Healthcare

 Sometimes "professional" investment research resembles little more than a day trader rag with nicer charts and fancier wording to make the reader feel less guilty and more professional about the kind of "investing" he or she is actually performing. Thus we point to Goldman's recent China "Portfolio Strategy" dated July 31st where they tell us to basically keep buying the Chinese market based on government support for the economy and a "favorable liquidity setup". We're told to buy on dips, "stay engaged" (ie. keep generating commissions), and trade earnings suprises. Is this professional investing or what your college roommate was doing during the dotcom bubble? It's hard to tell the difference.

Market view: Stay invested; buy on dips for new money A-share market gained 12.4% in July despite a 5.3% correction, which was provoked by concerns regarding credit tightening, on July 29. We maintain our positive market view on A shares and think the government’s pro-growth policy stance, which should ultimately lead to macro/earnings recovery and a favorable liquidity setup, will continue to bode well for equities.That said, we see price volatility nudging higher as uncertainties revolving around interim earnings and the government’s monetary policy stance intersect with an above-mid-cycle multiple (24x). We would stay engaged in the market and look for opportunities to accumulate positions on dips.

Strategies: Domestic demand exposure; Trade earnings surprises We recommend investors to focus on the following themes to gain exposure to the A-share market: (1) Laggards with valuation buffers and reasonable EPS growth; (2) Pro-cyclical domestic demand, which includes banks, insurance, property, and selected consumer and materials names; (3) Stocks that are potentially subject to positive earnings surprises.

That's the front page: trust the government to support the market, trust dumber investors to follow you (liquidity) and try to make little earnings trades hoping for pops. Oh wait. What about valuations?

Valuations: Above mid-cycle, but may persist CSI300 is now trading at around 23.9x I/B/E/S consensus P/E and 3.2X P/B on a 12-month forward basis against an average of 18.9x and 2.0x since April 2005, respectively (see Exhibits 1 and 2). On the basis that FY09 EPS growth for the aggregate market could be lower than the 15% that I/B/E/S consensus is currently forecasting, the forward P/E for CSI300 would be even higher at around 26.6x using our FY09 EPS growth assumption of - 5%. July 31, 2009

So valuations are sky high and earnings estimates might be missed. But we should hang on, because high valuations may persist. That's our upside investment case. High valuations may persist... and actually need to go higher or have upside earnings surprises to really give us upside on stock prices since they are already stretched as it is. Also, note that they compare recent valuation multiples to the average since... only 2005.. which was still a pretty bullish period for Chinese equities. So valuations are stretched even above what we saw during a pretty bullish time for China, but we should just have confidence in the government and liquidity to keep pushing things higher. This is what we are made to believe is "professional investing" rather than a gambler's punting.

To me this shows us that biotech isn't just an offshoot of pharma anymore. It is pharma. It's the more sophisticated an effective way for drugs to be developed. Perhaps soon we won't even make the distinction between biotech and old "chemistry-based" pharma. They'll all just be pharma (though the distinction between small innovative companies and large pharma marketing platforms, Big Pharma, will continue to apply) This is because most future discoveries are likely to be biotech-based. This also shows, as the linked article says, that right now "Biotech is good at making drugs and Big Pharma is good at selling them".

Black Box warnings are the most severe type of warning that the FDA can require for a pharmaceutical. They can indicate a wide range of potential risks, with varying degrees of probability, but one thing is for sure. The the term Black Box is downright scary and it frequently highlights a serious, though perhaps very improbable, health risk such as, well, death.

Still, to be fair, it could be simply telling me about a suicide risk that has 1/100th the probability of me similarly dying when I get behind the wheel of a car. And given the dark name, I'm far less inclined to risk the Black Box warning than to drive to the corner store. So perhaps this is a problem, that the term Black Box is too scary even if it does warn of some pretty unfortunate risks.

It appears the FDA has recognized this since they are beginning to phase-out the term with some better word choice. Is it fair if we call this a re-branding of the Black Box?

On the FDA conference call with reporters this afternoon to discuss the new warnings, two agency officials told the news media to use the phrase "Boxed warning" instead of "Black box warning." Why? As one of them put it, "Black box carries the implication, 'Don't you dare use this'." The other official added, "We don't want to scare people off (from trying to quit smoking). We just want them to be carefully monitored."