Whitney Tilson’s email to investors discussing Purdue Pharma and the opioid epidemic; bearish report on Uber and Lyft; Wells Fargo closed their accounts, but the fees continued to mount.
1) In my July 22 e-mail, I warned my readers to avoid the stocks of companies that were involved in fueling the devastating opioid crisis:
Q2 hedge fund letters, conference, scoops etc
I think these companies could end up like ones that were associated with asbestos, with many stocks destroyed and companies bankrupted. I'd be very cautious investing in the stocks of the following companies that are involved with this mess...
One of those companies was Johnson & Johnson (JNJ), which just got hit with a big penalty: Johnson & Johnson Ordered to Pay $572 Million in Landmark Opioid Trial. Excerpt:
A judge in Oklahoma on Monday ruled that Johnson & Johnson had intentionally played down the dangers and oversold the benefits of opioids, and ordered it to pay the state $572 million in the first trial of a drug manufacturer for the destruction wrought by prescription painkillers.
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In his ruling, he wrote that Johnson & Johnson had promulgated "false, misleading, and dangerous marketing campaigns" that had "caused exponentially increasing rates of addiction, overdose deaths" and babies born exposed to opioids.
I don't have a strong opinion on JNJ's stock because the company doesn't appear to be anything close to the worst corporate actor in the sordid tale. That title falls to Purdue Pharma, which bears most of the blame for launching the opioid epidemic more than two decades ago, as this New York Times article shows: Origins of an Epidemic: Purdue Pharma Knew Its Opioids Were Widely Abused. Excerpt:
Purdue Pharma, the company that planted the seeds of the opioid epidemic through its aggressive marketing of OxyContin, has long claimed it was unaware of the powerful opioid painkiller's growing abuse until years after it went on the market.
But a copy of a confidential Justice Department report shows that federal prosecutors investigating the company found that Purdue Pharma knew about "significant" abuse of OxyContin in the first years after the drug's introduction in 1996 and concealed that information.
Purdue Pharma far from lone offender
Purdue later passed the torch to other companies that then fueled the epidemic to horrific levels. One of those was Mallinckrodt (MNK), which is truly rotten to the core, not just for opioids, but also for its scammy, overpriced H.P. Acthar Gel. It will be a great day when it files for bankruptcy. This Wall Street Journal article is very revealing: New Details Emerge Over Mallinckrodt's Role in Opioid Crisis. Excerpt:
Now, more details and questions about Mallinckrodt's role in the opioid crisis are emerging, including whether it effectively guarded against products leaving legal distribution channels as required by law.
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The documents show that Mallinckrodt grew sales of prescription opioids while the nation's addiction crisis blossomed, even as employees and outside parties expressed concern over the effectiveness of the company's programs to guard against diversions and over-ordering.
Lastly, for those of you interested in more background, I suggest watching this 24-minute segment on Patriot Act With Hasan Minhaj, America's Deadliest Drug: Fentanyl.
2) My colleague Enrique Abeyta shared a bearish report with me last week from a month ago on ride-sharing services Uber (UBER) and Lyft (LYFT) by Arete, an independent equity research firm that Enrique has used for years.
Arete has been around since 2000 and Enrique tells me it's the leading independent shop that top tech investors use as an antidote to boosterish investment bank analysts. I was impressed with the report and, with Arete's permission, am sharing it with you here. Excerpt:
After several months of looking deeply into the underlying markets, we still question whether either Uber or Lyft can become structurally profitable in the medium-term, while consensus has not factored in any likely recession in their outlooks. We see issues with ride-sharing profits, given already-boosted take rates (with autonomous being years off), the low likelihood of a benign competitive dynamic in key markets, and other challenges in usage, insurance costs, and regulation.
We are initiating coverage with a Sell rating on Uber and a Neutral on Lyft, only because the latter is likely to "beat" what we think is oddly low 2Q19 guidance. Our '19E DCFs need to stretch forecasts until 2030E as we do not see either company becoming EBITDA profitable until '24E, and see Uber "worth" $33 (25% downside) and Lyft at $54 (18% downside). Our models assume slowing ride-sharing growth (reflecting recession risk to what is discretionary spend), while new initiatives (from electric scooters to Lagos boat taxis to autonomous driving) are immaterial. We are concerned that four major issues have been seemingly overlooked by the Street and the many banks in the IPOs:
- Growth, For How Long? Ride-sharing sales growth slowed to 9-12% for Uber in the last two Qs, while Lyft's growth rates will fall as it laps pricing changes. This is not a case of awareness – both brands are well-known. We think the "TAM" has been over-stated, and usage patterns (rides per active user) are clearly seen to reach a series of plateaus.
- From Benign to Brutal. Lyft relies on the US, where Uber has a dominant 70% market share. We think the current détente will ultimately prove unstable. LatAm markets show how Uber could be damaged by a well-funded new entrant, before it "grows the pie." We think the prisoner's dilemma is resolved in a "knife fight" dynamic, with food delivery even more fragmented.
- An End to Squeezing Drivers? Lyft got 40% of sales growth since '16 from cutting driver take rates. The scope for regulatory arbitrage is narrowing, as seen in many cities, and a pending California law (AB5) could add further costs. With the "autonomous revolution" still far off, we think the labour arbitrage underpinning both companies is nearing its limits.
- Food Delivery Adds Growth, Burns Cash. Uber had ~$1bn of "uneconomic" delivery costs in '18; cars are a poor solution for food delivery in many urban markets. Uber faces entrenched rivals, with Eats #1 in just one of the top 10 US markets. We can see Lyft seeking a merger with GRUB, as a source of customers and cash flow, but this would be highly dilutive.
P.S. Arete has a new report out that is bearish on Apple (AAPL), which I'll share if the company gives me permission.
3) It really boggles my mind that Wells Fargo (WFC), having paid billions in fines and under tremendous scrutiny for all sorts of bad behavior, is still doing crap like this... Wells Fargo Closed Their Accounts, but the Fees Continued to Mount. Excerpt:
Current and former bank employees said Mr. Einaudi got charged because of the way Wells Fargo's computer system handles closed accounts: An account the customer believes to be closed can stay open if it has a balance, even one below zero. And each time a transaction is processed for an overdrawn account, Wells Fargo tacks on a fee.
Best regards,
Whitney
