It’s been a giant game of tug of war this week for the broad market, with the bulls pulling for higher levels and the bears yanking for lower levels. Through yesterday, the S&P 500 seemed magnetized to 1440, with any significant move below that level bringing out buyers, including the Plunge Protection Team on any sharp moves lower. But any significant move higher ran into news that housing is still in the dumps and the consumer is pulling back. So, the market dips back down again. Yesterday was quite remarkable in itself, with the S&P rallying to 1440 at 1:43 p.m. EDT and then plunging 34 points in two hours and seventeen minutes to a new closing low for this decline at 1406.

Not only was the speed of that plunge remarkable, but 1406 is a major support level, as it was the breakout level set on March 12 and then it was broken to the upside on March 20. That began the slingshot move that capped the bull run so far, and while it stopped Wednesday’s decline cold, it gave way this morning. The S&P was sitting near the lows of the day at 1377 with 49 minutes left to trade, when the Plunge Protection Team struck. The bears were congratulating themselves on knocking the market down 34 points in just over two hours yesterday, so the PPT ran it up 35 points in 49 minutes today, closing the index up for the day. Take that! Most of the upturn was panicky short covering ahead of tomorrow’s options expiration.

Now that the S&P has broken 1406 and then 1395, the big weekly breakout level at 1326 has moved to center stage. It has never been tested, but that could happen very quickly if we go back down next week and break today’s 1371 low. Let’s focus on that.

Crash or No Crash?

I define a crash as a drop of 15% or more in 90 days or less — sometimes as little as one day. I know that the current market certainly feels like a crash in slow motion, but let me give you some perspective that comes from 37 years of being in the stock market every day.

First, even if the S&P goes down to test 1326, that would be a 14.7% drop from the highs set in mid-July (and a 6.1% drop from today’s close). True, a few more points would make this an “official” crash, but it would be very, very difficult for the market to drop much below 1326 unless the whole credit system comes apart right now. Even that level would be well up from the double bottom around 1200 seen in June and July 2006, which makes for a bullish chart even though it certainly doesn’t feel that way right now.

Second, it’s been four years and four months since the S&P had a 10% correction, which finally happened today when the S&P traded under 1398. The last time we saw a 10% correction was during that long period of January through March 2003, which bred complacency that showed up in a low volatility index — the VIX. Well, as you know, volatility is back. It jumped this past February after the Chinese markets tanked, and it has been at a higher plateau ever since. Yesterday, the VIX spiked up to 30, a level last seen in March 2003, at the bottom of the last 10% correction, and today the VIX closed up another point at 31.70. So, it has also been over four years since we’ve had this much fear in the market.

We had a 7.5% correction last summer, but with no hurricanes and falling oil prices, the broad market was able to stage its big rally into 2007. Then we had a 7.9% correction from the July 19 high to when the S&P hit 1433 on August 3. Since then the market has rallied and subsequently fallen sharply, but as of today, we are only down 1.5% from the August 3 close. I know it doesn’t feel that way, because Tuesday, Wednesday and most of today were brutal. But the markets are very oversold — there have been five days since June when more than 90% of the stocks were down for the day: June 7, July 24, July 26, August 3 and August 14.

Four years and four months is a long period to go without a correction of this magnitude — it’s only happened three other times in the last 110 years. And after each of those three runs, there was a very serious correction. A 10% correction is a normal event in a healthy bull market. There is a reason why it took so long for this correction to occur, and it continues to be one factor that is confusing the markets at this time: The weak U.S. dollar. European investors have seen a couple of 10% corrections in the U.S. market in euro terms in the last few years, but in nominal dollar terms it hasn’t happened yet. That’s because a weak dollar props up equity prices.

My third point is that bull markets don’t end with spike tops. They sell off sharply, as in the March 2000 to June 2000 period, and then rally back near the top, as in July and August 2000, before finally breaking down. In fact, they often drop and rally back a few times in a complex topping/consolidation pattern before breaking down. At worst, we are currently experiencing the first drop, and we will likely see a rally back to the 1550 area before a bear market really begins in earnest. At best, that rally will blow right through 1550 and then 1600, and the bull market will resume. So, we should still see higher levels from here no matter what scenario plays out.

In trying to identify the likely short-term bottom for prices to bounce from, it bothers me that the big weekly breakout level at 1326 has never been tested. Normally, markets will go back down to touch the breakout level before spring boarding to new heights. We are probably about to find out if the support level is 1326 now or later. In a crash, we could get to 1326 in one day.

So there are two possible scenarios that could play out: One, the S&P could be poised to build on today’s recovery back over the 1395 or 1406 breakout levels, or two, it could be getting ready to spiral down. There isn’t any way to predict which way it will go, as that depends on the news flow, what the Fed does, whether some big hedge funds collapse, and if we get into either a panic selling cycle that feeds on itself, like the October 1987 crash, or a panic buying cycle that feeds on itself, like the Gulf War I rally in January 1991.

If the first scenario occurs or if we go down and the 1326 level holds, whether it is hit in a crash tomorrow or, more likely, in early October, there would be overwhelming negative sentiment and revitalized short selling hedge funds to provide the energy for a parabolic rally over 1800 by the 2008 elections. Plus, a VIX in the 30s can push the S&P up hundreds of points as it falls back towards 10.

But if the second scenario plays out and 1326 doesn’t hold, the economy would almost certainly go into recession (there are no signs of that yet in the leading indicators) and business capital spending would follow consumer spending into the tank. That’s the classic way a business cycle ends, and it usually takes big Fed interest rate cuts to revitalize the housing sector, which normally leads us out of a downturn.

So far, the Fed is remarkably complacent about the market’s current situation, and I think that we should give them credit for that. Alan Greenspan would have cut the Fed funds rate by a half or three-quarters of a point by now, letting Wall Street exercise the “Greenspan put” to bail them out of any predicament. Not only did the Fed not cut rates at last week’s meeting, they didn’t even say anything to give comfort to their Wall Street buddies, who are in extreme pain as their leveraged hedge funds implode. Yesterday, St. Louis Fed President Bill Poole actually added to the pain, saying that the financial market chaos has not undermined the U.S. economy, and there is no need for the Fed to rescue the market with an emergency rate cut. Here are a few telling quotes:

“It’s premature to say that this upset in the market is changing the course of the economy in any fundamental way. Obviously, there could be an impact, but we have to rely on some real evidence.” Of course, by the time there is “real evidence” reported on the economy, it is already too late to prevent a recession, because the Fed’s tools work with about a six-month lag on employment and output. (But they work with a much shorter lag on the credit and stock markets, which is why the stock market is the best predictor of the economy.)

Poole said that the credit crunch would extend the housing slump, and it is not clear how long the downturn will last or how deep it will go. But, he added: “The issue for me is whether it’s going to spread into business fixed investment and the consumer segment more broadly. I don’t see evidence that that’s taking place.” Again, he wants “evidence” on a lagging indicator — business fixed investment — and a coincident indicator — consumer spending. The Fed should be looking at leading indicators due to the six-month lag between when they do something and when the results can be seen in the real world.

“I have not changed, fundamentally, my outlook. As I talk to companies, their capital spending plans are intact.” Capital spending is another term for business fixed investment, a lagging indicator.

“If the data confirm the market’s view that the economy is sagging, we’ll have to decide whether to share that view.” Wow, not only will they not act until we are in a recession, they may not even believe the data at first!

He also said that while U.S. inflation was “moving in the right direction,” the “job is not done.” Translation: Sorry, guys, can’t ease yet.

Then Poole said that, barring a “calamity,” there was no need for the Fed to consider cutting interest rates before their next regular meeting on September 18, even though the Fed funds market has been pricing in an earlier cut. Everyone on Wall Street is looking for the Fed to aggressively cut rates to bail out the market, but the Bernanke Fed may not be so quick to cut rates each time the market declines. Maybe they want to send a message to the market that this is not the Greenspan Fed, and Wall Street might be on its own for a little while.

Also, the yen surged 2.0% yesterday to a 12-month high against the dollar, which probably means that some of the hard-pressed hedge funds are getting out of the yen carry trade, where they borrowed cheap money in Japan and bought sub-prime mortgage debt on 10% margin. I have been saying that the weakness of the dollar in 2006 and the first half of 2007 was against the euro and the pound, and in the rest of 2007 and 2008 will be against the yen (and the yuan, of course). The dollar hit a new multi-year low yesterday. If you believe as I do that a decision has been made to drop the value of the dollar dramatically against our trading partners, thereby dropping the value of all the dollar assets they hold, then maybe the current situation suits Chairman Bernanke just fine.

The flight from stocks has also brought 10-year Treasury note yields down to 4.66%, lowering the cost of selling new debt to finance the Iraq war deficit. That’s another beneficial side effect for Bernanke.

Bill Poole is a voting member of the Fed, but he is also more of a monetarist than the other members, and, ultimately, it will be Chairman Bernanke who calls the tune. But if the Fed doesn’t roll someone out quickly to stake out a different position from Mr. Poole, the markets will assume silence is assent. Banks have already stopped lending, consumers are slowing spending, and you can bet that capital spending for 2008 will get whacked during the budget-setting sessions that start right after Labor Day.

The biggest negative that I see is that taking a recession in a Presidential election year is called the Jimmy Carter Strategy, and I’m not sure how the Republicans plan to beat Hillary Clinton if they have the country in both a religious civil war and a recession at the same time. Perhaps Karl Rove has it all figured out.

So the risk is that 1326 doesn’t hold and the credit crunch drags the economy into a recession while the Fed watches and moves too late to stop it. And that’s the reason why I am continuing to focus on the non-cyclical medical and energy technology sectors for most new recommendations, while planning our exit from the more cyclical areas at the next market top. This is not a time to think about selling anything, as that would just put you on the side of the lemmings who are either panicking or being forced to sell by their margin clerks. In this type of environment, big stocks go down on big volume because they are liquid and the margin-squeezed hedge funds have to sell something. Small stocks go down on little volume because the market makers don’t want to hold any inventory — actually, they want to be short — in a declining price environment. So, they just cut their bids as fast as they decently can.

The VIX is the Fear & Greed Index, and you have to remember to sell Greed and buy Fear. So, when you get that bad feeling in the pit of your stomach, that is the time to put more money to work in stocks and industries that should be immune to whatever is worrying the market. In this case, that is housing, a credit crunch and a slowing U.S. economy.

In the last issue, I mentioned a few stocks that I have been waiting to buy if we saw a continued decline: Cnet (CNET) in Content on Demand, CombinatoRx (CRXX) in Biotech, Cree (CREE) in LED lighting and Mindray (MR) in China and Biotech. Another stock that I have been watching is Akamai (AKAM) in Content on Demand. So, since the decline has continued over the past couple weeks, in this issue I am going to pull the trigger on two of these companies: Akamai and CombinatoRx. And if we do get a crash to 1326, we should get a chance to buy the rest of them.

Speedynet

The idea for Akamai Technologies (AKAM) was developed in 1998 at MIT when Internet pioneer Tim Berners-Lee challenged a group of students to figure out a way to get around bottlenecks on the Internet. The goal was to develop algorithms that could act like a helicopter traffic report, seeing traffic bottlenecks well before the data traveling along the Internet gets to them. Bypassing the bottlenecks makes data — video, voice, music or whatever — travel faster and smoother. The algorithms also needed to spot denial of service attacks by hackers and crooks, and stop them. Student Daniel Lewin developed and patented the answers, and used that as the basis for a business plan that he entered in MIT’s annual entrepreneurs’ competition. He won, formed Akamai and took it public in October 1999. The stock went to $350 in early 2000. I loved the business plan, but I couldn’t recommend it at that absurd valuation.

Akamai used their dotcom IPO money to deploy their first round of EdgeComputing servers, and then the company barely survived the dotcom crash as the stock got as low as 70 cents in October 2002. But they turned profitable in 2004 and have never looked back. Tragically, Danny Lewin died in the 9/11 attacks, but the company he founded went on to become the largest content delivery network in the world, with a 60% market share. They deliver content from the edge of the network, where costs are lower and capacity is high, instead of forcing it all through the core of the Net. With shoppers typically giving a site less than seven seconds to load before clicking away, the quick delivery of a web page from an Akamai edge server can make the difference between a sale and no sale. AKAM counts more than two-thirds of the top 100 retail sites as customers, simply because the Akamai sales force can demonstrate a very high return on investment.

Today, most of their customers are in digital media distribution and storage, or content and application delivery. But they have expanded into on-demand application performance services, like Salesforce.com’s online customer relationship management software-as-a-service that substitutes for the customer having to buy their own software. Salesforce.com has to be ready for unpredictable levels of Internet traffic, and Akamai can provide the computing power on demand, so Salesforce.com doesn’t have to install a huge server farm that stands idle much of the time, waiting for spikes in traffic. Because Akamai sees all the customer clicks, they also offer Web site intelligence services.

They filed a patent suit against their major competitor, Speedera, and then acquired them in 2005, so now about 20% of all Internet traffic flows through their servers. For example, they deliver all of the iTunes music and videos for Apple. Akamai has located over 25,000 servers in nearly 3,000 locations in over 70 countries all over the world, staging them near more than 750 cities that are heavy users of the Internet. The company then contracts with big government and private providers of Internet content to store part or all of their web pages and digital content on each server to be delivered quickly to surfers, so users get a much better Internet experience.

Akamai is growing more than 30% a year, and they should continue to grow that fast for at least five years. More and more Internet content is videos, pictures, streaming music, games and other high-bandwidth data that needs to get to the user smoothly and quickly, and I expect AKAM’s share of Internet traffic to increase from 20% to 30% or more over the next five years, even as traffic itself is growing 20% to 40% a year. Akamai gets paid according to the amount of bandwidth its customers use, and their business is operationally leveraged — they deploy a lot of expensive servers and then have low incremental costs against all that increasing traffic. They are in the midst of another $60 million round of server upgrades and expansion to serve their more than 2,000 customers, including numerous Fortune 500 global companies.

Only about 14% of the world’s population has broadband Internet access today. Fifty million of the 300 million in the U.S. have it (17%), but according to the Organization for Economic Co-operation and Development (OECD), there are only 128 million broadband subscribers in the other 29 most industrialized nations. There are another 122 million in China, or 75% of their 162 million total Internet users. But 162 million Internet users is only 10.4% of their total 1.3 billion population, so they have tremendous room for growth, requiring much more capacity to deliver video and other rich media. Only 3.5% of the 1.1 billion Indians are Internet users, and the country is determined to catch China. That’s all great news for Akamai.

Akamai’s competition for this huge, fast-growing market includes Internap Network Services (INAP), Level 3 Communications (LVLT), VeriSign (VRSN) and privately-held BitTorrent. Limelight Networks (LLNW) raised $200 million in an initial public offering on June 7 at $15, ran to $22, and promptly tanked on August 9 when they gave much bleaker guidance than they had on the road show. Even their underwriter, Goldman Sachs, downgraded the stock from buy to neutral. Akamai has sued Limelight under the MIT patents, and they are in the same court with the same judge as when they sued Speedera. So, I’m expecting the same positive results.

Akamai did three quick acquisitions between November 2006 and April 2007 that should maintain their competitive advantage against all comers. Last December, they bought Nine Systems for about $180 million in stock and cash. Nine Systems sold a media management framework to content providers to produce and then publish rich media content online. Then Akamai picked up Netli in March for $178 million in stock. Netli is a complimentary network infrastructure service provider that focuses on the application acceleration solutions like Salesforce.com. Finally, in April they snagged Red Swoosh for $15 million in stock. Like Netli, Red Swoosh had client-side tools for publishers to manage and distribute media files. They can also securely and predictably borrow compute cycles from Web-connected PCs and set-top boxes, giving AKAM peer-to-peer distribution technology like BitTorrent.

The company did $152.6 million in sales in the June quarter, up 52% from last year, while earnings per share rose 55% to 30 cents. They met, but did not beat, the consensus, and they did not raise guidance. They reiterated guidance for 43% to 46% revenue growth this year, to a range of $615 million to $625 million, and they will do 32 cents to 33 cents a share in the current quarter. Wall Street knocked the stock down because they didn’t guide higher, and some of the analyst questions on the call were hilarious versions of: “Well, you usually beat guidance, and this time you only matched it, so what went wrong?” Management patiently and repeatedly said that they guide for what they think they can do, nothing went wrong, and if they beat guidance in a quarter that is a pleasant surprise to them as well as Wall Street.

Akamai should be able to hit $825 million in 2008, up 32%, and earn $1.70 a share. They have a great balance sheet with no net debt, and after they finish the current round of server expansion, their free cash flow will explode. Even at a price/earnings multiple of 35X, just a bit higher than their growth rate, the stock will get to my target price. As their share of Internet traffic grows from 20% to 30%, while Internet traffic is growing 20% to 40% every year, they can grow revenues much faster than they will have to grow costs. I want you to buy AKAM under $30 for a $60 target in 12 months. Every subscriber should own some of this stock, so I am making it a Top Buy.

Unlock Profits By Knowing The Combination

I spent a lot of time analyzing two medical technology companies for this issue, but only one made the grade. The other one had what sounds like a dynamite product — a super-oxidized water that can kill bacteria, viruses and fungus, including Methicillin-resistant staph and Vancomycin-resistant enterococcus. The company makes it by the electrolysis of sodium chloride and water. Using a patented multi-chamber electrolysis process, these molecules are pulled apart and ions are formed. The electrolyzed oxidizing water is “super-oxidized.”

Trouble is, remembering that my chemistry is getting a little hazy, that’s roughly the way to make a very dilute solution of sodium hypochlorite, or ordinary laundry bleach. Adding a little vinegar or lemon juice would make it slightly acidic, and most of the hypochlorite would be in the form of hypochlorous acid. That is indeed a bactericide — the same one produced when chlorine is used to disinfect municipal drinking water.

The product is currently approved for washing vegetables, but it is more expensive than water with a little vinegar in it and may have the same problem that chlorine has in drinking water: It is an oxidizing agent that can react with organic components to produce potentially carcinogenic byproducts. The company also has this product approved for dermal wound care and burns as a cleaning agent, but I really wonder if it will prove to be any better than soap and water, or a dilute solution of vinegar. We’ll know soon enough, as they are presenting Phase II results with a placebo arm in September.

So as I wandered through their SEC filings, noting that the company came public this year and had to do a private placement last month just to get a year’s worth of burn rate on the balance sheet, I was remembering how many of these kinds of companies I’ve looked at in the last 25 years, and how many have flamed out — most, fortunately, without me and my subscribers as shareholders. That’s why this company didn’t make the grade. Plus, what I really wanted to find you was a development-stage drug company that didn’t have to bet the farm on a Phase II or Phase III trial, but still had all the upside of a biotech home run. And here it is.

CombinatoRx (CRXX) — pronounced Com-bin-ah-tore’-icks — was founded in 2000 by Alexis Borisy, a then 28-year-old Harvard chemistry PhD dropout, and several of his coworkers from the lab of a leading chemical biologist, Stuart Schreiber. What sets CombinatoRx apart from most biotech companies is that they have a very different drug development model. Instead of looking for the magic bullet for a disease by finding that one great molecule that targets a specific, single genomic target, they take all the drugs that are already approved and find out which combinations of drugs work much better than either treatment by itself. It’s a simple, powerful idea, and not so easy to do. So, how do they do it? CRXX developed special high-speed assay equipment to look for these synergistic combinations, which may be two drugs already approved to target the same disease, or one drug that targets a disease and another approved for an entirely different indication, or even two drugs that are approved for other indications but, put together, are effective against an entirely different disease.

Many diseases affect the body through multiple biological pathways. The activity of one drug targeting one pathway can be ineffective because biological systems often compensate by using a secondary pathway. By targeting multiple pathways, combination drug candidates can create synergistic therapeutic effects, which results in improved treatments for many diseases.

You have already guessed what this means — CRXX has found a unique business plan that benefits from all the hard work that other biotech companies have already accomplished. Almost all of the toxicity issues were taken care of during the two drugs’ Phase I and Phase II trials. All of the data has been published and analyzed, and all the FDA concerns are on the table. So all that CombinatoRx needs to do is be sure that there are no unfavorable drug interactions in preclinical work and a combined drug Phase I trial, and they need to do Phase II and III trials to show effectiveness. But they are working with molecules that are already demonstrated to be effective and safe, which takes a huge amount of risk and expense out of the picture. Yet, they can still patent the combination.

The best way to run this kind of company would be to discover combinations and license out the patents on most of them, while focusing on only one or two areas for combination drugs to be retained and developed internally for the company’s account. And that is exactly what CombinatoRx is doing.

The average small biotech company has one or two drugs in its pipeline and won’t take any more, as it costs $300 million to $800 million to get a drug to market. CRXX has seven drugs in their pipeline and spent $100 million on R&D last year. Phase II trials typically involve 50 to 250 patients so they are relatively cheap, yet can be powered to show statistical significance against a placebo or the standard therapy. Their drug candidates include:

• CRx-102, which contains the cardiovascular drug dipyridamole plus an unconventionally low dose of prednisolone, a steroid. CRx-102 works through a novel mechanism of action because dipyridamole selectively amplifies prednisolone’s anti-inflammatory and immunomodulatory activities without amplifying its side effects. In Phase IIa clinical trials, CRx-102 demonstrated a statistically significant anti-inflammatory effect with rapid onset of action in patients with osteoarthritis and rheumatoid arthritis. It will begin Phase IIb trials shortly.
• CRx-139, another oral selective steroid amplifier, in a Phase IIa trial for rheumatoid arthritis.
• CRx-170, a once-nightly dual-action analgesic that has successfully completed a Phase IIa trial in asthma and will go into Phase II this year for chronic low back pain.
• CRx-191, a topical selective steroid amplifier, using an antidepressant to amplify a mid-strength steroid. It goes into a Phase IIa trial this quarter for psoriasis.
• CRx-197, a topical synergistic cytokine modulator also going into Phase IIa this year for atopic dermatitis. It is based on loratadine, an allergy medicine, and nortriptyline, an antidepressant. Neither of these is indicated for the treatment of atopic dermatitis on its own, but CombinatoRx has shown that they act synergistically in preclinical models of inflammation.
• CRx-026, a dual-action anti-tumor drug candidate that completed Phase I/II in multiple tumor types. It is a combination of chlorpromazine, which is approved for treatment of psychotic disorders, and pentamidine, approved for the treatment of some infectious diseases. Again, neither of these is indicated currently for treating cancer. But the company’s preclinical studies suggest both regulate and inhibit cell proliferation — the process that causes tumor growth. CRx-026 appears to have a favorable side effect profile compared with other anticancer drugs, and it also has strong synergistic anti-tumor activity with many other approved anti-cancer drugs.
• CRx-401, an anti-diabetic agent entering Phase IIa this quarter for Type 2 diabetes.

The company has R&D collaboration agreements with the Spinal Muscular Atrophy Foundation, Accelerate Brain Cancer Cure, SAIC (Science Applications International Corporation), Angiotech Pharmaceuticals, the National Institutes of Health, Cystic Fibrosis Foundation Therapeutics, HenKan Pharmaceutical Company, Gene Network Sciences and Fovea Pharmaceuticals. They have 55 issued patents and around 455 pending patent applications.

There are only a couple of competitors following the combination drugs path, and each is focused on only one area because they do not have the custom, high-speed assay technology that CRXX has. Pozen (POZN) has a combination drug for migraines, but they just got their second “approvable” letter from the FDA, with the problem being some indications in toxicology tests that the drug causes unexpected changes to DNA. Orexigen (OREX) is working on a combination drug for obesity.

CombinatoRx has a much broader clinical portfolio than its competitors, which reduces our risk, and the technology to continue to develop combination drugs at a rapid clip. They had $101 million in cash as of the end of the June quarter, and they have been burning about $10 million a quarter. I expect that to increase towards $15 million as more Phase II clinical trials begin. The company expects to end the year with $70 million to $80 million in cash, including a $7 million milestone payment that they will receive in early October. They will not take most of these drugs into Phase III trials on their own, so I don’t expect their expenses to accelerate much next year. Their licensing fees and milestones should grow every year, and, eventually, they will have a large annual royalty flow to fund the development of their own drugs.

CombinatoRx has traded between $5.88 and $14.50 over the last couple of years, and at today’s close of $6.61, the company had a total market value of only $192 million. It’s down from $9 in March but really has not been hit in the recent decline. Most days you can buy stock under $7. I want you to buy CRXX under $7.50 for a $16 target this time next year, when they will have results from several of the new Phase II trials and should be announcing partners for Phase III trials.

Biotech MegaShift

Amgen (AMGN) announced a reduction in force of 12% to14%, or 2,200 to 2,600 people. This is in response to lower Aranesp revenues, and they are trying to increase operational efficiency without cutting most R&D programs. It is an 18-month program, targeting pretax savings of $1.0 billion to $1.3 billion. The pretax restructuring charges will be in the $600 million to $700 million range.

The company gave detailed guidance on what it might lose under the new National Coverage Determination rules that Epogen and Aranesp will not be reimbursed by Medicare unless red blood cell counts fall below 10 grams per deciliter (g/dL). They would expect to lose 10% to 15% of the patients that never fall below 10 g/dL. They also could lose half of the 10% to 15% that are poor responders. The remaining 70% to 80% of Medicare patients will bounce around 10 g/dL, going below, getting Aranesp to get better, then going above and having their Aranesp cut off. Amgen thinks that the use of Aranesp in this population could fall by two-thirds. In total, their overall Aranesp revenue would be cut by about one-third, assuming non-Medicare payers do not adopt the same schedule.

The remarkable thing about this schedule is that there is no obvious clinical or policy rationale for it, and it clearly is bad for patients. There is absolutely no clinical experience in managing hemoglobin this way, and both doctor and patient organizations are up in arms about it. It will drive the number of whole blood transfusions up 50%, and no one knows where that blood will come from. I believe the answer is “nowhere,” and the blood banks simply will run dry. Then a doctor will be faced with a patient that is obviously anemic, has a 10g/dL and can’t get Aranesp, but there’s no blood available. Interesting policy. There may be a “technical correction” to raise the hemoglobin level to 11 g/dL, which would help Aranesp sales considerably.

The company also announced that adjusted earnings per share guidance for 2007 has been changed from $4.28 to a range of $4.13 to $4.23, excluding restructuring charges. That’s a trivial reduction of only 1.0% to 3.5%. In other words, they are maintaining cash flow and preserving earnings in spite of the pressures on Aranesp and Epogen. Now that we know the real extent of all the Sturm und Drang on the bottom line, I believe the stock has bottomed. Buy the January 2009 $70 LEAP call (VAMAN) up to $12.50, for a $25 target price when AMGN stock hits $95, on or before the LEAPs expire in January 2009. If you want to be more conservative, buy the January 2010 $50 LEAP call (WAMJX) for around $12.

Crucell (CRXL) reported second-quarter revenues up 82% to $52.9 million, bringing them to $100.1 million for the first half of the year. They reiterated guidance for $295 million to $302 million for the year, so they expect to do two-thirds of the year’s sales in the second half as the flu season begins. For the quarter, they lost 38 cents a share, better than last year’s 59-cent loss. CRXL also repeated their goal to be cash breakeven for the year. And the vaccine division is about to turn profitable. On the human cell line program to replace eggs in vaccine production, their partner Sanofi Pasteur will give a presentation on their flu program in a September 17 company meeting and will discuss how successful Crucell’s PER.C6 technology was. CRXL remains a buy up to $28 for my $50 target.

New Energy Technology MegaShift

Oil prices have been in another volatile market, selling off 3.9% at one point today, but it looks like the $65 to $75 range will be the new level, unless there is a major hurricane in the next few weeks.

Energy Conversion Devices (ENER) got a three-year, $20 million contract with the Department of Energy to develop low-cost photovoltaic systems for buildings. This is part of the new Advanced Energy Initiative to make solar energy cost-competitive with conventional forms of energy by 2015. ENER gets their research covered to slash production costs — that’s a win.

Hybrid cars and delivery trucks are going to be an important initiative in China to lower pollution, and Cobasys, ENER’s joint venture with Chevron, is signing deals to take their battery technology to China. This will develop into a bigger market than either Japan or the U.S. Buy ENER under $35 for my $55 target.

Infinity Energy Resources (IFNY) held an excellent conference call. They have a new Chief Operating Officer and a new Chief Financial Officer. They are cash flow positive again, and the asset sales will happen shortly. Unfortunately, they are going to sell some assets in the Rockies, which is the original reason that we bought the stock. But they are retaining enough to keep it on the list as an oil shale investment, and the Nicaragua concession is starting to look huge. Management said that they will start actual work on the seismic data “in the near future.” IFNY is a Top Buy up to $5 for my $10 first target.

Rentech (RTK) reported last Thursday, and I had time to get the numbers into last week’s Radar Report, but not the conference call. Rentech reported revenues of $50.4 million and a loss of four cents a share, compared with $17.3 million and nine cents last year.

The biggest news on the call was that they are adding biomass as a feedstock to their process to produce ultra-clean synthetic fuels. They entered a joint development agreement for a 1,500 to 3,000 barrels per day standalone biomass facility with Solena Group — a global power production company that builds, owns and operates renewable clean energy plants. They have already identified the site and the fuel stock in Northern California that will turn biomass into jet fuel and naphtha, utilizing Solena’s proprietary gasification and Rentech’s proprietary Fischer-Tropsch technology. This will be the first commercial biomass-to-jet fuel production facility in the country. The Department of Defense has certified the use of the fuels for the B-52, and it intends to qualify the C-17 fleet next year.

Rentech’s demonstration plant in Colorado will be completed on schedule by the end of September, and they will add synthetic gas as an alternative source by the end of 2007. They will produce the first fuels in the spring of 2008, for delivery to potential customers for testing.

All of the other programs are on schedule. The Medicine Bow, Wyoming, project with DKRW is in the front-end engineering and design phase, with funding scheduled for completion by mid-2008. Construction is scheduled to start in the second quarter of 2008 and the facility is expected to be up and running in 2011. The facility will initially produce 13,000 barrels per day of clean diesel and a small amount of naphtha. Sinclair Oil has a long-term contract to purchase the diesel, and surplus power will be sold to the local utility grid. The captured carbon dioxide of this facility will also be used for enhanced oil recovery in the region. This is all great news for Rentech, and it remains a Top Buy up to $5 for my $11 target.

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