The financial and mainstream press have had a field day with Martin Shkreli, the thirty something year old Pharma company CEO. In September he came under widespread scrutiny for raising the price of a highly effective rare disease drug from $13.50 to $750 (a pill) overnight, soon after purchasing the company that makes the drug. Last week Shkreli was arrested by the Feds on charges related to his mismanagement of a hedge fund prior to becoming a Pharma company head. He has claimed through social media and an interview with the WSJ that the charges are baseless and has more to do with recent drug price increases. Whatever the motivations of the Feds, Shkreli made himself an easy target for the media, the public and law enforcement. The indictment sure makes it look like Shkreli is a criminal, and at the very least an extreme sociopath (just watch his interview on CNBC from Sept if you have any doubt of that last claim). There are few tears being shed on Shkreli’s behalf.
On the flip-side, there is another story that I find even more interesting, also in the healthcare space. But this one is centered around a thirty something silicon valley darling, Elizabeth Holmes, who founded a medical device company that supposedly revolutionized the way human blood tests are conducted. Holmes has raised closed to $400 million in funding from the best and brightest in Silicon Valley and beyond, creating a multi-billion dollar valuation on the laboratory company and making her a paper billionaire. After being a media and pharma-tech darling for most of 2014 and 2015, in mid October, the WSJ published a brutal take-down of Holme’s company, Theranos. Theranos has since issued multiple mea-culpas
Thinking about all of this last week I posed this question (on Twitter):
Is there a bubble in thirty something yr old CEOs who are full of shit? RT @FortuneMagazine How Theranos misled me. https://t.co/JjotMUrLcA
— Dan Nathan (@RiskReversal) December 17, 2015
As someone who has watched multiple asset bubbles inflate then pop during my career, the Theranos situation seems to pose much more risk to the investment landscape we now live in than that of a small time crazed fraudster. The Shkreli story will certainly get more clicks or views given his rash behavior and last week’s perp walk (think small time Madoff fraud news coverage during the much bigger financial meltdown) but last night’s acknowledgement that U.S. health regulators are, per the WSJ “investigating complaints about laboratory and research practices at Theranos Inc. by two former employees of the blood-testing startup company” could be the beginning of the end of one of the most beloved “unicorns” of this investment cycle.
Private companies reaching values that a lot of public companies can only dream of is a relatively new concept. And these private markets are really opaque. The last thing our public equity markets need are epic blowups in the far less liquid and insanely valued private market. There’s a risk of sentiment contagion.
How many other private “unicorns” are built on pure bullshit?? I suspect a bunch, as easy money has allowed the creation of fairy tales around revenue-lite, money losing products that have been created to appeal to venture capitalists more than consumers. While I don’t think public equities as a whole are an investment bubble, there has certainly been some crowding in a handful of tech and pharma-tech in 2015 that could be a cause for concern in the new year. But the irrational exuberance over the past few years has clearly been in private markets. If these private unicorns come crashing back to earth, it’s not just a bunch of fancy VCs taking big write-downs, but mutual funds and pension funds have gone into private markets in a big way in the past few years in search of yield. A liquidity event in the private markets could, for the first time, pose risks to public markets as large investors could use publicly traded stocks as a source of funds if private market investments get marked down. As an example, back in mid November, Fidelity marked down their private market value in tech unicorn SnapChat by 25%, and shares of Twitter (TWTR) are down 17% since.
Since seeing this ad for the Squatty Potty, I’ll never think of Unicorns the same way again: