, but perhaps for as long as 10 years. If someone yells ‘fire,’ what do you think the effect will be?” WBB is an investor in Navidea, Brozak says.
Shkreli sometimes becomes so disgusted with companies that he goes to extremes to try to fix their management issues. When Lexington, MA-based AMAG Pharmaceuticals announced last July its plan to merge with Allos Therapeutics, Shkreli thought the merger was such a bad idea he made an unsolicited bid to buy the company. He offered AMAG $18 a share on August 3, 2011—a 25 percent premium to the company’s closing price the day before—then led an effort to overthrow the board and have CEO Brian Pereira ousted.
Shkreli had never been a Pereira fan. The CEO, a physician by training, had been attempting to advance the company’s lead product, ferumoxytol to treat iron deficiency, ever since he was named CEO in 2006. Shkreli and other critics of AMAG’s proposed merger with Allos suggested there were few synergies between the two companies. Allos sells a drug to treat T-cell lymphoma. “When [Pereira] joined AMAG, he had not one day of experience at any corporation at all, which I thought was unacceptable for a CEO,” Shkreli says. “I think the decisions he made told that story very clearly.”
Shareholders voted down the Allos acquisition plan, and in November, Pereira stepped down. But MSMB is still trying to buy the company. A spokeswoman declined to comment, instead pointing to a series of SEC documents pertaining to the battle for control. In one such filing, dated November 17, 2011, AMAG urges its shareholders to revoke any consent they or their brokers might have given to MSMB’s takeover attempt. “MSMB Capital’s own statements in filings made with the SEC indicate that MSMB Capital does not understand AMAG’s existing business,” AMAG said in the filing. “MSMB Capital has not given AMAG stockholders a clear and concrete path as to how MSMB Capital intends to improve AMAG’s performance or realize value for your investment….”
Shkreli declined to comment further on AMAG due to “ongoing discussions” with the company. MSMB currently owns 1.2 million shares of AMAG worth a total of about $20 million, according to Bloomberg.
When it comes to larger pharmaceutical companies, MSMB doesn’t generally hold enough shares for Shkreli to throw his weight around. But that doesn’t stop him from trying. In a letter to some shareholders of New York-based pharmaceutical giant Pfizer in December 2010, Shkreli said he was pleased to see former CEO Jeffrey Kindler retire, but that he believed “Pfizer’s board of directors has been largely composed of the same value destroyers for more than a decade.” He suggested that the company discontinue its policy of promoting insiders to executive roles and instead consider outsiders with track records of “creating or preserving value.”
Shkreli says he’s still a Pfizer shareholder and is largely pleased with the company’s recent progress under CEO Ian Read, a 34-year veteran of the company who was promoted to CEO in 2010. But in true Shkreli fashion, he can’t help tossing out one remaining gripe about the company. “I don’t see them acquiring biotech companies, I don’t see them making any proteins in the clinic that are of any use,” he says. He acknowledges that Pfizer’s acquisition of Wyeth in 2009 brought some biotech molecules to its pipeline, but he still wishes the company would do more. “It doesn’t seem like they’re creating novel proteins, which is sad.”
In an e-mail, a spokeswoman for Pfizer points to the company’s recent efforts to fine-tune its biotech partnering strategy. “Pfizer is more strategic, focused and creative in its deal structures to help ensure the appropriate balance of risk and reward,” she says. “For example, in December 2011, Pfizer completed the acquisition of Excaliard Pharmaceuticals, which included an upfront payment, and contingent payment if certain milestones are met.”
Shkreli had some early training in the art of being outspoken. He started his collegiate career at Columbia University, but transferred to New York’s Baruch College to pursue a bachelor’s in business administration because “it was more advantageous for me to complete my degree quickly,” he says. At 17, he landed a job with Jim Cramer—the high-energy finance pro who was a hedge fund manager before starting TheStreet.com and starring on CNBC’s Mad Money. After about four years with Cramer’s hedge fund, Shkreli says, he moved on to Intrepid, a hedge fund that’s part of the Tiger fund family.
Cramer declined to comment on Shkreli in an e-mail, saying he has “no desire to be affiliated with him in any way.”
After a decade of criticizing—and sometimes profiting from—how other people manage life sciences companies, Shkreli decided to start his own: Retrophin. He says he was partly inspired to become a biotech entrepreneur when the 15-year-old son of one of MSMB’s investors died of a rare muscle disorder called myotubular myopathy. “I think the pharmaceutical industry has dismissed a lot of these [rare] diseases as too small to make money in, or too difficult to understand scientifically,” Shkreli says. “That doesn’t sit well with me. It’s one thing to invest in companies, it’s another thing to give to charity. It’s a whole other thing to build a company yourself—that’s real dedication to patients.”
The name Retrophin is short for “recombinant dystrophin,” an engineered form of a protein that’s lacking in patients with Duchenne Muscular Dystrophy (DMD), a genetic muscle disease. Shkreli says he wrote the genetic sequence himself for a form of recombinant dystrophin after reading about research done in academia. Retrophin is currently in discussions to license key patents on the molecule from the University of Minnesota. Shkreli says he has an agreement with a Swiss manufacturer to make the drug and he hopes to begin animal trials soon.
On February 21, Retrophin suddenly moved closer to becoming a commercial-stage company when it licensed a drug from San Diego-based Ligand that has already been tested in humans. The drug, called DARA (for dual acting receptor antagonist of angiotensin and endothelin receptors), was originally developed to treat hypertension. But Shkreli, who was once one of Ligand’s largest shareholders, suspected that the drug’s ability to filter excess protein from the urine could make it even more useful in treating some kidney diseases.
So Retrophin is now developing DARA for focal segmental glomerulosclerosis (FSGS), a rare kidney disorder for which there are no FDA-approved treatments. The kidneys of patients who have the disease are unable to filter out excess protein and ultimately fail, forcing patients to go on dialysis.
When Shkreli first came up with the idea to test the drug for FSGS, he called Howard Trachtman, professor of clinical pediatrics at New York University, and one of the nation’s best-known FSGS specialists. “I was thrilled, because historically FSGS has been a somewhat neglected entity,” says Trachtman, who will be the lead investigator in Retrophin’s phase 2 trial, which should begin imminently. “Biotech companies have been unwilling to take the risk, because it’s a rare disease. Martin is different.”
Shkreli is being guided by some of the pharmaceutical industry’s best-known strategists. In addition to Hassan, the former Schering-Plough CEO, the startup counts among its investors Brent Saunders, another Schering-Plough veteran who is now CEO of Bausch & Lomb. James MacDonald, who worked in early-stage drug development at Schering and is now an industry consultant, is helping Retrophin manage its clinical trials. “Martin has done a good job of selecting diseases in which there is a single element missing—a deletion of a single gene or protein,” MacDonald says. “That will make it easier to test his hypotheses. It’s not like you have to do clinical trials that go on for years. Either the drugs will work, or they won’t.”
MacDonald acknowledges that Shkreli’s reputation as a rabble-rouser gave him some pause at first, but he was swayed by the hedge fund manager’s passion for rare diseases. “He recognizes he has strongly held views, but if you have a strong argument, he listens to you,” MacDonald says. “That’s the mark of a smart person.”
MSMB could fund Retrophin indefinitely, Shkreli says, though he’s quick to acknowledge he’ll eventually have to find other sources of capital. Towards that end, Shkreli says Retrophin will probably “embark on an important strategic transaction in the future,” such as merging with a public company that is cash-rich and has expertise in drug development.
And Shkreli says he’s already thinking about finding someone to replace him as CEO of Retrophin. “I’m the largest shareholder, and I want to support the company and help it create drugs,” he says. “But the company and these patients deserve someone who’s been in the drug business for 20 or 30 years. We’re going to look for someone with tremendous pharmaceutical experience—a world-class executive.”
Judging from Shkreli’s history beating up on what he sees as the industry’s ineffective managers, it’s a fair bet he’ll likely put the next CEO of Retrophin through a pretty tough interview process.