Drug reimbursement shenanigans

In the drug industry, there are different types of abusive practices that occur:

  1. Drug companies encouraging off-label use (and/or “recreational” use) of their drugs, potentially harming patients’ health.
  2. Drug companies encouraging doctors to increase dosages and drug use, potentially harming patients’ health.
  3. Drug companies encouraging waste to increase the volume of drugs sold.
  4. Pharmacy benefits managers (PBMs) selling out their clients (payors) in exchange for kickbacks from drug manufacturers.
  5. Drug manufacturers using “specialty” pharmacies to bilk payors, tricking the payors into reimbursing expensive drugs that they would otherwise not reimburse.  Unlike traditional pharmacies, captive pharmacies can go the extra mile to obtain (possibly improper) drug reimbursement for the drug manufacturer.

This blog post will look at #4 and #5.

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Throwing pennies in front of a steamroller

One of the annoying things about short selling is that frauds and stock promotes will occasionally be taken private, causing short sellers to lose money on their positions.  If a company announces a going private transaction or other takeover event, my opinion is that the best strategy is to cover your short position and redeploy that capital into other shorts.  Looking back at Chinese reverse mergers, it seems that almost every going private transaction closed.  There were a handful of non-binding going private transactions that didn’t close; those were the only ones worth betting against.

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Sentieo: a better way to perform due diligence

Since January 2015, I’ve been using a research platform called Sentieo (website).  The main attraction of Sentieo is “Document Search”, a tool that searches through EDGAR filings, investor presentations, and conference call transcripts at the same time.  It allows me to find key pieces of information that I otherwise would not find.

For short selling, Sentieo is incredibly useful since almost all of my short selling involves tracking down scumbags.  Much of my work is spent searching through SEC filings for names of people, company names, and addresses.

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Kinder Morgan: The sell-off is probably a little overdone

Kinder Morgan does have some problems:

  1. Under its new CEO, Kinder Morgan has been stretching its numbers slightly.
  2. The big drop in oil prices will hurt the CO2 business.
  3. The big drop in commodity prices will lower infrastructure demand in the short term.

However, I think that the 60%+ drop in the share price YTD is a little overdone.  Kinder Morgan’s problems don’t seem that bad compared to other companies.

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Ways to inflate/deflate oil and gas reserves – Part 2

In the past, Arthur Berman and his colleague Lynn Pittinger wrote about shale reserve estimates at The Oil Drum.  The 2011 post “U.S. Shale Gas: Less Abundance, Higher Cost” pointed out potential pitfalls from using analogy wells to determine decline curves.

Type curves that are commonly used to support strong hyperbolic flattening are misleading because they incorporate survivorship bias and rate increases from re-stimulations that require additional capital investment.

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Ways to inflate/deflate oil and gas reserves

Here are some ways to do it:

  1. Generally, a number of estimation methods are allowed:  decline curve analysis (DCA), analogy, reservoir modelling, volumetric, pressure, or some combination of those methods, etc.  You can cherry pick among those methods to choose the one that yields outlier numbers.  The least time-consuming method is to use DCA, with Arps equations, with a high b-factor and with a low Dmin value.
  2. For DCA, you can use the analogy method for the underlying assumptions to “supplement” your wells’ production data with historical data that goes further back.  Like #1, the optionality in methods allow you to cherry pick.
  3. You could use the analogy method on wells that have undergone significant capex/opex spending on enhanced oil recovery techniques.  However, because you likely do not have access to those wells’ capex+opex figures, you could over/underestimate the economics of your own wells.
  4. In Canada, you are allowed to use commodity price forecasts that are well above the futures curve.  (*Things were very different in the early 2000s.)
  5. You could book reserves for non-producing wells, e.g. wells that are shut-in and wells that were not completed due to poor economics.  Theoretically, these wells could be NPV positive with higher commodity prices.

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