Star Scientific: A Struggling Tobacco Company Sitting on a Healthcare Gold Mine?

Includes: RAI, RCPI
by: Kinetic Investments

Star Scientific (CIGX) is perhaps best known as a company that develops low tobacco specific nitrosamines [TSNA] and licenses its tobacco curing technologies, which purportedly prevent the formation of cancer causing toxins present in tobacco and tobacco smoke. The company also manufactures, markets, and sells smokeless tobacco products, which arguably make for a "healthier" alternative to many of the more traditionally used tobacco products on the market.

The company recently made headlines when it announced that its outside patent counsel had received two notices from the United States Patent & Trademark Office [PTO], both of which confirmed the validity of the claims involved in the reexamination of the '649 and '401 patents. This comes as somewhat of a victory against RJ Reynolds Tobacco Company (NYSE:RAI) which filed the requests for re-examination of the patents in question back in January of 2009. RJ Reynolds filed the aforementioned requests on an "ex parte" basis, thus they cannot appeal the PTO's determination.

Shares of Star Scientific surged over 25% on 9.6x its average daily volume to its intra day high of $2.96 on 03/11/11 after the patent news was released.

End of Story?

Not quite. What many don't know is that Star Scientific is also engaged in the development of pharmaceutical products, particularly products that have a botanical, tobacco-based component, that are designed to treat tobacco dependence and a range of neurological conditions, including Alzheimer’s disease, Parkinson’s disease, schizophrenia and depression, and is also in the development of non-nicotine nutraceutical products.

So what does this mean?

While in the process of researching and developing a "smoking alternative dietary supplement" named CiGRX, Star Scientific seems to have discovered that one of the product's primary components, Anatabine, may be effective in the treatment of Alzheimer's and possibly other neurodegenerative diseases. As such, the company filed patent applications with the PTO for the formulation and uses of its Anatabine compound (RCP-006) and has teamed up with the prestigious Roskamp Institute to advance its studies for the treatment of neurological conditions as well as conditions associated with elevated blood levels of C-reactive protein [CRP].

On 02/28/11, it was quietly announced that Rock Creek Pharmaceuticals, a wholly owned subsidiary of Star Scientific, received notification that the Roskamp Institute had obtained institutional review board [IRB] approval for a multi-site human clinical trial for the RCP-006 compound. The three month study (dubbed the "Flint Study") will examine the effect of the compound on chronic inflammation and is expected to enroll roughly 200 patients.

The potential connection to Alzheimer's:

Anatabine has been shown to act as an anti-inflammatory agent, which may be helpful in reducing amyloid plaques. Amyloid plaques are one of the two brain abnormalities that are most commonly associated with Alzheimer's disease. It has also been suggested that Anatabine may promote new neuronal cell growth.

Alzheimer's is a disease with no cure and no survivors. According to the Alzheimer's Association, an estimated 5.3 million Americans of all ages have Alzheimer’s disease. In last year’s World Alzheimer Report, Alzheimer’s Disease International estimated that there are 35.6 million people living with dementia worldwide in 2010, increasing to 65.7 million by 2030 and 115.4 million by 2050.

Given the known market size for Alzheimer's alone, the financial interest that the Roskamp Institute has taken in the RCP-006 compound, and the fact that the company's CiGRX product (a lozenge which contains Anatabine) is already on the market and can be ordered online, there should be no wonder as to why the stock has been on a 64% tear since 03/01/11.

There may be room for the stock to continue its current run as shorts look to cover, but the real story here is one of potential for enormous long term growth. Insiders seem to agree, as they have been purchasing millions of shares on the open market over the last two weeks.

I hope to add to my position on any sort of pullback from current levels, but won't be surprised in the slightest if I don't see one.

Disclosure: I am long CIGX.