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$TNXP - 4 Reasons Tonix Could Be A Multi-Bagger
http://seekingalpha.com/article/1870881-4-reasons-tonix-could-be-a-multi-bagger
Dec 2 2013, 10:30 | 219 comments | about: TNXP, includes: LLY, MRK
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Disclosure: I am long TNXP. (More...)
Tonix Pharmaceuticals (TNXP) is developing TNX-102 SL for treatment of fibromyalgia and Post Traumatic Stress Disorder. We think that Tonix is one of the most undervalued stocks in the market. The four most important trends and catalysts for Tonix are:
1) Fibromyalgia and PTSD are Very Large Problems
FM is a Debilitating Disease - FM takes over patient's lives
Millions of Americans Have FM - Between 5 and 15 million American adults have FM.
FM is a Rapidly Growing Diagnosis - The FDA only recently approved the first drugs for FM.
FM is Linked to PTSD - PTSD affects about 7.7 million American adults every year
2) Large Unmet Need for Sleep Quality in FM and PTSD
Sleep Problems are Nearly Universal in FM and PTSD - Patients' sleep is not restorative, and there is a vicious cycle of pain and poor sleep making each other worse
Hyper-Vigilance - Cyclical Alternating Patterns in sleep indicate patients are "on alert"
Patients Are Desperate - There are no approved bedtime medicines, and off-label drugs can make matters worse
3) TNX-102 SL Meets the Sleep Quality Need in FM and PTSD
Cyclobenzaprine Promotes Restorative Sleep - Decreases "alert" Cyclical Alternating Patterns A2/A3
TNX-102 SL is a Novel CBP Formulation - Sublingual form has many advantages
TNX-102 SL Should Be Approved - Many factors bode well for approval
4) TNXP is Deeply Undervalued
Strong Intellectual Property - Should protect TNX-102 SL until 2033 and opens the door for use in other indications
Billion Dollar Revenues - TNX-102 SL should surpass $1 billion in annual FM sales
Asymetric Upside - Tonix could be a billion dollar company within a year
Let's look at these trends and catalysts in depth:
1) Fibromyalgia and PTSD are Very Large Problems
A) FM is a Debilitating Disease
Fibromyalgia is a chronic disease characterized by widespread and constant pain, unrefreshing sleep, fatigue, depression, anxiety, and memory problems. FM usually affects women. FM is a disease of the Central Nervous System, and the type of pain FM patients have is central pain - pain coming from an abnormality in the brain rather than pathology in the places experiencing pain. From the Mayo Clinic:
"Fibromyalgia is a disorder characterized by widespread musculoskeletal pain accompanied by fatigue, sleep, memory and mood issues. Researchers believe that fibromyalgia amplifies painful sensations by affecting the way your brain processes pain signals… People with fibromyalgia often awaken tired, even though they report sleeping for long periods of time"
The University of Maryland Medical Center elaborates on the distressing pain and hallmark sleep problems of FM:
"Widespread stiffness, burning, and aching pain. The pain also "radiates," or spreads, to nearby areas. Most patients report feeling some pain all the time, but the intensity of the pain may increase or decrease. Many describe it as "exhausting." The pain can vary with the time of day, changes in the weather, physical activity or inactivity, and stress. The pain is often more intense when sleep is disturbed.
Fatigue and Sleep Disturbances. Fatigue and sleep disturbances are almost universal in patients with fibromyalgia. Restless legs syndrome (RLS) and periodic limb movement disorder (PLMD) are also common. It is not clear whether fibromyalgia leads to poor sleeping patterns or if the sleep disturbances come first.
Many patients complain that they can't get to sleep or stay asleep, and they feel tired when they wake up. Some report that their fatigue is more distressing than their pain, because it interferes with their ability to enjoy life. Some experts believe that if a person does not have sleep problems, the condition may not be fibromyalgia."
Many hormonal, metabolic, and brain chemical abnormalities have been shown in fibromyalgia patients, but the disease is not completely understood.
B) FM is Very Costly
People with FM often have trouble performing work and maintaining employment, as well as trouble with daily life activities and maintaining social relationships. According to the University of Maryland 50 to 70% of fibromyalgia patients have a lifetime history of depression, half have difficulty with routine daily activities, or are unable to perform them, and an estimated 30 - 40% have had to quit work or change jobs.
The National Arthritis Data Workgroup analyzed published studies from national surveys and noted the destructive effects of FM in both work and life, with higher rates of divorce and application for disability benefits.
The pain and poor sleep of FM can result in fatigue, mood, and memory problems sometimes called "fibro fog." This is very problematic for FM patients in the workforce. A 2007 internet survey of 2,596 people with fibromyalgia shows the impact FM has on patients' careers:
"The respondents were nearly equally divided regarding their ability to maintain gainful employment. Those who were still working felt that their symptoms compromised their ability to be productive due to frequent absences and reduced work hours. Approximately 20% of the respondents had filed some form of disability claim and 6% received workman's compensation."
The International Journal of Clinical Practice published a study titled "Characteristics and healthcare costs of patients with fibromyalgia syndrome" and found FM was associated with many costly diseases:
"FMS patients were more likely than those in the comparison group to have various comorbidities, including diseases of the circulatory system [OR (95% CI) = 2.1 (2.0-2.1)], diabetes [1.5 (1.4-1.6)], anxiety [4.3 (3.8-4.7)], depression [4.9 (4.5-5.2)], irritable bowel syndrome [6.2 (4.9-7.9)], gastro-oesophageal reflux disease [3.8 (3.4-4.2)] and sleep disorders [6.1 (5.4-6.9)] (all p < 0.001) (Table 2). They also were more likely to have pain-related comorbidities, including painful neuropathies [10.3 (9.6-11.0)], back pain [14.2 (13.3-15.2)], cervical pain [16.3 (14.9-17.9)], arthritis [6.3 (5.8-6.8)] and migraine headache [6.9 (6.0-8.0)] (all p < 0.001)"
Fibromyalgia is a devastating disease that takes over the lives of its sufferers. FM is also a lifetime condition with no cure that affects millions of Americans.
C) Millions of Americans Have FM
By most estimates 2% to 6% of American adults are living with FM, or 5 to 15 million Americans in 2012. The National Fibromyalgia and Chronic Pain Association estimates 10 million Americans have FM, and the National Institute of Health currently says 5 million.
The NIH number is flawed, though. The data it refers to is from a 2008 study "Estimates of the Prevalence of Arthritis and Other Rheumatic Conditions in the United States Part II." That study itself looked at 2 studies from the 1990s - one from Wichita and one from Ontario. The Wichita study showed 3.4% of adult women with FM and 0.5% of men, the Ontario study showed 4.9% of women and 1.6% of men with FM. The study then only used the (American) Wichita data and used the 2005 census to come up with 5 million American adults, then cited mitigating factors:
"The 1990 ACR criteria for the classification of fibromyalgia require the presence of widespread pain for at least 3 months and pain on palpation in at least 11 of 18 anatomic sites (33). Despite its acceptance, a number of problems occur when the ACR criteria set is used to define fibromyalgia in populations, leading to difficulties in estimating prevalence (34-36). Also, fibromyalgia may be more common among persons with other medical conditions (37), so prevalence estimates of primary fibromyalgia may be lower than estimates that do not differentiate primary fibromyalgia from fibromyalgia secondary to other disorders."
FM is hard to diagnose, and was even harder in the past. The "pain on palpation" is a very subjective test of pressure on points that are painful when squeezed - everyone has pain if squeezed hard enough.
And the other mentioned medical conditions - fibromyalgia is known to be associated with a number of other disorders that might mask its presence. These include Chronic Fatigue Syndrome, Myofascial Pain Syndrome, Major Depression, Chronic Headache, Multiple Chemical Sensitivity, Restless Legs Syndrome, Lyme Disease, drugs and alcohol, Polymyalgia Rheumatica, Disorders Affected by the Sympathetic (also called Autonomic) Nervous System, Irritable Bowel Syndrome, Temporomandibular Joint Disorders, and chemicals and environmental toxins.
These factors, along with the lack of a laboratory test that could confirm fibromyalgia, have led to difficulty in diagnosing patients. Per the University of Southern California it can take 5 years for the average person with the condition to finally get a diagnosis, and as many as three out of every four people with fibromyalgia remain undiagnosed. Most patients in the 2007 internet survey saw at least 3 doctors before diagnosis, and a quarter of patients saw 7 or more doctors before finally being diagnosed:
"Some 46% had consulted between 3 to 6 health care providers before obtaining the diagnosis of FM, while 24.6% had seen >6 health care providers prior to diagnosis."
More recently, in May of 2013 Arthritis Care & Research published a study showing a much higher prevalence of FM, including a large hidden population of undiagnosed men:
"The age- and sex-adjusted prevalence of fibromyalgia in the general population of Olmsted County by this method was estimated at 6.4%.
CONCLUSION:
To the best of our knowledge, this is the first report of the rate at which fibromyalgia is being diagnosed in a community. This is also the first report of prevalence as assessed by the fibromyalgia research survey criteria. Our results suggest that patients, particularly men, who meet the fibromyalgia research survey criteria are unlikely to have been given a diagnosis of fibromyalgia."
Men are documented to be less likely than women to seek help of all kinds. Men can also tend to: be less likely to complain of pain, seek help only when they can no longer stand the pain, generally have a higher pain threshold, and self medicate with things like alcohol. From the American Psychological Association:
"dozens of studies and surveys over the past several decades have shown that men of all ages and ethnicities are less likely than women to seek help for all sorts of problems--including depression, substance abuse and stressful life events--even though they encounter those problems at the same or greater rates as women. In a 1993 study published in Psychotherapy (Vol. 30, No. 4, pages 546-553), for example, psychologist John Vessey, PhD, reviewed several epidemiologic surveys and found that a full two-thirds of mental health outpatient visits were made by women."
Millions of Americans have fibromyalgia, and many people with the disease remain undiagnosed. That is changing, though.
D) FM is a Rapidly Growing Diagnosis
In 2010, consulting firm Frost & Sullivan published a report showing the U.S. fibromyalgia market at $1.2 billion and growing at a compound annual growth rate of 18.4%.
There are several reasons for the growth, including the first FDA approvals, the end of the FM "cold war," and a broader accepted definition for diagnosis.
The FM market should continue to grow as physicians' acceptance and comfort level with diagnosis increases. There is also a diagnostic test for the disease newly available, and the FDA has selected fibromyalgia as one of 20 diseases for special focus over the next 3 years.
FDA Recent Approval/End of Cold War
Fibromyalgia hasn't always been recognized as a specific illness. For years many people were skeptical that fibromyalgia was even a real condition. The Mayo Clinic's Fibromyalgia misconceptions: Interview with a Mayo Clinic expert describes the attitudes toward FM:
"The top misconception is that people think fibromyalgia isn't a real medical problem or that it is "all in your head." It's sometimes thought of as a "garbage-can diagnosis" - if doctors can't find anything else wrong with you, they say you have fibromyalgia. There's a lot that's unknown about fibromyalgia, but researchers have learned more about it in just the past few years…It is a real physiological and neurochemical problem."
With the FDA approval of drugs for fibromyalgia in 2007, 2008, and 2009 more and more doctors are becoming comfortable making the FM diagnosis.
In addition, Canada, Japan, and Israel have also approved drugs for fibromyalgia.
Broader Definition
In medicine fibromyalgia is a disease of pain and attended to by rheumatologists. The American College of Rheumatology released guidelines for FM diagnosis in 1990 that included the aforementioned tender points exam and may have excluded a large number of people that have the disease. In 2010, they released less stringent guidelines for diagnosis that are as inclusive as pain lasting at least three months and no other underlying condition that might be causing the pain.
Set For Growth
As acceptance and awareness of FM amongst doctors and the patients continues to increase the number of diagnoses should continue to increase as well.
One factor that should bolster acceptance and awareness of FM going forward is that in April of this year the FDA named fibromyalgia as one of 20 diseases to focus on for special regulatory treatment. This is part of a provision in the 2012 PDUFA Reauthorization Performance Goals to assess risk-benefit decisions in diseases where treatment options are not optimal, and to facilitate a program that assesses tolerance for risk on a disease-wide level.
The FDA will conduct a public meeting on December 10 on fibromyalgia under that initiative that should also build awareness of the disease.
Additionally, there is a FM diagnostic test that recently became available. The results of a trial were published on BioMedCentral Clinical Pathology and the test seems to work. If the test is adopted as standard of care for diagnosis the number of diagnoses could jump dramatically.
The fibromyalgia market is growing rapidly and should continue to grow for a long time.
E) FM is Linked to PTSD
Fibromyalgia is not completely understood, but it is sometimes brought on by trauma. The 2007 internet survey found that:
"People with FM often associate a specific event to the onset of their symptoms. In response to the question "have any of the following potential triggering events occurred around the same time that your fibromyalgia symptoms first became apparent" Approximately 21% of responders indicated that they could not identify any such association. Over 73% of those who indicated some triggering event made attributions to emotional trauma or chronic stress (Table 5). The next most common attribution was acute illness (26.7%), followed by physical stressors (surgery, motor vehicle collisions, and other injuries). Another 20.6% of the responses acknowledged physical or emotional abuse as a child and 15.1% associated abuse as an adult to the onset of their symptoms. Childhood sexual abuse was cited by 9% of respondents. Approximately 10.1% of the responders related the onset of FM symptoms to the menopause."
(click to enlarge)
Many studies link trauma with FM.
A 2010 study in the Journal of Psychiatry Research showed two traumatic experience types - sexual and physical assault/abuse - were associated with a fibromyalgia diagnosis.
A 2011 study in the journal Arthritis Care and Research found the same:
"OBJECTIVE:
To systematically assess the potential association of fibromyalgia syndrome (FMS) with emotional, physical, and sexual abuse.
…The search identified 18 eligible case-control studies with 13,095 subjects. There were significant associations between FMS and self-reported physical abuse in childhood (OR 2.49 [95% CI 1.81-3.42], I(2) = 0%; 9 studies) and adulthood (OR 3.07 [95% CI 1.01-9.39], I(2) = 79%; 3 studies), and sexual abuse in childhood (OR 1.94 [95% CI 1.36-2.75], I(2) = 20%; 10 studies) and adulthood (OR 2.24 [95% CI 1.07-4.70], I(2) = 64%; 4 studies). "
The Clinical Journal of Pain published a study titled "Sexual and Physical Abuse in Women with Fibromyalgia Syndrome: a Test of the Trauma Hypothesis" that found that women who reported rape were 3.1 times more likely to have FM and also more likely to have PTSD.
A 2010 study in Clinical and Experimental Rheumatology showed Holocaust survivors had more than twice the normal rate of FM and increased rates of PTSD symptoms.
In 2009, Clinical and Experimental Rheumatology published a study titled "A Painful Train of Events: Increased Prevalence of Fibromyalgia in Survivors of a Major Train Crash," the study found:
"Fifteen percent of survivors participating in the study met ACR criteria for the classification of fibromyalgia. Significantly lower rates of physical and emotional functioning were found among survivors with fibromyalgia compared with those not meeting the classification criteria. Survivors with fibromyalgia rated significantly higher on scales of somatisation, obsessive-compulsive ideation, interpersonal sensitivity, depression, anger and hostility, phobic and general anxiety, paranoid ideation and psychoticism. Survivors with fibromyalgia also rated significantly higher on scales of posttraumatic symptoms including intrusion, avoidance and arousal."
PTSD LINK
FM seems to be a hyper-vigilance disorder of the central nervous system. From USC (linked above):
"Some fibromyalgia patients may be oversensitive to external stimulation, and overly anxious about the sensation of pain. This increase in awareness is called generalized hypervigilance. Fibromyalgia patients have been found to have greater awareness of, or less tolerance for, movement problems (such as tremor) that don't match their expected sensory feedback. This mismatch in sensory signals might enhance the perception of pain. Fibromyalgia patients also seem to be more sensitive to sounds."
If hyper-vigilance and over-sensitivity to sensory feedback seems a little like Post Traumatic Stress Disorder, it should.
PTSD is an anxiety disorder that can develop from experiencing or witnessing terrifying events. PTSD was once associated primarily with war veterans, but civilian PTSD is quite common and can be triggered by accidents, violence, assault, abuse, or even sudden and major emotional loss. People with PTSD often manifest a state of hyperarousal, where they can be subconsciously "on alert" and as a result feel anxious, have difficulty sleeping, be irritable, suffer emotional outbursts, or be easily startled.
FM and PTSD are both associated with trauma, and likewise a number of studies associate FM with PTSD and vice versa.
A study titled "Prevalence of Post-Traumatic Stress Disorder in Fibromyalgia Patients: Overlapping Syndromes or Post-Traumatic Fibromyalgia Syndrome?" published in Seminars in Arthritis and Rheumatism found that 57% of FM patients qualified for a PTSD diagnosis:
"In this study, 57% of the FM sample had clinically significant levels of PTSD symptoms. The FM patients with PTSDreported significantly greater levels of avoidance, hyperarousal, reexperiencing, anxiety, and depression than did the patients without clinically significant levels of PTSD symptoms. The prevalence of PTSD among the FM patients in this study was significantly higher than in the general population. Women with FM and PTSD reported a greater number of past traumatic events than did their male counterparts.
CONCLUSIONS:
The results represent the first comprehensive study applying structured clinical assessment of trauma exposure and PTSD to a group of FM patients. This study shows a significant overlap between FM and PTSD, according to the currently accepted diagnostic criteria for each"
This significant overlap may have gone unnoticed because FM is considered a pain disorder of rheumatology, while PTSD is considered a psychiatric condition.
PTSD is a Big Problem
PTSD is a very common disease. The NIH says about 3.5% of adults have PTSD in a given year - about 8.4 million American adults in 2012.
According to the US Department of Veterans Affairs:
about 7-8% of the population will have PTSD at some point in their lives.
Women are more likely than men to develop PTSD. About 10% of women develop PTSD sometime in their lives compared with 5% of men
PTSD occurs in about 11-20% of Veterans of the Iraq and Afghanistan wars, and in about 30% of Vietnam Veterans
FM and PTSD are very large problems.
2) Large Unmet Need for Sleep Quality in FM and PTSD
A) Sleep Problems are Nearly Universal in FM and PTSD
Almost all FM patients suffer from poor sleep quality. A study published by Therapeutic Advances in Musculoskeletal Disease showed more than 90% of fibromyalgia patients with disturbed sleep.
In the 2007 internet survey of 2,596 FM patients, problems with sleep were listed as the first, second, and third most intense symptoms of FM (listed with average severity score on a scale of 0 to 10):
(click to enlarge)
FM patients are not getting quality sleep. And not only are they not getting quality sleep, they can actually feel worse after sleep - to the point where sleep has lost its restorative power. From a Journal of Rheumatology titled "Sleep as a Window into the World of Fibromyalgia Syndrome":
"One of the most clinically problematic challenges in the management of fibromyalgia syndrome (FMS) is the unrefreshing nature of sleep. The problem goes beyond misperceiving the duration or quality of sleep, to a point where patients may feel worse after sleep - a complete loss of the restorative power of sleep."
The poor sleep of FM contributes to the fibro fog phenomena of forgetfulness and decreased alertness. Restorative sleep can improve these symptoms in FM patients. A 2008 study published in Patient Education and Counseling called Patient Perspectives on the Impact of Fibromyalgia notes:
"Participants greatly desired an improvement in their ability to sleep, and many reported that pain interfered with sleep. Most participants indicated that both fatigue and pain were directly related to the quality of their sleep ('If I can get sleep, I can fix all the rest.'). Many participants experienced a great deal of difficulty in rising and beginning preparations for the day; this difficulty was often attributed to pain upon awakening.
Mornings were particularly difficult for participants because they had difficulty sleeping at night and woke up in pain."
It's not just FM, sleep problems are nearly universal in PTSD as well. We saw that FM and PTSD appear to be a problem of "hyper-vigilance," and that hyper-vigilance creates big sleep problems for PTSD patients. From the Department of Veterans Affairs:
"Why do people with PTSD have sleep problems?
They may be "on alert." Many people with PTSD may feel they need to be on guard or "on the lookout," to protect himself or herself from danger. It is difficult to have restful sleep when you feel the need to be always alert. You might have trouble falling asleep, or you might wake up easily in the night if you hear any noise.
They may worry or have negative thoughts. Your thoughts can make it difficult to fall asleep. People with PTSD often worry about general problems or worry that they are in danger. If you often have trouble getting to sleep, you may start to worry that you won't be able to fall asleep. These thoughts can keep you awake."
If poor sleep is part of the problem of PTSD then quality sleep may aid healing, and earlier this year the American Journal of Psychiatry published a study suggesting sleep treatments could accelerate PTSD recovery:
"chronic sleep disruption associated with nightmares may affect the efficacy of first-line PTSD treatments, but targeted sleep treatments may accelerate recovery from PTSD. The field is ripe for prospective and longitudinal studies in high-risk groups to clarify how changes in sleep physiology and neurobiology contribute to increased risk of poor psychiatric outcomes."
Sleep problems are central to FM and PTSD.
Vicious Cycle
Sleep is an active process, people need deep sleep for emotional and psychological health. Restorative sleep also refreshes the body's system for perceiving and processing pain.
Non-restorative sleep can exacerbate the pain of FM and PTSD, which in turn can make restorative sleep even more difficult.
Many studies have linked sleep problems with widespread body pain and lower pain tolerance. A 2008 study published in the journal Joint Bone Spine links sleep/wake disruptions with the exact kinds of symptoms seen in FM and PTSD:
"Experimental evidence from humans and animal studies indicate that there is an inter-relationship of disturbances in the physiology of the sleeping-waking brain with the widespread musculoskeletal pain, chronic fatigue, and psychological distress"
The Therapeutic Advances in Musculoskeletal Disease linked above shows sleep loss equates to a loss of pain tolerance.
A study published in the Journal of Neuroscience links sleep disruption with anxiety:
"Together, these data support a neuropathological model in which sleep disruption may contribute to the maintenance and/or exacerbation of anxiety through its impact on anticipatory brain function. They further raise the therapeutic possibility that targeted sleep restoration in anxiety may ameliorate excessive anticipatory responding and associated clinical symptomatology"
This vicious cycle is seen in PTSD. From a study published last year in the European Journal of Psychotraumatology:
"Sleep facilitates the consolidation of fear extinction memory. Nightmares and insomnia are hallmark symptoms of posttraumatic stress disorder (PTSD), possibly interfering with fear extinction and compromising recovery. A perpetual circle may develop when sleep disturbances increase the risk for PTSD and vice versa. To date, therapeutic options for alleviating sleep disturbances in PTSD are limited…This suggests that disturbed sleep is a precipitating and perpetuating factor in PTSD symptomatology, creating a perpetual circle."
B) CAP A2/A3
Slow wave sleep in particular seems to be key to restorative sleep. A 1999 study published in the Journal of Rheumatology shows disrupting SWS can bring on the symptoms of FM:
"Disrupting SWS, without reducing total sleep or sleep efficiency, for several consecutive nights is associated with decreased pain threshold, increased discomfort, fatigue, and the inflammatory flare response in skin. These results suggest that disrupted sleep is probably an important factor in the pathophysiology of symptoms in fibromyalgia"
In addition a landmark study by the Clarke Institute of Psychiatry used sound to disrupt slow wave sleep in healthy patients. Individuals then reported their sleep was unrefreshing, and they developed body aches, fatigue, and increased tender points in many of the same areas seen in FM patients.
Slow wave sleep seems to be key to restorative sleep. Some types of non-REM brain wave patterns called cyclic alternative patterns (CAP) can be especially disruptive of slow wave sleep in people with FM and PTSD.
Two types of these cyclical alternating patterns in particular that are problematic are Alpha-2 and Alpha-3 (A2/A3). These patterns may be a periodic alarm signal during sleep, and occur in healthy people's sleep. The patterns may be there from earlier times for safety purposes to keep from being too vulnerable. But in people with FM the CAP A2/A3 patterns are too active, and don't allow for restorative sleep. From the "Sleep as a Window" study:
"a complete loss of the restorative power of sleep. This clinical feature has been associated with changes in sleep that are not readily determined by conventional sleep stages and scoring, but may be identified by a number of complementary analyses. In essence, they all capture in some form the dominance of low amplitude fluctuations in physiological signals during sleep1?,2… In the electroencephalographic (EEG) domain, the low frequency oscillations are detected by scoring the cyclic alternating pattern, or CAP4. These periods are dominated by phasic EEG complexes. A1 CAP is made up of slower wave forms, A3 fast/arousing waveforms, and A2admixtures. An increase in A2/A3 CAP is seen in a range of sleep-fragmenting conditions, including FM, sleep apnea, epilepsy, and auditory stimulation4?."
A different Journal of Rheumatology study titled "Cyclic Alternating Pattern: a New Marker of Sleep Alteration in Patients with Fibromyalgia?" showed the severity of symptoms in FM were correlated with the rate of CAP A2/A3 during sleep.
Drug therapies like sodium oxybate and cyclobenzaprine that decrease A2/A3 as a percent of total CAP are also shown to improve FM symptoms. But none of the FM approved drugs or insomnia approved sleep drugs are shown to decrease A2/A3.
C) Patients Are Desperate
Making Matters Worse
While there are drugs for insomnia that increase sleep quantity, there are no approved drugs that increase sleep quality. We saw from the Mayo Clinic that patients often wake up un-refreshed from a full night's sleep. FM and PTSD patients frequently use prescription sleep drugs, but these drugs are not approved for FM or PTSD, are not shown to improve symptoms, and may actually make problems worse.
The common sleep drugs like Ambien and Lunesta are derivatives or improvements of benzodiazepines and affect the GABA chloride conductance channel. These drugs are commonly used in FM and PTSD because of the high incidence of sleep problems, but these drugs may actually exacerbate the traumatic experiences that often underlie FM and PTSD.
The Center for Military Health Policy Research published a lengthy review of PTSD in recent wars called Invisible Wounds of War that investigates why recent wars have had such astronomically high numbers of PTSD sufferers. One of their conclusions was that the benzodiazapines do not offer any special benefit, and the widespread increased use of these drugs and opiates may be an underlying cause of the widespread increase in PTSD.
Bolstering this claim is a study published in the MIT Press Journals last month called "Pharmacologically Increasing Sleep Spindles Enhances Recognition for Negative and High-arousal Memories."
This study compared three arms: placebo, sodium oxybate, and zolpidem tartrate (Ambien). The study showed that Ambien seems to make negative memories worse by enhancing memory of them. This is consistent with PTSD sometimes being referred to as an "improvement" in emotional memory. The brain processes that account for this negative improvement are called sleep spindles. The study implicates the drugs in the problems seen in military PTSD:
"We show that memory can be experimentally biased toward negative and highly arousing stimuli after a sleep period with pharmacologically elevated sleep spindles. Specifically, compared with PBO, naps with ZOL were associated with enhanced memory performance for both negative and high-arousal stimuli. By contrast, SO (a comparison hypnotic) did not affect memory for different classes of emotional stimuli…These results suggest that sleep spindles may be critical for the consolidation of negative and high-arousal memories…Finally, we note that there may be broader implications of our finding that emotional memory for high-arousal and negative stimuli was enhanced after ZOL-rich sleep. These two characteristics, negativity and high arousal, predominate in anxiety disorders with a sleep-disruption component, such as posttraumatic stress disorder (PTSD; Germain, Buysse, & Nofzinger, 2008; Cukrowicz et al., 2006; Gillin, 1998; Ross, Ball, Sullivan, & Caroff, 1989). There is a high prevalence of insomnia in patients with PTSD (Wallace et al., 2011), which often leads to prescriptions for sleeping medication. Despite Veterans Affairs and Department of Defense clinical guidelines recommending against the routine use of benzodiazepines for PTSD, the adjusted prevalence of long-term use of benzodiazepines increased among men and women with PTSD between 2003 and 2010 (Hawkins, Malte, Imel, Saxon, & Kivlahan, 2012). In addition, the U.S. Air Force uses ZOL as one of the prescribed "no-go pills." Because hypnotics and benzodiazepines produce similar effects on sleep (Mariotti & Ongini, 1983), our findings are relevant to these clinical practices. In light of the present results, it would be worthwhile to investigate whether the administration of benzodiazapine-like drugs may be increasing the retention of highly arousing and negative memories, which would have a countertherapeutic effect. Indeed, a week course of temazepam soon after trauma was not effective in preventing PTSD symptoms, even producing numerically worse outcomes (Mellman, Bustamante, David, & Fins, 2002)."
We saw the common link FM has with trauma, these results would seem to indicate the same making-the-matter worse problem could be happening amongst FM patients as well as PTSD patients.
Approved Options are Lacking
There are 3 FDA approved drugs for FM and 2 for PTSD. None is for bedtime use.
In FM all three drugs are shown to modestly reduce pain. Pfizer's Lyrica is a membrane stabilizer that is used primarily for pain, and is a round-the-clock medicine.
Eli Lilly's (LLY) Cymbalta and Forest's Savella are antidepressants that are very similar to each other. They are both SNRIs (Serotonin-norepinephrine reuptake inhibitors) that are taken in the morning and early afternoon so as to not interfere with sleep.
These 3 drugs are helpful for some but are hardly a panacea. Cymbalta outsells Lyrica and a study published earlier this year by the Cochrane Library found that Cymbalta and Savella were just as likely to harm patients as help:
"The authors reviewed 10 high-quality studies comprising more than 6,000 adults who received either duloxetine, milnacipran, or a placebo for up to six months…Among fibromyalgia patients taking either of two commonly prescribed drugs to reduce pain, 22 percent report substantial improvement while 21 percent had to quit the regimen due to unpleasant side effects, according to a new review in The Cochrane Library."
PTSD treatments are hardly better. Even with the recent surge of PTSD there has not been a drug approved for the condition in more than a decade. In PTSD the 2 approved drugs, Zoloft and Paxil, have significant side effects including some that are like the symptoms of PTSD - sleeplessness, agitation, and headache to go along with sexual problems and nausea.
If that were not enough, both drugs carry the black box warning - the most serious type of warning on prescription drug labeling:
"Possible side effects to look for are worsening depression, suicidal thinking or behavior, or any unusual changes in behavior such as sleeplessness, agitation, or withdrawal from normal social situations"
The only approved drugs for PTSD risk side effects that are a lot like PTSD.
Options are severely lacking for FM and PTSD, especially for restorative sleep, and patients are desperate.
Off-Label Opiates and Sedatives
A study published last year in Pain Medicine noted widespread "polypharmacy" amongst FM patients - in desperation for relief patients are taking an average of 2.6 drugs per day. The 2007 internet study we saw shows the wide range of drugs patients are trying:
(click to enlarge)
Note the very high off-label use of controlled substances like opiates and sedatives. These drugs are not shown to have any lasting benefit, and have a recognized potential for addiction. We saw that things like benzodiazepines work for sleep quantity but not quality. None of these sedatives are shown to reduce CAP A2/A3. Opiates are very useful pain killers for damage done to peripheral tissue like a toothache, but do nothing for central pain.
So why are these drugs reported with such high satisfaction rates? In the case of the sleep aids they may in fact work to put patients to sleep, but the sleep is not restorative and the patients may not make the connection.
Another reason the sedatives and opiates may be reported to work is that they can be lifestyle drugs, or "euphorics." Patients may like the way the drugs make them feel irrespective of changes to their original symptoms, similar to self medicating with recreational drugs and alcohol. This seems to be the case in PTSD, from the Invisible Wounds of War study:
"Alcohol and drug use disorders are highly prevalent among individuals with PTSD, MDD, and TBI. For PTSD, a study of Vietnam combat veterans showed that up to 75 percent of veterans with a history of PTSD in their lifetime met criteria for substance abuse or dependence…According to Bremner and colleagues (1996), Vietnam combat veterans reported that alcohol, heroin, benzodiazepines, and marijuana "helped" their PTSD symptoms"
There is no cure for FM or PTSD. There are precious few treatments that provide relief, especially for restorative sleep, and patients are desperate.
3) TNX-102 SL Meets the Sleep Quality Need in FM and PTSD
There is an unmet need for a safe, non-addictive drug treatment for improving sleep quality in fibromyalgia. TONIX Pharmaceuticals is developing a reformulated version of cyclobenzaprine that focuses on improving sleep quality. Cyclobenzaprine has been shown to decrease CAP A2/A3 in sleep and improve the symptoms of FM.
A) Cyclobenzaprine Promotes Restorative Sleep
Opportunities in Repurposed Drugs
It is hard to find new drugs for the Central Nervous System. When the human genome was sequenced humans were shown to be about five times as complex as bacteria, encoding around 30,000 proteins. That made for a far lower number of druggable targets than scientists were expecting.
In addition, each protein performs diverse functions in different cells at different times so many potential drugs have to be excluded for their off-target effects.
Molecular target based drug design remains the standard for targeting infectious agents like HIV, but for diseases of the CNS and others too often target based drugs have collateral damage.
This is one of the reasons for the FDA 505(b)(2) provision. This allows drugs to be repurposed for new conditions and brought to market faster. Filing a New Drug Application under the 505(b)(2) provision allows a company to partly rely on earlier findings of safety from a drug's previous approval, making for a faster and less costly process. Examples of popular repurposed drugs include Celgene's (CELG) Revlimid, Valeant's Medicis, and Jazz's (JAZZ) Xyrem.
Cyclobenzaprine
Merck (MRK) originally got the muscle relaxant cyclobenzaprine approved for back spasms in 1977. This approval included a lot of work on the safety of CBP, and Tonix is able to use this data without charge in its own approval process.
Tonix is developing CBP for bedtime use in FM and PTSD to decrease the A2/A3 alarm signal and treat symptoms with restorative sleep.
In 2010, Tonix ran a double-blind, placebo-controlled, multi-site Phase 2a trial of FM patients taking very low dose cyclobenzaprine at bedtime. This study was conducted with renowned sleep scientist Dr. Harvey Moldofsky as the lead researcher, and published in the December 2011 issue of the Journal of Rheumatology.
The study was very exciting for FM patients and doctors, it showed:
a statistically significant improvement in pain, tenderness, and depression in the CBP group versus placebo
a statistically significant improvement in restorative sleep in the CBP group versus placebo, as measured by CAP A2/A3
that the increased nights of restorative sleep correlate with improvements in symptoms
This was a Phase 2a study, these studies are generally designed for "proof of concept" and not necessarily powered with enough of a sample size to show statistical significance. It is noteworthy that this study showed statistical significance with a total sample size of only 36 patients.
In addition, there were no serious adverse events, and no discontinuations due to adverse events in the treatment arm. This is not surprising. This is a very low dose of CBP, 2.8 mg, and CBP has been on the market for years at doses up to 30 mg.
Notably, for approval the FDA will only require statistical significance versus placebo in pain. In this study that was achieved with a 26% reduction in pain in the CBP group vs. 0% with placebo.
Robert Thomas from the Harvard Medical Center Division of Sleep Medicine published a public comment on the study in the same journal noting that:
"A case can be made that any treatment that does not reduce CAP A2/A3 may not improve symptoms of FM, regardless of where the site action is."
It is no surprise that CBP fared so well, CBP was chosen to be studied for good reason. It is already widely prescribed off label - note on the 2007 internet survey that CBP was the fourth most tried drug, with more than half of the FM patients having already tried it, and most finding it helpful. In fact, it scored the highest of all the drugs listed not including the (euphorics) opiates and sedatives.
Sodium Oxybate
CBP is the only drug besides Sodium Oxybate shown to increase restorative sleep in FM patients:
"SXB has been shown to decrease sleep onset latency, increase slow wave sleep, increase growth hormone secretion, consolidate sleep by increasing sleep efficiency and promote a normal sequence of non-REM and REM sleep"
SXB went through three placebo-controlled trials for FM branded as Rekinla, but the program was ended because sodium oxybate has addictive potential, is a controlled substance, and is the same drug as the very problematic date rape drug GHB.
CBP, on the other hand, is not a controlled substance and has no recognized addictive potential. Whereas SXB induces a state of sleep that is basically a stupor, CBP just makes patients a little sleepy, and patients don't get amnesia like with SXB.
When SXB was being developed FM patients campaigned for its approval passionately - SXB provides the restorative sleep that patients are desperate for. CBP can provide that same benefit without the serious problems of SXB.
SNARI - Serotonin and Adrenalin
CBP is a member of a class of compounds called Serotonin and Norepinephrine Receptor Antagonist and Reuptake Inhibitor (SNARI), it targets one serotonin neuron receptor (5HT2A) and one norepinephrine neuron receptor (the alpha-1 adrenergic receptor).
These targets help explain why CBP works. Adrenergic means having to do with adrenalin, and CBP helps block the effect of adrenalin. Serotonin is thought to play a major role in sleep and the central inhibition of pain, and CBP inhibits serotonin receptors and serotonin reuptake.
Trazadone and Prazosin
Besides CBP, two drugs in particular are used off-label for FM and PTSD. Trazadone is used for sleep in FM and PTSD, and interacts with the serotonin type 2a receptor in the same way that CBP does, inhibiting serotonin receptors and serotonin reuptake.
Prazosin blocks the alpha-1 adrenergic receptor the same way that CBP does, and is used to prevent nightmares in PTSD patients, reducing adrenalin to reduce the sleep disturbance of nightmares:
"Prazosin is an alpha-adrenergic blocker designed to treat high blood pressure and anxiety. It makes users less sensitive to the effects of adrenaline - something that can be produced in excess in PTSD patients.
Murray Raskind, MD, a psychiatrist, and his colleagues with the VA Puget Sound Health Care System have been prescribing prazosin to Vietnam-era PTSD sufferers for years, having found that the drug significantly reduced the intense nightmares associated with the disorder."
CBP combines the effects of both of these drugs in one. CBP can fill a huge unmet need for restorative sleep in FM and PTSD.
B) TNX-102 SL is a Novel CBP Formulation
Tonix has begun enrollment for its pivotal Phase 2b trial called Bedtime Sublingual TNX-102 SL as Fibromyalgia Intervention Therapy (BESTFIT). This trial is very similar to the 2a study, but will treat FM patients with TNX-102 SL, Tonix's proprietary sublingual (under the tongue) formulation of very low dose cyclobenzaprine.
Tonix has conducted 2 preclinical and 2 clinical pharmacokinetic and bioeguivalence studies on their sublingual CBP. The results of the latest study are discussed in Tonix's most recent Annual Report:
"Our second clinical study of sublingual CBP evaluated TNX-102 SL, the sublingual tablet formulation we expect to advance into further development. This study was conducted :in Canada. This study enrolled 24 healthy volunteers and evaluated a single dose of one 2.4 mg tablet or two tablets (4.8 mg) of TNX-102 SL or the currently-marketed 5 mg CBP tablet. In comparison to oral administration of the 5 mg CBP tablet, both sublingual doses of TNX-102 SL demonstrated faster systemic absorption. After administration of TNX-102 SL, blood levels of CBP were significantly higher at 20, 30, 45 and 60 minutes relative to administration of the 5 mg CBP tablet. In the study, TNX-102 SL was generally well tolerated. There were no unexpected adverse events, with the exception of a mild, temporary numbness at the tongue experienced by less than one-third of the subjects that received TNX -102 SL tablets"
TNX-102 SL is a proprietary formulation of CBP and a eutectic agent (to give it a lower melting point), so these sublingual advantages cannot be replicated by crushing up tablets and placing them under the tongue.
TNX-102 SL offers many advantages over oral CBP: metabolism, tolerability/safety, efficacy, bedtime therapy, compliance, and chronic use. Let's look at them.
Metabolism
Taking CBP orally can create several potential problems. The drug takes a long time to reach the liver and then is only slowly released to the blood (because of enzymes), gets partly re-taken up by the liver (so that it will be active later), and is also partly converted into a similar-acting and long-lasting metabolite call norcyclobenzaprine.
By contrast, taking CBP sublingually delivers the drug directly into the bloodstream where it can travel to the brain and largely bypass the digestive system. One of the effects of this is that TNX-102 SL reduces production of norcyclobenzaprine vs. oral administration.
Tolerability/Safety
Taking CBP orally takes several hours to start working, and also spreads the effect out over a longer period of time versus sublingual administration. This means that more of the drug is needed to achieve the same blood levels vs. sublingual.
Taking CBP sublingually also reduces potential for next-day grogginess. The sublingual form acts faster and leaves the blood faster than the oral form. Fatigue is already a problem for FM patients, so this is important. They can get the beneficial effects and still have the drug largely cleared by the next morning.
Efficacy
CBP can help patients stay asleep by reducing CAP A2/A3, but the effect of CBP can also makes patients feel a little sleepy prior to bed. A faster-acting, shorter-lived version can help patients fall asleep in addition to helping them stay asleep vs. the same dosing delivered orally.
In addition, the accumulation and presence of the long lasting metabolite norcyclobenzaprine can blunt the effect of administering more CBP. So by reducing the production of norcyclobenzaprine in the past, the sublingual version works better in the present.
Bedtime Therapy
TNX-102 SL takes about 30 minutes to work, so it is perfect for taking at bedtime. Oral CBP takes about 2 hours to start working.
Compliance
Patients are more likely to take a bedtime medicine if it can be taken at bedtime. Having to commit to a bedtime 2 hours in advance would lead to a loss of compliance for some patients.
Chronic Use
We saw that many sufferers of FM and PTSD are desperate enough to try things like opiates, and addiction is a real concern. Tonix's Phase 2a trial showed CBP can successfully target pain indirectly with restorative sleep, and do so at a very low dose.
So CBP is a good candidate for chronic use in the first place. On top of that the sublingual version has an advantage over oral administration for chronic use because the norcyclobenzaprine metabolite has more potential for long-term accumulation with the oral version.
TNX-102 SL offers many advantages over oral CBP
C) TNX-102 SL Should Be Approved
In September, Tonix announced that it had begun enrolling the Phase 2b BESTFIT trial, the first of two essentially identical pivotal studies needed for FDA approval in FM.
BESTFIT is a multi-site, placebo-controlled, double-blind trial comparing 60 FM patients on TNX-102 SL with 60 FM patients on placebo over a 12-week period. The drug needs to show a statistically significant improvement in pain versus placebo for approval. Tonix expects to announce the results of the study in October.
TNX-102 SL should fare very well in the BESTFIT trial because of its safety, its sublingual formulation, the longer duration of the trial compared to the successful 2a trial, the larger sample size compared to the 2a trial, and the FDA selection of FM for special regulatory treatment.
Safety
Safety is a major concern for any drug coming up for approval, but CBP has been approved for decades at doses more than 10 times TNX-102 SL. Add to that the fact that the Phase 2a study had no serious adverse events in the CBP group, and safety is almost a non-issue for TNX-102 SL.
Sublingual Administration
TNX-102 SL is faster, more convenient, more effective, has less side effect and compliance risk, and is more suitable for chronic use than oral CBP.
12 weeks
TNX-102 SL is well suited for chronic use and the BESTFIT trial is 50% longer than the Phase 2a trial that showed statistical significance in pain versus placebo. An extra month of restful sleep could very well improve symptoms even more.
Larger sample
The 2a trial only had 18 patients in each arm, yet was still able to show statistically significant results. With a sample size of more than 3 times the 2a trial, the BESTFIT trial is powered to show statistically significant results even if the results are a little weaker than in the 2a trial. And as we've seen, there are reasons to believe the results will be better than the 2a trial.
FM selected for special regulatory treatment
We saw that FM was selected as one of 20 diseases for the FDA to focus on for special regulatory treatment. This is part of the Section X provision in the 2012 PDUFA Reauthorization Performance Goals: Enhancing Benefit-Risk Assessment in Regulatory Decision-Making.
This provision is designed to assess risk-benefit decisions in diseases where treatment options are not optimal, and to facilitate a program that assesses tolerance for risk on a disease-wide level.
By naming fibromyalgia a disease to focus on for this program the FDA has acknowledged that FM treatments are lacking and that risk-benefit analysis should play a special role in the review process for FM drugs.
This bodes very well for TNX-102's approval chances in FM.
TNX-102 SL meets the sleep quality need in FM and PTSD.
4) Tonix is Deeply Undervalued
A) RISKS
We think Tonix is destined for success and a much higher share price, but there are risks.
Trial Risk
We saw the reasons that Tonix may do well in their BESTFIT trials, but clinical trials always come with risk, and there are no guarantees that TNX-102 SL will make it through its trials successfully.
Patent Risk
We will see that Tonix's intellectual property looks very strong, but the legal system can be like the FDA - unpredictable. There are no guarantees that TNX-102 SL's patents will hold up against generics in court, and this is a risk.
Competition Risk
While the FM and PTSD markets are currently clamoring for restorative sleep treatments, new products could come along that are better than TNX-102 SL, and this is a risk.
Market Risk
Even if TNX-102 SL makes it to the market without a problem, there are no guarantees that the product will sell successfully, and this is a risk.
B) Tonix Has Valuable Intellectual Property
PK Patent
While Tonix has a method of use patent for TNX-102 SL, it also has an active patenting strategy, and has filed a number of patents to extend TNX-102 SL exclusivity and expand its reach.
By far the most important of these patents is the pharmacokinetics (PK) patent filed in June of 2012 that should guarantee market exclusivity for TNX-102 SL through 2032.
A PK patent refers to the curve that shows how much drug is in the blood at certain times after administration
PK patents are sometimes called "Oxycontin patents" because Purdue Pharmaceuticals got strong patent protection using Oxycontin's PK profile. Oxycontin survived every court challenge by generics, even though it was a reformulation of 95-year-old Oxycodone, and those patents beat every challenge and expired naturally.
The company that filed and defended Purdue's patents was Ropes & Gray, and that is who Tonix hired to file and defend its patents.
These types of PK patents have proven very difficult to circumvent in court. Tonix's intellectual property around TNX-102 SL should guarantee market exclusivity until at least 2032.
TNX-102 SL for More than FM and PTSD
Tonix has an active patenting strategy, and one of the patents they've filed (Methods and Compositions for Treating Depression using Cyclobenzaprine) gives a clue to their ambitions with TNX-102 SL:
"Therefore, we believe that a low dose cyclobenzaprine will be effective for treating depression, including major depressive disorder."
That is a huge market, 24 million depressed American adults, to go along with FM and PTSD. And Tonix's management has good reason to believe that CBP can treat depression - it showed a statistically significant improvement versus placebo in the 2a trial. And you can add to that the fact that people with insomnia are ten times more likely to suffer from depression.
Is that all? No, that same patent application shows where else TNX-102 SL could be useful:
"Furthermore, the utility of a very low dose cyclobenzaprine as an agent for improving the quality of sleep, as a sleep deepener, or for treating sleep disturbances has been investigated. The very low dosage regimen was viewed as particularly useful in treating sleep disturbances caused by, exacerbated by or associated with fibromyalgia syndrome, prolonged fatigue, chronic fatigue, chronic fatigue syndrome, a sleep disorder, a psychogenic pain disorder, chronic pain syndrome (type II), the administration of a drug, autoimmune disease, stress or anxiety or for treating an illness caused by or exacerbated by sleep disturbances, and symptoms of such illness and generalized anxiety disorder. See US Patent Nos. 6,395,788 and 6,358,944"
TNX-102 SL should have market exclusivity for almost 2 decades, and there are some very large markets that it may enter.
201/301
Tonix also has a TNX-201 program for headaches and a TNX-301 program for alcoholism. Both of these are reformulations of already approved drugs to be brought along the 505(b)(2) program.
There are no immediate plans for TNX-301, but Tonix will have a pre-Investigational New Drug meeting with the FDA in the first quarter of 2014 for TNX-102 (reformulated isometheptene mucate).
100% Ownership
All of Tonix's intellectual property is fully owned with no royalties or obligations owed to anyone. This is relatively uncommon for new biotech companies.
Krele
When the day finally comes that TNX-102 SL goes generic, Tonix will be prepared with Krele:
"In August 2010, we formed Krele to commercialize products that are generic versions of predicate NDA products. We anticipate that when our branded products lose patent protection, Krele may market authorized generic versions of them. Krele also may develop or acquire generic products approved under ANDAs and we may market branded versions (branded generics) of such products."
Tonix's intellectual property is very valuable and should serve the company well for a long time.
C) Billion Dollar Revenues
TNX-102 SL Should Be Covered By Third Party Payers
FM is a very costly disease for patients and payers, in terms of both lost productivity and healthcare costs. For example:
Working adults with FM miss about 3 times as many work days as working adults without FM
Between 10% and 30% of all doctor's office visits are due to symptoms that resemble those of fibromyalgia, including fatigue, malaise, and widespread muscle pain (per the University of Maryland)
Mean total healthcare costs were three times higher among FMS patients, median costs were fivefold higher (from "Characteristics and healthcare costs" in part 1)
Most money is not being spent on drugs that might provide cost saving benefits, but on more expensive things. Per the CDC office and emergency room visits, procedures and tests, and hospitalizations are the largest components of direct medical costs among patients with fibromyalgia.
The Springer Science and Business Media's Fibromyalgia Definition and Epidemiology Guide provides some bleak details on the lost productivity costs of FM:
"Employment may also be negatively affected by fibromyalgia. One study compared work status in 136 fibromyalgia patients and age- and sex-matched controls who were being treating for non-rheumatologic conditions [18]. Work at the time of medical diagnosis was compared with current work situation at the time of study evaluation. Patients with fibromyalgia were significantly less likely to still be employed in the same job that they had at the time of their disease diag- nosis compared with those without fibromyalgia (19% vs. 58%, P<0.0001). Job was lost due to the medical condition for 47% with fibromyalgia and 14% with other conditions. Furthermore, 7% of fibromyalgia and 5% of non-fibromyalgia patients additionally switched jobs due to their medical condition. In another study, employees with fibromyalgia (N=8,513) lost more work days annu- ally compared with either employees with osteoarthritis (N = 8,418) or controls (N = 7,260) [19]. Both patient groups were actively involved with medical treat- ment for their respective conditions. Total days lost in 1 year were 30 days for employees with fibromyalgia vs. 26 for arthritis vs. 10 for controls (dif- ference vs. fibromyalgia patients was significant for both arthritis and controls, P<0.0001). Consequently, fibromyalgia patients were absent from work on 15% of all possible work days over 1 year, about three times the loss seen with controls."
In addition to all these costs of lost work, FM patients are high pharmacological treatment seekers. In desperation they try different treatments, even risky ones that may have their own costs like opiates or currently available prescription sleep aids.
Third party payers have a lot of incentive to reimburse a new medical treatment that can get patients back to work and out of the hospital and therapist's office.
All of the drugs approved for FM and PTSD are reimbursed by insurers at Tier 2 (preferred brand drug).
TNX-102 was specifically designed for the treatment of FM. It is different from and not competitive with the other approved therapies. It focuses on a key symptom with a unique formulation.
With the problem of restorative sleep being so central to FM, it is hard to imagine the FDA approving TNX-102 SL (meaning it showed statistical significance in pain) and then insurers not covering the cost.
That is what Tonix's management believes. CEO Seth Lederman at the Warsaw conference in September:
"We spent a lot of time and effort to reach out to payers, describe the nature of our product and the kind of benefit it might give patients and we've had a very positive response from them. Because, it turns out, that the insurance companies are well aware that fibromyalgia is a very expensive problem as it is today, and that by reimbursing even a premium prescription product, they could save money in other areas."
FM Projections
The first drug for fibromyalgia was only approved six years ago. The approved drugs have shown the way forward for gaining approval for FM, but they have not solved the sleep quality problem. This creates a very dynamic marketplace and an excellent entry point for a company with a differentiated product that can make a significant difference in patients' lives.
TNX-102 SL is a bedtime medicine that is unlikely to meaningfully compete with the other available drugs. With almost all FM patients needing higher quality sleep, and no viable competitor, TNX-102 SL could treat a lot of patients.
According to a report by Decision Resources there were 3.7 million diagnosed, drug-treated FM patients in 2011 in the United States, France, Germany, Italy, Spain, the United Kingdom and Japan, with the US accounting for 80% of sales, or $1.44 billion. If we take 80% of 3.7 million patients we have 3 million diagnosed, drug-treated American patients with FM.
In the 2010 Frost & Sullivan Assessment of the U.S. Fibromyalgia Market the total value of the market for fibromyalgia drugs was $1.2 billion, growing at a compound annual growth rate (CAGR) of 18.4% per year from 2007 to 2010. That growth rate agrees with Decision's $1.44 billion 2011 sales number.
We saw the reasons that the FM market should continue to grow rapidly: relatively recent first FDA approvals in FM are helping to end the cold war against FM diagnosis, a broader definition for diagnosis recently recommended by the American College of Rheumatology, the FDA's recent selection of FM for special consideration, and a possible diagnostic test newly available.
There are two other factors that should continue to bolster growth in the FM market. One is that the Affordable Care Act going into effect will provide insurance for tens of millions of previously uninsured Americans.
The other is the graying of America. The incidence of FM rises with age - to more than 7% amongst seniors - and America is growing older.
TNX-102 SL should go to market in 2017. What kind of sales could it do after a few years?
We saw the US FM market was $1.44B in 2011, and growing at 18.4% annually. If that rate of growth keeps up then the US FM market will be $6.6B in 2020.
For a more conservative projection, let's say the market grows at just 8%. In this case the US FM market will be $2.88B in 2020, exactly double what it was in 2011.
$2.88B looks conservative - at 18.4% that number would be reached by 2015.
(It is important to note that most projections of the FM market show a drop-off coming. This has nothing to do with the growth of the FM diagnosis, but rather the fact that all 3 approved FM drugs are coming off patent. For our purposes of calculating a non-competing FM product's market potential, this does not matter.)
Per Decision Resources, 2011 sales in FM for Cymbalta, Lyrica, and Savella were $560M, $450M, and $137M respectively.
TNX-102 SL could be a game changer in FM, it has the potential to fill a major need for desperate patients. None of the currently approved drugs is a game changer. Yet, even in our conservative market projection Cymbalta and Lyrica are each on pace to sell about $1B by 2020 just with market growth. A bedtime medicine for restorative sleep could certainly match that, and possibly far surpass it.
Let's analyze it a different way and look at retail pricing of FM drugs and sleep aids:
Savella: $6.30 a day
Cymbalta: $8.00 day
Lyrica: $10 day
Ambien (Brand): $9.43 day
Silenor: Approx. $7 day
Lunesta: $10 day
Both FM drugs and sleep aids average a little over $8 per day. Frost & Sullivan projected TNX-102 SL at $8.14 per day by taking the average of Lyrica and Cymbalta, and that looks fair. They then applied a 72.9% discount factor (that number taken from Wolters Kluwer) to come up with a manufacturer's price of $5.93 per day.
TNX-102 SL is a novel formulation with a special design that is crucial to the way it works, and it could very well be priced at a premium to the market. But we will go with $5.93.
$5.93 per day X 365 = $2,164 year
We saw the reasons that FM is a rapidly growing diagnosis, and we saw there were about 3 million diagnosed, drug-treated FM patients in the US in 2011. If we calculate 6% growth of this population (less than a third of the 18.4% market rate) this would be 5 million in 2020.
This is a population of high treatment seekers that are desperate for a bedtime medicine for quality sleep. If half of the diagnosed patients opt for TNX-102 then:
2.5 million X $2,164 per year = $5.41 billion
What if TNX-102 only gets 1 million patients (one third of the current market)?
1 million X $2,164 per year = $2.16 billion
TNX-102 SL could easily do $1 billion in revenue annually in FM alone.
Tonix's future cash flows look hefty, and there's also the fact that TNX-102 SL is for chronic use - to be used as long as patients tolerate. Along with being very low dose, its sublingual metabolism should make TNX-102 SL tolerable in perpetuity. Add in patent protection and those cash flows look robust.
There is also the international market for FM to consider, the PTSD market, the depression market, and the other indications that Tonix is pursuing.
So what is Tonix worth?
E) Tonix Should Get a Valuable Partner
Major pharmaceutical companies are going through a "patent cliff" period where a lot of major drugs are coming off patent, and companies are scrambling to try and replace those revenues.
The stock market currently values pharmaceutical revenues at more than three times their annual rate. Let's look at a market cap vs. annual revenue comparison of 8 companies that relate to Tonix (all numbers from Yahoo):
Market Cap / Annual Revenue:
Lilly : $55B/23 = 2.4
Pfizer (PFE): 208/56 = 3.7
Allergan (AGN): 29/6 = 4.8
Merck: 143/44 = 3.3
Celgene: 67/6 = 11.2
GlaxoSmithKline (GSK): 129/42 = 3.1
Jazz 6.5/.8 = 8.1
J&J (JNJ): 269/71 = 3.8
Only Lilly has a multiple under 3, and the mean is 3.7. So generally speaking, $1 billion in annual pharmaceutical revenue is valued at about $3.7 billion by the market.
This has been the case for the buyouts of companies with reformulated drugs for the Central Nervous System.
In 2001, Johnson and Johnson bought Alza for $11 billion. Alza had a reformulation of Ritalin called Concerta. Concerta was doing about $200 million of annual sales at the time.
In 2007, Shire bought out New River Pharmaceuticals for $2.6 billion. Their drug Vyvanse was a reformulation of Dexedrine. In 2012, Vyvanse did $1 billion in sales.
Then there is MAP Pharmaceuticals.
MAP Pharmaceuticals
The most likely path forward, as Tonix CEO Seth Lederman sees it, is that Tonix will take on a partner after the current Phase 2b trial, run the final trial with funds from the partner, and then after the final trial a partner might want to do a complete buyout.
In January 2013, Allergan bought out MAP Pharmaceuticals. MAP had reformulated Migranal into Levadex under the 505(b)(2) program for migraine headaches. MAP is an interesting comparison to Tonix for a number of reasons:
The buyout was less than a year ago
The partnership was struck before the final trial was run
505(b)(2) reformulated drug
Central Nervous System drug
Pain drug
Women's health product (migraines)
MAP had no other viable candidates besides Levadex. Levadex was projected by Allergan's CEO to peak at $500 million in annual sales, and a Wells Fargo analyst projected $250 - $500 million peak sales.
After MAP ran its second to last pivotal trial (equivalent to Tonix's BESTFIT 2b trial running now) they agreed to a development and licensing deal with Allergan that included a $60 million upfront payment and $97 million in milestones. MAP's stock surged to a $500 million on the news.
After the final trial was run, and months before the FDA ruled on Levadex, Allergan bought out MAP completely, for $958 million.
TNX-102 SL for FM could represent MAP Pharmaceuticals times two based on projected revenues, and the drug has a lot of value outside of FM. It does not seem a stretch to say that Tonix could get a deal structured like MAP's deal, and at twice the value.
Who are the potential partners?
A lot of companies would benefit from marketing TNX-102 SL, but Pfizer, Lilly, and Allergan stand out.
Pfizer and Lilly are already in the FM game, and have huge sales forces to reach primary care physicians. As TNX-102 SL would be an add-on product and not a direct competitor to Lyrica or Cymbalta, these two companies make a lot of sense.
Allergan seems to make sense, too. Allergan is building out a women's health franchise and FM is most certainly a women's health concern.
Tonix could be like MAP times two, and that would make them a $1 billion company within a year.
Share Price
Fully diluted with options and warrants Tonix has less than 10 million total shares. If management gets their preference they will get a fair partner deal after the current trial, and have no need to raise funds. At $1 billion in market cap Tonix would be $100 per share.
F) The Celgene Contingency
Tonix could be a $1 billion /$100 per share company within a year, but that might be a shame for shareholders. Tonix has exciting possibilities that could make its value much higher than $1 billion if it stays independent. This is reminiscent of Celgene.
Celgene was repeatedly low-balled by potential partners in 2000, and instead of accepting an unfair offer, Celgene raised money themselves by issuing shares. A little more than a decade later and Celgene is now a $60 billion company - larger than many of the companies that would not pay up when Celgene needed a partner.
Tonix management has repeatedly said they will not accept an unfair offer, and they call this "the Celgene Contingency." Their preference is to partner after the current trial, but if they cannot get a fair deal they will stay independent and develop their products in house like Celgene.
Tonix has enough money to fund its operations until the current BESTFIT trial is over, and said as much in their third quarter 10-Q filed several weeks ago
(bold is my emphasis):
"The Company's primary efforts are devoted to conducting research and development for the treatment of CNS diseases. The Company has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future. The Company does not have any commercial products available for sale and there is no assurance that if approval of its products is received that the Company will be able to generate cash flow to fund operations. In addition, there can be no assurance that the Company's research and development will be successfully completed or that any product will be approved or commercially viable. Management believes that the Company has sufficient funds to meet its research and development and other funding requirements through at least September 30, 2014...Our future capital requirements will depend on a number of factors, including the progress of our research and development of product candidates, the timing and outcome of regulatory approvals, the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims and other intellectual property rights, the status of competitive products, the availability of financing and our success in developing markets for our product candidates. We believe our existing cash is sufficient to fund our operating expenses and capital equipment requirements for at least the next 12 months. "
This in spite of the fact that Tonix announced in that same filing that it expects to begin a Phase 2 trial of TNX-102 SL in subjects with military-related PTSD in the second quarter of 2014.
CEO Seth Lederman explains this at the Rodman & Renshaw Annual Global Investment Conference:
"We're working with thought leaders from major academic institutions and there's so much interest in this area that the major academic institutions, we believe, are going to basically go at risk on this hoping that they can then get grants in the future because it is such an enormous problem."
Dr. Lederman may have a good understanding of academic institutions' inclinations - he was a tenured professor at Columbia University and founded Tonix with Donald Landry, chairman of the department of medicine at Columbia University.
The large amount of academic interest in PTSD is largely in response to a Presidential order for the establishment of two joint research consortia. These consortia are to research the diagnosis and treatment of post-traumatic stress disorder and mild traumatic brain injury over a five-year period, and are already funded with $107 million.
Tonix met with the FDA in October 2012 to discuss what they need to do to get approval for TNX-102 SL in PTSD.
This market is about the same size as FM, and there is a lot of urgency on the part of the US military for solutions. One stark fact of recent wars is that there are now more suicides than war deaths.
The military knows it has a big problem. Tonix has had talks with the U.S. Department of Defense, and while they have no official deal, the DOD is aware of TNX-102 SL. In the future the department could fund further development or be a very large customer of a shovel ready project, tested specifically in military PTSD.
CEO Seth Lederman sums up the prospects for TNX-102 SL:
"If TNX-102 SL can be shown to alleviate the symptoms of FM or PTSD more effectively than the currently accepted first line of treatments, it could become the new first line of treatment."
If Tonix stays independent to market these treatments, it could be the size of Celgene in about a decade.
G) The Best People
Tom Reddington was instrumental in helping Celgene raise funds when they needed to, and he has an impeccable record of helping quality biotech stocks with investor relations. He is now doing Tonix's investor relations, and his endorsement is noteworthy.
Also noteworthy are the rest of the people involved with Tonix. The board and management may be the most exciting thing of all for this very exciting company.
The first thing to note is that the board and management are all significant investors in Tonix. This data is from before the most recent financing, but it shows management's level of personal commitment:
(click to enlarge)
And there have been no insider sales.
Tonix's team is distinguished by success in exactly the areas in which Tonix is working - Fibromyalgia, 505(b)(2) drug development, and making differentiated treatments for the central nervous system from repurposed drugs.
In addition to a long list of business achievements, CEO and cofounder Seth Lederman was a professor of medicine and of rheumatology, having direct experience treating fibromyalgia patients.
CFO Leland Gershell helped Dr. Lederman found two companies, Bella and Targent. Even though he is a qualified CFO he is also an MD/PhD from Columbia.
Donald Landry is a cofounder of the company and the chairman of the department of medicine at Columbia University.
Dr. Samuel Saks cofounded and was CEO of $6 billion biotech firm Jazz Pharmaceuticals.
And Doctor Ernest Mario may be the most impressive of all. He's the former CEO of Glaxo, the global pharmaceutical company. But he is also the former CEO of Alza, and he sold that company to Johnson & Johnson for $11 billion.
Tonix is run and owned by very successful people that have direct experience in the most important areas of its business. Whether Tonix gets bought out or stays independent its future looks very bright.
Tonix looks like one of the most undervalued stocks in the market, and should be a multi-bagger.
$DNGDF - Dynacor: My Top Overall Stock Pick For 2014
http://seekingalpha.com/article/1859931-dynacor-my-top-overall-stock-pick-for-2014?source=email_sto_edi_pic_4_4&ifp=0
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTC:DNGDF over the next 72 hours. (More...)
Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.
Dynacor Gold (OTC:DNGDF) remains one of the most undervalued, unknown companies in the gold sector, but I think investors are slowly starting to catch on to the story.
I first wrote about Dynacor in an article on Sept. 5 when the shares traded at $1.42. Since then, Dynacor reported outstanding Q4 earnings results and the shares have rocketed higher to $1.68 a share, outperforming nearly every other gold stock on the market.
Still, Dynacor remains an incredible value and several key catalysts await which could send shares even higher. Dynacor is my top pick among the gold sector in 2014 and I will try to convince investors below.
Company Information
Dynacor has 36,316,111 shares outstanding. With a current share price of $1.62, the company has a market cap of $58.69 million. The company had cash on hand of $10.3 million at the end of the quarter and virtually no debt, so Dynacor has a current enterprise value of about $48 million.
The 52-week range for the share price is $.82-$1.67. Average trading volume on the OTC markets is 8,575, which means the stock is very thinly traded. On the TSX, the stock trades under DNG.TO, and volume is higher at 42,650.
Dynacor is Outperforming the Market; Technicals Remain Bullish
You will see in this chart below that shares of Dynacor are up 30 percent on the year. Meanwhile the (GDX) Gold Miners Index is down 50 percent and the (GLDX) Gold Explorers Index is down around 70 percent.
(click to enlarge)Credit: Yahoo! Finance
However, I expect even greater things in 2014.
Dynacor: Why Is It Outperforming?
It is difficult to call Dynacor a gold stock because the company isn't a miner or pure explorer - one part of their business is exploring for gold, while the core of the business is ore processing.
Dynacor owns and operates a successful gold ore processing plant in Peru. The company receives ore from local miners and gets to choose which ore to process, allowing the company to pick the highest grade ore they can find.
Higher gold prices generally lead to higher margins in the ore processing business for Dynacor. However, while lower gold prices means lower margins, the company remains profitable, even at $1,250 gold as we saw in the most recent quarter.
Here are a few reasons why Dynacor is outperforming the market:
#1 Positive Quarterly Results, But Bigger Things to Come
Dynacor reported some pretty impressive results for the last quarter:
- The company announced operating income of $4.6 million and net income of $3.0 million ($.08 a share) for the quarter.
- The company recorded record quarterly gold sales of 20,598 ounces.
- Cash gross operating margin per ounce of gold sold was $285 ($1,320 per ounce selling price), which proves that the business model works in any gold environment. The margin sold in Q3 2012 was $331 per ounce, as higher gold prices lead to a higher margin.
- Cash on hand of $10.3 million at quarter end compared to $3.3 million at December 31, 2012.
(click to enlarge)Credit: Dynacor Gold Corporate Presentation
Update on New Mill
The company is currently producing around 20,000 of gold per quarter at its ore processing division in Huanca. However, the company is currently constructing a new mill at Chala, Peru, which will have an initial capacity of 300 tpd and be readily expandable to 600 tpd.
The new mill will cost approximately $10 million to construct and it is very likely that the company will fund the remaining construction of the new mill with cash on hand.
This new mill should allow the company to process 25,000 ounces per quarter; with an expansion to 600 tpd, they could be producing as much as 32,500 ounces per quarter. However, the company should also be producing the gold at lower costs due to brand new equipment and a decrease in electricity costs as the company will be connected to the power grid in Chala.
Construction is underway and the only permit that the company still needs is a permit for the actual mill itself. However, the company expects to receive this permit sometime in the next few months, and since they have received permits for construction, the building of the new plant is already well underway. The company is still aiming to test the new plant in Q2 2014, with the new plant commissioned and in operation by mid-2014.
An upgrade to 450 TPD will take place shortly after. At 450 TPD, the company expects to produce 25,000 ounces of gold per quarter. With a gross margin of $300 per ounce, which should be attainable even at current gold prices, the company would record cash flow of $5-7 million per quarter; with a plant upgrade to 600 TPD, the profits could be even greater.
Of course, if the price of gold were to go higher, margins would also increase. In 2012, full year margins were $317 an ounce, up from this previous quarter's $280 an ounce. With the new mill's efficiency, margins should be even greater. If Dynacor were to record a gross margin of $350 an ounce and produce more than 100,000 ounces of gold from Chala, the results could be phenomenal.
#2 Non-Dilutive Company
Dynacor prides itself on being a non-dilutive gold company. The company has only 36 million shares outstanding and this share count has remained steady over the years.
Dilution has been a huge problem for many junior gold mining companies in this market. Many junior gold miners developing a project or trying to get into production have had to deal with cost overruns and other issues, with many having to take on debt or issue millions of shares at depressed share prices.
Next, many exploration companies simply have to issue equity to continue exploration. This is simply the nature of their business model.
However, Dynacor does not have this problem as they are self-financed with their profitable ore-processing business. This is a huge plus for shareholders, especially since the company will most likely not have to take on debt or issue equity to finish construction at the new mill.
#3 Big Upside Remains at Tumipampa With Drill Results Coming
Dynacor has a $2.8 million drilling and exploration program underway on its flagship copper and gold exploration property, Tumipampa, located on the Andahualas-Yauri Belt in Peru. This gold belt hosts a number of gold-silver-copper skarn deposits such as Las Bambas, Los Chancas, Constancia, etc.
Tumipampa is surrounded by 6 senior mining companies who have invested over $8 billion in mine development in this region as you'll see below.
(click to enlarge)Credit: Dynacor Gold Corporate Presentation
Again, this exploration drilling is auto-financed through the company's ore processing division. It is a huge plus that Dynacor does not have to go to the market to issue shares to explore the property.
Some investors might argue that Dynacor should focus solely on their ore processing business. After all, exploration does cost money.
However, the Tumipampa property has the type of home-run potential that can't be ignored by investors and I believe the company is making the right choice by actively exploring the property.
The company reported positive drill results in a Sept. 27 news release:
"During the months of July and August, six (6) holes were drilled HDD7- HDD12. Drill hole HDD8 intercepted the Avelia Ines vein and returned 4.767 g/t Au and 0.2% Cu over 1.1m and drill holes HDD9 and HDD10 revealed close to the surface disseminated gold mineralization with 0.457 g/t Au over 12.4 m and 0.151 g/t Au over 12.2 m."
"This new discovery demonstrates that gold mineralization is very widespread on the Tumipampa property and can be found: (A) associated to polymetallic ores in the skarn, (B) in high grade gold vein structures such as the Manto Dorado, and (C) as low grade disseminated gold in pyritic ore associated to brecciated quartz. As shown by drill holes HDD9 and HDD10 disseminated gold ore is found very close to the surface from depths of 20.0 and 14.8m, respectively."
Meanwhile, underground drilling from within the cross-cut began in August and drill results should be coming in soon. An initial resource estimate is to be expected early 2014. I think that the most likely long-term outcome for Tumipampa is Dynacor finding a partner for the property to get it through to production.
The company could also sell the property completely or try to get it into production itself, and perhaps use its own mill to process the gold.
Dividend Discussion is on the Table
I recently brought up the idea of a dividend to Dale Nejmeldeen, Investor Relations at Dynacor. I argued that this could be a great way to get the shares trading somewhere near a reasonable price. He replied shortly after and said that a dividend will definitely be on the table.
If you do the math, it would not take much money for Dynacor to pay a very decent sized dividend, since the company only has 36 million shares outstanding and is producing robust amounts of cash flow.
For example, in the most recent quarter, Dynacor reported cash flow from operating activities before change in working capital items of $3.5 million, or $14 million on an annual basis. If the company can increase this to $5 million a quarter, which I feel is attainable with the new mill, we are looking at $20 million cash flow annually.
If the company paid out just 30 percent of its cash flow in dividends, it would amount to $6 million in dividends paid for the year. This would amount to dividends paid per share of $.166.
At the current share price of $1.68, this would amount to a dividend yield of 9.9 percent.
Even if the company decided to pay just $2 million per year in dividends or .055 per share, this would still result in a dividend yield of 3.3 percent! At the same time, I believe the company would still have enough money to explore its property at Tumipampa, even under both scenarios.
This is one huge benefit to investing in a non-dilutive, profitable company like Dynacor. I would not be shocked to see Dynacor start paying a small dividend in late 2014 or early 2015 as the company expands its new mill to 600 TPD and actively explores its Tumipampa property.
Bottom Line? My Top Overall Stock Pick for 2014
Dynacor is not only my top gold stock for 2014, but it's my top overall pick. To summarize:
VALUE: Dynacor has a current enterprise value of $48.39 million; meanwhile, the company is generating positive cash flow of $3 million per quarter at their current operations, or $12 million annually. This gives the company an EV/cash flow ratio of just 4.1.
The company also boasts a return on equity of 49 percent, among the highest in the industry. With the new plant online in 2014, profits should only increase. Even if the new plant were to somehow not work out, the company is still running a very profitable operation at Huanca.
LOWER-RISK: Dynacor is one of the lowest-risk microcap stocks I've ever seen. The company has made a name for itself as an honest and reliable business partner in Peru. The company has a very solid balance sheet with very little debt and $10 million in cash, with working capital of $14 million.
KEY CATALYSTS IN 2014: The company has begun construction at its new mill at Chala, which will start at 300 TPD but upgrade to 600 TPD with lower operating costs. Construction is ongoing and the only permit that remains outstanding is the permit for the actual mill. The company says the permit should be coming in very shortly and there is no reason for the delay; the fact that they have begun construction without this final permit tells me that they believe they will receive it without any problem.
Meanwhile, the company's exploration property has a ton of upside potential and can be seen as a "bonus" for investors. I want to emphasis again that the Tumipampa project is surrounded by 6 senior mining companies who have invested over $8 billion in mine development in this region. It should be very interesting to see the upcoming drill results.
However, even without this exploration property which holds big upside in my view, and even without the new mill at Chala, Dynacor is still a solid buy.
The exploration property holds a tremendous amount of upside potential and the company has several options for the property going forward. The company will continue to drill and come out with the first resource estimate; several drill results are pending and should be released to the market shortly.
Dynacor has risen more than 20 percent since my first article but still remains very undervalued. The company has a number of key catalysts coming, which is why I've ranked the stock my top overall pick for 2014.
$ICAD - Multi-Bagger Potential As iCAD Nears A Pivotal Inflection Point
http://seekingalpha.com/article/1753292-multi-bagger-potential-as-icad-nears-a-pivotal-inflection-point?source=email_stocks_and_sectors&ifp=0
Editor's notes: iCAD has several sources of new revenue growth that haven't been factored into the stock. As it hits profitability and gains leverage, the company's shares could have big upside.
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Disclosure: I am long ICAD. (More...)
We believe iCAD, Inc. (ICAD), a provider of innovative cancer detection and targeted therapy solutions, has the potential to double over the next twelve months and triple by the end of 2015. Multiple near-term catalysts will accelerate iCAD's top-line growth and position the company to return to GAAP profitability in the next 2-3 quarters, potentially as early as Q4. Given that iCAD's stock is cheap by various valuation metrics, undiscovered, and under-owned, we feel strongly that shares have minimal downside and substantial upside into both year-end and also throughout both 2014 and 2015.
iCAD is reminiscent of CalAmp (CAMP) circa 2012. We alluded to this in our first article on iCAD earlier this year when the stock was trading in the mid-$4s.
In particular, iCAD shares many of the same attributes that provided the foundation for CalAmp's turnaround over two years ago:
- A legacy business poised to turn up after years of declining.
- New product initiatives that will accelerate top-line growth and expand its TAM.
- Inherent leverage in its model not yet appreciated by the Street.
- An enterprise value of under $100 million.
- A stock 50% below 5-year highs and 65% below 10-year highs.
To wit, iCAD has five product initiatives poised to kick into high gear over the next three quarters. The market is not yet aware of these multiple growth drivers, including a high-margin recurring revenue line that is already growing sequentially. As evidence mounts that growth has begun to accelerate, we expect iCAD's shares to significantly outperform the market over the next two years.
With a tight share structure (only 10.85 million shares outstanding), the potential for 74% gross margins and 15% operating margins by 2015, and a significant multi-year J-curve in both revenues and earnings on the horizon, iCAD is one of our highest conviction names heading into 2014.
3 important drivers will spur growth in iCAD's legacy CAD business
During the past five years, iCAD's legacy cancer detection CAD business has declined significantly:
iCAD's 5-Year Financial Overview
(click to enlarge)
Source: iCAD
While a 58% decline in revenues is considerable, we believe there is hope for the CAD line. After delving deeper into the iCAD story, we now see three important product initiatives that should initially stem the decline in CAD revenues and eventually turn them much higher. These initiatives, which have escaped the attention of most investors, will build over the next 1-3 quarters.
Taken together, we believe iCAD can come close to doubling its CAD revenues over the next two years from a $17-$18M run-rate in 2013 to $32-$34 million in revenues for 2015.
Let's delve into each of these product initiatives now.
1. Tomosynthesis' multi-year inflection point ramps in 2014.
Over the next four years, there will be an aggressive upgrade cycle in mammography from 2D to tomosynthesis. A technology proven to be superior to 2D mammography, tomosynthesis improves diagnostic accuracy by 7%, while simultaneously lowering recall rates.
By 2018, 75% of the 10,000 digital systems are expected to have been upgraded to tomo.
Take a look at an industry ready to inflect:
Source: iCAD
Late this year we expect GE to gain approval for its tomosynthesis product line, SenoClaire. Once approved, we expect GE to be very aggressive in securing tomo market share. The conversion to tomosynthesis will be seamless due to its large installed base and because its Senographe Essential and Senographe Care digital mammography platforms are both easily upgradeable to SenoClaire.
Because CAD is a necessary workflow tool for tomosynthesis, due to the large volume of data produced for each patient, this upgrade cycle will be a big accelerator for iCAD's CAD revenue.
While difficult to model out precisely at this juncture, it seems reasonable to expect iCAD to see $3-$4 million in tomo revenues next year and $6-8 million in 2015.
We do not believe forward estimates contain much, if any, revenues from tomo.
2. MRI partnership with Invivo - iCAD is the "Intel Inside" Invivo's MRI offerings.
Although not a household name, Invivo is a powerhouse within the MRI field. iCAD forged a partnership with Invivo earlier this year that will start to ramp in Q3. iCAD's CAD software has essentially become the "Intel Inside" Invivo's MRI offerings.
With an installed base 8X larger than iCAD's MRI base of customers, this partnership is key as it will not only allow iCAD greater reach, it will also reduce iCAD's expenses.
Note the bullish language regarding Invivo three quarters ago in a conference call with investors:
Bill Bonello - Craig-Hallum
Can you maybe size the MRI CAD opportunity with your strategic partner?
Ken Ferry - President, Chief Executive Officer
Well it's a pretty significant opportunity. This company is a leader in software as well as a number of other products and accessories within the MRI segment and basically their installed base is well over 1,000 systems and they are the market leader.
So it's a pretty considerable installed base. The opportunity for us is a combination of new customers and upgrades to the installed base. The systems that we will provide them are substantially different next-generation thin client platforms.
Secondly it gives us an opportunity to sell a nice technology and refresh upgrades. It's a considerable opportunity over time. We are excited about it.
We believe the Invivo partnership can produce $1.5 million in revenues in 2014 and $2.5-$3 million in 2015. These estimates may ultimately prove conservative. We hope to gain more color on this partnership's potential on the next conference call.
3. Services recurring revenue model about to turn up.
iCAD currently garners $8 million in recurring CAD services revenue each year. On its most recent conference call, management was very explicit in telling investors that this revenue line was poised to turn up.
As multi-year contracts with its installed customer base come up for renewal over the next three years, iCAD will benefit from new recurring revenue service contracts. We therefore believe that this revenue line could rise 30% for each of the next three years.
This would imply an additional $2.4 million in revenues in 2014 and $5.5-$6 million in add-on revenues in 2015.
Summary of growth drivers for iCAD's CAD legacy products
Over the next three quarters, we believe the CAD revenue line will turn higher due to the three aforementioned catalysts. We feel confident in the following add-on revenues to the CAD line for both 2014 and 2015:
Add-On Revenues
2014
2015
Tomosynthesis
$3-4
$6-8
Invivo
$1.5
$2.5-3
Services
$2.4
$5.5-6
TOTAL
$7.4 million
$15.5 million
We believe most of these add-on revenue have yet to be built into forward estimates.
To be safe, let's assume a third of these revenues have already have been built into forward numbers. This still results in 80%+ gross margin revenues of $5.2 million in 2014 and $10.85 million in 2015 not currently in analyst models for those years.
We will detail later why these add-on revenue are so important for iCAD.
Xoft Axxent eBX system poised to meaningfully accelerate
Faced with a meaningful decline in its CAD software business, in 2010, iCAD's management team made a game-changing decision when they purchased Xoft, a cancer technology platform company with $119 million of R&D invested in it, for $13 million.
This was a risky move at the time. iCAD was losing money in 2010 and hemorrhaging cash at the same time. Three years later, this acquisition looks like a steal.
After growing revenue over 86% in 2012, Xoft's revenue has accelerated in 2013, growing over 100% year-over-year in the first half of 2013. We expect this trend to accelerate further as we move into 2014.
We are particularly encouraged by the upswing in Xoft's expendable/recurring revenue line. With accelerated adoption being seen, particularly within its skin cancer vertical, we expect Xoft's recurring revenue line to have a significant impact on iCAD's overall results as early as Q4 of this year. More on this later.
For now, let's take a brief look at Xoft to understand why this unique technology is gaining market share within the breast and skin cancer verticals.
The Xoft Axxent eBX System
The Xoft Axxent eBX System is an isotope-free radiation treatment approved by the FDA and CE marked for use anywhere in the body, including for the treatment of early-stage breast cancer, endometrial cancer, cervical cancer and skin cancer.
It utilizes a proprietary miniaturized x-ray as the radiation source which delivers precise treatment directly to cancerous areas while sparing healthy tissue and organs. Medical staff can remain in the room, without a shielded vault, while Xoft is operational. As seen below, the Xoft unit is compact and mobile, which allows customers to use it for different applications potentially each day.
Xoft Axxent eBX System Console
(click to enlarge)
Source: xoftinc.com
Along with its aforementioned attributes, Xoft also enjoys first mover advantage over its competitors and defensible intellectual property, boasting a host of 66 patents in force and 17 patent applications in process.
Before presenting our projections for Xoft over the next few years, investors should take note of a few important considerations regarding Xoft in relation to the skin vertical:
1. Xoft is the only electronic brachytherapy system with peer reviewed published clinical data supporting its use in skin cancer.
2. Current reimbursement rates are extremely favorable for Xoft usage for dermatologists and radiation oncologists. With the average patient requiring 8 to 10 treatments at an average treatment cost of $2,000, the $16k-$20k received for Xoft dwarfs the $1500 reimbursement for the current standard of care known as Mohs surgery.
While reimbursement rates for Xoft will certainly come down for skin cancer treatments as volumes increase, we believe that the economics for Xoft will remain compelling for the next few years, at a minimum.
Xoft's adoption will accelerate throughout 2014 and 2015, particularly in skin cancer
Typically it takes 3-5 years of efficacious data, along with publications in peer-reviewed journals, before a new medical technology will receive regional MAC and then nationwide reimbursement coverage. It is therefore difficult for a new technology to enjoy accelerated adoption before this process occurs.
The past twelve months have been pivotal for iCAD in this regard.
Last November, 5-year follow-up data from the pivotal Targit-A trial was presented at the 2012 San Antonio breast cancer symposium. This data showed that IORT results continued to be non-inferior vs. whole breast radiotherapy.
In short, for early-stage breast cancer patients, the Xoft technology has been proven to be equally efficacious with its targeted one dose treatment as compared to current radiation therapy which is administered daily for six weeks after a lumpectomy.
In its skin indication, 3-year results were recently presented at ASTRO. These results demonstrated that patients who had high dose rate (HDR) electronic brachytherapy with the Xoft system had no recurrences, low toxicity levels, and good cosmesis.
We believe that these multi-year results will accelerate further adoption within the skin cancer segment for Xoft/iCAD.
Unlike breast cancer remediation, which often entails many layers of bureaucratic red tape before prospective hospitals will adopt a new technology, the skin cancer market enjoys a much quicker path to both acceptance and utilization, especially now with the recent 3-year data supporting Xoft's usage.
Importantly, early-phase adoption has already begun to accelerate for iCAD over the past two quarters. Note the console growth over the past 2 quarters in skin in yellow highlights below:
Xoft Controller/Console Sales
(click to enlarge)
Source: iCAD
Not surprisingly, with the impressive growth in Xoft controller sales into the marketplace, procedure volumes have begun to ramp, especially so within the skin vertical:
(click to enlarge)
Source: iCAD
As doctors educate their patients and become more experienced, and as installations increase and become more mature, growth in patient counts in the coming quarters will lead to a powerful lift in high-margin recurring revenues for iCAD.
Recurring revenue line poised to grow rapidly the next two years
The fastest area of growth for iCAD will occur in the recurring revenue line from selling radiation "sources." While the math is not to the dollar, our best guess is that each patient will result in $850 in source revenue for iCAD. The results over the past two quarters already speak for themselves.
Note how recurring revenues have accelerated meaningfully both year-over-year and also sequentially:
2012
2013
YOY % Increase
Therapy, Service & Source Revenue Q1
$566k
$900k
59%
Therapy, Service & Source Revenue Q2
$622k
$1M+
61%
Although we cannot be certain of its timing, we expect to see an inflection point step-up in quarterly recurring revenues to $1.5 million in the next two to three quarters. Our best guess is that this will occur in Q4. A move above $2 million in quarterly recurring revenues could occur as early as Q1 or Q2 of 2014.
What really intrigues us is where the recurring revenue line for skin will grow to during the next three years.
There are over 700,000 new cases of skin cancer reported each year. Now consider that Xoft treatments are non-invasive and particularly beneficial to elderly patients who have skin cancer in hard to reach areas of the body. With that in mind, we believe Xoft can achieve a 3-5% market penetration in the skin cancer vertical over the next three years.
Also note that iCAD currently only receives reimbursement in 19 states and is expecting to receive additional regional MAC reimbursement on the East Coast in 2014. Full nationwide reimbursement could also be forthcoming in either 2015/2016.
Taken as a whole, we believe our market share assumptions are quite reachable for the next three years. Now let's model out what different levels of market penetration would mean for iCAD's recurring revenue line, from the skin cancer market alone:
Year
Market Share
# of Patients
Reimbursement
Total
2014
1.25%
8,750
$850
$7.5M
2015
2.5%
17,500
$850
$15M
2016
5%
35,000
$850
$30M
Now, if we add the expected increase in recurring revenues from breast cancer to our skin cancer model, the end result is an impressive revenue ramp over the next three years. Take a look:
Year
Skin Cancer
Breast Cancer
Total
YOY % Increase
2014
$7.5M
$1.5M
$9M
-
2015
$15M
$3M
$18M
100%
2016
$30M
$5M
$35M
94%
We do not believe current estimates reflect such market share assumptions. More importantly, with the majority of these add-on revenues flowing directly to the bottom-line, we believe that iCAD will ultimately demonstrate tremendous leverage in its model by the second half of next year and particularly in 2015.
Current Estimates
With multiple legs of growth expected to take shape over the coming 4-8 quarters, we believe that current estimates for both 2014 and 2015 are too low.
Craig Hallum has the following model for iCAD for the next four years:
C. Hallum iCAD Model
(click to enlarge)
Note the significant leverage in iCAD's underlying profitability in their model for both 2016 and 2017. Of particular import, note how earnings are expected to triple as revenues rise from $52.8M to $60.4M.
As iCAD's revenues begin to ramp, we believe the current lone analyst at Craig Hallum, will be forced to raise his projections, pushing estimates for 2016 and 2017 forward to 2014 and 2015. With that in mind, please take a look at IPI's iCAD model:
IPI iCAD Model
(click to enlarge)
Conclusion
With multiple growth drivers on the cusp of inflecting simultaneously, we believe iCAD is about to embark upon a very powerful multi-year growth curve. As evidenced above, there is tremendous leverage in iCAD's model as revenues trend above $50 million. As consensus estimates move higher, we believe that iCAD's shares will stair-step higher over the next 4-8 quarters.
At $7, iCAD's shares have a $75 million market capitalization. For a company with a disruptive cancer technology platform, already showing two years of very strong year-over-year growth, and a CAD software business poised to re-boot, we believe iCAD could follow a similar trajectory seen in shares of both Mazor Robotics Ltd. (MZOR) and Novadaq Technologies (NVDQ). While both MZOR and NVDQ have bigger potential market size opportunities, we believe that shares in both companies are very expensive (both trade for 15-20X 2013 sales estimates).
In comparison, iCAD's shares are cheap at current levels, trading for only 1X our estimates for 2015. Shares will not remain under-owned and under-followed for much longer.
Risks:
As with any company in a turnaround phase, there are always hiccups along the way. We could be early or too bullish in our analysis of iCAD, or both. The accelerated adoption of the Xoft technology may not occur as quickly as we anticipate and/or reimbursement rates for skin procedures could decline faster than we project.
In an attempt to gain market share, iCAD management may invest significant amounts of capital in the business which would negatively affect profitability in the next 4-8 quarters, where we expect the company's revenues to significantly ramp.
If a government shut-down should occur again due to political deadlock or the overall economy slide back into recession, the capital equipment market would in turn slow down, and slower sales for iCAD could be expected.
Finally, all technology companies are prone to the rise of new competitors which effectively make their own products obsolete.
While we are aware of these risks, we also feel confident that these factors will only dampen the magnitude of expected upside for iCAD over the next two years. Given the competitive advantages iCAD currently enjoys, we believe significant downside is muted, thereby providing investors with a wonderful asymmetric investment heading into 2014 and beyond.
Silver Miners Analyst Watch: October Edition
http://seekingalpha.com/article/1729772-silver-miners-analyst-watch-october-edition?source=email_authors_alerts&ifp=0
Oct 4 2013, 15:50 | includes: AG, CDE, EXK, FSM, HL, PAAS, SSRI, SVLC, SVM
Disclosure: I am long AG, HL, EXK, SVLC. (More...)
Another month, another analyst watch summary for silver miners from your humble scribe. We are finding it hard to fathom that October has started, and with that the last quarter of this year is already upon us.
As in previous installments we are summarizing our observations of analysts' price targets for primary silver mining companies as published on Yahoo.com. In this October instalment comparisons will be made to the data given in our September edition.
As in previous reports we included the following silver miners in alphabetical order: Coeur Mining (CDE), Endeavour Silver (EXK), First Majestic Silver (AG), Fortuna Silver Mines (FSM), Hecla Mining (HL), Pan American Silver (PAAS), Silver Standard (SSRI), Silvercorp Metals (SVM) and SilverCrest Mines (SVLC).
We duly note that most companies considered for this article are covered by more analysts than reported in our table. This article only considers analyst reports available through Yahoo.com and not all analysts are providing their data free of charge on this platform.
The table below summarizes our data. The first three columns list the company name, ticker symbol and share price at the time of writing. Price targets (low, median and high) are listed in the following three columns. These targets are followed by a column giving the number of analysts providing data to Yahoo.com and the mean recommendation given by these analysts ranging from 1.0 (strong buy) to 5.0 (sell). This concludes the data sourced directly from Yahoo.com.
The following columns are colored in light green and contain data derived from our source data. These data points are given in percentages related to the share price at the time of writing. The column titled "median-price" gives the difference between the share price and the median target price. The column titled "high-low" gives the difference between the high and the low target. The last four columns titled "target change" document the changes in price targets since the September report with the last columns giving the average change over the low, median and high price targets.
(click to enlarge)
Shares trading significantly below the median price target can be viewed as having a greater potential than shares trading closer to this level. Values in column "median-price" can therefore give some indication on the potential of a stock. This way of thinking does not apply for companies that have had significant events moving the share price in recent times since analysts will take their time to update their data accordingly.
A diagram visualizing this difference between the medium price target and the current share price is given below.
Applying the logic outlined above would indicate the greatest potential for Silver Standard closely followed by First Majestic Silver and SilverCorp Metals. Hecla Mining and Endeavour Silver can be found at the lower end of this ranking.
(click to enlarge)
Column "high-low" measures the difference between the high and the low target and represents a measure for the divergence in analyst opinions.
This Divergence in analyst targets is greatest for Coeur Mining this time around. The price target range is smallest for SilverCrest and SilverCorp. The diagram below illustrates our data.
(click to enlarge)
On average price targets were lifted by 2.69% during the past month. This is in fact the first time this year that we are reporting an average price target increase, however modest it may be. SilverCorp Metals received the greatest boost in price targets, while Endeavour Silver's targets were cut yet again with Silver Standard and First Majestic Silver sharing this fate.
Column "target change average" lists the average change in price targets and the diagram below illustrates them.
(click to enlarge)
The final diagram illustrates column "Recommendation" from the table above. We have introduced a new feature for this diagram. The little red bars indicate changes in analysts' recommendation from last month. The diagram shows four such indicators for First Majestic Silver, Fortuna Silver Mines, Endeavour Silver and Coeur Mining. These four companies are currently receiving slightly better recommendations than one month ago.
Obviously, analysts are still liking First Majestic Silver best, ahead of SilverCrest and Fortuna Silver Mines. The least attractive of the bunch, at least in the analysts' minds, continues to be PanAmerican Silver, presumably owing to the company's botched hedging 'strategy'.
(click to enlarge)
Our pick of the month
Granted, it's hard to look past First Majestic Silver but we have picked it too often in a row on past occasions.
This time around our thumbs-up goes to SilverCorp Metals. Only two analysts are providing data accessible through Yahoo.com, but both are in agreement about the high potential for this company and both have lifted their targets considerably in recent weeks.
Energy Fuels Aims to Dominate US Uranium Production with Finalized Strathmore Acquisition
http://uraniuminvestingnews.com/15882/energy-fuels-aims-to-dominate-us-uranium-production-with-finalized-strathmore-acquisition.html?utm_source=Resource+Investing+News&utm_campaign=03fd19c3ff-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_f83d87db0f-03fd19c3ff-248737485
Thursday September 5, 2013, 4:15am PDT
By Vivien Diniz - Exclusive to Uranium Investing News
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Energy Fuels Aims to Dominate US Uranium Production with Finalized Strathmore Acquisition The largest conventional uranium producer in the United States, Energy Fuels (TSX:EFR,OTCQX:EFRFF) is en route to increasing its production by 500 percent now that it has finalized its acquisition of Strathmore Minerals (TSX:STM).
As of August 30, Energy Fuels has acquired all the issued and outstanding shares of Strathmore by way of a plan arrangement. Per the arrangement, Strathmore shareholders received 1.47 common shares of Energy Fuels for each common share of Strathmore for an approximate 19.5 percent of all outstanding Energy Fuel shares.
The acquisition of Strathmore was announced in late May 2013, and approval from shareholders, Korean utility KEPCO and the Supreme Court of British Columbia trickled in throughout the summer.
In May, Curtis Moore, spokesperson for Energy Fuels, told Uranium Investing News that move to acquire Strathmore just made sense. Both companies have projects located in close proximity to each other and Strathmore’s Roca Honda project is the largest high-grade uranium project in the US, which, given its proximity to Energy Fuels’ White Mesa mill, made the acquisition incredibly attractive.
Energy Fuels’ White Mesa mill is the only conventional uranium mill in the whole of the US with a processing capacity of 2,000 tons of uranium ore per day. Combined with the face that Energy Fuels currently produces 25 percent of the uranium in the United States, the acquisition of Strathmore has brought the company even closer to becoming the dominant uranium producer in the US.
Stephen Antony, president and CEO of Energy Fuels, told investors in a statement that “Energy Fuels possesses a large, unique portfolio of US uranium assets, which should grow in strategic importance, as we believe the US will increasingly focus on secure, domestic energy supplies. In my opinion, the need for a secure, domestic supplier of uranium for the US market will be underscored following the expiration later this year of the US-Russia HEU agreement, which currently provides approximately half of the uranium supply imported into the US. In the past 15 months, we have grown to become the second largest uranium producer in the U.S., with expected production of approximately 1.15 million lbs. of U3O8 during FY-2013.”
Securities Disclosure: I, Vivien Diniz, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: Energy Fuels is a client of the Investing News Network. This article is not paid-for content.
$ZIPR - Flying Under The Radar, But Not For Long: ZipRealty Has 60% Upside
http://seekingalpha.com/article/1666292-flying-under-the-radar-but-not-for-long-ziprealty-has-60-upside?source=email_stocks_and_sectors&ifp=0
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Editor's notes: Underfollowed ZIPR is making a key transition that will help it prosper new home sales pick up. 60% upside, helped by the company's focused approach.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
As I have noted in previous articles, when looking for a company to buy, I try to find some of the following characteristics:
A stock that has fallen out of favor with investors
A stock that has a major catalyst on the horizon
A company that has signaled that they are close to a bottom in their business
A compelling valuation
A stock that is supported by assets that create a "floor" on the stock
Insider Buying
ZipRealty (ZIPR) is a company that meets 5 of the 6 criteria listed above. The stock has fallen out of favor over the last several years as performance declined during the recession. The company has completed a major restructuring and recently returned to positive EBITDA margins. Operations of the company are further supported by a pickup in home sales in the US. There has also been significant insider buying over the past month, and the company trades at a deep discount to its competition. I believe the stock has at least 60% upside from its current price.
Inflection Point in Business - A Return to Positive EBITDA
The last few years have not been kind to ZIPR. The company was originally geared towards a more traditional real estate brokerage business, which leveraged the internet to display housing listings. Management over-expanded the business during the housing boom, and as home sales declined in the recession, the company saw drastic declines in operating performance. We can see that even over the last few years, revenues have declined dramatically:
We can also see how this performance impacted the company's stock price:
(click to enlarge)
Source: https://www.google.com/finance?q=zipr&ei=7SsgUrjwDKPz0gHx-AE
In 2011, with the company in free-fall, management began a restructuring initiative to refocus the business around their core strengths in technology, online marketing, and only their most attractive local real estate markets. ZIPR closed offices in the following markets: Fresno/Central Valley, CA, Charlotte, SC, Naples, FL, Jacksonville, FL, Miami, FL, Palm Beach, FL, Tampa, FL, Hartford, CT, Minneapolis, MN, Virginia Beach, VA, Tucson, AZ, Atlanta, GA, Raleigh-Durham, NC, Philadelphia, PA, Salt Lake City, UT, and Westchester County/Long Island, NY. The company also transitioned local operations to eight third-party brokerages in Tucson, AZ, Atlanta, GA, Raleigh-Durham, NC, Philadelphia, PA, Salt Lake City, UT, Westchester, NY, Long Island, NY and Brooklyn, NY.
As part of this restructuring, management launched the Powered by Zip program to provide third-party real estate brokers with robust, proprietary end-to-end technology solutions. We will talk about this new, software-as-a-service business later on.
The restructuring has been successful to date. Recently, with a new business model, the company returned to positive EBITDA territory:
Source: ZIPR August 2013 Investor Presentation
The company expects to remain in positive EBITDA territory, and grow EBITDA by at least 10% annually, for the foreseeable future.
This inflection point has gone mostly unnoticed by investors, mainly due to a lack of analyst coverage (more on this later). The company has transformed its business and now is prepared to grow and benefit from the pickup in housing trends. As we will talk about later, an EBITDA profitable business in this segment should be valued much higher than its current stock price.
ZipRealty
ZipRealty is the company's traditional, real estate brokerage business. The company owns and operates brokerage business in 19 regions with over 1,500 licensed realtors. Here is a brief overview of strategy and economics of the business from the company's recent presentation:
We see from the chart that home prices have increased over the last several months, which improves the company's profitability. ZIPR then takes half of the commission, less lead generation costs, which results in 32% contribution margins.
The company's competitive advantage in this segment is its technology platform, user-friendly website, and award-winning mobile app. The company uses the site to allow consumers to do their own research, which management recently noted has become the preferred method of screening for houses by potential buyers. The company also leverages this technology in the new Powered by Zip segment.
Powered by Zip
The Powered by Zip segment allows third party brokers to leverage the company's technology for their own use. This gives the individual realtors a competitive advantage and incremental referral point in their respective regions. Here is an overview of strategy and economics of this software-as-a-service business:
Competition in this segment includes Zillow (Z) and Trulia (TRLA). The company differentiates itself from the competition in multiple ways:
The focus is on serious customers, defined as those who expect to purchase or sell a home within the next six to eighteen months. ZIPR does not have the reach or traffic that Zillow or Trulia has, but they have a higher conversion rate from users. The company is also known for having the most up-to-date listings in the industry, which improves customer satisfaction with serious customers.
The focus is more geared towards real estate agents than the other sites. This allows the company to better foster relationships and convert a higher percentage of users. The company provides a more user-friendly platform that its competition.
The platform creates a competitive advantage for the third party users. ZIPR not only helps to generate online leads on their behalf, but also provides them access to an enterprise cloud-based application that better enables them to turn client leads into closed transactions. Zap offers these brokers crystal-clear, real-time visibility on their transaction pipeline, brokerage operations and financials, while facilitating a paperless transaction environment. Because Zap is a cloud-based application, third parties benefit from a rapid innovation cycle without the burden of expensive IT maintenance and software upgrade costs.
We have talked about the inflection point of the company as it restructured its traditional business and launched its software-as-a-service business. Let's now talk more about other catalysts for the stock…
Insider Buying
I've noted in several articles that I look for insider buying when I evaluate a name. When looking at ZIPR, insider buying has been strong over the last month:
(click to enlarge)
Source: http://www.secform4.com/insider-trading/1142512.htm
We have seen over 200,000 shares purchased by insiders (avg. volume of 45K shares traded daily and 21MM total shares outstanding) over the past month. These purchases have been made by both the CEO and Osmium Partners (2nd largest shareholder who already owns over 2.5MM shares). These purchases give me even more conviction on the prospects of ZIPR going forward.
Lack of Analyst Coverage
Another thing I like to see in a stock is a lack of analyst coverage. This is for two reasons:
Lack of coverage creates a lack of both knowledge and consensus on the company. This creates an opportunity for analysts to do their own work, which can cause a short-term "information arbitrage" vs. the overall market.
Increased sell-side coverage can be a catalyst - as coverage increases, more investors will understand the story, which could create greater demand for the stock.
When looking at ZIPR, Yahoo finance shows no analyst coverage:
(click to enlarge)
Source: http://finance.yahoo.com/q/ae?s=ZIPR+Analyst+Estimates
Furthermore, on the company's latest earnings call, there were no questions from sell-side analysts.
I believe sell-side coverage could begin in the near future for multiple reasons:
High-flyers Zillow and Trulia already have expanded coverage (10 analysts and 8 analysts covering each respective name). There is much overlap between the companies, making coverage of ZIPR easier to implement.
As the economy and housing picks up, demand for housing-related names will increase, creating a justification for the sell-side to begin coverage.
The company has been making the rounds at small-cap conferences (3 conferences attended so far this year) which gets the story out to the analyst community and will create greater demand for coverage.
New Home Sales as a Catalyst
New home sales are the biggest driver for the real estate brokerage industry since it is a commission-based industry. Home prices are the other major driver, but we noted above that home prices have recently increased. As for sales, the US has recently seen a stabilization/pickup in new home sales, which should be a catalyst for the real estate brokerage industry, and therefore ZIPR, going forward.
Source: US Census Bureau
We see in this chart that: 1. We are under the long-term average of annual new home sales, and 2. We have seen an inflection point upward. Both of these facts should help support the real estate brokerage industry, and ZIPR, going forward.
Balance Sheet
The company has a clean balance sheet, with $13MM in cash (14% of market capitalization) and no debt. In the company's most recent 10-K, management highlighted the company's liquidity position:
"We believe that our current cash, cash equivalents and short-term investments will be sufficient to fund cash used in our operations, restructurings and capital expenditures for at least the next twelve months. Our future capital requirements will depend on many factors, including our level of investment in technology and online marketing initiatives, our rate of growth in our local markets and in expanding our Powered by Zip broker referral network and possible litigation settlements and legal fees. Although there are signs that an economic recovery may be underway, if the recent depressed macroeconomic environment and residential real estate market continues without recovering or worsens, we may have a greater need to fund our business by using our cash, cash equivalent and short-term investment balances, which could not continue indefinitely without raising additional capital. We currently have no bank debt or line of credit facilities. In the event that additional financing is required, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business and results of operations will likely suffer."
I take this statement as support that the company has adequate cash on hand for operations (this is a 10-K so they are going to protect themselves and be conservative with their statements). It is also possible for the company to take on a revolver to finance operations if necessary, without issuing new shares.
Valuation
We have already reviewed the various catalysts for the company's stock. Now, let's take a look at its valuation compared to the competition:
I will say that ZIPR, considering it is a hybrid business model, will most likely always trade at a discount to Z and TRLA, but the comparative analysis shows that ZIPR is significantly undervalued compared to the other two companies. Furthermore, considering EBITDA has such a small base and just returned to positive territory, we could see big increases in EBITDA over the next several years. Considering the business model, let's take a look at EBITDA sensitivity based on revenue:
For my valuation, I am assuming revenues grow back to at least $110MM (still below 2010 levels). I am using a 10.0x EV/EBITDA multiple, which equates to a $7.25 price target (60% upside from current price. This also equates to a 1.2x EV/Sales multiple, which makes sense considering sales are now becoming more profitable, so expansion of the EV/Sales multiple could occur. These multiples are still well under the valuations of Z and TRLA.
Longer-term, I think the company will get to $150MM in sales and at least $25MM in EBITDA (as the company expands they will have to reinvest in technology). This gives us an upside target (on a blended valuation of the 10.0x EV/EBITDA and 1.5x EV/Sales multiples) of $11.50 (150% upside).
My downside target is $90MM in sales and $6MM in EBITDA, and a $3.50 price target (20% downside). This gives us a 3-to-1 risk-to-return ratio on our intermediate price target and a 7.5-to-1 risk-to-reward ratio on our longer-term target.
Risks
Risks for the company include:
Economic Sensitivity - as we said above, the company is dependent of new home sales and increased home prices. A reversal in economic growth would be negative for the company.
Inability to grow the Powered by Zip Segment.
Overexpansion - as the company did during the housing boom.
Higher-than-expected technology costs.
Catalysts
Catalysts for the company include:
A pickup in the economy and home sales.
Increased home prices.
Increased sell-side coverage.
Market-share gains.
Conclusion
ZIPR has several company-specific catalysts and has reached on inflection point in both its restructuring and overall business. The company is also supported by improving trends in the industry. Using conservative multiples, as compared to the company's competition, I am using a $7.25 price target on the stock, with a longer-term target of $11.50. I believe the downside target is $3.50. I am encouraging investors to buy the stock now at its current price level.
$UREE - US Rare Earths Confirms It Has the Most Accessible Critical Rare Earth Deposit in North America
http://us2.campaign-archive1.com/?u=ba09a8c9504f44d5c72511f7a&id=25b2f3c0b6&e=c65bb4fea3
USRE'S 2013 EXPLORATION IN LEMHI PASS, MT RETURNS HIGHER GRADES OF RARE EARTHS THAN FIRST REPORTED
PLANO, Texas, Aug. 20, 2013 /PRNewswire/ -- U.S. Rare Earths, Inc., (OTCBB:UREE) announced the results of its 2013 exploration in Lemhi Pass, Montana. The results confirmed that the company's properties have the highest accessible critical rare earth deposit in North America. The initial results of the sub-surface drilling in Phase I of the Lemhi Pass exploration, not only confirms historic data, but returned higher grades of rare earths than first reported.
The exploration work will allow UREE to adequately assess its land positions and prioritize resource exploration and development efforts. UREE has initiated an extended drilling program in Lemhi Pass, Montana based on the positive results.
The results are part of the detailed work completed in Phase I on the "Last Chance Vein" property located in the southeast part of the trend. This area already has access roads and underground works two adits with tunneling over 1500 feet (453m).
The property, located near the mining-belt of Idaho and Montana is uniquely positioned for development of a processing facility. Full-scale mining and milling operations would create significant and sustainable jobs in the region.
UREE CEO Kevin Cassidy says, "Based on the success of the Phase I season drilling, I have approved the request by our lead geologist, Howard Dunn, to initiate additional drilling in the Last Chance area of Lemhi Pass. Because this area is located in the continental US, with highways nearby, the area is perfectly positioned to meet the domestic demand for rare earths. The positive results from our drilling samples means that we'll be able to secure significant amounts of much needed rare earths for domestic and global consumption without relying on mines in remote regions of the globe or be beholden to Chinese government policies."
The 2013 UREE exploration program is completing sampling and drilling on several of its properties located in Lemhi Pass and North Fork area property holdings.
UREE is working to SEC and Canadian NI43-101 standards, with state-of-art field equipment and drilling technology to validate historically reported data and define newly discovered grades and tonnages of the rare earth mineralization in a few selected areas of the Lemhi Pass area and in the relatively unexplored North Fork District, north of Salmon, ID.
This suite of critical rare earth metal oxides (neodymium, terbium, dysprosium, yttrium, europium, and erbium) found in the UREE held Lemhi Pass properties best reflects the economic potential of a deposit with respect to U.S. and global demand, and is based on extensive research conducted by the U.S. Department of Energy, U.S. Department of Defense, JP Morgan market analysis, and research by Russian scientist V.V. Seredin.
The forecast consensus is that demand for neodymium, terbium, dysprosium, and yttrium will exceed their output. Europium and erbium are critical metals also likely to be under-supplied. Thus, the Critical Rare Earth "basket" in Lemhi Pass represents both the most critical and likely undersupplied rare earth metals and where deposits with high percentages of these metals will be in a position for most favorable development.
U.S. Rare Earths (OTCBB:UREE) holds nearly all of the historically known rare earth element mineralization occurrences in the Lemhi Pass District and covers approximately 120 Square Miles of terrain along the Idaho-Montana Border. This area is ranked by Russian Academy of Sciences' Researcher, V. V. Seredin, as holding the richest critical rare earths in the continental U.S. UREE (www.usrareearths.com) holds 97 mining lode claims in Montana and Idaho covering 1680 acres (680 hectares).
UREE is working with Process Engineering LLC, of Meridian, Idaho to conduct this season's work.
The field team of 12-16 professionals is led by Process Engineering's Principal, Mr. Howard Dunn, as a senior geologic engineer and "Qualified Person" under both SEC and CIM Canadian National Instruments 43-101 Standards.
Lemhi Pass was first investigated in the early 1950's for uranium and thorium for the U.S. developing market. Continued investigation, during the late 1960's and through the 1970's, by the U.S. Defense Minerals Exploration Administration (DMEA) and Atomic Energy Commission (AEC) - now the U.S. Department of Energy (DOE) -identified that rare earth metals were associated with the trace amounts of thorium.
Cautionary Note to U.S. Investors Concerning mineralization. In this news release, the definition of "mineralization is not equivalent to SEC Industry guide 7 "reserves" and is not equivalent to "mineral resources" definition utilized by CIM in the "CIM Standards on Mineral Resources and Reserves – Definitions and Guidelines" adopted on August 20, 2000 and amendedDecember 11, 2005.
The standards employed in estimating the mineral resources referenced in this news release differ significantly from the requirements of the United States Securities and Exchange Commission (the "SEC") and the resource information reported may not be comparable to similar information reported by United States companies. The term "resources" does not equate to "reserves" and normally may not be included in documents filed with the SEC. "Resources" are sometimes referred to as "mineralization" or "mineral deposits." While the terms "mineral resource", "measured mineral resource", "indicated mineral resource" and "inferred mineral resource" are recognized and required by Canadian regulations, they are not defined terms under standards in the United States. The terms "mineral reserve," "proven mineral reserve" and "probable mineral reserve" are Canadian mining terms as defined in accordance with National Instrument 43-101 - Standards of Disclosure for Mineral Projects ("NI 43-101") and the CIM – CIM Definition Standards on Mineral Resources and Mineral Reserves, adopted by the CIM Council, as may be amended from time to time by the CIM. These definitions differ from the definitions in the United StatesSecurities and Exchange Commission Industry Guide 7 ("SEC Industry Guide 7") under the Securities Act of 1933. Under Canadian rules, estimates of inferred mineral resources may not form the basis of feasibility or prefeasibility studies, except in rare cases. Disclosure of "contained ounces" in a resource is permitted disclosure under Canadian regulations; however, the SEC normally only permits issuers to report mineralization that does not constitute "reserves" by SEC standards as in place tonnage and grade without reference to unit measures.
The estimation of measured, indicated and inferred mineral resources involves greater uncertainty as to their existence and economic feasibility than the estimation of proven and probable reserves. U.S. investors are cautioned (i) not to assume that measured or indicated resources will be converted into reserves and (ii) not to assume that estimates of inferred mineral resources exist, are economically or legally minable, or will be upgraded into measured or indicated mineral resources. It cannot be assumed that the Company will identify any viable mineral resources on its properties or that any mineral reserves, if any, can be recovered profitably, if at all. As such, information contained in this news release and the documents incorporated by reference herein concerning descriptions of mineralization and resources under Canadian standards may not be comparable to similar information made public by United States companies in SEC filings.
Forward-looking Statements. Certain statements found in this release may constitute forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect the speaker's current views with respect to future events and financial performance and include any statement that does not directly relate to a current or historical fact. Such statements reflect the current risks, uncertainties and assumptions related to certain factors including, without limitations, competitive factors, general economic conditions, customer relations, uncertainties related to the availability and costs of financing, unexpected geological conditions, success of future development initiatives, imprecision in resource estimates, ability to obtain necessary permits and approvals, relationships with vendors and strategic partners, the interest rate environment, governmental regulation and supervision, seasonality, technological change, changes in industry practices, changes in world metal markets, changes in equity markets, environmental and safety risks, and one-time events. The mineralization contains thorium, a radioactive element, which may increase the cost of mining, processing, and disposal and could have additional costs than those costs associated with mineralization that does not have thorium content. Should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described herein. Forward-looking statements cannot be guaranteed and actual results may vary materially due to the uncertainties and risks, known and unknown, associated with such statements. Shareholders and other readers should not place undue reliance on "forward-looking statements," as such statements speak only as of the date of this release.
While data analysis continues the reported total rare earth oxide assay grades and critical rare earth oxide percentages were compiled from analytical work completed by Activation Laboratories in Ontario, Canada, a recognized industry leader in rare earth analysis.
True vein thickness is estimated across total rare earth oxide grades above 1000 ppm. Drill core interval assay data is reported for apparent and estimated true thickness intervals and channel sample data for true width intervals.
Does Your Junior Have Competent Management? – Rick Rule
http://sprottgroup.com/thoughts/articles/does-your-junior-have-competent-management-rick-rule/
Sprott Asset Management USA Chairman Rick Rule shared with me his most essential insights to investing in natural resources. In a previous post, I related why Rick views the exploration industry as the “research and development” side of mining.
So how does this affect our investment strategy in the natural resource sector?
“We have established that exploration is a knowledge business,” Rick begins, “and that a small number of sector participants generate the overwhelming majority of the industry’s economic success. These two realizations are key to improving your chances of success.”
“This type of market is an example of what social scientists term ‘Pareto’s Law,’ or the ‘eighty-twenty rule.’” The rule holds that eighty percent of the work is accomplished by twenty percent of the participants. The really productive people are the top 20% of those top 20%, and the worst are the bottom 20% of the lowest 20%: “In a large enough sample, the ‘lips’ of the bell, the outlying 20% on both extremes, can be run through the same performance dispersal curves. Thus 4% of a population contributes in excess of 60% of the utility associated with a class of tasks, while a very different 4% of the population contributes 60% of the disutility.”
Rick believes this concept is highly valuable when applied to the mining industry. In order to pick the winners, he says, you must have the ability to view the entire field as a spectrum. Each management team will fall somewhere on the spectrum – most around the average – but those on the higher end of the bell curve become exponentially more valuable. So investors should seek to determine the quality of the management team independently of the value of the current project they are undertaking.
“The key for investors is to evaluate management teams based on their past performances in similar situations.”
Beware of teams whose past successes were in areas different from where their current project is located: “It is important to see that the participants in past successes are directly relevant to the task at hand. A mining entrepreneur might reference past success where he or she was successful in operating a gold mine in Archean terrain in French speaking Quebec. This is very impressive, except that this same promoter now proposes to explore for copper, in young volcanic rocks, in Spanish speaking Peru! The identified skill sets must closely match the chosen task.”
Past success in the relevant field is an invaluable tool to filter out the truly productive industry participants, says Rick, especially since most companies will immediately fail this test: “More than half of the management teams you interview will not be able to point to a history of success relative to the task at hand.”
So being successful in the “research” end of the mining industry is, according to Rick, about picking the best elements in the market. How should you approach a management team about their current project? Once they have established enough credibility that we care about their project and their views, what should we look at next?
“Making money and adding value in mineral exploration is a function of answering a series of unanswered questions. Management must have first established sufficient credibility that we care about their answers. They must identify and defend their thesis based on the evidence at hand. 90% of the management teams you interview will be unable to present a reasoned argument for pursuing their project and to justify the approach they are using.”
“So let’s examine the questions one by one.”
“Is the process by which an exploration team proposes to pursue their target valid or optimal? Does it in fact address the most essential questions that will determine whether the project is a success?”
“Does the management team possess the requisite skill sets to conduct the process and efficiently answer these questions?”
“Does the management have a reasonable estimate as to how much time will be required to answer these questions? How was the estimate established?”
“Does the management know how much money will be required to answer these questions? How much will it cost to run the company during that time? If there are capital shortfalls, how, when, and from whom will the shortfall be addressed?”
“How would the management quickly ascertain that the project was unsuccessful – meaning that the target is not of sufficient value to justify further exploration? This is a very inconvenient situation for management, which may result in a reduction in their equity and options values. They may construe disappointing exploration results as threatening to their salaries. In most exploration projects, we expect that exploration will be unsuccessful at establishing a resource, but the ramifications of this outcome are rarely discussed be management.”
“What valuation range will we have if exploration does result in the discovery of a resource? Too often, exploration teams pursue targets where even ‘success’ will produce a paltry reward relative to the risks. Small mines have as many problems as big mines, but they cannot make you big money.”
“Finally, is management’s estimate of the potential economic value of a project well-reasoned?”
Rick believes these questions are essential to ascertaining with confidence that your team is competent, knowledgeable, and will efficiently deploy their shareholder capital.
Rick Rule founded Global Resource Investments in 1994. Global provides brokerage and investment banking services to high net worth individuals, institutional investors, and corporate entities worldwide. In 2011, Global was acquired by Sprott, Inc., a public company based in Toronto, Canada, which has in excess of $9 billion in assets under administration in the resource and commodity sectors.
Invest -with -sprott
Sprott Group offers a wid
$WLT - Buy This Coal Miner At A Deep Discount
http://seekingalpha.com/article/1547142-buy-this-coal-miner-at-a-deep-discount?source=email_stocks_and_sectors&ifp=0
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
By Adam Fischbaum
Beleaguered shareholders of this coal miner probably feel like Lee Dorsey in the classic 1966 song "Working in the Coal Mine":
"Lord! I'm so tired! How long can this go on?"
That's a good question. It's been a wild ride for Walter Energy (NYSE: WLT) over the past seven years.
The share price is lower than it was during the apex of the financial crisis. But while there was a massive sell-off of all types of assets in 2008 and 2009, current conditions seem much more stable.
So what gives?
The End Of The Supercycle
With explosive economic growth in emerging markets such as the BRIC nations (Brazil, Russia, India and China) has come a rapid escalation in commodity prices based on what has seemed like an insatiable need for raw materials. Commodity producers and investors have enjoyed very good returns. How good? This 10-year chart of the S&P GSCI Commodity Index says it all.
But these days? Not so much.
As the U.S. dollar strengthens, commodity prices (contracts are priced in dollars) soften internationally by sheer market mechanics.
However, the psychological reasons for the downturn stem mainly from the fear of an economic slowdown in the emerging markets (primarily China) and the continued weakness in global demand due to the slow recovery in the U.S. and the persistent malaise in the eurozone economies.
But what does all of this have to do with a coal producer in Birmingham, Alabama? Plenty.
The Other "Clean Coal"?
An important input commodity, coal -- especially U.S.-produced coal -- has seen its price rise and fall violently in recent years. The first part of the 21st century saw thermal coal prices rise nearly fourfold from around $40 per short ton to $140 in 2008, which coincided with the global financial crisis. Since then, prices have settled back to around $55 per short ton.
In the industrialized world, coal is primarily used for two things: as fuel to help generate electricity and to make coke for steel manufacturing.
A large, fast-growing economy such as China uses a lot of coal for both purposes. However, China is also the world's largest coal producer, with the United States a distant second.
Should a slowdown in China affect what happens to coal domestically? Not really, but federal government regulation can.
Since both Bush administrations and the first Obama administration, the U.S. has had virtually no concrete energy policy. It's no secret that the current administration is no fan of coal from an environmental standpoint.
Compounding those worries, large power producers have switched en masse to natural gas as a cheap, clean fuel source. Obviously, that doesn't help prop up prices. So it makes sense that the stocks of domestic coal producers have been beaten up over the past few years.
However, Walter produces primarily high-quality metallurgical coal that is used in steelmaking. Is the market throwing the baby out with the bathwater?
Buried Treasure
The company's numbers look terrible: negative earnings for 2013 with an analyst consensus of a loss of $1.43 a share; weak Chinese demand (although China is a large coal producer, they produce very little high-quality metallurgical coal); and coking coal prices down 18% to a recent price of around $140.
To give the market even less confidence, Walter recently postponed proposed refinancing of $1.6 billion in term loans, citing market conditions. Most investors wouldn't touch this idea with a 10-foot pole. But look beneath the surface.
Walter Energy is in a fairly simple business: It owns and produces a tangible asset. Conservative estimates put Walter Energy's tangible book value at around $16 a share. Much of that is tied to the company's coal reserves (coal in the ground). That wasn't a big deal when shares were trading north of $100, but with shares staggering around $11.50, it's a different story -- that's 45% upside. The value is literally buried in the ground. But the story gets better.
As far as the metallurgical segment -- Walter's bread and butter -- goes, demand has stabilized, albeit at lower levels. According to the U.S. Energy Information Administration, coking coal domestic demand for 2013 should slip about 1.4% from last year, to 20.5 million tons. Not a disaster.
Imports are a different story. Last year, import demand stood at 125.7 million tons. This year's forecast is pretty grim at 107.1 million tons, a 14.8% drop. However, the 2014 forecast for coking coal imports appears stable at 108.4 million tons. A modest increase of just 1.2% leaves some room for an upside surprise.
As far as Walter Energy is concerned, the picture, believe it or not, is getting brighter. Forget about 2013: Sales should come in at around $2.1 billion versus $2.5 billion last year, which would be an ugly 16% drop. However, forecasts for 2014 call for sales of $2.3 billion, which would be an impressive 9.5% improvement over 2013.
Cash flow is also improving. After a negative 98 cents per share last year, free cash flow has turned positive to about 48 cents per share. That's expected to climb more than 170% next year to a projected $1.31 per share. The company will accomplish this through tighter capital controls and eliminating the dividend.
While I normally don't like to see dividend cuts, this is necessary for the survival of the company and actually adds more value to a deeply undervalued stock.
Last, the hope of all stock investors: Walter Energy is rumored to be a takeover candidate. Whenever certain sectors become depressed, consolidation often follows. Possible suitors have included Alpha Natural Resources (NYSE: ANR), Brazilian miner Companhia Siderurgica Nacional (NYSE: SID) and Warren Buffett's Berkshire Hathaway (NYSE: BRK.A). Based on the unlocked assets at Walter, that idea is right up the Oracle of Omaha's alley.
Risks to consider: By its nature, contrarian deep-value investing is extremely risky. As an investor, you're buying into an idea or event that may very well fail to materialize. As a business, Walter Energy is in a precarious position. One way to protect yourself would be to use a stop-loss order 15% to 20% below your purchase price. Another way would be to use options to hedge your long position. (My colleague Amber Hestla-Barnhart covered this in great depth.) Finally, the coal industry is depressed and very sensitive economically. Continued global economic weakness would likely suppress this idea.
Walter Energy is clearly undervalued, based on the company's improving internals and improving macro conditions, a 12-month price target of $16 would bring the company back to its book value. Shares currently trade around $11.50. This would represent a 40% return. The annual 50-cent-a-share dividend gives the stock a yield of about 4.4%. Don't count on it being that high forever, but this will help the company in the long run.
$PAL - The Only $1 Stock You Should Buy Today
http://seekingalpha.com/article/1528112-the-only-1-stock-you-should-buy-today?source=email_macro_view&ifp=0
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.
By Nathan Slaughter
If you want to be successful in the stock market, then sometimes you must think like a contrarian.
I've spent 15 years in the investment industry. In that time, I've seen many investors struggle and many others make a fortune.
The difference between success and failure usually has little to do with intelligence or analytical skills. Rather, the best investors generally have an ability to stay cool under pressure and the fortitude to break away from the herd when necessary.
This is the best way to make money when it comes to commodity investing.
Like many investors, I've been neutral to bearish for most precious and industrial metals over the past couple of months. However, there is one notable exception.
Before I tell you about this metal, let me give you some background on it first...
It's one the scarcest metals on the planet. In fact, for every 10 ounces of gold pulled out of the ground, only 1 ounce of this metal is taken out of the ground -- and gold is supposedly one of the scarcest metals on Earth.
This is exactly the sort of scarcity that can drive up prices; all that's needed is demand. And we're seeing that, too.
So what metal is going against the grain? Palladium.
What's going on with this metal is exactly what you should look for when seeking out a commodity to invest in.
Unlike gold, whose value hinges on fickle expectations for monetary stability, palladium prices are influenced by more predictable supply-and-demand fundamentals.
Even under optimum conditions, palladium mines have been struggling to keep up. Not to mention that last year labor disputes cut operations at several large mines, leading global output to fall 11%.
Additionally, due to rising costs, many producers have been forced to close less economical mines.
In years past, withdrawals from Russia's palladium stockpile could cover any shortfall, but those reserves are now thought to be nearly exhausted.
On top of the dent in supply is a dramatic increase in demand. Worldwide palladium consumption jumped 16% last year to hit a record 9.9 million ounces. And I expect equal or greater consumption in 2013 and beyond.
Palladium is an extremely important metal. In fact, I would say it's indispensable for the global economy.
It plays a key role in the automotive industry. They are essential to catalytic converters, which turn vehicle exhaust into harmless water vapor. Without these devices, internal combustion engines would spew out tons of noxious pollutants. That's why they are installed on almost every car and truck that hits the road.
And auto manufacturing is one of the few strong spots in an otherwise soft global economy.
According to LMC Automotive, an automotive industry market research firm, global vehicle production will rise 3.4% this year to 83.8 million vehicles. And growth is expected to accelerate 6% next year.
Keep in mind, auto manufacturers make up 65% of demand, but aren't the only hungry buyers anxious to get their hands on palladium. It's also found in iPods, Blu-ray players and flat-panel monitors, among other places.
Put the picture together, and you start to see why palladium has decoupled from other commodities, gaining ground at a time when just about everything else is retreating. I expect it to rise above the $800 in the coming year -- a 20% increase from current prices.
So what's the best way to invest in palladium? Rather than trying to invest in it directly, like all commodities, I like putting my money with miners pulling the stuff out of the ground.
For palladium I like junior miner North American Palladium (NYSE: PAL), which I'm expecting big things from over the next 12 to 24 months.
There are three main ways that a miner can boost cash flows and excite the market:
1) Fetch higher prices for its metals.
2) Produce and sell more of those metals.
3) Find a way to get them out of the ground for less.
An improvement in any of these areas can make a dramatic difference. I believe North American Palladium is positioned to achieve all three.
First, given the supply and demand factors I discussed above, I am confident palladium will continue climbing.
Second, North American Palladium is in the midst of redoubling its efforts to extract value from its flagship palladium mine -- located in Canada, one of the few mines outside of Siberia and South Africa. The property relinquished 163,000 ounces of palladium last year and has much more to give.
In fact, output is expected to rise to 250,000 ounces per year once expansion efforts end. That's an increase of 90,000 ounces annually -- nearly 60% above current production levels.
Finally, when production begins to expand, costs are expected to drop precipitously, diving to $250 per ounce by 2015 (versus $490 today). With costs falling and palladium prices rising, profit margins could surge to around $550 an ounce, from $240 per ounce today.
Multiply that $550 by an additional 90,000 ounces of annual production, and you start to see that North American Palladium has the potential to multiply its stock price several times over.
Granted, there are several variables that have to fall the right way for this bullish scenario to play out. But at less than $1 per share, the market is expecting very little from North American Palladium. Still, the stock is better-suited for risk-tolerant investors.
I think this could be one of the best ways to take advantage of global palladium supplies being stretched ever thinner. As more palladium begins flowing, the company will transition into a more efficient, mid-tier producer.
$NGD - New Gold: Attempting Aggressive Growth
http://seekingalpha.com/article/1474681-new-gold-attempting-aggressive-growth?source=email_rt_article_readmore
New Gold (NGD) is a rapidly growing Canadian gold mining company with no lesser a goal than "To establish the leading intermediate gold company." On May 31 2012 the New Gold announced its latest acquisition, namely a friendly takeover of Rainy River Resources (RRFFF.PK). This latest event seemed to serve as a good enough excuse for us to summarize our notes on this particular company.
New Gold has a market capitalization of $3.25B and a dual listing on the Toronto and New York stock exchanges. The forward P/E is listed at 14.49 in line with peers in the gold mining sector. 55% of the company's outstanding shares are held by institutions with Van Eck Associates holding the largest portion at 10.8% and institutional holdings increasing during Q1/2013. Management and the board of directors collectively hold in excess of $100M of company shares. (data source)
Analysts have published price targets between $9.00 and $15.48 with a median price target of $11.13. Shares are trading significantly below all targets at $6.83 at the time of writing. Analysts also give a buy recommendation of 1.7 which is one of the best in the sector at present (1 means a strong buy; and 5 means a sell). New Gold is part of the Market Vectors Gold Miners ETF (GDX) and within the peer group considered in this particular ETF New Gold has shown a performance smack on the median over the past year. The chart below compares the price development of gold as expressed by the SPDR Gold Trust ETF (GLD) and the GDX since the start of 2012.
NGD Chart
NGD data by YCharts
To date New Gold has four 100% owned operating assets:
The Cerro San Pedro mine is a gold-silver heap-leach operation located in central Mexico producing gold-silver dore. This open pit mine has been in operation since 2007 and has yielded around 140,000 ounces of gold plus 2M ounces of silver each of the past two years. Reserves of 1.4M ounces of gold and 52M ounces of silver indicate a present estimated mine life of 10 years. There is ample scope to extend mine life through exploration with the current focus being put on a zone of high grade manto-style sulphide mineralization as it extends from an area of historic underground mining.
The Mesquite mine in California is also a gold heap-leach operation. The mine was re-started in 2008 by New Gold and is a simple truck and shovel open-pit with a current estimated mine life of 13 years backed by 3.1M reserve ounces. Near pit exploration is ongoing at various targets indicating a high probability for additional reserves.
The Peak complex in NSW, Australia, is comprised of five underground mines with a central plant producing gold and copper. The mine has been in production since 1992 and produces gold dore and copper concentrate. Production is stable at around 100,000 ounces of gold and 13Mlbs of copper. Reserves of 570,000 ounces of gold suggest a present life of mine of just over 5 years; however, ample resources and a history of replacing depleted mineralization through exploration indicate a strong probability of a much longer life left in this mining complex.
The New Afton open pit mine in British Columbia, Canada, is the youngest addition to the operating portfolio and began commercial production ahead of schedule in July 2012. The expected annual life of mine output is for 85,000 ounces of gold, 214,000 ounces of silver and 75M lbs of copper. Present reserves of 1.05M ounces of gold plus associated by-products indicate 14 years of mine life expectations at present. However, plenty of resources that can be expected to be converted into reserves over time, plus drilling designed to delineate further mineralization with open pit as well as underground potential raise expectations for significant extensions.
(click to enlarge)
All four assets are solid low-cost producers. Overall cash cost on a by-product basis were $421 in 2012 and are forecast to drop to $265 - $285 in 2013 due to the high copper content at New Afton. These cash costs are among the lowest in the industry. The highest cash costs within this portfolio are recorded at Mesquite ($690 in 2012 rising to around $840 in 2013), and the lowest costs are forecasted for the New Afton mine with negative cash costs of $1400. It should be pointed out, that these numbers are cash costs which is a non-GAAP measure that neglects various cost components and expenses. The gold mining industry is slowly waking up to criticism with regards to explaining their production costs and a new measure called all-in sustaining cash costs is emerging, possibly as a new future industry standard. New Gold seems to be supportive of this trend and has published a 2013 estimate of $875 per ounce all-in sustaining cash cost. If achieved, this performance would be significantly less than most other producers and bode very well for New Gold's future cash flow.
New Afton will drive growth in the short-term. For the mid-term the company has two very interesting development projects:
The Blackwater development project is located in south-central British Columbia, Canada. New Gold acquired the project in 2011 has since added the adjacent Capoose deposit and has expanded the total measured and indicated resource to almost 8M ounces of gold and over 60M ounces of silver plus additional inferred resources to boot. A PEA was completed in September 2012 with a production target of 500,000 ounces per year in mind. Completion of a feasibility study is anticipated for later in 2013 and tentative plans for production by 2017 have been mentioned. The project will require considerable capex due to the low grades that will require high throughput. Without doubt, the results of the FS will be eagerly anticipated by investors.
The second development project by the name of El Morro in Chile is a joint venture with Goldcorp (GG). New Gold's 30% share of this project is free-carried to production and a $71M loan associated with this project is only repayable from production. The project is of significant size with current reserves measured at 2.9M ounces of gold plus 2.1B lbs of copper and blue sky exploration potential. This project is presently suspended due to a dispute with native land owners. These native land owners are the same people fighting against the nearby highly problematic Pascua Lama project of Barrick Gold (ABX) and are tough opponents to have when trying to develop a mining operation.
Both these projects represent opportunities for New Gold, but in their own right both these projects are problematic when looking from a potential investor's point of view. Blackwater will need significant amounts of cash to be brought into production, and El Morro might turn into a second Pascua Lama if managed inappropriately.
And this might be the right place to introduce Rainy River, New Gold's latest acquisition. The flagship project of this exploration company is the Rainy River project in NW-Ontario. This project has proven and probable reserves of 4M ounces of gold plus 10.3M ounces of silver. A feasibility study has been completed based on assumptions for an open pit reserve at just over 1.3g/t gold equivalent and an underground reserve at just over 5g/t gold equivalent. This study assumed annual production of 326,000 ounces of gold plus 494,000 ounces of silver and computed an after-tax NPV of $931M, an after-tax IRR of 23.7% and payback within 3.2 years at a gold price of $1400. For a project this size, these metrics are very attractive, even though the gold price is hovering just under the project assumption at the moment. The initial capex is estimated to $713M and foreshadows the need for substantial financing. The timeline for approvals presently stretches into 2015 with construction commencing earlier in 2014. First production is apparently possible late in 2016.
In other words: Rainy River might sneak in before Blackwater in the development pipeline.
This brings us to our main concern with regards to New Gold's development plans. The company has currently $800M in outstanding unsecured notes which is a significant debt burden already (note to those checking the debt on yahoo.com: we are not counting the $71M debt in connection with the El Morro project). This long-term debt is due in 2020 at current terms. On the other hand, the company holds 672M in cash of which presumably $198M will be spent on the Rainy River acquisition leaving around $474M in the kitty, plus $100M of undrawn revolving credit. Recent growth has been impressive, but a significant portion of the growth has been financed by debt. Fellow author Jeff Williams has analyzed New Gold's debt positions and concluded that New Gold is already exposed to more financial risk than peers like Goldcorp or Kinross (KGC) due to its debt. Having said all this we would also like to note that New Gold has been shown to be a diligent manager of debt repaying the development loan for Mesquite four years ahead of schedule.
Looking at the Rainy River and Blackwater developments we envisage the need for combined capex in the order of $1.5B to $2B. This is a lot of money to raise for a company with a market capitalization of $3.3B. New Gold has a couple of years of strong cash flow ahead and will certainly improve its cash position further. However, a strong gold price will be necessary to keep enough cash coming in to service the existing debt on the one hand and to build capital for mine development on the other. Net earnings of $36.3M in Q1/2013 showed continuing strength and we will watch with interest when Q2 results are released that will be affected by the recent drop in spot price.
Goldcorp putting El Morro into production might just provide the windfall necessary for New Gold to be able to put Rainy River and Blackwater into production without significant dilution or further debt.
In Summary
New Gold has a declared focus on aggressive growth and it certainly walks the talk as evidenced in past years and also by its most recent acquisition of Rainy River Resources. We believe that the price of $198M is a fair consideration for the project and the acquisition was done at an opportune point in time.
New Gold operations offer solid and reliable low-cost production and free cash flow. Earnings from operating assets should provide a significant portion of capital towards project development; however, additional debt or share dilution seems probable considering the assumed development costs.
The company already carries significant debt and an increase in this debt position would increase the financial risk associated with New Gold.
New Gold is a growth story and should be treated as such by investors. In our view New Gold represents a high risk/reward investment proposition that requires close monitoring of debt levels and cash flow.
Given the focus on growth we suggest that investors should not expect meaningful dividends in the near future.
Junior Gold with a Major Mining Shareholder
http://juniorgoldminerseeker.blogspot.co.uk/p/gold-junior-explorers-with-major-mining.html
I believe the best approach to identify high potential Junior Gold and Silver Explorers, Developers and Miners is to identify great people and great projects.
A separate page on this blog is focused on key people, their past performance and current projects.
Another approach is to rely on the due diligence and expertise of the larger mining companies and to look at where they are investing their money and efforts. Many of the majors have to some degree "outsourced" their exploration efforts and will increase reserves by acquisition rather than discovery.
Equally companies like Barrick and the companies they acquired like Placer Dome have historical ownership and knowledge of vast areas which may have been sold or optioned during the 1990's when gold prices and profits were low, but that knowledge base may lead them back to some of these properties.
Past examples of majors taking early stakes in successful exploration would be Kinross taking a significant stake in Underworld Resources (UW.v) which they subsequently acquired after key discoveries had been made.
Here is a list of Larger Mining companies and investments or joint ventures they have made in Junior Explorers and Developers. This was from trying to follow insider info Jan 2012, please alert if you believe this is out of date.
I shall add a spreadsheet for tracking and link to more detailed posts
Major - Barrick Gold
Atna - Barrick sold its' 70% stake in Pinson mine leaving euity stake
Auriga Gold (AIA) (see old mines with new exploration)
Midway MDW.
Carpathian - (CPN.TO) - 9% stake
Novagold (NG.TO)
Allied Gold (ASX) no remaining stake. Interesting aggressive growth in Papua New Guinea.
Major - Newmont
Evrim Resources (JV) - JV 2012 Mexico - Paul Van Eeden
Eurasian Minerals (EMX.v) buying stakes during 2010/11
Fronteer - Acquired
Lydian (LYD.TO) purchases 2007/10 - Lydian purchases Newmont's interest - issues shares
Pilot Gold (PLG.TO) - As part of Fronteer acquisition)
Gabriel Resources (GBU.TO) (2005)
Loncor - (LN.v) - buying stakes 2010/11 - DR Congo >20,000 Km2 - political risk. Seeking Alpha article. Directors with BAA Banro.
Triple Plate Junction (LON:TPJ) JV Papua New Guinea
Premier Gold - JV on Rain/Saddle property consolidation - Premier 55% stake operator, utilise Newmont infrastructure into production.
Magellan Minerals stake, MNM.v
Major - Goldcorp
American Bonanza - 2004 now ?
Chesapeake - 2007 purchases
Evolving Gold - 2010 19m shares
Guyana Goldfields - sold out
Lexam - sold out
Madison Minerals -
Manitou - MTU.v - 7m shares 2010
Osisko (sold stake)
Planet Exploration 2003/4
Primero (floated)
Tahoe - (THO.TO) x40m 2010
Silver Wheaton - sale of silver by-product
Major - Anglo Gold Ashanti
Mariana Resources - Argentina
Silver Bull Resources
Evrim Resources
Major - Kinross
Underworld (UW.v) - Acquired
Red Back Mining - Acquired
Bema Gold - Acquired
Aurelian - Acquired
Alacer Gold - non insider 2007
BC Gold - Non insider 2011 -holding
Laurentian Gold Fields - non-insider 2009
Revolution Resources x6m Sept 2011 (ex Underworld team)
Ryepatch Gold - non insider 2010
Victoria Gold - buying 2008/9/10/11
White Bear Resources - (WBR.v) - x2.3m 2011
Sarama Resources (SWA.v) - 9% pres Oct 12
Major - Agnico Eagle
Golden Goliath - near Fresnillo / other properties. Richard Hughes.
Alexandria Minerals
Colibri Resource - 2011 x6m
Continuum - 2006
Cumberland - Acquired
Forum - 2008
Grayd - Acquired
Comaplex - Acquired
Queenston - Purchases stakes during 2010 - Acquisition proposed by Osisko
Stornoway
Western Troy (WRY.v)
Evolving Gold (EVG.TO) Joint venture on Rattlesnake Hills. Goldcorp insider at EVG also.
Rubicon - $70m stake
Major/Mid Tier - Iamgold
Avnel Gold - buy 2011
Carlaw Capital (CLW.P.v) x22m Aug 2011. shares 22>5c ?
Euro Ressources SA (chg nature ownership?)
Galane Gold
Merrex Gold (MXI.v) - (Buy 2011)
Mexican Silver Mines (? stock?)
Orezone - non insider 2010 - acuired original orezone
Oromin - (OLE.TO) x16m 2009
Columbia Crest (ex Eaglecrest) xxx (Columbia)
Bellhaven (BHV.v) 2011 (Columbia)
Bought Trelawny TRR.v
Major/Mid Tier - Osisko
Bowmore (BOW.v)
Brett Resources - Acquired
Threegold
Mexico Project
JV in Nevada
Bought Queenston QMI
Major/Mid Tier - AuRico Gold
Aurion Resources (Au.v) JV - Presentation Dec-2011 - The presentation shows that this was a Jim Dines Pick Jan 2011. This was also a Rick Rule investment, though no longer an insider through the Rule family trust since moving to Sprott.
Northgate - Acquired
Capital Gold - Acquired
Major - Couer D'Alene
See appendix of presentation for details
International Northair (INM.v) 11.8%
Silver Bull (SVB.TO) 12.7%
Huldra Silver (HDA.v) 9.5%
Commonwealth Silver - yet to IPO 6.8%
Cara Cara Silver (CSV.v) 3.4%
Apogee Silver (APE.v) - 9.7%
Pershing Gold (PGLC.OB) 4.3%
Soltoro (SOL.v) 7.6%
Bought out Mirasol's JV stake in
Major/Mid Tier - Hecla
Canamex in Nevada.
Dolly Varden in Canada
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