Has the market correction created an opportunity for biotech and life science stocks? Yes and no.

The correction hit micro, small and mid caps companies in the sector harder than the big caps - as to be expected - and trading trends indicate these little guys are still vulnerable because investors are nervous. For example, in the cosmetic medicine sector, Medicis (MRX) had weaker than expected results, by some, and many other companies in the space sold off including market leaders Allergan (AGN) and Mentor (MNT). This kind of sell off shows the irrationality and nervousness of the market - cosmetic medicine is the fastest growing segment of life sciences and biotech and is arguably the fastest growing component of the entire economy (30%-35% annual growth). How bout them Boomers?

This level of irrationality tells me it may be best to nibble - not wait, but not plunge in - a comment I hate to make simply because that is what all the geniuses on CNBC are saying, but this time, they are right.

On that note, a company not recommended in my letter but of ongoing interest to me is Cell Genesys (CEGE). The company is in the personalized cancer treatment/cancer vaccine space, a segment hated on Wall Street, and is in Phase III trials for a treatment for advanced prostate cancer. The drug, GVAX, uses irradiated prostate cancer cells that have been genetically modified create a hormone with the catchy name of GM-CSF). This hormone has a vital role in stimulating the body's naturally occurring immune system.

The phase III trials will not produce results until mid to late 2008 - enrollment just started --- but there is an exogenous catalyst that could have a big impact on the stock. Dendreon (DNDN) is in the last leg of the approval process for a "cancer vaccine" for advanced prostate cancer - totally different technology and approach - and if it gets approval CEGE could move, if it fails to get approval, CEGE could also move, DNDN's advisory committee meeting is later this month and approval or disapproval will come by mid-May. CEGE is also interesting as its cash is about the same as its' market cap - $170MM-$175MM -- and it carries slightly less than $200 MM in convertible debt - so the company is valued at about $200MM, a pittance if it gets approval, which could not occur before the end of 2009. The company's burn is very manageable so there should be no financial catalysts, other than a partnership with a Big Pharma company, so you have to wait for trial results.

Remember, Wall Street hates the "cancer vaccine" companies and a famous one, Antigenics (AGEN), blew up like a super nova because its treatment did not work (for an-depth look at what it takes to get a novel technology thought the FDA, read Inside the FDA, Antigenics is at the heart of the story).

Building a blog takes time - and questions? What companies are you looking at right now?

Vaccines conjure up youthful memories (at least in my youth) of sugar cubes with polio vaccine and tuberculosis vaccines that caused scars.

In the 1990s, the Clinton administration wrecked the domestic vaccine industry - that is not a political statement, it is a fact - and the industry was moribund and the population increasingly at risk. Then 9/11 happened and the subsequent anthrax attacks in the United States.

The world, including the United States, began to wake up -- and then two other, more important, events happened in 2005. First, Avian Flu was identified and began to kill people; second, Bill and Melinda Gates intensified their efforts with the help of their foundation to wipe out some terrible diseases through the development of new vaccines.

The opportunity for the next five years revolves around these two events - government efforts to prepare for pandemics and terrorism, and other efforts like the Gates' to eradicate disease in third world countries.

Experts view pandemics in a manner similar to the weather - they are hard to predict in the short run, but the World Health Organization (WHO), and other organizations and experts, are absolutely convinced a flu-type pandemic is a "when" not an "if."

Warren Buffet views a WMD (weapon of mass destruction) attack as a "when" not an "if". Rather than argue the point, governments around the world are beginning to prepare. Forget recent headlines about pandemic flu, because the actual investment opportunity is preparedness.

Pandemics are major, almost spontaneous outbreaks of infectious disease that affect large populations. The definition used by the U.S. Centers for Disease Control is the best for our purpose: "An epidemic occurring over a very wide area (several countries or continents) and usually affecting a large proportion of the population".

What diseases frighten governments and healthcare officials the most, creating the greatest opportunity for investors? Asian Avian Flu and smallpox, the latter the result of a bio-terrorist attack.

Outta Hand? Then I Guess It's Time to Act!

You gotta love our politicians! They wait until the problem is out of hand then blame the private sector for not having an immediate solution, when solutions take years to research and develop and, for the most part, are made unprofitable because of the government's policy in the first place.

The politics of public health and serious, short-term health events -- a severe flu outbreak or new type of flu, a rare and deadly Third World illness or even a terrorist event -- dictate the amount of public money that is spent. The market for vaccines is arguably several times the size of the world's population. Realistically, though, the market size is decided by the level of government attention to a health problem and, by extension, government spending on the problem.

This approach has made the country, and the world's current vaccine infrastructure, embarrassingly fragile. Most of the world's flu vaccine is created in cultures using eggs as the medium. It's not the newest technology and events since 2005 have helped create breakthroughs in new manufacturing systems based on something called cell line technology.

Cell-line technology is best described as the mass production (in bioreactors) of vaccines,
rather than the mass production of vaccines in chicken eggs. The leading vendor of these systems has crated a host medium for making vaccines in a bioreactor based on the replication of the human retina. These bioreactors, kept in a room no larger than a small dining room, can make up to 12 million doses of a vaccine per month - and if it were the egg-dependent process it would require a vastly larger area.

In late 2006, a new law was signed by President Bush to repair the broken system and it was called Project Bioshield. Billions of dollars spent before this were wasted on efforts that did not produce a useable vaccine. Now, the department of Health and Human Services has a fund, similar to a venture fund, to push projects along and has also granted vaccine manufacturers immunity from liability for four years - something critical to the development of new vaccines.

The leading vaccine company in the world is GlaxoSmithKline, but given its size, this new business will not push it into double-digit growth, The real winners in this market will be those companies developing new vaccines and new vaccine manufacturing technology. Companies to watch include Iomai (IOMI), Acambis (ACAM) and Crucell (CRXL).

Bottom line: I like this marketplace and have written about several companies in this space in my letter, the ChangeWave Biotech Investor. I've done so, in part, because of its minimal risk for a biotech, and the potential for lots of upside. The U.S. government, post 9/11, post anthrax, and, most importantly, post Katrina, is not going to remain unprepared -- and it will buy vaccines when they become available and when they expire, or are used up, the government will buy them again.

That is a lot of dough.

Simply put, vaccines for everything from Avian Flu to small pox and malaria are the new evergreens that will produce revenues and cashflow for winning biotech companies going forward.

Hollis Eden (HEPH) Pharmaceuticals blew up last week - it should have! - and the blogs and message boards were hot with information as to why and whether this is temporary, etc. Stay away HEPH, whatever you do.

The stock was down 40% and more last week on news the Department of Health and Human Services was not going to grant the company a contract for a product, Neumune, to counter radiation exposure, and is down more than 50% in the past month. HHS actually said they were not going to give a contract to anyone, it was canceling the procurement and might begin a similar procurement later in the year.

As you might expect, the company went nuts because HHS sent them a letter saying the product was "technically unacceptable." The very same agency told HEPH in October that Neumune was within the parameters specified for competitors under the department's request for proposal (RFP) and this RFP was being managed under Project Bioshield -- an umbrella program for the development and procurement of products related to Bioterrorism and pandemics. The program was overhauled based on legislation passed late last December and that may have prompted this decision.

The company may appeal to Congress, HHS and respond to the next procurement. None of this should interest investors. What should you should focus on is a company with losses of almost $185 million dollars since its inception, that's been renamed, and is one-product dependent on a government procurement.

Yes, the country needs other forms of protection against radiation exposure for the population, and if that is too large a target then at a minimum for first responders and the military. But we are talking about the same people who can't seem to get food to hurricane survivors or communications gear to poor cities six years after 9/11. Do you want to make an investment based on the competence of the Department of Health and Human Services and the Department of Homeland Security? The agency also nuked VaxGen (VGEN), which had been awarded a near-$900 million contract for an anthrax vaccine that was later cancelled - as was the company's listing on the NASDAQ!

Hollis Eden is all over the place, using a second-generation steroid platform to treat everything in sight, without a focus on a particular marketplace. It has nothing in late-stage trials and no hope of generating revenue for several years based on this HHS rejection. It is in no danger of going bankrupt - it has roughly two years of cash based on the current burn - but the lawsuits will soon be coming since the company sold shares at $6.50 in November. The current market cap is just a bit more than its cash, so many investors are saying you can get the company for nothing. Maybe so, if that is what it is worth.

If you think HEPH might come back, look at Vaxgen (VGEN), look at Biopure (BPUR), look at Northfield Labs (NFLD) - companies whose success is dependent on a government procurement. Then look at other companies, such as BioCryst (BCRX) and Lomai (IOMI) and see how companies can be lumped together with this group, but instead have a broad product line and diverse partnerships and sources of funding.

Which statement is true?

A diabetes epidemic is raging in the US - and most of the rest of the developed world.

A disease epidemic is just beginning in the US - and most of the rest of the developed world.

They both are true - and this epidemic presents wonderful opportunities for investors. How to sort out winners and losers? Look at what Wall Street often forgets - patient convenience.

Diabetes is epidemic and a cousin of heart disease because they share a primary cause -- obesity. This is doubly true for the supposedly knowledgeable baby boomers. This generation may be the best-informed ever about health, but they are also the least healthy bunch of oldsters the world has ever seen -- partially because they are living longer thanks to advances in life sciences, and partially because they eat too much and exercise too little. Tobacco was the chief villain among our parents' generation, while McDonald's, all-you-can-eat pasta bars and "jumbo" everything are doing in the Boomers. If you think I am overstating the case, think again. According to the charts, I am obese -- more than 25% overweight -- although no one thinks I am anything other than slightly overweight.

At present diabetes is the second-largest preventable public health problem, after smoking-related illness and death, and consumes 10% of the national healthcare budget.
The market for diabetes treatments, testing and related products and services is estimated by some on Wall Street to be $30 billion by 2009. Take my word for it; it will be closer to $35 billion. The American Diabetes Association estimates more than 213,000 people died from diabetes and related illnesses in 2005. The estimated cost is more than $150 billion dollars -- roughly one in 10 healthcare dollars spent in the U.S.

Some salient facts show how harmful this supposedly treatable disease is today:

• Half of all diabetics are over the age of 55 and the incidence of the disease increases with age. Conversely, roughly 18%-19% of Americans over the age of 60 have diabetes in some form.
• More than two-thirds of people with diabetes die of heart disease or stroke -- yes, they are cousins. Diabetics' chances of having heart disease are two to four times greater than a non-diabetic. The same is true for stroke.
• The leading cause of blindness in people ages 20-75 in the U.S. is diabetic retinopathy, a disease attacks the retina and stems directly from diabetes.
• Kidney disease called diabetic nephropathy affects 10%-20% of diabetes patients and is responsible for more than a third of new renal patients - and these folks require dialysis or kidney transplants.
The disease has been treatable for many years with various medications and insulin, but this does not seem to matter. Why? The world has shifted not to constant medical care from physicians but self-managed care and diabetics are about as successful in taking care of themselves as we all are about eating less. Case in point -- it is recommended diabetics test their blood glucose levels four times a day and 41% American diabetics surveyed recently respond to this advice by testing once per week and another 10% just once per day.

ChangeWave surveys show patient self management is not the wave of the future, it is here, right now, and the key to patient compliance is patient convenience. Three examples:

1) Wall Street geniuses said a new drug, Byetta, would fail because it required injection twice a day unlike oral competitors. It is now a blockbuster. Why? It is the only diabetes medication, anywhere, anytime, that induced weight loss and, more importantly, patients inject themselves twice a day, at the same time, avoiding lots of fumbling and measuring and doing things at different times of the day and mealtime.
2) ChangeWave surveys show that Exubera, a form of inhalable insulin, once it is marketed aggressively by Pfizer, will be a blockbuster (the same survey predicted this for Byetta despite conventional wisdom at the time) with new patients and eventually with existing patients already taking insulin. Would you inject yourself when you could breathe instead? Players in inhalable insulin include Pfizer (FE), Eli Lilly (LLY), Nektar (NKTR), Alkermes (ALKS), Aradigm (ARDM) and Mannkind (MNKD).
3) Tired of Wilfred Brimley selling you diabetes supplies on cable at two AM? Don't be - his outfit, Liberty Medical, is actually Polymedica (PLMD). They ship testing supplies, insulin, pretty much whatever a patient needs and does all the paperwork with Medicare. Over the past year the stock has gone from $12 to $40. Enough said about patient convenience.
4) The "hot" product segment catering most to the need for patient convenience is insulin pumps - devices that automatically test and supply insulin as needed. There are many vendors - and major issues with these products-- send me an email if you want more information on this or post something to this blog. I can be reached at mshulman@changewave.com

That is not say patient convenience is the only driver behind successful investments. Diabetes kills and causes terrible problems - and with them investment opportunities.
As a mature patient marketplace, treatment is also very sophisticated and can be broken down into the following segments: diagnosis and testing, early treatment, mid-stage treatment pre-insulin, insulin treatment, late-stage insulin treatment, and complications from diabetes -- namely diabetic nephropathy and diabetic retinopathy. Many companies serve different cross-sections of this marketplace and it is best for investors to look at the whole market when evaluating companies.

Diabetic Peripheral Neuropathy: This is the disease associated with diabetes that creates great pain in patients, often a burning sensation, due to damage to the nervous system. There are no effective treatments but given the size of the market there is a lot of activity in this area.

Diabetic Retinopathy: The current preferred treatment is surgery and only a handful of companies are working on treatments for this disease -- the leading cause of blindness in people ages 20-74. Several biotech companies have drugs in mid- and later-stage trial and even a partial delay in the onset of blindness or a mitigation of symptoms is attractive to patients and public health authorities. Four companies had drugs in mid-stage trial - Lilly, AstraZeneca (AZN), ISTA Pharmaceuticals (ISTA) and OSI Pharmaceuticals (OSIP).

Diabetic Nephropathy: Many companies are pursuing treatments for this disease, which has terrible effects on patients and is a drain on healthcare budgets. At present, other drugs from other market segments (notably blood pressure medications) are used to slow the progression of the disease. If there is to be a winner in this category, it may be a drug in Phase III trial called KRX-101 from Keryx Biopharmaceuticals (KERX). It has shown encouraging data in late-stage trials. More trials and trial data will be needed for approval but this is a company and drug to watch in this segment.

Find out more - contact me at mshulman@changewave.com or post your comment, I read and respond several times a week.

Nitromed received the first ever ethnic/race specific drug approval for a drug for cardiac disease -- for African Americans. The company has been unable to sell it in voilume due to pricing and reimbursement issues and I believe continuning skepticism about this kind of drug, depsite trial results that showed a greater than 40% redcution in deaths. At this time, the company does not have the resources or management talent to "break out" -- get the drug moving int he markelpace -- and I would avoid th stock until there is evidence they can fix this sales problem. Admittedly, if they solve the problem with a powerful partnership, the stock will probabyl run away before it can be bought but it is a tock worth missing until there is hard news.

Amgen (AMGN) still has some slipping to do, as a company and as a stock, before I would get in. Current revenue and profit forecasts are no better than wobbly because of the uncertainty surrounding reimbursement -- which drives other forms of reimbursement -- for the off-label use of Aranesp to treat anemia in cancer victims undergoing therapy. It will take the rest of this year for investors to get a handle on how this will end up - already several state Medicare authorities (the program is administered at the state level) have said they will not reimburse for the use of Aranesp and cancer centers are cutting back on its' usage. Last week, Amgen took a hot when they suspended a trial for a cancer treatment, vectibix, as a "first line" treatment, in combination with other therapies, for colorectal cancer - and this was important because of competition from other products and a weak pipeline. The company is also slowing down hiring, for several reasons, and if they are uncertain you should be too. I might start looking around $50.

This is an important week in the fight against cancer - a new treatment for advanced prostate cancer, Provenge is up for review by an FDA advisory panel on March 29th. That a new drug is up for review is not itself a major event - the core technology used in this treatment is what, long term, is very important in the multi-generation war on cancer. Provenge is designed to stimulate the body's immune system to do much of the heavy lifting against cancer on its' own. Blood is taken from a patient, sent to a facility where it is treated with Provenge, activating certain dendritic cells that in turn, when re-injected in the patient, activate T cells known to fight prostate cancer. Analysts believe this kind of treatment is extensible and if approved, Provenge could eventually be changed to treat other forms of cancer.

Provenge, if approved, would be the first treatment of this type. Wall Street calls it a cancer vaccine because it uses the body' own immune system, but this term also implies it can prevent cancer, confusing many investors - I call it a personalized cancer treatment, which is exactly what it is for each patient being treated by Provenge. If approved, Provenge could be the first of an entire new generation of personalized treatments and a major catalyst for a wave of investment in this type of technology.

I have written extensively about Provenge in my letter, ChangeWave Biotech Investor, as part of an ongoing interest in leading edge treatments and speculative companies. I am not alone - the entire industry is keeping an eye on the panel meeting, and the eventual FDA decision (that is to happen by May 15th), wondering if a new revolution is in the making, something similar to the approval of Genentech's (DNA) Avastin, the first anti-angiogenesis drug to reach the market a few years ago. I will report back here on Friday with the outcome of the meeting - I will be there - and please, don't be shy, post your questions and comments before or after.