When crisis cases play out in the media for all to see, if you have the right relationships with the right journalists, you can learn a lot about what’s coming, enabling you to preempt, respond, and counter. It’s different, however, when you take on short sellers—the mysterious, often anonymous, band of traders, hedge funds, and analysts who make their living by targeting a company and, more often than not, its executives in a bid to take down its stock price, sometimes by almost any means necessary.
Trying to identify them can be like trying to grab a ghost. When you take on the “shorts,” the rules often are bent or broken by the other side. Some of them are unabashedly unethical, and because they recognize no standards of behavior, you don’t know what they will do next. It is as if they don’t let the facts get in the way of a good story—no, wait, that is precisely how some of them operate.
In fact, some short sellers will invent facts, planting rumors in the media and on the street that they know damn well are not true to batter the price of a stock they have shorted. They have been known to misrepresent themselves, impersonating reporters, government officials, and company executives to extract information. Worst of all, they operate with the utter impunity of anonymity, letting them lodge even the most scandalous charges without being held accountable.
Yet some in the media, including top-grade publications, are only too happy to make use of tips from short sellers with an agenda and parrot their storyline in articles directly generated by the shorts. The web, which now is a major outlet in and of itself, has spawned thousands of online chatrooms for stock gossip and provided a megaphone for blogger websites, including those that are long on bold opinions, invective, and scurrilous assertions without showing any regard for the ethics and standards that have governed journalism for decades. Twitter posts add to the turmoil, with some thinly traded stocks vulnerable to wild fluctuations in response to silly speculation. Then, if the story is right or your luck is bad, mainstream, top-line media will pick up on social media stories and do their own stories. There can be hundreds of tweets and Facebook posts, but they won’t have anywhere near the impact of a major story in Barron’s, the Wall Street Journal, the Financial Times, or the New York Times on the price of a company’s stock. (Hence my Rule 7: Social media are often a means to an end. Even now, traditional mass-media franchises still have a much bigger effect on Wall Street and bringing about change.)
When short sellers start rattling your company’s cage, therefore, you must respond responsibly, quickly, copiously, and persistently. Rule 1 of Sitrick’s Ten Rules for Engagement is that confining yourself to “no comment” sometimes can be PR malpractice. When you go to war against short sellers, “no comment” can be disastrous. Since this may be the only response possible if you don’t have the facts, it is crucial to get the facts as soon as possible. Otherwise, you’re a sitting duck for both the shorts and the media. An editor I knew at Barron’s, a Vietnam veteran, used to say whenever a company he was writing about refused to cooperate, “That’s fine with me, because they’ve just declared themselves to be in the free-fire zone.” Shorts love “no comment” for the same reason. So do I when we are on offense.
Trying to strike back at short sellers requires getting hold of the right facts, but also being able to document them, whether with an audited financial statement, testimony or validation from the right expert, a new study, or some other form of proof. It also requires research on the opposition to figure out who is throwing the spears and what his angle or motivation is. Then the strategic communications counselor must be able to get this information to the right reporters at the right outlets to shield your client’s reputation and stock price and mount a counteroffensive of your own.
To be clear, a lot of PR people will argue that because a short seller holds a large short position in the company’s stock, the reporter should not use what he or she says. When I am confronted with this comeback, my response is that, while it is important that the reporter know about the short seller’s position so he can take it into account when vetting the information, the only thing that matters is whether the information is true. If what he is saying is true, he can be a convicted felon. In a court of law the accused is innocent until proved guilty, but in the court of public opinion, he is often assumed guilty until proved innocent. This is especially true when the short is a regular source of information for the reporter or his publication.
Before we go further, let me offer a quick definition. To sell a stock short is to bet on its decline. The short seller sells “borrowed” shares, which he doesn’t own, pocketing the proceeds for the time being, with the promise to return the borrowed shares later—presumably, after the stock price has fallen and the short seller can buy the replacement shares at a much cheaper price than when he sold the borrowed shares to start the trade.
If you short Apple stock at, say, $125, and it falls to one hundred, you could “cover the short” by buying shares at one hundred dollars, paying them back to your broker, and pocketing the twenty-five-dollars-per-share difference. If, instead, Apple rises to two hundred dollars, you could get crushed in a “short squeeze,” having to replace the shorted shares by acquiring them at prices far higher than what your borrowed shares fetched when you first sold them.
To be sure, nothing is inherently wrong with short selling. It is an entirely legal practice that allows investors to hedge their upside bets, helping the market to determine the right price for a stock and making markets more liquid and adaptable. The problem is that some short sellers try to knock down a company’s stock price by planting damaging and false rumors. As you might suspect by now, I have a problem with that. Lying is wrong, and when you tell lies to manipulate stock prices, you may be breaking the law. As for other short sellers who didn’t launch the lie but pile on and trade on the rumors, if they too disseminate information they know to be untrue, they could be breaking the law as well. And they should be stopped.
When short sellers wage an attack, more is at stake than a company’s stock price. Irresponsible and false rumors can seriously damage relations with lenders and vendors, forcing a company to pay higher interest rates on new debt and accept less favorable terms from suppliers. Speculation about solvency or a regulatory investigation can derail deals and spook customers, partners, and employees. And a stock’s fall can gain momentum as investors decide it doesn’t matter whether the rumors are false because this stock is headed down anyway.
Perception Becomes Reality
Perception becomes reality. A company can end up in trouble because of rumors that it may be in trouble or key constituents think it is in trouble. The valuation of a company may depend less on its actual performance and more on how investors feel about it—whether they trust and have confidence in management, and whether they like what they see.
Short sellers operating outside ethical bounds therefore play a con game that relies on undermining the confidence other investors have in a business. It is the strategic communications advisor’s daunting mission to restore that confidence at the worst time by proving that the rumors are wrong—assuming, of course, that they are wrong. A word to the wise, then, when you must wage combat with short sellers: sometimes, the facts don’t speak for themselves. Short sellers thrive in companies with complicated businesses, which by their very nature can result in a vacuum of understandable facts. They also thrive when companies don’t respond to allegations, filling an information void with speculation, rumor, conjecture, forecasting, guesses, and, in some of the toughest cases I have handled, outright, intentional, bald-faced lies. The best way to fight an onslaught of non-facts is with relentless use of the real facts.
I’ll say it again: the facts don’t speak for themselves. The truth of that insight was reinforced a while back when I met the CEO of an internationally respected company that had come under attack by a fairly large group of short sellers. A man of understated skill and integrity, he faced a pack of jackals who were spreading the lie that his company was on the brink of financial collapse.
The company, though it had been under attack for more than a year, had ignored the innuendo and false rumors, deeming them so incredible as to be unworthy of response. The CEO, like many chief executives when their company comes under fire, had chosen to keep a low profile, declining press interviews and letting the financial gains speak for themselves, an approach his PR advisors had endorsed. Now the CEO had lost faith in this passive strategy. “We were ignoring this. We can’t ignore this anymore,” he told me in our first face-to-face meeting in his offices. “We thought the facts would speak for themselves.”
“I’m sorry, but in cases like this they don’t,” I responded. “Unless somebody corrects it, the wrong facts can go on forever.”
For this CEO, whose identity cannot be revealed here, the company’s lawyers and we were able to neutralize the short sellers by demonstrating that they had been lying. The stock price reacted positively. Once we were able to get out the real facts about the company and its performance, the market responded by sending the company’s stock back to its pre-attack levels. As the business continued to improve, the stock reacted accordingly. Today, the company is thriving and so is its stock price.
In many short seller raids, traders go to desperate lengths to try to damage the target, providing false tips to government investigators, alleging wrongdoing to the company’s bankers, accountants, and customers, and convincing reporters to write stories based on the shorts’ version of the facts. Keep that last method in mind: reporters are on the front lines of many short seller campaigns, and often you must focus your countermoves on their efforts. It’s an interesting circle of life: bankers, customers, rating agencies, analysts, and investors are influenced by what they read in the media; on the other hand, what reporters write in the media is influenced by those they consider credible sources, which include bankers, customers, rating agencies, analysts, investors, and short sellers.
In one instance, the first attack surfaced in a blistering New York Times article. In another, it was an analyst’s report, which was then quoted in a major financial magazine. In a third case, the sniping came in local newspapers, first criticizing the company and then the board.
I have been fortunate that with very, very few exceptions, the CEOs and companies I have represented have played by the rules and within the law. While I have represented them, all have played by the rules and within the law. Nevertheless, I have seen many cases in which it took shockingly little evidence, concocted by a group of anonymous short sellers, to jolt a major public company and unjustifiably tarnish the otherwise impeccable reputation of its CEO. And that’s why I have formulated Rule 7: If you don’t tell your story, someone else will tell it for you.
In a short seller attack, traders will spread a damaging story in the vacuum left by the company’s silence. The firm’s inside and outside PR advisors often advise the firm that responding to the criticism will just make it worse. Sometimes the PR people field an inquiry themselves and never even tell their client, deciding on their own to ignore it. In one case, a reporter for a major business publication told us that the PR people kept promising an interview only to postpone it several times and then say it wasn’t happening. When I asked the client about it, he told me no one in the company even knew the reporter was requesting an interview. Yet now the reporter was angry and believed the company was “jerking her around.”
Clients must keep in mind that what their agency does on their behalf is attributed to them, even if they know nothing about it. If a PR agency is rude to a reporter, slamming doors on his fingers, refusing to comment, failing to return his calls, it is as if the company itself is doing those things.
In combatting short sellers for clients over the past several decades, I have found that the more complicated a business is, the more attractive a target it is for the shorts. Few analysts and very few reporters or investors understand the intricacies of these complicated businesses, whether they are in financial services or pharmaceuticals or technology. This narrow band of understanding allows a lot of wiggle room in interpretation, and short sellers like that. If a short puts forth a plausible interpretation of a company’s health or prospects, most reporters—and even some analysts—are incapable of evaluating it, though the good ones will check with a second source.
Short sellers also like a thinly traded stock, the price of which can be pushed around more easily because the daily “float”—the supply of company shares available for trading hands among buyers and sellers—is so small. Such stock is susceptible to volatility and manipulation. The other side of that coin is that if the company’s stock were to rebound sharply, the shorts would get squeezed, their losses multiplying with each rise in the company’s shares while they struggle to acquire enough shares on the open market to cover their souring bets. And the more stock they buy on the open market, the higher the price goes. In fact, I have seen many cases where setting the story straight fueled a sharp rise in the company’s stock price, inflicting great pain on our client’s adversaries. Critics of short seller tactics might view this as just deserts.
In waging battle against short sellers, it is important to understand the basis of their story and then disprove it with specific facts. That is how you turn a story. It isn’t magic, it’s a matter of identifying the key points and demonstrating that what the reporter has been told is wrong, communicating the real facts comprehensibly and convincingly.
While I cannot get into many of the specifics of how we proceed in telling our clients’ stories, I will say that we provide riveting details, evidence, that expose the falsehoods. To gather the facts, we sometimes have to conduct our own forensic probe. This is where former top journalists and litigators come in handy.
One of the reasons reporters are so good at this job (assuming you find the right ones) is that they know how to gather and evaluate information, how to dig down to the facts. The same is true of good litigators.
In one of the cases we worked on together, one of my partners, who had been a Wall Street Journal reporter before joining my firm, began by inspecting ten years of financial statements with help from a client’s senior financial analysts, trying to unearth the problems that sparked doubt among short sellers while also sifting out the figures that could contradict them. In another case involving two major pharmaceutical companies, we had to educate ourselves not only about the companies and their CEO but about the science itself. In yet another case, another partner who had been a reporter and editor with the Wall Street Journal, Forbes, and Bloomberg and I did the same. I think you get the idea.
After learning about the company, we review the analysts’ reports and media coverage, identify the errors, and set about correcting the record. Working with our clients’ lawyers, we help a company beat back the shorts and restore shareholder value—in some cases at a substantial multiple of the stock’s lows. The truth will prevail if you put the proper amount of effort into telling it in the right way to the right constituents.
A Matter of Life and Death
A company’s reputation for a stable balance sheet and the trustworthiness and wisdom of its leadership are among its greatest assets. Short sellers seem to gravitate toward a target whose reputation for integrity is a key asset for attack. Drug companies, for example, must be trusted for their clinical trial results, patient safety, and commitment to medical ethics. When short sellers attack, it can be a matter of life or death.
In 2002 the shorts started circling around an innovative drug company, the publicly held American Pharmaceutical Partners of Schaumburg, Illinois, and Los Angeles. APP, as it was known, and its privately held affiliate, American BioScience of Los Angeles, were in the final stages of testing a potential blockbuster cancer drug called Abraxane.
For all the promise of this new drug, some short sellers took aim at derailing it, peddling the self-serving story that APP had overhyped the promise, that its clinical trials were rigged, and that it had too cozy a relationship with American BioScience, the parent that had spun it off and taken it public the year before. The shorts did whatever they could to sow doubt about the drug, even though this threatened to delay FDA approval and endanger the lives of cancer patients.
The late stages of experimental drug trials, which are filled with uncertainty, provide an ideal environment for short sellers. Since drugs can pass phase I and phase II trials, sending a company’s stock price higher in anticipation of approval, only to fail phase III and be denied FDA approval, the trials invite speculation and sometimes outright misrepresentation. A drug maker’s stock price can swing wildly at the slightest hint of what the results might be, and short sellers can surf the gaps between these highs and lows.
In raising doubts about Abraxane, the traders drew a bead on a second target as well: the two companies’ founder, CEO, and controlling shareholder, a brilliant, bold, and extraordinarily accomplished surgeon, researcher, and inventor named Patrick Soon-Shiong, whom they tried to isolate and impugn.
Dr. Soon-Shiong had already been fired and sued at an earlier company he had founded because he refused to continue work on a procedure that would put patients’ lives at risk. He hired my firm after a story appeared in the New York Times in March 2002 accusing APP of having an improper business relationship with Premier, Inc., a powerful hospital distributor that owned a stake in APP. Premier had investments in twenty medical firms, half of which did business with the firm, posing possible conflicts of interest, the Times asserted. From there, the short sellers moved on to impugning first Dr. Soon-Shiong personally and then the drug Abraxane, which increases the potency and reduces the adverse side-effects of a common cancer drug, Taxol. (Taxol lost patent protection in 2000 and is known generically as paclitaxel.)
I needed to know all the facts down to the molecular level to be able to talk about why Abraxane was a breakthrough. Dr. Soon-Shiong explained that with traditional delivery methods of cancer medication, only a small percentage of the drug actually reaches the tumor. This inefficiency is the result of administering the drug in a “shotgun” approach throughout the body and the human immune system’s tendency to attack cancer drugs as soon as they enter the body, sensing an invader and reducing their potency by half or more. Dr. Soon-Shiong wanted to avoid this counterattack by sneaking the medicine past the immune system’s sentries.
Tumors feed themselves by taking nutrients from the blood cells. All solid tumors contain secreted protein acidic and are rich in cysteine, or SPARC, Dr. Soon-Shiong told me. SPARC is the vehicle that draws the white blood cells into the tumor so it can survive and grow. What if, he wondered, we could trick the tumor into thinking it was feeding itself, when instead it was killing itself? He believed he could do this by using nanotechnology to shrink the cancer medication to a thousandth of the size of a blood cell, hide millions of molecules of this cancer medication inside submicroscopic balls made with a coating of a human protein (albumin), and inject it into the patient’s bloodstream. The tumor might blithely ingest the tiny, undetectable medicine balls, and instead of feeding itself would kill itself. Because the balls were coated with albumin, a protein found in egg whites, each one would act like a Trojan horse, traversing the bloodstream unmolested. This might let the Taxol travel to its destination without setting off alarms in the immune system.
There is an added benefit, Dr. Soon-Shiong told me. Taxol usually must be delivered in a chemical solvent known as Cremophor. Patients, to battle the deleterious effects of the Cremophor, must load up in advance on steroids, which have their own side effects. The Cremophor is so toxic and caustic that it melts through IV tubing, requiring special glass tubes to administer it. The Abraxane approach would eliminate the need for the solvent, the special equipment, and the steroid treatments, Dr. Soon-Shiong had told analysts, investors, and medical colleagues. Thus, Abraxane offered a possible triple advantage: more potency, fewer and milder side effects, and easier and faster delivery.
If this new molecular delivery system worked, APP, which would make and deliver the drug, and American BioScience, which owned the drug, designed it, and now was in late-stage trials to test it, had plans to produce an array of cancer drugs, saving or extending the lives of hundreds of thousands of patients and, in the process, reaping billions of dollars in sales.
Raising Doubts, Questioning Integrity
But short sellers were doing all they could to raise doubts about Abraxane and Dr. Soon-Shiong himself, questioning the integrity of the clinical trials and accusing him of all kinds of things, including putting his own interests before those of his minority shareholders.
American BioScience, the research and development arm, was formed in the early 1990s, and in 1996 APP was founded with an initial focus on U.S. marketing and distribution of generic pharmaceutical products manufactured by others. In June 1998, APP acquired Fujisawa USA’s generic injectable pharmaceutical business, including manufacturing facilities in Melrose Park, Illinois, and Grand Island, New York, and a research and development facility in Melrose Park. (Dr. Soon-Shiong held a more than 80 percent stake in both companies.)
APP did a booming business selling generic injectable drugs, and in November 2001, it announced a deal to acquire the North American rights to Abraxane (still in trials) from its 65 percent owner and progenitor, American BioScience. APP agreed to pay American BioScience $60 million up front plus $25 million later and a split of future profits. A month later, Dr. Soon-Shiong staged an initial public offering of APP shares on the Nasdaq stock market, raising $134 million. And the month after that, in January 2002, APP handed the required $60 million upfront payment to American BioScience.
Some critics charged that he was self-dealing, draining away tens of millions of dollars that APP had just raised from outsiders in the IPO, and diverting the cash to his privately held firm, American BioScience. APP emphasized that an outside consultant had given the deal a positive fairness opinion and that all four of the company’s outside directors had approved the terms to ensure all shareholders would fare as well as Patrick Soon-Shiong would.
By early 2003, short interest in APP had soared to 17.5 million shares, roughly half of all the company’s shares that traded on the Nasdaq. All that selling in the stock depressed the company’s share price to a low of less than six dollars in the first half of the year. Typical of the media coverage tilting against Patrick Soon-Shiong and APP was a story in TheStreet.com in March 2003 that began, “The most intriguing question about American Pharmaceutical Partners (APPX: Nasdaq) is who will benefit most from the business: Chairman and CEO Dr. Patrick Soon-Shiong or its outside shareholders?”
Actually, one might argue that the “most intriguing question” was what new cancer-fighting drugs might be unleashed if Abraxane was found to extend patients’ lives in trials then underway. Instead, the story went on to discuss Dr. Soon-Shiong’s control of both companies and their business relationship:
That is one of the reasons why short sellers have targeted American Pharmaceutical, which they see as simply a cash machine for Soon-Shiong and American BioScience. To these critics, who have borrowed against 47% of the freely traded shares, everything about this arrangement favors Soon-Shiong leaving outside shareholders holding a very short straw.
The story did point out (in the bottom half) that APP executives “insist all the details concerning the deep and interlocking relationships . . . are disclosed” and noted that the company was “engaged in a rigorous practice of full public disclosure” and that its auditors and regulators had not raised any concerns. It then quoted my partner on the case, Lew Phelps, as the company spokesman, saying: “None of this is kept secret from investors, and no one is holding a gun to their heads making them invest in our company.”
The short sellers kept fanning the flames of the rumor that these dealings between APP and American BioScience hadn’t been disclosed at all, even though this was flatly false. On Wall Street, failing to disclose some controversial matter can get you in even more trouble than the controversy itself, so this can be an attack entry point for the shorts.
Then one afternoon I got a call from Dr. Soon-Shiong saying that a reporter from the Wall Street Journal’s “Heard on the Street” column was writing something for the next day. “My IR (investor relations) firm said we shouldn’t respond,” he told me. “What are they calling about?” I asked. “I don’t know,” he said. I suggested I call and ask. “You can always say no comment, once we find out,” I said, knowing that this almost never happens once the client hears the questions. “Let’s at least make an informed decision.”
I got the issues the reporter was asking about. He was claiming that several key items had not been disclosed. I discussed it with Dr. Soon-Shiong. “They absolutely have been,” he said. They’re in our current 10Q.”
“Then let’s get on the phone and point them out to him,” I said. And we did just that.
Dr. Soon-Shiong said he was nearby and would walk over to my offices, based in Century City at the time. I promptly got the reporter on the phone to go over the assertions he planned to include in his story—likely fed to him by the shorts. The first item, Dr. Soon-Shiong said, is on page x, line y, of the 10Q. “See it?” I would say, and read it to the reporter. By the fourth example, he said, “I got it, and I will never use that person as a source again,” adding that there would be no story.
In September 2003, the company put out a press release hailing promising early results for Abraxane over Taxol in the ongoing trial but saying the details and data wouldn’t be released until a cancer drug conference in December. This delay, despite the outstanding results, encouraged the short sellers’ fearmongering, and they knocked down the share price of APP stock accordingly, reducing it by one-third of its former value.
You can play whack-a-mole indefinitely and struggle to keep up with the rumors planted by the shorts, but it can be a frustrating game. We needed to get out in front of them, to tell our own story in our way. To do that, I knew we needed to pick the right Lead Steer, a media outlet that, if we delivered the evidence, wouldn’t be afraid to take a contrarian view and devote effort and space to telling Patrick Soon-Shiong’s side of the story. Ideally, it would be an outlet that other media would be likely to follow.
Forbes magazine, in this case, was the right fit. Contrarian by design, it zigged where other reporters zagged, celebrating what its managing editor at the time called “heroes of capitalism, and the triumphs and travails on the path to creating new wealth.” So I invited the managing editor to a private lunch with Rudy Giuliani, the former New York mayor and a possible Republican presidential contender. Giuliani was consulting to Dr. Soon-Shiong at the time. I told the editor at the outset that the purpose of the meeting was for him to sit down with the doctor and hear what he had to say. If he agreed that there was a good, contrarian story there, he should assign someone to write it.
The lunch went well. There were only three of us there, and the Forbes editor was the only journalist at the table. (I avoid group sessions with journalists, preferring to offer an exclusive or a special opportunity to one journalist at a time.) Quickly grasping the importance and the sizzle of the Soon-Shiong story, he assigned the profile to a young staff writer, shepherding it into the magazine’s October 6, 2003 issue (which appeared online and on newsstands two weeks earlier than the publish date).
That editor was none other than Dennis Kneale, my collaborator on this book. He and his reporter put together a heroic tale of an innovative scientist-entrepreneur crusading to save lives (and create new wealth) while battling hordes of short sellers. The story was worthy of Horatio Alger: born in South Africa to Chinese parents who had fled China in World War II. Graduated from medical school near the top of his class, one of the first nonwhite surgical residents to join a major hospital in Johannesburg, earning a thousand dollars a month (half the pay of white doctors). Joined the faculty of UCLA medical school in 1983, and two years later, at age thirty-four, performed the school’s first pancreas transplant, saving the life of a diabetic woman.
A Unique Insight
The Forbes article described how Dr. Soon-Shiong, searching for less invasive treatments, pursued an emerging technique that, rather than replace the pancreas entirely, sought to inject the existing organ with an extra dose of islet cells, which produce insulin inside the pancreas. Then came his unique insight: one could protect the islet cells from attack by the body’s immune system by “hiding” them inside capsules made from a seaweed-based gel.
Dr. Soon-Shiong formed a new company, VivoRX, to pursue this work, joined by the drug-maker Mylan. Then he formed a second company for himself, VivoRX Pharmaceutical, to research the broader notion of shrouding other cancer drugs inside a “biologically active” capsule to rev up potency without triggering the immune system.
In 1998, Dr. Soon-Shiong refused to continue the procedure after he discovered it could put patients at serious risk, and VivoRX fired him. Cleared of any wrongdoing by an independent arbiter who reviewed seventeen thousand documents in the case, as the Forbes story pointed out, he went on to pursue his research at his second company, which he renamed American BioScience. While the earlier diabetes research withered after he left (he had a noncompete agreement in diabetes research), his new efforts to develop Abraxane showed enormous promise. Once again, he set up a new, separate company, this one to produce and distribute drugs from other makers: American Pharmaceutical Partners, APP, which he took public in December 2001.
The Forbes profile had a great “why now?” angle: soon the results would be released for final phase III trials of Patrick Soon-Shiong’s new cancer drug. The headline was perfect: “Vindication.” Three months later the company released trial results, which were promising and impressive.
“New Drug Said to Improve Delivery of Cancer Medication,” ran the headline in the New York Times on December 6, 2003. The story announced that in the trial of 460 women with metastatic breast cancer, Abraxane had reduced tumors in 33 percent of them, compared with 19 percent for the old Taxol delivery with solvent and the steroid therapy. Those on Abraxane were able to get 50 percent more paclitaxel than those on Taxol, and in just half an hour compared with a three-hour infusion for Taxol patients. Abraxane, just as Dr. Soon-Shiong had hoped, didn’t require the steroid treatments that must accompany Taxol, and only 9 percent of women on the new drug had a severe reduction in infection-fighting white blood cells, compared with 22 percent of women on Taxol.
Shares of APP popped up nicely on the news, and by the end of 2003 the company’s short interest had fallen from seventeen million shares to ten million, the share price climbing from six dollars early in the year to twenty. Soon, however, the short sellers were back, chipping away at the results. “New doubts raised by trial methods in cancer drug study,” the Los Angeles Business Journal reported on January 5, 2004, adding:
The stock initially surged on the news, but since then it has dropped back down as short sellers, who have been gunning for the company and its controversial chief executive, L.A.-based Patrick Soon-Shiong, seized on questions about the study’s methodology and the drug’s potential to gain Food and Drug Administration approval.
The shorts complained that three-quarters of the trial patient base consisted of women in Russia, questioning whether the results could be trusted. Taxol showed less effectiveness in the Russian patients than elsewhere, which could make Abraxane look better than it is, they asserted. The article quoted a report by a Wall Street analyst who was a former FDA medical reviewer and a critic of this trial’s design: “We still believe the odds favor non-approval with the phase 1, 2 and 3 data in hand for Abraxane at this time.”
By September 2004, the shorts had succeeded in rousing the interest of regulators, and the Wall Street Journal disclosed that the Securities and Exchange Commission was conducting a preliminary inquiry into disclosures made by American Pharmaceutical Partners regarding Abraxane. In particular, the SEC was said to be looking at whether APP misled investors regarding whether Abraxane would require steroid treatments. (Nothing ever came of this.)
In January 2005 came the proof of what Patrick Soon-Shiong knew to be true. Much to the short sellers’ dismay, the FDA approved Abraxane for breast-cancer patients who had not been helped by first-line treatments. This made Abraxane a second-line treatment, which has a smaller market, but it was only the beginning. Shares of the company jumped 47 percent in a single day, a triumph that Dr. Soon-Shiong commemorated with paperweights displaying APP’s stock chart from that day. Shares of APP more than doubled from their low in late 2004, approaching the thirty-dollar mark a few months after Abraxane won FDA approval. The short interest in the company, meanwhile, plummeted from ten million shares to five million and falling. This battle was all but over.
By the end of 2005, Dr. Soon-Shiong moved to quell the controversy over his control of the two companies, publicly-held APP and privately-held American BioScience, by merging them, APP acquiring its former parent for $4.1 billion in APP stock. This handed more than three billion dollars in stock to Dr. Soon-Shiong with his 80 percent stake in American BioScience, sparking a new round of short seller accusations of self-dealing and sweetheart terms.
The merged company, renamed Abraxis BioScience, soon had seventy-four trials underway for Abraxane, testing it against various cancer targets. With Abraxane on the market, the financial firepower of Dr. Soon-Shiong’s breakthrough—revving up an off-patent cancer drug with a new delivery system that unlocked more of its power and eased its side effects—became clear.
Then in 2007, Patrick Soon-Shiong split his company in two—again—forming separate, publicly held concerns: Abraxis BioScience, Inc., which held the Abraxane business and the protein-nanocoating technology, and APP (for Abraxis Pharmaceutical Products), which had the injectables business. Dr. Soon-Shiong owned 80+ percent of both Abraxis BioScience and APP. He made this move because he felt the market wasn’t fully valuing the two parts of the company, and he proved to be right: the combo had a total market value of $3.5 billion just before the split, and less than a year later the total value of the two separate companies combined was at six billion dollars.
Abraxane won approval as a second-line defense in Europe in 2008, and eventually the drug won FDA clearance as a first-line treatment for breast cancer and for some cases of melanoma and pancreatic cancer, with promising trials for lung cancer, small-cell carcinoma, and still other targets underway. In September 2008, as shares of APP were at seventeen dollars and change and near their high, the company sold itself to a German healthcare giant for twenty-three dollars a share, plus a contingent value right that could deliver up to an additional $980 million, or six dollars per share in cash, for a total consideration of $5.6 billion. Investors who had purchased APP stock in the IPO back in 2001 had reaped a sevenfold return on their investment in seven years. If you had invested ten thousand dollars in APP stock at the original IPO, by the time APP was sold seven years later, your investment would have grown to more than $72,000. The S&P 500 stock index went up only 13 percent in the same seven-year period.
That rich return, moreover, was for only half of what Dr. Soon-Shiong created. Then on June 30, 2010, the other half got bought, too, Abraxis BioScience (now a billion-dollar-a-year business thanks to Abraxane’s later approval to treat pancreatic cancer) selling itself to Celgene for $3.6 billion. Add that to the earlier payoff, and a ten-thousand-dollar investment in the original APP back at the beginning (2001) had soared to $97,400, up almost ten times in less than nine years. The S&P 500 index of big-company stocks, in the same period, enduring two bubble-bursts (the dotcom meltdown in 2000–2001 and the global meltdown in 2008–2009), had risen only 4.2 percent.
Billions for Companies Once Derided
All those billions, for companies that once were derided by short sellers as headed for failure and bankruptcy, thanks to the brilliance, creativity, and, perhaps most of all, the perseverance and persistence of a single innovator, an American immigrant named Patrick Soon-Shiong. With a net worth north of $12 billion, he is the richest doctor in the world. He is also one of the most compassionate men I have ever met, the personification of the caring doctor you used to see in TV dramas.
Dr. Soon-Shiong acquired Magic Johnson’s 4.5 percent stake in the Los Angeles Lakers basketball team in 2010, and in 2016 he made a far bigger splash by paying $70 million for a 13 percent stake in the Tribune Company (now Tronc), the owner of the Los Angeles Times and Chicago Tribune, to rescue it from the unwanted embrace of Gannett. For this, much to his dismay but not to my surprise, he drew vastly more coverage in the media than he gets for trying to develop drugs to cure cancer. He continues working on his innovations with stealth delivery systems for cancer and diabetes (having circled back to where he began his research), and continues to use me as a kind of consigliere.
Some short sellers may have made some profits here and there by shorting the stock of American Pharma, covering their bets and shorting it again on the rebound, but others got clobbered by the stock’s rise, losing millions of dollars. A few of them may have been bankrupted. And all of these short sellers likely would have made far more money by betting in Patrick Soon-Shiong’s favor rather than rallying against him.
For all the billions of dollars his innovations generated, however, the even higher value created by Patrick Soon-Shiong is that his cancer drugs now are shrinking tumors, easing therapy and side effects, and improving and saving the lives of thousands of patients. For example, Abraxane been used to treat other types of cancer, achieving complete remission in pancreatic cancer. Dr. Soon-Shiong has invested more than a billion dollars in his newest company, Nantworks, which is dedicated to improving the quality of human life. As should be expected, he has made tremendous inroads. He is someone I am honored to call my friend and my client, and it has been a privilege to work alongside him, both as strategic public relations counsel and as a member of his various boards of directors including those of APP, Abraxis BioScience, and one of his two new public companies, NantHealth. If you are a cancer patient, or if you love someone who is, you owe a debt of gratitude to Patrick Soon-Shiong and those like him. The value of his work is incalculable. At the risk of using what has become an overused term, it is priceless.