A Doctor's Walk Down Wall Street

I am a big believer in the invest-in-what-you-know thesis of Peter Lynch. This is particularly true in the field of healthcare. I have learned over time that doctors have a huge potential advantage in the handicapping of pharmaceutical stocks. We can get subjective experience of the how the new drugs work from our patients and from our colleagues, we can get a feel for how effective the marketing is for any particular drug and, just as importantly, we understand much of the science involved and know how to critically read the literature.

I have gone to several of the healthcare conferences held by big investment banks for healthcare analysts (in the past when I was thinking about working for a hedge fund) and talked to many of these folks. There is a huge lack of understanding of the basics of medicine among the analysts who cover these stocks. At one of the meetings, an analyst for Merrill asked if the plaque in arteries was related to plaque on teeth. Remarkable no one else in the room laughed at this.

As a result of this knowledge gap, the markets in healthcare are not as efficient as one would think. I have seen several situations where data were released and the market misinterpreted the finding. Later the company explained the results in small words to the analyst community and the market priced the news appropriately. One example was Esperion (ESPR). A few years ago, they released a trial on an early stage lipid drug which showed more regression coronary artery disease than any other drug before or since. The analysts had a whisper number of 10% regression and when the drug caused a 5% regression the stock traded down 20%. I bought at this point and the stock rebounded the next day when Steven Nissen commented in the analyst call that this was a landmark trial. Pfizer bought ESPR soon afterwards for a hefty premium- although the drug is still in phase 2 limbo.

I am certainly not always right- Hell, I started shorting Merck at 27 and it is now at 50. But, I have been right much more than wrong. So I am either lucky or good. I have learned a lot about the pharma industry along the way. I will be discussing my take on some of the more interesting companies in the cardiac space ( I am a cardiologist) in this series-if there is interest. Among my top picks - which I will be discussing in more detail in later articles - are CVTX, SNY. Among my top short picks are NTMD ( which I have ridden down from 20 to 2), BSX, MRK and FOXH. I have mixed feelings about companies like MDCO and PDLI.