Mike Havrilla on DSCO - Discovery Laboratories Inc.

Despite the notion of investing in the healthcare sector as a safe haven, the following six companies (APPY, CMED, CYPB, DSCO, MYL, PFE) are all down sharply over the past year despite solid underlying fundamentals, which are largely unaffected by global economic conditions.

Diagnostics

China Medical (CMED) is trading near its IPO levels of August 2005 despite excellent growth prospects and a PEG ratio of 0.3X, a forward PE of 8X, and a dividend yield of 1.8%. For some perspective on the velocity of the downturn in CMED, the stock opened this week trading in the low thirties and I bought shares this morning at around 21 bucks. The Company develops and sells consumable diagnostic kits to detect a variety of diseases and also to gauge the effectiveness of drug therapies as a play on personalized medicine.

Earlier this week, AspenBio Pharma (APPY) reported that its clinical trial was 70% enrolled for AppyScore, which is a blood-based diagnostic screening test for appendicitis. APPY expects to complete the trial before year-end and file a 510(k) with the FDA in early 2009, which is a quicker approval process for medical devices and tests compared to the PMA process.

Generic Drugs

Mylan Labs (MYL) is the number two player behind Teva Pharma (TEVA), which is trading at levels not seen in over a decade despite trends in favor of the global generic drug industry, which include the following: nearly $70B in brand name drug sales with looming generic competition through 2012 and a push by insurers to increase generic substitution rates from 65% of all prescriptions dispensed to over 70%.

Big (Generic?) Pharma

Pfizer (PFE) currently yields near 8% while trading at a forward PE of under 7X and recently announced plans to make a bigger push into the low-margin generic drug business, which is expected to nearly double to $520B in sales in 2012 from 2006 levels. Given all the talk of Pfizer looking to make a series of biotech acquisitions to fill its pipeline; the recent announcement suggests Pfizer could be eyeing a company such as Mylan Labs which specializes in high margin generics such as fentanyl patches.

Also, Mylan has a stronger global footprint with its $6.7B purchase of the generic division of Merck KGaA in 2007 – with Mylan itself now trading at a market cap of just $1.9B and an enterprise value [EV] of $6.8B. Mylan is valued at an EV/revenue multiple of just 1.75X with an estimated forward PE of 6.3X, making it an attractive buyout candidate for Pfizer to jump-start its new generic drug strategy.

Small-Cap Stocks, Big FDA Decisions

Cypress Bio (CYPB) and partner Forest Labs (FRX) have a pending FDA decision for milnacipran in the treatment of fibromyalgia, which has been widely used as an anti-depressant in Europe and other markets for over a decade. The FDA missed its decision deadline, but expects to resolve the matter in a "matter of weeks", which is encouraging since the agency did not simply delay the deadline by three months as it has done in many recent cases.

Discovery Labs (DSCO) expects to hear from the FDA by October 31 on whether the agency will classify its response to an approvable letter for Surfaxin earlier this year as a Class I review. DSCO expects the Class I designation, which would result in a decision deadline of December 17, rather than the six month period for the Class II review process. Insiders for DSCO are bullish on the stock and have been buying consistently for more than a year.