Zillow (NASDAQ:Z) : It’s Not Just the Ridiculous Valuation – it’s the Ridiculous Business Model


When it comes to investing in Web 2.0 , the stampede is on – everybody wants a part of the Next Big Thing.  The rewards have been great for companies like LinkedIn. 

But the risks of investing in anything less are devastating.  The market has been unforgiving in punishing disappointers, as seen in recent collapses in Facebook, Groupon, Zynga Netflix and Pandora. 

So what determines the difference?

Investible Web 2.0 companies have all of these critical success factors:

1)   A new and disruptive way to use internet technology to meet a real market need

2)   Exponential revenue growth driven by viral buzz, solidly founded on genuine customer loyalty

3)   Soaring revenues free of heavy expense models – not dependent on overhead-heavy sales department headcounts

4)   Revenue transparency throughout the complete business model

Zillow (NASDAQ:Z) has had an incredible run, doubling since January based on the hope it will become a Next Big Thing. 

But Citron sees more than just shadows of doubt here – Zillow utterly fails each of the four points above.  While management glibly talks the Web 2.0 game, Citron sees major red flags in every one of the four criteria above.    

For the full story, click here:

Citron Reports on Zillow



Questcor Update: Aetna Denies Nearly All Coverage for Acthar Gel

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Aetna (NYSE: AET) drops coverage for Questcor’s only drug, for indications now generating 95% of Questcor (NASDAQ:QCOR) revenues. 

HP Acthar Gel for multiple sclerosis and nephrotic symdrome will not be reimbursed. 

   This is not insurance pushback:  This is Insurance Denial.

One of the largest managed care providers in the United States, Aetna has disclosed that after studies and review of scientific literature, it finds no proof of efficacy to substantiate reimbursement for Achtar, except for Infantile Spasms (West Syndrome).

Beginning Friday, September 14 Aetna will cease to offer reimbursement for new patients to use HP Acthar Gel, except for the rare indication of infantile spasms.  

Click for the new Aetna Clinical Policy Bulletin:

( http://www.aetna.com/cpb/medical/data/700_799/0762.html )

Analysts have been defending QCOR over the past week, with claims like this one made as recently as yesterday by Oppenheimer :

“Despite recent speculation about payers looking at Acthar reimbursement with increasing scrutiny, based on comments from management, we believe reimbursement rates to be strong and expect that to continue.”

This statement couldn’t be any more wrong if they tried.  Further, it should be noted that Questcor CEO Bailey sold another $2 million worth of stock last week. 

In Aetna’s assessment of Acthar, we read the one line that says it all:

 “Aetna considers repository corticotropin experimental and investigational for all other indications, because its effectiveness for these indications has not been established.”

Aetna justifies the change in reimbursement by saying:

“This CPB is revised to state that repository corticotropin is considered not medically necessary for corticosteroid-responsive conditions because it has not been proven to be more effective than corticosteroids for these indications.”

Note these words from Aetna.  This was not a decision made because of increasing prices, but rather due to the absence of clinical evidence proving the clinical benefit of Acthar.

Aetna has reached these conclusions based upon a review of currently available clinical information (including clinical outcome studies in the peer-reviewed published medical literature, regulatory status of the technology, evidence-based guidelines of public health and health research agencies, evidence-based guidelines and positions of leading national health professional organizations, views of physicians practicing in relevant clinical areas, and other relevant factors”

Aetna’s medical policy committee composed of internal /external experts within a range of specialties has now come to the same conclusions as the leading experts in Multiple Sclerosis, Nephrotic Syndrome, and Rheumatology from the most respected institutions in the United States. The sales ramp of Acthar has been nothing more than an exploit of inefficiency in the healthcare system, and is not backed by any clinical data to prove its merits beyond the original study supporting its use for Infantile Spasms.

As the managed care companies continuously subject their medical loss ratios to intense scrutiny, Citron expects United Healthcare, WellPoint, and Humana to follow Aetna within the next 12 months, and drop Acthar for all indications except Infantile Spasms.  Aetna will prove to have been the “first domino” in the chain of health insurance reimbursement decisions made by the majors. 

When it comes to operations, joint policies are not uncommon to major managed care programs.  The industry leaders tend to “vote together”, as they most recently did with regard to the anticipated Supreme Court ruling on the new National Health Care Act:  


They have little choice but to present a united front with regard to Questcor.  Otherwise, competing plans place themselves at a significant disadvantage, having to pay expensive claims for a treatment without clinical proof to justify the high expense. 

Did you not expect this would happen eventually?

   Short-Sighted Time Horizon?

Citron previously noted that Questcor can’t be surprised that their day of reckoning was coming.  Every month when they present their prescription data they reassure investors in their 8-K’s:

“Insurance coverage continued to remain favorable for Acthar during June 2012.”

“Insurance coverage to remain favorable for Acthar during July 2012.”

“Insurance coverage continued to remain favorable for Acthar during August 2012.”

That is doublespeak for “keep your fingers crossed — so far so good…”

What are they going to say next month?

When a company claims a “multi-billion dollar market opportunity” entirely based upon on insurance reimbursement, and has to resort to disclosure framed within a month-to-month time horizon, it reveals how fragile the business model truly is.

Shareholders take note:

This decision from Aetna enables all managed care providers to exit the business of overpaying for an expensive legacy drug by placing the burden of proof unequivocally on Questcor.  Acthar reimbursement was not dropped because Aetna asserts Acthar does not work.  Acthar was dropped because there is no clinical data (except for Infantile Spasms) that proves that it does work (any better than steroids). 

So will Questcor now submit Acthar to formal clinical trials to satisfy the managed health care providers?    I think we know that answer.

Was this any surprise?

In the company’s last 10-K, the company clearly states:

Acthar is a high priced drug and the sale of Acthar depends in part on the availability of reimbursement from third-party payors such as private insurance plans. In the United States, there have been, and we expect there will continue to be, a number of state and federal proposals that limit the amount that private insurance plans may pay to reimburse the cost of drugs, including Acthar. We believe the increasing emphasis on managed care in the United States has and will continue to put pressure on the price and usage of Acthar. In addition, current third-party reimbursement policies for Acthar may change at any time. Such changes could include lower reimbursement or the loss of insurance coverage”


This is no longer an argument.  One of the country’s largest managed care providers has drawn the line — years too late in our opinion, but never too late to deliver affordable and efficient healthcare to the American people.  Citron expected Questcor would face insurance “pushback” this year, but we didn’t anticipate that a managed care provider the size of Aetna would just cut it off altogether.  No second line or third line here:  no reimbursement, period. 

Over the past two months we have spoken to numerous shareholders and analysts on Questcor.  It seems as if everyone was in agreement that Acthar was not the “wonder drug” management claimed, but the sales channel and reimbursement program was intact. 

To that we responded, “It is never a problem, until it’s a problem…”  Ladies and gentlemen, it’s official:  IT’S A PROBLEM!

Cautious Investing To All.


Citron Publishes Open Letter to FDA seeking transparency about Nu Skin’s AgeLOC products


Yesterday, news broke that as of last Friday, the FDA sent a "15-Day Warning Letter" to L'Oreal, the world's largest cosmetic company, ordering it to cease and desist making claims for its widely marketed cosmetics line, Lancome.  

The specific basis for FDA's complaint is :

" The claims on your web site indicate that these products are intended to affect the structure or any function of the human body, rendering them drugs under the Act." 

Some of the specific language FDA objects to is eerily similar to, although less exaggerated than, Nu Skin's own marketing language about "resetting gene clusters".  Note how FDA specifically objects to pseudo-medical anti-aging product claims such as :

·    "boosts the activity of genes and stimulates the production of youth proteins" 

Today, Citron publishes an open letter to the FDA, requesting transparency with regard to comparable quasi-medical claims made by Nu Skin for its flagship product line "AgeLOC", a brand under which it sells cosmetics, dietary supplements, electrical devices for skin treatments, and a soon-to-be-marketed weight management product.

Citron is not publishing this letter to impact any short-term knee-jerk movement in the stock price.  Citron wishes to add transparency regarding the fundamental risks to Nu Skin's product line and the impacts on Nu Skin's business. 

Readers are referred to Citron's August 16th story about Nu Skin.   The exaggerated medical claims are explicitly detailed and the strategic risks are explored.  As well, the seriousness of the "15-Day Warning Letter", which is really a Cease and Desist order, is explained.

It is Citron's opinion that what is a pimple for L'Oreal may be cancer for Nu Skin.   AgeLOC is its flagship branding strategy, but its scientific foundation is highly dubious at best.  And its own distributor training, provided to over 160,000 reps in North America alone, has been highly misleading.

Stanford and Purdue have an important role to play with regard to the transparency the market needs.   We hope they will clarify their positions soon, with regard to their respect intellectual property reputations and AgeLOC claims, to which their names have been liberally appropriated by Nu Skin.



Citron's Open Letter to FDA:

(Click to Read)