I have based a lot of my analysis on this blog around financial models, specifically rNPV, which I have talked about many times. However, after a discussion on ViroPharma's (VPHM) Yahoo! Finance message board, I noticed that I never mentioned a key component to valuation, which is a company's cost of capital.

Cost of capital [COC] is a firm's expected cost to finance its operations. It consists of a weighted average of a company's cost of equity [COE] and cost of debt [COD]. COC is calculated with the following formula:

Amgen (AMGN) reported earnings Thursday night and investors were giving the stock a 4% boost Friday. The stock, which is down some 36% in the past year, has struggled since mid-2005. The company's growth has slowed, and the company has a cloud over it with a pending FDA panel review of anemia drugs. The panel meets in March, and could place restrictions on drugs that treat anemia from chemotherapy, which could affect Amgen's Epogen and Aranesp.

Amgen's 2007 earnings were nothing to boast about, as the company posted $14.77 billion in revenues, only a 3.5% gain, and $4.8 billion in adjusted profit, a 4% gain over 2006. It must be noted, however, that Amgen did still grow despite a 25% drop-off in fourth quarter sales of Aranesp.

Gilead Sciences (GILD) announced a record fourth quarter Wednesday, as the company posted $1 billion in product sales for the quarter, the first time the company had broken the billion-dollar mark in product sales. Led again by its HIV franchise, Gilead beat Wall Street estimates, which led to an upgrade from Friedman Billings Ramsey, an outperform reiteration from Rodman & Renshaw and a price target increase from Standard & Poors.

Revenue growth was led by continued strength in HIV drug Truvada. Truvada sales increased 33% year-over-year to $449 million for the fourth quarter. Gilead's newest HIV drug Atripla came in with $260 million in revenues for the quarter, slightly under analyst estimates. However, there are expectations for Atripla to further pick up its growth this year as the EU approved the once-a-day treatment in December.

It has been brought to my attention that I made an error in my recent Tysabri article. The drug Remicade is owned by Johnson & Johnson (JNJ), which it received in its purchase of Centocor, Inc. Schering-Plough (SGP) markets the drug outside the United States. I apologize for the error.

Also, I want to clarify a few issues that have been brought up as well.

[See article correction.] The roller-coaster ride that the drug Tysabri has been on over the past several years hit another high this week as the FDA approved it to treat Crohn's Disease [CD]. But this approval doesn't necessarily mean the roller-coaster ride will end for the drug, which is co-marketed by Elan (ELN) and Biogen Idec (BIIB) and also is approved to treat multiple sclerosis [MS].

Tysabri was originally approved for MS in 2004, but was pulled from the market in 2005 after two patients died after contracting PML. The FDA allowed the drug to return to the market in 2006 with a risk-management plan, and there have been no complications with PML since. The drug will have a risk-management plan for Crohn's as well.

Genentech (DNA) reported full-year 2007 earnings Monday and, while the company beat on the bottom line and guided 2008 in-line, investors sent shares down again as its major drugs missed revenue estimates. Shares of DNA have traditionally traded on the company's revenues, and this time is no different.

Fourth quarter revenues for cancer drug Avastin came in at $603 million (a respectable 23% growth), but analysts expected sales of $616 million. Lymphoma drug Rituxan had sales of $596 million, but analysts expected $603 million. Same goes for breast cancer treatment Herceptin ($327 vs. an expected $332) and eye-disease drug Lucentis ($197 vs. $200).

ViroPharma (VPHM) had a big week with its stock climbing 20% after the company announced better-than-anticipated guidance for 2008 sales of its bacterial infection drug Vancocin. The company expects that 2007 sales of Vancocin were in the guided range of $202-208 million and that 2008 sales will fall in the range of $210-235 million. This guidance greatly out-paces what analysts were projecting. Consensus 2008 estimates had ViroPharma with $182 million in sales.

Analysts, for a couple of years now, have feared generic competition to Vancocin, which could eliminate 50% of the product's sales in the first year of an available generic. However, a generic form of Vancocin is not available yet, and it appears from ViroPharma's guidance that it does not feel one will be available this year.

Theravance (THRX) shareholders will want to mark February 27 on their calendars, as the FDA announced Thursday that it will meet to review Theravance's NDA for its drug telavancin. The FDA has already delayed telavancin's approval once, saying the company needed to submit revised labeling and re-analyzed or updated patient data.

Telavancin is a first-of-its-kind drug to treat "superbug" bacteria (essentially MRSA). Back in October, when the approvable letter was issued by the FDA, I wrote about my concerns over whether telavancin would eventually get approved. I still have a lot of concerns, and investors should be weary of this one. FDA panel reviews are not a good sign, as they are usually called when the FDA has concerns it wants addressed. However, new FDA rules require a panel review for first-of-kind drugs, so the panel could just be a formality.

Isis Pharmaceuticals (ISIS) came out as the big winner from the JPMorgan Healthcare Conference as the biotech announced a licensing deal with Genzyme (GENZ) for its cholesterol drug mipomersen. The deal marked the end of an auction for the drug in which up to 10 companies were interested.

Genzyme will pay $325 million up front to Isis, with a $150 million investment and $175 million upfront licensing payment. Genzyme's investment in Isis is for five million shares of the company at $30/share, which is approximately 5.75% of Isis. Genzyme will also pay up to $1.58 billion more and the companies will split the profits if the drug reaches certain milestones.

Back in September, I was neutral on a high-flying Celgene (CELG). The stock has dropped 27% since then, and I feel now is a better time to get in on the stock. The last quarter of 2007 trading was not too kind to Celgene. The company offered lower guidance; the third quarter was disappointing; and then the stock lost 11% on December 10 as Millennium Pharmaceuticals (MLNM) announced that its multiple myeloma drug Velcade fared better in clinical trials than Celgene's Revlimid.

However, analysts came out afterward with bullish sentiment on Revlimid, and Monday Celgene said that Revlimid likely beat Street estimates for 2007 revenues, and the company upped its 2008 guidance, which is providing a boost for the stock.

You can see by the market's reaction to recent trial results what it thinks of this marketplace and the potential for Amgen (AMGN). This is a very different market than cancer -- much tougher to crack, lower-margin drugs and less growth potential. I don't think the results will push the company forward too much.

Denosumab, if approved, will eventually go head-to-head with very-low-cost generic Fosamax, a market leader -- and Fosamax (from Merck (MRK)) is a pill, while Denosumab requires an injection.

Wall Street has been a mess lately. Credit woes continue; Bernanke talks of a slowing economy; the Dollar is at record lows; and oil is nearing $100. So where can we make money in this market? I'm sure the nature of my site has already given away the answer. Yep, I think we can make money in biotech. I think this market sets up well for the biotech sector because of the slowing economy, the weak dollar, and potential for growth.

It's pretty common to Wall Street that investors become defensive when a slowing economy presents itself. That tends to mean investors flock to gold, consumer staples, supermarket, and medicine stocks. Biotech certainly fits the bill because people in need of medicine are probably going to pay for it despite a slow economy.

Staph infections have been sprung into the spotlight lately with several school closures and reports of infections all over the country from schools in New York and Virginia to the University of Colorado.

Along with the recent news coverage came Tuesday's FDA decision to issue an approvable letter to biotech company Theravance [THRX] for its drug Telavancin, which treats methicillin-resistant Staphylococcus aureus [MRSA]. The Centers for Disease Control [CDC] estimates that Staph infections kill more people every year than HIV. And after reading a Forbes.com article on this topic, I thought that I would take a look at the biotechs that compete in this area.

Gilead (GILD) once again posted stellar numbers last week when it announced its third quarter earnings. The company earned $0.42 per share on $1.06 billion in revenues. Also, the company announced Monday that its board has authorized the repurchase of $3 billion worth of its stock through 2010.

To start with, I think the earnings strength is no surprise. However, it did "surprise" and beat the Street by three cents. Gilead's core strengths are dominant right now. Sales from the HIV franchise grew by 45% year-over-year, thanks to Truvada and Atripla. Also, Atripla was approved by the European Union last week, so sales should continue to increase for that product.

Vanda (VNDA) shares, which have struggled for months now, have surged 20% in the past two days. The company presented at the Natixis Bleichroeder Hidden Gems Conference on Monday, and the stock has been riding strong following it.

Investors must have liked what President and CEO Dr. Mihael H. Polymeropoulos had to say at the conference. I listened to the conference call and there are a few things I heard that could be the reasoning behind the stock's recent movement.

Development-stage biotechnology companies NeurogesX (NGSX) and Vanda Pharmaceuticals (VNDA) both announced Thursday that they have filed marketing applications for their respective products. NeurogesX, which announced positive top-line data for its pain patch NGX-4010 earlier this month, said that it has filed a Marketing Authorization Application with the European Medicines Agency for NGX-4010.

Vanda said that it has filed a new drug application with the FDA for its schizophrenia drug iloperidone. Both announcements were expected, but are still significant for investors. First, NeurogesX's announcement means that it remains on track with its plan. The company expects to file for approval of NGX-4010 in the United States in the first half of next year and approval in Europe before that would be very positive for the company. Starting in Europe will force the company to get a partner sooner, which investors want. It also allows the company to start earning revenues while the NDA is under review in the U.S., which would increase the company's value.

Sonus Pharmaceuticals (SNUS) announced Monday that its breast cancer drug Tocosol paclitaxel did not meet its primary endpoints in a phase III trial and, therefore, the company will not pursue a new drug application. The announcement sent shares tumbling some 85% in pre-market trading.

I got burned in this one as well, but there are several lessons that we (including myself) can take away from this one.

Celgene (CELG) has a 62% difference between its current 52-week high and low. What's impressive about that is the fact that there are almost 52 weeks between those two marks. Celgene has been a diamond in the rough-patch that has been big-cap biotech over the past year, returning 70% since September 14, 2006.

While big-cap biotechs Amgen (AMGN) and Genentech (DNA) have seen their stock prices flounder (AMGN has fell 20% over the past year; DNA is flat), Celgene has continued to give investors what they want when investing in biotech--growth.

Biotech stocks provided some leadership in the markets last week, as the volatility of the overall market didn't affect the sector. The iShares Biotech ETF (IBB) returned 2.40% for the week, while the Dow Jones Industrial Average fell by 1.83% and the S&P 500 lost 1.39% for the Labor Day-shortened week. Biotech's leadership was courtesy of some bullish comments from several analysts and a positive outlook from Biogen (BIIB).

The week started with an upgrade of the entire sector to "overweight" from "market perform" from Bernstein Research. Biogen then added to the fire Thursday by releasing a promising outlook for the next three years. Biotech also got a vote of confidence Thursday from Jim Cramer, as he said that Celgene (CELG), Gilead (GILD), and Cephalon (CEPH) are "worth a look."

NeurogesX (NGSX) announced positive top-line Phase III results Tuesday for its NGX-4010 pain patch that treats post-herpetic neuropathy [PHN] (Read the press release). The stock jumped as much as 18% on the news to $8.38.

The stock has shed some of that gain, back to around $8, which is still up more than $1 since last Thursday. Despite the quick run-up, I don't think we've missed the boat just yet on NGSX. I believe now is just as good of a time to get in as last week, because the data release gives investors more confidence and there still isn't much ownership in this stock.