A coin is tossed and lands on heads 49 times in a row. You are asked whether you want to bet on the next flip. What do you do? The retail investor says; of course he wants to bet – 49 times in a row, tails is due to come up. The quant beside him says; he has no interest in betting on an outcome that has an expected payoff of zero. No edge – no bet. But the savvy trader at the end pipes up; yup he’ll take some of that action. Yet instead of betting on tails, he says he wants heads. He puts it all on heads, and sure enough, heads comes up again. Why does he do this? Sometimes not everything is as it seems. Yes, there is a chance the coin had a fluke run of 49 times in a row. That can happen. But what are the odds? Isn’t the better bet to assume the coin isn’t evenly balanced?
I can’t take credit for this next hypothesis, it was actually one of my buddies who told me about the idea, but I think it makes tons of sense. Everyone probably knows the story of former hedge fund d-bag Martin Shkreli who, as the CEO of Turing Pharmaceuticals, raised the price of a 62 year old drug called Daraprim from $13.50 a table to $750.00 overnight. This was an extreme example of what a bunch of other companies have been doing in a more subtle manner.
From the NY Times:
Turing’s price increase is not an isolated example. While most of the attention on pharmaceutical prices has been on new drugs for diseases like cancer, hepatitis C and high cholesterol, there is also growing concern about huge price increases on older drugs, some of them generic, that have long been mainstays of treatment.
Although some price increases have been caused by shortages, others have resulted from a business strategy of buying old neglected drugs and turning them into high-priced “specialty drugs.”
Valeant Pharmaceuticals and Concordia Healthcare are two companies that have experienced mind boggling share price appreciation using this sort of strategy. Three years ago VRX was a $50 USD stock. This summer it ticked above $250. CXR’s run has been even more impressive. In the fall of 2013 when it came public it traded for $4.50 CAD. It hit $120 this summer.
Back to Martin Shkreli and his preposterous drug price rise. Was he the world’s biggest asshole and think he could get away with the price increase? That very well could be the case. He is after all a former hedge fund manager…
But what if there is more to this story than it seems? What if Shkreli shorted VRX an CXR before his stunt? What if the outrage from the public, and the subsequent comments from government officials, were all part of the plan?
Have a look at what has happened to the price of VRX and CXR since Shkreli’s price increase. First CXR:
Either Shkreli is the biggest d-bag on the face of the planet, or an evil genius. I personally am going with a lot of both…
Thanks for reading and have a great week-end,