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Source: George S. Mack of The Life Sciences Report (6/6/13)

Alan Brochstein of AB Analytical Services blogs, publishes and creates model portfolios for retail investors and consults with institutional investors. He leans heavily toward medical technology because he sees the industry’s devices, instrumentation and molecular diagnostics as huge efficiency creators and money savers for hospitals. He never pulls the trigger on a stock unless it has adequate insider ownership and superb management—two ingredients that almost always lead to success. In this interview with The Life Sciences Report, Brochstein highlights several turnaround stories that he believes can create real shareholder value and make money for investors.

The Life Sciences Report: Alan, you hold a multitude of advisory positions both internally and externally. Please connect all those dots for me and explain your business model.

Alan Brochstein: I was working at Piedra Capital Ltd., then a $500 million ($500M) assets-under-management equity firm, and left in 2006 to start my own firm, AB Analytical Services. The original plan was to work almost exclusively with small investment advisers, and I continue to do that to this day. But the business has evolved along the way. I currently work with a few registered investment advisers, and I sit on the investment committee at Friedberg Investment Management Inc.

I’ve stuck with those original parts of my business model, but in early 2007, I started blogging for Seeking Alpha. I really enjoy connecting with the public through that interaction. I started a model portfolio service in 2008, and have three different models. One of the stock models is called Top 20. It’s very eclectic and represents my best ideas. My Conservative Growth/Balanced portfolio is more disciplined, and contains 60% stocks and 40% bonds. The goal of the latter is income and capital growth, and also capital preservation. I just hit the five-year anniversary of Top 20; it has returned approximately 133%.

Yet another part of my business has had a huge impact on everything I do. For four years I’ve been working with Bethesda, Maryland-based Management CV. This independent research firm provides an analytical framework for evaluating management teams, and I’ve contributed hundreds of due diligence reports on management teams to the business.

TLSR: Management CV helps investors determine the quality of management. Is this a proprietary product that’s offered to institutional investors?

AB: Yes. It’s an institutionally oriented service focused on larger, publicly traded companies.

TLSR: You’re a chartered financial analyst (CFA). Do you create discounted cash flow (DCF) models on companies you follow?

AB: I do some modeling, but my approach is mainly to review other people’s models instead of building my own. Building models is not the best use of my time. It’s more important to me to understand what’s driving the numbers in a model.

TLSR: I know you follow medtech, which is what we are going to talk about today. What other industries do you follow?

AB: I’m a generalist, but a lot of my companies are in healthcare. I have a disproportionate number of stocks in medtech, which is an area that has fascinated me for years, and I’ve been able to find a lot of interesting names in that space. I tend to be focused, but not exclusively, on smaller companies. Some of them might even be considered micro-cap.

I have a watch list of 100 stocks that I follow. These 100 stocks aren’t the same every week; they are rather a living, breathing group of companies. If a company on my list is acquired, I have to find a replacement. Though I focus on 100 stocks at any one time, I like to think that I focus on more.

TLSR: My understanding is that you have been exploring the idea that insurance companies like medical technology companies because they save money on drugs. Would you expand on that idea for me?

AB: One specific example of this phenomenon is a new technology called renal denervation (RDN). It’s a device-based technology for treating hypertension that has been resistant or unresponsive to conventional or first-line therapies. The therapy represents a huge opportunity, and it’s not going to be a monopoly. Medtronic Inc. (MDT:NYSE) will be first to market, and St. Jude Medical Inc. (STJ:NYSE)will be a fast follower. Medtronic’s Symplicity, available in some markets already, could be available in the U.S. later this year, while St. Jude’s EnligHTN received the CE mark in Europe a year ago and could be available in 2014. A lot of smaller companies involved in this technology have been acquired, but there are still several other players. Patients can go in for a quick, minimally invasive procedure, and then they may not have to take blood pressure medications for years. The benefit goes beyond comparing the cost of the medicine to the procedure; it is also about patient compliance issues and the side effects of the medications, as well as mitigating complications that may arise from unmanaged hypertension.

TLSR: These are large companies. St. Jude has a $12 billion ($12B) market cap, and Medtronic is more than four times that size, with a $52B market valuation. Can RDN technology actually move shares of these companies?

AB: St. Jude called out the market as a $25B opportunity a little over a year ago. I don’t know if that’s true or not, but optimism rules when you’re talking about the future. I have seen estimates that 25% of hypertensives fail to respond to conventional drug therapy, and St. Jude suggests that 4% penetration of the 250M global patients that fall into this category would yield a ($25B) market opportunity. I have also seen estimates that the market could be $2-3B per year within the next decade. According to government data, we spend more than $20B per year on prescription medicine to treat hypertension in the U.S. alone. Unfortunately for these companies, trying to get a lot of growth when so much of the business is exposed to the cardiac rhythm management market (CRM) market is challenging. I don’t follow Medtronic, but given that it’s larger, I would imagine it will be more difficult for RDN to affect share price. On St. Jude, I think RDN can definitely move the needle. But, is it enough to double the value of the company? No.

TLSR: Alan, I’m thinking that even as a minimally invasive therapy, RDN is going to be a difficult sale when there are alternatives. Nevertheless, it’s certainly going to be a valuable service for many patients.

AB: You are right. It’s not a first-line treatment; that’s for sure. But perhaps it could become first-line once safety and efficacy are better proven.

TLSR: You follow some surgical robotics names. Hasn’t hospital consolidation been a problem for this industry? Can you address this?

AB: I’m not sure we’ve reached the point where hospital consolidation is an issue with surgical robotics. I don’t think that’s been a problem for Intuitive Surgical Inc. (ISRG:NASDAQ) and its da Vinci Surgical Systems, which are used for prostatectomy, hysterectomy and many other procedures.

The other surgical play I’m following closely is MAKO Surgical Corp. (MAKO:NAS). Its challenge hasn’t been a macro issue with consolidation or other big-picture issues, but rather one of getting early adopters to its system, the RIO Robotic Arm Interactive Orthopedic System, which is used to perform minimally invasive MAKOplasty procedures for partial knee resurfacing and hip replacements. The company has been able to get surgeons to use the system, but it has tapped out that pool of single users and has had to move up to the executive or CFO levels at hospitals to get sales. Hospitals are saying the system is good, but they must get more surgeons to use it to achieve economies of scale. The selling process takes time, and that has been the problem with MAKO. It’s not as far along on the adoption curve as it would like to be.

TLSR: Could you address some other names and their value propositions?

AB: I have mentioned St. Jude Medical. The value proposition there is the great franchise. St. Jude does a lot of research and development (R&D), but it’s never the one that invents a new product or procedure. Instead, the company comes up with a better version, a better mousetrap.

Management is a very important consideration for me. Chairman and CEO Dan Starks is very passionate about cardiac health, which is most of St. Jude’s business. Dan and his former CFO John Heinmiller, who now serves as executive vice president, own tons of stock in the company. St. Jude’s is very well run. For years, it stood out from Medtronic and Boston Scientific Corp. (BSX:NYSE) for its quality, but then ran into quality issues with the Riata Silicone Defibrillation Leads for its CRM devices. The company voluntarily stopped selling the Riata leads in December 2010. That was a disaster, but it’s mostly behind the company now. There were residual questions about the Riata replacement technology, the Durata lead system, which has come under attack. But data released by Population Health Research Institute at Heart Rhythm 2013 seemed to refute the reported problems.

CRM has been a tough area for all the players because of changes in the market. Defibrillation products may have been overused. Cardiologists, like all physicians, want to do procedures—that’s what they do. People were getting CRM devices when they might not have needed them. In any event, that market has been very sluggish recently. We’re starting to see it come back now, just like the hip and knee market. Especially with recent information about Durata not having the feared flaws, St. Jude can get its premium valuation back.

TLSR: You mentioned MAKO before.

AB: People who have been successful in the past are more likely to be successful in the future. I knew about MAKO because Management CV had done a profile on the company and its CEO, Maurice Ferre, who has a history of building and selling companies. I was very familiar with MAKO as a good management story.

Well, that kind of fell apart last year. By the time I looked more closely at it, MAKO had missed two straight quarters, and went on to miss another. I think MAKO is a high-growth story where people’s expectations were probably too high. The stock was decimated after the company had to reduce RIO placement guidance in Q2/12 and Q3/12 and then its procedure expectations in Q4/12. The company’s procedure growth has slowed from about 50% to 30%. But it seems like the management team has now figured out what the challenges are.

TLSR: MAKO is up 14% over the past four weeks, but is down 48% from a year ago. Do you like it now? Do you see it as a value play?

AB: I do, but value is a tough word to use for this company. I have it in my Top 20 model portfolio. It has high gross margins, but it is not profitable right now. I think the stock could double to $23 per share or so, but the company has to hit its numbers. That’s been the problem.

TLSR: No company is going to continue to grow revenues at 50%.

AB: That’s probably true, but I think the decline happened a little quicker than people thought.

TLSR: Go to your next idea, please.

AB: Masimo Corporation (MASI:NASDAQ), based in Irvine, is interesting. I was charged by my clients to find a replacement for one of my stocks, Synovis Life Technologies, which was acquired by Baxter International Inc. (BAX:NYSE) at the end of 2011. I needed to find another Synovis. That meant I was looking for a rapidly growing company that investors didn’t appreciate for whatever reason.

Masimo struck me as a similar opportunity. It was hurt by declining earnings after it settled with Covidien Ltd. (COV:NYSE) and accepted lower royalties for its pulse oximetry technology. The idea was that as Masimo progressed, investors would realize the core underlying growth was pretty high and that vanishing royalties from Covidien were a one-time hit. Again to management: The company’s CEO, Joe Kiani, is an entrepreneur and a brilliant guy who invests for the future. A lot of investors like that, but other investors want to see earnings today, right now. Kiani has done some dilutive acquisitions—technology buys—that have chipped away at earnings. However, he has a better appreciation now for the balance between investing for the future and letting some drop to the bottom line today. He has made some large open-market purchases, too, at great prices, including a purchase of 50K shares near the lows at $18.47 a year ago.

TLSR: What’s the growth driver at Masimo?

AB: The main opportunity that I see for this company is its ability revolutionize the way hemoglobin is monitored. Right now, it is guesswork, meaning early transfusions on a preemptive basis. The current standard is to draw blood, run it to the lab and then wait for an answer, which is time-consuming. Masimo can monitor hemoglobin in real time, allowing surgeons to avoid early transfusions. Transfusions are dangerous and expensive, but Masimo’s noninvasive Total Hemoglobin monitoring system, based on its Rainbow technology, has been clinically proven. If cost-benefit analyses are performed, hospitals see that a lot of money is saved by using the system. In fact, Masimo guarantees it.

TLSR: I note that you have a small cardiovascular play in coverage where investors may be able to get a significant bump.

AB: I have followed Volcano Corp. (VOLC:NASDAQ) for years, and the stock has always been pretty expensive. The company has alliances with many companies, except for Boston Scientific, which is its competitor in intravascular ultrasound (IVUS), and St. Jude, which competes in fractional flow reserve (FFR). Volcano is focused on percutaneous coronary intervention (PCI), which is a minimally invasive or nonsurgical method of dilating narrowed coronary arteries to place stents.

Volcano’s original technology is IVUS, which aids the interventional cardiologist in placement of a stent. The company grew market share in that area; it was a big growth business. All of a sudden the company’s PCI business hasn’t been quite as good. Medicare and insurance companies have questioned potentially excessive stenting, which has been a problem for Volcano as procedures have actually declined. On the other hand, the company has developed its FFR technology, which helps determine if the PCI should even be done. The company has both angles covered. The company also has been very heavily focused on Japan, and recently that’s been a problem because of the currency moves between Japan and the U.S.

Volcano seems to compete very well with the giants in the field. The bottom line is that Volcano is a company that saves the healthcare system money, which addresses a theme of mine. FFR can prevent unnecessary surgeries.

TLSR: The medtech category also includes a lot of diagnostics and prognostics technology. Can you mention something in this realm?

AB: That gets me to the final company I want to talk about, Luminex Corporation (LMNX:NASDAQ), which is based in Austin, Texas. One of the things that attracted me to Luminex is its CEO, Patrick Balthrop, who has been running the company for nine years. He spent 20 years at Abbott Laboratories (ABT:NYSE), mostly in its diagnostics division. This guy really knows how a molecular diagnostic company should work. I can’t tell you I understand all the technology, but what I can tell you is it has a lot of royalty revenue coming from a total of 40 paying partners.

The company is known for its respiratory test panel, and has recently introduced a gastrointestinal pathogen panel that allows rapid diagnosis of bacteria, viruses and parasites. Molecular diagnostics allow for quicker diagnosis, which is a money saver and potentially saves lives as well.

TLSR: Diagnostics seem to have a short shelf life. They lose market share rapidly when another test appears on the market. What about the future?

AB: Luminex is investing 20% of its revenue in R&D, and that goes to the problem of obsolescence. Like Masimo, this is a company with a vision for the future. I imagine it could show more profit now, but it is investing for 5–10 years out, not next year. Unlike a biotech company, which needs U.S. Food and Drug Administration (FDA) approval—if it doesn’t get it, lights out—Luminex has revenue and is growing that revenue at 15–20% per year.

Unfortunately, from an earnings standpoint, Luminex is reinvesting everything it makes, so it ends up with a sky-high price/earnings ratio, and that scares off investors. But I’m very happy with what it’s doing. I feel like it’s a great story.

TLSR: The invest-for-tomorrow game is very difficult for most smaller companies. Are investors just afraid that they can’t pull it off?

AB: Investors are often focused on the short term, unfortunately. In this market, investors are focused on mature, dividend-paying companies, not growth and not speculation. There’s just not a lot of interest in small-cap medical device companies in general. The other issue for these companies is the 2.3% medical device tax. Because it’s an excise tax, it hurts a small company more than a big company.

TLSR: Thank you for these insights, Alan.

AB: I really appreciate it, George.

Alan Brochstein, CFA, has worked in the securities industry since 1986. He managed investments in institutional environments until he founded AB Analytical Services in 2007, and now provides independent research and consulting services to registered investment advisors. In addition to advising several hedge funds and investment managers, including Friedberg Investment Management, where he participates as a member of the investment management committee, Brochstein is also a senior analyst for the independent research firm Management CV. Brochstein also offers the Analytical Trader service at Marketfy, where he uses fundamental and technical analysis to offer specific trade ideas geared toward swing traders.

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DISCLOSURE:

1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Alan Brochstein: I or my family own shares of the following companies mentioned in this interview:None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.

5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.

6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

By WallStreetDaily.com

Words mean little on Fridays in the Wall Street Daily Nation.

Instead, I select a handful of graphics to put important economic and investing news into perspective for you.

So I’ll try to shut up now…

Another Pick-Up for Pickups

Last week, I did my best Jeff Foxworthy impression and mentioned that you might be a redneck if you drive a pickup. But you’d be a pretty darn smart redneck if you also owned a few hundred shares of Ford (F).

Well, that’s even truer today.

Since then, Ford F-150 sales data for May came out. And it looks like the boom times are back for dealerships!

Ford sold a total of 72,000 trucks in May, which brings the year-to-date total up to almost 300,000. That’s a 21.5% increase over last year – and the highest total since the recession hit.

As Americans keep buying pickups, is your portfolio built Ford tough? It should be.

Get a Grip, Would Ya?

The summer months promise to bring volatility to the stock market. But investors really need to get a grip on their emotions.

The latest bullish sentiment reading from the American Association of Individual Investors (AAII) dropped to 29.5%. Keep in mind that two weeks ago, it stood at a jubilant 49%.

So we’re talking about the largest two-week decline in bullish sentiment since the bull market began, according to Bespoke Investment Group.

And all it took was about a 5% selloff for the S&P 500?

Again, investors need to get a grip. I get that their risk appetite remains “almost paralyzed,” as UBS Group’s (UBS) CEO, Sergio Ermotti, said. But there’s no such thing as investing without volatility. Unless you’re Bernie Madoff.

I must confess. The contrarian in me rejoices when I see this data.

As average investors get more and more cautious about the rally, it’s a strong indicator that stock prices are going to head higher still. Bring it!

Wherefore Art Thou, Yield?

Yesterday, I chastised Bloomberg for preying upon everyday investors’ insatiable hunger for income.

Today, I want to flip the script and share why we’re such easy targets: We’ve watched yields literally collapse ever since the Great Recession hit.

“In the past six years, central banks around the world have cut interest rates 515 times, increased global liquidity by $12 trillion and crushed bond yields to the point that almost 50% of all global government bond market cap currently trades below 1%,” says Michael Hartnett at Bank of America (BAC).

That’s left investors of every stripe wondering if they can get any income at all these days.

Sure you can. Just not a lot. Not from the old tried and true investments, at least.

Now you know why I’m such a fan of merger arbitrage opportunities in this zero-yield world. It’s a proven (but largely overlooked) way to earn short-term yields of 5% to 10% (or more).

Speaking of which, it appears that one of my recent merger arbitrage recommendations, Zhongpin, Inc. (HOGS), will close in the next 30 days or so. But fear not, I’m researching several new opportunities and will be in touch immediately once I find a suitable one.

That’s it for this week. Before you go, though, let us know what you think of this weekly column – or any of our recent work at Wall Street Daily – by sending an email to [email protected], or leaving a comment on our website.

Ahead of the tape,

Louis Basenese

Article By WallStreetDaily.com

Original Article: Friday Charts: Schizophrenic Investors, More Pickups and Why Yield Matters So Much

By MoneyMorning.com.au

Did the recent stock price action surprise us?

No. Just the opposite in fact.

The recent stock price action confirms what we’ve said in recent weeks.

While the mainstream press and many analysts banged on about the search for yield driving stock prices, we said investors didn’t really want yield at all.

Or not just yield anyway. They wanted more than that. It just goes to show, you need to pay more attention to what investors do rather than what they say…

The recent fall is exactly why we suggested you should tread with caution before buying income stocks at the high.

It was good to be cautious. The Australian market has slumped 400 points in two weeks. That means we’re in ‘correction’ territory now.

So, what was it about the market action that stumped so many in the mainstream?

Simple. Most folks looked at investors rushing into dividend stocks and assumed investors wanted income. While that’s partly true, it doesn’t tell the whole story.

The fact that dividend stocks reached a peak and then fell in recent weeks tells you investors want more than dividends…they want growth too.

Dividends Just Won’t Cut it

Look, it’s not hard to work this out. If investors as a whole really only want dividends they would keep buying while stocks are travelling high.

After all, paying a sky-high price for Commonwealth Bank [ASX: CBA] to get a dividend yield of 5% is still better than anything you’ll get in a savings account.

But the fact is it’s not just about yield. There are a bunch of other factors involved. One of them is risk. You can lose some or all of your capital in the stock market, whereas thanks to the government guarantee you can’t lose capital from a bank account (subject to government-imposed limits).

There’s another reason. Foreign investors piled into the Australian market while it looked as though the Aussie dollar would keep climbing. Remember all those forecasts about the Aussie dollar hitting USD$1.50?

Well, now that foreign investors realise the Aussie dollar can fall, they’re quickly taking measures to protect their money. Either they’re selling Australian stocks and repatriating the dollars back to their home currency, or they’re putting in place hedging strategies to protect their Australian dollar exposure.

Both have the effect of putting further downward pressure on the Australian dollar. Of course, if the Australian dollar reverses and heads back up, the unwinding of these hedging transactions would increase the upward pressure.

That’s what happens in a leveraged market. You get bigger swings.

But perhaps the biggest fib about the recent move was the story that investors had given up on growth…

Greedy Investors Want More

It’s just not true that investors didn’t or don’t want growth. However, it’s not that they want growth instead of dividends (or vice versa) it’s that they want growth and dividends.

And you can’t blame them. When you’re getting 40-50% capital growth plus 5-7% dividend yield, it’s easy to be greedy. But with income stocks trading at full valuation, there wasn’t room for further growth.

So it’s not surprising that stocks fell back from the peak, just as we expected (and feared) they would. The question now is whether stocks will fall further.

The benchmark S&P/ASX 200 is already about 100 points lower than we had bargained for. Our bet was that stocks would trade between 4,900 and 5,200 points for the rest of the year.

For now we’ll stick with that view. Odds are the market has experienced what Murray Dawes calls a ‘false break’. That’s where an index or stock goes through a previous support or resistance point, but rather than continuing to fall or rise it reverses back with the range.

A Buyers’ Market for Sensible Investors

That’s why we continue to be bullish on stocks – and not just dividend stocks either. We’re especially excited about the opportunities in the technology sector.

We suggested you start to ‘average in’ to stocks when the index got to around 5,000 points. That means buying one-third or one-half of your usual transaction size.

If you followed that advice, we’d suggest buying another third or half of the position today. While there’s still a risk stocks could fall further, investors with a sensible stock exposure should be able to invest through this volatile period without any worries.

Furthermore, the recent fall shows perfectly why we still recommend a relatively conservative approach to the stock market.

The market can turn on a sixpence quickly. If you have too much of your wealth in stocks, these big moves can cause you to panic and sell when you should be looking to buy stocks.

In short, this recent short-term fall has given you a great opportunity to top up your stock portfolio while over-exposed investors sell.

Although the growth and dividend picture may not be as great as it was 12 months ago, even some of the big blue-chips could give you 20-30% growth plus 6% dividends over the next year.

Again, we know it’s not a popular view to take in this market, but stocks look pretty good value right now. It’s definitely a time to buy rather than sell.

Cheers,
Kris
Join me on Google+

From the Port Phillip Publishing Library

Special Report: How to Buy Better Stocks

Daily Reckoning: Why it’s Going to Get Ugly When Interest Rates Rise Again

Money Morning: Signs of Stress in the US Bond Markets

Pursuit of Happiness: Improving Your Life Through New Technology

Australian Small-Cap Investigator:
Why Now is a Good Time to Invest in Small-Cap Stocks

By MoneyMorning.com.au

How many times do you come up with an idea and think to yourself, ‘Wow, I should really do that.’

People in general have the capacity to come up with great ideas. We are all inherently creative to some extent. But there are a few key factors that separate great ideas from great technologies and from great businesses.

In this current global economic environment, a lot of businesses are struggling. There’s a lot of doom and gloom about. Yet it seems every other day there’s a story about successful technology companies making billions of dollars.

Recently the ‘Billion dollar Buy-out’ is the catch phrase running around tech hubs like Silicon Valley. But what takes a company from being worth nothing with a great technology to, to a billion dollar business?

Before we look at the answer first I should point out that, like with the English language there’s an exception to every rule. There are some companies that just have technology so good it sells itself.

A good example of that is Atlassian. Atlassian is an Australian private company that has no sales force, just a great software solution. They develop proprietary software that helps companies track information, analyse data, collaborate on documents and develop their own programs.

Not quite a billion dollar company yet, Atlassian has gone from start-up to about $200 million in just 10 years. Their clientele includes eBay, Facebook, Twitter and LinkedIn.

Also there are some great technology companies worth billions of dollars like photo-sharing website Instagram, and microblogging platform Tumblr. But…that doesn’t make them great businesses either. Mainly because they don’t actually make any money. These two are examples of a great idea that people love, but don’t pay for.

But there are a lot of great ideas in the world. A lot of inventions, a lot of smart people coming up with world changing ideas. Some get lucky (like Instagram and Tumblr), some fail and some take years of hard work.

For those ideas to become great companies, the pathway to that destination is relatively simple.

1. Have an idea,
2. Turn the idea into an invention,
3. Sell the invention to some people to see if it’s good,
4. Create a business to sell invention to more people,
5. Have plan for business, make it big,
6. Sell invention to many people,
7. Make invention better,
8. Make company bigger,
9. Repeat cycle and add to business model,
10. Sell for a billion dollars.

Sounds simple enough? Well unfortunately it’s not. Most people get to step one easy enough. But then most people will fail at step 2.

For the very few that make it to step 2. Most of them will fail at step 3. And for those that make it to step 4…they are likely to fail in the first year of business.

The Best of the Worst and the Best of the Best

But some do make it through the other side, and still can’t take great technology to a great business. Here’s a couple of examples of great technology, but not great businesses.

1. Segway.

   The launch of Segway had hype and fanfare like nothing before. It was the answer to the problems of personal transportation. It was a game changer…well that’s what the owners believed at least.

   The Segway is actually an amazing piece of technology. With inbuilt gyroscopes it’s a self-balancing battery powered transportation device.

   It’s got a swathe of computers and motors that work in tandem to make the machine work. But Segway never really took off as a business. Why?

   Well the technology is great and the sales pitch is outstanding. But the Segway didn’t actually solve a big problem. It was just something new and interesting. It ultimately failed to disrupt the transportation market it was aiming at, personal transport. People couldn’t afford it and didn’t find it particularly helped them in any way.

2. MiniDisc.

   Cassette tape ended the reign of the record player. The ability to have a compact portable audio device was ground breaking, but then CD’s came along and spoiled the party for cassette tapes.

   CD’s were the major format at the time, and dominated the music industry for many years. But in 1992 a new technology and format came out that was going to spell the end of CD’s forever. It was great technology, it was the MiniDisc.

   You could quickly search through discs, and even record and edit on the portable device itself. It was better tech than all other audio formats.

   But the problem with MiniDisc was hot on its heels was still better technology. Technology that would change the way we listen to music, and change the whole music industry forever. MP3′s and MP3 players.

Each of these examples highlights a different problem that stops great technology from being a great business.

Segway had tunnel vision and weren’t prepared to accept that as great as their technology was it didn’t really solve a problem for lots of people. And although they are still a business, they certainly aren’t a great technology business.

MiniDisc weren’t open and aware to other technologies in the market place. They failed to appreciate the market in which they were trying to build a business. Within a few years a superior technology simply overtook it.

But for point of comparison, let’s look at some great business, and see what made them stand out in a competitive world of technology.

1. Apple.

   You simply can’t go past Apple when it comes to turning great technology into a great business.

   When Steve Jobs and Steve Wozniak put together the first Apple computer they didn’t know the impact it would have on the world. But what they did have was a great vision to put a Personal Computer in the homes of millions of people.

   The benefit they had here was that they started a whole new industry. The Personal Computer didn’t exist at that stage. So the two Steve’s had the advantage of being early movers.

   That’s not to say there weren’t competitors. IBM and Dell became competition, as did Microsoft when it came to operating systems and software. But what Apple did was make their products beautiful and easy to use. And what they were able to do was design, market and sell their products like no one else.

2. Nokia.

   Although not at the pinnacle it once was, Nokia is an example of taking great technology and turning it into a great business.

   Mobile phones were all the rage from the late 80′s into he 90′s and of course the smartphone revolution today. But Nokia dominated the mobile phone market through the 2000′s. How?

   What Nokia did was make a product accessible to the masses using available technology. Mobile phones were expensive devices that only the affluent and rich could afford.

   Nokia changed all that by putting to market an affordable mobile phone for everyone. This led them to having the top 6 bestselling mobile phone models of all time.

   They sold almost one billion units worldwide between those top 6 models alone. Nokia phones are still the number one used phone in developing nations across Africa.

There a couple of key factors that made these two companies tech giants of the world.

Apple had the combination of a great technical guy in Wozniak, but a great salesman in Jobs. Without the creative and marketing genius of Jobs, Apple would simply be a company for computer hobbyists.

If Wozniak had gone it alone he wouldn’t have had a great company. If Jobs had done it himself the company wouldn’t have had great technology.

Likewise Nokia didn’t necessarily have the marketing genius and personality of a Jobs-like leader. But they identified an unmet need in a market that affected millions of people.

They created a big solution to a big problem. And that was to put affordable mobile phones in the hands of everyone. They also had the advantage of being the first company to mass market cheap mobile phones.

The Great Business Checklist

When we look at these basic examples of great technologies, it’s fair to say not one technology is necessarily better than another. They all meet an unmet need, and they all were new technologies of their time.

But what companies like Nokia and Apple were able to do was have the leadership and management in place to make great technologies into great businesses. They also met an unmet need that impacted millions of people around the world and were also able to make their technologies simple and accessible to everyone.

And that’s the key difference between great technology, and great technology companies. It’s really got nothing to do with the technology at all.

It’s about the people that lead the technology and the team that’s involved to take it from good to great. It’s about making it accessible and relevant to lots of people, not just one small segment.

These companies also had the foresight to see when something wasn’t working. For them failure was par for the course, just a part of the process. And both Apple and Nokia had their fair share of failures. But they saw the problems, and fixed them the next time around.

So here’s the checklist that makes a great business from a great technology.

With the steps outlined and the checklist above, there’s potential to turn great technology into a great business. It’s hard, takes years and there’s a very good chance it won’t work.

But the right tech, the right people, the right plan and the drive to make it happen, gives a fighting chance of making a truly great technology business.

Sam volkering.
Editor, Money Morning
Join me on Google+

From the Archives…

Keep One Eye on Resource Stocks and the Other on the NASDAQ
31-05-2013 – Kris Sayce

Getting in on the ’99 Cent Craze’ with Crowdfunding
30-05-2013 – Sam Volkering

Buyer Beware: Japanese Government Bonds are Moving
29-05-2013 – Murray Dawes

The Best Contrarian Play on Gold I’ve Ever Seen…
28-05-2013 – Dr Alex Cowie

A Revolution in the Share Market is Coming…
27-05-2013 – Kris Sayce

By MoneyMorning.com.au

Just when you think central bankers are as clueless as our Treasurer, they go and surprise you. The release of minutes from the latest US Federal Reserve Advisory Panel meeting was a bit of a revelation.

The Federal Reserve’s ‘mad scientists’ appear to realize they have created a financial monster. Call it Bernankenstein’s Monster if you like. Take this extract (bold emphasis is mine):

‘There is also concern about the possibility of a breakout of inflation, although current inflation risk is not considered unmanageable, and of an unsustainable bubble in equity and fixed-income markets given current prices.’

Concern about an ‘unsustainable bubble‘? Given the Federal Reserve’s previous track record of creating bubbles (housing rings a bell), all they can muster is ‘concern’. What about fear and alarm?

Here’s another bit of genius from the minutes:

‘Uncertainty exists about how markets will reestablish normal valuations when the Fed withdraws from the market. It will likely be difficult to unwind policy accommodation, and the end of monetary easing may be painful for consumers and businesses. Given the Federal Reserve’s balance sheet increase of approximately $2.5 trillion since 2008, the Fed may now be perceived as integral to the housing finance system.’

‘Reestablish normal valuations?’  Is this Fed code for the fact we now have abnormal valuations? The minutes insinuate the ‘mad scientists’ know they have stuffed it up.

The Experiment Has Gone Too Far Now

And as for the idea that the withdrawal of stimulus ‘may be‘ painful, please spare us the ‘may be’. The market is a highly dependent ‘junkie’. When the Federal Reserve turns off the ‘juice’ (voluntarily or involuntarily), a world of hurt waits.

Haruhiko Kuroda (Bank of Japan Governor) can’t afford to be as contemplative as the Fed. He is a modern day kamikaze – if he thinks of the inevitable outcome, he would never have signed up in the first place. Kuroda is zeroing in on the battleship called ‘deflation’.

A lot of others have moved into Kuroda’s slipstream and had a free ride on the devaluing yen and rising Nikkei. But poor old Kuroda has run into severe turbulence. This is tossing the markets around like a single seater in a cyclone.

Uncertainty and volatility are the hallmarks of Japan’s experiment in printing their way to inflation. The Nikkei’s wild swings (of up to 500 points in a day) illustrate investor nervousness.
According to Wikipedia ‘about 14% of kamikaze attacks managed to hit a ship‘. I think Kuroda’s odds of achieving his mission are even lower.

Central banks believe (publicly at least) asset bubbles can rescue the global economy. History doesn’t just tell us, it shouts at us; asset bubbles don’t fix anything.

The pain of the bust far outweighs the euphoria of the bubble. Time and again this is the lesson central bankers never learn.

Andy Xie, from Caixin Online summed it up:

‘Japan and the United States are using asset bubbles to revive their economies. They are struggling to manage the speed of bubble expansion or contraction. This dancing on a pinhead brings big uncertainty to the global economy. When they fail, a global recession may follow.’

Welcome to the Real World  

Central bankers tell you they are busy conducting an ‘experiment’. But the economy isn’t a scientific research project. They can’t control it. The global economy is a complex and unpredictable ecosystem. Its evolution is a function of the decisions the seven billion people who inhabit the earth make every day.

A handful of bureaucrats and academics with computer models can’t control this ecosystem, any more than marine scientists can control the ocean.

Acknowledging this fact is a step towards understanding the gravity of the situation. Otherwise, these crackpot scientists will blow the lab sky high.

We only have to look back a dozen years to see how their previous experiments (of lesser intensity) have failed.

US fund manager John Hussmann made this observation in his latest report:

‘… the last two 50% market declines – both the 2001-2002 plunge and the 2008-2009 plunge – occurred in environments of aggressive, persistent Federal Reserve easing.’

The significant share market losses suffered during the ‘tech wreck’ and ‘GFC’ occurred when the Fed was aggressively intervening (meddling) in the economy. The Fed’s tampering only makes a bad situation worse.

If we look further back in time, Hussmann discovered:

‘…the maximum drawdown (loss) of the S&P 500, confined to periods of favorable (meddling) monetary conditions since 1940, would have been a 55% loss. This compares with a 33% loss during unfavorable (non-meddling) monetary conditions.‘

According to Hussman the market collapses ‘were preceded by overvalued, overbought, overbullish euphoria‘. This is what asset bubbles do. The animal spirits run strong – the need for greed drives values well above rational levels.

Anyone with a passing interest in the financial world knows the current level of meddling is without precedent. So if all the previous periods of ‘Fed intervention’ resulted in 50+% losses, what pain is in store for this market?

The following charts show the current level of disconnect between the market and the economy.

The first chart tracks US economic activity. In 2008/09 (the grey shaded area represents a recession) all measures of economic activity fell into a crater.

The important take from this graph is 2010 onwards. After the economy ‘recovered’ from its initial GFC shock, it has steadily declined. This is in spite of the US Fed spending trillions (over the past four years) ‘stimulating’ the economy. The Great Credit Contraction is proving far more powerful than the printing press.

Click to enlarge

This next chart compares the performance of the S&P 500 index with the level of margin debt (borrowing to invest) in the US. Talk about a mirror reflection. 

While the economy (Main Street) is tanking, Wall Street is gearing up and milking the experiment for all it’s worth.

Click to enlarge

The next wave down in this Secular Bearmarket will be gut wrenching. It’ll make the previous two corrections look like gentle slippery slides.

Interest rates are destined to go lower, but being in a cash bunker is still the best place to observe the inevitable detonation of this experiment.

Vern Gowdie
Contributing Editor, Money Morning

Join Money Morning on Google+

From the Archives…

Keep One Eye on Resource Stocks and the Other on the NASDAQ
31-05-2013 – Kris Sayce

Getting in on the ’99 Cent Craze’ with Crowdfunding
30-05-2013 – Sam Volkering

Buyer Beware: Japanese Government Bonds are Moving
29-05-2013 – Murray Dawes

The Best Contrarian Play on Gold I’ve Ever Seen…
28-05-2013 – Dr Alex Cowie

A Revolution in the Share Market is Coming…
27-05-2013 – Kris Sayce

AUDUSD remains in downtrend from 1.0582 (Apr 11 high), the bounce from 0.9434 is likely consolidation of the downtrend. Range trading between 0.9434 and 0.9791 could be expected in a couple of days. Key resistance is at 0.9791, as long as this level holds, the downtrend could be expected to resume, and another fall towards 0.9000 is still possible after consolidation. On the upside, a break above 0.9791 resistance will indicate that the downtrend from 1.0582 had completed at 0.9434 already, then the following upward movement could bring price back to 1.0500 zone.

Forex Signals

By www.CentralBankNews.info
    (Following article is written by Michael Lombardi of Profit Confidential for Central Bank News, which occasionally will carry articles by guest contributors if they are of interest to our readers.)

    By Michael Lombardi, MBA for Profit Confidential
    This doesn’t make it easy to understand for investors who bought gold stocks and have now seen them go down in price…
    But while the prices of gold stocks have pulled back significantly this year, demand for physical gold bullion has gone through the proverbial roof.
   The U.S. Mint had to halt the sales of its most-sold 1/10-ounce gold bullion coin. In Australia, the Perth Mint is working in overdrive to fill rising orders. The British Mint reports British consumers’ buying of gold has accelerated as well.
    In the first quarter of 2013, total demand for gold bullion from China amounted to 294 tonnes, as jewelry demand in the country increased by 19% from the same period last year. Bar and coin investment demand rose by 22% from the first quarter of 2012. (Source: World Gold Council, May 16, 2013.)
    In India, demand for gold bullion came in at 257 tonnes in the first quarter, up 27% from the first quarter of 2012. Retail investments in gold bullion edged up by 52%, and demand for jewelry was up 15% in the first quarter.
    Likewise, demand for gold bars and coins in the U.S. were up by 43% in the first quarter of 2013 compared to the first quarter of 2012.
    And that’s not all! The biggest driver of gold bullion prices in my opinion, central banks, bought more gold.

    The first quarter of 2013 marked the seventh straight quarter when central banks accumulatively added more than 100 tonnes of gold bullion to their reserves. But we still have central banks, such as the Bank of China and the Russian central bank, whose gold bullion reserves are nowhere close to the ones of the U.S. or Germany.
    In total, in the first quarter of 2013, overall demand for gold bullion was 963 tonnes.
    While the gold bears argue economic conditions in the U.S. are getting better and, thus, the luster of gold bullion has dissipated, the reality is that the global economy is slowing as growth rates become stagnant. At the same time, central banks around the world still think paper money printing will drive their economies toward economic growth.
    What holds true, regardless of the bearish pressures for gold bullion prices now, is that fundamental demand is still strong, while the long-term technical uptrend has yet to be broken.
    I am still bullish on gold bullion. In the long term, the paper currency will lose its fight against inflation. Just look at the U.S. dollar as an example. In a matter of 100 years, what you could have bought for $1.00 in 1913 now costs you close to $23.50. (Source: Bureau of Labor Statistics web site, last accessed May 17, 2013.)

By www.CentralBankNews.info Here’s today’s Central Bank News’ link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.

Source: George S. Mack of The Life Sciences Report (6/6/13)

Edison Investment Research assesses the value of emerging companies with a model that assumes revenues and earnings are years away. Then again, every investor does that. What’s unusual is that Edison looks for tomorrow’s upside in companies still small enough to double, triple and quadruple in value down the line. In this interview with The Life Sciences Report, Edison Biotechnology Analyst Christian Glennie applies his valuation skills to seven innovative biotech and specialty pharma companies and discusses the share-moving catalysts that investors need to know about now.

The Life Sciences Report: Let me ask you to go ahead and talk about some of your names. Would you choose a company to start with?

Christian Glennie: Thanks, George. Sucampo Pharmaceuticals Inc. (SCMP:NASDAQ) has had a good run starting from the very solid base it has built over a number of years. The company is founded on a novel technology—prostone-based compounds, which are essentially derivatives of natural fatty acids. It is the only company we know of that is working in this area. The key product so far is Amitiza (lubiprostone), which has been developed to treat a range of constipation disorders. It first launched in 2006, and Takeda Pharmaceutical Co. Ltd. (TKPYY:OTCPK) has been the company’s long-term marketing partner for Amitiza in the U.S.

On April 23 the company announced U.S. Food and Drug Administration (FDA) approval of Amitiza for opioid-induced constipation (OIC), which is a very significant market opportunity. We estimate that approximately 2.5 million (2.5M) patients taking opioids chronically for non-cancer pain will suffer from OIC. The approval puts the product in a strong position, given there are very few competitors in this space, certainly in terms of prescription drugs. We model U.S. peak sales for the product at $665M, of which the opioid-induced constipation application is approximately $200M.

TLSR: Christian, to be clear, that $665M represents the total of peak sales in the U.S., and that figure is partnered with Takeda. Is that right?

CG: Yes. The drug is sold by Takeda, Sucampo’s U.S. partner. Takeda has an opportunity to invigorate the brand. Sales have been solid but not spectacular. Revenues have been increasing year over year, but not at huge growth rates. I see an opportunity for the company to reposition and reinvigorate Amitiza with a new marketing effort.

The approval also distinguishes the product from a new competitor on the scene, Linzess (linaclotide) from Ironwood Pharmaceuticals Inc. (IRWD:NASDAQ) and Forest Laboratories Inc. (FRX:NYSE), which was launched at the end of last year. So far, in our analysis, it looks like prescriptions of Amitiza are holding up. Our theory has always been that the entrance of Linzess would actually help grow the market for use of prescription drugs for constipation disorders. The cascade of treatment protocols for constipation starts with dietary and lifestyle changes, followed by regular over-the-counter laxatives and prescription-type laxatives before patients and physicians move on to targeted agents.

TLSR: So what is Amitiza’s advantage in OIC over its pipeline competitors?

CG: The advantage of Amitiza is that it acts directly on the epithelial secretory glands to stimulate mucosal secretion of water and sodium chloride. This increases liquidity in the gut to help soften stools and aid motility. By acting directly, Amitiza bypasses the negative secretory actions of opioids on receptors in the gut, which causes the constipation. In contrast, mu-opioid antagonists block these receptors. But the real issue for this class at the moment is FDA concern over cardiovascular safety associated with the chronic use of these drugs. The approvability of these agents are in doubt until the FDA completes its review of the field.

TLSR: How do you value this company?

CG: We currently have a valuation of $420M, which is $10/share. It’s not a price target. It’s rather a valuation as of discounted cash flow (DCF) to where we believe the shares should be trading today. Once Amitiza rolls out commercially in Europe there will be upside, as we don’t currently include European sales in our DCF model. But this is more of a 2014 story.

TLSR: Let’s go ahead to your next idea.

CG: Biotie Therapies Corp. (OTCMKTS:BIOZF), based in Finland, is interesting on two levels. First, it has just introduced a drug into Europe called Selincro (nalmefene), an opioid antagonist, which is intended for alcohol dependence. Selincro was launched through Biotie’s Danish pharma partner H. Lundbeck A/S (HLUKY:OTCPK; LUN:OMX).

The drug is an alternative approach to alcohol dependence. Current therapy is targeted at complete abstinence from alcohol consumption, which presents obvious challenges since abstinence may not be a realistic or attainable treatment goal. The difference with Selincro is that it actually helps moderate consumption, and that over a period of time—months and years—it has significant long-term health benefits.

TLSR: I’m sure there are social implications to this newer thinking. How much support is there for this kind of shift from such an old, entrenched model?

CG: There are huge implications on both the social and health levels. Acceptance of the therapy is going to require a paradigm shift in the treatment of alcohol independence in Europe, where the overriding theme is still very much about abstinence, just as it is in the U.S. A lot of data about the drug’s benefits is emerging from clinical trials and supportive work by key opinion leaders, talking about how more realistic treatment goals should have significant benefits. Initial uptake of the product is likely to be fairly slow. A significant education and awareness program is required from Lundbeck, but in the long run we see peak annual sales in Europe in excess of €300M ($392M).

TLSR: Because of the educational component and the paradigm shift required, what period of time are you talking about for peak sales?

CG: That peak would be about 10 years out—in 2023 or so—and the product has a 10-year exclusivity. The peak is at the end of that period.

TLSR: Is there any prospect of getting the product approved in the U.S.? Is a new drug application (NDA) or supplemental NDA anticipated?

CG: No, not at this stage. The company simply wouldn’t have the intellectual property (IP) protection to make it worthwhile at this stage. The product itself, nalmefene, has been available in other forms in the U.S. If Selincro were to launch in the U.S., it might only have three years of new product exclusivity, and three years is probably not worth the investment.

The key is establishing the therapy in Europe, because of the potential for approval in eastern European countries outside the European Union, as well as in places like Russia, which could be a significant market. There are plans to develop a market in Japan as well.

TLSR: I understand why a slow uptake is anticipated. You would be fighting a lot of tradition. But I’m wondering, who are the clinicians being targeted in Europe? Psychiatrists? Treatment centers? Where do you start?

CG: The drug will be targeted at the specialists, but also general practitioners in Europe. Selincro does have to be part of a broader treatment program that includes psychosocial support. Some clinicians will still focus on complete abstinence as the ultimate endgame, but a product like Selincro should help patients along that path. Abstinence is not the explicit initial treatment aim for the product, but ultimately any product that helps patients reduce alcohol consumption should bring them farther down the path to complete abstinence.

TLSR: You said you liked Biotie on two levels. Is the Parkinson’s disease product, the selective adenosine 2a receptor (A2A) antagonist tozadenant (SYN115), driving any value here?

CG: Yes. Because Selincro is licensed to Lundbeck, the key operational focus of Biotie is tozadenant, which is, as you say, an A2A antagonist. It has a partner in UCB S.A. (UCB:BSE) for that program, but the deal has been structured such that Biotie is responsible for development of the pivotal phase 3 program. UCB will pay milestones as the drug goes through the various stages. Although UCB is helping fund the trials, it is Biotie’s responsibility to conduct them.

Biotie had the phase 2b data readout earlier this year, and we are very encouraged by the data. When we compare tozadenant to other A2A receptor antagonist candidates, Merck & Co. Inc.’s (MRK:NYSE)preladenant and Kyowa Hakko Kirin Co. Ltd.’s (4151:TYO) istradefylline (KW-6002), in terms of phase 2 data, efficacy and reducing Parkinson’s “off” time, the benefits of Biotie’s therapy were more significant. We view Merck’s recent decision to abandon development of preladenant after the failure to demonstrate efficacy in three phase 3 trials as a potential positive for Biotie in the long run, given that tozadenant is now the leading A2A candidate in development.

The benefits of tozadenant were also evident in the actual disease score. When you score Parkinson’s patients on the extent of the severity of their disease, tozadenant presented significant improvements in that measure. That was encouragement to proceed to phase 3.

TLSR: What’s the next story you wanted to talk about?

CG: Turning to a near-term catalyst story, NovaBay Pharmaceuticals Inc. (NBY:NYSE) should get readouts from three phase 2 trials on its aganocide technology in H2/13. Aganocides are synthetic, stable analogs of N-chlorotaurine, which are produced by white blood cells as an endogenous antiseptic to kill foreign microbes. NovaBay has produced a lot of data to show that its agent, NVC-422 (auriclosene), has the ability to overcome bacterial resistance, which is a key issue for the healthcare industry as a whole.

TLSR: What about the trials getting ready to give a readout?

CG: The trials are in viral conjunctivitis, impetigo and urinary catheter blockage and encrustation. They all will report in H2/13. The company has a significant partner for its impetigo program in Galderma Pharma SA, a private Swiss company specializing in dermatology products. We currently have NovaBay valued at about $1.90/share. But if all of the trials read out strongly positive, I’ve put the valuation in the region of $3.50/share, which would justify phase 3 probabilities.

TLSR: Christian, NovaBay has a $50M market cap. The company’s lead compound, NVC-422, will not be used internally but on mucous membranes, sclera or/and the eardrum. But even with those limitations, it still can mitigate or even prevent the use of antibiotics in so many indications. For instance, children with conjunctivitis could be treated and sent back to school without having antibiotic eye drops. Clinicians all over the globe are looking for antibiotic substitutes. Is this product and platform seen as not being very sophisticated, in part because it is a topical medication?

CG: Ultimately it comes down to data. That’s why these trials are so key. They are, by far, the most extensive trials that NVC-422 has undergone. The previous trial in viral conjunctivitis was mixed. It was a phase 2-type study, not as well designed or powered as the current study, and it produced mixed data. The back story is that Alcon Laboratories (a subsidiary of Novartis AG [NVS:NYSE]) was a partner of NovaBay in the eye disorders setting, and terminated the agreement after those results came out. That was obviously disappointing. But if the phase 3 data is positive, then, yes, the stock is significantly lower than where it could be.

TLSR: What’s the next name you’d like to visit?

CG: Another catalyst story for 2013 is Cleveland BioLabs (CBLI:NASDAQ). This is a very different story. In the near term it’s a biodefense play, but its longer-term potential is in oncology. The company’s compound, entolimod (CBLB502) is a medical countermeasure to radiation. It is going through the U.S. government’s Biomedical Advanced Research and Development Authority (BARDA) to fund development and for potential supply contracts for stockpiles. It’s critical to understand that the regulatory pathway is very different. The FDA created the Animal Efficacy Rule for these kinds of biodefense products; companies need to demonstrate the efficacy of a product in animal studies, but only need to demonstrate safety in humans.

The key catalyst for Cleveland BioLabs in the near term is the award of a development contract from BARDA, which is due any time now. It could be worth up to $50M, but it is not an upfront payment. BARDA will reimburse the company for further studies on entolimod.

TLSR: What is entolimod? What is the mechanism that makes it both potentially efficacious in radiation injury and in oncology?

CG: It’s being classified as a TLR5 (toll-like receptor 5) agonist, which is fairly unique within the TLR class of potential anticancer agents. Two opposite therapeutic concepts are at work here. One is that entolimod can suppress apoptosis (cell death) in normal cells, which helps protect against damage induced by radiation. The second is that it also helps activate apoptosis in tumor cells, specifically in TLR5+ tumors, by mobilizing an innate immune response.

TLSR: I understand that the near-term catalyst is getting the development contract from BARDA, but then what does Cleveland have to do? What are the next events?

CG: The company has done a number of studies demonstrating the efficacy of entolimod in nonhuman primates, but the company needs to do another set of animal studies, and another set of clinical human safety studies. The target would be to file a biologic license application (BLA) toward the end of 2014. The other major potential catalyst would be a procurement contract, whereby BARDA would commit to buying X number of doses from Cleveland BioLabs over a certain number of years. Looking at previous contracts that have been handed out by BARDA for products targeting anthrax or smallpox, I estimate an order in the region of 300,000 (300K) doses, which would equate to a contract of more than $200M to Cleveland.

But timing that kind of contract is uncertain. I provisionally have an estimate that it might come in 2015, which might coincide with an FDA approval on the biologic license. However, FDA approval is not a prerequisite for a supply contract with the U.S. government. A number of other products—again, for anthrax and smallpox—have already been delivered to the U.S. government but have not gotten formal FDA approval. The procurement agreement would be a significant event.

TLSR: What’s the next name you’d like to mention?

CG: Medigene AG (OTCMKTS:MDGEF) is a German company with a longer-term play in terms of catalysts. It is focused on the development of a product called RhuDex, a CD80 antagonist to treat autoimmune disorders. RhuDex is an immunomodulator that potentially blocks the interaction between CD80 on antigen-presenting cells and CD28 on T cells, preventing the overstimulation of T-cells that is often involved in autoimmune disorders. The company has done initial studies in rheumatoid arthritis (RA)—mainly safety studies—but it has decided to focus on primary biliary cirrhosis (PBC), a rare autoimmune disease of the liver. This is very much of an orphan disease indication, with the key market for PBC in the 200–300K patient range across the U.S., Europe and Japan.

Developing RhuDex for PBC could be very lucrative compared to trying to develop it for RA. The clinical timelines are significantly shortened. Also, the company has approximately $22.2M in cash at the moment, which is sufficient to get a phase 2 study in PBC going.

In looking at Medigene, investors will find a big valuation discrepancy versus another company also targeting PBC, Intercept Pharmaceuticals Inc. (ICPT:NASDAQ), which did a $75M initial public offering (IPO) in H2/12. It has more than just a PBC opportunity, but Intercept’s value has been underscored by the potential in PBC. It has done significant subsequent fundraisings, and now has a market valuation of about $530M, versus Medigene with a $37M valuation.

Intercept is in the middle of a pivotal study for its PBC candidate. The phase 2 that Medigene is running is of a similar design to Intercept’s phase 2 trial. It will start in H1/14, and we hope to get some data by the end of 2015.

TLSR: Medigene also has a phase 2 candidate, a newer version of an old cytotoxic agent. Could this drive any value?

CG: Yes. In fact, Medigene has just secured SynCore Biotechnology Co. Ltd. (a member of the Sinphar Pharmaceutical Group) as its global development partner for EndoTAG, a novel lipid-based formulation of paclitaxel. The theory here is that the positively charged lipid formulation targets the negatively charged endothelial cells lining the blood vessels that feed tumor cells. Phase 2 data suggests an overall survival benefit when EndoTAG is added to paclitaxel in patients with triple-negative breast (HER2/neu-negative, estrogen receptor-negative and progesterone receptor-negative) cancer, compared to paclitaxel alone. The SynCore deal ends uncertainty about the drug’s future after a long search for a partner, and a global phase 3 trial is now targeted to start in H2/14. We estimate a potential market launch in 2019.

TLSR: So the primary value driver is RhuDex, followed by EndoTag, is that right?

CG: EndoTag probably accounts for about one-third of the valuation. But in the longer term, the story is very much about RhuDex in PBC.

TLSR: Staying with EndoTag for a moment, I saw a note that five out of a total six patients had a complete response in triple-negative breast cancer. That was certainly a very small number of patients, but it makes me want to see what happens with further development. Triple-negative breast cancer is a truly unmet need in oncology.

CG: Yes, very much so. A number of products are being developed for the setting, but, as you say, it’s a tough form of cancer that does not respond to standard hormonal therapies or targeted agents, with chemotherapy being the only treatment option.

TLSR: Did you have another name you could share?

CG: Mast Therapeutics Inc. (MSTX:NYSE.A) is in a completely different area of disease. It used to be called Adventrx Pharmaceuticals, but changed its name in March of this year. It is currently developing MST-188 (purified poloxamer 188), which is in a phase 3 pivotal trial for sickle-cell disease.

Poloxamer 188 is essentially a polymer surfactant that helps to improve blood flow. The drug binds to hydrophobic surfaces of damaged cell membranes and restores these surfaces to a more natural and healthier hydrated state. This is particularly important for sickled blood cells because they block small blood vessels, which leads to a number of complications, one of which is vaso-occlusive crisis, an acute episode that causes immense pain. Many patients experience these crises frequently through a year, and severe cases may require hospitalization for five to seven days. At the moment, the only available therapies are analgesics and fluids. MST-188 could apply to a number of disease indications involving impaired blood flow.

TLSR: Peripheral artery disease perhaps?

CG: Yes. At the moment Mast has plans to do a proof of concept-type study in acute limb ischemia in combination with standard thrombolytic agents. The concept is that MST-188 could be a positive addition to a number of therapies in a number of settings. By helping restore blood flow, clinicians could reduce the duration of crisis episodes in sickle cell patients, a huge benefit because the more often patients have these events, the greater the cumulative effect, causing gradual massive damage to various organs.

TLSR: What about a catalyst? When and what?

CG: The sickle cell study has just gotten underway this year. In terms of completion of the study and getting the data, we’re looking at 2015. Similar to Medigene, data for MST-188 in sickle cell are a little way off, but the company does have a number of potential proof-of-concept studies to run, which hopefully will be supportive of MST-188. Ultimately, the key valuation driver would be the sickle cell study.

TLSR: What about staying power? Mast is a small company with a $32M market cap. Is it funded well enough to complete a lengthy study?

CG: It is reasonably well funded, with $32M in cash as of Q1/13. Sickle cell is not an area that has attracted huge investment or interest from big pharma, but it’s interesting that within the last couple of years, the likes of Pfizer Inc. (PFE:NYSE) and Novartis AG have gotten involved in the sickle-cell space by licensing a couple of mid-stage development products for the disease. That provides reasonable validation of the interest in the space.

TLSR: MST-188 is not proposed as a chronic therapy, is it? It may be used for a few days—two to three days, correct?

CG: Exactly. The drug would be used in conjunction with intravenous analgesics and fluid drips. The idea is to reduce the duration of crisis, but hopefully there would be other benefits—reduction in pain, reduction in time to hospital discharge and the like.

TLSR: Christian, I know you follow Athersys Inc. (ATHX:NASDAQ). Could you speak to it?

CG: We’ve certainly been interested in Athersys, but we have not initiated full coverage. I’m interested and excited by the MultiStem (multipotent adult progenitor cell) technology it is developing. It has Pfizer as a partner in ulcerative colitis. The real big ticket item, potentially, is the outcome of its phase 2 trial in ischemic stroke trial, with results expected in 2014. This could be transformational for the company. It’s an exciting story and definitely a company to watch.

TLSR: Many thanks to you. I’ve enjoyed this very much.

CG: Yes, I have enjoyed it as well. Thank you too.

Christian Glennie joined the healthcare team at Edison Investment Research in January 2012 and has 11 years’ experience covering the global biotech/pharmaceutical sector as an analyst and a journalist. He came to Edison having held senior analyst and editorial roles at EvaluatePharma and EP Vantage.Glennie also has prior experience as a marketing analyst at Zeneca Agrochemicals.

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DISCLOSURE:

1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Life Sciences Report:Athersys Inc., Merck & Co. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment. Merck & Co. Inc. is not affiliated with Streetwise Reports.

3) Christian Glennie: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Sucampo Pharmaceuticals Inc., Biotie Therapies Corp., Novabay Pharmaceuticals Inc., Cleveland BioLabs Inc., Medigene AG, Mast Therapeutics Inc., Athersys Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.

5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.

6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Source: Peter Byrne of The Energy Report (6/6/13)

Ramping up domestic North American liquid natural gas production for export to pricier international markets could be a game changer for struggling junior explorers. In this interview with The Energy Report, C. K. Cooper & Company’s Jeff Grampp tells us why drilling in domestic gas fields for export is a good idea. . .if the Feds play along. And he identifies promising juniors with leaseholds in particularly desirable fields.

The Energy Report: Jeff, if the Obama administration continues to authorize liquid natural gas (LNG) exports, will that benefit the juniors as well as the big producers?

Jeff Grampp: I believe all U.S. natural gas producers will generally benefit from an increase in LNG exports. Historically, the pricing dynamics of natural gas in the U.S. have been linked to local supply-demand dynamics. With an increase in the potential to export, domestic natural gas producers would be able to access higher priced markets internationally, particularly in Europe and Asia. There will also be local economic benefits tied to the creation of jobs at newly constructed exporting facilities.

Of course, an increase in natural gas prices potentially could burden U.S. consumers. Politicians will have to gauge public opinion as new export facilities open and if natural gas prices increase. I believe the situation will not necessarily be governed by Economics 101, where the U.S. would maximize exporting to realize higher international prices, because powerful political factors will be in play.

TER: How does the domestic supply situation affect consumer prices?

JG: We have seen a recent correction from when prices bottomed at the sub-$2 per thousand cubic feet (Mcf) level. The natural gas rig count has gone down tremendously over the last couple of years. But, at the same time, there remains pent-up potential gas supply that’s not being tapped, due to the more attractive economics of the oil- and liquids-rich plays. As natural gas prices creep up and export facilities enter the equation, producers may increase activities in natural gas plays. We could also see a yo-yo effect as prices go up, and supply may build up incrementally. But if supply ramps up too much, of course, then prices could fall.

TER: Will exporting gas from North America reduce the supply available for domestic consumption?

JG: If producers can sell natural gas at much higher prices internationally, then it would obviously make sense to access those markets. Supply could be diverted from domestic consumption for export, possibly leading to more uniform global natural gas prices, which would be more similar to oil. As it currently stands, oil is the more transportable commodity, so oil prices tend to trade more in sync around the world, whereas natural gas supply-demand dynamics have historically been a function of regional supply-demand factors. But with more global exports potentially in play, we could see natural gas prices trade more in line internationally in the near future. Therefore, we could see natural gas prices fall in regions where they are higher, and in lower-priced regions, such as the U.S., prices could rise.

TER: What are the obstacles for opening up the North American market to export?

JG: I believe the federal government will be reluctant to allow substantial exports of natural gas early on, given our dependence on fossil fuels to run the economy. The federal government will likely be hesitant to ramp up LNG export facilities, even though international demand may warrant more facilities. The Feds are taking a measured approach in their approval of export facilities, as they are watching to see how early facilities play out before accelerating the permitting process. There are also environmental concerns to consider, in terms of where these operations can be built, especially in Alaska. But there is also political pressure to open up the market for exporting.

TER: If we do start exporting more natural gas from the U.S., what kind of competition would we face globally?

JG: Australia exports LNG. Some U.S. producers are also looking at exporting LNG from their international assets. A vast amount of natural gas potential globally is not being fully realized, partly due to regional supply-demand dynamics. Traditionally, if natural gas demand is low in a local economy, it has not made sense to develop the resource because exporting potential was limited. But if producers can access international markets, where prices are higher and supply is limited, it definitely makes sense to develop the assets.

TER: Is there demand for U.S.-derived LNG in the Latin American and Central American markets?

JG: The demand in those developing economies is not as robust as in Europe and Asia, as they tend to rely more on diesel fuels and oil than upon natural gas.

TER: How do you assess President Obama’s recent statement that energy is booming in America?

JG: It truly is booming, due to the technological revolution in horizontal drilling and increased exploitation of oil and gas deposits that were previously considered to be uneconomic. As technology continues to evolve, and with more efficient fracture stimulation and completion methodologies, many previously marginal plays will begin to bear fruit.

TER: With junior energy stocks at all-time lows, what should investors look for when assessing a mid- or micro-cap company in exploration and production (E&P)?

JG: We’ve actually seen a number of quality junior players appreciate nicely recently. At C. K. Cooper & Company, we look for strong management teams with proven track records. We also try to identify companies with growing production bases and a strong level of current running room for exploiting potential drilling locations. Accessing capital markets to acquire drilling locations and production can work, but there can also be a lot of uncertainty in terms of available capital and obtaining the right asset to integrate into a company, so we like to find companies with solid assets in place, rather than those that will rely primarily on potential future acquisitions.

TER: Is the problem of finding capital improving for the juniors?

JG: Given today’s very favorable interest rate environment for issuers, the debt market can often be an attractive source of capital, if junior E&P firms are prudent. Investors should watch out for firms that have overleveraged through accessing the debt side too much. The equity side remains difficult. There is only so much capital available, and equity investors are being judicious in allocating capital to only the companies with the highest returning prospects.

TER: Is this a good time to buy in the mid-cap E&P sector?

JG: There are good buying opportunities. We just initiated on Midstates Petroleum Company, Inc. (MPO:NYSE) with a Buy rating and an $11 price target. The company had an initial public offering (IPO) in April 2012 with some conventional Gulf Coast assets, and it made two producing property acquisitions this past year in the Mississippi Lime and Anadarko Basin. These two assets give Midstates significant running room in two midcontinent plays with lower-risk, liquids-rich horizontal drilling opportunities. On the Gulf Coast assets, Midstates is testing horizontal wells in conventional reservoirs with some pretty encouraging early results. The firm has a very strong management team, and we see a lot of upside with the name.

TER: What names are attractive to you in the natural gas space?

JG: On the gas side, we like FX Energy Inc. (FXEN:NASDAQ), which has assets in Poland. It has several large exploratory blocks and recently announced a very solid production test on an exploration well in a 100%-owned block outside of its Fences concession. The Fences concession has been one of FX Energy’s more successful blocks and news of the company’s drilling success outside of the Fences concession is particularly positive. FX Energy plans to drill more wells near this most recent find after it acquires three-dimensional seismic data and there is good potential in 2013 for FX Energy to capitalize on its recent success.

TER: How do international pricing dynamics affect FX Energy’s position in the Polish market?

JG: Most of Poland’s natural gas is supplied by Russia, with natural gas prices in Poland being quite high given its lack of domestic production. FX Energy’s strategy has been to take advantage of the localized natural gas pricing dynamic. In the long term, it would not be out of the question for Polish imports of LNG to impact natural gas prices in Poland, but it seems unlikely to have a major impact over the next couple of years. For the time being, these guys are producing natural gas in the right place given that they receive nearly $7 per Mcf.

TER: Moving back to North America, are there any other companies that canny investors should buy?

JG: We really like the Wattenberg Field names at C. K. Cooper & Company. We cover Bonanza Creek Energy Inc. (BCEI:NYSE), PDC Energy Inc. (PDCE:NASDAQ) and Synergy Resources Corp. (SYRG:NYSE.MKT), which all operate in the Wattenberg Field. We like finding smaller players in areas with a lot of offset operator activity, particularly by the larger independents and majors. The two largest players in the Wattenberg Field are Noble Energy Inc. (NBL:NYSE) and Anadarko Petroleum Corp. (APC:NYSE). Both of these companies are spending billions of dollars testing aggressive down-spacing and upside potential in a variety of targets in the field. That activity allows the smaller firms to sit back and watch, and then play catch-up in the patterns that work. Noble and Anadarko are testing different “benches” in the Niobrara and the underlying Codell formation. Their de-risking of the potential of the targets then trickles down to the Bonanzas, PDCs, and Synergys. These smaller companies are starting to do their own testing of aggressive horizontal targets, because the big guys have shown that it works.

TER: How big is the Wattenberg Field?

JG: It is a relatively smaller field within the DJ Basin in northeastern Colorado. It’s a liquids-rich play with well costs typically running between $4–5 million ($4–5M). Noble is also drilling long lateral wells to enhance recoveries, and is seeing encouraging results. Companies are targeting different benches within the Niobrara Formation, which are generally referred to as the A bench, the B bench and the C bench. The Codell Formation underlies the Niobrara and is also prospective for horizontal development, potentially yielding four different horizontal targets. And the firms are testing down-spacing, with as tight as 40-acre spacing for a horizontal well. Ultimately, there could be between 8 and 16 horizontal wells per target in a section, which could translate to significant value for these companies’ leaseholds.

TER: How do you assess the potential for mergers and acquisitions (M&A) in the Wattenberg, given the lack of equity capital available at the moment?

JG: M&A definitely comes into play in the Wattenberg. Given that the Wattenberg is a relatively small field, with very few players holding significant acreage positions, it stands to reason that Noble or Anadarko could look at expanding their positions through M&A deals. Conversely, a large company not yet in the Wattenberg Field would likely need to go through one of the smaller companies with leaseholds to establish a sizeable position. Many E&Ps have also tried to find similar success outside of the Wattenberg Field in the greater DJ Basin, but results have been mixed. We really like the Wattenberg Field because it offers good upside potential that is lower risk.

TER: Do companies like Noble and Anadarko have capital available for M&A?

JG: Their ability to raise capital would likely be a little easier than smaller independents, given their size, reputation and longevity as public companies. They are not small companies with unproven management teams trying to raise equity to explore vast acreage positions. The capital markets generally like having the comfort of knowing their capital is being allocated to something that could generate a solid return and is also lower risk. For the larger players, convincing the market that expanding leaseholds in the Wattenberg Field is a good play should be a no-brainer.

TER: How do you set your buy and sell target prices?

JG: Our price targets are generally based on net asset value. We evaluate the company’s current proved reserves and back out any debt and senior securities to get a proved value for the common equity. We then value the upside potential on the company’s acreage by calculating how many wells it could potentially drill, and estimating how much a given well is worth on a net present value (NPV) basis. We then assume that these wells get developed over a number of years to arrive at an NPV of the company’s entire leasehold position. We believe this generates a value that is comparable to what a fair value price would be for the company in an M&A deal, which is often how value is realized for micro-, small-, or mid-cap names.

TER: Do you have any final investing advice for people looking to get into or stay in the junior energy space?

JG: It’s important to identify a strong management team that can execute a development plan. Look for companies with strong assets and good offset operator activity that will allow them to risk share or jointly determine the best and most efficient way to develop the assets.

TER: Thank you very much, Jeff.

JG: You are welcome, Peter.

Jeff Grampp is a senior analyst in the research group at C. K. Cooper & Company, a full-service investment bank. Grampp joined C. K. Cooper & Company in 2011 and has been instrumental in publishing research and assisting in covering E&P companies across the firm’s entire oil and gas universe. Grampp is primarily responsible for covering the E&P sector at C. K. Cooper, with a focus on mid- to micro-cap names. He is currently a CFA Level III candidate and is a licensed FINRA broker: Series 7, 63, 86 and 87. He received his master’s degree in business administration from Chapman University, where he also received a bachelor’s degree in business administration and accounting with emphases in finance and marketing.

DISCLOSURE:

1) Peter Byrne conducted this interview for The Energy Report and provides services to The Energy Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: none.

2) The following companies mentioned in the interview are sponsors of The Energy Report: FX Energy Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Jeff Grampp: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Bonanza Creek Energy Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.

5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.

6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.