Before you read this post, please know that I do not own this stock, although I do recommend it in my service. I'm exposing this because it's a hatchet job done on a product category that can save tens-of-thousands of lives -- and because a company's stock took a hit for no reason.

That company, Cepheid (CPHD), took a major hit yesterday after the close, due to an article in the Journal of the American Medical Association -- an article that should never have been published.

If it was vetted, then the people who agreed to its publication should check into a hospital that doesn't do any MRSA testing the next time they aren't well.

The article claimed that MRSA testing did not help reduce MRSA infections -- which of course is not only illogical but utter nonsense if you live in the real world.

The study at the core of the article was based in Switzerland (University of Geneva) and I have been told by sources that this hospital used home-brewed, home-built tests -- not a standard test from Cepheid or competitor Becton Dickinson.

There is a detailed criticism published by Betsy McCaughey, founder and chairman of the Committee to Reduce Infection Deaths, a not for profit with an obvious goal -- saving lives. Her critique is found below, verbatim. The organization's website is www.hospitalinfection.org.

Let's cut to the chase. The AMA article is quasi-science that is a short seller's dream.

For of you interested in the truth and the potential that MRSA testing has to save lives (and help companies succeed) look at the the Veterans Administration. The VA has arguably has one of the the toughest potential MRSA problems in the country, due to the nature of their patient population. It reduced MRSA infections by more than 70% with a pilot program that had MRSA testing at its core, and is now pushing that program nationwide. Cepheid has captured the vast majority of the testing business at the VA.

Last point -- some unsolicited, non-stock advice: Don't go to any hospital for any procedure that doesn't first include comprehensive MRSA testing. No one in my family will. Am I paranoid? No. A teacher in the school situated next door to my son's high school died a few months back. She was diagnosed with a malady other than MRSA and was sent home. Then she died of MRSA. MRSA is real and it's deadly.

Enough said, read the letter from Betsy McCaughey.

This is the rebuttal letter -- verbatim -- by Ms. McCaughey. I hope she doesn't mind my posting it here. If you do Ms. McCaughey, contact me and I will pull it down.

March 11, 2008
New York, New York

JAMA Article Provides False Support for CDC's Do-Nothing Position on MRSA

A new study in the Journal of the American Medical Association (JAMA) purports to show that screening for MRSA (methicillin-resistant Staphylococus aureus), a simple skin or nasal swab, is not effective in reducing MRSA hospital infections ("Universal Screening for Methicillin-Resistant Staphylococcus aureus at Hospital Admission and Nosocomial Infection in Surgical Patients," JAMA vol. 299, no. 10, March 12, 2008).

The findings of the authors will be seized upon by the Centers for Disease Control and Prevention (CDC) and advocates of the do-nothing status quo. But the study is seriously flawed - rendering is findings meaningless.

1. Researchers used a 'rapid test,' but many patients were not tested until they had already been in the hospital for twelve hours. Furthermore, the results of the MRSA tests were not acted upon for another 22½ hours on average. Most patients had completed more than half of their hospital stay before their results were known. Therefore, the precautions they needed - isolation, proper antibiotics, chlorhexidine baths - were taken late or not at all.

2. Unbelievably, almost a third of surgical patients (31%) who tested positive didn't get their test results until after their surgery. Therefore they too didn't receive any of the precautions they needed. Some people carry MRSA germs in their noses or on their skin without realizing it. The bacteria do not cause infection unless they get inside the body - usually via a catheter, a ventilator, or an incision or other open wound.

3. No weekly MRSA testing was conducted, which is de rigueur when conducting universal screening to prevent patients colonized with MRSA from passing it on to other patients in the hospital.

4. A previous study by the same lead author at the same location, The University of Geneva Hospital, found that universal screening on admission with preemptive contact precautions (the way it's supposed to be done) decreased MRSA infections in the medical intensive care unit.

The study released today, says Betsy McCaughey, Chairman of the Committee to Reduce Infection Deaths, "doesn't prove that MRSA screening is ineffective. The study omits the precautions that are supposed to follow a MRSA positive test result. It's like testing a recipe, but omitting half the ingredients or test-driving a car without the tires."

Today's JAMA article provides false support for the CDC's persistent do-nothing position on the dire problem of M.R.S.A. The CDC's lax guidelines continue to give hospitals an excuse to do too little.

Chairman and founder of the Committee to Reduce Infection Deaths and former Lieutenant Governor of New York State, Betsy McCaughey is available for interview immediately at:
917-748-0227 or 212-534-3047
www.hospitalinfection.org

I have disliked Amgen (AMGN) for a very long time and have the good fortune of having two publishing platforms to discuss the company: my ChangeWave Biotech Investor service and my short service, ChangeWave Shorts.

I write about it whenever I hear "value" investors who know nothing about biotech or life sciences telling investors to buy the stock because it "must come back" or it's "cheap."

My background is the computer industry -- when it had 49 personal computer companies, eight major mini-computer makes and the "bunch" of mainframe companies -- the five major competitors to IBM.

All but one of those original 49 are gone, all eight minicomputer makers are gone, all of the IBM mainframe competitors are gone from that business and just three are in business, at all, doing something else.

And over and over I heard and read analysts and pundits telling people to buy these dying companies because they were "cheap" and "must come back." Don't you believe it!

Amgen has not created an original blockbuster drug since the breakup of the Soviet Union and has a terrible pipeline. Two-thirds of the company's profits are from anemia drugs getting slammed by the FDA, Medicare and private insurers -- with falling sales due to safety concerns revealed during the runup to a recent FDA panel meeting. The company now seems to rely more on lobbyists than scientists for its success.

I know, this sounds like a non-quantitative polemic. So let's talk numbers.

At least $1.35-$1.55 of their anticipated $4 in 2008 profits are from anemia drugs for dialysis patients with declining sales due to declining reimbursement rates, new dosage guidelines, anticipated competition from Micera from Roche (which I believe will eventually be allowed in the U.S. by the courts and/or the ITC) and an eventual crackdown on rebates.

Some serious percentage of this is going away - and the best case for Amgen is 40 cents to 60 cents per share in profits. I see another 40 cents to 50 cents at risk in the cancer market due to an FDA panel ruling (and, eventually, an agency ruling) that will restrict the use of these drugs for an annoying reason -- data shows they may accelerate death in some patients.

Oh, and cut out the rebates, someone is gong to say. Shocking! Rebates! Shocking!

So, the best case is $3 a share in profits, and at current multiples that means a $30 stock price -- and this dog is being valued on profits, not growth, since there ain't no growth.

Oh, and AMGN has announced the stock buyback.

And did I mention Moody's may knock Amgen's credit rating down depending on the final FDA decision on anemia drugs?

My subscribers have saved a lot of money by avoiding Amgen and some have made a lot of money buying puts on the company. Whatever you do, anytime you give consideration to this company, hear a little voice in your head saying: "value trap, value trap."

If you don't believe me, think Digital Equipment Corporation; or Burroughs; or how about the Osborne computer? Remember them?

I typically write about stocks of interest to investors, but today I am just hacked off. Bear with me and pardon the pun.

Not all drugs and biotech companies are created equal -- and the belief that a drug may cost too much because of its price, is representative of the simplicity and shallowness of the current debate in politics and in press about healthcare costs in the United States.

We live and, for the most part, benefit from a capitalist healthcare system built into a capitalist economy -- with all the commensurate risks and rewards. High-priced drugs with large profit margins are part of this system, and the numbers kicked around by politicians and the press obscure the central reality of our system: A high price for a drug is not necessarily a high cost to society when a drug saves or extends a life and when profits spur the development of treatments that (over time) reduce costs by saving or improving the lives of patients.

Two recent editorials complained about the price of cancer treatment Avastin, made by biotech giant Genentech (DNA), and Genzyme's (GENZ) treatment, Cerezyme, for Gaucher disease.

Avastin fights various forms of cancer and costs upward of $110,000 per annum or more, while Genzeyme's product can top more than $400,000 per annum. The Times's editorialists believe this is way too expensive. Tell that to a patient with Gaucher's disease or a cancer patient who lived, on average, the five and a half months predicted by the median survival of patients in the Avastin clinical trial that led to the drug's approval. In a country that rewards creativity and success, don't you want to reward companies for saving patients so they can reinvest the money to save more patients in the future?

I am no apologist for an industry holding many companies that currently make far too much money for what they return in improvements in public health -- Amgen and its anemia drugs come to mind -- but this specific complaint is misplaced and depressingly similar to the hollow campaign rhetoric dominating the air waves.

While the editorial reflected public frustration with medical costs it also is a mirror of the poverty of the healthcare debate which is increasingly dominated by the inability of patients and the general media to separate prices from costs. In reality, a seemingly high-priced drug may actually save money in the short or long run, not to mention the life of a patient.

I do not deny that patient, public and political frustration is well grounded - too many things cost too much, from allergy shots to fifteen dollar boxes of sterile tissues -- but price should and cannot be confused with cost. In this instance, the clarity of the target (a $100,000 a year drug) and the vast size of the company led the debate.

If the company were a start up that had never made a penny, tried for 10 years to develop the drug and finally succeeded, would there have been criticism? Of course not, and the focus would have been on the happiness felt by surviving patients and the money saved when they left the hospital and went home to live, and not to die in a hospice.

A new report that came out today made this point all too well.

Genentech's cancer drug Rituxan, in combination with chemotherapy, has helped younger patients with non-Hodgkin's lymphoma live two-thirds of the time for five years or more, compared to 50% of the time in the early 1990s. Call it longer living through high-profit chemistry. Genzyme has a robust pipeline paid for with profits from Cerezyme.

This does not seem to faze politicians, patients and pundits who fail to discriminate among the products and the companies that supply them. Avastin is not a "me-too" product; it is not the umpteenth variation of the same pain killer; it is not a treatment for a brand new disease like restless toe syndrome. Avastin, along with many other high-priced drugs, extend and, sometimes, save lives. That is Genentech's mission. Reducing the price of Avastin, and the flow of dollars available to develop new products at a company like Genentech will materially affect the development of new products and eventually lead to the premature death of many patients.

Do I exaggerate?

The drugs in question took more than a decade to develop and are (or were) unique when approved. Avastin is a first and best-in-class anti-angiogenesis cancer drug that reflects billions of dollars in past, current and future development costs. I follow many companies in the life sciences industry and can say without hesitation the drug's parent and creator is considered by many (including me) to be the world's finest cancer company. Genentech has more than 100 clinical trials underway, and is always pushing the envelope and looking for new ways to save lives. The funds for the trials and "envelope pushing" come from high-priced drugs already on the market.

Some surveys also find Genentech to be the finest place to work in the United States -- and it would be difficult to find a company with a better track record for working with, and listening to, the FDA. You won't see pictures of Genentech scientists on yachts with Congressional lobbyists and call girls -- instead they spent their money on R&D last year -- more than they declared as a net profit.

The laws of economics are simple -- a reduction in price of current drugs will reduce Genentech's ability to improve Avastin, develop new treatments and serve patients. Ultimately, a lower price for Avastin may actually mean a higher cost to society.

Genentech and Avastin are easy targets for politicians, the media and complaining patients. The harder (and real) targets are avoided by too many people.

What are the real drivers of runaway costs? People, not patients.

According to Dr. Mark McClellan -- former FDA and Medicare chief now at the Brookings Institution -- the key to cost control is keeping people healthy. The current system rewards the treatment for illness and its reimbursement and often does not pay for routine physicals and other measures to improve health, like managed exercise and diet programs.

Of course, no one ever sold a newspaper or got a vote by saying "Hey, fatso, you may need help, but the first place to start is by getting the potato chips out of your mouth."

But sticking it to a company that has improved or saved 10s of thousands of lives (but is an easy target because of a $100,000-a-year drug) is sexy.

It would be better if the politicos, the public and the media took a look at the real cost and value of a drug, not the price -- and that's something we currently don't do.

A good example is the recent demise of drug BiDil and NitroMed.

BiDil was the first drug ever approved by the FDA for one ethnic group: African Americans. This heart medication was so successful in trial that the patients on placebo were put on BiDil midway through the trial for ethical reasons -- the patients receiving the drug saw a 43% reduction in deaths from heart attacks.

No matter -- BiDil failed in the marketplace because payers (insurers and Medicare) would not pay. Medicare and private insurers asked for too high of a co-payment from patients who could not afford the drug. These payers did not, and would not, factor in a 43% reduction in deaths, and all the costs associated with a sick and dying patient, when demanding these co-payments. And this narrow view of the costs won the day! Since the drug has been approved it is probable that more patients have died unnecessarily of heart problems who could have been managed with BiDil, than the number of soldiers who have died in Iraq.

Narrow-but-headline-grabbing analyses of high-priced drugs undermine the truth: It is the value of a drug relative to its price that matters. Narrow, artificial price limits on life-saving, unique drugs can kill -- and, are likely, already doing so.