Two big coming biotech IPOs are likely to reignite investor interest in biotech, specifically the genomoics sector. Complete Genomics (Future symbol: GNOM) and Pacific Biosciences (Future symbol:PACB) have filed S-1 Registration Statements with plans to go public in the fourth quarter. This also happens to be the time when the biotech market is bullish seasonally.

Biotech had a good year in a choppy overall 2010 market, with the NYSE Arca Biotech Index up 15.3% year-to-date (YTD). Selected molecular diagnostics stocks have fared well YTD with GenProbe (GPRO) up 12%, Illumina (ILMN) up 50% , and Sequenom (SQNM) up 44%.

A rally in diagnostics stocks was triggered last week by earnings from for major players. This week,  the AACC (American Association of Clinical Chemistry) meeting could add fuel to the fire, when close to 20,000 clinical lab professionals and over 500 exhibitors gather to discuss key industry developments.

As of mid-morning trading, many diagnostic stocks are up 2%. Here is a financial summary from last week's earnings announcements:

		7/26/2010	2010
Company	Symbol	P $	Q2 Rev $	Q2 EPS	PEG	P/S	Sh.Equity $
Cepheid	CPHD	16.5	49.6	-0.03	n/a	4.8	137
Immucor	BLUD	19.3	82.9	0.3	1.27	3.87	439
Meridian	VIVO	19.5	33.9	0.16	1.72	5.4	139
Neogen	NEOG	28.3	39	0.2	1.66	3.8	153

Among the topics that will be covered in Plenary Sessions at the AACC are: Biomarkers for Alzheimer Disease, the Changing Healthcare Landscape, Stem Cells, Inflammation and Cardiovascular Disease and Systems Medicine (P4).

There are several symposia such as Personalized Medicine and Immunosuppression in Solid Organ Transplantation. Laboratory medicine topics are very broad including diabetes, endocrinogy testing, pharmacogenomics,lipid management and sepsis diagnosis. The conference program is here.

Our focus for the Meeting will be companies in the "Tools and Diagnostics" area as well as hot topics in laboratory medicine. Some players exhibiting in our universe in addition to those four above are: Abaxis (ABAX), Alera (ALA), GenProbe (GPRO), Luminex (LMNX), Quidel (QDEL), SeraCare (SRLS) and ThermoFisher (TMO) .

Rod N. Raynovich is the principal with Raygent Associates, a biotech consultancy, as well as a regular contributor to The Rayno Report.

LOS ANGELES -- On Monday April 26, a panel moderated by CNBC anchor Maria Bartiromo including executives and leaders including Michael Milken convened to discuss Health Reform in a session focused on "Prevention and Cures". The primary focus of the discussion was the need for government policy and health reform to address "wellness" and chronic diseases such as diabetes. One of the conclusions from the panel is that the healthcare reform recently been enacted into law is "uneconomic" and has put prevention and wellness on the "back-burner" even though unhealthy living represents a major  cost to society. A lingering concern is that we are a few years away from price-setting of medical products and services.

Gilead Sciences (GILD) share got clobbered today, trading down 10% at midday, after the company lowered its 2010 sales forecast to a range of $7.4-$7.5B from $7.6-$7.8B citing recently enacted healthcare legislation. Net income for the quarter ended March 31 jumped from $854.9M or $0.92/sh. compared with $589.1M or $0.63/sh. in the Year ago period. Gilead’s first-quarter sales increased 24% to $1.79B primarily due to strong sales of its antiviral drugs to treat HIV-related conditions. CFO Robin Washington said the decrease reflects the impact of recently passed U.S. healthcare legislation which would have an sales impact of $200M and an earnings impact of $0.15 sh. in 2010 primarily in the HIV business. Sales of its HIV drug Atripla increased 36% to $692 M for Q1 compared to analysts’ estimate of $726M. Royalties from Roche sales of Tamiflu were $246.3M from increased sales related to the influenza pandemic. The healthcare reform impact would be  related to pricing of antiretroviral sales in the use from Medicaid and Medicare Part D. However, no 2011 guidance was given due to the fact that the bill was passed only on March 23. There are also pricing pressures in Europe.

Below find the summary of our Diagnostics and Tools Portfolio as published on Raygent.com and Genetic Engineering News (www.genengnews.com) on Feb.2, 2009. We are currently reviewing four new stocks: Genomic Health, Genoptix,  MicroFluidics, and Neogen. All of these stocks are “holds”.  Immucor (BLUD) has support at 20 and is now in the portfolio.

		3/29/10 $ P	Original Rec	Price	% Return
Abaxis	ABAX	26.8	2/2/09	15	79
Genomic Health	GHDH
Genoptix	GXDX
GenProbe	GPRO	48	2/2/09	45	7
Hologic	HOLX		2/2/09	12	52
Illumina	ILMN	39	2/2/09	29	35
Immucor	BLUD		4/5/10	20	0
Inverness	IMA	39.7	2/2/09	25	37
MicroFluidics	MFLU
NeoGen	NEOG
Qiagen	QGEN	$23.10	3/15/10	21.5	12
Sequenom	SQNM	6.1	11/18/09	3.75	37
SeraCare	SRLS	4	11/18/09	2.75	81

This week's development of a legal judgment against Myriad Genetics (MYGN) is shaking the biotech world. On Monday, a judge in the District Court for the Southern District of New York ruled against Myriad and granted a motion for the plaintiffs, the American Civil Liberties Union(ACLU) and others, concluding that isolated DNA compositions are not patent eligible subject matter. This essentially invalidated Myriad patents BRCA1 and BRCA2 used in their breast cancer diagnostic tests. Intellectual Property (IP) is the raw material for the creation of biotech companies. Without an invention covered by a robust patent portfolio, venture funding can be very difficult. Since the beginning of the “genomic age” in the late nineties the patenting of genetic materials and methods have gone through a minefield of lawsuits and opinions but in the end  have significantly protected companies with well designed IP. However, patents on human genes have always been a gray area.

  Although we are still technically in a bear market for early-stage biotechnology due to lack of speculative funding from both VC’s and investment banks syndicating IPO’s, many public companies have been doing well. As a result we have a more bifurcated market with larger caps stable or growing and smaller caps in a funk. Nonetheless there is plenty of money on the sidelines that will drive stocks of companies with compelling products and technology. At the recent Rodman and Renshaw Investment Conference in November of 2009  the buzzword was “cash runway” as smaller cap companies with weak balance sheets need to retrench until new money comes back into the market. Nonetheless, Rodman continues to fund PIPES in the biotechnology sector as technology is progressing and deals are being done. Negative articles and “hand wringing” abound in the biotech market citing clinical trial failures, political concerns, a dearth of funding and a “breakdown of the business model." But these critics miss the point: the universe of companies and universities in the biomedical sector are trading and investing in R&D programs that result in drugs, diagnostics and services with the objective of improving healthcare.

 Yesterday, we gave you an intro to why the clinical diagnostics sector looks primed for sustainable growth.  Many sources paint an optimistic scenario for the In Vitro Diagnostics (IVD) market. In a report from the Embargo Group of Austin,Tx, a survey of executives in the IVD and medical device industries said that 71% of the executives expect overall sales to increase in 2010 and 70% felt positive or somewhat positive about the overall business environment. Despite declining prices due to lower reimbursement for tests and increased competition, IVD companies are betting on strong returns from new products in advanced lab automation and molecular diagnostics.  Enterprise Analysis Corp.(EAC)  forecasts a 2010 growth rate of 6.1% for the industry versus 5.3% in 2009. Another trend in the IVD marketplace is that there is solid evidence of the diagnostic test value through health economic studies.

The health-care debate is drawing lots of attention to problems: rising medical costs, the Medicare budget, need for better clinical outcomes, and the push for biogenerics. This has caused a lot of concern among investors and limited returns in the healthcare sector. But biotechnology is evolving particularly in genomics, robotics and cell biology, and opportunities still abound where there is true innovation. M&A activity has picked up, even though funding for venture start-ups, equity for public companies, and IPOs have slowed to a trickle. This means that companies in the diagnostic sector that already have the cash flow or a strong balance sheet, product sales,  and platform technologies  can take advantage of this environment because diagnostic tests have become faster, better and cheaper with the added blockbuster of molecular medicine that can ultimately deliver lower costs of treatment and better clinical outcomes. Below are some thoughts on specific stocks to watch in this space.

Microfluidics (MFLU.OB) is a leader in advanced nano-material processing for a variety of industriesturn-around play with value characteristics. And it's cheap! ($0.99) Raygent Associates and The Rayno Report will be following up with a report on the company's technology after its earnings report in a couple weeks, but given the company's decent fundamentals and low price there is the potential for a strong move up. The company sells high-pressure microfluidic processors that are used to create materials on the micro-and nano-scale to achieve unique product characteristics and qualities. The technology achieves the following functionality:

• Particle size reduction
• Bottom-up nanoparticle creation
• Cell disruption
• Nanoencapsulation
• Nanoemulsions and dispersions

The applications for creating this microfluidic "features" is  development and manufacturing of a variety of products in diverse industries such as biotechnology, pharmaceutical, cosmetics and nutraceuticals. These products allow manufacturing to be scaled up in a uniform and repeatable way. For example, 17 of the top 20 pharmaceutical companies use microfluidizer processors and are of particular benefit to manufacturers of vaccines who need to create stable microemulsions of vaccines with their adjuvants. In the company's third quarter financial results released on November 3, 2009, it reported a net income of $450k on revenue of $4.5M with a backlog of $4.75M. Sales were strong from vaccine developers and manufacturers.The balance Sheet as of September 30 showed $1.7M in Cash with long-term convertible debt of $4.7M. Stockholder equity was $1.15M. One see this  company easily growing beyond it's current market cap of $10.5M. With 10.5 million shares outstanding that gives you a share price of $1. Assuming revenues of $18M for 2010 the price/sales ratio would be 0.583.

(Editor's Note: The Rayno Report, in conjunction with Raygent Associates, has been working on some exclusive research regarding the H1N1 virus and the development of vaccines. A more detailed report will be available later this month for a fee. We are publishing some early finding here, free of charge.) The potential global H1N1pandemic has generated renewed interest in vaccines. Vaccines over the last 100+ years have been one of the most important agents for controlling infectious disease, beginning with smallpox then polio in the fifties. From a commercial standpoint, vaccines have been a low growth business due to safety risks and low prices utilizing technology – i.e. you must grow a virus grown in fertilized chicken eggs. This archaic technology limits the market and also results in frequent shortgages, many of them currently being publicized in the H1N1 market. However, that doesn’t mean the renewed interest in vaccines hasn’t generated a big wave of business. It has spurred M&A deals involving and inteterest in Big Pharma in vaccine products. This is a good side business because it is more difficult to discover and get FDA approval for drugs. New technologies such as adjuvants, cell culture, and engineered antigens now provide an evolving R&D base for novel immunotherapeutic products. And longer term there is the potential of genomics for sequencing organisms and developing immune boosters. The Bill and Melinda Gates Foundation (www.gatesfondation.org)  has been funding vaccine research since 1998 and committed $2B through 2009. Major developmental programs are for malaria, TB and HIV with a goal of preventing 4 million deaths per year. More than 200 million children have been immunized since inception. The WHO (www.who.int) lists the following new vaccines that are at or near the commercial stage: Rotavirus,  Pneumococcal  disease, Human papillomavirus (HPV) and meningococcal meningitis A (Men A) so a significant rollout of new products is underway. So what does this all mean for the vaccine market going forward? Several bullish forecasts for adult and pediatric vaccines have been published over the past two years. Kalorama Information published a comprehensive report, Vaccines The World Market, in June of 2009 with profiles of companies and product forecasts. Kalorama reported global sales of $9.9B+ in 2008 for pediatric vaccines with growth forecasted at 16.3% annually through 2013 reaching $21.1B. While Kalorama believes in the growth model they reiterate the lingering concerns about product safety, supply shortages and consumers’ reluctance to immunize.(There are plenty of vaccine opponents out there). Datamonitor estimates the current market for vaccines by major players in the $19B range. The leaders in order of market share are Merck (MRK), Sanofi (SNY), GlaxoSmithKline (GSK), Wyeth (now Pfizer: PFE) and Novartis (NVS). Seasonal Flu sales for 2008/2009 are $2.8B growing to the $5B range by 2018/2019. VisionGain states in their global vaccine report,“The period of 2008-2013 will be one of the fastest growing segments of the pharmaceutical market.” Scienta Advisors of Cambridge, MA in a recent report forecasts 12% annual growth from 2008 through 2014 with growth of 8% in the viral vaccine sector and 10% growth in the pediatric bacterial vaccine sector vaccines for meningitis and MRSA. Major Players are 90% of current vaccine sales GlaxoSmithKline, Novartis and Astra Zeneca (AZN) have recently made major investments in vaccine products and technology. Leerink Swann estimated orders of $7B for swine flu from all players worldwide. The Wall Street Journal reported that GSK has invested more than $3.2B on R&D, acquisitions and manufacturing and one of the biggest bets on flu vaccines.  GSK is also the leading developer of adjuvants starting with the $300M acquisition of Corixa in 2005. GSK markets over 25 vaccines worldwide with a broad pipeline of 20 vaccines for pediatric and adult diseases including herpes and flu. AstraZeneca (AZN) bought vaccine innovator Medimmune  two years ago and now are selling the FluMist nasal spray products for seasonal flu A+B. Medimmune is a leader in pediatric health with its RSV vaccine. AZN has a number of collaborations with smaller companies for vaccine and immunotherapy development.  Novartis (NVS) has a contract to supply 90 million doses to the U.S. with a recent switch from multdose to single dose due to U.S. consumer concern about the use of trace amounts of thimerosal, a preservative that contains mercury. Conclusion Heavy R&D investment in vaccine technology over the past 10 years by government,  non-profit and commercial organizations will result in new formulations, better delivery systems and new products to control infectious disease. Advances in cell culture and bioreactors combined with recombinant technology such as DNA and VPL vaccines will make manufacturing more cost effective and speed up introduction of new products. Adjuvants  can boost the immune response and lower costs. As new vaccine products proliferate and technologies gain clinical and regulatory acceptance smaller innovative biotech companies will undoubtedly advance in the market. Please check back for more information on our comprehensive report on the vaccine market coming soon.

After a nasty October correction of 10%, biotech stocks are in a recovery mode and poised for a Q4 rally extending to early January. This has been a trend in the past few years (’05,’06, and ’07 trends) but was disrupted by the recent financial crisis of ‘08/09. A nice base has formed in the IBB tracking ETF at levels of 75-79 so a rally would take this popular ETF beyond 80, seeking the September highs of 85. Partnerships and good clinical news have given support to biotech stocks lately and the sentiment has improved especially with biotech financing. Burrill and Company (www.burrillandco.com) recently reported growing momentum in the sector (November 1, Genetic Engineering News) with total financing of $35.6B through Q3 2009. This compares to a total of $18.4B in the same period of 2008. Partnering was particularly strong with financings of $22.2B through Q3 compared to $10.4B in 2008. Venture Capital financings were $3B, about the same level as 2008. At a recent BIO Investor Conference on October 28 in San Francisco, a financial roundtable discussed a trend toward more “bio to bio” partnerships as both large and small companies in the space focus on strategic aspects of their respective technologies and Intellectual Property. In the meantime the M&A trend should continue with big pharma seeking technology and late stage products. Our Raygent Life Science Portfolio is up about 7% YTD; it could have yielded significantly more with rebalancing trades we talked about. Recently we added Cephalon (CEPH) as a new large cap position and additional weighting of Cubist (CBST), Supergen (SUPG), and Viropharma (VPHM). The Mid Cap sector has been difficult to play due to a combined affect of disappointing clinical news and high valuations/expectations. To play in biotech, we recommend a balanced portfolio with an overweight of large caps and the IBB ETF supplemented by smaller caps with good balance sheets. Additional smaller cap positions that should be added are: Alnylam (ALNY), a core play in RNA interference therapeutics for infectious disease and cancer,  Idera (IDRA) a core play in immune response therapeutics through targeted Toll Receptors for infectious and inflammatory disease and SeraCare (SRLS) a biological products and services Company in a turnaround mode with revenues growing to the $50M range and a profitable quarter. -- Rod Raynovich, Raygent Associates (www.raygent.com) Disclosure: The author of this post trades actively in biotech and is long many of the stocks mentioned in this post, including IBB, CEPH, CBST, SUPG, VPHM, ALNY, IDRA, and SRLS.

A summer Biotech rally was sparked by deals. Life sciences stocks kept pace with market sectors that offer comparable risk and performance such as small-cap growth, science and technology, and midcap growth. The broadly diversified biotech ETF -- IBB -- was up 16%, moving from 70 to 81 in the three-month period. About 50% of the IBB holdings are large cap companies such as Amgen (AMGN), Celgene (CELG), Genzyme (GENZ), Gilead (GILD) and Teva (TEVA). The IBB was flat for the year as of July 1, so all the gains came in Q3. The Fidelity Select Biotech Fund was up 9.4% YTD and underperformed due to overweighting in large caps such as Cephalon (CEPH), Genzyme (GENZ), and Gilead (GILD). The fund was underweight in tools and diagnostics, where a lot of upside performance was found. The key drivers to biotech performance have not changed over the past few years, but M&A activity has come to the forefront as several acquisitions have sparked the sector: * Abbott announced a play to buy Solvay for $6.6B. * Bristol Myers completed the acquisition of Medarex for $2.4B * JNJ bought Cougar for $1B, 18% of Crucell for $441M, and 18% of Elan for $885M. * Sanofi bought Merial for $4B The vaccine area was almost entirely abandoned by large pharmaceutical companies in the 1980s, but now that area accounts for many of the deals. New immunotherapy technologies and a greater market need for disease prevention against new infectious agents such as swine flu has brought vaccines to the forefront. Building a long-term product pipeline has always been an arduous process for large-cap pharma companies, as it requires a development process of 7-10 years with costs in the range of $1B per drug and a high risk of failure. The acquisition route has become more attractive because of good technology value. The deal-making is helped by the fact that there is a shortage of capital for smaller biotech companies in the current post-meltdown market environment. Over the past few weeks, several analysts have rushed to put out their biotech acquisition lists spurring rallies across the screen. Another factor mentioned is that biotech products may be less affected by healthcare reform than more mature drugs. A Portfolio that we track -- The Rayno Life Science portfolio -- was up 13% YTD and higher for Q3.With higher weighting of selected stocks as we recommended, it could be up as high as 15%. The big winners in the portfolio with Sep 30 prices and in order of stock appreciation YTD: Targacept (TRGT): up 700% at 21.3 Abaxis (ABAX) up 65% at 26.75 Inverness (IMA) up 58% at 38.75 Illumina (ILMN) up 55% at 42.50 United Therapeutics (UTHR) up 45.5% at 49 Among the losers in the portfolio were Array BioPharma (ARRY), Celera (CRA), Cephalon, Cubist (CBST), Gilead (GILD), and Viropharma (VPHM). Cubist, Gilead, and Viropharma are now recovering. The results from life science stock performance YTD illustrate the following principles of biotech portfolio management: 1) It is important to overweight large caps to protect losses due to events and volatility. 2) Tools and Diagnostics companies provide good returns and excellent diversification without binary clinical trial risk . Some of these include Abaxis (ABAX), Illumina (ILMN), and Inverness (IMA). Those looking for speculative plays on beaten down tools stocks should look at taking profits in Illumina (ILMN) and buying Helicos (HLCS) and Sequenom (SQNM). 3.) Stock picking can be difficult with the smaller caps due to clinical trial risk so if you are going to invest in small caps, a larger pool of stocks is necessary. If the small-cap growth market holds up and we continue to get good news on clinical trials, the M&A backdrop should support higher biotechnology valuations. Contributing Analyst Rod Raynovich is the Principal of Raygent Associates, a biotech research and business development firm. Raygent Associates may be long or short stocks in the Rayno Life Science portfolio from time to time and as of this writing we are long CBST, GILD and VPHM.