"Biotechs are the ultimate recession-proof market segment," says Michael Shulman, who recommends Alkermes (NASDAQ: ALKS).

The editor of The ChangeWave Biotech Investor explains, "As investors flee companies that will be hurt by a credit crunch, money has flowed into many biotechsFears of an economic softening are pushing investors to recession-proof companies that can grow despite the economy."

Further, he contends, many biotech companies are cheap. He says, "They are at technical as well as fundamental bottoms, and sitting on large cash balances."

The bottom line, he notes: "Start considering bottom-fishing, right now. Go with growth, and companies with cash, and a good chart." One stock that he believes is "getting ready for an interesting few months" is Alkermes, the drug-delivery company.

MAJOR PAPERS:

• Barron's Online's (subscription required) "Weekday Trader" suggest investing in several pharmaceutical names during the stock market woes, including Merck & Co Inc (NYSE: MRK), Eli Lilly & Co (NYSE: LLY) and Schering Plough Corporation (NYSE: SGP).
• Speculation intensified that the Federal Reserve is going to cut interest rates shortly, and moreover, some are suggesting that it already has cut them stealthily, reported the Wall Street Journal (subscription required).
• Sprint Nextel Corporation (NYSE: S) will spend $5B on WiMAX through 2010, reported the Wall Street Journal.
• Wal-Mart Stores Inc (NYSE: WMT) is considering smaller, higher-end stores for introduction early next year, reported the Wall Street Journal.

OTHER PAPERS:

• The CEO of Deutsche Telekom (NYSE: DT) , René Obermann, called for the European mobile phone networks to be consolidated, reported the Independent.
• Citigroup Incorporated (NYSE: C) is believed to be negotiating the purchase of a European pension plan worth about GBP200M, reported the U.K. Times.
• U.S. Treasury Secretary Henry Paulson said the economy and markets are "resilient," and can absorb any losses from the recent market instability, and has not raised the possibility of policy changes to deal with the markets' problems, reported the New York Times.

Eli Lilly (NYSE: LLY), a company that makes money by treating depression, raised the spirits of Wall Street today, Eli Lilly exceeded analyst expectations for second quarter earnings and raised its projections for the rest of the year.

After backing out the acquisition cost of Hypnion Inc. and Ivy Animal Health, adjusted earning hit $0.90 per share, compared to expectations in the $0.80-0.82 range. The company also raised its 2007 year-end projection for adjusted earnings to $3.40-3.50, slightly above analyst expectations.

Strong quarterly earnings were attributed in part to the sales of anti-depressant drug Cymbalta, up 67% to over $500 million, Zyprexa, up 9% to $1.2 billion, and Cialis, that is still swelling worldwide. Recently announced results of studies that found little or no relationship between the SSRI class of antidepressants and birth defects have also strengthened the company's outlook.

However, many of the reservations Bloggingstocks' Victoria Erhart expressed a few months ago still remain valid, and the long-term health of the pharmaceutical company may be dependent on restocking a less than burgeoning drug pipeline.

The stock took a jump on news of the earnings report, up over $1, or more than 2%, in midday trading.

A press release [PDF] out this morning confirmed positive Phase III results of Novo Nordisk's (NYSE: NVO) potential blockbuster drug, Liraglutide, which is an analogue of the naturally-occurring hormone GLP-1 in development by Novo for the treatment of type 2 diabetes. The clinical results of the first of five late-stage studies showed that Liraglutide provided significantly better glucose control and led to significantly more weight loss than patients who used Sanofi-Aventis SA's (NYSE: SNY) Lantus.

Novo CEO Lars Rebien Sorensen said the company is looking to apply for regulatory approval of the drug in the U.S. and Europe in the middle of next year, and hopes to receive approval by mid-2009.

This data is excellent news for Novo, who has been trying to gain market share against competitors for some time in the attractive U.S. diabetes market. Unfortunately, the data is also a negative for rivals Amylin Pharmaceuticals Inc (NASDAQ: AMLN), Eli Lilly and Company (NYSE: LLY) and Pfizer Inc (NYSE: PFE), who all have diabetes drugs on the market - Byetta and the inhalable insulin Exubera, respectively.

Shares of Novo were up nearly 4.5% this morning on the Liraglutide data, which some analysts called "a positive surprise."

MOST NOTEWORTHY: Dell Inc (DELL) and United Parcel Service Inc (UPS) were today's notable upgrades:

• Merrill Lynch upgraded Dell Inc (NASDAQ: DELL) to Buy from Neutral as they see Michael Dell's return to CEO signaling a new level of commitment by the Board for a serious change and sentiment is unlikely to get worse. JP Morgan upgraded Dell to Neutral from Underweight as they see limited downside risk with Michael Dell at the helm.

• Merrill Lynch also upgraded United Parcel Service (NASDAQ: UPS) to Neutral from Sell, citing valuation.

OTHER UPGRADES:

• Prudential upgraded Eli Lilly & Co (NYSE: LLY) to Overweight from Neural citing valuation and expectations for 10% earnings growth over the next four years.

• Lehman Brothers upgraded Siemens AG ADS (NYSE: SI) to Overweight from Underweight.

• Old Dominion Freight Line Inc (NASDAQ: ODFL) was upgraded to Overweight from Equal Weight at Stephens. The firm expects earnings momentum to accelerate in the second-half of 2007.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

U.S. stocks were slightly higher on light trading volume. The Dow was up 0.45%, the NASDAQ 100 up 0.35%, the S&P 500 up 0.35%, while 10-year bond rates decreased to 4.6030%. The CBOE VIX was up .02 to 11.38.

• Telik Inc's (NASDAQ: TELK) January option implied volatility collapsed after disappointing data. Telik was recently down $11.47 to $4.79. TELK Phase 3 trails related to its cancer drug Telcyta (treatment for non-small cell lung cancer & ovarian cancer) "did not achieve statistically significant improvement in overall survival." JANY & STFL downgraded Telik to sell. Telik's January option implied volatility was at 85, according to Track Data, below a level of 215 from last week, suggesting decreasing risk.
  

• Eli Lilly's (NYSE: LLY) January 55 calls were active on 6,163 contracts as Lilly rallies. Eli Lilly recently rallied .43 to $51.77, after a Court of Appeals for the Federal Circuit in Washington, D.C. ruled its 2011 Zyprexa patent was valid. Lilly faced pressure last week on documents leaked to the NY Times indicating Zryprexa (schizophrenia treatment) had understated weight gain and diabetes risk. Lilly's Zyprexa accounts for approximately 25% of Lilly's sales & 50% of its EPS. Lilly's January option implied volatility of 19 was near its 26-week average of 19, according to Track Data, suggesting non-directional risks.
  

• U.S. Bancorp's (NYSE: USB) calls active on company going ex-dividend on 12/27/06. USB goes ex-dividend on 12/27/06, paying a dividend of .40 cents. USB total intra-day call option volume was heavy on over 962,946 contracts, according to Track Data. Heavy call volume was attributable to traders hoping to take advantage of option exercises, call pricing discrepancies and low option transaction commission fees.
  

Liquid stocks with option implied volatility above 90, according to Track Data: AtheroGenics (NASDAQ: AGIX), Momenta Pharmaceuticals (NASDAQ: MNTA), Dendreon Corp (NASDAQ: DNDN), Escala Group (NASDAQ: ESCL), and Northfield Laboratories (NASDAQ: NFLD).

Option volume leaders today were Telik Inc, Altria Group (NYSE: MO), Clear Channel Communications (NYSE: CCU), and Apple Computer (NASDAQ: AAPL).

Options analysis provided by Paul Foster, options strategist for Theflyonthewall.com.

MOST NOTEWORTHY: Circuit City (CC), Best Buy (BBY) and Eli Lilly (LLY) top today's list of downgrades.

• Prudential downgraded Circuit City Stores Inc. (NYSE:CC) to Underweight from Neutral, with a $22 target, citing concerns of flat-panel TV price erosion and the high cost structure as compared with Best Buy and other retailers.
• In addition, Best Buy Co., Inc. (NYSE:BBY) was also downgraded by the firm to Neutral from Overweight with a $50 target, citing third-quarter margins that were below expectations.
• Credit Suisse removed Eli Lilly & Co. (NYSE:LLY) from their U.S. Focus List.

OTHER DOWNGRADES:

• Deutsche Bank downgraded L-T-L transporters JB Hunt Transportation Services Inc. (NASDAQ:JBHT) and YRC Worldwide Inc. (NASDAQ:YRCW), citing valuation.
• Sirius Satellite Radio Inc. (NASDAQ:SIRI) was downgraded at Bernstein to Market Perform from Outperform, based on the lower subs forecasts and the fact that Sirius is more reliant in the retail after-market than competitor XM Satellite Radio Holdings Inc. (NASDAQ:XMSR).
• AG Edwards downgraded Micron Technology Inc. (NYSE:MU) to Sell from Hold, citing the DRAM pricing risk; the firm said prices are currently running at more than twice its projected trend and it sees a risk of a correction in the next few months.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

Several big pharmaceutical firms announced excellent results for the third quarter. Pfizer's third quarter profits actually more than doubled to $3.36 billion. Other companies including Wyeth, Novartis, and Eli Lilly also did well.

But, it may not be able to go on forever. One sign -- Pfizer's sales of Zoloft fell 43% as a generic version hit the market in mid-August.

Not only are generic drugs cheaper than the originals, but large companies like Wal-Mart are pushing them at especially low prices to bring in customers. As a matter of fact, the effort by Wal-Mart Stores, Inc. (NYSE:WMT) which is being matched by Target Corporation (NYSE:TGT), may be the biggest thorn in the side of big pharma.

The other pesky problem is patents. A number of key patents on major drugs are expiring, opening the door for generic competition. In an effort to help save money for American citizens, the FDA has even said that it will "fast track" some generics as they come to market.

Companies like Pfizer, Inc. (NYSE:PFE) are going to the court system to try to at least delay the marketing of generic versions of its most profitable drugs including Zoloft.

The legal battle continues to heat up as generics companies like Teva try to push the envelop to get generic versions of patented drugs to market faster to improve their bottom lines.

Teva and its counterparts are not going away. The battles at the FDA and in the courts are still in the early stages. These worries have already affected Big Pharma's valuation in recent years, but will likely bring more pain in the future as well. Even though this quarter's earnings are robust.

Douglas McIntyre is a partner at 24/7 Wall St.