Market Overview

Dr Faessel - 6-17-2011

 

MAKING THE VALUE PROPOSITION FOR STAR SCIENTIFIC

Tobacco could kill one billion people this century -(Reuters)

Part one: CigRx™, the over-the-counter nutraceutical that reduces the urge to smoke.

My recent reports on Star Scientific have dealt largely with the research that is underway at the Roskamp Institute , the Johns Hopkins School of Medicine, theFlint Study and a newly announced 500-person study in Pisa, Italy.

Let's delve back in time to one of the other distinctive thrusts of the Star Scientific story that garnered early investor interest and expand on that aspect and its multibillion-dollar potential.

The smoking statistics are beyond appalling; worldwide, between 80,000 and 100,000 kids start smoking every day. Approximately one quarter of children alive in the Western Pacific Region will die from smoking. Tobacco use costs the global economy $500 billion a year in direct medical expenses, lost productivity and environmental harm. Gross cigarette sales are $325 billion a year. Amazingly, over 40% of smokers try to quit at least once a year.

Recall that for about a year the shares of Star Scientific were in fairly tight trading range where shares oscillated between $1.40 and $2.25. At that time interest in the shares was driven largely by the potential of the Reynolds American Inc patent infringement lawsuit, stories about a treatment for Alzheimer and the development of CigRx™, the over-the-counter nutraceutical that reduces the urge to smoke. Subsequently in early March 2011 Star’s shares broke out of the above mentioned base on huge trading volume of millions of shares and the stock ran to $5.12 by early April. Volume over a five-day period was an astonishing 60.8 million shares.  The impetus for this initial spike in price was largely due to a U.S. government re-examination of patents central to the lawsuit against Reynolds that were validated, i.e. “set in stone” with no possibility of  appeal.

This news from the US Patent Office added fuel to the developing CigRx™ thesis and propelled the stock to the above mentioned highs. These highs were then exceeded on May 31, when shares ticked $5.35.

I have kept subscribers up to date on these themes; most recently the tour and overview of important new discoveries using Star's compound (RCP-006) being made at the distinguished Roskamp Institute in Sarasota, Florida that I attended on June 1. See Seeking Alpha: http://seekingalpha.com/<wbr><wbr><wbr>article/273675-star-<wbr>scientific-astonishing-<wbr>research-with-unfathomable-<wbr>market-potentiall</wbr></wbr></wbr></wbr></wbr></wbr>

Let us not forget that while these subjects look to have immense payoffs for Star Scientific and shareholders the huge market potential of CigRx™ that will reduce the urge to smoke should not be overlooked. Its market potential is staggering, and its eminent regional and national rollout gets closer by the day. Keep in mind that many of the drugs that are distributed by Stars marketing and distribution agentinVentiv Health* from their big Pharma clients do sales in the $ multi-billions. Therein lies the moon-shot potential.

CigRx™, Star Scientific's non-nicotine, nutraceutical (dietary supplement) is on the shelves in Richmond, Virginia their initial test market. The launch has been undertaken and shepherded by inVentiv Health Inc., a major drug / health product distributor with sales of $1.1 billion. inVentive Health is looking to aggressively market this product, having seen the huge sales of nearly $1 billion generated by Pfizer’s troubled Chantix

Over 6 million people in the USA have been prescribed Chantix. In studies 44% of smokers who were prescribed the drug managed to quit during the weeks 9 to 12 of the treatment, but severe side-effects came to light later such as hostile behavior, psychotic episodes, suicide thoughts, and serious skin reactions have dramatically curtailed sales. The first year out of the box the drug had $200 million in sales, $400 million the second year and then peaked at worldwide sales of $883 million a year.  Four years ago Chantix looked like Pfizer’s next big thing, but after the negative news of the side effect was released U.S. sales immediately fell 49% to $96 million, and worldwide sales fell dramatically 24% to $182 million by 2008. Since then the drug has made a comeback, especially overseas where to make up for lost revenue in the USA, Pfizer looked increasingly to foreign markets. In the first nine months of 2010, while revenue from Chantix in America fell another 16.8 %to $252 million, sales in the rest of the world grew 22.17% to $270 million. The cost of Chantix is about $120 a month.  

There are a few other doctor-prescribed drugs in the giant $2.5 billion "quit smoking" market that are pricey to patients but have had some success. The costs of “other” quit treatments that encompasses patches, lozenges and gum that now rule the market are: $475 for a 12-week regimen of Nicorrete gum; $300 for 12-weeks of Commit lozenge, and $336 for the 12-week regimen of the Nicoderm patch. Critically, the “quit rate” on all of these treatments is a paltry 5%.

In New York City the price on a pack of cigarettes has skyrocketed to $14.50. As you may know, the state, federal and even city taxes send the costs of cigarettes thru the roof. Several states tax over $3.00 a pack, yet Missouri only taxes $0.17 per pack. Hence, without these taxes, and considering a price-point somewhat below cigarettes, the margins on CigRx™ should be terrific for Star Scientific. One single carton of cigarettes in New York City now costs $150.00 in some outlets where there is also a municipal tax of $1.50 per pack plus the huge $4.35 state tax per pack.

The importance of this data is that it paints the picture of the mega-market for a smoking cessation product, and subsequently the interest by inVentive Health in “partnering” with (CIGX).

The Richmond launch included infomercials running on TV, representatives contacting the local doctors in the area, and delivery of the CigRx™ product to pharmacies and other health-related outlets. And you can purchase it very simply online:www.cigrx.com

Here are some “what ifs”:

If CigRx™ achieved $100 million in sales the first year post test market, (CIGX) would earn about 0.30 a share in [EPS]; introduce a 20 times multiple and that would equate to a $6 stock. If CigRx™ could achieve an $800 million run rate (CIGX) would earn $2 to $3 a share and have a potential $40-$60 stock.

From what I heard on my trip to Florida, Star and inVentive Health are preparing for a major push with new, state of the art call centers to handle the volume of sales that they anticipate. 

So you get the picture―inVentive Health has the muscle and know-how, sees a big if not huge revenue stream, and has the money to push CigRx™ out to a nationwide public.

Also of note: the (RCP-006) product CigRx™, which reduces the urge to smoke, has over 27,000 “friends” on Facebook, up from about 5,000 a month ago. It appears to be on its way to going viral.http://www.facebook.com/CigRx

Another notable metric mentioned at the Roskamp meeting is that about 100,000 people have now taken (RCP-006) compounds.

* inVentiv Health is the world's largest communications network dedicated exclusively to healthcare. The clientele of inVentive Health are a “who's who” in the realm of pharmaceutical and healthcare companies and the firm has marketing and sales capabilities in 40 countries around the globe. This client list includes; Johnson & Johnson, Abbott Laboratories, Novartis, Merck, Pfizer, and Eli Lilly.

On 8-4-2010 the eminent private equity firm Thomas H. Lee Partners paid $1.1 billion cash for inVentiv Health in a buy-out.

There are other looming, potentially hugely market moving dimensions to the (CIGX) story that are percolating and ready to pop over the next few months. When the magnitude of the numerous $billion potential themes of the “Star Scientific” story are added together it makes it a one of a kind equity. In my many decades involved in the market I cannot recollect a story that carries as much potential. Hence, I included Star Scientific (CIGX) as one of my Best Ideas for 2010 and for 2011. I reference it as a, “Stock for the Ages - Likely!”

If you missed my previous reports—more specific in detail and scope on each of these themes—or wish to receive my Best Ideas for 2011, send a request to:Dr.Faessel@onthemar.com

Part two; on the RJR/patent damages lawsuit that’s winding its way towards conclusion... To be published soon...

Disclaimer: I have bought shares of Star Scientific in the open market.

Posted-In: abbott laboratories and Eli Lilly Johnson & Johnson merck Novartis PfizerLong Ideas Short Ideas Trading Ideas

 

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