- An entire industry maligned because of one guy gaming the system
- The real story behind the $13.50 pill that’s now $750…
- … and the investing takeaway the financial media won’t tell you
- A stock screen that automatically eliminates 90% of the market
- A risk-off day… readers tell us we have performance issues (!)… the velocity problem, continued… and more!
The biotech industry is populated with legions of innovators who toil day and night to discover treatments and cures for humanity’s most fearsome diseases.
In the last 72 hours, the world has learned the industry is also populated with douche bags like Martin Shkreli…
The only thing worse than an overly burdensome regulatory process for drugs… is someone who hides behind it to rig the market.
Alas, the world is drawing all the wrong lessons from Shkreli’s 15 minutes of fame. And investors who don’t understand what’s really going on stand to miss out on significant gains.
Let’s dive in…
As you might have heard, the biotech sector’s been getting slammed this week. IBB, one of the big biotech ETFs, dropped 4% yesterday. It’s down another 3% as we write this morning.
It all started with a Sunday New York Times story about Shkreli’s privately held company, Turing Pharmaceuticals. Last month, Turing picked up rights to Daraprim — a 62-year-old drug that treats a rare and life-threatening parasitic infection. Turing jacked up the price from $13.50 per tablet to $750.
Outrage ensued from the establishment media and the politicians. Hillary Clinton glommed onto it yesterday morning, inveighing against “price gouging” on Twitter and promising she’d unveil a plan to address it today.
IBB was already down on the day, but the drop accelerated after her tweet.
Shkreli took to the financial cable channels and doubled down. “We know, these days, in modern pharmaceuticals, cancer drugs can cost $100,000 or more, whereas these drugs can cost a half of a million dollars,” he told Bloomberg TV. “Daraprim is still underpriced relative to its peers.”
The political and media outrage begs a critical question: How does anyone manage to get effective monopoly power over a drug that was first made in 1953 and went off patent long ago?
In the first place, it helps to understand Shkreli’s entire life story appears to be about leveraging government regulations in a way that lines his own pockets.
“He started MSMB Capital, a hedge fund company, in his 20s,” says the Times story, “and drew attention for urging the Food and Drug Administration not to approve certain drugs made by companies whose stock he was shorting.”
Isn’t that nice?
Now at age 32, “Shkreli is taking advantage of loopholes that can be used to block generic competition,” says Ray Blanco of Technology Profits Confidential and Agora Financial’s FDA Trader.
Here’s how Derek Lowe explains it at the blog of Science Translational Medicine magazine: “The FDA grants market exclusivity to companies that are willing to take ‘grandfathered’ compounds into compliance with their current regulatory framework.” Once a company does that, it gains an effective monopoly through the “generic bioequivalence” rules.
How does that work? Let’s say you run XYZ Pharmaceuticals and you want to bring a competing version of Daraprim to market.
Well, good luck jumping through the regulatory hoops. As the FDA explains on its own website, “The firm must fully document the generic drug’s chemistry, manufacturing steps and quality control measures. Each step of the process must be detailed for FDA review.”
Nor does it end there: “One way scientists demonstrate bioequivalence,” the FDA says, “is to measure the time it takes the generic drug to reach the bloodstream and its concentration in the bloodstream in 24-36 healthy, normal volunteers. This gives them the rate and extent of absorption — or bioavailability — of the generic drug, which they then compare to that of the pioneer drug.”
Ah… So to satisfy the FDA, you’re going to need a supply of Daraprim for comparison purposes — at $750 a pill, thank you very much.
There’s a whole cottage industry of people like Shkreli who “don’t seem to be as interested in discovering drugs as in discovering opportunities to use other people’s drugs as a means to stick it to patients and payers,” sums up Mr. Lowe.
Why innovate to make a fortune when you can use government regulations to throttle any competition?
Heh… In that sense, all Shkreli has done is borrow a page from Big Pharma. The more regulations that pour forth from the FDA, the better it is for Big Pharma companies that have the back-office resources to comply with all those regulations. Upstart competitors don’t stand a chance.
As a result, Big Pharma has done almost no innovation during the last 15 years. We documented last year how they’ve spent most of the 21st century merely copying each other’s best-selling drugs.
We have no idea how Hillary Clinton will propose to address the issue of “price gouging.” But we do know she and Barack Obama were the top recipients of donations from Big Pharma during the 2008 election cycle. We also know Big Pharma is thick as thieves with the Clinton Foundation.
Maybe Mr. Shkreli can stroke a big check to the Clinton Foundation and make it all go away?
Here’s the investing takeaway: “The Hillary dip is buyable,” says the aforementioned Ray Blanco. “The Yellen dip last year was another opportunity to buy.”
Ah, yes… We documented it when it happened in July 2014. Federal Reserve chairwoman Janet Yellen told Congress, “Equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched.”
Biotech dropped 6% in the ensuing week… and then went on a 64% tear for the next year.
“Whenever biotech drops for political reasons — that’s a buying opportunity,” affirms Stephen Petranek, editor of Breakthrough Technology Alert.
We’ve spilled much digital ink today dumping on Big Pharma fat cats and fast-buck artists gaming the system like Martin Shkreli. So we can’t lose sight of the fact there remain many quality biotech players attracting investment dollars as they work to slay the dragons of cancer, heart disease, diabetes and the like.
One in particular is worth your attention at this time — especially because it would set off a panic if it ever hit the establishment media.
MarketWatch, CNBC, Fox Business… they’d all LOVE to get their hands on the audio of this private conversation.
It details an off-exchange opportunity that could make in-the-know investors an absolute fortune in the coming months.
That’s why the full audio is available to only 50 Agora Financial readers per day.
I checked with my publisher, and he assured me there are still a few spots left for today, but they’re filling up fast. Click here to discover how to be one of the 50.
As stocks rose yesterday for no obvious reason, they’re falling today for no obvious reason.
The financial media are trotting out the usual “global growth” and “China” concerns. Oh, well, Jim Rickards warned us there’d be more volatility like this. At last check, the major indexes were all down at least 1.5%, the S&P 500 at 1,936.
Gold’s latest pop isn’t holding; the bid as we write is $1,125. Crude is also losing ground, down 2% at $45.67.
“One of the brightest investors I know describes 90% of publicly traded companies as ‘point products,’” writes Matt Goodman — better known here at Agora Financial as “Yoda.”
Yoda works closely with our investment director Chris Mayer to unearth 100-baggers — stocks that can turn a $10,000 investment into $1 million.
Companies that make “point products” won’t get you there. Here’s a definition from PC Magazine — “a product that provides a solution to a single problem rather than addressing all the requirements that might otherwise be met with a multipurpose or multiservice product.”
A point product is “a one-trick pony,” says Yoda. “RC Cola is a point product. Coca-Cola is the bundle. Ask yourself: Do businesses and restaurants want to deal with someone who can solve one problem? Or do they want to deal with someone who can solve all of their problems?
“This is why Coca-Cola and Pepsi have a like-for-like product in each beverage category. They are after the most valuable part of business: the ecosystem. Bundles compete on their ecosystem. Point products compete purely on one product. Ecosystems are much harder to replicate, and therefore compete against.”
Coca-Cola and Pepsi were both 100-baggers. RC has been passed from owner to owner over the years; in fact, U.S. and foreign ownership rights to the name are held by different firms.
Chris Mayer’s book 100 Baggers: Stocks That Return 100-to-1 and How to Find Them has now been released to the general public… but only Agora Financial readers like you have access to a FREE copy via this one-of-a-kind offer.
“Last week, you said Currency Wars Alert readers made 20% in the last three weeks. But that’s not been my experience. How did you calculate that 20% gain?”
“You provided three- and six-week and three-month performance statistics,” writes another. “You do not provide names of issues (stocks, bonds, funds), dates of recommendation and closing dates. If your statement of performance is to be believed, the foregoing must be provided.
“I have read all of Mr. Rickards’ books, have been a subscriber to Strategic Intelligence and Currency Wars Alert essentially from their beginnings, have purchased many of the options recommendations and have participated in all conference calls for subscribers. Overall, I find it all rewarding, informative and entertaining. But in general, the performance I’ve experienced does not track with your general three- and six-week and three-month performance statements.
“Given that credibility is one of your key intangible assets, if not your key intangible asset, I recommend strongly that you back performance with statistical fact. Thank you for your time in reviewing this. I would appreciate a response.”
The 5: To be clear, we were not describing overall performance during a given time frame — merely a handful of selected plays that have performed quite nicely.
And we purposely held back the names and ticker symbols out of respect to paying subscribers like yourself — you wouldn’t want us to just give it away, especially since we’re talking about positions that are still open, would you?
Thanks for writing in — and keeping us on our toes.
“There are many reasons why velocity remains stagnant,” a reader writes, carrying on our recent velocity discussion,“ but one, more than any other, is the chief reason.
“Total credit market debt in the USA is higher today than it was at the end of 2008. Americans as a whole have reached their credit limit.
“Borrowing is a claim on future earnings, and our economy was principally debt driven in the early years of the 21st century. Today, 99% of the population feel things are not better than they were in 2008.
“Most incomes are flat, and most are paying down debt they incurred years ago, leaving less to spend on nondiscretionary items. So for now, debt remains at all-time highs, while velocity remains low.”
“You want money velocity? Do some math,” writes another.“ What if QE4 bought consumer debt instead of bankster debt?” $85 billion a month paying down 100 million credit card accounts would be $850 a consuming person.
“Buy 200 million accounts and there would be $425 a month in sudden prosperity to the average consumer. Or you can put it into other consumer loans, thereby ‘juicing’ the 76% of the economy everyone seems so concerned about. Why haven’t they done this, my naive tuchas asks?”
The 5: Why, your question answers itself! However, read on…
“I am sure one problem with the velocity of money has been the longtime widening of the gap between the wealthy and the rest,” writes our final correspondent.
“More money to the wealthy does not increase spending. They have had enough to spend what they want for some time. More money to the wealthy is almost like taking money out of circulation.”
The 5: Careful there. You’re falling into the common trap of thinking that borrowing and spending creates prosperity, rather than saving and investing.
Here’s the problem: Years of horrible Fed policy have lined the pockets of the 0.1% while doing nothing for the 99.9%. At the same time, years of horrible White House and congressional policy have destroyed the incentive for anyone who’s saved some money, wealthy or otherwise, to plow that money into building businesses and hiring people.
That’s America 2015: Consumers too broke to spend, savers too scared to invest. Heckuva job, guys…
Best regards,
Dave Gonigam
The 5 Min. Forecast
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