When Bad Things Happen To Bad Companies

“It looks like a much smaller generic private company completely outmaneuvered two of the giants of the pharmaceutical industry,” said Gbola Amusa, European pharmaceutical analyst for Sanford C. Bernstein & Company. “It’s not clear how or why that happened. The reaction from investors and analysts has ranged from shock to outright anger.”
—New York Times

Thus says one of Wall Street’s Finest in reaction to this week’s news that Barry Sherman, the CEO of a no-name company (named Apotex), had figured out a way to blow the doors off one of Big Pharma’s most profitable franchises five years ahead of nearly everybody’s estimates by using a deal he negotiated with Bristol-Myers that was subsequently nixed by the government.

Here’s how he described his coup:

Mr. Sherman, in a telephone interview, all but ridiculed his two big rivals, saying they had naïvely agreed to conditions that allowed his company to bring its product to market even though the deal was rejected by regulators.

“I think they acted foolishly in a number of ways,” said Mr. Sherman, a Toronto billionaire who amassed his fortune in the generic drug business.

Mr. Sherman said that he had never expected the American government to approve the deal, but that he had conducted the negotiations in a way to let him push the Apotex drug onto the market.

Mr. Sherman said Apotex was engaged in an “all-out launch” and has already shipped most of its inventory while manufacturing continues.

Now, I could have spared the Sanford Bernstein analyst quoted at the top—and any other of Wall Street’s Finest—all that “shock” and “outright anger” at the latest in a long string of bad news from Bristol-Myers, if anybody had asked, by pointing out that there is a reason bad things keep happening to Bristol-Myers: look at the track record of the man in charge.

Oh, sure, I know the latest spin—the company has a amassed a great cancer drug pipeline under its CEO, the MBA-trained Peter Dolan, who has to his credit been working feverishly to bring the company back from the brink of a channel-stuffing disaster that resulted in an SEC investigation, a fine, and subsequent earnings restatements.

But Mr. Dolan was—and I merely point this out as a fact—President of Bristol-Myers during the time period (“from the first quarter 2000 through the fourth quarter 2001” according to the SEC) that it was found by the SEC to have been doing what was described by the SEC as follows:

…improperly recognizing revenue from $1.5 billion of such sales[“excessive” amounts “ahead of demand”] to its two largest wholesalers and using “cookie jar” reserves to meet its internal sales and earnings targets and analysts’ earnings estimates.

Mr. Dolan was—and I merely point this out as a fact—both Chairman and CEO of Bristol-Myers in 2004 when the company settled with the SEC and paid a $150 million fine for the above.

Mr. Dolan was also—and I merely point this out as a fact—President of Bristol-Myers in 2001 when the company spun off its orthopedics business, Zimmer, in order to ‘focus on its pharmaceutical business’ (the one with the channel-stuffing problem), thereby freeing Bristol-Myers from the distraction of owning one of the great growth businesses in medical device history.

Likewise, Mr. Dolan was—and I merely point this out as a fact—Chief Executive Officer in 2001 when the company spent $7.8 billion to buy DuPont’s drug business, which left most of Wall Street’s Finest scratching their heads at the time, and still does.

And he was also—and I merely point this out as a fact—Chief Executive Officer when the company paid $70 a share for 20% of the about-to-become-scandal-embroiled biotech company Imclone in 2001 (Imclone trades under the ticker IMCL, and is currently $32.78 bid, $33.11 offered).

And here is how the Times described the situation by which Mr. Sherman has apparently outfoxed Mr. Dolan, Bristol-Myers, and its Plavix partner, Sanofi:

As part of the federal investigation, the F.B.I. recently searched the offices of Mr. Dolan and Dr. Andrew Bodnar, his close adviser. Dr. Bodnar visited Mr. Sherman’s Toronto office twice to personally negotiate part of the deal, according to Mr. Sherman.

The Justice Department is believed to be investigating whether Bristol and Sanofi tried to conceal a so-called side deal with Apotex that would not have passed regulatory muster. Both companies have denied doing anything improper.

“Bodnar kept saying that he was in contact with Peter Dolan and Dolan was 100 percent behind whatever he was negotiating,” Mr. Sherman said yesterday. “Whatever he was doing, whether or not there were side deals that were not reported to the F.T.C, I cannot comment on.”…

In the telephone interview yesterday, Mr. Sherman declined to comment on what Apotex had or had not told the government. But he said he never expected the deal to clear regulatory review and went along with it simply to position his company to enter the market with its generic. Mr. Sherman said he viewed efforts by brand-name companies to extend monopolies through settlement negotiations as “outrageous.”

“Our focus was to get the concession that would enable us to launch, when the F.T.C. turned us down,’’ Mr. Sherman said.

Now, somebody please explain to me why Wall Street is “shocked” that Bristol-Myers was, as today’s New York Times article says, “completely outmaneuvered” by a no-name generic drug maker?

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.