American Innovation in Health Care is Alive and Well

For all the debate about possible reform to the U.S. medical system, it is easy to forget that the majority of major innovations in drugs and medical devices come from America. It is worth remembering that even with all the problems troubling the health care system, innovation continues to be a bright spot. Three of the biggest gains among individual stocks on Monday were from U.S. companies in the pharmaceutical sector largely because of this sort of innovation..

The biggest winner in today’s action are investors in Human Genome Sciences (HGSI) which is up more than 30% in afternoon trading following the completion of their second successful late stage clinical trials for a treatment of Lupus. We first wrote about this company after the completion of their first major trial on this drug in July (HGSI’s Lupus Drug Shows Great Potential), and the stock is up huge again after positive results for this difficult to treat disease. The stock is hitting multi-year highs above $24, and the stock is up more than 600% since the first trial was completed. With a lack of alternatives for those that suffer from Lupus, HGSI’s Benlysta could be a major source of revenue for the company if it can now get approval from regulators.

Amylin Pharmaceuticals (AMLN) is also trading higher today by nearly 10% after this weekend the company announced that it has agreed to co-develop and commercialize compounds for obesity with Japan’s Takeda Pharmaceuticals. Amylin will get $75 million up-front for the deal, but it could be much more lucrative if the partnership reaches certain benchmarks for sales of the compounds. In addition to this partnership, the FDA approved extended use of Amylin’s Byetta as a standalone treatment. Both of these developments are targeting treatment for those suffering from diabetes, an amazing 7.8% of the population according to the American Diabetes Association. Amylin is positioning itself to gain market share in this huge area of need and we believe that this stock continue to have tremendous potential going forward.

Vertex Pharmacueticals (VRTX) is the third drug company on the move today after receiving positive results from a Phase II trial of its experimental hepatitis C treatment Telaprevir. The treatment was administered twice day as opposed to three times, which will be more convenient for consumers. VRTX investors hope this will give it a competitive advantage over other treatments, and the stock has traded more than 8% higher on the day. This drug is extremely important to the Vertex pipeline of drugs and they hope to seek regulatory approval 2H 2010 to possibly be available in 2011.

So, if Monday’s news is any indication America innovation in health care is alive and well, and at least today, investors are seeing the benefits. As for Ockham, our valuation methodology has both HGSI and AMLN as Undervalued, but Vertex was recently downgraded to Overvalued. While these events are unlikely to affect our rating going forward (because they have no impact on current fundamentals) this does illuminate what the future of these companies will look like. It is extremely difficult to predict the outcome of these sorts of trials like HGSI and VRTX just went through, but for some investors this is a risk worth taking.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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