Monday, December 23, 2013

Stocks DD Cites Ackman's Q4 Investor Letter Update


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http://www.scribd.com/doc/193312081/Pershing-Square-December-2013-Investor-Letter

Not much info at all other Herbalife.

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Stocks DD Cites on FNMA: Fairhome's Response to Govt's motion & Richard Epstein's views on Govt's response


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Richard Epstein's (Constitutional expert) views  -> https://www.dropbox.com/s/cx40ukv53lqdgdh/Richard%2BEpstein%2B-%2BTranscript.pdf

http://www.valueplays.net/2013/12/23/fairholme-responds-treasury-motion/
http://www.valueplays.net/wp-content/uploads/Fairx-discovery-motion.pdf

Indeed, the Government’s factual claims flatly contradict not only the allegations in Plaintiffs’ complaint, but also the Government’s own prior public statements. Although the Government now represents to the Court that the future profitability of the Companies is “purely speculative and unknown,” it neglects to point out that, as alleged in the Complaint, earlier this year it represented the exact opposite state of affairs to the Securities and Exchange Commission and to the public. For example, in March 2013, Fannie, under FHFA’s control as conservator, announced in a 10-Q form that “we expect our annual earnings to remain strong over the next few years” and that “[w]e expect to remain profitable for the foreseeable future.” Compl. ¶ 57 (emphasis added) (quoting Fannie Mae, First Quarter Report (Form 10-Q) at 1, 2 (March 31, 2013)). And in May 2013, the acting director of FHFA told the public that “it is clear [Fannie and Freddie] are each beginning to show regular, strong profitability.” Id. ¶ 60 (emphasis added) (quoting Edward J. DeMarco, Acting Director, FHFA, Remarks as Prepared for Delivery at Federal Reserve Bank of Chicago’s 49th Annual Conference on Bank Structure & Competition 2 (May 9, 2013))

Freddie was “speculative and conjectural” is directly contradicted by the accounting treatment of the value of Fannie and Freddie’s accrued losses for tax purposes. During the financial crisis, the Companies took a valuation allowance on deferred tax assets to account for their expectation that their future income would not be large enough to take advantage of their prior losses. As Plaintiffs explain in the complaint, in light of expectations for sustained profitability, the Companies changed this view. In the first quarter of 2013 alone, Fannie released $50.6 billion of the Company’s deferred tax assets valuation allowance. Compl. ¶ 58 (“The release of this valuation allowance underscores Fannie’s financial strength, as it demonstrates Fannie’s expectation that it will generate sizable taxable income moving forward.”). Similarly, in the third quarter of 2013, Freddie released $23.9 billion in deferred tax assets. Freddie Mac, Third Quarter Report (Form 10-Q) at 50 (Nov. 7, 2013). The release of the valuation allowances contradicts the Government’s assertion that the financial health of the Companies is unknown and unknowable and suggests that discovery is likely to reveal the Government anticipated Fannie and Freddie would generate tens of billions in profits.
Discovery is likely to reveal information relevant to resolving the factual dispute between Plaintiffs and the Government about the Government’s assessment of the future profitability of the Companies. And it is likely to produce evidence establishing that the Government in fact believed at the time of the Net Worth Sweep, and continues to believe, that Fannie and Freddie will experience sustained profitability. The fact that the Government has made statements in press releases discussing the future profitability of the Companies and has allowed the Companies to make similar statements to the SEC and to release some of their deferred tax allowances confirms that such evidence almost certainly does exist. The Government is almost certainly in possession of e-mails, strategy documents, internal analyses and projections, and other communications regarding the expected future profitability of Fannie and Freddie (both at the time of the Net Worth Sweep and at present) and also regarding when (if ever), and how, the conservatorship will end. Plaintiffs are entitled to discovery of those documents. This discovery should include the production of all nonprivileged documents, and appropriate depositions, relating to the Government’s decision to allow Fannie to disclose in its 10-Q form that it expects “to remain profitable for the foreseeable future.” Plaintiffs should also be afforded discovery about the Government’s decision to allow the Companies to release billions of dollars of deferred tax asset valuation allowances. All of this information is held only in the hands of the Government and is not available to the public or Plaintiffs. 

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Friday, November 15, 2013

Stocks DD Opines on FNMA: Why investor's focus on Government's/Congress's GSE Exit/Reorg proposal is a Red Herring and Mr. Ackman's bet.


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Additional Disclaimer: Please note this post is speculative and inevitably would be riddled with inaccuracies and errors in judgement. This is HIGHLY RISKY investment(esp common equity) esp with the legal uncertainty revolving around the conservator-ship. If legal judgments don't go in favor of private shareholders, then stock holders get ZERO. 

First things First: If you are a shareholder of GSE, please sign shareholder petition here. This is created by non-profit organization by Ralph Nader who is fighting for shareholder rights
Background: Fannie and Freddie don't directly make loans. Rather, they buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. In doing so, they help make loans available and exert influence over the housing market. Together, Fannie and Freddie own or guarantee about half of U.S. mortgages — nearly 31 million home loans worth $5 trillion. And along with other federal agencies, they back about 90 percent of new mortgages. This link provides a fantastic historical perspective, multi-decade profitability of GSE,  financial condition of GSE, significantly improved underwriting quality since 2009(half of the current portfolio) that will bode well for future profitability compared to historical profitability, and talks about return to stockholder control. This is a MUST-READ document and is fairly recent(Aug 2013). An interesting quote from the above article: For stockholders, the economics of the GSEs’ mortgage business could be attractive, but the psychology of the decline in stock prices and the federal government’s claim on all profits could potentially offset this plus
Why investors focus is wrong
Everyday the headline and sound bytes news on GSE is about the Reorganization and the potential lesser government role in GSE. For investors, this is a 'red herring' news to focus on. Investors are wrongly focused on the uncertainty of Government or Congress action on the various Re-org Proposal. Instead the clear signs of lack of distress and profitability in GSE, investors should be focused on the Court decision on Aug 2012 agreement and the current significant undervaluation of GSE. This will largely determine whether the upside to common equity is limited or is very significant.

Mr. Ackman owns 10% in equity of Fannie Mae and Freddie Mac and has expressed his intent to be part of the Recapitalization proposal discussion with the US Treasury( 1 of senior preferred holders as well as $187b loan issuer which is now nearly paid out) amongst other stakeholders. Ackman was buying all the way until Nov 14th and started buying the shares Oct. 7 and accelerated purchases after Oct. 21. Ackman paid a total of $401 million for his combined holdings. The backbone of the thesis on investing in commons could likely be the following. BTW here is Ackman's recent interview

Thesis on Investing in Common Equity

1.  Constitutional challenge(5th amendment-property rights) of Aug 2012 "Net Sweep agreement"(profits are being swept and given to US Treasury) and the breach of fiduciary duty to shareholders (read Legal perspectives below). See the website Restorefannie. The court hearing date is Dec 6th. Mr. Ackman is likely convinced that Conservatorship fiduciary duty towards shareholders has to be honored, esp considering GSE was on road to profitability and was not in distress even back in Aug 2012 when the net sweep agreement was signed. In any case, the 2 parties may be focused on negotiating the path forward since $187b is nearly repaid and the path forward would likely be restoring conservatorship's fiduciary duty to shareholders since GSE clearly are not showing signs of deep distress(although they are far from capital adequacy). So while the actual exit option may take a long time and congressional consensus, the court judgment will clearly RE-Rate the Common equity because such a judgement on breach of fiduciary duty would emphatically restore the rights back to its common shareholders. BTW here is Ralph Nader (congressman) interview is on the side of shareholders.

Quote from below article
"The Third Amendment to the Stock Purchase Agreement represents just this kind of one-sided transaction. Yet the government seeks to avoid this obvious implication by three specious arguments. First, it claims that there really was a mutually beneficial bargain here. After all, the Third Amendment was needed “because of a concern that the Enterprises, although solvent with Treasury’s assistance, would fail to generate enough revenue to fund the 10 percent dividend obligation.” Fat chance. Indeed, the one way to magnify the miniscule risk of default is to strip Fannie and Freddie of liquidity by the unilateral “dividend” payment made to the government. As a conservator, FHFA is supposed to defend shareholders, not fork over their money to Treasury."


Legal Perspectives 
2. GSE's value could be far significant than its liabilities (see below). GSE's have a  multi-decade history of profitability leaving aside 2008,2009 and 2010. All the upside after the preferreds are made whole will have to inure to Common equity. So the upside to preferred  is just 3 times where as upside to commons would be many times over and interestingly an investor in both preferred and commons are basing it on the same premise that net sweep is seizure of property rights.
      Enter Activist Investor Ackman
      Generally speaking, Mr. Ackman is in for the long term. Ackman is a real estate expert and has great credibility when it comes non-operational restructuring (non-business related as in Balance sheet restructuring, forecasting legal outcomes) as was witnessed in General Growth. The equity investment in General Growth Ackman made has grown >20 times in a few years. Here is another article that gives some historical perspective along with various exit options. "By law, conservatorship will end with their return to stockholder control if the  GSEs become safe and solvent or with receivership if they are unable to pay their debts". Right now Fannie mae only has net worth of $10b with a balancesheet of ~2.75T, but if and when the sweep is terminated those $9b/quarter earnings(see earnings presentation below) would start to add to the capital base and it is easy to see capital adequacy($150b?) within 2-3 years for the current balance sheet(without any new injection of external capital) provided sweep is terminated & housing rebound continues(Fed has announced to keep short term rates low until at least mid-2015. GSE finance portion of their investment portfolio with short term borrowing). 

      3. Alignment of incentives between Govt(Taxpayer) and Private shareholders as Govt owns rights to 80% warrants based on Sept 2008 agreement. So one can rest assured the Govt would want to maximize their profit and protect their interest in common esp after the $187b is paid out and the govt sees reduced risk in GSE from a capital adequacy standpoint. Note however though, it would take 2-3 years for the GSE's to be considered well adequate. So Ackman could be sitting with the US govt on the same side, helping to figure out how best to maximize the value or their pay out to common in whatever exit option the govt or congress decides.In this sense , the GSE Exit option and political consensus needed and the net sweep agreement with  constitutional challenge is somewhat of a Red Herring that the Market is currently focusing because both the GOVT(thru its 80% warrants) and Private Shareholders are on the SAME side (and it is clear due to the housing rebound there is NO immediate capital needs for GSE)..Both own stakes in GSE.  Also note that the government could be sympathetic to stockholders for another reason: A number of employees of GSE have historically owned stock of GSE's.

      4. MOAT of GSE A.K.A The Monopoly it is
      This is ONLY enterprise(monopoly) that has the below advantage: Ability to consistently make highly attractive  NIM (net interest income) by matching LONG Term mortgage rates with LONG Term Agency backed MBS or Agency Bonds. This competitive advantage for Funding exists because of the implicit government backing the agency enjoys for its MBS and Bonds.

      5. Their earnings will likely be more insulated with what happens in the economy compared to 2008,2009. This is because of underwriting quality since 2008 which is now materially superior and it is 50% of their portfolio and their loan loss provisioning (and credit losses) will likely be in control even if housing prices go south (higher LTV Ratio,higher borrow quality and such).

      6. Without GSE (a.k.a implicit guarantee for agency MBS to investors), the affordability of 30 year mortgages(pivotal support for home ownership in the US) will no longer exist. So shut down of GSE  is unlikely. 

      The Berkowitz Proposal
      Here is The Berkowitz Recapitalization Proposal  Berkowitz recapitalization proposal IMHO is giving away the value and upside to preferreds. Why would the shareholders would want to do that when they can maximize their value by doing a market auction. Lets remember by Law preferred are entitled to ONLY 100% of principal in their recovery and any residual value has to inure to common shareholders



      Speculating on the Value of GSE's Common Equity

      Back of the Envelope Calculations (This is a highly oversimplifying calculation. I am ignoring debt because as of most recent quarter GSE had a positive net worth): So the question is what could be the residual equity value to private shareholders after paying off preferreds and the govt: 

      OldCo's value(runoff of existing assets) + NewCo value (Securitization platform+IP+Human Cap +Goodwill+Relationships) =  
      Prefered's Dividends  (7%) + Preferred's Principal ($136b-FNMA + $86b-FMCC = $222b) + Common equity ($20b*-FNMA + $10b*-FMCC)  + 80% warrants given to US Treasury
      Note*-based on stock price of ~$3.3

      Obviously Mr. Ackman is betting the left side of the above equation is much bigger than > $242b (not counting preferred dividends) ? Note, both FNMA and FMCC reported ~$9b in quarterly earnings each. Remember also, as housing market improved, extraordinarily, both Fannie and Freddie have paid out $187b in the last 4 years what they had borrowed from Treasury during the crisis. So if housing rebound continues and less so short term interest rates remain low(as GSE finances a part of investment portfolio with short term funds), and FNMA and FMCC can earn net profits of $72b/year(annualizing Q3's ~18b net profit), and the number $252b just translates 3.5 times its net profit (removing one-time incoming from release of tax deferred asset/valuation allowance-then you get $45b for FNMA alone. So the $72b in income for GSE seems reasonable). Assuming average 7% interest on ALL preferred, that translates to $15b/year on the $222b preferred..So that would still be 4.42 times net profit. 

      At 10 times EBITDA, enterprise value would be at 10*$90b=$900b or  $678b left over for common equity . Factoring in US Govt 80% warrants, private shareholders equity would be valued at 0.20*$678b = $134b (approx 4.5 times present price) . This is where Mr. Ackman's legal, real estate, restructuring and value maximizing expertise fits in nicely in terms of preserving value for existing equity holders (as he did in General growth)


      Near term catalysts 
      • Dec 17th - Defendants file briefs on the suit (Aug-2012 agreement challenge)
      • Legal proceedings of the various investor suits. Look at the court calendar here
      • Word spreads on 5th amendment case - Lobbying by investors and other stakeholders -> restorefannie
      • Ackman's investor letter (his thesis on FNMA could be disclosed)
      Longer term catalysts
      • Potential NYSE Listing (2014,2015?)
      • Capital adequacy and returning control to stock holders (2015? 2016?)
      • Ability to raise non-dilutive capital from a position of strength(2015?) 
      Miscellaneous Thoughts/Quotes
      Is it possible that the OldCo itself can make whole the preferreds (dividends & principal) and NewCo's value will entirely inure to existing Common equity? Or could some of the preferreds stay in OldCo and some just transferred to NewCo's capital structure?
      The other question is to ask is "Will the NewCo's value be substantial without any implicit guarantee from Govt" ? Will they be able finance their investment portfolios without implicit govt guarantee on their bonds.

      Also, right now no dividend payments are being made to preferred and in Dec when the complete $187b is paid out to US Treasury, there is still no plans of what is going to be done to GSE profits which is substantial(Fannie mae in recent quarter earned $8.6b). See below lawsuit. The existing Net Sweep Agreement entitles the US Treasury to receive all profits (including settlement or restitution payments) from Fannie Mae and Freddie Mac. A few preferred shareholders are currently suing the US challenging the Sweep Agreement and demanding the resumption of dividend payments.  Here is a quote from seekingalpha article  "Conservatorship alone doesn't absolve the FHFA from its fiduciary duty to shareholders of those companies. The notion of a breach of fiduciary duty on the site of the conservator could further increase chances that the Net Sweep won't stand its ground in court."


      Here is somewhat different exit option -> Link

      Under Fairholme’s proposal, the preferred shares would be exchanged at their full par value of $34.6 billion for shares in a new mortgage insurer that would separate new underwriting from the legacy investments held by Fannie Mae and Freddie Mac. Ackman’s common shares would give him ownership of the pair’s legacy book of business, including mortgages that soured during the housing crisis.While that legacy business would shrink over time, Ackman, in an interview with CNBC last year, said Fannie Mae should stop selling foreclosed assets and become a residential real estate investment trust.  “They should just keep the foreclosed assets, fix them up and rent them, and become a big residential REIT that owns homes,” Ackman said in the interview. “That would immediately stabilize the housing market.

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      Thursday, November 7, 2013

      Stocks DD Opines: Is The Market Stupid ? Skewed Risk Perception(Valuation) & Following of Development stage companies vs Established Pharma


      Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

      Do you understand R-I-S-K ?
      Most biotech/pharma "investors" esp retail investors either don't understand risk or don't bother to understand risk well. Majority of these biotech "investors" are traders trying to speculate on valuation changes based on clinical or regulatory or speculative M&A event of unproven companies/management. Investors chase 1 drug pony companies(esp buying at high valuations) without fully understanding various risks (clinical,regulatory,marketing,commercialization/reimbursement) if the event does not turn in their favor. The market usually disregards one of the biggest risks which is the market competition, and the longer the lead time for the drug to reach meaningful revenues, the bigger the risk for market competition (potential for new and improved competition drugs). Development stage companies also carry dilution risk all the way until company reaches profitability. At the same time, the market surprisingly continues to ignore blue chip businesses with solid earnings today and near future with relatively low risk profile trading at cheap valuations. 

      Case in point is this undiscovered pharma company: Taro Pharma which although operates in generic business, has limited competition due to the "niche-ness"(higher technical barrier to entry) of the topical/dermatology sector and has delivered strong results in the last 4 years since the new control took over. And unlike a brand innovator that comes with R&D, Regulatory, Commercialization risk and a very-high risk R&D and Marketing/Commercialization dollar spend, this company has low R&D risk, Regulatory risk and Commercial risk, and spends productive R&D dollars on low-risk clinical equivalence studies. As a generic company it spends little to nothing on marketing/commercialization. The R&D spend(<10% of sales) replenishes part of its aging generic pipeline, while at the same time it enjoys limited competition on a good part of its portfolio, thus allowing it to enjoy a sustainable EBITDA margin of >40%. 
      Below I have tried to objectively evaluate the favorable business characteristics of Niche Generic Pharma with Branded Pharma as well as Generic Pills Pharma.





      This company has a lot going for it that should make it really attractive for investors and they are listed below. Yet as indicated by Seeking Alpha and Stocktwits it is covered/followed  30 times Lower than AMRN/DNDN . (Amarin is a 1-drug pony where the regulatory risk unraveled recently when the FDA's Adcom vote came in unfavorable for its Anchor indication despite a SPA. Interestingly about ~1000 Amarin shareholders have congregated to create a petition to FDA for considering approving "Anchor" indication). Hopefully the recent debacles of AMRN and SRPT highlights the regulatory risk for these 1 drug ponies.


      Snapshot taken on 10/30/2013

      Isn't the market stupid in chasing speculative 1 drug pony with enormous risks and disregarding relatively lower risk companies with a fundamentally solid business and proven performance ? I have highlighted in BOLD the 3 tenets to my Bullish Taro thesis: Valuation(& strong business highlighted above), Management's ROI record and Minority Shareholder protections.
      1. Number 1(Yes the Market Leader) in Generic Dermatology in the USA
      2. Operates in an Oligopolistic sector with unique barriers to entry
      3. Yet Trades at Only  ~7 times ttm EBITDA*
      4. Accumulated cash of $613m (end of June 2013) and est at $700m (by end of dec 2013)
        1. An opportunity to make an acquisition in the specialty sector
        2. Accretive acquisitions would add significantly because of synergies
      5. Top Class management that knows how to allocate capital (it has returned 38% annually for close to 20 years! Can it get better than that ?) see page 32 SUN IR
      6. Almost zero leverage with a debt of $29m
      7. Backed by a business with stable cash flow of >$250m/year
      8. Longstanding Brand name in the US amongst practitioners and patient
      9. A relatively untapped sales opportunity in the rest of world markets for its portfolio of 180+ products.. which they could monetize by selling ROW rights to their products in emerging and other international high growth markets
      10. Minority Protection including "majority of minority vote" for any strategic transaction and highly watchful & active activist investors. Israel has STRONG minority shareholder protections. Read pages 93-105 to understand this
      11. Robust generic pipeline in 3-4 years as well as a significant specialty product entering phase 2b which could garner $500m sales/year.
      Note: The next 1-2 years may have some challenges due to entry of competition in some products but this company's earnings growth outlook in 4 years time is Solid. Plus, they have great leverage with est $700m cash, with just $29m debt and unlocking value in ROW markets which today is 1% of sales.



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      Thursday, October 3, 2013

      Stocks DD Cites: Ackman's Q3 Investor Letter


      Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

      Link

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      Tuesday, September 10, 2013

      Stocks DD Cites: Sears Long Thesis From Baker's Capital


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      Link-> http://www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

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      Thursday, September 5, 2013

      Stocks DD Cites: Raging Cap's Open Letter to Taro Shareholders


      Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

      The letter -> http://finance.yahoo.com/news/raging-capital-management-supports-vote-200400281.html

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      Monday, August 26, 2013

      Stocks DD Cites: Taro Pharma is the Number 1 Generic Dermatology Firm in the USA


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      Yes, It is official! Buried down under in a filing late last week, Taro, nonchalantly confirmed that it is now the Number 1 Generic Dermatology firm in the USA in Sales. Shareholders it is time to celebrate and be proud of this. You own an unique, invaluable asset in the market place: A Market Leader in a fundamentally favorable, limited competition business. 

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      Tuesday, August 20, 2013

      Stocks DD Cites: Ackman's Quarterly Letter to Investors


      Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

      Other than a few-pages-long diatribe on Herbalife (BTW, we don't recommend going short or going long Herbalife for reasons articulated in our prior posts. We think on either side the investment carries enormous uncertainty and risks), an admission of mistake on JCPenney, we don't see much in this letter. He barely mentions APD which is disappointing. Market would have loved to see what his APD thesis was. It does appear he thinks it APD fairly valued considering the present price.  He says: "In other words, we believe that we are paying a fair price for the Company as-operated, and a bargain price if we can successfully effectuate change". He does not specifically state what changes he is talking.


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      Saturday, August 17, 2013

      Stocks DD Cites: Bill Ackman's Interview with Charlie Rose


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      http://www.charlierose.com/watch/60253956

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      Thursday, August 15, 2013

      Stocks DD Cites: Perrigo's 2014 Rx Guidance


      Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article





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      Sunday, August 4, 2013

      Stocks DD Opines: Seeking Alpha Article: Bluemountain Nominates Two To Taro's Board and Why We're Bullish


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      Thursday, August 1, 2013

      Stocks DD Cites: Minority Shareholder Bluemountain Proposes 2 nominees to Taro Board


      Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

      Letter by Bluemountain that owns 1.5% of Taro

      Excerpts from Bluemountain's Letter below

      OT: Unlocking Shareholder Value
      It is our belief that there exists a significant ongoing opportunity to create shareholder value at Taro through, among other best practices, refining of its business strategy, evaluating an optimal capital structure and the use of Taro's growing cash balance, implementing more robust capital markets and shareholder communications, and ensuring that all strategic options are considered on an arm's length basis.
      We continue to expend considerable time and resources to explore all avenues available to ensure that value is maximized for all shareholders of Taro. We will continue to do so as necessary.  To this end, we have nominated the following individuals, whom we believe bring the requisite industry, operational, strategic and financial experience to execute the duties of External Director in a manner consistent with the letter and spirit of the Companies Law.

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      Wednesday, July 31, 2013

      Stocks DD Cites: FDA's love letter to Spectrum Pharma on Zevalin


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      FDA sends this letter dated 07/23 to Spectrum pharma on Zevalin marketing practices  ->Full Letter here Link  

      Mr. Anil Hiteshi, RAC, 
      Vice President, Global Regulatory Affairs 
      Spectrum Pharmaceuticals 
      157 Technology Drive 
      Irvine, CA 92618 
      RE: BLA #125019 
      ZEVALIN® (ibritumomab tiuxetan) Injection for Intravenous Use 
      MA #195 

      Dear Mr. Hiteshi: 

      As part of its routine monitoring and surveillance program, the Office of Prescription Drug 
      Promotion (OPDP), of the U.S. Food and Drug Administration (FDA) has reviewed a 
      professional sales aid (0103058300) (sales aid) for ZEVALIN®
       (ibritumomab tiuxetan) Injection for Intravenous Use (Zevalin) submitted by Spectrum Pharmaceuticals, Inc. (Spectrum) under cover of Form FDA 2253. This sales aid is false or misleading because it minimizes important risk information, overstates the efficacy of Zevalin, and omits material facts. Thus, the sales aid misbrands Zevalin in violation of the Federal Food, Drug, and Cosmetic Act (the FD&C Act), 21 U.S.C. 352(a) & 321(n), and implementing regulation 21 CFR 1.21(a). Cf. 21 CFR 202.1(e)(5)(i), (iii); (e)(6)(i), (x), (xviii).

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      Saturday, July 27, 2013

      Stocks DD Opines on MNTA: MNTA/Mylan wins Copaxone patent suit but we're not impressed with MNTA's value proposition


      Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article

      This friday Momenta/Mylan won the generic Copaxone patent litigation suit, effectively allowing them to launch copaxone in May 2014, assuming FDA approval of their ANDA's -> Link

      While we think this is positive for Momenta considering that Copaxone profit sharing agreement with Sandoz stays at 50% despite new generic competition(unlike Lovenox sharing), investors should weigh in the following facts. 

      1. The declining market share of Copaxone due to newer, more efficacious products including Tecfidera. We think the decline could be precipitous in the coming years as the new orals take foothold.  "The medical community considers Tecfidera effective and safe, on the basis of the clinical trials conducted in the past few years. It reduces attacks by 49 percent (compared with 20-30 percent for Copaxone), and its side effects are not severe."
      2. Prospect of generic competition including Mylan. Please remember it was shocking to see Momenta's characterization patents did NOT hold in the lovenox case and Amphastar launched its product. Momenta went all the way to the supreme court  in this case.  The safe harbor provisions allowed Amphastar to copy processes in Momenta's lovenox characterization even during commercial manufacturing. This judgment , in our opinion, was pivotal to Momenta's valuation and quashed Momenta's perceived competitive advantage as a generic maker of complex products with IP to block further generic competition. While momenta spends years and millions of R&D dollars to get its 2 minutes of fame as being the First generic by making remarkable strides in characterization for complex molecules, in some sense, shareholders of Momenta are subsidizing the approval path for the  future generic competitors that piggyback on MNTA's characterization technology/process (thanks to the supreme court verdict) that is largely put on public domain by FDA and get FDA approval subsequently in a few months/years. So we are inclined to speculate, that at best, Mylan could be a year or two away behind Momenta in its ANDA approval and Momenta could enjoy sole generic status for this very short period.
      3. Momenta for 2013 projected that its net cash usage will average approximately $20 to $24m/quarter. As of March 31st, 2013 had $324m in cash.
      4. Momenta's market cap is already $880m
      5. The 1st drug in the Biologics program is at least 5-7 years away from FDA approval. At this point we assign no meaningful value to this program.
      So while we hail Momenta's pioneering characterization technology for complex generics, we believe it has so far not proven  a big competitive advantage, except to put Momenta ahead of generic competition by a few months/years. Hence, given that Momenta trades at $880m market cap, we are inclined to believe there is no significant upside to MNTA stock price.


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      Thursday, July 25, 2013

      Stocks DD Rebuts to Bronte's article


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      Disclosure: I am neither short or long. I wrote this on my own.

      Investing in Herbalife (Short or Long side) 
      First of all, let me state I have no position (either long or short) in Herbalife. I think there are good reasons NOT to be on the either side considering the risks and the uncertainty on both sides. I would not be a long because of the legal risk or potential FTC action in the US. (I am not saying Herbalife is compliant or non-compliant. I am not a legal expert). Although it is important to note that the US is only 80% of Herbalife's business. 

      Even if you truly believe FTC would eventually come down hard on Herbalife, I would not be short because of the trading risk. Nobody can predict the timing of regulatory investigation or action, if any. Also, nobody can predict in the short term where Herbalife would trade at and it is just risky to be on the short side. A bunch of rogue traders, momentum trading, follower-based investing, media coverage could feed onto itself and create a short squeeze. I am pretty sure this is Ackman's biggest nightmare today, if he has not already hedged his short position in some way or he has not covered. ( It is quite possible that Ackman may covered his position but is still lobbying for FTC action to protect his ego. We all have seen infamous (ego?) fight b/w Icahn and Ackman)  Existence of Amway business for decades, the international nature of Herbalife, does bolster's the longs thesis from a risk standpoint. However, one should undermine the power of Ackman.  A major legal precedent had to be set in General growth for Ackman's 10-bagger long thesis. And lo and behold that legal precedent was set and Ackman made >10 times his investment. 

      Setting the Record Straight with Bronte's Capital's John
      Bronte Capital's John wrote the following yesterday:

      "One of the dumbest arguments I have heard (made insistently by StocksDD amongst others) is that the turnover in Herbalife customers/distributors is enormous and therefore Herbalife must be evil or at least burning the customers.
      I would love to see the customer retention rate scatter amongst Herbalife distributors (my guess is the average is low and the spread is wide) and say Weight Watchers (probably with a similarly low average and wide scatter). The people I have met who are the most convincing Herbalife sales people have lost a lot of weight and kept it off for several years. These people are I expect the exception. Turnover and failure would be the norm."

      The Rebuttal
      First of all, I never said Herbalife is evil or that Herbalife does not meet the threshold of retail sales. I just asked Bronte a question the answer to which ONLY people can speculate. Why do a large %(90%?) of  distributors leave ?

      Second, it is a complete red herring to try and correlate the secondary stock resales or resales in ebay/craigslist to the Product's genuine retail demand. Why ? I can give 10 different reasons. Let's start with these a few...

      1. How many people will take the pains of stock reselling ? They may as well keep it and consume it until it lasts. 
      2. Some may just trash it.
      3. Some may just give it away to friends as gift or "sell" it for 20 cents to a dollar.

      So, the billion dollar question still remains;
      How many distributors sign up to primarily avail discount and are real consumers  ?

      Here is a potential Solution for the Regulator: For every distributor that does NOT renew its membership a.k.a "failed distributor" (I have heard the churn rate here is >90%), the regulator should require a mandatory survey taken every single former distributor: So this is not a sampling which I believe was done by Liberman's research for Herbalife

      The survey would go something like this:

      A. What was your Primary intent to join MLM ?
      1. To be Consumer and avail the discount.
      2. To make Full time income (>30k or higher).
      3. To make Supplemental income (1k-10k).
      4. I was simply obligated to buy it because of a friend/relative. If I had a choice I would not have bought it. 

      Depending on the answer to the 1st question, one of the 3 below groups of questions could be asked.

      B. Primary Intent to join MLM: Consumer
      1. Would you have joined MLM(paying annual fees and buying mandatory stock) to just get a discount but were NOT allowed to sell/distribute product ?

      C. Primary Intent to join MLM: Full time income 
      1. Are you quitting because you realized that you could never achieve the full time income that you expected to make when you joined ?
      2. Were you misled to believe that you could achieve full time income ? Were you aware of the odds of first time distributor achieving full time income when you joined ?

      D. Primary Intent to join MLM: Supplemental income
      1. Are you quitting because you realized that you could never achieve the supplemental income that you expected to make when you joined ?
      2. Were you misled to believe that you could achieve supplemental income ? Were you aware of the odds of first time distributor achieving supplemental income when you joined ?

      By having real responses from real distributors that fail to sign up again, regulators could get an idea of the following:
      1. Of the distributors that are leaving (remember the 90% churn rate), what % were bona fide consumers or bonafide retail demand ? So 'yes' to A1B1 and A4, implies he/she is a real consumer.
      2. Of the distributors that are leaving, what % answered Yes to question C/D.1) (Real distributors) and No to question C/D.2) ( were sold unreasonable expectations of income by the MLM).

      Regulators could set threshold % compliance limits for each MLM. For example, >50% have to be consumers and >25% could not have been sold unreasonable expectations of income.  In my opinion, when you have 10000's failed distributors taking these survey these statistics will not lie. You will ultimately know the reason for the demand. 

      I would appreciate feedback from readers. 

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      Monday, July 22, 2013

      Stocks DD Comments on Bronte's post on Herbalife


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      http://www.businessinsider.com/hempton-on-ackmans-herbalife-thesis-2013-7?pundits_only=0&comments_page=1#comment-51edb5ac69bedd264d000012

      Pay close attention to comments (esp from yours truly)

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      Tuesday, July 9, 2013

      Stocks DD Opines on TARO - Seeking Alpha Article: A Serendipitous Event That Could Potentially Re-Value TARO's Shares In The Market


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      Link -> http://seekingalpha.com/article/1539522-a-serendipitous-event-that-could-potentially-re-value-taro-s-shares

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      Wednesday, June 19, 2013

      Stocks DD Opines on Anacor: An interesting speculative long term value play


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      Anacor pharma IR preso at Deutsche Bank Conf

      -> http://www.media-server.com/m/p/o6med9nj

      -> http://www.scribd.com/doc/149510844/Anacor-Investor-Presentation-June-2013-Compatibility-Mode

      1. They have cash at least until launch next year
      2. 1 interesting pre-NDA asset (onychomycosis) and another more interesting phase 3 asset(atopic dermatitis). Phase 3 to start early next year. There are good market comparables which seem to suggest the 2 products together could garner $300m in peak sales conservatively. Read company's IR presentation for details and Seeking Alpha contributors. SA link
      3. Insider ownership very high at 46%. The company was founded >10 years ago.
      4. Their market cap is <$209m
      5. CFO purchased approx 43k shares at ~$5.2 in the open market this week.
      6. Share price of $5.18 is below their recent secondary offering of $6.39.
      7. They may be awarded a potential monetary settlement with Valeant in September after their arbitration hearing. If they win , they could get damages up to $215m in which case they will likely have no need to dilute in future. I will be studying the merits of this case and make another post.

      Keep in mind, this is a speculative play.

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      Monday, June 17, 2013

      Stocks DD Cites: SEC taking interest in minority buy-outs


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      http://dealbook.nytimes.com/2013/06/17/a-warning-shot-on-management-buyouts/

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      Sunday, June 2, 2013

      Stocks DD Opines on Shareholder rights: Why Shareholders rights of publicly listed companies require changes


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      Is being a shareholder just exercising right by voting on annual proxies ? 

      I hope not.

      Is being a shareholder just submitting proxy proposal annually ?

      I hope not.

      Why not expand shareholder rights to make the board and management accountable to shareholders ?

      1. Can company's management be mandated to answer questions in quarterly earnings call for questions raised by a group of 50 shareholders say owning >1% ?

      2. Can company's board be mandated to answer questions every quarter  raised by a group of 50 shareholders say owning >1% ? A quarterly shareholders meeting in lieu of annual shareholders meeting.


      • Eg:  Company A  has a huge cash hoard. Till date the board has not answered shareholder's questions on their plans for this cash which is earning <0.5% interest. Shareholders believe there are lots of missed strategic market opportunities for this cash.
      • Eg: Shareholder's believe Company A could be a great acquisition candidate for company B that would likely offer Company A at least 3 times its current market price based on company B's recent market acquisitions. Can company A's board be forced to have discussions in good faith with company B.
      • Eg: If shareholders need  changes in the way company conducts itself , there has to be a way for shareholders to suggest this to management/board and the management/board needs to be mandated to respond.  Company A has investor relation practices that has room for improvement. 
      3. If there is compelling reason to have ad-hoc proxy vote on critical shareholder proposal  (that meet specified criteria) raised by say 50 shareholders owning >1% without waiting for the annual proxy , shouldn't it be possible? 
      • Eg: Company A's shareholders believe there is compelling market evidence that could value the company 3 times in a strategic acquisition with Company B. Shareholders would want company  A's board to pursue this opportunity. Shouldn't there be a proxy vote without having to wait for the annual proxy ? Keep in mind markets change fast.
      4. In today's digital age, Shouldn't companies be mandated to provide a current list of shareholders to informally discuss, assess, poll proposals that would maximize or unlock shareholder value before submitting the winning proposals for proxy voting ?

      These rights become esp important when there are conflicts of interest in the board.



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      Sunday, May 19, 2013

      Stocks DD Cites: Hedge Fund Elliot gets 3 board seats in Hess's Proxy Fight


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      QUOTE
      Elliot owns 4.5% of Hess.


      The hedge fund singled out Hess’s board, which it said was packed with cronies of the founding family, like Thomas H. Kean, the former governor of New Jersey, and Samuel A. Nunn, a former United States senator from Georgia.
      Elliott put together its own slate of directors, including Rodney F. Chase, a former deputy chief executive of BP, and Harvey Golub, the former chief of American Express. And it called for what is essentially a breakup of the company, into an international oil exploration concern and a domestic driller.
      Late on Wednesday, the two sides began discussing what Elliott considered an olive branch, according to people briefed on the matter who were not authorized to speak publicly about the talks. The hedge fund was already confident that it would win the vote: one of its preliminary counts had about 148 million votes cast in its favor, versus about 132 million for Hess.
      The two sides huddled separately for hours at the Four Seasons hotel near Hess’s offices here, these people said. Hess and its advisers, including Goldman Sachs, the law firm Wachtell, Lipton, Rosen & Katz and the proxy soliciting firm Mackenzie Partners, commandeered the hotel bar and the nearby business center. Elliott and its group, including the law firm Paul, Weiss and the proxy solicitor Okapi Partners, operated largely from a conference room one floor above.
      One of the lawyers working for Elliott was Samantha Lipton, the daughter of a Wachtell co-founder, Martin Lipton.
      By dawn, the two sides had largely negotiated an agreement. And hours later, what some advisers had expected to be a tense, fractious shareholder meeting instead passed quickly and quietly. QUOTE


      http://dealbook.nytimes.com/2013/05/16/hess-and-elliott-settle-fight-over-companys-board/

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      Saturday, May 18, 2013

      Stocks DD Cites: CALPERS the $200b gorilla well known for activism


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      Proxy Fights
      For the full list go here-> http://www.calpers-governance.org/proxyvoting/home

      http://www.law360.com/articles/24125/calpers-seeks-proxy-access-at-unitedhealth
      "The California Public Employees' Retirement System, also known as CalPERS, said Monday its proposal will allow shareholders who own at least 3% of the company’s stock for more than two years to nominate two directors."

      http://www.reuters.com/article/2009/10/01/idUS218931+01-Oct-2009+BW20091001
      The California Public Employees Retirement System (CalPERS) said it plans to
      vote its shares for the Shamrock Activist Value Fund, L.P. nominees and shareholder proposals. Since announcing its nomination of three candidates to the Texas Industries Board of Directors and its three corporate governance shareholder proposals, Shamrock Activist Value Fund, L.P. has gained the public support of two of the company`s largest shareholders. Southeastern Asset Management, Inc., which holds more than 9% of the outstanding shares of Texas Industries common stock, publicly announced on Sept. 1, 2009 that it will vote for all three Shamrock Activist Value Fund, L.P. nominees and all three of its shareholder proposals.


      http://www.consumerwatchdog.org/story/calpers-opposes-wellpoint-anthem-deal-calls-proxy-fight
      Citing "excessive" executive compensation, the nation's largest public pension fund said Monday it would fight the proposed merger ofWellPoint Health Networks and Anthem Inc. that would create the nation's largest health maintenance organization. CalPERS directors also called on Gov. Arnold Schwarzenegger through his Department of Managed Health Care to hold a public hearing on the merger and impose its authority to prohibit improper spending on administrative costs such as executive compensation.

       http://articles.latimes.com/2013/feb/07/business/la-fi-tn-shareholder-greenlight-sues-apple-to-block-stock-proposal-20130207
      CalPERS apparently liked the fact that Apple's proposal called for the majority election of all directors, in addition to the elimination of what CalPERS termed the "blank check" preferred stock. 

      Any Tom, Dick and Harry can submit an investment proposal to CALPERS
      http://www.calpers.ca.gov/index.jsp?bc=/investments/investment-proposals.xml

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      Friday, May 17, 2013

      Stocks DD Cites: Whalewisdom update on q1 13f filings on Taro - Calpers has a token position now


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      Filer   Shares Held Market Value Change in  Shares


      BLUEMOUNTAIN CAPITAL MANAGEMENT, LLC 651,737 $38,250,444 8,073
      RAGING CAPITAL MANAGEMENT, LLC 447,583 $26,268,646 27,200
      GREYWOLF CAPITAL MANAGEMENT LP 390,286 $22,905,885 202,789
      ANCIENT ART, L.P. 259,848 $15,250,479 136,017
      RENAISSANCE TECHNOLOGIES LLC 125,400 $7,359,726 39,400
      CONSONANCE CAPITAL MANAGEMENT LP 57,356 $3,366,224 57,356
      D. E. SHAW & CO., INC. 44,200 $2,594,098 44,200
      ATIVO CAPITAL MANAGEMENT LLC 28,741 $1,686,809 28,741
      NAVELLIER & ASSOCIATES INC 21,023 $1,234,000 67
      LOEB OFFSHORE MANAGEMENT LP 20,000 $1,173,800 39,500
      CALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM 14,856 $871,899 14,856
      BLACKROCK INSTITUTIONAL TRUST COMPANY, N.A. 12,763 $749,060 8,754


      Calpers is a well known activist investor. Right now their position is small. We don't know when they initiated their position. The big question is are they accumulating and is it harbinger for activism and a potential proxy fight to unlock shareholder value in TARO.

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      Tuesday, April 16, 2013

      Stocks DD Cites: Taro Pharma - SA article


      Read, understand and consent to the blog's DISCLAIMER here before proceeding to read the article


      http://seekingalpha.com/article/1339201-my-thoughts-on-taro

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      Saturday, April 6, 2013

      Stocks DD Cites: Trius's Tedozolid differentiation from Pfizer's Linezolid


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      Presentation->Link

      See slide 20, where they say 40% of Linezolid's sales (in off-label indication where long term dosing is needed)  and Linezolid safety is questionable. Tedozolid does well in safety signals in long term dosing . I think the major concern was generic linezolid in 2016 but this above data would likely put that concern to rest?





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      Saturday, March 9, 2013

      Hedge Fund Saga on Herbalife: A very interesting article


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      Link

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      Friday, March 8, 2013

      Stocks DD Cites: Moving the needle on Zevalin - Raj's Talk 2 Years ago


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      March 2011 Q4 2010 Conference Call - Listen from min 34:00 to 44:00 -> Link

      Suffice to say Management has NOT been able to move the needle on Zevalin sales for the LAST 2 YEARS. We hear the same/similar pitch to Investors today from Raj that you heard 2 years ago. The sales still is around $30m in 2012. 

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      Saturday, March 2, 2013

      Stocks DD Cites: Vanity Fair on Ackman and Leob


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      Link

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      Saturday, February 16, 2013

      Perrigo


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      Link

      Perrigo's CEO makes some interesting points:
      Papa described the ideal formula will be 90 percent generic refill, and 10 percent branded. “The reality is when a brand comes out with a new innovation, you should get rewarded for the renovation,” Papa said. “But when it’s been on the market for 15 or 20 years, it’s time to now to get a store brand into into the market place so the brand can focus on the next new innovation.”
      Papa was introduced by Meijer co-CEO Mark Murray who described the Midwest retailer’s relationship with Perrigo as “spectacular.” Perrigo manufactures much of Meijer’s store brand, over-the-counter pharmacy products.

      When asked why health care costs are so much higher in the U.S. than in other industrial countries, Papa attributed it to legal expenses and the investment required to research and develop new drugs.
      At some point we may stop paying for the world’s innovation from a pharmaceutical point of view, but for right now that is what is happening,” Papa said.


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