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Drivers Of The STAR SCIENTIFIC (STSI) Trade - Science Risk And Execution Risk

Dr. John L. Faessel

ON THE MARKET

Commentary and Insights

STAR SCIENTIFIC (STSI)

Drivers of the Trade - Science Risk and Execution Risk

TIME TO BUY...

Multiple themes worth perhaps $ billions to erupt shortly: the sale or spin-off of Star's tobacco biz; a license deal to a major tobacco co.; a Reynolds settlement plus US Supreme court results; Big Pharma license deals; several human study results imminent; escalating sales of Anatabloc to arc higher; a new managed care interest; the expansion of the product line with Anatabloc Cream, plus a major partnership /merger - and who know what else - are at a boil. Read on...

On Friday, shares of Star Scientific sold off, post-release of their 10Q that seemed to disappoint many investors. The shorts also poured it on, and the stock, whose symbol recently changed from CIGX to (STSI), closed down 8.46%. Opportunity knocks.

As my readers know, I have been focusing of late on the ever developing science of anatabine / Anatabloc™. But let's now talk about the basis of the intrinsic trade, and why I think the Star shares are an exceptional buy as the shares have backed-off their recent highs of $5.05 ticked in early July.

There are two key aspects of this investment/trade, these being the science risk and the execution risk. Most important of all is the question: Is the science there? (Without the science, 'forgetabout it!) But also, can little Star execute to bring its various themes to fruition, justifying its market cap?

Re the Science Risk

The science risk is now close to nil as there is a mass of confirming data, quotes from prestigious names, research done by influential and potent supporting scientific entities (Johns Hopkins, Harvard, Roskamp) powerful institutions funding the research (Walton Family Foundation and the National Institutes of Health [NIH] for two) and a building avalanche of anecdotal testimonials that in sum make the science a fait accompli. Connect the dots here...

Due to break soon: the Johns Hopkins University School of Medicine is to release the results of a thyroid study performed in nine clinical sites in Michigan, Texas, New Jersey, Illinois, and Florida, referred to as the Anatabloc Supplementation Autoimmune Prevention thyroid study. It is estimated by analyst Otis Bradley (Gilford Securities) that, "treatment of thyroid diseases using Star's Anatabine technology could cause sales of Star's Anatabloc anti-inflammatory tablet (now on the market over-the-counter) to skyrocket from virtually nothing today to an annual run-rate over $400 million (with profit of $200 million or $1.00 per share) in 2013."

Recall that at a meeting at the Roskamp Institute I attended in June 2011, Dr. Paul Ladenson, Director of the Division of Endocrinology at Johns Hopkins stated that, "aside from RCP-006 (anatabine - now Star's Anatabloc™) there is no known compound that stops thyroiditis."

Let's note right about here that in the United States alone over 70 million thyroid prescriptions are written (the 4th most prescribed for the disease) at a value of about $2 billion.

In January Star announced that it had completed a successful human clinical trial showing that Anatabloc™ lowers chronic inflammation as measured by C-reactive protein [CRP] levels in human subjects' blood. (A Google search of CRP yielded 23,500,000 results.)

Another thought re Thyroiditis (Hashimoto's disease - an auto-immune disease); Anatabloc™ seems to be especially effective (Star's patent says, "positively correlates") in reducing inflammation in the "100's" of auto-immune illness's including both cardiovascular disease and cancer." Put a $ figure on any of these conditions and what it would be worth to Star in their share price and you can grasp the essence of 'its' long-side potential.

Paul L. Perito, Chairman and President of Star (STSI) said in last Friday's press that; "I am encouraged by the [Johns Hopkins] preliminary data..." Mr. Perito is the new president of the Harvard Law Alumni Association and he was Secretary of the Harvard Law School Association for the past 14 years. He's not encouraged easily...

Recall that anatabine, the basis of Star's Anatabloc™ product, is the subject of ongoing and 'continuing to expand' research that's been underway for a couple of years in one form or another, performed by distinct and separate entities and the published results of which, to date, are truly remarkable. A quick e.g.: Roskamp showed that RCP-006 (now Star's Anatabloc™) in human blood is more than four (4) times more effective than either Celebrex or Voltarol and 3 times more effective than Lipitor (the best selling drug in pharmaceutical history) in reducing inflammation. These three (3) prescription drugs have sold in the $100's of billions.

The central point is that 'they' wouldn't be pursuing this 'expansion of research' tack if the results were less than favorable. Can you imagine John Hopkins wasting their time and Walton's money on a dead issue? No way!

Perito said re the CRP study: "This clinical trial clearly demonstrates there is a real and significant effect on CRP levels in blood from nutritional supplementation with Anatabloc™." And think about the following quote from Curtis Wright, MD, MPH (Chief Medical Officer at Star's Rock Creek Pharmaceuticals) who served at the U.S. Food & Drug Administration [FDA] as Acting Director - 10-year of service there: "I am amazed that these low doses of Anatabloc™ had an effect [lowering CRP] in this population, which is at such high risk due to obesity and smoking."

Check out this video re the action of Anatabine: http://www.youtube.com/watch?v=IaEg0SorD3A&feature=youtu.be

Multiple human studies in Pisa, Italy (500 thyroid subjects), Florida (Alzheimer's), and nine clinical sites in Michigan, Texas, New Jersey, Illinois, and Florida, referred to as the Anatabloc Supplementation Autoimmune Prevention thyroid study plus the Flint Michigan study [CRP] are under way; several are expanding their studies, and results will begin to come in this summer.

Recently below the radar screen but still 'churning' is that Star is teaming up with McColl Partners LLC "structuring a controlled auction for bidding by pharmaceutical companies for licensing and/or co-venturing relationships." Mr. McColl was former Chairman of the Board for Bank of America.

Net, net - there is a big bundle of confirming and corroborating science going Star's way. If you would like my reports on the discovery, patents, research, testing etc. shoot me an email request: Dr.Faessel@onthemar.com

Now about the Execution risk:

Obviously Star must continue to execute. And while certain important legal and patent* issues are in the hands of the courts, what can be said is that Star has brought them to these decision points and it has cost them 'plenty' in both time and treasury spent. It's now all about when and how much $$ is coming Stars way...

According to PACER, a settlement conference** with Reynolds Tobacco, now Reynolds American (NYSE:RAI) is underway. Key is that the magistrate judge has ordered the meeting so as to bring this more than decade-long legal slog to a conclusion. Obviously Reynolds has strung this out hoping that Star would fold or go away, but now the presiding judge is clamoring for a settlement as he and the legal system are starting to smell of fish. I kind of doubt that the case will get settled, knowing the antipathy between the parties, though 93% of mandated settlement conferences in front of magistrate judges do. A decision to settle or one to abort the settlement issue is due soon. Note that the Gaines v. Hennen*** case went on for 54 years....

Licensing / selling / splitting off the tobacco related and curing method / technology:

Let's start with a central issue: Last week (8/6/2012) Star Scientific changed their trading symbol from CIGX to (STSI). The word is out there that 'they' are prepping to split the company up into a health related/ lifestyle company (STSI) and one (XXXX) that holds the tobacco parts. Likely they would then spin off the tobacco unit in a dividend or sell it off completely. This would leave the science entities of anatabine and line extension / Anatabloc™ / and facial cream / 'others too' - i.e. a prescription version - under a separate corporate health-related umbrella. It is long known by Star followers that the 'big names' Johns Hopkins, Harvard, Roskamp, Walton, etc wish for this separation as they desire no corporate relationship under their pristine banners with a company that has tobacco parts. Hence, presumably, the symbol change.

That said, the tobacco-related biz holds what could be $billions if Star or (XXXX) is able to successfully sell off or license its curing method / technology. Certainly the payoff could be worth $billions in licensing fees and royalties from an industry that sells $80 billion of tobacco products in the U.S. and $250 billion globally. Over the last 5 years that's an industry with over a $trillion in sales, and since the lawsuit was filed over 11 years ago it's twice that amount. Envision a cigarette with the cancer causing elements removed and what that would be worth to the inventor, i.e. Star? Consider what a minuscule 2% royalty would mean to Star or XXXX in revenue? Each day 13,500 people die from tobacco-related illness worldwide; the totality of all that suffering and pain is staggering.

Star's CEO Jonnie Williams mentioned at the Harvard Club meeting in June that he expected a "global entity" would be the first to license the technology extracting nitrosamines (the cancer-causing agents in tobacco) to below detectable levels "this summer." Underscore "global" - i.e., not necessarily Big Tobacco USA.

I myself have recently said re Star that "somebody 'out there' is going to come in with a substantive down payment, plus a licensing or royalty deal and I think it's going to be sooner rather than later."

Note that on March 11, 2011 Star's patents* were validated by the United States Patent & Trademark Office with no possibility of appeal. The entire tobacco industry is now beholden to Star Scientific. How beholden? I believe it could be in the billions of dollars.

Once again on Star's curing method / technology: it results in a tobacco product that has the deadly nitrosamines reduced to "below the levels of detection" [BDL] (i.e. unable to be found, i.e. not there, I presume?)... From what I understand, no one else is able to accomplish this. Nitrosamines are identified by scientists worldwide as the cancer-causing agents in tobacco leaf and smoke.

The execution question is always an issue, especially with a company in development with as many moving parts as Star. However, Star's management has been able to prudently steer its many themes to this point in time. Now with numerous mega-buck events ready to break loose, can Star manage this metamorphosis on a truly world stage alone, or will it decide to partner up? Reflect that only two (2) years ago it was a one-trick pony (the Reynolds lawsuit) so it's no wonder that the market has valued the shares as 'it' does. Management has been exceptionally studied, careful, and has used utmost restraint in dealing with the numerous themes that are part of the story. So to date the shorts have been wrong. In my opinion they get 'wronger' by the day.

Short interest is now 23,839,224 shares, up 396,091 from the last reporting period.

At the same time a growing number of institutional holders (now 114) hold 17.8% or 25,844,219 total shares. Additionally, one holder of Star (Tradewinds Master Fund) holds over 10%, another 16,606,520 shares.

In Sum

The science builds and management continues to execute, always seemingly from an ever more substantial and sound platform. Star / Anatabloc™ is well on the way to becoming a household word as radio and TV ads now are becoming commonplace. And the news of the wonders of Anatabloc™ is spreading. For e.g., I told a good friend, an older gent like me, about the amazing effect that Anatabloc™ has had on my prostate woes (tho I originally took it for my thyroid). He tried it - and flipped out about its beneficial effects on his nightly urinary pattern (re getting up, starting, and 'stream' issues [BPH]), and he tells me that he has told 11 of his friends about its benefits and they are getting the same results and now they are spreading the word. My friend bought some Star shares. More importantly, he has witnessed in himself a remarkable improvement in his memory, says he no longer writes notes to himself and is no longer so distressingly forgetful. In short, he's gaga about the whole Anatabloc subject.

Re my thyroid: Eight years ago I was diagnosed with hypothyroidism and have been treated for the disease since then. Last month I received my lab results back from my internist. My Thyroid Stimulating Hormone [TSH] test was 1.84, the lowest reading in 8 years and down from 6.29 (hypothyroidism) when I began my treatment. Since I began taking Anatabloc last year my TSH has fallen from 3.3 to the new low of 1.84.

With the just published Johns Hopkins abstract delineating in scientific terms the mechanism of action (and results), would you envision the Johns Hopkins-orchestrated thyroid studies in Pisa, Italy, and the 9 studies in the USA (both results due shortly) to be anything but positive? As was the 'first' CRP study...

* The '649 and '401 patents, which issued in 2001 and 2002, cover the tobacco-leaf curing process in a manner that largely prevents bacterial activity in the tobacco leaf. That activity results in the formation of tobacco specific nitrosamines (TSNAs), a group of carcinogens that have been identified for decades by researchers worldwide as one of the most lethal and abundant toxins in tobacco leaf and smoke. The StarCured® process, as described in the 649 and 401 patents, results in tobacco leaf with TSNA levels that Star believes are the lowest found anywhere in the world. The company more recently filed a patent application, in December 2008, for a further innovated curing process that results in TSNA levels in the tobacco leaf are below levels of detection by conventional standards of measure.

** From PACER

U.S. District Court
District of Maryland (Greenbelt)
CIVIL DOCKET FOR CASE #: 8:01-cv-01504-MJG
Star Scientific v. R.J. Reynolds,et.al
Date Filed: 05/23/2001
Assigned to: Judge Marvin J. Garbis Date Terminated: 12/21/2009
Referred to: Magistrate Judge Susan K. Gauvey (Settlement)
Nature of Suit: 830 Patent
Case in other court: Appeals for the Federal Circuit, 07-01448 Jurisdiction: Federal Question
United States Court of appeals for the
Federal Cir, 10-01183
Cause: 35:271 Patent Infringement
Date Filed # Docket Text
08/06/2012 Settlement Conference held on 8/6/2012 before Magistrate Judge Susan K. Gauvey
re: this case and MJG-02-CV-2504. (dass, Deputy Clerk) (Entered: 08/08/2012)

*** What collectively is called the Myra Clark Gaines Case over a period of over 54 years went to the Louisiana Supreme Court five times and to the United States Supreme Court seventeen times, making the case the longest-running lawsuit in U.S. history.

To view the very comprehensive Anatabloc™ website that includes a link to buy the product online or by phone: http://anatabloc.com

* If you missed my last (STSI) report, Hypothesis no longer - New Peer Review Credibility from Johns Hopkins Could Drive Star Scientific Shares Higher see: https://seekingalpha.com/article/749001-new-peer-review-credibility-from-johns-hopkins-could-drive-star-scientific-shares-higher

Disclosure: I am long (STSI) formerly (CIGX). I have bought shares the open market and have no affiliation with the company.

Also New (8/1/2012) see a terrific 13 page research report by Gilford Securities on (STSI) / CIGX by market maven Otis Bradley: http://www.wirelessledger.com/Gilford_initiates_CIGX_08_01_2012.pdf