State of California-Needs to go on a Budget Diet

Recently, I have taken a closer look at how the State of California spends money. If you ran your household this way, you would be filing for bankruptcy. Take a look at the chart above which shows spending vs. revenues for the State budget years 2000-2001 to 2008-2009:

Notice how spending has increased over 43% since the 2000-2001 budget year? The budget was balanced through the 2005-2006 budget year but spending continued to escalate while revenue growth slowed down. Unfortunately, the State Legislature never considers that the tax payers will go through a tough economic time or those revenues will slow let alone decline. Welcome to the recession of 2008-?

Since tax payers revenues are decling, where can the State of California make real cuts (not phony one like cutting the “rate of spending”)? My source document is the 968 page State of California budget document for budget year 2008-2009. Let’s take a look at programs that can be cut or reduced immediately. It will require hard choices just like any taxpayer would be required to make when their income levels off or is reduced.

1. Heath and Human Services Agency $5,335,000

(We spend this kind of money on an agency that advises the State on health issues?)

2. California Conservation Corps Workforce Development $37,638,000

(Why is the State spending money doing workforce development-scrap the entire program)

3. Department of Conservation-Mineral Resource Development $5,117,000

(The State doesn't need to map mineral resources-Private Industry can do that)

4. Housing &Community Development Block Grants $4,276,000

5. Migrant Services $6,866,000

6. Wildlife Conservation Board $204,000

7. Health Planning & Development (Work Training) $5,059,000

8. California Department of Aging $216,442,000

(What does this department do??)

9. Small Business Loan Guarantee Program $4,886,000

(Would need to see a report on how this department is doing. If this is the Cedley Program, it might make sense)

10. California Science Center $17,934,000

(Users should pay for this in terms of fees)

Total Savings $303,757,000

These are relatively small programs when you are dealing with a $111.8 Billion budget. But there are tons of other programs and worthless commissions that need to be cut. How about the Solid
Waste Advisory Board? These commissions are where they park old politicians who are termed out and pay them $135,000 per year to do nothing.

Now, let’s look at two of the bigger sinkholes in the budget:

1. Aid to illegal aliens Approximate cost of $10-15 Billion per year. This includes teaching illegal alien children in school, funding emergency room visits for the uninsured where the bills are sent to the State and every hospital is straining to get paid for their services.

2. Growth in Government Workers Cost estimates run from $10-30 Billion per year depending on what budget year you want to use.

The number of California State employees has increased from 170,000 to nearly 350,000 over the past 10 budget years! With increases in employees also come increased salaries, health insurance benefits and higher pension obligations that will further bloat spending in the future.

It is well past time for the State bureaucrats to make serious cuts in State employment rolls. An immediate hiring freeze should be instituted and 35,000 to 50,000 workers should be eliminated. We are talking about 10-15% work force reduction. Workers in the private sector are losing their jobs at a record pace and the State of California should be no different. California managers need to review and cut spending and personnel across the board. The benefits:

• Restore the State’s bond rating so the State can borrow at lower rates

• Balance the budget so that recently passed taxes can be eliminated or rolled back

• Cut future budget problems now rather than let them mount up leading to additional tax increases

Since the State of California has no leadership in either house of the Legislature or in the Governor’s office, I doubt it will happen anytime soon. So, we taxpayers need to starve the beast. The first place to start is rejecting Proposition 1-A on May 19, 2009, a ballot initiative that would extend recently passed tax increases for two more years under the guise of putting spending caps on the State budget.

Tiger Woods-The Masters

Watching Tiger Woods in the Masters was amazing and frustrating! You watch him make amazing shots year after year so expectations were very high going into this years Masters golf tournament. It seems as if he starts off slowly each year. Why? I think he isn't playing enough tournaments to stay sharp under tournament conditions. Certainly the 9 month layoff from knee surgery impacted his sharpness but if you go back to the last few Masters tournaments since he won it in 2005 you will see a similar pattern. Slow out of the gates the first two days and then he will catch fire at some point but it is almost too late to matter. Last year, he finished second to Trevor Immelman but three shots off the lead.

Well, 2009 was no different. The first two days, Tiger shot birdies followed by bogies. He missed a lot of putts by an inch or two. He made unforced error after unforced error with his irons and missed a lot of shots he normally makes. He could easily have been minus -5 or -7 heading into the final round. Instead, he was -4. Still a good score but 7 shots off the leaders.

He was pared with Phil Mickelson and they had an amazing battle. This was the tournament within the tournament as the leaders were stumbling while Phil and Tiger were hot. Phil shot 6 birdies in the first nine and at one point was 1 shot off the lead. Tiger was -3 on the front nine and picked up another three shots to get to 10 under by the 16th hole. Could he pull this off?! Alas, he and Phil ran out of gas and Tiger bogeyed the last two holes to finish at -8 (Tied for 6th place). Phil Mickelson plunked a shot into the water on the beautifual 12th hole but did fight back to get back to -10 before surrendering a bogey on #18 to finish at -9.

Tiger Woods is a grinder. He never lets up nor will he go away once he starts a tournament. He just needs to play more tournaments to get out of the gates faster. I look forward to following his progress in the US Open (June), the British Open (July) and the PGA Championship (September). Can he add another Major Title to the 13 he already has? We shall see.

Hollis-Eden Pharmaceuticals-Ego and Mismanagement-Part II

Throughout its many years of corporate existence, there have always been power struggles within management. Richard Hollis co-founded the company with Patrick Prendergast. Soon after the company went public, Prendergast was forced out by Richard Hollis. Prendergast sued the company and eventually the suit was settled with Hollis-Eden getting the rights to early molecules (HE2000 was assigned to Hollis-Eden as part of the settlement) and Prendergast getting stock plus options based on his delivery of other compounds. Terren Peizer, an ex Drexel Burnham Lambert bond broker who some say helped bring down Michael Milken, was President of Hollis-Eden for a brief two year period before being forced out by Richard Hollis in February 1999. Peizer was and is a master at stock promotion and had the Hollis-Eden stock price trading in the $15-19 range as significant money was raised from Robert Peterson (founder of a Car Magazine Empire) to fund early R&D efforts. No one is quite sure what caused the blow up between Richard Hollis and Terren Peizer or what functions Peizer was there to perform while there (other than fund raising and stock promotion) but Peizer, in order to go quietly, did get cheap warrants at attractive pricing with a 10 year holding period.

Daniel Burgess was brought on as Chief Financial Officer in August 1999 after leaving Nanotech Technologies. He eventually became Chief Operating Officer in December 2004. He made a lot of Hollis-Eden’s presentations to the financial community during biotech conferences and was instrumental when the company was out raising funds for future research and development or intellectual property buyouts. Hollis and Burgess led the company on the acquisition of Congressional Pharmaceuticals in February 2004. This acquisition brought in numerous patents filed by Dr. David Gordina and included Phosphonol, a compound that was advertised as Hollis-Eden’s lead candidate to prevent DNA mutation. With Neumune and Phosphonol, the Company seemed to have the right compounds to offer the government to treat people who were exposed to radiation and needed treatment to ward off the effects of neutropenia and cell mutations.

Hollis-Eden raised $62.5 million in September 26, 2003 at a time there was a lot of hope and hype about BioShield and Neumune. In fact, the stock kept reaching new highs during the summer of 2003 as the Hollis and Burgess went out on a road show and reached an all time high of $36.00 on September 23, 2003 only to have the Company’s secondary offering quickly deflate the stock value as the underwriters and their cronies knew about the secondary offering and shorted stock knowing full well that the offering price would be far below what the company’s stock was trading at. The deflation of the stock price was swift and the stock was back trading below $15.00 by November 2003.

The funding was used to fund expensive trials with Neumune leading up to the Company’s application to the Department of Health and Human Services under a Request For Proposal. Hollis-Eden announced on December 21, 2004 that it had filed a formal request with DHHS to have Neumune considered for this award. The Company submitted data on both mice and monkey trails. Since the Company had partnered with a government agency (AFRRI) and was backed in its efforts by the Department of Defense and one of the architects of BioShield Legislation passed in July 2004, things were looking good right? Not so fast my friend. Dealing with the government can lead to a lot of disappointments, especially when money is involved.

In May 2005, Hollis-Eden filed an IND application with the FDA to begin Phase I clinical trials in healthy human volunteers. The company also hired John Clerici of law and lobbying firm, McKenna Long & Aldridge, LLC help secure the DHHS award. In September 2005, DHHS issued a Draft RFP for a therapeutic to treat neutropenia associated with Acute Radiation Syndrome. The company was lobbying to have up to 24 million doses of Neumune stockpiled around the country so that the drug could be delivered and administered within a 6 hour window needed for survival. So what do the geniuses at DHHS do? In December 2005, they say they will stockpile only 100,000 doses of ARS treatments, substantially lower than HEPH management anticipated. The stock price plummeted to around $5.00.

On January 29, 2006, CBS correspondent Ed Bradley took on the topic of Nuclear Terrorism with a 15 minute segment dealing with the potential effects of a nuke going off in a major city and how the government procurement efforts were coming along. He spoke to Richard Hollis and Robert Marsella of Hollis-Eden, a representative from DHHS (Stewart Simonson who headed up this procurement effort declined to be interviewed but Dr. William Raub agreed to be thrown under the bus), US Representative Tom Davis and Vice Chairman of the 9/11 Commision and former congressman Lee Hamilton. Davis and Hamilton were roundly critical of Stew Simonson and his department’s decision making. Raub said that 100,000 doses was the beginning not the full procurement. Even Bradley admits that Hollis-Eden took the unusual step of criticizing the agency that would be handing out the award. At this point, the game was probably over but the Company continued on.

In June 2006, DHHS says that HEPH is in the “competitive range” for further discussion. Two other contenders for the award were thrown out at that time. On September 27, 2006, DHHS announced a delay on the ARS procurement. HEPH stock traded at $5.57. Company management expected the award to come by the end of November 2006 but that date came and went with no announcement. Finally, on February 1, 2007, DHHS set a new revised date of March 7, 2007 (HEPH-$5.46). On March 7, 2007, DHHS abruptly announces that Neumune is “technically unacceptable” with no other explanation. The stock closes at $2.90.

At that point, management was in shock and, in May 2007, Daniel Burgess COO left the company with some other non essential employees. At that time, the stock traded at around $2.50 to $2.90. Richard Hollis and the science team regrouped and decided to never again deal with a government procurement effort and would begin to push its next generation small molecule compounds’ HE3235 (Apoptone-treatment for prostate cancer) and HE 3285 (Triolex-treatment for Type II Diabetes, Rheumatoid Arthritis and Ulcerative Colitis). The company finally started preparing for trials and entered into four Phase I/II trials with these two compounds beginning in February 2008-July 2008 with expected trial conclusions in the March to April 2009 time frames.

The key area where management has gotten in trouble is never having entered into a partnership with a large pharma company. Partnering would do two important things for the Company-validate the science and share financial risk without diluting the shareholders. Richard Hollis’ stubborn determination to “go it alone” has done a disservice to his shareholders. Hollis could have partnered HE2000 for malaria, hepatitis B and AIDS with a larger Pharma. He chose not to in hopes that funding would come from the Government of South Africa, the World Health Organization or the Gates Foundation. He could also have partnered Neumune with a larger better established Pharma partner that was better connected to the process of navigating the FDA. He did not and the Company and the stock price got clobbered. Finally during the Q2 and Q3 2009 conference calls with investors, he admitted that the Company would look to get Phase I/II data on Triolex and Apoptone so they could partner with Big Pharma.

So, let’s fast forward to February 10, 2009, Richard Hollis was scheduled to present at the BIO-CEO Conference in New York City. About the time the presentation was to begin, a conference employee came in and said the conference has been cancelled. No explanation from the Company. Numerous investors call the company’s investor relations staff to find out what is going on. They are told that no information is available. This same explanation goes on for five weeks with no explanation. What could cause the Company CEO to abruptly cancel the meeting? Are they about to announce a partnership with a Pharma who wants the inside track on Triolex? Or is the trial data bad but the shareholders aren’t being told. Finally, in late March, the Board of Directors filed with the SEC indicating that Richard Hollis has been fired for “cause” on March 18, 2009 with no explanation. It isn’t until the 10-K filing on March 31, 2009, that the Company announces the first Triolex trial data doesn’t show an acceptable endpoint although the Board of Directors acknowledge that all that data hasn’t been analyzed yet. No additional data was provided for the Ulcerative Colitis, Rheumatoid Arthritis or Apoptone trials. The stock gets crushed again. So much promise and so many disappointments.

Somehow I doubt that all the drama is over. Who knows, the company has approximately $20 million in the bank as of March 31, 2009 and some key trials ongoing. Will it rise again like the Phoenix or will it continue to fall victim to boardroom power struggles and infighting. The book rights might be more valuable than the stock.

Please note that the writer continues to hold stock in HollisEden Pharmaceuticals.