No wonder he's smiling.

Photographer: Win McNamee/Getty Images

For This Trump Nominee, It Was Better to Be Lucky

Joe Nocera is a Bloomberg View columnist. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. He is the co-author of "Indentured: The Inside Story of the Rebellion Against the NCAA."
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When I wrote about Tom Price's health-care stocks on Tuesday, I was in a state of high dudgeon. Price, the Georgia congressman who is President Donald Trump's nominee to be secretary of Health and Human Services, has a portfolio clotted with pharmaceutical, medical device and health-care companies -- this despite sitting on an important health subcommittee and taking repeated actions aimed at helping those companies. While I doubt Price did anything illegal, he clearly acted unethically, ignoring the kind of conflicts of interest that would get most of us fired.

The one stock I didn't dwell on was the one that's gotten the most attention: Innate Immunotherapeutics, a tiny Australian penny stock. Because it was so obscure, I wanted to do a little more digging. Which I've now done. And while Price's ownership of the stock has caused Democrats to howl -- Senator Ron Wyden accused Price of insider trading at a confirmation hearing on Tuesday -- I came away more amused than anything else. You know what they say: Sometimes it's better to be lucky than crooked. (They do say that, don't they?)

Our story begins with a different congressman, Chris Collins, a Republican who represents upstate New York. (He was the first sitting congressman to support Trump.) Prior to running for Congress in 2012, Collins had been a successful businessman. A former Westinghouse Electric executive, he bought the company's gear division in 1983 and sold it two decades later. 

Along the way, he became a kind of angel investor for struggling small companies, most in upstate New York, with names like Schlyer Machine and Volland Electric. In addition to taking an ownership stake, he often took a board seat as well. Over the years, he's had more hits than misses; Collins's net worth is estimated at nearly $70 million.

Around 2005, Collins met Simon Wilkinson, the chief executive of Innate Immunotherapeutics, which was then called Virionyx and was based in New Zealand rather than Australia. Wilkinson, whose background was in finance and banking, was in the U.S. trying to raise money. Just as he had with small industrial companies in New York, Collins became an investor and joined the board. He also talked up the stock among friends and neighbors, and even held meetings with potential investors.

Like many small drug companies, Innate Immunotherapeutics struggled to find a drug that could generate revenue. It tested an anti-AIDS drug in India, an anthrax vaccine and what it called "an emergency therapy for acute radiation-induced neutropenia." Finally, it landed on a drug to treat a certain debilitating stage of multiple sclerosis. To pay for a clinical trial, the company raised over $7 million toward the end of 2013. The stock opened at just under 20 cents a share. Yes, that's right: 20 cents. Which is pretty much where it stayed for the next two years.

In 2015, Price, who had learned about the stock from his friend Collins, became a shareholder. Then in April 2016, the company announced that 93 patients had enrolled in a key clinical trial for the drug, meaning that it could move forward. The stock started to climb, until by mid-August it had hit 40 cents a share.

Needing more money, Wilkinson decided on a private placement -- which both Collins and Price took part in. Price bought more than 400,000 shares, while Collins became the company's biggest investor, with 17 percent of the stock. Because it was a private placement, the two men got a discounted price of 18 cents a share. (Though such discounts are common in private placements, this is what has caused Democrats to accuse Price of insider trading.) Soon afterward, Innate Immunotherapeutics received a favorable research report, causing the stock to rise some more.

By the time Price was nominated to be HHS secretary, the stock was around 75 cents a share. Price had quadrupled his money from the private placement.

And then?

I could hear Wilkinson chuckle on the phone from Australia when I asked him what had been driving the stock in recent months. "God bless the American media," he said. Thanks to the Price nomination, Innate Immunotherapeutics was all over the news. Investors were concluding that these two powerful shareholders would be able to help the company jump over regulatory hurdles.

"It's rubbish," Wilkinson said, but that didn't mean he wasn't enjoying the stock's run-up. As of Wednesday, Innate Immunotherapeutics shares stood  at $1.77. As Peter Lynch used to say, Price has gotten himself a ten-bagger.

Pennies From Heaven
Daily closing stock price in U.S. dollars
 
Source: Bloomberg

When I asked around about Innate Immunotherapeutics, I found several skeptics who thought the company was, let's just say, a little fishy. They pointed to the fact that a key research report was commissioned by the company, that Wilkinson has no previous biotech experience and that the company seems more focused on its stock price than its drug development. The company has made it clear to investors that it hopes to sell itself to a bigger pharma company if the clinical trial proves successful.

On the other hand, the National Multiple Sclerosis Society, which is as reputable as they come, has invested in the company and owns 1.6 percent of the stock. And the company has been using the drug on patients in New Zealand (under what's called the country's compassionate use program), where it claims to have had success.

Not that it matters to Price. His nomination has caused him to promise to sell his health care stocks, Innate Immunotherapeutics included, once he is confirmed. Whether the company cures multiple sclerosis or turns out to be worthless, Price will have seen a gain of nearly 900 percent in six months. A gain that has taken place, in no small part, because he was nominated to be a cabinet secretary.

Democrats, no doubt, will look at that gain and continue to believe that Price did something untoward. And as I've noted, the man does have an ethical blind spot when it comes to stocks.

But in this case? I'd say he just got lucky.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Joe Nocera at jnocera3@bloomberg.net

To contact the editor responsible for this story:
Jonathan Landman at jlandman4@bloomberg.net