More thoughts on NGE Capital, Mayne Pharma, and Crowd Mobile

I originally intended this as another scuttlebutt post but commentary on Mayne and Crowd quickly got too in-depth, so I pivoted. Might have a formal scuttlebutt post in the next couple of weeks.

Here are some thoughts on a possible pump and dump in Crowd Mobile, the regulatory environment at Mayne Pharma, and my surprise when I discovered two friends of mine had actually met David Lamm years ago:

Edit: I have made a small addition to the end of the Crowd Mobile piece below, if you’re interested.

Mayne’s regulatory woes

Now, the reason Mayne shares have fallen so far is, I think, a combination of the perception that the Teva acquisition is a dog (which I addressed in my Buy thesis), and the regulatory issues. There is a huge, entirely correct movement to crack down on pharma shenanigans in the USA, but my view on regulation in general is that Mayne is small enough to sneak beneath notice. For example it sells opiates (a hot issue), but not many. It does however sell methylphenidate (think ‘Ritalin’; similar in effect to amphetamines) and butalbital (a barbiturate) which are drugs of concern and account for 17% of GPD revenue. Methylphenidate is chronically overprescribed in the USA (for ADHD especially), which is a key issue but change is hard to achieve in this area and on balance I think risks to these sales are low.

Mayne also gets new patents for ancient generic drugs (another key issue) by changing their formulation, but only has ~3 drugs (its Specialty Brands Division). Plus many of its reformulations (e.g. turning a tablet into a gel, or a delayed action tablet) can convincingly be argued to add value. Thus I think the company will avoid notice, but broad-based reform (if any) will still have a potentially serious impact on its future if Mayne loses the ability to reinvent drugs in this way.

There are also Mayne-specific problems where the company is accused of manipulating the price of Doxycycline Hyclate tablets. Mayne sells both a generic version of these as well as a specialty brand, ‘Doryx’. As I understand the accusations, Mayne won’t avoid notice here because it and Mylan were at the time (I think) the only generic suppliers of Doxycycline. However, as I hinted at in my thesis, the regulators are going to have a tough time proving wrongdoing. It’s not hard to match prices without colluding if there is only a small number of suppliers – and this sort of ‘soft collusion’ is not necessarily illegal.

Revenue is unlikely to be severely impacted (though I note the company has already mentioned legal fees and a possible sales impact, implying prices may be falling). This is because generic Doxycycline sales account for less than 4% of Generic Product Division (GPD) revenue (it’s not even mentioned):

source: Company prezzo, click to enlarge

There are several nuances to the regulatory aspect as there are Mayne-specific (eg doxycycline price fixing) allegations and larger industry concerns (patents, overprescription etc). My overall view is that Mayne generally avoids the attention of regulators over the next few years, and maybe even benefits from the fast-tracking of patents and generic approval. Mayne also stands to benefit from the shocking leverage present in the sector – many players are tapped out and may have to divest drugs, especially if interest rates rise. Mayne has relatively modest debt and with any luck can benefit from forced selling. In my initial thesis I wrote that I would prefer Mayne not to acquire and to focus on generating cash, but that would be a missed opportunity if there are quality portfolios coming on sale at forced divestment prices. I would prefer to see management go for bite-sized acquisitions – another Teva-like would be a warning.

So I may have to amend the thesis somewhat. Mayne is historically an acquisition machine and they’ve done pretty well, but I maintain a generally jaundiced view of debt and acquisitions. Fortunately I have not paid through the nose for the uncertainty.

A pump and dump in Crowd Mobile? 

An anonymous account that 10foot has just discovered on Twitter, @stockswami, has stated his belief that there is a pump and dump underway in Crowd Mobile shares. Now, firstly, swami is an anonymous account and the author appears to have a strong agenda. He is perpetually calling out tiny ASX companies, regulators, and various market players accusing them of stock manipulation, incompetence and a garden variety of other things. On balance his critiques seem well worth listening to, but readers should approach all anonymous accounts (including this one) with a critical eye.

This alleged pump and dump interests me because 10foot owns shares of Crowd Mobile (ASX:CM8). I have never been in this situation before and I was originally quite sceptical because Crowd Mobile is an established business and does not seem like the usual piece of shit that individuals try to manipulate. However, if I tie together a few pieces of disparate information it is possible to see his point.

I’ve commented previously on Crowd CEO Carosa’s salary package as being pretty outrageous (~2% of market capitalisation last year, due to the equity awards). Carosa also makes additional money via Crowd Mobile contracting with his companies Dominet and DJ Carmichael, a brokerage firm of which Carosa is a director and 5% shareholder. Multiple reports from Carmichael feature on CM8’s website. On their own, none of these connections are problematic, plenty of executives make money, both morally and immorally, by contracting to their companies at fair or unfair rates.

Next, Crowd Mobile seems quite self-promotional. I was surprised to see a little while ago that both CEO Carosa and Crowd Mobile shared my purchase thesis for Crowd both on Twitter and on LinkedIn. Company promotion is not unusual among small caps and I figured that if the CEO was comfortable publicising my criticism of the company and his salary, then by inference the company has nothing to be worried about. However, by inference, we also saw that the CEO was handed half a million in equity last year at low prices, so if you took the cynical view and wondered who gets paid the most if the share price goes higher….

Heuristic: Strongly promotional companies are usually better off avoided as they can be more concerned with looking good than actually doing the work required to achieve their goals.

Then I spotted this article yesterday which made me consider the possibility of a pump quite strongly. It is a blatant puff piece that nevertheless does a pretty good job explaining the investment opportunity and the company’s future opportunity in digital influencing. If you read the disclosure “S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity…”.

Paid or unpaid? Did Crowd pay for it? Did DJ Carmichael (the broker) pay for it? The more important question is, what should I do in this situation? I hate market manipulation with a fiery passion and I don’t want anything to do with a company that may be manipulating/ being manipulated.

(As a side note, I have noted that 10foot companies typically enjoy a 7%-10% rise in the weeks after I buy them, which is concerning although I am uncertain if it’s anything to do with me. Something to keep an eye on.)

Should I sell just to clear my conscience? That would result in potential financial loss (or missed gains) for no reason on the fear of a pump that may not exist. No, the solution is one which I originally got from Howard Marks: Have a firmly held view of intrinsic value and make your judgement based on that information.

I have a fair opinion of what Crowd Mobile is worth in a range of circumstances, depending on the rate of growth in Q&A and decline in Subscription. If overall cash earnings stay flat, my view is that Crowd is worth more than today’s prices. I won’t say how much more in case it spoils my ability to sell – I haven’t fully thought out my exit strategy as I wasn’t expecting to need it for a couple of years yet. But consider yourself forewarned, there is a good chance of me selling in the near future if my estimate of intrinsic value is exceeded. Something to keep an eye on.

Edit: I re-read this post and realised I sounded very negative on Crowd in this, which was not my intention. I think Crowd is an OK company coming out of some tough times, that was convincingly undervalued when I bought it. Obviously, I have little reason to complain if somebody campaigns its share price higher for me.  I don’t have any specific belief that the company is doing anything wrong, but I can definitely see how someone might construe that people are attempting to pump its share price. I am staying the course and will be making my investment decisions based on the company’s progress and my estimate of its intrinsic value.

David Lamm and NGE Capital

A friend of mine told me recently that he and a colleague met David Lamm years ago, though Lamm wouldn’t remember them. If they recall correctly it was as he was looking for initial investors for Kentgrove Capital, his private fund. They distinctly remember a discussion among themselves afterwards where they openly wondered if Lamm would be around long enough, as an independent fund manager, to become a fixture in the Australian investment industry. This was not a reflection on Lamm himself – just their thoughts on how difficult it is to get started as a fund manager. Both were openly stunned when I told them that Lamm had returned 15.6% p.a. over the past 7 years at Kentgrove, progressed to buying an LIC, and was also one of the major shareholders in Godfrey’s.

Obviously they don’t have a clue about Lamm, or they would have invested in his fund. But I’m wondering if their initial doubts and subsequent respect (both friends have independent records of significant, sustained outperformance) could suggest that Lamm has ‘got what it takes’ to succeed where many managers have failed. There seems to be a definite ‘hill’ with fund managers whereby, if they get to the other side, they’re probably going to be around for the long haul.

Obviously I want to invest with a winner and, just maybe, Lamm is one of those.

I own shares in NGE Capital, Crowd Mobile, and Mayne Pharma.  This is a disclosure and not a recommendation.

Do you have a preference for reading multi-topic longer pieces like this one, or would you have been more engaged by individual pieces on Crowd Mobile and Mayne? Please let me know your thoughts via comments, email, or twitter @10footinvestor as I’m currently working to improve the readability of the site.