Salix Pharmaceuticals, Ltd. (SLXP)

Imagine, if you will, that it is December 3, 2008. Reeling from crushing blows to erstwhile blue chip financial and commodity stocks, you seek to change your fortune with speculative biotech investments. Some diligent research allows you to identify Salix Pharmaceuticals as a promising candidate. After all, they have approved drugs and revenues with late stage pipeline candidates. Recently the stock was on a strong upward trend until a possibly disproportionate pullback to 7.14 due to the FDA extending their PDUFA date for Metozolv by three months. Seeing your opportunity for a strong rebound, your finger hovers over the buy button ... when suddenly a cloud of smoke appears in your living room and a genie appears! "Before you press that button," he says, "there are a couple of things you should know. One is that later this month the FDA will slap a black box warning on Salix bowel prep tablets due to reports of severe irreversible kidney damage. The other is that the 1100 mg formulation of balasalazide will receive a complete response letter from the FDA requesting a whole new phase III study to demonstrate equal effectiveness to Colazal." He then disappears leaving a faint odor of bowel prep.

Thanking the stars for your good fortune, you abandon your plans to invest in biotech and buy Satyam instead. Two months later you're irritated to see Salix trading at 9.6 despite everything the genie said coming true. Then you remember how much the genie looked like Jim Cramer. Then you remember you promised yourself you'd stop doing bong hits while your brokerage account was open. The moral of the story? Small cap biotech stock movements make no sense in the short term. Decide for yourself what a share should be worth and then move when the random walk strays too far from a rational value. Salix rising on waves of bad news? Red thumb.