Hollis Eden Pharmaceuticals-Ego and Mismanagement-Part I

HollisEden Pharmaceuticals, Inc. (Symbol:HEPH) is a sad tale of a once promising biotech company that has been mismanaged and severely weakened by a lack of adherence to fundamental management principles. The company was founded in March 26, 1997 when Hollis-Eden, Inc. was merged into Initial Acquisition Corporation (Reverse Merger into a Public Shell) and changed its name to Hollis-Eden Pharmaceuticals, Inc. The Co-Founders, Richard B. Hollis and Dr. Patrick T. Prendergast, formed the company to commercialize Prendergast’s work on small molecule metabolites branching off from DHEA(Dehydropiadivesterone), a multi functional steroid produced by adrenal glands. Later, it was found that Prendergast didn't even have a doctorate.

Their early work focused primarily on a drug compound named HE2000 subsequently called Immunitin. This compound showed tremendous promise in eliminating malaria parasites from malaria sufferers. In early Phase I/II testing, HE 2000 cleared malaria parasites from 17 out of 21 patients. Testing was done in South Africa and Thailand where patients were plentiful and where malaria was becoming resistant to current therapies. The Company’s scientific team lead by James Frincke found that the drug worked by boosting the patient’s immune system such that it could naturally fight off the parasites. In addition, Immunitin was also tested in rhesus monkeys that were given the Shiv Virus (a close substitute to the AIDS virus) to see if Immunitin could boost the monkeys immune system so they could fight off the advanced AIDS virus. The monkeys did well and survived for up to and past the trial end point of six months. Because the trials were conducted in South Africa, Richard Hollis made many trips down to South Africa and became friendly with Prime Ministers Nelson Mandela and Thabo Mbeki to see if he could get the South African government to sponsor HE 2000 in large scale Phase II/III human trials. The Company also courted the World Health Organization and The Gates Foundation to get funding. After years of working in that country, it became apparent that funding would be difficult due to the fact that the South African government would not guarantee that Hollis-Eden’s patent rights would be protected. HE 2000 was also tested in Singapore for patients fighting Hepatitis B.

Meanwhile, Hollis-Eden scientists were also testing and building up a huge patent library of other metabolites that showed promise for curing other autoimmune diseases. They learned a lot about how the immune system worked in regulating inflammation, which is the leading cause of many common immune diseases such as Diabetes, Rheumatoid Arthritis, Ulcerative Colitis and Crohn’s Disease.

In Mid 2001, the Company was approached by an research agency of the Department of Defense that was seeking to test compounds that might be effective as radioprotectants. When the terrorists attacked the World Trade Towers and the Pentagon on 9/11, this defense agency came to HollisEden within two weeks of the attack to speed things along. HEPH worked with thm on HE2100 (subsequently called Neumune) to see if they would be a suitable compound. In February 2002, the company received research funds from AFRRI (Armed Forces Radiology Research Institute) under a Cooperative Research and Development Agreement (CRADA). AFRRI team members indicated that they had been looking for a suitable radioprotectant for over 40 years and were encouraged by testing with Neumune. From 2001-2005, the Company tested Neumune on over 30 rhesus macaques using AFRRI research dollars and raised more money to continue testing monkeys. Richard Hollis and his management team pushed hard for the government to set up new procurement procedures. Project BioShield was conceived and passed by Congress in July 2004 to streamline government procurement of various drugs that would protect Americans against anthrax, dirty bombs and other terror agents. Hollis-Eden was viewed by many to be the "poster child" for BioShield. Little did any investors know what would ultimately happen.

Disclaimer: It should be noted that the author has held postions in Hollis-Eden since 1997 and currently holds stock in the Company today.

Another Time Bomb-Pension Shortfalls

The stock market's steep decline is a ticking time bomb for state and local governments and universities that have their employees enrolled in defined benefit plans. Think the Federal Government is the only entity with bailout problems? Think Again.

The National Bureau of Economics Research published an article in September 2008 by University of Chicago professors Robert Novy-Marx and Joshua Rauch entitled “The Intergenerational Transfer of Public Pension Promises”. In the article, the authors pointed out that the value of Public Promises is $7.9 Trillion in the next 15 years. Their belief is that there is a 50% chance of underfunding these pensions by $750 Billion and a 25% chance of underfunding these pensions by $1.75 Trillion during this time period. One writer recently commented that this underfunding has grown to over $2.5 Trillion. Where is this money supposed to come from to pay these obligations?

So, let’s look at the State of California as one example of the looming problems. The State Legislature just came through a bruising battle to solve a $40 billion hole in the State budget. Taxes were raised on sales taxes (up 1%), car license fees (100% increases) and gasoline ($.12 per gallon). The cost to taxpayers is estimated to be over $1,200 per family per year. What we didn’t see in this debate was any discussion of projected shortfalls in pension obligations. The State of California has some of the most powerful employee unions in the United States and pension shortfalls will be huge given the recent drop in the market. How many billions will be required to “top off” these pension funds?? It remains a mystery but bears watching to see how it will impact the State’s deficit.

Now there is a second potential impact to each state. Taking a quick look at public universities and potential pension shortfalls in this sector, we expect to see pension shortfalls of several billion dollars for some of the largest university systems which, in turn, are creating funding stresses for Regents and State Legislators. For instance, the University of California system saw its investments drop by about $6 billion as of June 30, 2008. Facing a funding problem, the California Regents agreed to fund an additional $877 million against an estimated $2 Billion short fall. Since the stock market has only gotten worse since June 2008, we can only expect that the University of California pension shortfall will grow larger and will contribute to California’s budget deficit problems. It is safe to say that most other states have the same growing pension funding problem for public employee retirement systems and universities.

Are there any reasonable solutions for this ticking time bombs? It seems as if public pensions will have to be restructured and quickly or face looming bankruptcies in the near future. There are only so many tax dollars that can keep being transferred to unions at the expense of taxpayers that are struggling in a bad economy. Will any of the politicians recognize the problem and begin to make the hard choices needed? I doubt it but we must face it before the citizenry comes unglued.

Health Insurance Part2-Saving $5,000 per year

As a consumer of health care services, it is time to get smarter on what makes up insurance premiums and how you can reduce them. A knowledgeable broker recently told me that 15-20% of our premiums go to cover those who go to emergency rooms either as uninsured patients or just trying to not incur charges on their insurance. We are talking about illegal aliens who go to the emergency rooms for "colds" or other ailments because they are uninsured. Think about this. If your monthly insurance premium is $700, up to $140 goes to the insurance company and the state to cover costs of those who shouldn't be here. This is an outrage.



I have heard recent stories where emergency room doctors are treating people with and without insurance for colds and various ailments because they don't want to see or can't afford to see a regular doctor. Some patients are even taking ambulances as it represents a "free way" to get to the ER. We are paying for this in much higher premiums.



Another area that causes premiums to continue to increase is maternity coverage. My broker told me that premiums run $350-400 per month to cover maternity alone. Make sure that you review your coverage with a knowledgeable broker, especially if you aren't having anymore children. This could save you nearly $5,000 per year.

Health Care Costs are Out of Control

You see it. I see it. Health care costs have spiraled out of control. I just received a new insurance bill for next month, up 33%! Why are our health insurance bills continuing to go up at astronomical rates year after year with no end in sight?

Here are some of the causes:

1) Longer approval times and higher costs to get drugs approved by the Food & Drug Administration. A recent study indicates that the cost to get one drug approved is over 10 years and costs over $ 1 Billion for testing. Drug Companies pass along the costs in terms of higher drug pricing.
2) Health care providers submit inflated bills for routine procedures hoping that the insurance companies won’t knock off most of their billing. I recently saw an imaging center submit a bill for $2,400 to the insurance company for a cat scan that took 5 minutes to perform and was told it would cost $600.00 if I paid cash. The insurance company knocked the bill down to $733.00, 22% higher than the cash price.
3) Administrative costs were up 23% at the top 5 Health Insurance Companies according to some health care industry watchdogs. What are they doing to control their costs?
4) Increasing use of emergency rooms by illegal aliens and the uninsured. These costs are passed along to the State who ultimately approves health insurance premium increases for you and me.

What can be done about this mess?

-California employers can pass along the higher premiums to their employees for only so long before they must leave the state. Either that or they can band together to bring pressure on the insurance companies.

-Self employed individuals and small companies don't have many choices. They can look for health insurance policies that have higher deductibles to keep insurance premiums lower, change to HMO’s such as Kaiser Permanente or set up Health Savings Accounts or Health Reimbursement Accounts.

-We can also support legislation aimed at controlling insurance premiums just like what occurred with auto insurance rates in 2003. A defeated California Assembly Bill 1554 proposed having all health insurance premiums and deductible changes approved by the State Insurance Commission. The bill was defeated in 2007 and 2008 after campaign money was funneled to key assemblymen and senators who blocked its passage. Election pressure is needed to break the insurance-politician connection that continues to hurt consumers.

Has Midas Lost His Touch?

Fitch Ratings announced on March 12, 2009 that they were cutting its top-level AAA credit rating for Berkshire Hathaway, Inc. to AA+ on the so called issuer default rating and cutting its senior unsecured debt to AA. Fitch left the insurance and reinsurance units with AAA ratings but changed its view to a negative outlook. Fitch went on to say"Fitch views this risk as unrelated to Mr. Buffett's age(78), but rather Fitch's belief that Berkshire's record of outstanding long-term investment results and the company's ability to identify and purchase attractive operating companies is tied to Mr. Buffett". Berkshire Hathaway has $37.1 Billion in equity puts tied to four of the world's stock markets. Buffett recently told investors that they have lost $9.5 Billion in value since the markets turned down.

I wonder if Moody's will cut Berkshire Hathaway's rating like they have all the other insurance companies that Berkshire competes with? Given Berkshire's significant holdings of Moodys common stock, I doubt it. They will wait to do that until way down the road or until Midas dies.

SEC Chairman Mary Schapiro Where art Thou?

March 11, 2009-SEC Chairman Mary Schapiro said today that the "uptick rule" may be reinstated. She said that the SEC will "hopefully" propose for public comment next month for the reinstatement of the so-called "uptick rule". Investors have been requesting the reinstatement since the rule was eliminated on June 6, 2007. The uptick rule requires short sellers to sell at a price above a stock's most recent trading price. It would keep short sellers from piling on a stock that is a decline. Schapiro said that "a multitude of investors, both large financial institutions and individuals, have been pushing for the rule to be restored".

Ms. Schapiro appeared before a Congressional panel to request an increase in the SEC budget. She was also asked about "Mark to Market" accounting rule that forces banks to value assets at current prices, as relief for those institutions in the financial crisis. She said "I have a lot of sympathy for" that view adding that "it is not our intention that these assets be written down to zero or to fire-sale prices." The SEC doesn't advocated suspending the rule but is pushing the Financial Accounting Standards Board to come up with new guidance.

Hello Mary...you have the power to suspend Mark to Market Accounting today as you were given that power in September 2008 by Congress. What are you waiting for?? With stocks down over 50% since the uptick rule was eliminated and "Mark to Market" accounting rules were implemented in mid to late 2007, haven't we seen enough evidence that both need to be scrapped for the public good?

If the Obama Administration wants a turnaround on the way Americans are feeling, getting the stock market moving upwards will be a way to restore confidence. With confidence, personal spending will resume.

Moodys Blues

Rating Agencies continue to be at the center of the storm for why the financial markets, especially financial institutions are in their own mini depression. Moodys Corporation has been the chief culprit hitting banks, life insurance companies and monoline insurers with quarterly investment downgrades primarily due to "Mark to Market" problems. When they aren't actually marking down companies, they are "warning" they will be marking down companies after they complete their review of the most recent quarterly numbers. Most banks, life and monoline insurers depend on their ratings to bid on new business. When they are downgraded, they have to increase their reserves for their investment holdings and their ability to write new business declines. Each new quarter brings lower earnings and thus another chance for the Rating Agencies to mark them down once again. This has been going on for about six or seven quarters. These stocks are down 85-95% in value.

Since sophisticated investors can't figure out what these complex derivatives are worth and how long these assets will be held, how can Moodys provide accurate ratings on the company's they are rating? Mark to Market valuation problems continue to overhang this process.

There is another issue that adds an element of uneasiness to ratings process. Warren Buffett's Bershire Hathaway owns a large investment in Moodys (around 48,000,000 shares or 20% of Moodys common stock). There seems to be an inherent conflict of interest here since Berkshire Hathaway has been building up insurance business in the very lines (monoline insurers and life insurers) while Moodys is downgrading Berkshire's competitors to junk status. Berkshire Hathaway can write all the business it wants with a AAA rating while its competitors are being downgraded repeatedly. Could one hand be helping out the other hand? Since master investor Buffett was pushing hard for "Mark to Market" accounting rules back in 2003-2005, was his goal to clean up balance sheets or to drive down competition so he could pick up more assets on the cheap? I think financial reporters should ask Warren Buffett some tough questions about the inherent conflicts of interest he has between his investment in Moodys and his ever expanding insurance business.

Mark to Market Accounting and your investments

The Financial Accounting Standards Board put forth FAS 157 ("Mark to Market Accounting") effective for public entities filing financial statements due on or after November 15, 2007. What did this seemingly innocuous rule do? It changed the way that companies (banks, insurance companies, brokerage companies and other public companies account for assets on their books). FAS 157 created a new definition of Fair Value as follows: "The price that would be received to sell an asset or paid to Transfer a liability in an orderly transaction between market participants at the measurement date". In times of illiquid markets, the price of these assets fall away and are valued at $.10 on the Dollar.

The Dow Jones Industrial Average was 13,110.05 on the day this went into effect. Since that time, investors have seen trillions of dollars of net market value evaporate with capital being raised and institutions such as Lehman Brothers, Merrill Lynch, Wachovia Bank being swept under into either bankruptcy or hastily arranged mergers. The DJIA closed today at 6,624 (March 6, 2009) and it is clear the Obama Administration is struggling to figure out what to do to stem the economic disaster that a declining stock market brings.

Here is something that can be done to stem the capital drain. Congress, in passing the Emergency Economic Stabilization Act of 2008, included a Section 132 which gave the SEC the authority to suspend Mark to Market accounting if they determined that it is in the public interest to do so. After losing 50% of stock market valuation since November 2007, isn't it well past time for the SEC to suspend FAS 157??

The answer is clear enough to me. Suspend FAS 157 and its Mark to Market consequences.

Welcome

I have a lot to say about the current economy and stock market. How did we get to this point in the economy and what solutions are there to get the stock market out of a bear market?

How did we get here??

1) Abusive loan underwriting which was bundled and sold off around the world
2) Hedge funds using short sales to weaken once strong financial institutions
3) The Securities and Exchange Commission was asleep at the wheel in not regulating the Hedge Funds and Naked Short Selling abuses
4) A certain mega billionaire pushing for "Mark to Market" on all assets whether understood or not. Well, he got his wish and billions of asset value have disappeared. And the market value of many of his companies have gone down as well.
5) Ratings agencies like Moody's and Fitch have been marking down banks, insurance companies of all stripes constributing to the market decline. At some point, it becomes self fulfilling.
6) Politicians from both parties throwing money at the problems with no accountability. Does anybody really understand the mess that is AIG? What is happening to those billions in investments and loans?

How do we get out of this mess? It isn't easy and will take some hard "medicine":
1) Like the Brits, eliminate short selling.
2) Suspend "Mark to Market" accounting rules. Nobody really knows how to value the various instruments on the financial statements of banks and insurance companies now anyway.
3) Set up a bad bank to purchase the toxic assets from the banks and insurance companies. It was done before with the Resolution Trust Company in the late 1980's. It wasn't perfect but it did help clean things up.
4) Politicians need to present a positive message about where we are heading. Right now, they are ineffective and clearly don't have a plan. Spending money at record amounts isn't a good plan. It just increases debt at a time when foreign governments don't want to buy US paper.
5) Banks and credit card companies need to be restrained from cutting credit card lines of credit at the worst possible moment.

It takes leadership-someone who has a vision to lay it out-and the backing of the American people to make it happen.