A graph from the May 2008 issue of Harvard Business Review tells a story about the dumbing down of the global economy.

From an article, Rebuilding the R&D Engine in Big Pharma [subscription required] the graph shows the total shareholder returns for various industries in two time periods: from 1985 to 2000 and from 2001 to 2007. Here are three of the leading sectors from 1985 to 2000 (average annual shareholder returns are in parentheses):

• Pharmaceuticals (20.0%)
• Financials (18.8%)
• IT (17.4%)

Between 2001 and 2007, three of the leading sectors were:

• Energy (15.2%)
• Materials (14.3%)
• Financials (7.0%)

Although analysts appear reserved in their sentiment, insiders appear quite positive in regard to the future of ZymoGenetics Inc. (NASDAQ: ZGEN). However, short interest in the company has been increasing and is running at approximately 18% of float. The company is currently engaged in marketing it's protein based treatment for stopping blood loss during surgery. It faces entrenched competition in that field.

I myself would have no desire to short this stock right now, even though its level of return stinks to high heaven. The major impetus behind why I think short sellers are in essence shorting themselves is multifaceted. First, ZymoGenetics reported 2007 increases in sales and gross profits, even as the company made clear that it is years from profitability. Second, as reported by Forbes, New York-based private equity firm, Warburg Pincus has increased its stake in ZymoGenetics and is considering a request for greater presence on the board. Third, and finally, I simply think that ZymoGenetics shares are at their natural bottom. To me, the indications I get from the company's share movements of late have all the earmarks of a classic Wall Street tug of war.

I'd be tempted to jump in on this stock right now myself, but only with long term intent and only with a gambler's share. Press clips give me the impression that the company's team knows what it's doing on the pharmaceutical side. The basic financial numbers, however, indicate to me that the company needs some modest cleaning up in that regard.

ZymoGenetics stock is currently trading within the very bottom of its previous five year range. Analysts are positive but quietly reserved on this stock. Analyst consensus is a firm hold.

Gary Sattler is a freelance blogger with no stock picking credentials. He does not knowingly hold interest in the companies mentioned in this blog post.

Readers of this space know that biotech and pharmaceutical companies are not the preferred investment candidates, but there exceptions to the rule, and Gilead Sciences is one.

Gilead Sciences, Inc. (Nasdaq: GILD) is a biopharmaceutical company that concentrates on the research, development, and marketing of anti-infective medications with a primary focus on treatments for HIV.

In general, analysts see Gilead registering 25-30% revenue growth in FY 2008, following solid, double-digit gains in FY 2007. Further, Gilead should also register market share gains for HIV drugs, offsetting likely royalty revenue declines for Tamiflu, in the immediate years ahead.

MAJOR PAPERS:

• Mining companies BHP Billiton Limited (NYSE: BHP) and Rio Tinto Plc (NYSE: RTP) are not only competing over iron-ore customers, but they are not competing for investors as well, according to the Wall Street Journal's "Heard on the Street." BHP says 60% of their investors also own Rio shares; Rio puts the figure at 50%.
• Prices for the top 50 branded drugs increased an average of 6.73% in 2006 and 7.82% last year at wholesale, according to market research firm Delta Marketing Dynamics. Often targeted by politicians, pharmaceutical companies are undeterred, the Wall Street Journal reported.

WEB SITES:

• According to iSuppli sources, Apple Inc (NASDAQ: AAPL) has cut its 2008 NAND order forecast and informed suppliers that its demand growth will slow in 2008 vs. 2007.
• The Boeing Company (NYSE: BA) is considering suspending work on the short-range version of its 787 jet, the -3 shorthaul, in an attempt to get production of the long-range version, the long-range -8, back on track, Flight Blogger said.

The National Institutes for Health has announced the partial suspension of a diabetes treatment study which was focusing on aggressive measures to reduce blood sugar levels. An article in The Wall Street Journal indicates that the aggressive strategy being used apparently resulted in a small increase in the number of patient deaths as compared to a moderate treatment approach being used on other patients who were involved in the study. The increase was merely three deaths per 1000 patients, yet researchers are unable to correlate the exact reasons for the increase in deaths and therefore the more aggressive portion of the testing has been terminated.

The study did not focus on specific treatments. Rather, researchers were attempting to determine the importance of differing treatment strategies. John Buse, president for medicine and science at the American Diabetes Association stated, "We were basically trying to see if we should have a full-court press on blood sugar or just try to do a reasonable job." The study, which is named Accord, involves providing diabetic patients with various drugs in an effort to reduce blood sugar levels and is also seeking to isolate particularly beneficial bio-markers for monitoring diabetic patient health.

Shares of Swiss pharmaceutical maker Novartis AG (NYSE: NVS) are lower in early morning trading after the company announced its fourth-quarter net profit fell by 45%, hurt by a restructuring charge and higher generic competition.

Novartis said net profit attributable to shareholders slipped to $904 million from $1.65 billion in the fourth quarter. Net profit from continuing operations also plunged 42% to $931 million from $1.6 billion in the same period of last year. The results were below analysts' average estimate of a profit of $1.33 billion. Included in the company's figures was a $444 million charge related to Novartis's cost-savings program pressured earnings.

However, Novartis results weren't really a surprise, as analysts had anticipated the fourth quarter would be weak for the drugmaker after the company announced in December that it would cut 2,500 jobs worldwide. Its decision came on worries over ongoing challenges from generics producers. Novartis declared that the job cuts brought the $444 million fourth-quarter charge, but it expects to save $1.6 billion in costs each year until 2010.

Pfizer (NYSE: PFE) shares are slightly cheaper now than a decade ago, even though the company's per-share profits are more than 70% higher. The stock is unloved for a reason: Pfizer, like many drug makers at the moment, is finding it difficult to develop new medicines.

The company's biggest seller, Lipitor for lowering cholesterol, faces the loss of patent protection in 2011. Two of Pfizer's past hits, Zoloft for depression and Norvasc for high blood pressure, are already losing sales to generic competitors. Last year, a promising inhaled insulin flopped in the marketplace. The year before, a drug that raises levels of so-called good cholesterol proved too risky, and research was halted.

And Pfizer isn't alone. Last year, the Food and Drug Administration approved just 16 first-of-its-kind drugs, a 20-year low.

All that said, I think the stock warrants a purchase at today's price for five reasons.

MAJOR PAPERS:

• The Wall Street Journal's "Heard on the Street" reported that analysts believe investors should take a look at some Indian pharmaceutical stocks, including two of the subcontinent's biggest generics makers, Dr. Reddy's Laboratories Limited (NYSE: RDY) and Cipla Ltd.
• According to the Wall Street Journal's "Heard in Asia," shares of India's three largest tech and outsourcing companies by sales, Infosys Technologies Limited (NASDAQ: INFY), Tata Consultancy Services and Wipro Limited (NYSE: WIT), may be worth a look by investors despite some near-term volatility.

OTHER PAPERS:

• David Letterman is seeking his own deal with the Writers Guild of America which would allow his show to return to air on CBS Corporation's (NYSE: CBS) CBS station in early January even if the strike is continuing, the New York Times reported.
• According to the UK Times, Ford Motor Company (NYSE: F) is expected to name Tata as the preferred bidder for its Jaguar and Land Rover units.

Pfizer (NYSE: PFE) is facing a number of lawsuits that say its painkiller Celebrex can cause heart attacks. Yesterday, a court threw some of those cases out. The Wall Street Journal wrote "U.S. District Judge Charles R. Breyer of San Francisco ruled that plaintiffs in the litigation haven't presented scientifically reliable evidence that Celebrex caused heart attacks or strokes when taken at a daily dosage of 200 milligrams." Pfizer says that the 200 milligram dose is the one most commonly given.

The cases involving Celebrex include over 3,000 plantiffs, and some are suing about effects of the drug at a higher dose, but the ruling is still a considerable relief for the big pharma company.

Like most drug liability cases, this one hinges on whether Pfizer knew that there were risks that the drug could cause significant problems beyond those disclosed on the labels. In that case, the amount of the dose would seem to be academic, especially for anyone who became sick.

But the court may have more wisdom than Wall Street and some plaintiffs will go unrewarded. As the tobacco companies proved two decades ago, suing big business rarely yields much reward.

Douglas A. McIntyre is an editor at 247wallst.com.

MOST NOTEWORTHY: Global pharmaceutical stocks, Rigel Pharmaceuticals and Brightpoint were today's noteworthy initiations:

• Bernstein initiated global pharmaceutical stocks with a Cautious view. The firm initiated Merck & Co Inc (NYSE: MRK), Schering Plough Corporation (NYSE: SGP) and Wyeth (NYSE: WYE) with Outperform ratings, as well as Bristol-Myers Squibb Company (NYSE: BMY) and Eli Lilly & Company (NYSE: LLY) with Market Perform ratings.
  
• CIBC resumed coverage of Rigel Pharmaceuticals Inc (NASDAQ: RIGL) with a Sector Outperformer rating and $16 target. The firm expects near-term upside to be driven by positive phase 2 results of R788 in rheumatoid arthritis, expected in December, and thinks the company's strong scientific platform will support long-term appreciation.
  
• Bear Stearns started Brightpoint Incorporated (NASDAQ: CELL) with an Outperform rating and $20 target, as they are positive on Brightpoint's merger with Dangaard given the significant synergies and diversification it provides.

OTHER INITIATIONS:

• Genitope Corporation (NASDAQ: GTOP) was initiated with a Neutral rating at Merriman.
  
• Grubb & Ellis Company (NYSE: GBE) was reinstated with an Outperform rating at William Blair.
  
• Roth Capital started Emcore Corporation (NASDAQ: EMKR) with a Buy rating and $13.80 target.
  
• Morgan Stanley started ING Groep NV (NYSE: ING) with an Equal Weight rating.

In one of the worst moves by a large pharma company in recent memory, Pfizer Inc. (NYSE: PFE) is tying up with doctor social network Sermo. According to The Wall Street Journal, "Pfizer-affiliated doctors will be able to talk candidly with the site's 31,000 members, potentially giving the company insights into prescribing patterns and a way to show doctors data on its drugs."

The paper points out that there is some risk in the move because the FDA and other federal agencies watch drug company communications with doctors very carefully. But Pfizer has cut its sales force and the internet may be a way for the company to do some not so subtle marketing.

The part of the plan that is really flawed is that Sermo could become a platform for groups of doctors to mount powerful criticisms of Pfizer drugs or offer clinical evidence that pending or current drugs may represent unacceptable risks to patients. In other words, the social network could undo as many sales as it makes for the big drug company.

It is Pandora's Box that Pfizer will wish it has not opened.

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

UST (NYSE: UST) volatility Flat; UST down 6%; Altria Group (NYSE: MO) testing Marlboro Moist Smokeless tobacco. UST, a leading producer and marketer of moist smokeless tobacco products (Skoal, Copenhagen), is recently down $3.06 to $48.91. MO announced the introduction of Marlboro Moist Smokeless tobacco into test market. MO had been frequently mentioned as possibly interested in UST. UST has a market cap of $7.7 billion with quarterly March 2007 total revenue of $447 million. UST September option implied volatility of 26 is near its 26-week average of 23 according to Track Data, suggesting non-directional price risk.

Forest Labs (NYSE: FRX) volatility Elevated on patent challenge Appeal. FRX, a U.S. based pharmaceutical company, is recently down .48 to $37.74. FRX's Lexapro, an antidepressant accounting for 66% of FRX total revenue, is facing a patent challenge appeal.Buckingham Research says "LXP patent challenge appeal which we would expect to be resolved from an appellate decision over the next few months (we expect FRX to prevail in this case)." FRX call option volume of 9,195 contracts compares to put volume of 4,571 contracts. FRX September option implied volatility of 70 is above its 26-week average of 33 according to Track Data, suggesting larger price risks.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

It's a classic tale: A pharmaceutical company looks for the next big drug only to have that drug fail a late-stage trial. Then shares plummet.

That's exactly what happened to specialty pharmaceutical drug company DepoMed Inc (NASDAQ: DEPO). The company announced earlier today that Gabapentin GR, its experimental drug for nerve pain caused by shingles, failed to meet its primary goal of a late-stage trial. The primary endpoint of the Phase 3 trial was to reduce average daily pain scores, which it did, but only during the initial weeks of the treatment. After that, pain scores in patients treated with the drug were "statistically lower" in comparison with a placebo. The company also said pain relief from the medicine over the course of the study was not "statistically significant," but that the medication proved effective in reducing sleep interference.

That's gotta hurt.

Gabapentin, which is an experimental altered form of Pfizer Inc's (NYSE: PFE) Neurontin, was designed to release through gastric retention, where the drug stays in the stomach and is absorbed. Due to positive Phase 2 clinical trial data, DepoMed was counting on the drug to help it compete against Pfizer's Neurontin and its even newer treatment, Lyrica, as well as other generic drug makers who market Neurontin under the chemical name gabapentin.

Don't look for DepoMed to wave the white flag yet -- the company said it didn't expect the disappointing data to interfere with other efforts to develop Gabapentin GR as a treatment for menopausal hot flashes.

On the announcement, DepoMed shares were down a whopping 60%.

MOST NOTEWORTHY: Select pharmaceutical companies, timber companies and Kona Grill Inc (NASDAQ: KONA) and were today's noteworthy initiations:

• Medarex Inc (NASDAQ: MEDX) was initiated with a Positive rating at Susquehanna. The firm said Medarex has multiple drivers include a potential buyout by one of its existing partners, as well as clinical progress and the success of its technology platform in monoclonal antibody therapeutics.
• Susquehanna also initiated shares of Dyax Corporation (NASDAQ: DYAX), Millennium Pharmaceuticals Inc (NASDAQ: MLNM), and Idera Pharmaceuticals Inc (AMEX: IDP) with Neutral ratings and Dynavax Technologies Corporation (NASDAQ: DVAX) and Coley Pharmaceutical Group Inc (NASDAQ: COLY) with Positive ratings.
• Rayonier Inc (NYSE: RYN), Plum Creek Timber Company Inc (NYSE: PCL) and Weyerhaeuser Company (NYSE: WY) were initiated with Buy ratings at Merrill Lynch.
• Kona Grill was initiated with an Outperform rating at Cowen. The firm believes Kona can grow its asset base 10-fold at strong store-level cash-on-cash ROICs.

OTHER INITIATIONS:

• Jefferies initiated shares of Input/Output Inc (NYSE: IO) with a Buy rating and $19 target.
• Goldman Sachs initiated shares of Minerals Technologies Inc (NYSE: MTX) with a Buy rating and $80 target.
• JP Morgan initiated shares of Orexigen Therapeutics Inc (NASDAQ: OREX) with an Overweight rating and is positive on the company's obesity pipeline.

Two down-and-out pharmaceutical stocks deserve some attention, according to Dreman Asset Management's Cliff Hoover, the heir apparent to the firm's founder David Dreman.

In Barron's portfolio manager interview [subscription] this weekend, Hoover mentioned Amgen Inc. (NASDAQ: AMGN) is transforming itself into a Big Pharma company. Amgen should be able to grow 8% to 10% per year and its R&D is double that of other Big Pharma companies. However, the stock has gotten hit due to anticipated slower growth and concerns that its anti-anemia drug reimbursement rates may be somewhat restricted by Medicare. However, the company has five years before biogenerics could come to market and by then the company should be able to bring some quality new products to market with its massive R&D budget.

Hoover also likes Pfizer Inc. (NYSE: PFE) with his argument being not too different than his bullish stance on Amgen -- the company is cheap and should be able to come up with new drugs with its massive R&D budget. However, many of it big blockbuster drugs are just coming off patent.

Hoover has a price target of $34 for Pfizer up from $27 currently, not a bad return. His target on Amgen is $70 versus its $54 trading price. Dreman Asset Management has an excellent track record at picking up big-name companies when their businesses are in dire straits. These two stocks are having a difficult time but could make some good money on a turn around.