Chicago, IL – October 8, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: CRA International (CRAI), FTI Consulting Inc. (FCN), Huron Consulting Group Inc. (HURN), LECG Corporation (XPRT) and Navigant Consulting Inc. (NCI).

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Here are highlights from Wednesday’s Analyst Blog:

CRAI’s Q3 Results Disappoint

CRA International’s (CRAI) third quarter results were disappointing. The company earned 31 cents per share, significantly down from the Zacks Consensus Estimate of 47 cents.

Results were impacted by the ongoing uncertainty of the global recession as clients reduced their spending, while the company continued to experience stalled litigation cases and consulting project delays.

Revenue for the quarter was $86.3 million, down from $111.2 million in the prior-year period. Gross margin was 32.9% compared to 33.8% in the year-ago period, reflecting a decrease in revenue.

Selling general and administrative expenses were down to $20.0 million from $24.9 million in the year-ago quarter as a result of CRAI’s aggressive cost-control efforts.

Operating income for the quarter was $6.2 million, down from $10.2 million the year-ago period. Operating margin declined 190 basis points to 7.2%.

Utilization rate during the quarter was 69%, a decrease from 71% reported in both the prior quarter as well as in the year-ago period. The recent utilization rates are well below management’s long-term target of maintaining mid-to-high 70s.

CRA International reported net income (on a GAAP basis) of $2.9 million or 27 cents per share in the quarter, compared to $4.2 million or 39 cents per share in the year-ago period. However, excluding the restructuring costs, a foreign currency gain attributable to a substantial liquidation of the company's New Zealand operations in fiscal 2008, gain from convertible bond repurchases and NeuCo’s results, the company earned $3.4 million or 31 cents per share compared with $3.5 million or 32 cents per share in the third quarter last year.

In early June, CRAI announced the acquisition of Marakon Associates, a reputed strategic consulting firm known for pioneering value-based management. Management stated that the integration of Marakon has been proceeding smoothly. This acquisition significantly expands CRAI’s client offerings in major markets.

CRA International competes with a broad range of public and private consulting firms. Its closest publicly traded peers to CRA International include FTI Consulting Inc. (FCN), Huron Consulting Group Inc. (HURN), LECG Corporation (XPRT) and Navigant Consulting Inc. (NCI).

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Based in Phoenix, Arizona, Avnet is one of the world’s largest distributors of electronic components and computer products. MosChip provides high performance multimedia and connectivity solutions for consumer, industrial and computing applications.

According to the deal, Avnet’s Electronics Marketing unit will distribute MosChip products throughout Asia. The distribution agreement spans Australia, China, India, Korea, Hong Kong, New Zealand, Taiwan and Southeast Asia. MosChip products include Network Appliance Processors and co-processors, audio / video processors, USB and PCI / PCI Express connectivity semiconductors.

Last month, Avnet reported weak fourth-quarter results as its top line remained challenged by adverse business conditions amid the global economic slowdown. The company’s organic growth continues to be lackluster and it continues to expand only through acquisitions.

Although both bookings and billings increased during the period and backlog was up for the first time in several quarters, rival Arrow Electronics (ARW) maintained that the weakness in top line is yet to bottom out and visibility still remains limited. In particular, business conditions in Europe remain challenging.

Management stated that growth in Asia continues to offset sales decline in other regions. Business in Asia is associated with lower selling prices and lower costs. While this might help margins in the short term, it would not be sustainable until Avnet sees some strength in the high-margin Americas and EMEA regions.

Mylan is now the third-largest generic company in the world after the acquisition of Merck Generics and Matrix Labs. We expect the Merck Generics acquisition to contribute significantly to Mylan’s long-term growth and the help the company expand its footprints in non-U.S. markets.

At present, the company has 120 abbreviated new drug applications (ANDAs) that are awaiting FDA approval, targeting approximately $85.6 billion in branded sales. Among these, Mylan believes 34 are first-to-file opportunities, representing about $17.3 billion in annual brand sales. The company is looking to launch nearly 24 new products in the US in the remainder of 2009 and another 45 in 2010.

Another significant opportunity for Mylan could be the launch of a generic version of Teva’s (TEVA) Copaxone. In June 2008, Mylan signed a license and supply agreement with India’s Natco Pharma Ltd. for glatiramer acetate pre-filled syringes, a generic version of Teva’s multiple sclerosis treatment. The agreement grants Mylan exclusive distribution rights in the U.S. and all major markets in Europe, Australia, New Zealand, Japan and Canada and includes an option to expand its sales into other markets.

The company is looking to file an ANDA for generic Copaxone shortly. While the US launch is not likely to take place before 2011, Mylan is looking to launch the product in other territories in 2010. We have a Neutral recommendation on the stock.

Sales of the company's two ESA (Erythropoiesis-Stimulating Agent) products, Aranesp and Epogen, declined by 8% from the second quarter 2009, reflecting the negative impact, primarily in the supportive cancer care setting, of additional product label changes that occurred in August 2008. However, market share stabilization and modest pricing strength lead to the upside to our forecasts. Sales of Enbrel increased 7% in the second quarter of 2009 and far exceeded expectations based on favorable changes in wholesaler inventories (stocking). Nevertheless, Amgen continues to have strong pricing power with Enbrel, and the drug continues to maintain a leading position in both the rheumatology and dermatology segments.

Gross margin came in at 85.8%, dead-on with our forecast. Operating expenses were also essentially in-line with our expectations. However, the company was able to post adjusted net income of $1,311 million, up 6% and nearly $110 million above our forecasts, based on the revenue upside (about two-thirds of the upside) and a significantly lower-than-expected tax rate (one-third of the upside).

Adjusted earnings per share came in at $1.29, up 13% from the second quarter 2008, and a whopping $0.11 ahead of our expectations and $0.13 ahead of the Street's consensus. EPS upside was driven by higher revenues, lower taxes, and a 64 million decrease in share count from the second quarter 2008, thanks to Amgen's ongoing buy-back program.

Management also provided financial guidance for 2009. Revenues for 2009 are trending towards the upper end of the current guidance range of $14.4 billion to $14.8 billion. Amgen now expects 2009 adjusted EPS to be in the range of $4.80 to $4.95, an increase from the previous range of $4.55 to $4.75, excluding stock option expense, certain expenses related to acquisitions, restructuring charges, the income tax benefit.

In a separate announcement, Amgen announced a collaboration agreement with GlaxoSmithKline (GSK) for which the companies will share commercialization of Amgen's monoclonal antibody denosumab for postmenopausal osteoporosis (PMO) in Europe, Australia, New Zealand, and Mexico.

Amgen maintained commercialize rights to the drug for PMO and oncology in the U.S. and Canada, and for all oncology indications in Europe and specified markets. Glaxo will commercialize denosumab in all regions outside of Amgen's reach, which include China, Brazil, India, and South Korea.

Financial terms of the partnership include an initial payment and near-term commercial milestones to Amgen totaling $120 million, and ongoing royalties. In Europe, Amgen and Glaxo will share profits after accounting for expenses associated with the partnership. In emerging markets, GlaxoSmithKline will be responsible for all commercialization expenses and purchase denosumab from Amgen to meet demand.

The U.S. FDA is expected to rule on the approval of denosumab in October 2009.

Early this morning, Rio Tinto Plc (RTP) agreed to sell its Alcan Packaging Food Americas division to U.S.-based food and beverage packaging firm Bemis Co. Inc. for $1.2 billion. Out of the total consideration, Bemis might pay $200 million in form of shares.

Headquartered in Chicago, Alcan Packaging Food Americas has approximately 4,600 employees at 23 locations in the US, Canada, Mexico, Brazil, Argentina and New Zealand. Alcan Packaging Food Americas generated revenues of $1.5 billion in 2008, accounting for 23% of the unit's total revenues. The sale of the Food Americas division is Rio's first significant step towards reducing the asset portfolio it acquired with Alcan.

This deal is the latest in Rio's ongoing divestment program aimed at reducing its debt. Rio had incurred significant debt when it acquired Alcan Inc. in 2007. Since then, the company has been on a drive to reduce its hefty debt.

During 2008, the company generated $3 billion by divesting its interests in Cortez, Greens Creek and Kintyre uranium assets. So far this year, Rio has announced asset sales of about $3.7 billion, including interest in the Ningxia aluminum smelter in China, Corumba mine in Brazil, the company's potash assets, and the Jacobs Ranch coal mine in the U.S. The company said that the divestment program is on course for other assets identified for sale, including the remainder of Alcan Packaging and Alcan Engineered Products.

Apart from divestments, Rio raised additional capital through its recently completed $15.2 billion rights issue. The company has $8.9 billion of debt maturing in 2009, $9.1 billion maturing in 2010, and another $10.0 billion in 2012.

Looking forward, we believe it is very important for the company to realize attractive prices for its assets in order to pay down debt. But if the company ends up selling non-core assets at distressed prices, meeting its debt reduction targets might be difficult.

Whether it is merely temporary or a sign of something more durable it is hard to escape the fact that as the discourse on green shoots and second derivatives linger we might be entering a new leg of this crisis. Thus, there should be no mistake. We are very much still stuck in the mire and especially so in the context of the so-called developed OECD economies where it is difficult to see where any speedy recovery is going to come from. On the other hand the world is not made up entirely by the OECD edifice and it is exactly the potential for an asymmetric "recovery" and how global monetary policy might serve to transmit such a recovery which is the topic of this entry. In order to frame the discussion, it is worthwhile to go back to before the crisis where, most notably, the low interest rate environment in Japan was driving carry trading activity across the world with Australia, New Zealand, the Eurozone, the US as notable targets in the developed world edifice where also of course emerging markets were in the spotlight. Whether there are similarities with such historical flashbacks can be debated; but what is abundantly clear is that conditional on the return of some variant of an environment conductive to the carry trade something has also changed.

This change is most clearly expressed through the process by which the US Fed's credible commitment to maintain low rates may become the driving force for a search for yield and return (carry trade) in key emerging economies. In that light, my good friend Edward Hugh recently authored two extraordinarily important pieces and although it is hardly news that I plug Edward at this space I highly recommend you to have a look at these two. Nay, it is imperative that you read them.

The main thrust of the story is that after having observed green shoots throughout since February the carry trade wheel appears to be revving up again. Volatility have come down, risky assets have flown, money market rates in the G3 are beginning to behave, and reports have even come in that a seasoned carry trade veteran Miss Watanabe is once again dipping her toe although people close to the data also suggest that a lot of the effect from Miss Watanabe is clouded by Japanese corporates playing with transfer pricing.

[click on graphs for better viewing]

But, as noted, this time there is a twist. Sure, the BOJ is still running an almost open shop with respect to the provision of funding  to play the game but relative to the carry trade of old days, something has changed. Now, it is not the only the BOJ anymore but also the BOE, to a lesser extent the ECB, and most importantly the Fed who are forced to commit to very low levels of nominal interest rates in order to fight off deflation as well as to commit to the support of the restoration of a financial system which has been mortally wounded during the evolving crisis. In a world where uncertainty is high this is a prerequisite to avoid disaster, but in a world where sentiment suddenly shifts to the better it potentially becomes the underpinning factor for what some have dubbed the mother of all carry trades. It is of course this which we have been observing more than passing evidence of in the past weeks.

In a global macroeconomic context, this all goes back to the discussion of re-balancing and decoupling. In the most recent print edition The Economist calls it decoupling 2.0 and although I never liked the idea of decoupling as it was traditionally narrated with Europe or perhaps China taking over as the global supplier of net capacity (demand) it was also always going to be a very true narrative. To put it in other terms; the world decoupled a long time ago and it has long been clear that big emerging economies would rise to the scene to command a much larger relative position.

Besides this common ground, I have mainly had two gripes with the narrative. Firstly, the original idea that Europe and Japan would rise to the occasion to take over from the US was a mirage masked by the simple fact that the Fed reacted more quickly and swiftly to the incoming storm. Secondly, I have also been skeptical about the idea of China (and Russia even) providing demand through a more liberal policy towards the management of its capital account and currency. Essentially, Goldman Sachs' old conceptualization of the BRICs should be allowed to move into the eternal dust bin not only because there is a fundamental difference between China/Russia and Brazil/India, but also  because the emerging market edifice is much more diverse and important to be reduced to the whims of the punch line department at the world's biggest and arguably best investment bank. 

With these points on the table it is of course worthwhile to ask whether investors and other market participants are responding to this new narrative of vibrant growth in emerging markets and subsequent carry trade opportunities.

Even a modest glance over the recent news bulletins suggests almost a feeding frenzy as investors and their advisors scramble to exploit whatever window of opportunity that may have opened to make some easy money in an otherwise extraordinarily difficult environment. One notable example was in the context of the CEE economies where Deutche Bank recently suggested that investors borrow in Euros to buy the Ruble and the Forint. Of course, there are carry trades and then there is; well Russian roulette, and of all the potential punts out there this one would seem, to me, the equivalent of a trip to Las Vegas, playing on horses or another derivative of gambling. Apart from DB, Barclays have also picked up the baton with analyst Andrea Kiguel providing the main points that the Brazilian Real and Turkish Lira be the preferred targets of choice;

Brazil’s real, South Africa’s rand and Turkey’s lira offer the “largest upside” as investors return to the so-called carry trade, Barclays Plc said. A global pickup in investor demand for higher-yielding assets and signs the worst of the global recession is over “bode very well for the comeback of the emerging-market carry trade,” analysts including Andrea Kiguel in New York wrote in a report. The carry trade refers to the practice where investors borrow funds in a country with lower interest rates and then invest the money in nations where returns are higher.

Brazil’s real has gained 18 percent in the past three months against the U.S. dollar while Turkey’s lira has advanced 10 percent. South Africa’s rand is up 22 percent, the best performing emerging-market currency in the past three months. “As the decline of global risk aversion gives way to the re-pricing of U.S. dollar, we see potential for emerging-market foreign exchange to continue rallying,” analysts including Andrea Kiguel in New York wrote in a report.

The American Banks want to play ball too and emphasising the unusual and lingering low interest rate environment in Europe, Japan, and the US; JPMorgan and Goldman Sachs are hailing all systems go.

The carry trade is making a comeback after its longest losing streak in three decades.

Stimulus plans and near-zero interest rates in developed economies are boosting investor confidence in emerging markets and commodity-rich nations with interest rates as much as 12.9 percentage points higher. Using dollars, euros and yen to buy the currencies of Brazil, Hungary, Indonesia, South Africa, New Zealand and Australia earned 8 percent from March 20 to April 10, that trade’s biggest three-week gain since at least 1999, data compiled by Bloomberg show.

Goldman Sachs Group Inc., Insight Investment Management and Fischer Francis Trees & Watts have begun recommending carry trades, which lost favor last year as the worst financial crisis since the Great Depression drove investors to the relative safety of Treasuries. Now efforts to end the first global recession since World War II are sending money into stocks, emerging markets and commodities.

Speaking a language most investors can understand Bloomberg reports that a composite index constructed by ABN Ambro where the Euro, Yen, and USD are used to buy Turkish Lira, Brazilian Real, the Forint etc has so far earned an annualized 196 percent from March 2 to April 10. Such kind of rapid reversal of fundamentals can only be underpinned by a very strong dose of positive sentiment as the one we have been witnessing with all the talk about green shoots and second derivatives. As Macro Man points out the most recent survey on Global Funds Managers from Bank of America and Merril Lynch sported the biggest degree of optimism since 2004 and, naturally, a substantial re-allocation of assets towards emerging markets.

Now, this is of course all well and good but the underlying economic dynamics here are not as straight forward as they may seem. There are particularly two issues worth noting. 

On the one hand there is the simple issue of where all the liquidity provided by the BOJ, the ECB and the Fed is going. Only recently, the vice chairman of the Federal Reserve Donald Kohn pointed out that after getting a one trillion dollar boost from the Fed's purchase of treasuries and asset backed securities (most notably the MBS) the economy appeared to be on the mend. Leaving aside the question of whether the economy is actually on the mend or not the more fundamental question is the extent to which the Fed, the ECB and the BOJ can govern where exactly this "boost" is going and, of course, subject to what leverage multiple. This, I think, was what made Paul Krugman ever so timidly to venture the idea the perhaps some form of buy American/protectionism wasn't as bad as it was meant out to be. In a European context we can ask a similar question about whether all the liquidity provided by the ECB will simply move into the CEE to play the carry there and consequently further exacerbate the imbalances which have not been unwound yet.

On the other hand there is the receiving end where some emerging markets are already reeling under the prospects of sucking up the inflows. The first proverbial shot across the bow was fired by Henrique Meirelles who is in charge of the Brazilian central bank. Recently, he consequently pointed out that the central bank is standing ready to increase the purchases of USD in order to stem the unduly appreciation of the Real on the back of carry trade optimism and a resurgence of the upward trend in commodities which is a core driving force in the Brazilian case. But this runs much deeper than Meirelles recent comments. Going back to the last time, before the crisis, many emerging markets and commodity linked economies also squirmed under the pressure of inflows. Of course and undoubtedly much to the chagrin of many central bankers, raising rates to quell the inevitable inflation which comes on the back of hot money inflows only serves to worsen the problem. Thus, and with a number of central banks stuck at near 0 % in nominal interest rate, raising rates only intensifies the pressure. This was abundantly clear in economies such as Brazil, India, New Zealand, Australia, and most importantly in the CEE where many economies actually depegged with respect to the Euro because it was believed that the carry flows would lead to nominal appreciation which would choke off the inflation. The most ardent example of an attempt to halt the carry pressure was of course Thailand where capital controls on inflows were installed, not in order to to stem an outflow as originally described in the literature, but rather to avoid to much money coming in.

The key to understand this process is the nature of global monetary policy and the so-called credit channel. This is one of the reasons why I demand that you read Edward's posts linked above, but you could also go right to the source in the form of a paper by Danish economist Carsten Valgreen as well as my own account of said paper. The point is simply the extent to which economies can loose control over monetary policy and what this means. There is ample evidence I think that in a world where interest rate differentials of the current magnitude represent an inbuilt part of the edifice, there exist notable externalities from monetary policy. One aspect of this is created by the fact that some central banks basically have committed to a prolonged period of quantitative easing and another aspect is created by the fact that as the crisis ripples through, the world will be saddled with more economies than before dependent on exports to grow. These two facts taken together suggest that the pressure on those brave souls out there willing to stand up and run a deficit will also face what I have come to call a "turret ride" since when times are good the inflows may seem excessive only to retreat if the mood turns sour. As noted, following traditional convention hot money inflows can create investment bubbles and inflationary pressures (if you don't have the capacity) and the answer would be to raise rates, but if the low risk environment persists such policy measures will only intensify the pressure. I think that this aspect of the global economy is very important to take aboard.

Into the Light with Wings of Wax?

This may of course be much ado about nothing since in the current environment wreckers of havoc to the carry trade and any other kind of risk prone activity potentially lies around every corner. In this sense I agree with people closer to the market than myself. However, it is still worth paying attention to the way markets and investors are reacting and then to think about the consequences of the joint commitment by the big central banks to keep rates low. Clearly, such commitments are always subject to withdrawal if and when the respective central banks see it fit to suck back the liquidity, but so far that point is far into the horizon. This means that we are about to see just how much capacity there is to absorb the carry flows and where the money ultimately will flow. Some investors will certainly be flying equipped only with similar wings as Icarus while some again will be sporting a set of more durable wings. Whatever the future days and weeks will bring, I for one think it is fascinating to watch.

The U.S., as mentioned, is the only country to earn an "A." China gets a "B+" while Italy, Japan, The Netherlands and Taiwan rank "B's." The numbers go on from there with New Zealand bringing up the rear, earning a big D-.

I don't have the global experience to compare the U.S. and New Zealand, but I know one thing: we don't deserve an "A."

• How do we deserve an "A" when the majority of mutual funds are sold on commission, putting the interests of financial agents at odds with the interests of investors?
• How do we deserve an "A" if 70-85% of our funds trail the market average, due primarily to high fees?
• How do we deserve an "A" if the average mutual fund turns over its entire portfolio each and every year?
• How do we deserve an "A" when most mutual funds don't bother to vote their shares in an intelligent fashion?
• How do we deserve an "A" when we have a 401(k) program that disguises its fees and shunts investors into overpriced, under-performing funds?
• How do we deserve an "A" when our shareholder communications (starting with prospectuses) are unintelligible legalese, and 99% of them are thrown away unread?

Savvy investors in the United States can find great mutual fund products: products with low fees, high transparency and dedicated management. 

But the majority of Americans are poorly served by mutual funds, which charge high fees for a substandard product and uses tantalizing advertisements to lure investors into chasing returns.

An "A"?  Not in my book.

When President Obama's administration released the proposed budget for the upcoming fiscal year, drug stocks quickly dropped. Fears of socialized medicine, or "Hillary-Care 2.0" turned investors away from the sector.

Was the drop warranted?

There are 6 key components to healthcare reform that could have a meaningful impact on pharmaceutical and biotechnology companies in the near future.Four of these are potentially negative, whereas the other 2 are potentially positive.

First Potential Negative: Increasing Pricing Rebates

The new proposal calls for an increase in Medicaid rebates from the current level of 15% to 21%. This equates to a 6% decrease in pricing power by all the companies in our universe into the Medicaid market. If we delve deeper into the ramification of this action, we see that the potential earnings impact for most large pharmaceutical companies is in the area of 1%, at most.

Most pharmaceutical companies average roughly 5% to 20% of their U.S.business to Medicare / Medicaid. Some companies, including Wyeth (WYE), Pfizer (PFE), and Abbott Labs (ABT) are on the low-end, whereas others, such as Bristol-Myers Squibb (BMY), Eli Lilly (LLY), Merck (MRK), and Gilead (GILD) are on the high-end.

The overall impact to the top-line is muted significantly for companies with greater sales outside the U.S., including PFE, ABT and Johnson & Johnson (JNJ).

Notice Abbott and Pfizer are on the right side of that list twice, low exposure to Medicaid, high percent of sales outside the U.S. But nevertheless, we would classify the 1% EPS risk associated with increased pricing rebates as mostly bark, only a tiny bite.

Segment Analysis For Top Drug Companies
Company	% U.S. Revenues*	Est. % Govt. Biz	% At Risk Exposure
Abbott Labs	48%	~8%	~4%
Bristol-Myers	59%	~14%	~9%
Johnson & Johnson	51%	~9%	~5%
Merck & Co.	56%	~10%	~6%
Schering-Plough	30%	~8%	~3%
Eli Lilly & Co.	54%	~18%	~10%
Pfizer, Inc.	42%	~6%	~3%
Wyeth, Inc.	47%	~5%	~2%
*Revenues include all operations, not just Pharmaceuticals

Second Potential Negative: Biologic Generics

It is clear that we will have some sort of path to approval for generic biologic drugs, or "biosimilars," in the near-future. New draft legislation is expected to call for 10 years of market data exclusivity for new biologic drugs - a victory for the biotech industry as Representative Henry Waxman (D-CA), Chairman of the House Energy and Commerce Committee, recently introduced a bill calling for only 5 years of data exclusivity.

But biosimilars will not be as devastating to biotech products as generics were to small molecules. Manufacturing biologic drugs is significantly more cost prohibitive and knowledge intensive than small molecules.

Biotechnology companies themselves often struggle with manufacturing scale-up and meeting demand. Manufacturing Eli Lilly's Erbitux or Amgen's (AMGN) Enbrel is no easy task. There are few generic manufacturers with the necessary expertise, or capital required, to manufacture large batches of biosimilars.

And, there are significant additional hurdles. If the FDA will require proof of bioequivalency, then generic manufacturers will need to start doing costly large-scale clinical trials - something most will shy away from doing. Conversely, if the FDA does not require a bioequivalency study, we believe most doctors will shy away from using the "biosimilar" products because they know the complexity of the manufacturing process and have no proof that the generic Aranesp really is identical to the branded Aranesp.

It's a catch-22 that generic companies looking to break into the biologic market will have to deal with.

That being said, firms with potentially the biggest risk exposure to generic biologic legislation include Amgen and Biogen Idec (BIIB). Teva Pharmaceuticals (TEVA) is most likely the biggest winner.

Top Biologic Drugs And Their Patent Expiration
Neupogen (Amgen)	2013	Neulasta (Amgen)	2015
Aranesp (Amgen)	2014	Enbrel (Amgen)	2012
Myozyme (Genzyme)	2016	Fabrazyme (Genzyme)	2015
Herceptin (Roche)	2019	Avastin (Roche)	2018
Rituxan (Roche)	2018	Lucentis (Roche)	2018
Erbitux (Eli Lilly)	2017	Remicade (J&J)	2014
Humira (Abbott)	2016	Synagis (AstraZeneca)	2018

Third Potential Negative: Drug Reimportation

A consortium of 4 Senators (Dorgan D-ND, Stabenow D-MI, McCain R-AZ, and Snowe R-ME) introduced in early March 2009 the, "Pharmaceutical Market Access and Drug Safety Act." The bill would allow U.S.-licensed pharmacies and drug wholesalers to import FDA-approved medications from Canada, Europe, Australia, New Zealand and Japan - areas where drug prices are on average 35% to 55% lower than in the U.S. The legislation would also allow individual consumers to purchase prescription drugs for personal use from safe, reliable, FDA-inspected Canadian pharmacies.

The Congressional Budget Office (CBO) estimates the bill would save American consumers $50 billion over the next decade, including more than $10 billion in federal government savings. If we assume the savings are linear, or average roughly $5 billion per year, that represents approximately 2% of the total U.S. $250 billion pharmaceutical market. The EPS impact from a 2% haircut to the top-line of each pharmaceutical company, assuming drug reimportation hits everyone equally, is extremely manageable, and will most like average no more than 1% to 2% per company if enacted.

Fourth Potential Negative: Tax Reform

(This also the one with the most teeth.) .

Tax reform has little to do with fixing the healthcare system and more to do with closing loopholes and going after drug company's profits directly.  It is also by far the most socialistic approach to the problem, as we would classify drug reimportation and biosimilars as more capitalistic approaches.

Over the past several years large-pharmaceutical companies have gotten quite good at lowering their effective tax rates thanks to foreign subsidiaries and R&D credits. In fact, the average tax rate using the 14 largest U.S-based pharmaceutical and biotech companies in 2008 was 23%.

It is possible that the President's proposal could raise the effective rate for each firm to 30% by closing these loopholes and cutting R&D tax credits.

That equates to a 7% increase in effective tax rate for the average company, or as much as a 20% to 30% decrease in net income. The details on the tax reform aspect to President Obama's proposal have yet to be divulged, but this does have the potential to be a significant negative for our coverage universe.

2008 Tax Rates for Top U.S. Drug Companies
Abbott Labs	22%	Amgen	22%
Bristol-Myers	22%	Alcon, Inc.	15%
Genentech	36%	Biogen Idec	29%
Genzyme	34%	Gilead Sciences	27%
Johnson & Johnson	23%	Eli Lilly & Co.	21%
Merck & Co.	17%	Pfizer, Inc.	22%
Schering-Plough	15%	Wyeth, Inc.	30%

It's not all potentially bad news though with respect to healthcare reform.We see two potentially very positive changes that could emerge as a result of new legislation.

First Potential Positive: New Research Funding

In early March 2009, President Obama reversed a standing executive order from the previous administration by lifting the federal ban on human clinical testing of embryonic stem cells. This opens the door to potentially billions of dollars in government funding for this new, and potentially breakthrough, platform.

Stem cell companies, although mostly small and unprofitable, are the biggest direct beneficiary of the news. However, big pharmaceutical companies are clearly interested in stem cell research, and with a significantly more friendly administration in control, we may see a big push in this area in the coming years.

Besides opening up funding for stem cell research, the Obama administration has made it clear it wants to see additional increases in funding for infectious diseases such as HIV/AIDS and Hepatitis-C, as well as for cancer and obesity-driven diseases such as diabetes and cardiovascular disease.  At this point, similar to the proposed tax reform, the details are thin. How much money the government will spend and who will get the money remains to be seen, but Genzyme (GENZ) and Gilead would seem to be the two biggest beneficiaries of increased funding in their core areas.

Second Potential Positive: Increase Coverage

This is the "no-brainer" when it comes to how universal healthcare would benefit big drug companies. There are an estimated 40 million people living in the U.S. without health insurance. Opening up some sort of government sponsored program that would insure even half of these people would be a significant revenue driver. We would view this as a systemic benefit across the entire universe of healthcare companies.

Potentially another 20 million Americans looking to use prescription drugs could mean as much as another $25 billion in drug sales per year. That would equate to an increase of over 10% in 2010. Therefore, even if pricing drops by 6% and reimportation takes down sales by another 2-3%, the net top-line impact of Obama's healthcare reform may be negligible if the size of the target market increases.

Healthcare Reform Is Necessary

Fixing healthcare, or at least starting on a long-term solution, is at the center of President Obama's plans for the next 4 years, and for good reason.

According to the National Center for Policy Analysis, the unfunded liability associated with Medicare / Medicaid is roughly 7x that of the current unfunded liability for Social Security. By 2030, it grows to 15x the size.

Social Security may be the "third rail" in American politics, but Medicare / Medicaid is the train bearing down on the tracks.

Still Waiting on the Details

It is also critical to realize that many of the details to President Obama's proposal have yet to be ironed out. That debate will take place on the floor of the House and Senate over the next few months.

What was released last month was more a broad stroke, sweeping legislation, plan of action. The President called for a $634 billion healthcare reform reserve fund over 10 years aimed at fixing many of the problems that exist with the current system. This $634 billion is paid for through $318 billion in tax increases on Americans earning over $250,000 and $316 billion in savings to be squeezed from drug makers, hospitals and managed-care companies.

The net result of healthcare reform is likely to be limited on big pharmaceutical earnings.

As noted above, the effective tax rate change has the potential to take the biggest bite out of profits. What we may end up seeing is a small reduction in revenue growth rates for the largest firms by 2% to 4%, with almost this entire drop hitting the gross margin line. Operating margins are likely to remain stable as most of the company look to cut costs and synergize through mega-mergers (Pfizer-Wyeth, Merck-Schering, Roche-Genentech). The mega-merger trend should continue, with names like Bristol-Myers, Eli Lilly, Sanofi-Aventis (SNY), and AstraZeneca (AZN) most likely the next to jump into the fray. Net margins could take a hit if tax rates increase, which would certainly have a negative impact on earnings, but we expect that this type of broad-based impact to the entire sector will have only limited impact on applied valuation multiples.

When the President's budget is finalized we should get a better sense on how the above 6 forces will impact each name individually. At this point, the fear of healthcare reform seems entirely more bark than bite. Although there is bite, the Amex Pharmaceutical Index is now down 13% YTD, and our calculations show that the expected earnings hit, excluding the tax rate issue, is significantly less.

Wishing you luck,
Jason Napodano, CFA
Senior Analyst, Zacks Equity Research

Jason covers the pharmaceutical industry for Zacks Equity Research. His article on how health care reform may impact the drug sector helps us view certain stocks in a new light.For example, Teva Pharmaceuticals is identified as a potential big winner with new generic biologic legislation. If you'd like to see Jason's in-depth research report on TEVA issued April 1, you may download now by starting a free trial to our Zacks Premium service.

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For anyone who didn't catch it on March 12, comedian Jon Stewart put to shame many hard-nosed financial journalists when he caught CNBC's Jim Cramer in outright lies about his scamming ways running hedge funds.

Stewart, host of Comedy Central's "The Daily Show," also blasted Cramer for his less-than-substantive antics on CNBC's "Mad Money" show. 

We should all stand up and applaud Stewart's performance. But he took it too far when talking about how his elderly mother had bought into the industry's long-term investing mantra.

Stewart should've stayed on-topic, drilling Cramer and not letting him off the hot seat. Instead, he ventured too far afield when relating the apparent drubbing his mom took in the markets during the ongoing recession.

Although ex-journalist Cramer is the sort of slumdog millionaire we all should be wary of taking too seriously, he could've redeemed himself a smidgen by pointing out to Stewart that long-term investing shouldn't take the rap.

My Parents ... And The Importance Of Sound Advice

Sitting by the computer watching on Comedy Central's site the next day (see clip here), I couldn't help thinking about my parents. They're both around the same age as Stewart's mom, and while their portfolio has taken a hit as a result of this economic mess, it's still nowhere near a double-digit loss.

As some of you might remember, there was a lengthy review on IU.com's discussion boards a while ago about whether my parents should dump their (unnamed) adviser, who was unresponsive to requests for information about their allocation plan. To make a long story short, most pros and amateurs alike agreed that an unresponsive and overaggressive adviser wasn't worth keeping.

So we dropped the adviser and moved their portfolio to Vanguard. Not only did we save thousands of dollars in yearly fees to fund companies, but we also discovered an amazing statistic while hunting through the maze of paperwork and accounts the adviser had set up: My parents, in their mid-80s, had something like 80% of their assets in stocks!

We since have merged their portfolios into an easy-to-manage 70% bond allocation. By the end of last year, that was up to 80% bonds as the stock portion fell and the fixed-income index funds held their ground. With a large portion in munis, the portfolio is doing even better this year.

Back to Jon Stewart. He was correct in pointing out that investing requires monitoring and it's not as easy as it looks. But when he made the leap to condemning long-term planning, he clearly was ranting—and well beyond his comfort zone.

Someone should let Stewart know that long-term asset allocation isn't an industry-inspired plot to hold investment dollars longer. It's an ages-old strategy with a wealth of academic knowledge behind it that savvy veteran investors have long embraced.

It just takes some thought and preparation. How you allocate assets is critical. In fact, the longer-term focus your portfolio takes, the more due diligence is required in terms of making sure you've got the right plan of attack.

Consider if you had a simple two-ETF portfolio. For all domestic equities, let's take the Vanguard Total Stock Index ETF (NYSE: VTI). With bonds, let's go with the iShares Barclays Aggregate Bond ETF (NYSE: AGG).

The table below shows how asset allocation impacts this simple portfolio's returns on a percentage basis, both over the short and longer term (through 3/17/09):

Another equal-weight exchange-traded fund based on the S&P 500 is being proposed, this time using Select Sector SPDRs to carve up the index.

The ALPS Equal Sector Weight ETF would track a Merrill Lynch benchmark that divvies up the broad U.S. stock market by its nine major sectors, according to a recent filing still under review by the Securities and Exchange Commission. Each would be represented by a Select Sector SPDR fund. 

"At all times, the Merrill Lynch Equal Sector Weight index will be comprised of the constituents in the S&P 500, albeit in different weights," said the registration statement. 

The fund-of-funds ETF is expected to come with an annual expense ratio of 0.55%. 

The proposed ETF would compete against equal-weight sector portfolios both  from Rydex and ProShares. But one other, the Rydex S&P Equal Weight (NYSE: RSP), actually does much the same as the new ALPS fund would attempt to accomplish. Namely, it includes all sectors under one umbrella.

But there's a caveat. While RSP equal-weights each of the S&P 500's stocks, the new product is giving the same weights to each sector—on a cap-sized basis. 

That should make the new ETF correlate much closer to the actual S&P 500's performance. Also, RSP rebalances on a quarterly basis. 

"It's not a bad idea—we've been big fans of equal-weighting for years," said Anthony Welch, a portfolio manager at Sarasota Capital Strategies. 

He has been using separate Rydex equal-weight ETFs for each sector to come up with an overall mix to match the S&P 500. 

"We'll have to see what the internal costs are going to be for the new SSgA (State Street Global Advisors) equal-weight ETF and how much it rebalances," said Welch. "But with its closer correlation to the S&P 500, and RSP's greater emphasis on mid-cap stocks, it comes down to what you want to equal-weight.

He added: "It comes down to a choice of weighting your portfolio at the stock level or at the sector level."  

You can read the prospectus for the new ALPS/SSgA fund here.

On Tuesday, the media company filed a lawsuit in the U.S. District Court in Delaware accusing Amazon's electronic reader Kindle of infringing intellectual property rights of a patent it had registered in November 2007.

Amazon introduced the second version of Kindle last month for a retail price of $359, calling it the future of book reading. The first model of the wireless device was released in November 2007.

Discovery sought a "fair compensation" through damages for "any future infringement" of the patent but did not seek an injunction preventing sales of the Kindle.

Mylan Inc. (MYL), Barr Laboratories Inc. and Novartis AG (NVS) unit Sandoz Inc. have submitted abbreviated new drug applications (ANDAs) for Solodyn. Israel-based Teva Pharmaceutical Industries Ltd. (TEVA) has already received a nod from federal health regulators to market its generic version of the oral antibiotic and began shipment of the product.

Medicis filed its petition for a 30-month stay on ANDAs of Solodyn, after suing all the generic makers. Solodyn, which is scheduled to lose patent protection in 2018, contributes nearly 50% of the Scottsdale, Arizona-based company's total revenue.

Shares of the company are down more than 11% today.

Fidelity National Financial Inc (FNF) shares are experiencing unusually high trading volume. The Jacksonville-based company's stock jumped over 6% at noon.