The Participant 9/30/15: Biotech Beating

by Jason Kelly

Wednesday, September 30, 2015




The Nasdaq Biotech Index has declined more than 20% in the eight trading sessions since Sept. 17.

The blame is being placed partly on comments made by Hillary Clinton, front-runner for the Democratic nomination in the 2016 presidential election. She said on the Sept. 20 edition of CBS’s “Face the Nation” program, “I’m going to address” drug prices, “starting with how we’re going to try to control the cost of skyrocketing prescription drugs. It’s something I hear about everywhere I go.” In speeches the next day, she said, “Nobody in America should have to choose between buying their medicine and paying their rent.” Then, she tweeted, “Price gouging like this in the specialty drug market is outrageous. Tomorrow I’ll lay out a plan to take it on.”

Her tweet referred to a sudden 5,456% increase in the price of Daraprim, a 62-year-old anti-infective drug, by Turing Pharmaceuticals. Turing CEO Martin Shkreli explained on CNBC that the drug had been priced too low and needed to generate profits that could be put toward new research.

Critics retorted, be that as it may, taking the price from $13.50 per pill to $750 overnight was outrageous. Joel Gallant, a doctor and the former chairman of the HIV Medicine Association, said in an interview, “They are not in the game for biomedical research. They are getting exclusive rights to a cheap drug and raising the price because they can.”

PhRMA, the pharmaceutical industry’s primary lobbying group, drew a distinction between itself and Turing’s decision, posting on Twitter that the drugmaker “does not represent the values of PhRMA member companies.” Further, PhRMA said Turing is not one of its members, which include such global giants as Merck (MRK $49) and Pfizer (PFE $31). “PhRMA members have a long history of drug discovery and innovation that has led to increased longevity and improved lives for millions of patients,” the lobby group wrote in a statement. “Turing Pharmaceutical is not a member of PhRMA and we do not embrace either their recent actions or the conduct of their CEO.”

Thus chastised and despite having said on CNBC that he would not lower the increased price as a result of the outrage, Shkreli recanted and said his company would reduce the price of Daraprim “to a point that is more affordable” after all. No word yet on the new discounted price. $749 per pill, perhaps?

While the general public viewed the incident as evil drugmakers looking to profit off the woes of everyday people who have no choice but to buy the medicine they need, biotech investors saw things differently. To them, it raised the possibility that the industry’s longstanding practice of acquiring what looks to be an underpriced drug based on the dearth of alternatives, then ratcheting up the price, might come under closer scrutiny and possibly even new regulation. If there’s one word that makes a biotech investor drop a pill bottle on the sell button, it’s “regulation.”

So that’s what they did. Down went Jazz Pharma (JAZZ $125), Mylan (MYL $40), and the whole gang in the iShares Nasdaq Biotech ETF (IBB $289). Since Sept. 21, they’re down 23%, 19%, and 20%, respectively.

The next phase whenever something like this occurs is for the financial media to trot out the value-buying advice, which is what they’re doing now. A round-up of z-vals at Reuters mentioned Amgen (AMGN $134), Biogen (BIIB $278), Celgene (CELG $105), and Gilead (GILD $96) as bottom-buying candidates. Len Yaffe of Stoc*Doc Partners seconded Amgen and Gilead on CNBC, then added Juno (JUNO $40) and Regeneron (REGN $452) as stocks whose “prospects are much better than the analysts expect.” Since Sept. 21, these six stocks are down 13%, 15%, 16%, 14%, 6%, and 18%, respectively.



From Note 35 sent to subscribers last Sunday morning, with data as of Friday, September 25:

Let’s revel in the joy of witnessing the market go our way. We’ve been wanting lower stock prices for not just months, but quarters, and now we’re finally getting them ahead of a rebalancing. The market fall started a month ago, but has lasted, as hoped. Given one more week of price weakness, we’ll be sitting pretty next Sunday when we place orders that will put more capital to work for a rebound. Once those fill, we’ll switch our desire from price weakness to price strength. …

[The Dow 2 is] a modified version of the highest performing permutation of the Dow Dividend Strategies presented in the Permanent Portfolios chapter of The Neatest Little Guide to Stock Market Investing. The strategies all work with the ten highest-yield stocks of the Dow Jones Industrial Average on an annual basis. Within that group of ten, the Dow 10 buys all of them, the Dow High 5 buys the five highest yielding of the ten, the Dow Low 5 buys the five lowest priced of the ten, and the Dow 1 buys just the second-lowest-priced stock of the ten. The latter was called the penultimate profit prospect by Michael O’Higgins in his 1991 book Beating the Dow.

The Dow 1 was by far the best performer of the bunch until the subprime mortgage crash, in which it killed itself by owning General Motors in 2008 and Bank of America in 2009. Aside from that, I’m not a believer in systems that produce just a single stock to own, even if that stock is from the Dow, a collection of some of the world’s most established companies. Even they can give up the ghost, as GM demonstrated.

The best performing Dow Dividend Strategy is the Dow Low 5, sometimes called the Small Dogs of the Dow. We’ll use it to produce a list of just five stocks to consider each year for our Dow 2 plan, which will buy two of the five, as its name implies. The two will be the ones trading at the largest discount to fair value as calculated by Morningstar.

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The Kelly Letter is emailed to subscribers every Sunday morning. It costs $19.97 per month or $236.97 per year. See a two-minute video about its low-stress way of beating the stock market at:



The following excerpt is from Credit Suisse’s latest client note, as reported by Bloomberg.

“… We have been looking for the market to retest the spike low from August at 1,867, and then medium-term support at 1,820, the October 2014 low. With several key sectors now also falling to major support levels — notably industrials -‒ and looking vulnerable, we think the risk a major top may be established has risen sharply.

“Below 1,867 should keep the risk lower for price and ‘neckline’ support at 1,832/20. Below here would mark the completion of an important top, turning the core trend bearish. If achieved, we would target 1,738/30 initially — the low for 2014 itself, and the 38.2% retracement of the 2011/2015 uptrend. Although we would expect this to hold at first, a break would be favored in due course for 1,575/74 — the 38.2% retracement of the entire 2009/2015 bull market. …”

“We’ve obviously already had a significant fall in the stock market, triggered by the breaking down of the lows we saw earlier this year. The big question now is whether this is just a correction in a bull market,” [a member of the Credit Suisse team] told us. In his mind, tumbling past 1,820 would signal that the market move could be something bigger.

On the plus side, a move above 1,953 could help ease selling pressure, the Swiss bank said.

To see this call in The Z-val Zone, please visit:

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Background: The term “z-val” is a shorthand introduced in the book, The 3% Signal, for “zero-validity forecasters” and “zero-validity environment.” The latter phrase was coined by Nobel Prize winner Daniel Kahneman in his book, “Thinking, Fast and Slow,” where he wrote that “stock pickers and political scientists who make long-term forecasts operate in a zero-validity environment. Their failures reflect the basic unpredictability of the events that they try to forecast.” This is why stock market forecasters are proven to sport an accuracy rate of about 50%, same as a coin toss, yet they continue forecasting.

You can peruse the growing collection of tracked forecasts in The Z-val Zone at:

Seen a forecast I should track? Send me the link in a reply to this note.



From Steve Martin’s comprehensive list of side effects associated with a drug for joint pain, which appeared on the Shouts & Murmurs page of The New Yorker, April 13, 1998:

“This drug may cause joint pain … If you undergo disorienting nausea accompanied by migraine and raspy breathing, double the dosage. Leg cramps are to be expected; one knee-buckler per day is normal. Bowel movements may become frequent — in fact, every ten minutes. If bowel movements become greater than twelve per hour, consult your doctor, or any doctor, or just anyone who will speak to you. …

“If your hair begins to smell like burning tires, move away from any buildings or populated areas, and apply tincture of iodine to the head until you no longer hear what could be taken for a ‘countdown.’ … You may feel a powerful sense of impending doom; this is because you are about to die. … Do not take this product if you are uneasy with lockjaw. … You also may experience a growing dissatisfaction with life along with a deep sense of melancholy — join the club! …

“Discontinue use immediately if you feel that your teeth are receiving radio broadcasts. You may experience ‘lumpy back’ syndrome, but we are actively seeking a cure. … When finished with the dosage, be sure to allow plenty of ‘quiet time’ in order to retrain the eye to move off stationary objects. Flotation devices at sea will become pointless, as the user of this drug will develop a stone-like body density; therefore, if thrown overboard, contact your doctor. … Users may experience certain inversions of language. Acceptable: ‘Hi, are how you?’ Unacceptable: ‘The rain in Sprain slays blainly on the phsssst.'”

Yours very truly,

Jason Kelly

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