Superdrugs and Storage Solutions

Posted On Oct 29, 2014 By Dave Gonigam

  • An episode of The 5 loaded with “buyout bait”
  • What’s a “superdrug”? And what can it do for your portfolio?
  • Cancer “superdrug” with proven results… and undiscovered potential
  • Thrilling gains from a boring business
  • Waiting on the Fed… golden eye candy… how banks create money (again? Ugh)… and more!

   Imagine a drug that could cure one out of five breast cancer patients.

“In 1999,” recalls our investment director Paul Mampilly, “I received data on an incredible new drug that I believed could change the world.” It indeed had the potential to cure one in five breast cancer patients. “I remember thinking if this drug works, this is going to be a big deal. And today, that’s exactly what’s happening.”

If you’ve been with us for a while you know Paul thinks we’re in the early innings of “the biggest and greatest biotech bull market in history.”

And if you were with us yesterday, you know Greg Guenthner of our trading desk says the biotech sector has just broken out of a seven-month sideways pattern — a fact that “can make you a bundle over the next few months.”

With both of those factors in mind, let’s explore what Paul rightly calls a “superdrug” — the first of its kind.

   “Breast cancer patients used to dream that they could get rid of their cancer,” says Paul. “Today, it’s a reality.”

In February 2013 the FDA approved a drug for late-stage breast cancer patients. “In other words,” Paul explains, “the drug is being used by very sick people with no options left. But it’s working miracles for these patients already.”

For powerful, albeit anecdotal evidence, look no further than a website called Inspire, a social-media site where patients write about their experiences on new drugs. “I use Inspire to check on how a company’s drugs are actually affecting patients,” says Paul.

And at Inspire, you find glowing testimonials. A common one: “I am NED!!!” That’s short for “no evidence of disease.” That’s considered a cure if you’re a cancer patient.

   “A cancer superdrug works just like a heat-seeking missile,” Paul analogizes.

“It hunts down cancer cells in your body and kills them. And only them. The technical name for a superdrug is an antibody-drug conjugate (ADC). Our bodies use antibodies every day to kills viruses and harmful bacteria. And a superdrug uses our bodies’ natural immune systems to hunt down and kill cancer cells. That means unlike chemo, it works with your body to kill cancer. It’s healthier and safer, and the side effects are minimal compared with chemotherapy.”

The hard numbers are equally compelling: “In a recent study,” says Paul, “the drug produced NED in 23% of patients. Twenty-three percent is an incredibly high number. Most old cancer drugs have 0% NED.”

And for those who did not achieve NED, the results were still difference-making: “Patients taking the drug lived nearly six months longer than patients on older drugs. Patients also went 10 months without their cancer getting worse when compared with older drugs.”

We can anticipate your objection: If the drug won FDA approval nearly two years ago, why is its maker a compelling investment now?

   Two reasons: First, Wall Street is underestimating the drug’s sales potential.

“Wall Street analysts estimate the drug could generate sales of as much as $5 billion,” says Paul. “That’s going to make it one of the best-selling cancer drugs ever.

“But I believe it could generate $7 or even $8 billion in sales. Why? Because one year’s supply is going for $94,000. And the drug is being tested in other cancers. If it works in one more cancer type, sales are going to be more than $5 billion.”

This is a company, by the way, whose market cap is less than $800 million.

   Second reason: “The company has 22 superdrugs in testing,” says Paul. And Big Pharma companies want access to the revenues they’re bound to generate.

That’s because Big Pharma is staring down a phenomenon some experts call the “patent cliff.”

“Big pharmaceutical companies are desperate for new drugs,” Paul explains. “The drugs they currently sell are going off patent. When a big pharmaceutical company’s drug goes off patent, a generic or knockoff drug is made available to patients. These generics or knockoffs are sold at a huge discount. For example, a 30 pack of the popular cholesterol-lowering drug Lipitor in branded form sells for $142. The generic or knockoff sells for just $22.50. As soon as the generic version was released, branded Lipitor sales tanked immediately by 70%.

“As much as $200 billion of big pharmaceutical companies’ revenue is at risk in 2014 from generics and knockoffs. Two hundred billion dollars! That’s according to an expert research organization that specializes in tracking patents.

“I track what big pharmaceutical companies are buying every day. These companies are about to lose billions in sales and would love to control this much smaller company’s pipeline of 22 superdrugs.” Already this year has seen buyouts that generated big short-term gains — InterMune, up 38%… Auxilium Pharmaceuticals, up 43%… Durata Therapeutics, up 75%…

Undervalued, and buyout bait to boot: No wonder Paul recommended these shares so enthusiastically to his FDA Trader readers last week. It’s still below his buy-up-to price. For access to all of Paul’s recommendations, follow this link.

   Stocks are treading water this morning, traders marking time until smoke emerges from the Marriner Eccles Building in Washington and the Federal Reserve issues its latest policy pronouncement. As we write, the Dow and the S&P are flat, the Nasdaq and Russell 2000 slightly in the red.

The Fed statement comes out around the time this issue of The 5 hits your inbox. The safe bet is the committee members will follow through on the “tapering” process that began in January and bring “QE3” to an end after more than two years. The only drama lies in whether they’ll stick with their pledge to keep the fed funds rate near zero for “a considerable time.”

Yawn, stretch…

   “Now’s the time to get excited about computer storage again,” writes Jonas Elmerraji of a sector that sounds, well, unexciting.

But before you nod off, know this: “In the last several years, every single computer storage stock I’ve recommended has been acquired at a premium,” says Jonas. Three of them, in fact. Average gain: 53%.

But why now? “In short,” says Jonas, “large tech companies are hungrier for acquisition opportunities than they’ve ever been.”

If you were with us yesterday, Jonas explained how big U.S. companies are sitting on a record cash hoard of $1.53 trillion. Shareholders are itchy, demanding boards find something to do with that money…

  • …either give it back to them in the form of dividends or buybacks (that’s what Apple is doing)
  • …or grow the business. Mergers and acquisitions offer instant growth. (Besides, if the global economy is slowing down, do you really want to invest in new equipment and hire new people?)

   “There’s a very good reason why computer storage stocks have been such big targets lately,” says Jonas… and yes, he’s eyeing his own buyout bait today.

“The demand for storage is growing at a break-neck pace. It’s growing so fast, in fact, that an estimated 95% of all the data saved on computer networks today was created within just the last two years. And by 2020, experts believe that demand will reach 40 zettabytes — as recently as 2012, all of the data stored globally added up to just 2.7 zettabytes. That’s a staggering growth rate.

“And while it translates into big demand for storage in your phone and your computer, the storage demands in the enterprise world (the servers and data centers that feed data to those phones and computers) are off the charts.”

The player Jonas has in mind is a fat target because it’s sitting on a huge patent portfolio. Few people outside the industry have ever heard of the company, but its collection of “intellectual property” ranks just below the likes of Hitachi and IBM.

Jonas is keen on a select few Silicon Valley players that could deliver outsized gains before year-end… as he explains right here.

   “Nuggets like this don’t come along every day,” says precious metals appraiser David McCarthy.

No, they do not…

At 6 pounds, “nugget” seems like an understatement…

The “Butte nugget” is named for the county in California where it was discovered only this summer. It weighs 6.07 pounds. “I really didn’t believe that I would see a California nugget of this size unearthed during my lifetime,” McCarthy says.

It went on display late last week at the San Francisco Fall Antiques Show. Then it went up for auction over the weekend, fetching $400,000. The buyer is identified only as a “prominent Bay Area collector.”

Hmmm… Assuming the thing is nearly pure gold, and with around 14 troy ounces in a pound, that works out to nearly $4,600 an ounce. With a spot price of $1,223 this morning, that’s one heck of a collectible premium…

   “It is very hard for people to understand how our fractional reserve banking system works, and since it defies common sense, they are slow to accept it,” a reader writes.

We’d better back up a bit: Late last week and early this, we got unwittingly dragged back into the matter of how banks don’t actually loan some fraction of their deposits. They issue loans and create brand-new deposits.

“For those who believe that a bank only lends out a portion of the deposits they have taken in,” our reader goes on, “think about this.

“Fannie Mae and Freddie Mac, at the height of the mortgage banking cycle in 2008, held a combined $5 trillion in outstanding mortgages. Then add mortgages held by other institutions, car loans, student loans and credit card debt and compare this with the amount of currency in circulation, M1 money supply, that could be deposited at a bank, which amounted to less than $1 trillion.

“So where did the money come from to fund all these loans? It came courtesy of our banking system, which allows the funds to be created out of thin air, or from nothing. This is a crude example, and certainly doesn’t explain the complex system they use, but it shows the ability the banks have to create funds when they want to.”

   “My ‘buts’ are not satisfied with your answers,” writes a persistent reader weighing in on two issues, including the loans-create-deposits matter.

“With all due respect to the late Harry Browne [cited here on Monday], his illustration suggests that one borrows money at 6% interest to keep it in a checking account that pays 0.25%? If a lender deposits the loan proceeds into borrower’s checking account, it won’t stay there long but flow out to purchase the goods or services for which it is borrowed.

“The bank may have inflated its assets (loans), but also its liabilities (deposits). What is the bank going to use to clear the checks presented by vendors in a few days? C’mon, the only bank that can create money ‘out of thin air’ is the Fed.”

The 5: You’ve answered your own question. “While banks do not need the deposits to create loans, they do need to balance their books,” writes lawyer and author Ellen Brown; “and attracting customer deposits is usually the cheapest way to do it.”

What’s more, “if the bank lacks retail deposits, it can borrow in the money markets, typically the Fed funds market where banks sell their ‘excess reserves’ to other banks.”

At the risk of making readers’ eyes glaze over, we’ll leave it at that…

[Note to hard-money advocates: Just because we’re citing Ms. Brown does not mean we agree with everything she writes.]

   “On gold,” our reader goes on, “the answer is also inadequate. It is said we cannot trust data from China. It appears you suggest we also cannot trust data from N.Y. Fed or elsewhere, thus including the ‘experts.'”

The 5: Trust the New York Fed!? Which, when the Germans asked it to repatriate 300 metric tons of their gold held there, told them it would take seven years? We’re talking about an amount of gold that, as the Singapore-based analyst Grant Williams pointed out a year ago, could fit on three 747s.

Again, we could dig into this all day, but have a 5 Min. limit to respect and readers we don’t want to bore to tears. Suffice it to say yes, power brokers in both the West and East are doing their best to make the physical gold trade as opaque as possible.

All we can do is turn to the handful of experts around the world — and we’re fortunate to have one of them, Jim Rickards, in our own stable — who do their best to unpack the available data and reconstruct it to the best of their ability…

Best regards,

Dave Gonigam
The 5 Min. Forecast

P.S. Well, that was quick: Yesterday, Matt Insley issued an options recommendation to readers of Real Wealth Trader. This morning, he urged them to unload half the position — for a cool 74% gain.

Real Wealth Trader is less than a year old, and it’s off to a great start. And the best is yet to come. Grab your share, starting right here.


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