Monday, December 09, 2002 8:45:47 AM
Dec. 9th CEOcast Weekly Newsletter
VOLUME 60
After eight weeks of euphoria, fear returned. The Dow lost 250 points, or 2.8% as investors took profits. The Nasdaq declined 56 points, or 3.8% and the S&P 500 dropped 24 points, or 2.6%. Concerns about a struggling economy and weak corporate earnings dashed any remaining hopes that one of the major indices might avoid a third consecutive yearly decline. The Russell 2000 lost 2.4%. Only the Dow, down 13.7% for the year, appears to even have a chance of avoiding a double-digit decline.
After a wild ride upward over the past two months, which even saw the Dow briefly top its August high on Monday, investors paused to take some profits. Why this week? Certainly, the corporate news was not very favorable. Disappointing earnings/sales forecasts from industry leaders AOL Time Warner (NYSE: AOL), Walt Disney (NYSE: DIS) and Hewlett-Packard (NYSE: HPQ) did not help. United Airlines’ (NYSE: UAL) seemingly imminent bankruptcy was another reminder of how weak the airline industry is. Sluggish same-store sales numbers from retailers, a soft manufacturing report and rising unemployment levels all served as a reminder of how fragile the nascent economic recovery is. Valuations, many believe, have gotten ahead of themselves.
The news is not all negative. While many investors have realized substantial gains during this rally, this week’s pullback was reasonably orderly and did not do much technical damage. In fact, the Nasdaq closed Friday at a key technical support level in the 1,419 to 1,423 range, which represents its 20-day moving average, the September 11th reaction low and the top of the rally during the Summer. Thus, we believe that the bias remains higher for the Nasdaq, because of favorable seasonal factors. This week’s pullback may mean nothing more than the indices working off some of the over-bought conditions that occur when stocks rise too far too fast.
We have not spent much time discussing geo-political events and their impact on the market, because they are hard to forecast. Clearly, the Iraq situation will remain at the forefront of investors’ minds. It is likely that there will be continued rhetoric out of Washington this week as President Bush continues to push for Iraqi dictator Saddam Hussein to "fess up" to the weapons violations that have been ongoing in Iraq for years. This could prove to be a bit of a distraction to the markets, although few expect any military action before next year. In the interim, investors will turn their attention to a relatively slim list of corporate earnings announcements, led by retailers Albertson’s (NYSE: ABS) on Monday morning , Kroger (NYSE: KR) on Tuesday morning and HJ Heinz (NYSE: HNZ) on Thursday morning. Homebuilders Hovnanian (NYSE: HOV), on Monday morning, and Toll Brothers (NYSE: TOL) on Wednesday will also report results. Look for strong results out of each company. Thursday evening, Adobe Systems (NASDAQ: ADBE) will announce earnings.
As the year comes to a close, many companies will hold mid-quarter updates and analyst meetings this week. On Monday, Pharmacia (NYSE: PHA) holds its annual shareholder meeting. Tuesday morning Agilent Technologies (NYSE: A) holds an Analyst Day. Merck (NYSE: MRK), Oxford Health Plans (NYSE: OXHP) and Unisys (NYSE: UIS) also host similar events. The same day, Nokia (NYSE: NOK) will provide a mid-quarter update, as will semiconductor company Xilinx (NASDAQ: XLNX) and medical giant Medtronic (NYSE: MDT). On Wednesday after the market closes, Amgen (NASDAQ: AMGN) will hold a call to update 2003 guidance.
The economic calendar is a bit more active than the corporate one, highlighted by the Federal Reserve Open Market Committee’s meeting on Tuesday. Investors expect that Chairman Alan Greenspan will leave the fed funds rate unchanged and will continue to maintain a neutral bias. Tuesday, October Wholesale Inventories will also be announced. Thursday, retail sales for November will be released, which are expected to show a slight increase from the prior month. Finally, Friday brings the November Producer Price Index which should remain steady from October’s level. On Friday, the December Michigan Sentiment, which is expected to increase to approximately 85 from 84.2 the previous month, will be announced.
We have received numerous inquiries about our Special Newsletter coverage of eResearchTechnology (NASDAQ: ERES), a leading e-research technology and services provider for clinical applications. We anticipated that there would be a major short squeeze this week as short-sellers would begin to cover their positions, driving the price dramatically higher. This did not occur -- yet -- disappointing many of the investors who bought in expecting it to move rapidly higher. In fact, many investors bought the stock after it gapped higher on Tuesday, even reaching a high of $16.75. We hope investors have patience, as the fundamentals of the company are tremendous. The company actually raised its fourth and first quarter guidance this week, as it now expects to report revenue of $11.5 to $11.7 million. This translates, in our view, into 14 cents per share, or 43 cents per share for the 2002 year. It also increased its first quarter guidance by another 2 cents per share. Analysts, all with price targets of at least $21 on the company, expect the company to earn 65 cents per share for 2003. We believe the company is capable of doing much better, possibly earning as much as $0.70 to $0.73. This would represent earnings growth of as much as 75% from 2002’s results, and a P/E multiple of just 20 times ’03 estimates. Based upon current valuations, we believe the stock is cheap at current levels. A short squeeze can occur at any time, as investors in Neoware (NASDAQ: NWRE) and J2 Global Communications (NASDAQ: JCOM) will attest to. Still, ERES was up 4% for the week and 84% for the year. We encourage our readers to continue to accumulate positions.
Penn Octane Corporation (NASDAQ: POCC), a leading supplier of Liquefied Petroleum Gas (LPG) to Mexico, is expected to announce its first quarter results, for the period ending October 31, on Monday. The company is also likely to update investors on its plans to transition the company to a Master Limited Partnership at the time. The company continues to dramatically improve its operating results. Penn Octane has generated 38 cents per share in earnings for the past nine months, and expects to report EPS of 5 cents for its first quarter, compared to a loss of 10 cents per share last year. This would mean that the company trades for approximately 6 times trailing 12-month results. Even better, for investors, is that the company is now entering the strongest period of the year, as LPG for propane is used at a much higher rate during the winter months. The stock ended the week at $2.32.
Quanex Corp. (NYSE: NX), a maker of materials used for automobiles and building products, posted record net income of $15.1 million, or 97 cents per share, in its fourth quarter ended Oct. 31, compared with $11.2 million, or 77 cents per share, a year earlier. The company earned $2.07 per share for the year on a diluted basis. Despite coming off record results, the company expects fiscal 2003 to be even better, as a result of value-added products at both its MACSTEEL and Nichols Aluminum divisions, improved pricing of raw materials and new programs at its Engineered Products division. The company expects to earn 39 cents per share for its quarter, and to post improved sequential results for each of the subsequent quarters. This is a great way to play an economic recovery. The stock ended the week at $32.55, up 6.3%, meaning the company trades at less than 16 times earnings trailing 12-month earnings.
REX Stores Corporation (NYSE: RSC), a specialty retailer of consumer electronic products and appliances, reported third quarter results for the period ending October 31 this week. The company had net income of $4.3 million, or $0.31 per diluted share, compared to $4.4 million, or $0.33 per diluted share, in the third quarter of fiscal 2001. For the first nine months of the year, net income rose 21% to $13.8 million, or $0.95 per diluted share, from $11.4 million, or $0.86 per diluted share, in the first nine months of fiscal 2001. Net sales in the third quarter of fiscal 2002 were $95.7 million compared to $107.3 million in the year-ago period. Fiscal 2002 third quarter comparable store sales fell 8% from the third quarter of fiscal 2001. Net sales in the first nine months of fiscal 2002 were $282.3 million compared to $312.7 million in the first nine months of fiscal 2001, while comparable store sales for the period declined 7%. While the company’s third quarter sales declined, other large retailers such as Best Buy and Circuit City posted sluggish results as well. We believe that at its current P/E multiple of less than 7 times trailing 12-month earnings that the company represents an excellent way to play an economic turnaround. The stock ended the week at $11.57, up 12% from when we began coverage.
Cepheid (NASDAQ: CPHD), a leading developer, manufacturer and marketer of fully integrated systems that enable genetic assessment, announced this week the next-generation of its real-time DNA analysis system, the Smart Cycler® II. The Smart Cycler® system, which has become a standard real-time analysis instrument for DNA sequence detection, has been up-graded to meet the rapidly evolving needs of today's molecular biology labs. Molecular biologists have demanded growing applications and expanded capabilities of today's amplification and detection chemistries. The Smart Cycler® II real-time, multiplexed optical detection system has been enhanced to give users more flexibility and more choice in the use of next generation fluorescent detection dyes, chemistries, and techniques. The stock hit another 52-week high this week, before closing at $6.03, up 53% in two months since we began coverage.
Another stock we like quite a bit that has broken out to a new 52-week high this week is Wireless Facilities (NASDAQ: WFII). The stock is up 47% in the three months since we began coverage, as the leader in the management of wireless telecommunications networks, continues to be one of the few wireless companies that has been able to growing revenues sequentially and to post bottom-line earnings. The company has no debt and continues to generate impressive cash flow. The stock ended the week at $6.93.
We continue to believe that all investors should own gold stocks today as a hedge against geo-political events and an economic recovery that has been inconsistent at best. We have tended to focus on the junior gold stocks. Silverado Gold Mines (OTCBB: SLGLF) is a company we highlight every week. The stock is an excellent way for investors to get tremendous leverage to a price increase in gold. The company continues to develop its Nolan Mine in Alaska, and its stock seems to establish a new 52-week high virtually every week. This week was no exception. Despite a lack of an appreciable upward move in the price of gold during the past seven weeks, the stock is up 80% from the time we began coverage. Is now too late to establish a position? We think not. When a gold stock rises significantly without price appreciation in the metal, it often means that the stock is being accumulated by "smart money". In this case, savvy investor David Tice, manager of The Prudent Bear Fund, has been a recent buyer. The price increases have come on significant spikes in volume, also a bullish sign. The stock ended the week at $.705, and is up 700% for the year! Still, we think that the advance is only gaining momentum.
Golden Eagle International, Inc. (OTCBB: MYNG) is another junior mining company with rapidly improving fundamentals. This week, the company announced that it had achieved record production at its gold recovery plant at Cangalli, Bolivia. The company’s open pit operations produced 3,859 tons. While it is currently unable to sustain these production levels, it can now consistently produce at 2,000 tons per day. The company expects to be able to shortly assess its gold grade, and will likely issue a report within two weeks. We believe that investors should consider increasing positions ahead of this report, as a favorable announcement would have significant implications for future revenues. The stock has tremendous support at $0.25, and has been another big winner, up 86% in the five months we have covered it. Volume increased this week, indicating that it could be under accumulation, a bullish signal.
BIO-key International (OTCBB: BKYI), announced this week the signing of an OEM agreement with Monarch Medical International Ltd. This marks a new application for the company’s "True User Identification™" software, which enables finger-based one-to-many positive biometric identification in a wide variety of commercial and governmental applications for information security and access control. Monarch is an Information Manager, providing the key component for clinical and financial healthcare administration. Since HIPAA regulations have increasingly focused on securing medical records, this market could represent a significant opportunity for the company. The stock ended the week at $0.67, up 1 cent on the week.
Orphan Medical (NASDAQ: ORPH), the maker of treatments for uncommon diseases, reiterated its previous 2002 sales guidance of $15.5 million to $16 million, supported by a strong response to its cataplexy treatment since its launch Oct. 7. The company announced that 552 prescriptions were written for its Xyrem sodium oxybate oral solution through Nov. 29, exceeding the company's expectations. Xyrem is the first and only approved medication for the treatment of cataplexy, a debilitating symptom of narcolepsy. Investors have been watching results closely, as the drug is expected to be a catalyst for the company’s future sales growth. The U.S. cataplexy market is estimated to be in excess of $125 million annually. The stock ended the week at $9.91, up 10.3% since we began coverage in October.
Investors who have followed Aceto Corporation (NASDAQ: ACET) a global distributor of Pharmaceuticals and Specialty Chemicals, have done well since we initiated coverage in our March 17th newsletter. The stock was selling for $10.93 at that time and closed Friday at $14.72, a 34.6% increase. We expect further growth as the company gave earnings guidance for the first time in its history. The company announced at its annual shareholders meeting that it expects earnings for its fiscal year ending June 30, 2003 to be in excess of $1.11 per diluted share, before giving effect to any non-cash goodwill impairment charges, that represents an increase of $0.36 per diluted share and a 48% increase in earnings over the previous year. The company also announced a 3 for 2 stock dividend and an 8% increase in the annual cash dividend payable on its common stock. The annual cash dividend will increase to 23 cents per common share from 21.3 cents (both adjusted for the stock dividend), and will continue to be paid semi-annually. Both the stock dividend and the cash dividend will be paid to holders of record as of the close of business on December 18, 2002 and will be paid on January 2, 2003. Few companies can boast of significant increases in both stock appreciation and dividends. The stock ended the week at $14.72.
America Online Latin America Inc. (NASDAQ: AOLAC), a leading interactive services provider in Latin America, announced this week an interactive marketing agreement between its subsidiary AOL Mexico S. de R.L. de C.V. and American Express Mexico. The American Express card is being prominently promoted across the AOL Mexico service, in conjunction with an integrated marketing communications campaign with online promotions, direct mail marketing materials through bill inserts, and various consumer advertising initiatives. We believe that additional agreements such as these could indicate that the advertising business is slowly beginning to return. Since AOLAC has a leading brand name, it is likely to be one of the biggest beneficiaries of this trend in Latin America. The stock ended the week at $0.49.
Tri-Valley Oil & Gas Co. (OTCBB: TRIL) announced this week that it had begun drilling the Aurora No. 1-19, a new field wildcat some six miles southeast of McFarland, California. The Company is hoping to discover a potential now estimated in the range of 18 million barrels of oil. The Aurora prospect is one of the 26 separate prospects comprising the TVOG Opus I Drilling Program L.P. that the Company has underway. Tri-Valley expects to reach a total depth of 5,800 feet to test the primary objective of the Aurora Prospect before the end of December. The company has 20,000 line miles of digitized California seismic data and a proprietary geologic library with 700 leads and prospects in California that is more than all the other independent companies combined. Aurora is just one of many high-impact prospects it is pursuing. The stock ended the week at $1.78.
SmartServ Online, Inc. (NASDAQ: SSOL) announced this week that the Nasdaq had informed it that it had maintained its listing on the Exchange. The company continues to expand the distribution of its wireless financial content, as most recently ALLTEL will begin offer its digital wireless customers with BREW-enabled phones the ability to preview and subscribe to the Forbes.com Wireless, powered by SmartServ™. The stock ended the week at $1.28.
International Hi-Tech Industries Inc. (OTCBB: IHITF), an emerging company whose principal business is the development and commercialization of a new building system, jumped 8% this week after announcing improved operating results. The company is positioning itself to receive a large order from a joint venture with Saudi Arabia. The company lost approximately $600,000 on an operating basis for the third quarter, although because its revenues currently come from licensing deals, revenues and earnings are still lumpy, impacted by key customer wins. The stock ended the week at $0.27.
SPECIAL SITUATIONS:
Health Sciences Group Inc. (OTCBB: HESG) $0.80
One of the fastest growing areas in healthcare is nutraceuticals. In fact, 74% of Americans surveyed said that they consumed nutraceuticals regularly. Over half of the country has used nutraceuticals at one time or another. Experts estimate that the nutraceutical industry could be as large as $50 billion. Servicing this highly fragmented industry are numerous companies, many of which have unrealized value potential often stemming from inadequate capital resources, limited management experience, and unexploited intellectual property. Identifying this as an opportunity, Health Sciences Group, Inc. has embarked on a plan to acquire and vertically integrate these companies to efficiently provide value-added products and services.
The Company has wasted little time in aggressively pursuing this strategy. In December 2001, only forty days after announcing its intentions, Health Sciences successfully acquired its first two companies. Then it proceeded to successfully expand the appraised value of the acquired intellectual property portfolio by over $4.0 million. Within approximately three months thereafter, the Company announced its intentions to acquire Quality Botanical Ingredients, Inc. (QBI), a leading purchaser, manufacturer and contract processor of bulk botanical materials and nutritional ingredients. Its largest announced target to date, QBI will give the Company a sizeable presence in the nutraceutical market. QBI is expected to post revenues this year of approximately $15 million.
The Company’s current businesses include XCEL Healthcare, Inc. and BioSelect Innovations, Inc. XCEL operates a specialty pharmacy, which delivers pharmacological products and services to clients with chronic illnesses. Typically, XCEL clients spend $20,000 to $50,000 per year on treatment. XCEL has built a powerful network of referral sources through its affiliations with many of the leading medical institutions such as UCLA Medical Center and Cedars Sinai Hospital. BioSelect develops and wholesales its private-label proprietary products to a global network of customers who manufacture and distribute compounded pharmaceuticals, nutraceuticals and skin care products. The acquisition of BioSelect provided Health Sciences with a portfolio of proprietary (patents pending) combinations of over-the-counter (OTC) pharmaceutical and nutraceutical products that address very large consumer markets. Health Sciences is expected to post revenues this year of approximately $5.2 million.
Health Sciences’ revenues have been relatively small to date. For the nine months ended September 30, the Company generated revenues of approximately $4.2 million, posting a loss of 56 cents per share, or nearly $3.2 million. This should all change, however, once the Company concludes its acquisition of QBI. The dietary supplements market at the retail level is estimated at $17 billion with herbs and botanicals representing about one fourth of this total.
The Company’s strategy of acquiring companies in the healthcare sector is not a new one. However, what makes Health Sciences unique is that it is acquiring companies that, when put together, provide all of the necessary components required to produce value-added nutraceutical/pharmaceutical products from start to finish. These products include nutritional supplements, functional foods & beverages, and skin care products, which are sold typically to wholesale customers. By producing products for wholesale distribution, the Company is generally less susceptible to retail market fluctuations. The less dollars the Company has to spend on marketing and advertising to retail consumers, the more it can drop to the bottom line. Health Sciences expects to aggressively grow its revenue base internally through operational improvements and by making additional accretive acquisitions.
We often like to say that it is more important to bet on the jockey than the horse when selecting micro-cap companies. This is where the Company’s management experience should be invaluable. Its CEO was formerly the Sr. Manager of Investments & Acquisitions for DIRECTV, Inc., a wholly-owned subsidiary of Hughes Electronics Corporation. Its current President was the founder and Chief Executive Officer of Worldwide Financial Group, Inc., a boutique investment bank servicing the needs of public and private companies operating in health-related areas. Other executives retained from the XCEL and BioSelect acquisition have notable qualifications and operating experience.
The stock has fallen from approximately $3 in January to today’s levels as a result of investors’ frustrations with the Company not having yet completed the QBI acquisition. Thus, with a market valuation of approximately $7 million today, much of the risk has been taken out of the stock. We think that the Company is now closer to closing the QBI transaction, and that such an announcement could be a catalyst for the stock to move higher. Lately, the Company’s trading volume has been increasing, a sign that a breakout could be forthcoming. Since the stock is currently just about its 52-week low, we believe that an upcoming QBI announcement could be just what the doctor ordered to create a sharp near-term increase in Health Sciences.
Pharmos Corporation (NASDAQ: PARS) $1.32
One of the most severely depressed sectors has been biotech. Pharmos Corporation is a bio-pharmaceutical company that discovers and develops new drugs to treat a range of inflammatory and neurological disorders such as traumatic brain injury and stroke. The company considers major research & development projects to be those projects that have reached at least Phase II level of clinical development. The Company's major project is the development of dexanabinol for the treatment of traumatic brain injury, which is currently involved in Phase III testing in Europe, Australia and Israel. During the third quarter of 2002, the gross cost of the project was $4.0 million. Total costs since the project entered Phase II development in 1996 through September 30, 2002 are $22.8 million, that are certainly in line with other research projects.
Brain injury treatment has a large unmet need. There is no drug for people that have been hit on their head or have had a serious car or other vehicle accident. In the U.S. alone there are 300,000 brain injuries each year. Approximately 50,000 die and another 80,000 suffer long term disability. Based on a number of models the potential for treatment is in the $500 million range.
Although the company does not currently have any approved products it has sold two successful ophthalmic products to Bausch & Lomb, and continues to receive milestone payments which can be as high as $12 million over the next two years. These funds should contribute a significant amount to allow the company to finish its Phase III trials.
Pharmos' chemical library consists of two chemically distinct cannabinoid platforms, tricyclic dextrocannabinoids and bicyclic cannabinoids. The two classes of synthetic cannabinoids have different mechanisms of action, but there is considerable overlap in their therapeutic potential for treating neurological, cardiovascular, autoimmune and inflammatory disorders.
The tricyclic dextrocannabinoids, for which dexanabinol is the prototype, do not bind to either of the two known classes of cannabinoid receptors. Therefore, this family of compounds does not show the psychotropic and other negative side effects seen with naturally occurring cannabinoids. Drug candidates in this family display biological activity by blocking the activation of specific channels in nerve cells and/or
inhibiting several major inflammatory mechanisms. Both activities may reduce the amount of sudden and programmed cell death caused by certain disorders.
Dexanabinol has potential in another significant area, which occurs after cardiac bypass surgery. It is estimated that 25 percent of all patients going through bypass surgery have cognitive impairments. Currently there is a Phase II trial underway to determine whether the drug will work. It is estimated that one in four patients have this problem and are waiting for a drug treatment. In the U.S there are about one million cases per year.
Finally, Pharmos has a large early stage program for the treatment of pain. This program has three main candidates which will be targeting such things as multiple sclerosis, inflammatory bowel disease and rheumatoid arthritis. We believe that Pharmos, with its proprietary technology and a past record in drug development bears close watching for investors who understand the long term horizon needed to bring a drug to market.
Forbes Medi-Tech Inc. (NASDAQ: FMTI) $0.41
One of the areas that has received the greatest focus in the healthcare sector has been the cardiovascular area. As heart disease is one of the leading killers in the country today, many companies have attempted to develop solutions, including cholesterol-lowering products. Forbes Medi-Tech appears to have a promising portfolio of cholesterol-lowering pharmaceutical products. Its lead compound FM-VP4 has been approved for a Phase II clinical study. In addition, it already has a product on the market which has demonstrated promising revenue growth.
The company’s platform is based upon core sterol technology. Plantsterols, also known as phytosterols, are lipid-like compounds found in the cells and membranes of oil-producing plants, grains and trees. Plant sterols have attractive commercial applications as cholesterol-lowering agents in the nutraceutical, dietary supplement and pharmaceutical market. The company has acquired exclusive worldwide commercialization rights to these patented technologies. Forbes has refined the original licensed technology as well as developed improved technologies in the area of wood sterols, where phytosterols are obtained from tall oil pitch. Obtaining phytosterols from oil pitch rather than oil soap has proven to be more cost efficient utilizing the improved extraction technology.
As we mentioned in the profile on Health Sciences, nutraceuticals are one of the most promising areas in healthcare. Forbes has developed Phytrol™, a proprietary functional food ingredient, derived from wood-pulping byproducts that has been clinically proven to significantly lower "bad" cholesterol when consumed in different foods such as margarine, chocolate and dairy products. Phytrol™ is marketed under the brand name Reducol™. The results of a pivotal Forbes-sponsored clinical study on Reducol™ were published in the American Journal of Clinical Nutrition in June, 1999. The key finding showed a 24.4% reduction in LDL cholesterol in the test group with Reducol™ - enriched margarine in their diet compared to an 8.9% reduction for the group on a standardized diet alone. The study, conducted at McGill University in Montreal, took place over a 30-day period on 32 mildly hyperlipidemic (higher than average cholesterol levels) individuals.
The company has made major investments in manufacturing of phytosterols. It currently has a 50-50 joint venture with Chusei (USA) Inc. to manufacture the product from a plant in Pasadena, Texas. The company recognizes approximately 60 to 70 % of the revenue from the joint venture. Approximately 800 tons of Phyto-Source's 1,000-ton annual production capacity has been secured by these new and existing contracts. The company has also secured sterols supply agreements for up to $40 million over a two-year period based on customer forecasts. Forbes expects to generate revenue this year of $5 million, of which direct sales and royalties will be approximately $4.5 million. Sales volumes of phytosterols for calendar 2002 for the company and its joint venture are anticipated to be 350 tons, compared with 180 tons for the previous year. Based on existing sales contracts, and assuming that forecasted supply requirements will be ordered, the company is projecting its share of revenue from sterol sales for 2003 will be $12 million. This figure represents its share of the $20 million projected revenue of the combined sales contracts of the company and the Phyto-Source joint venture. Forbes is in discussions with several other companies regarding possible new major sterol contracts.
The second opportunity for the company is a clinical one, as VP4 is a water and lipid-soluble analogue of phytostanols, which has demonstrated dramatic cholesterol-lowering and anti-atherosclerotic properties in pre-clinical studies. The safety and effectiveness of this cholesterol transport inhibitor are currently being investigated in a combined Phase I and Phase II protocol at the Academic Medical Center in Amsterdam, one of the world's leading centers for the management and research of dyslipidaemia. The revised Phase II protocol does not change the investigation of the four groups of 25 hypercholesterolemic volunteers who will be treated daily for 28 days with either a placebo or escalating doses of FM-VP4. The company believes that the release of the Phase I results on safety in early January could lead to substantive discussions with partners.
Despite the potential of this large market, the company has a valuation of less than $10 million. Recently, it raised approximately $975,000, which should avert any short-term liquidity concerns that investors may have. The company recently completed a restructuring designed to further reduce its cash consumption. It believes that it currently has sufficient capital to achieve profitability, although it continues to seek additional financing. The stock, like many other small pharmaceutical companies, has been impacted by the downturn in the sector, as it is off 78% this year. However, we believe that the large market opportunity in cholesterol-lowering products, nominal valuation and potential for significant growth in the sale of phytosterols make the company an attractive investment candidate at current levels.
Let us know what you think about our coverage. You may reach us at news@ceocast.com.
The CEOcast Newsletter is an electronic publication committed to providing our readers with factual information on selected publicly traded companies. All statements and expressions are the sole opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. The profiles, critiques, and other editorial content of CEOcast may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. THE READERSHOULD VERIFY ALL CLAIMS AND DO ITS OWN DUE DILIGENCE BEFORE INVESTING INANY SECURITIES MENTIONED. INVESTING IN SECURITIES IS SPECULATIVE AND CARRIESA HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS NEWSLETTER IS PROTECTEDBY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCEDIN ANY WAY WITHOUT THE EXPRESSED, WRITTEN CONSENT OF THE EDITORS OF CEOcast. Moreover, as detailed below, this publication accepts compensation from certain of the companies that it features. To the degrees enumerated herein, this newsletter should not be regarded as an independent publication. The profiles, critiques, and other editorial content of CEOcast may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. This information has not been independently verified by CEOcast. The reader should use caution, as a result. The following companies, featured in this newsletter, have compensated CEOcast: Silverado Gold Mines, forty-thousand dollars and one hundred sixty thousand shares of stock for a five-month program, BIO-Key International, seventy-five hundred dollars per month, plus options to purchase two hundred thousand shares at forty-two cents, Rex Stores, seven thousand five hundred dollars, Cepheid, seven thousand five hundred dollars, Orphan Medical, seven thousand five hundred dollars, Quanex, seven thousand five hundred dollars, Golden Eagle International, six thousand dollars per month, plus fifty thousand shares of stock per month, eResearchTechnology, seven thousand five hundred dollars, plus warrants to purchase twelve thousand shares at thirteen forty, Tri-Valley Corporation, six thousand dollars per month, AOL Latin America, seven thousand five hundred dollars, Health Science Corporation, eighty thousand dollars for a two month program, Forbes Medi-Tech, seven thousand five hundred dollars, SmartServ Online, seven thousand five hundred dollars, Wireless Facilities, seven thousand five hundred dollars, Penn Octane Corporation, six thousand dollars per month, twenty thousand shares of stock and warrants to purchase twenty thousand shares of stock at three dollars fifty five cents (our editors own sixty-four thousand shares as well), Pharmos Corporation, seven thousand five hundred dollars, Aceto Corporation, ten thousand dollars.
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VOLUME 60
After eight weeks of euphoria, fear returned. The Dow lost 250 points, or 2.8% as investors took profits. The Nasdaq declined 56 points, or 3.8% and the S&P 500 dropped 24 points, or 2.6%. Concerns about a struggling economy and weak corporate earnings dashed any remaining hopes that one of the major indices might avoid a third consecutive yearly decline. The Russell 2000 lost 2.4%. Only the Dow, down 13.7% for the year, appears to even have a chance of avoiding a double-digit decline.
After a wild ride upward over the past two months, which even saw the Dow briefly top its August high on Monday, investors paused to take some profits. Why this week? Certainly, the corporate news was not very favorable. Disappointing earnings/sales forecasts from industry leaders AOL Time Warner (NYSE: AOL), Walt Disney (NYSE: DIS) and Hewlett-Packard (NYSE: HPQ) did not help. United Airlines’ (NYSE: UAL) seemingly imminent bankruptcy was another reminder of how weak the airline industry is. Sluggish same-store sales numbers from retailers, a soft manufacturing report and rising unemployment levels all served as a reminder of how fragile the nascent economic recovery is. Valuations, many believe, have gotten ahead of themselves.
The news is not all negative. While many investors have realized substantial gains during this rally, this week’s pullback was reasonably orderly and did not do much technical damage. In fact, the Nasdaq closed Friday at a key technical support level in the 1,419 to 1,423 range, which represents its 20-day moving average, the September 11th reaction low and the top of the rally during the Summer. Thus, we believe that the bias remains higher for the Nasdaq, because of favorable seasonal factors. This week’s pullback may mean nothing more than the indices working off some of the over-bought conditions that occur when stocks rise too far too fast.
We have not spent much time discussing geo-political events and their impact on the market, because they are hard to forecast. Clearly, the Iraq situation will remain at the forefront of investors’ minds. It is likely that there will be continued rhetoric out of Washington this week as President Bush continues to push for Iraqi dictator Saddam Hussein to "fess up" to the weapons violations that have been ongoing in Iraq for years. This could prove to be a bit of a distraction to the markets, although few expect any military action before next year. In the interim, investors will turn their attention to a relatively slim list of corporate earnings announcements, led by retailers Albertson’s (NYSE: ABS) on Monday morning , Kroger (NYSE: KR) on Tuesday morning and HJ Heinz (NYSE: HNZ) on Thursday morning. Homebuilders Hovnanian (NYSE: HOV), on Monday morning, and Toll Brothers (NYSE: TOL) on Wednesday will also report results. Look for strong results out of each company. Thursday evening, Adobe Systems (NASDAQ: ADBE) will announce earnings.
As the year comes to a close, many companies will hold mid-quarter updates and analyst meetings this week. On Monday, Pharmacia (NYSE: PHA) holds its annual shareholder meeting. Tuesday morning Agilent Technologies (NYSE: A) holds an Analyst Day. Merck (NYSE: MRK), Oxford Health Plans (NYSE: OXHP) and Unisys (NYSE: UIS) also host similar events. The same day, Nokia (NYSE: NOK) will provide a mid-quarter update, as will semiconductor company Xilinx (NASDAQ: XLNX) and medical giant Medtronic (NYSE: MDT). On Wednesday after the market closes, Amgen (NASDAQ: AMGN) will hold a call to update 2003 guidance.
The economic calendar is a bit more active than the corporate one, highlighted by the Federal Reserve Open Market Committee’s meeting on Tuesday. Investors expect that Chairman Alan Greenspan will leave the fed funds rate unchanged and will continue to maintain a neutral bias. Tuesday, October Wholesale Inventories will also be announced. Thursday, retail sales for November will be released, which are expected to show a slight increase from the prior month. Finally, Friday brings the November Producer Price Index which should remain steady from October’s level. On Friday, the December Michigan Sentiment, which is expected to increase to approximately 85 from 84.2 the previous month, will be announced.
We have received numerous inquiries about our Special Newsletter coverage of eResearchTechnology (NASDAQ: ERES), a leading e-research technology and services provider for clinical applications. We anticipated that there would be a major short squeeze this week as short-sellers would begin to cover their positions, driving the price dramatically higher. This did not occur -- yet -- disappointing many of the investors who bought in expecting it to move rapidly higher. In fact, many investors bought the stock after it gapped higher on Tuesday, even reaching a high of $16.75. We hope investors have patience, as the fundamentals of the company are tremendous. The company actually raised its fourth and first quarter guidance this week, as it now expects to report revenue of $11.5 to $11.7 million. This translates, in our view, into 14 cents per share, or 43 cents per share for the 2002 year. It also increased its first quarter guidance by another 2 cents per share. Analysts, all with price targets of at least $21 on the company, expect the company to earn 65 cents per share for 2003. We believe the company is capable of doing much better, possibly earning as much as $0.70 to $0.73. This would represent earnings growth of as much as 75% from 2002’s results, and a P/E multiple of just 20 times ’03 estimates. Based upon current valuations, we believe the stock is cheap at current levels. A short squeeze can occur at any time, as investors in Neoware (NASDAQ: NWRE) and J2 Global Communications (NASDAQ: JCOM) will attest to. Still, ERES was up 4% for the week and 84% for the year. We encourage our readers to continue to accumulate positions.
Penn Octane Corporation (NASDAQ: POCC), a leading supplier of Liquefied Petroleum Gas (LPG) to Mexico, is expected to announce its first quarter results, for the period ending October 31, on Monday. The company is also likely to update investors on its plans to transition the company to a Master Limited Partnership at the time. The company continues to dramatically improve its operating results. Penn Octane has generated 38 cents per share in earnings for the past nine months, and expects to report EPS of 5 cents for its first quarter, compared to a loss of 10 cents per share last year. This would mean that the company trades for approximately 6 times trailing 12-month results. Even better, for investors, is that the company is now entering the strongest period of the year, as LPG for propane is used at a much higher rate during the winter months. The stock ended the week at $2.32.
Quanex Corp. (NYSE: NX), a maker of materials used for automobiles and building products, posted record net income of $15.1 million, or 97 cents per share, in its fourth quarter ended Oct. 31, compared with $11.2 million, or 77 cents per share, a year earlier. The company earned $2.07 per share for the year on a diluted basis. Despite coming off record results, the company expects fiscal 2003 to be even better, as a result of value-added products at both its MACSTEEL and Nichols Aluminum divisions, improved pricing of raw materials and new programs at its Engineered Products division. The company expects to earn 39 cents per share for its quarter, and to post improved sequential results for each of the subsequent quarters. This is a great way to play an economic recovery. The stock ended the week at $32.55, up 6.3%, meaning the company trades at less than 16 times earnings trailing 12-month earnings.
REX Stores Corporation (NYSE: RSC), a specialty retailer of consumer electronic products and appliances, reported third quarter results for the period ending October 31 this week. The company had net income of $4.3 million, or $0.31 per diluted share, compared to $4.4 million, or $0.33 per diluted share, in the third quarter of fiscal 2001. For the first nine months of the year, net income rose 21% to $13.8 million, or $0.95 per diluted share, from $11.4 million, or $0.86 per diluted share, in the first nine months of fiscal 2001. Net sales in the third quarter of fiscal 2002 were $95.7 million compared to $107.3 million in the year-ago period. Fiscal 2002 third quarter comparable store sales fell 8% from the third quarter of fiscal 2001. Net sales in the first nine months of fiscal 2002 were $282.3 million compared to $312.7 million in the first nine months of fiscal 2001, while comparable store sales for the period declined 7%. While the company’s third quarter sales declined, other large retailers such as Best Buy and Circuit City posted sluggish results as well. We believe that at its current P/E multiple of less than 7 times trailing 12-month earnings that the company represents an excellent way to play an economic turnaround. The stock ended the week at $11.57, up 12% from when we began coverage.
Cepheid (NASDAQ: CPHD), a leading developer, manufacturer and marketer of fully integrated systems that enable genetic assessment, announced this week the next-generation of its real-time DNA analysis system, the Smart Cycler® II. The Smart Cycler® system, which has become a standard real-time analysis instrument for DNA sequence detection, has been up-graded to meet the rapidly evolving needs of today's molecular biology labs. Molecular biologists have demanded growing applications and expanded capabilities of today's amplification and detection chemistries. The Smart Cycler® II real-time, multiplexed optical detection system has been enhanced to give users more flexibility and more choice in the use of next generation fluorescent detection dyes, chemistries, and techniques. The stock hit another 52-week high this week, before closing at $6.03, up 53% in two months since we began coverage.
Another stock we like quite a bit that has broken out to a new 52-week high this week is Wireless Facilities (NASDAQ: WFII). The stock is up 47% in the three months since we began coverage, as the leader in the management of wireless telecommunications networks, continues to be one of the few wireless companies that has been able to growing revenues sequentially and to post bottom-line earnings. The company has no debt and continues to generate impressive cash flow. The stock ended the week at $6.93.
We continue to believe that all investors should own gold stocks today as a hedge against geo-political events and an economic recovery that has been inconsistent at best. We have tended to focus on the junior gold stocks. Silverado Gold Mines (OTCBB: SLGLF) is a company we highlight every week. The stock is an excellent way for investors to get tremendous leverage to a price increase in gold. The company continues to develop its Nolan Mine in Alaska, and its stock seems to establish a new 52-week high virtually every week. This week was no exception. Despite a lack of an appreciable upward move in the price of gold during the past seven weeks, the stock is up 80% from the time we began coverage. Is now too late to establish a position? We think not. When a gold stock rises significantly without price appreciation in the metal, it often means that the stock is being accumulated by "smart money". In this case, savvy investor David Tice, manager of The Prudent Bear Fund, has been a recent buyer. The price increases have come on significant spikes in volume, also a bullish sign. The stock ended the week at $.705, and is up 700% for the year! Still, we think that the advance is only gaining momentum.
Golden Eagle International, Inc. (OTCBB: MYNG) is another junior mining company with rapidly improving fundamentals. This week, the company announced that it had achieved record production at its gold recovery plant at Cangalli, Bolivia. The company’s open pit operations produced 3,859 tons. While it is currently unable to sustain these production levels, it can now consistently produce at 2,000 tons per day. The company expects to be able to shortly assess its gold grade, and will likely issue a report within two weeks. We believe that investors should consider increasing positions ahead of this report, as a favorable announcement would have significant implications for future revenues. The stock has tremendous support at $0.25, and has been another big winner, up 86% in the five months we have covered it. Volume increased this week, indicating that it could be under accumulation, a bullish signal.
BIO-key International (OTCBB: BKYI), announced this week the signing of an OEM agreement with Monarch Medical International Ltd. This marks a new application for the company’s "True User Identification™" software, which enables finger-based one-to-many positive biometric identification in a wide variety of commercial and governmental applications for information security and access control. Monarch is an Information Manager, providing the key component for clinical and financial healthcare administration. Since HIPAA regulations have increasingly focused on securing medical records, this market could represent a significant opportunity for the company. The stock ended the week at $0.67, up 1 cent on the week.
Orphan Medical (NASDAQ: ORPH), the maker of treatments for uncommon diseases, reiterated its previous 2002 sales guidance of $15.5 million to $16 million, supported by a strong response to its cataplexy treatment since its launch Oct. 7. The company announced that 552 prescriptions were written for its Xyrem sodium oxybate oral solution through Nov. 29, exceeding the company's expectations. Xyrem is the first and only approved medication for the treatment of cataplexy, a debilitating symptom of narcolepsy. Investors have been watching results closely, as the drug is expected to be a catalyst for the company’s future sales growth. The U.S. cataplexy market is estimated to be in excess of $125 million annually. The stock ended the week at $9.91, up 10.3% since we began coverage in October.
Investors who have followed Aceto Corporation (NASDAQ: ACET) a global distributor of Pharmaceuticals and Specialty Chemicals, have done well since we initiated coverage in our March 17th newsletter. The stock was selling for $10.93 at that time and closed Friday at $14.72, a 34.6% increase. We expect further growth as the company gave earnings guidance for the first time in its history. The company announced at its annual shareholders meeting that it expects earnings for its fiscal year ending June 30, 2003 to be in excess of $1.11 per diluted share, before giving effect to any non-cash goodwill impairment charges, that represents an increase of $0.36 per diluted share and a 48% increase in earnings over the previous year. The company also announced a 3 for 2 stock dividend and an 8% increase in the annual cash dividend payable on its common stock. The annual cash dividend will increase to 23 cents per common share from 21.3 cents (both adjusted for the stock dividend), and will continue to be paid semi-annually. Both the stock dividend and the cash dividend will be paid to holders of record as of the close of business on December 18, 2002 and will be paid on January 2, 2003. Few companies can boast of significant increases in both stock appreciation and dividends. The stock ended the week at $14.72.
America Online Latin America Inc. (NASDAQ: AOLAC), a leading interactive services provider in Latin America, announced this week an interactive marketing agreement between its subsidiary AOL Mexico S. de R.L. de C.V. and American Express Mexico. The American Express card is being prominently promoted across the AOL Mexico service, in conjunction with an integrated marketing communications campaign with online promotions, direct mail marketing materials through bill inserts, and various consumer advertising initiatives. We believe that additional agreements such as these could indicate that the advertising business is slowly beginning to return. Since AOLAC has a leading brand name, it is likely to be one of the biggest beneficiaries of this trend in Latin America. The stock ended the week at $0.49.
Tri-Valley Oil & Gas Co. (OTCBB: TRIL) announced this week that it had begun drilling the Aurora No. 1-19, a new field wildcat some six miles southeast of McFarland, California. The Company is hoping to discover a potential now estimated in the range of 18 million barrels of oil. The Aurora prospect is one of the 26 separate prospects comprising the TVOG Opus I Drilling Program L.P. that the Company has underway. Tri-Valley expects to reach a total depth of 5,800 feet to test the primary objective of the Aurora Prospect before the end of December. The company has 20,000 line miles of digitized California seismic data and a proprietary geologic library with 700 leads and prospects in California that is more than all the other independent companies combined. Aurora is just one of many high-impact prospects it is pursuing. The stock ended the week at $1.78.
SmartServ Online, Inc. (NASDAQ: SSOL) announced this week that the Nasdaq had informed it that it had maintained its listing on the Exchange. The company continues to expand the distribution of its wireless financial content, as most recently ALLTEL will begin offer its digital wireless customers with BREW-enabled phones the ability to preview and subscribe to the Forbes.com Wireless, powered by SmartServ™. The stock ended the week at $1.28.
International Hi-Tech Industries Inc. (OTCBB: IHITF), an emerging company whose principal business is the development and commercialization of a new building system, jumped 8% this week after announcing improved operating results. The company is positioning itself to receive a large order from a joint venture with Saudi Arabia. The company lost approximately $600,000 on an operating basis for the third quarter, although because its revenues currently come from licensing deals, revenues and earnings are still lumpy, impacted by key customer wins. The stock ended the week at $0.27.
SPECIAL SITUATIONS:
Health Sciences Group Inc. (OTCBB: HESG) $0.80
One of the fastest growing areas in healthcare is nutraceuticals. In fact, 74% of Americans surveyed said that they consumed nutraceuticals regularly. Over half of the country has used nutraceuticals at one time or another. Experts estimate that the nutraceutical industry could be as large as $50 billion. Servicing this highly fragmented industry are numerous companies, many of which have unrealized value potential often stemming from inadequate capital resources, limited management experience, and unexploited intellectual property. Identifying this as an opportunity, Health Sciences Group, Inc. has embarked on a plan to acquire and vertically integrate these companies to efficiently provide value-added products and services.
The Company has wasted little time in aggressively pursuing this strategy. In December 2001, only forty days after announcing its intentions, Health Sciences successfully acquired its first two companies. Then it proceeded to successfully expand the appraised value of the acquired intellectual property portfolio by over $4.0 million. Within approximately three months thereafter, the Company announced its intentions to acquire Quality Botanical Ingredients, Inc. (QBI), a leading purchaser, manufacturer and contract processor of bulk botanical materials and nutritional ingredients. Its largest announced target to date, QBI will give the Company a sizeable presence in the nutraceutical market. QBI is expected to post revenues this year of approximately $15 million.
The Company’s current businesses include XCEL Healthcare, Inc. and BioSelect Innovations, Inc. XCEL operates a specialty pharmacy, which delivers pharmacological products and services to clients with chronic illnesses. Typically, XCEL clients spend $20,000 to $50,000 per year on treatment. XCEL has built a powerful network of referral sources through its affiliations with many of the leading medical institutions such as UCLA Medical Center and Cedars Sinai Hospital. BioSelect develops and wholesales its private-label proprietary products to a global network of customers who manufacture and distribute compounded pharmaceuticals, nutraceuticals and skin care products. The acquisition of BioSelect provided Health Sciences with a portfolio of proprietary (patents pending) combinations of over-the-counter (OTC) pharmaceutical and nutraceutical products that address very large consumer markets. Health Sciences is expected to post revenues this year of approximately $5.2 million.
Health Sciences’ revenues have been relatively small to date. For the nine months ended September 30, the Company generated revenues of approximately $4.2 million, posting a loss of 56 cents per share, or nearly $3.2 million. This should all change, however, once the Company concludes its acquisition of QBI. The dietary supplements market at the retail level is estimated at $17 billion with herbs and botanicals representing about one fourth of this total.
The Company’s strategy of acquiring companies in the healthcare sector is not a new one. However, what makes Health Sciences unique is that it is acquiring companies that, when put together, provide all of the necessary components required to produce value-added nutraceutical/pharmaceutical products from start to finish. These products include nutritional supplements, functional foods & beverages, and skin care products, which are sold typically to wholesale customers. By producing products for wholesale distribution, the Company is generally less susceptible to retail market fluctuations. The less dollars the Company has to spend on marketing and advertising to retail consumers, the more it can drop to the bottom line. Health Sciences expects to aggressively grow its revenue base internally through operational improvements and by making additional accretive acquisitions.
We often like to say that it is more important to bet on the jockey than the horse when selecting micro-cap companies. This is where the Company’s management experience should be invaluable. Its CEO was formerly the Sr. Manager of Investments & Acquisitions for DIRECTV, Inc., a wholly-owned subsidiary of Hughes Electronics Corporation. Its current President was the founder and Chief Executive Officer of Worldwide Financial Group, Inc., a boutique investment bank servicing the needs of public and private companies operating in health-related areas. Other executives retained from the XCEL and BioSelect acquisition have notable qualifications and operating experience.
The stock has fallen from approximately $3 in January to today’s levels as a result of investors’ frustrations with the Company not having yet completed the QBI acquisition. Thus, with a market valuation of approximately $7 million today, much of the risk has been taken out of the stock. We think that the Company is now closer to closing the QBI transaction, and that such an announcement could be a catalyst for the stock to move higher. Lately, the Company’s trading volume has been increasing, a sign that a breakout could be forthcoming. Since the stock is currently just about its 52-week low, we believe that an upcoming QBI announcement could be just what the doctor ordered to create a sharp near-term increase in Health Sciences.
Pharmos Corporation (NASDAQ: PARS) $1.32
One of the most severely depressed sectors has been biotech. Pharmos Corporation is a bio-pharmaceutical company that discovers and develops new drugs to treat a range of inflammatory and neurological disorders such as traumatic brain injury and stroke. The company considers major research & development projects to be those projects that have reached at least Phase II level of clinical development. The Company's major project is the development of dexanabinol for the treatment of traumatic brain injury, which is currently involved in Phase III testing in Europe, Australia and Israel. During the third quarter of 2002, the gross cost of the project was $4.0 million. Total costs since the project entered Phase II development in 1996 through September 30, 2002 are $22.8 million, that are certainly in line with other research projects.
Brain injury treatment has a large unmet need. There is no drug for people that have been hit on their head or have had a serious car or other vehicle accident. In the U.S. alone there are 300,000 brain injuries each year. Approximately 50,000 die and another 80,000 suffer long term disability. Based on a number of models the potential for treatment is in the $500 million range.
Although the company does not currently have any approved products it has sold two successful ophthalmic products to Bausch & Lomb, and continues to receive milestone payments which can be as high as $12 million over the next two years. These funds should contribute a significant amount to allow the company to finish its Phase III trials.
Pharmos' chemical library consists of two chemically distinct cannabinoid platforms, tricyclic dextrocannabinoids and bicyclic cannabinoids. The two classes of synthetic cannabinoids have different mechanisms of action, but there is considerable overlap in their therapeutic potential for treating neurological, cardiovascular, autoimmune and inflammatory disorders.
The tricyclic dextrocannabinoids, for which dexanabinol is the prototype, do not bind to either of the two known classes of cannabinoid receptors. Therefore, this family of compounds does not show the psychotropic and other negative side effects seen with naturally occurring cannabinoids. Drug candidates in this family display biological activity by blocking the activation of specific channels in nerve cells and/or
inhibiting several major inflammatory mechanisms. Both activities may reduce the amount of sudden and programmed cell death caused by certain disorders.
Dexanabinol has potential in another significant area, which occurs after cardiac bypass surgery. It is estimated that 25 percent of all patients going through bypass surgery have cognitive impairments. Currently there is a Phase II trial underway to determine whether the drug will work. It is estimated that one in four patients have this problem and are waiting for a drug treatment. In the U.S there are about one million cases per year.
Finally, Pharmos has a large early stage program for the treatment of pain. This program has three main candidates which will be targeting such things as multiple sclerosis, inflammatory bowel disease and rheumatoid arthritis. We believe that Pharmos, with its proprietary technology and a past record in drug development bears close watching for investors who understand the long term horizon needed to bring a drug to market.
Forbes Medi-Tech Inc. (NASDAQ: FMTI) $0.41
One of the areas that has received the greatest focus in the healthcare sector has been the cardiovascular area. As heart disease is one of the leading killers in the country today, many companies have attempted to develop solutions, including cholesterol-lowering products. Forbes Medi-Tech appears to have a promising portfolio of cholesterol-lowering pharmaceutical products. Its lead compound FM-VP4 has been approved for a Phase II clinical study. In addition, it already has a product on the market which has demonstrated promising revenue growth.
The company’s platform is based upon core sterol technology. Plantsterols, also known as phytosterols, are lipid-like compounds found in the cells and membranes of oil-producing plants, grains and trees. Plant sterols have attractive commercial applications as cholesterol-lowering agents in the nutraceutical, dietary supplement and pharmaceutical market. The company has acquired exclusive worldwide commercialization rights to these patented technologies. Forbes has refined the original licensed technology as well as developed improved technologies in the area of wood sterols, where phytosterols are obtained from tall oil pitch. Obtaining phytosterols from oil pitch rather than oil soap has proven to be more cost efficient utilizing the improved extraction technology.
As we mentioned in the profile on Health Sciences, nutraceuticals are one of the most promising areas in healthcare. Forbes has developed Phytrol™, a proprietary functional food ingredient, derived from wood-pulping byproducts that has been clinically proven to significantly lower "bad" cholesterol when consumed in different foods such as margarine, chocolate and dairy products. Phytrol™ is marketed under the brand name Reducol™. The results of a pivotal Forbes-sponsored clinical study on Reducol™ were published in the American Journal of Clinical Nutrition in June, 1999. The key finding showed a 24.4% reduction in LDL cholesterol in the test group with Reducol™ - enriched margarine in their diet compared to an 8.9% reduction for the group on a standardized diet alone. The study, conducted at McGill University in Montreal, took place over a 30-day period on 32 mildly hyperlipidemic (higher than average cholesterol levels) individuals.
The company has made major investments in manufacturing of phytosterols. It currently has a 50-50 joint venture with Chusei (USA) Inc. to manufacture the product from a plant in Pasadena, Texas. The company recognizes approximately 60 to 70 % of the revenue from the joint venture. Approximately 800 tons of Phyto-Source's 1,000-ton annual production capacity has been secured by these new and existing contracts. The company has also secured sterols supply agreements for up to $40 million over a two-year period based on customer forecasts. Forbes expects to generate revenue this year of $5 million, of which direct sales and royalties will be approximately $4.5 million. Sales volumes of phytosterols for calendar 2002 for the company and its joint venture are anticipated to be 350 tons, compared with 180 tons for the previous year. Based on existing sales contracts, and assuming that forecasted supply requirements will be ordered, the company is projecting its share of revenue from sterol sales for 2003 will be $12 million. This figure represents its share of the $20 million projected revenue of the combined sales contracts of the company and the Phyto-Source joint venture. Forbes is in discussions with several other companies regarding possible new major sterol contracts.
The second opportunity for the company is a clinical one, as VP4 is a water and lipid-soluble analogue of phytostanols, which has demonstrated dramatic cholesterol-lowering and anti-atherosclerotic properties in pre-clinical studies. The safety and effectiveness of this cholesterol transport inhibitor are currently being investigated in a combined Phase I and Phase II protocol at the Academic Medical Center in Amsterdam, one of the world's leading centers for the management and research of dyslipidaemia. The revised Phase II protocol does not change the investigation of the four groups of 25 hypercholesterolemic volunteers who will be treated daily for 28 days with either a placebo or escalating doses of FM-VP4. The company believes that the release of the Phase I results on safety in early January could lead to substantive discussions with partners.
Despite the potential of this large market, the company has a valuation of less than $10 million. Recently, it raised approximately $975,000, which should avert any short-term liquidity concerns that investors may have. The company recently completed a restructuring designed to further reduce its cash consumption. It believes that it currently has sufficient capital to achieve profitability, although it continues to seek additional financing. The stock, like many other small pharmaceutical companies, has been impacted by the downturn in the sector, as it is off 78% this year. However, we believe that the large market opportunity in cholesterol-lowering products, nominal valuation and potential for significant growth in the sale of phytosterols make the company an attractive investment candidate at current levels.
Let us know what you think about our coverage. You may reach us at news@ceocast.com.
The CEOcast Newsletter is an electronic publication committed to providing our readers with factual information on selected publicly traded companies. All statements and expressions are the sole opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. The profiles, critiques, and other editorial content of CEOcast may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. THE READERSHOULD VERIFY ALL CLAIMS AND DO ITS OWN DUE DILIGENCE BEFORE INVESTING INANY SECURITIES MENTIONED. INVESTING IN SECURITIES IS SPECULATIVE AND CARRIESA HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS NEWSLETTER IS PROTECTEDBY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCEDIN ANY WAY WITHOUT THE EXPRESSED, WRITTEN CONSENT OF THE EDITORS OF CEOcast. Moreover, as detailed below, this publication accepts compensation from certain of the companies that it features. To the degrees enumerated herein, this newsletter should not be regarded as an independent publication. The profiles, critiques, and other editorial content of CEOcast may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. This information has not been independently verified by CEOcast. The reader should use caution, as a result. The following companies, featured in this newsletter, have compensated CEOcast: Silverado Gold Mines, forty-thousand dollars and one hundred sixty thousand shares of stock for a five-month program, BIO-Key International, seventy-five hundred dollars per month, plus options to purchase two hundred thousand shares at forty-two cents, Rex Stores, seven thousand five hundred dollars, Cepheid, seven thousand five hundred dollars, Orphan Medical, seven thousand five hundred dollars, Quanex, seven thousand five hundred dollars, Golden Eagle International, six thousand dollars per month, plus fifty thousand shares of stock per month, eResearchTechnology, seven thousand five hundred dollars, plus warrants to purchase twelve thousand shares at thirteen forty, Tri-Valley Corporation, six thousand dollars per month, AOL Latin America, seven thousand five hundred dollars, Health Science Corporation, eighty thousand dollars for a two month program, Forbes Medi-Tech, seven thousand five hundred dollars, SmartServ Online, seven thousand five hundred dollars, Wireless Facilities, seven thousand five hundred dollars, Penn Octane Corporation, six thousand dollars per month, twenty thousand shares of stock and warrants to purchase twenty thousand shares of stock at three dollars fifty five cents (our editors own sixty-four thousand shares as well), Pharmos Corporation, seven thousand five hundred dollars, Aceto Corporation, ten thousand dollars.
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