“The other side of the very high short position (in CIGX) is, of course, that if they are as wrong, as we obviously believe they are — in spades — they will be slaughtered." - Otis Bradley, Chief Market Strategist at ICM Capital Markets Ltd, June 21 2011
A Stock for the Ages – Maybe? Likely!
Disclaimer: I'm an investor in Star Scientific Inc. (CIGX) shares and have no other affiliation with the company than as a shareholder.
What we know: There is a massive 21 million share short position in CIGX and Otis Bradley, Chief Market Strategist at ICM Capital Markets, suggests that “if they are wrong they will be slaughtered.” If you are familiar with the story, you know that there has been a relentless attack on the shares of Star Scientific.
Estimates range that the “shorts” have now lost over $40 million shorting the shares. And if you add in “naked shorts”, that number could possibly be $100 million to $200 million!
Jonnie Williams, Patrick Cox, John Mauldin and I have been cast as blaggards with an attendant implication to sell the Star shares. This is an attack of the messenger, not the message. However this message is much too powerful to knock with dubious character assassinations. Did Jonnie or the rest of the cast of supposed villainous black hats, me included, somehow hoodwink Johns Hopkins, the Roskamp Institute, Harvard, McColl Partners, inVentiv Health, Thomas Lee Partners, the United States Patent & Trademark Office, the FDA, Sidley and Austin, plus over 90 financial institutions? Unlikely! It’s no wonder “they” can’t break the stock.
I might add that I like being mentioned in the company of those august, brilliant and accomplished guys.
Read on regarding the issues of the corporate balance sheet, revenue, and losses; then we’ll look at some facts.
Not a single person or institution I know of bought one share of Star Scientific because of its balance sheet or current earnings. Nowhere have I read or heard that anyone—broker or fund manager —has suggested they should, and in fact it’s quite the opposite. Certainly “that’s” not the reason to own CIGX, because current revenue and earnings are nowhere in the CIGX story.
Do any of the growing list of now over 90 institutions that own roughly 41 million shares of CIGX have it in their portfolios because of the balance sheet, revenue or earnings? I think not. Surely these institutions have financial officers who must read the 10Qs and 10Ks and are subject to compliance regulation and overviews? Just some of the actually compelling reasons that institutional and insider ownership of Star’s shares continues to accelerate are addressed below.
Tradewinds Investment owns over 20 million shares ($90 million plus), Goldman Capital 5.6 million shares, Barclay Global 2.4 million shares, Blackrock Fund 2.2 million shares, State Street 1.4 million shares, Dimensional Funds 1 million shares - just a few of the many believers in Star’s science, research and management (see here).
In any event, the shorts have essentially doubled their bet that the Star shares would be reduced to cinders. Over the last couple of months, numerous negative articles about CIGX have surfaced, usually with increases of put options established prior to the "hit" article. Each one of these attacks has been an opportunity for real investors to buy stock on the cheap. It's becoming obvious that these tactics aren't working anymore.
My handle on why it isn't working for them is that there is a compelling fact-based story out there that investors / brokers / analysts / and mutual funds believe in.
As I've mentioned several times, I believe there is a lot of very positive news pertinent to Star’s shares that is going to land this month and I believe that the "shorts" are vulnerable to a degree not often seen in the markets. We may be about to witness the annihilation of a short pool, as l can think of news on several of CIGX’s themes that are beginning to bubble and near ready to boil (see below)--and these developments could tremendously propel Star’s shares.
Now let's look at some of the facts that are the essence of the CIGX story.
FACT: The ramping up in sales of CigRx™—a product that reduces the urge to smoke, and that is accessible through the Star website and in the environs of Richmond, Virginia—is a fact. Notably, the rollout of CigRx™ is managed and supervised by inVentiv Health (a Thomas H Lee Partners subsidiary), a leading marketing and distribution company with a client list that includes many of the largest, most successful pharmaceutical and biotech companies in the world including Johnson & Johnson (NYSE:JNJ), Abbott Laboratories (NYSE:ABT), Novartis (NYSE:NVS), Merck (NYSE:MRK), Pfizer (NYSE:PFE), and Eli Lilly (NYSE:LLY). inVentiv has marketing and sales capabilities in 40 countries around the globe.
Now consider that while only 2 persons out of 10 who visit physicians smoke, the inVentiv detail force will be adding to their “on premises” physician marketing another Star product (RCP-006) to reduce low grade inflammations. The market “here” is of staggering proportions as the product targets chronic inflammation that is present in a number of coronary and vascular diseases, and in auto-immune diseases such as thyroid disease, diabetes and arthritis.
TIME Magazine, in a February, 2004 cover story entitled “The Secret Killer: The Surprising Link between Inflammation and Heart Attacks, Cancer, Alzheimer’s and Other Diseases”, described chronic inflammation as the “engine that drives many of the most feared illnesses of middle and old age.”
I don’t know of a company that is savvier or more experienced when it comes to identifying (and partnering up with) growth companies, fostering development of brand identification and gaining dominant market share positions than Thomas H. Lee Partners. It’s one of the nation’s oldest and most successful private equity firms, and has invested approximately $22 billion of equity capital in more than 100 businesses with an aggregate purchase price of more than $150 billion. Consider that they / inVentiv chose CigRx™ and (RCP-006) for what will be a national rollout. Imagine the research and marketing studies that they have done... And yet “someone” is betting that they will fail?
Star and inVentiv Health are preparing for a major push with new, state of the art call centers to handle the volume of sales that they anticipate.
FACT: A recently published graph (follow this link) from the Roskamp Institute website shows the astonishing effects of the naturally occurring compound anatabine (RCP-006) on the molecule that typically causes inflammation during bacterial infection in human blood cells. The chart demonstrates the dramatic effect of anatabine versus Lipitor, well known to have advanced anti-inflammatory properties.
The graph demonstrates vividly how anatabine (RCP-006) is more than three (3) times more effective than Lipitor in reducing inflammation. Lipitor sales in 2010 were $10.7 billion.
FACT: Star is working with Johns Hopkins University. The June 1 meeting at the Roskamp institute featured two prominent Professors of Medicine at the Johns Hopkins School of Medicine, widely known and acclaimed endocrinologist Dr. Paul Ladenson, and internationally known Dr. Patrizo Caturegli. They spoke at length about their research on (RCP-006) in stopping thyroiditis.
Dr. Ladenson stated that,
Aside from (RCP-006) there is no known compound that stops thyroiditis.
FACT: The Roskamp Institute, funded by the National Institutes of Health and private donations, is conducting research using (RCP-006) on Alzheimer’s disease, gastroenterology, rheumatology, cancer, auto-immune diseases (lupus), and cardio-atherogenesis (the process of atheromatous plaque development in arteries), among other conditions.
The Director of Research at Roskamp, Michael J. Mullan, MD, Ph.D, spoke at the June 1 meeting and said,
The compound (RCP-006) dramatically reduces inflammation, thereby inhibiting production of beta-amyloid and, therefore, resulting in less Alzheimer’s disease.
FACT: Dr. Mullan played videos showing once Alzheimer’s-afflicted mice beginning not only to remember again, but able to add critical new information to the cognitive equation and, thus, to change behavior so as even to improve their lot. That’s impossible for a “demented” mouse. A split screen video depicted a fully impaired mouse with the diseased for comparison. He went on to also say that CRP (C-reactive protein) levels also fell 50% in these test animals, indicating less inflammation.
Dr. Mullan called the research “profound” and announced that it is now being readied for the all-important step of peer review.
FACT: The “Flint Study” (see press release 2/28/2011) is a multi-site human clinical trial involving the treatment of neurological conditions as well as conditions associated with elevated blood levels of CRP.
The results of the now 300 person study are due to be released this month (July).
Mr. Sharp is also a member of the Johns Hopkins Medicine Board of Advisors.
Star is working with McColl Partners LLC “structuring a controlled auction for bidding by pharmaceutical companies for licensing and/or co-venturing relationships” (see here).
Did anyone out there buy CIGX betting on a favorable US Court of Appeals ruling? Maybe years ago, but recently, I think not! But the odds of that minor aspect of the Star story getting a “thumbs up” from the 3-judge Federal panel is definitely improving. This news could break at any time...
Also of note: the (RCP-006) product CigRx™, which reduces the urge to smoke, has over 40,000 “friends” on Facebook, up from about 5,000 a month or so ago.
Another notable metric mentioned at the Roskamp meeting is that about 100,000 people have now taken (RCP-006) compounds.
When the magnitude of the numerous billion dollar potential themes of the “Star Scientific” story are added together, they make for a one of a kind equity. In my many decades involved in the market I cannot recollect a story that carries as much potential. Hence, I included Star Scientific (CIGX) as one of my Best Ideas for 2010 and for 2011. I reference it as a “Stock for the Ages - Likely!”
If you missed my previous reports—more specific in detail and scope on each of these themes—or wish to receive my Best Ideas for 2011, send a request to: Dr.Faessel@onthemar.com
Disclosure: I'm an investor in Star Scientific (CIGX) shares and have no other affiliation with the company than as a shareholder. I have bought shares of Star Scientific in the open market.