It seems to be an American trait to cheer for the underdog, and I like a David-versus-Goliath story as much as anyone. But I almost never bet real money on David, because that’s not the way the fight usually turns out. Though, in the case of Rochester Medical Corp. (ROCM), the subject of Monday’s Flash Alert, we get to enjoy the underdog story and make money, because the fight is over and David won. Wall Street just hasn’t noticed yet — not a single Street analyst follows the stock.

To recap a bit and expand on the Flash Alert, Rochester Medical was founded by Jim Conway, an IBM software engineer and inveterate tinkerer. His brother ran a urology device company and told him there was a real need for a latex catheter without pinhole leaks. In 1979, the two brothers started cooking up latex mixtures in their kitchen oven, developed a product and a company, and then sold the catheters to hospitals. Eventually, they sold that company.

By 1988, the Conway brothers realized that a significant proportion of the population is allergic to latex and could not easily use latex catheters. So, they started Rochester Medical to make catheters of silicone and other materials, and went public in 1991. By then, they had the idea of developing a Foley catheter impregnated with a 30-day, antimicrobial-emitting compound (not an antibiotic). The Release-NF catheter was born, and it was approved by the FDA in 1998. A study at the Johns Hopkins Burn Center in hospitalized acute-care patients showed urinary tract infection rates fell 70% using the Release-NF instead of a traditional latex catheter. That’s huge, and they should have owned the market in the year or two following the FDA’s approval.

But nothing happened. As I covered in the Flash Alert, Conway realized that the big guys in the business — C. R. Bard and Tyco — were pressuring the biggest distributors to hospitals — Premier Medical Solutions and Novation — to lock Rochester out of the market. So, Rochester filed an antitrust suit in 2004. Premier settled last November, and Bard settled in December. In theory, the trial against Novation and Tyco starts in May, but I expect a settlement from those two any day. Since Novation distributes for Bard, and Tyco distributes through Premier, both of which have already settled, it would be very risky for the defendants to go to trial. Also, ROCM’s litigator is Mark Lanier, who recently won a $253-million Vioxx judgment against Merck.

About 90,000 people die every year in the U.S. from infections that they get in health care facilities, and 40% of all hospital infections are caused by catheters. The annual cost of treating hospital infections exceeds $30 billion. There were 211 million catheters sold in the U.S. in 2006. So, as you can see the need for catheters that don’t cause allergic reactions and reduce the amount of infections patients get is a huge market and ROCM has the only approved product.

In addition to Rochester’s extended-care catheters made from silicone or proprietary materials and their acute-care drug-emitting catheter, they make the FemSoft Insert — a liquid-filled, conformable silicone urethral insert for managing stress urinary incontinence in adult women. This is a badly underserved market, as the problem typically hits women who are in their 50s and 60s and who have had children. Often these women are also too embarrassed to leave their homes until a friend or relative finally gets them to go to a doctor.

ROCM built their revenue stream one doctor or nurse at a time, by going to trade shows, calling on small hospitals that didn’t deal with Premier or Novation, and selling in the U.K. They had record December first-quarter sales of $7.5 million, up 63% from the prior year.

Backing out the settlements, which gives the stock an unrealistic price/earnings ratio less than 8X, as I said on Tuesday, I think ROCM can earn around 50 cents a share this year. But this number could be much higher, because Premier started distributing Rochester catheters to 1,500 U. S. hospitals on March 1 under a 27-month contract, and the Release-NF meets a compelling medical need.

I expect ROCM to report breakeven for the March quarter, which will have only one month of Premier sales. They will report March second-quarter results around April 18, and I think that they will give a very positive outlook for U.S. hospital sales for the rest of the year. I then expect 20 cents to 25 cents for the June third quarter and 30 cents to 35 cents for the September fourth quarter. That would have them exiting the year at a $1.20 to $1.40 run rate, so the 2008 fiscal year should be sensational. The run rate is the basis for my target price, and I could be off a quarter either way on when they hit it. I want you to buy ROCM under $23 for a $40 target by the end of this year. Remember the stock could have an explosive move any day if they announce a settlement with Novation and/or Tyco, so I recommend that you get on board now.

Avian Flu MegaShift

BioCryst (BCRX) said on Tuesday that they will delay intravenous Fodosine studies and shift their lead indication from T-cell Acute Lymphocytic Leukemia (T-ALL) to Cutaneous T-cell Lymphoma (CTCL). CTCL is a bigger market and probably provides a faster time to market, but the stock still dropped $1.58 on Tuesday on very heavy volume. The company said that they were concerned with the stability of the IV formulation due to particulate matter in the solution from the vial stoppers used in packaging. That will be fixed. But they also said that they expect a lower-than-anticipated response rate in T-ALL, well below the preliminary 18% complete response rate they reported at last year’s American Society for Hematology meeting.

The CTCL patient population is older (typically 50 to 60 years old) than the T-ALL patients, and I doubt the response rate in T-ALL says anything useful about future outcomes in CTCL patients — especially given the excellent safety and activity seen in those studies so far. There are about 16,000 annual CTCL patients versus 1,000 T-ALL patients, so it is easier to enroll participants in a clinical trial. Because Fodosine is an oral drug, it is a much better solution for a chronic condition like CTCL that could be treated on an outpatient basis. BCRX recently submitted their protocol for a Phase III CTCL study, asking for a Special Protocol Assessment that, if they hit their numbers, would essentially guarantee approval. The FDA should approve this by the third quarter, and the trial could start before the end of the year.

In addition, we will get preliminary data from the ongoing Phase II study of intramuscular peramivir in seasonal flu by midyear, with final data from this trial due before the end of the year. And although things have been quiet on the bird flu front, as Tuesday’s New York Times said: “Viruses mutate constantly, many experts point out. And when one has already acquired the ability to jump species, occasionally spread from human to human and kill 60 percent of the people who catch it, it is far too early to dismiss it.”

I am not changing my buy limit or target price on BCRX — it remains a Top Buy up to $19 for a $30 target.

Biotech MegaShift

Dendreon (DNDN) went before the FDA Advisory Committee today and won approval of Provenge by a vote of 13 to 4. The FDA does not have to follow the Committee’s recommendation, but they almost always do.

The FDA staff comments that were posted on Tuesday basically acknowledged that Provenge extended survival, but then questioned the statistical analysis. The summary said: “The submitted data tend to support a finding of clinically meaningful increased survival, but doubts remain about the persuasiveness of the efficacy data.” They expanded this to: “Based on the results of the statistical analyses of the efficacy data presented by the sponsor and the results of analysis performed by this reviewer, it appears that the two studies provide some evidence in support of using Provenge for the treatment of men with asymptomatic metastatic androgen independent prostate cancer.”

Then they added: “However, the key efficacy evidence (difference between the two arms in overall survival) is based on post-hoc analyses. Although it is impossible to precisely estimate the false positive rate due to the nature of the analyses, it is certain that the level of falsely claiming effectiveness for this product is substantially higher than the one in a conventional setting.”

One surprise to me was that although the company has always said that Provenge is safe with few side effects, the FDA said that patients taking Provenge reported a higher rate of cerebrovascular accidents like hemorrhagic and ischemic strokes — 3.9% of those on Provenge compared to 2.6% of those on placebo. The actual numbers were small, but the FDA said that they were a “potential safety signal” that they wanted the Advisory Committee to discuss. The Committee unanimously said that Provenge was reasonably safe for patients with advanced prostate cancer, which should minimize this issue going into final FDA approval.

The stock rose nicely Tuesday and Wednesday, as the market did not see any major surprises in the FDA comments. It did not trade today. Dendreon will hold a conference call at 4:30 p.m. PDT, after this issue is posted, to discuss the results. You can listen in at 800-289-0572, and I’ll have a Flash Alert out tomorrow if necessary. The stock will be up sharply on Friday, due in part to the large short position. DNDN remains a Top Buy under $7 for my $14 target. If you can get some under $7 on the opening, do it. In any case, do not sell any stock yet. We still have both the partnership announcement and formal FDA approval to go. Also, DNDN will have the money to put their breast cancer and head & neck cancer programs back into the clinic. You may not want to sell this one for a few years, just so you can have bragging rights.

Content on Demand MegaShift

Intel (INTC) is opening a $2.5 billion semiconductor manufacturing plant in Dalian, China. About half of Intel’s sales come from Asia, and this will be Intel’s first manufacturing facility in China. There will be more. The January 2009 $22.50 LEAP call is a Top Buy up to $3.50 for my $12.50 target in two years.

Silicon Image (SIMG) said that the issues causing the company’s unusually high tax rate guidance for 2007 of 55% to 60%, would improve to between 39% and 43% for 2008. Also, there had been concerns about the company’s inventory build-up, but that is expected to disappear as orders for HDTVs increase this year.

On Monday, the company announced the general availability of the second-generation SteelVine storage processors. I don’t talk very much about this part of their business, as we are in the stock for their HDMI products and the single-wire living room. But with high-definition video comes the need to store hours and hours of the stuff, and these SteelVine processors are designed to give motherboard and storage appliance manufacturers a more powerful and cost-effective solution, with lower power requirements and a smaller footprint. SIMG remains a Top Buy up to $13 for my $20 target.

Zhone Technologies (ZHNE) continues to lead the global Broadband Loop Carrier (BLC) market in real world provisioning of VoIP and IPTV services.They now rank among the top three DSL equipment providers in North America. During 2006, Zhone shipped over one million ports of its BLC platform. As long as their new products do so well, I think we should stick with the stock while sales of their legacy products decline to levels that will not mask the growth in their DSL business. ZHNE remains a buy up to $2 for my $5 target.

New Energy Technology MegaShift

We saw $68 oil briefly yesterday on rumors that Iran shot a missile at a U.S. ship in the Persian Gulf. Oil is still over $66 today. We’re paying $3.15 a gallon or more for regular gasoline in California, and the complaints are starting. Wait until the summer driving season gets here!

All of the alternative energy stocks were hurt by the sharp decline in the price of oil. To discuss where we stand with our current positions based on this decline and the current increase in oil prices, I’ll be updating the New Energy Technology MegaShift next week. But the bottom line is that the recent increase in the price of oil is not a fluke. Economic activity around the world is picking up as central banks flood the system with liquidity, and I think oil is headed up again, taking the alternative energy stocks with it Fuel Cell Energy (FCEL), Plug Power (PLUG) and Ocean Power Technologies (OPWT) will benefit, and I expect big moves from Connacher Oil & Gas (T.CLL), Gasco Energy (GSX) and Infinity Energy Resources (IFNY). Both Holly Corp. (HOC) and Royal Dutch Shell (RDS.A) will also respond to rising oil. And Rentech (RTK) looks especially cheap for the reason discussed below.

Energy Conversion Devices (ENER) will also move up rapidly with increasing oil prices, as consumers swing back to hybrid cars. Right now, though, the company is facing pressure from its largest shareholder, which told the company that it should consider management and other changes, according to an SEC regulatory filing. Coghill Capital Management, a Chicago-based investment firm that holds 2.4 million shares, or a 6.1 percent stake wouldn’t elaborate on the changes that it believes ENER should make but said that it intends to be in contact with board members to discuss its views. We will have to wait to see if anything comes of this.

Banc of America Securities began coverage of the solar cell sector, saying that a mix of government incentives, declining production costs and rising oil prices bode for “substantial growth” in the industry. But it rated ENER neutral. I think they’re wrong on this rating, as ENER is not only a leader in batteries for hybrid cars but also for solar panels. Buy ENER on dips under $32 for my $55 target.

FuelCell Energy (FCEL) jumped $1.50 on Tuesday after the Connecticut Clean Energy Fund chose six projects that would incorporate 68 megawatts of the company’s fuel cell products. FCEL valued the deal at up to $200 million if all six projects receive approval from the state’s two utilities. Under the 2003 state energy act, the two utilities are required to enter into long-term power purchase agreements with developers to purchase not less than 100 megawatts of Class I renewable energy. It was a big win for FCEL, and no matter how many of the six projects are built, they will be showcase installations for future contracts elsewhere. FCEL is a Top Buy up to $11 for my $22 target.

Holly (HOC) said that by 2009 it expects to increase its crude oil processing capacity by 18% or 20,000 barrels per day, to 131,000 barrels per day. They expect earnings before interest, taxes, depreciation and amortization (EBITDA) to increase by $332 million by 2010 to 2011 because of the plant expansions. That projection, based on 2006 prices, would represent an 80% increase in EBITDA from last year’s $414 million mark. The numbers will be considerably higher if oil prices are higher in 2010 to 2011, as I expect them to be. Hold HOC for my new $65 target.

Rentech (RTK) shareholders gave the company room to run a blue light special. At last Thursday’s annual meeting, shareholders approved the potential issuance of 20% or more of RTK’s outstanding common stock at prices as much as 20% below market value. These would be private investments in public equity by institutions and hedge funds, or PIPE financings. It is a common move for development-stage companies, and should give the company flexibility to finance more projects, invest in joint ventures or sell stock to a strategic partner. RTK remains a Top Buy up to $5 for my $11 target.

Connacher Oil & Gas (T.CLL) announced the expected spectacular financial results for 2006 last Friday. I’ve covered the production figures before: Conventional production more than tripled to 2,725 barrels of oil equivalent per day, and revenue grew approximately 25X over 2005 to $245 million. Cash flow per share increased 450%, despite a 75% increase in weighted average outstanding shares issued to finance growth. Capital spending, including acquisitions, reached $452 million, and the company completed almost $600 million in debt and equity financing while maintaining current assets well above current liabilities. Shareholder equity more than tripled, and total company assets increased over 400%. Despite all the good news, the stock is trading 24% below its 52-week high. Production should start from their first tar sands well within 90 days, which should provide a nice bump up in the stock. T.CLL is a Top Buy up to $4.50 for my $7 target.

Security MegaShift

American Science and Engineering (ASEI) won a contract extension for $17.5 million to provide the U.S. Government with service and maintenance for X-ray inspection systems. ASEI was awarded the initial phase in September 2006, valued at $11 million. The total contract has a potential value of $46.2 million, of which ASEI has received $28.5 million. ASEI is still in my buy zone under $59 for a $93 target.

Packeteer (PKTR) won a contract with NetVersant to deploy iShared appliances in 22 customer service centers. The value of the contract was not disclosed. PKTR now has over 65,000 systems deployed at more than 7,000 customers worldwide. Buy PKTR on dips under $12 for my $22 target.

Market Outlook

The S&P 500 generated an hourly sell signal yesterday, and it could be headed back down to test the breakout point at 1408. If that happens, it looks to me like it could bounce at 1410 and definitely should bounce at 1405 if this uptrend is still intact. New uptrends often come back down to test the breakout point, and if the test holds, as I think it will, enough bearish sentiment will build up to slingshot us up over 1460. If the S&P breaks 1405, it will put us back into a consolidation market. And if it breaks 1374 that will generate an important sell signal — but I don’t think that is going to happen. In fact, if today’s late-day reversal generates a new hourly buy signal, that would be the strongest possible pattern and point to a very quick move up over 1460. The economy appears to be gaining strength again and December-quarter final GDP was revised up a bit today, yet the chaos in the sub-prime mortgage market will keep Bernanke’s Fed from raising rates. As long as they continue to print money, the dollar will continue to fall and the stock market will continue to rise. You should be fully invested.