The latest crash of the financial markets has created some great buying opportunities in the health care sector. You can almost pick any Biotechnology or Pharmaceutical stock and be guaranteed that it is undervalued today. The sell-off was steep and broad and took down good stocks with the bad. It certainly felt like some hedge funds were desperately liquidating anything in their portfolio. The financial stock selling was only exacerbated by a crash in commodities to create a avalanche effect that may not be over yet.

This has created a great buying opportunity in names such as Amgen (AMGN), Genentech (DNA), Genzyme (GENZ) and Celgene (CELG) to name a few.

On Tuesday August 26, Amylin (AMLN) and its partner Eli Lilly (LLY) announced that four patients had died while on diabetes treatment Byetta.

Both Amylin (down 12%) and Lilly (down 1%) sold off in after hours following repeated headlines saying Byetta was responsible for the deaths.

Analyzing the performance of my previous picks is by far my favorite part of writing this blog. It has on many occasions allowed be to learn from my mistakes.

I have moved the numbers to Google docs so that they are easier to read. Click  here to enlarge.

In July, Biogen-Idec (BIIB) and Elan (ELN), who co-market the multiple sclerosis drug Tysabri, announced two new cases of PML, a potentially deadly side effect. The stocks sold-off almost entirely. Biogen-Idec lost about 30% of its market share while Elan has lost over two thirds of its value.

I had previously recommended shares of Biogen-Idec right after the buyout rumors vanished and the stock was trading around 54. I had based that recommendation on the potential success of Tysabri.

On May 31st, AMAG Pharmaceutical (AMAG) announced results from a randomized phase III study of Ferumoxytol, an intravenous [IV] iron replacement therapy, in 31 patients with chronic kidney disease [CKD] stages 1-5 with functioning kidney transplants. The primary endpoint was the mean change in hemoglobin from baseline at Day 35.

The following results were obtained (copied from business wire press release at Yahoo.com).

Diabetes is a tough market to compete in for any company. Insulin is the standard therapy for most patients with severe Diabetes. It is a naturally occurring hormone and it exists as both short acting and long acting therapy. It requires close monitoring as it may have dangerous side effects. This is the hurdle that any product entering the market has to pass. The new product would have to be safer and more efficacious than insulin to get wide acceptance.

One of the serious side effects of any potent therapy is the drop of blood sugar levels below safe levels or hypoglycemia. If a product is equally safe and efficacious, it will have a tough time beating Insulin unless it is more convenient. This is an over simplification of the many problems these patients face but it may be useful as a set of guiding principles when picking a stock.

Back in January, I wrote an article predicting a good year for the Biotechnology/Biopharma sector based on early performance vs. major indices. Here is a link to that article.

Five months have passed since that post was published and I have written very few articles since. The markets have had a roller coaster ride. An ugly February-March period was rescued by Fed intervention and a short term rally that followed proved short-lived.

On Monday, March 31st, Vertex (VRTX) announced, through an abstract, the interim results of an open-label phase 2 trial for Telaprevir for treatment of Hepatitis C. 26 of 32 patients who previously failed other therapies (81%) experienced rapid virologic response [RVR] after four weeks of treatment. Even though these rates may not be sustained in longer term, chances are a good portion of these patients will be cured.

The release of these results has prompted analysts who disliked the company and the stock last week to suddenly change their minds. I was surprised at the timing of this news as I was expecting some results released in the second half of this year.

On March 17th, Arena Pharmaceuticals (ARNA) reported that they will continue with phase III trials after an independent review of unblinded data showed no cardiac safety concerns for the weight loss drug Lorcaserin. This was a rather important result for Arena because there had been concerns that it may have similar heart valve problems that plagued fen-phen, which targeted the same receptor.

I have written in the past about the differences in the selectivity in these drugs, which theoretically is enough to avoid the cardiac side effects. However, data released last week is the proof that the FDA needs to assure this product is safe. This also proves they have great scientists and good judgment.

It is time again to review past picks and to learn about my mistakes. The table below includes a list of my historical picks.

It is hard to find any signs of optimism on Wall Street these days. Nasdaq has had 8 consecutive down days and is down 8% to start the year, and most investors are ready to predict a bad year for the markets. Some of this sell off could be attributed to redemptions at hedge funds and mutual funds. But to me, this sell off feels a lot like flight from a US recession which has turned into a flight to anything foreign. It is true that the growth overseas (and down in South America) is much better than here in US, but it comes with a much higher set of risks.

One source of domestic safe haven has always been health care. It is a well known recession proof play that has benefited from economic cycles. The Nasdaq Biotech Index is flat for the year, outpacing the Nasdaq, and may signal a good year for Pharmaceutical and Biotech names.

On October 16th, shares of Biogen-Idec (BIIB) gained $13 to hit $82 based on rumors that the company had put itself up for sale. That day I recommended an aggressive sell because of the price tag and uncertainties around finding a possible suitor.

Thursday Biogen-Idec announced that it did not find a buyer and it was going to continue as a stand alone company. BIIB shares lost about $20 and was trading as low as $54, much lower than its share price before all the rumors began when the stock was in the $60s.

Onyx Pharmaceutical (ONXX) is enjoying the rewards of its potential blockbuster, Nexavar. On Monday, November 19th, FDA approved Nexavar, already approved for kidney cancer, for treatment of liver cancer. The product did so well in clinical trials that the company and its partner Bayer (BAY) had to halt the trials for ethical reasons to give Nexavar to the control group as well.

Onyx's stock has been doing tremendously well. In 2007, it rose more than 500% from about $10 to its current price of $53, but is off its 52 week high of $61.

Vertex Pharmaceuticals' stock (VRTX) dropped about $5 or 14% to $30 on the news release that Schering Plough's (SGP) Protease inhibitor Boceprivir, which had performed poorly in previous trials, showed that about 79% of patients achieved early response. As soon as this news came out (with no trial result detail), an analyst from Cowen and Co. downgraded Vertex due to concerns from competition.

First of all, the size of this market (up to $4 billion annual estimated sales) makes competition less of a factor. Second, being first to market increases the probability of success of any product, but it does not guarantee it. Third, the details of the Schering trial will make us realize that Telaprevir is still arguably the best product with the most clinical data. For example, in the Boceprivir trial, patients were primed with Peg-interferon and ribavirin before the start of triple drug therapy. Also, no long term sustainability of response rates are available beyond the original 12 week data mentioned in the abstract. Finally, the drop out rates due to side effects, the unknown methodology for calculation of percent responders, as well a the higher minimum detection limit of the PCR assay used to determine virus levels make me question the strength of these results.

Rumors of a buyout sent Biogen Idec (BIIB) shares up about $13 to over $82 per share.

I first recommended BIIB last year at $44.6 based on the potential success of Tysabri in treating MS (link to that article). As of Tuesday's price, the stock is up 84% and I am recommending to sell and to take any profits as I believe a buyout is far from certain and any changes to these speculations will send the stock back down to $70.

Genzyme (GENZ) saw its shares break out last week from $62.5 to over $68 on higher than average volume. The weekly chart below demonstrates this movement and its significance as it broke a long term trend of lower highs that started in 2005.

Pharmasset (VRUS) is a clinical stage pharmaceutical company focused on developing antiviral medicines. Its research is focused on development of a class of compounds known as nucleoside analogs. Nucleosides are the building blocks of DNA and RNA and used by virus proteins during replication and growth.

The analog drug is a small chemical variation of the natural nucleoside which inhibits the activity of the enzyme leading to disruption in replication. This approach has the advantage of a high rate of success as the the natural nucleoside gives a great starting point for developing a drug in addition to a potentially low side effect profile and resistance to mutation. The disadvantages include limited potency and slow metabolism.

My last performance review was in April of this year. I have not been writing much recently and not due to laziness. The reason for this lack of activity was my overall skepticism of the markets. Two sharp corrections happened this year in March and in August, from which the markets have strongly rebounded. The underlying economy, however, was extremely weak and it looked like we were going into a recession induced by a crisis in the housing market.

The Fed, however, decided to reduce interest rates earlier this month to avoid a recession. I believe this was a mistake. I don't think the Fed's job was to bail out bad hedge funds, bad loan underwriters and consumers who made poor decisions by making borrowing cheap again. I believe the long term effects of this act will be increased inflation, higher long maturity bonds and a collapse of the dollar. I hope I am wrong!

I have previously written about ALTU when the stock was trading around $18 back in November 2006 (link).

Since then Altus has signed a development and commercialization agreement with Genentech (DNA) for ALTU-238, a longer acting version of human growth hormone currently in phase II clinical trials with a $2 billion market. On May 10th, Altus announced initiation of a phase III clinical trial for ALTU-135, an enzyme replacement therapy for cystic fibrosis. To fund this large and expensive trial, Altus had a stock offering earlier this year which raised about $89 million dollars.

The results look impressive as they show a rapid response in Telaprivir treated patients vs. placebo in the first 4 weeks. However, the interpretation of results at 12 weeks becomes questionable due to lack of statistical significance. Analysts were focusing on a small subset of 20 patients who were to receive the Vertex drug for just 12 weeks and then be checked 20 weeks later for signs of relapse. Here is the quoted text from the press release regarding those 20 patients:

Analysis of PROVE 1 Patients who Finished All Treatment at 12 Weeks: Seventeen of 175 patients received at least one dose of telaprevir in “Arm D” of the PROVE 1 study (telaprevir + peg-IFN + RBV). According to the study protocol, patients in Arm D were eligible to stop all treatment at week 12 if they met on-treatment criteria, including the achievement of RVR (<10 IU/mL at week 4) and maintenance of this viral response (<10 IU/mL) at week 10 of treatment. Nine of 17 patients met these criteria and stopped therapy at 12 weeks, and 6 of these patients continued to have undetectable HCV RNA at week 20 of post-treatment follow-up. Of the remaining 8 patients enrolled in Arm D, 4 discontinued due to adverse events prior to week 12, and 4 did not achieve RVR.