The Role of Luck in Investing
The Role of Luck in Investing
A Look Back at the Acquisition of BioSpecifics by Endo Pharmaceuticals
In 2020, I made a decision to sell my position in BioSpecifics, a company that earned a royalty stream on a drug called Xiaflex, which treats two different diseases, Peyronie’s and Dupuytren’s contracture. The diagnosis rates of both diseases are very low and Xiaflex is the only approved medical treatment. It was also on the cusp of getting approval for another indication, treating cellulite on women’s bodies, which I thought had big potential.
So why did I decide to sell? I was worried about an inexplicable change in CEO, COVID delays, but most importantly I was worried about BioSpecifics’ marketing partner, Endo Pharmaceuticals (NASDAQ: ENDP).
This is what I wrote:
The final problem is that BioSpecific’s marketing and sales partner is Endo Pharmaceuticals, which is having financial and litigation problems (opioid and mesh products). COVID may have weakened them to the point where they may need to enter Chapter 11, which would complicate sales, marketing and royalty payments if this were to happen.
So, imagine my surprise when shortly after selling and then writing that post, Endo Pharmaceuticals announced that they were buying BioSpecifics for $540 million in cash and a big premium to where I sold BioSpecifics. I felt terrible and embarrassed. Luckily, I had other winners, but I’ve always wondered what I got wrong in my analysis, especially after watching Endo’s stock eventually surge from $3 on COVID lows to as high as $10 per share.
But fast forward just two years later and Endo announced this month that it was filing for bankruptcy.
It turns out my analysis of the risks was not wrong, just early. COVID and the stimulus that followed turned the stock market into a hot mess with capital available for all. When that changed this year, suddenly cash flow and balance sheets became important again and unfortunately Endo’s shaky financial position left it vulnerable when capital left the market.
And remarkably what Endo is offering to settle its opioid claims is $550 million, almost exactly what they paid in cash to BioSpecifics. Would they have avoided bankruptcy if it hadn’t bought BioSpecifics? We will never know.
How does one calculate the odds that management of a distressed company will launch an all cash offer for another company, when instead it needed to be more careful with cash? Seems like low odds, but it happened, and it happened in a brief window of capital availability that soon disappeared.
A more recent example is Elon Musk’s offer to buy Twitter (NASDAQ: TWTR). What would Twitter’s stock price be without this offer? My best guess would be below $20 per share, or 50% less than its current price. We may find out depending on how the litigation works out between the two parties as Musk is now trying to get out of the deal.
The reason I write about BioSpecifics, is that luck, both good and bad is rarely discussed when analyzing investment decisions. Sometimes you analyze the risks and decide something isn’t worthwhile and then watch that investment soar in value. Other times, you decide to invest and an unlucky event (COVID, Ukraine War, etc) happens and your investment goes down in value.
It may also be that in bull markets it is much easier to get lucky and that in bear markets much easier to get unlucky. In the end fundamentals should win out, but it is never certain whether “luck will be a lady tonight” or not as Endo just showed us.