Navarroâ�,��"�s Big Economic Picture

While the Dow closed at a new record, the other major indices were lackluster, fighting mixed signals.  While the Google juggernaut rolled on, other companies like SanDisk and Broadcom dragged on the Nasdaq, creating guidance worries for the 4th quarter.  We are still in full bull mode â�,�“ which is to say another typical October.   Watch for signs of fatigue, however, and be ready to book your profits before Christmas.

This Weekâ�,��"�s Market Movers
It will be a quiet week in Lake Woebegone, at least until Friday when the first look at the 3rd quarter GDP numbers hit the wire.  With inflation moderating, an upside surprise wonâ�,��"�t do much, but look out below if GDP comes in well below estimates.  

Other events of note are the FOMC Fed meeting on Weds â�,�“ but there is likely to be no change in policy.  And both existing and new home sales are in on Weds and Thurs respectively.  With long end rates moderating, the sector may get a bit of a dead cat bounce â�,�“ but donâ�,��"�t get too excited.

Navarroâ�,��"�s Portfolio Shorts and Longs 
Hereâ�,��"�s a penny pick for the week: the Zix Corporation (ZIXI).  Itâ�,��"�s half as cheap as two buck chuck.  It â�,��"provides e-communication services that protect, manage, and deliver sensitive information to enterprises and consumers in healthcare, finance, insurance, and government industries in the United States.â�,�  Technicals are strong and the float is pretty good.

Vainoâ�,��"�s Biotech Corner: Vical and a Cardiome Update

My focus this week is on a company called Vical (VICL).  It has developed a very interesting way to deliver DNA into muscle tissue.  Their focus is on so-called DNA vaccines. 

A vaccine acts by exposing the immune system to low levels of pathogens, to which are generated antibodies that remove the interloper.  Even after all the protein is gone, the antibodies persist, sometimes for decades.  This means that subsequent exposure to the pathogen will be harmless (or less harmful) as antibodies are already present to remove it. 

In DNA vaccine therapy, a modified form of pathogenic DNA is injected, typically into muscle tissue, where it begins forming the pathogenâ�,��"�s proteins in small doses.  The immune system does the same job of creating antibodies against the pathogenic proteins.  A particular advantage of DNA vaccines is they are much cheaper to produce, are easier to store, and may last longer.

Two weeks ago Pfizer announced it had agreed to purchase PowderMed, a private company, for an undisclosed sum.  PowderMed has figured out a way to deliver DNA by precipitating it onto gold particles and, literally, blasting it through the skin.  Itâ�,��"�s pretty cool.  Itâ�,��"�s also broadly similar to what Vical does.

Vical has a pretty decent pipeline of clinical trials.  Its most advanced product is a Phase 3 study on a DNA construct (not strictly a vaccine, but same idea) to generate angiogenic growth factors that should have application in the treatment of arterial disease.  In addition, they have three other Phase 2 studies and nine Phase 1 studies underway.  This is a less than mature pipeline, but the stock is trading in the low single digit range.

Vical announced on Friday (October 20) that it had demonstrated the efficacy of a DNA vaccine to treat avian flu in ferrets.  This prompted a lemming-like surge of buying that pushed the stock price up as high as 22%:  the price retraced, but still closed up almost 10% on the day.

Iâ�,��"�m not usually overly impressed with preclinical studies, but this caught my eyeâ�,�”and itâ�,��"�s not that Iâ�,��"�m a big rodent fan.  I like the simplicity of the technology, and I like the breadth of Vicalâ�,��"�s pipeline. To be fair, revenue from any of Vicalâ�,��"�s products is years away, but my guess is theyâ�,��"�ll be able to generate enough interest that theyâ�,��"�ll be bought out or will enter into a substantial partnership within the next year.

While the company is risky, I do think Vicalâ�,��"�s drugs show promise. The share price will wind back down in the next week or so, and when it gets back to $5.50 I think it will be a good buy.

Canadian Cardiome Carries On
I mentioned Cardiome Pharma (CRME) in celebration of Canada Day in July.  The stock took a nicer flyer after that, jumping from the high $8s to just above $14 in early September.  The stock had tanked due to the FDA rejecting their NDA filing for an IV form of their drug RSD1235, which treats atrial fibrillation.  A paper in 2004 published in the Journal of the American College of Cardiology on a Phase 2 study on this drug was very encouraging. The rejection had nothing to do with the science but merely with careless paperwork.  While this is a stupid mistake, itâ�,��"�s easier to fix than a drug that doesnâ�,��"�t work. 

Cardiome announced positive Phase 2a data for an orally available form of RSD1235 on September 13th.  The markets response after â�,��"buying the rumorâ�,� was to â�,��"sell the storyâ�,� and the stock dropped almost 25%.  The stock is also off a bit more on announcement of a shelf-registration to sell up to $150M of stock.  My take is this makes for a good entry point.  This stock will get a bump when they refile the NDA for IV RSD1235, and when they initiate a larger Phase 2b study for oral RSD1235. I think this is a good buy, eh.

Peter Navarro is a business professor at the University of California-Irvine, and can be contacted at pn@peternavarro.com. Matt Davio is a managing partner at the hedge fund, Red Rock Capital Fund, and be contacted for hedge fund services at redrock@peternavarro.com.  Andrew Vaino is a Ph.D. chemist currently teaching at The University of Maine.

DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.