The “Cancer off Switch”: 3 Breakthrough Companies Poised for 300% Gains By Patrick Cox The word “astonishing” does not begin to describe the scientific and technical breakthroughs announced in just the last few months. One unexpected development after another, each with the potential to make stock market history, made headlines. For those who watch emerging technologies and the profits they offer, these are nearly overwhelming times. Never in my or anyone else’s life has there been anything like it. Science magazine named advances in RNAi research the scientific breakthrough of the year in 2002. In 2006, the two scientists responsible for the 2002 discovery won a Nobel Prize for their work. The discovery of RNAi did not generate as much public interest as, say, stem cells. Scientists and pharmaceutical companies got very excited, though. One of the most excited scientists was Nobel– winning MIT biologist Phillip Sharp. I’ll describe some of these developments here. Then, I’ll discuss three stocks that could each show you 300% gains over the next six–18 months. No company is entirely safe from the twists and turns of history. But the stocks I have for you today look like the Googles or Microsofts of biotech stocks. Sharp co–founded Alnylam Pharmaceuticals (ALNY: NASDAQ) in 2002 to develop RNAi drugs. Sharp’s record of starting businesses is worth noting. In 1978, he co– founded the biotech giant Biogen, which became Biogen Idec, which now has over $2 billion revenue per year. Another Alnylam co–founder is Thomas Tuschl, credited with developing the means of extending RNAi technologies from plants to mammals. First, let me clue you in on what I mean by the “Cancer off Switch”… Alnylam is no secret. Its stock has tripled in price in the last two years, and it has attracted quite a bit of attention lately. A new series of successful European patent applications and product trial announcements helps explain recent price spikes. Turning off Cancer With the Flip of a Switch here is a special type of mechanism that can actually control gene expression. This means that it is possible to simply turn off, or silence, specific genes and the proteins they produce. In the process, hundreds of serious diseases could be cured. These run the gamut from liver cancer and macular degeneration to measles and the flu. Similarly, these sequences can be used to increase production of beneficial proteins. At the annual meeting of the American Society for Cell Biology, Alnylam announced positive in vitro and in vivo results in tests designed to block production of the protein that causes eye diseases such as age–related macular degeneration (AMD) and diabetic retinopathy. This reinforces successful results in lab animals and some limited human testing. This year, the company will begin the approval process for additional drugs, perhaps treatments for liver cancer or high cholesterol. Alnylam’s pipeline of major product innovations for the decade, in fact, is mapped out. There is no more exciting area today. This is true both for scientists seeking to cure maladies once thought incurable and for investors. It’s been only a decade since the first real research about the mechanism was published. It’s been only two years since the first Nobel Prize was awarded for this “Cancer off Switch” breakthrough. It won’t be the last award. Industry watchers say the announcement that Alnylam expects four major new collaborations with leading pharmaceutical companies by 2010 also spurred prices upward. Last year, Alnylam signed a deal with Roche Holding AG that could be worth $1 billion. Roche agreed to pay $331 million upfront to license technologies and to buy nearly 5% of Alnylam’s stock for $42 million. Together, the two companies will work on RNAi products to treat cancer and respiratory, metabolic and liver diseases. Severin Schwan, Roche’s CEO, told Swiss magazine SonntagsZeitung that he hopes Alnylam will be Roche’s ”second Genentech.” Various companies are in the race to build patent libraries and develop specific therapies. Only a few have both the expertise and the funding to be big winners. Fewer still have the financial skills needed to build their companies into truly transformative success stories yielding returns measured in tens of thousands of percent. Three of these passed my screen for truly transformational companies… Breakthrough “Cancer off Switch” No. 1: A Technology Worthy of a Nobel Prize Roche is just one of the top companies allied with Alnylam. It has strategic relationships with Novartis AG, Biogen Idec, Medtronic Inc., Cystic Fibrosis Foundation Therapeutics Inc. and the Mayo Foundation for Medical Education and Research. It has over $60 million in federal contracts. You can get an idea of how pharma insiders value RNAi therapies by looking at Merck’s purchase of rival RNAi firm Sirna Therapeutics. Merck paid $1.1 billion in 2006 for Sirna, which had a market cap of $923 million. Alnylam’s market cap is around $1.3 billion now. The “Cancer off Switch” that we keep talking about has another name in the scientific community — RNA interference (RNAi). RNAi is a natural cellular defense mechanism discovered accidentally by a geneticist working with petunias. It provides a way to turn off specific genes that produce the proteins that cause diseases — like a light switch. I’m extremely impressed that Alnylam gave up only 1 (over, please) 5% ownership to Roche in return for at least a third of a billion dollars — and maybe a full billion. There is always a danger in these forward–looking companies that they will be acquired, diluting their pure play value. That’s not a bad downside, however. toward applying a nanotech solution to this biotech problem. Moreover, it is engaged in a range of incredibly promising research. Any one of these projects could launch its stock into the history books. The New Problem Facing Entrepreneurs Speaking of deals, just weeks ago, Alnylam forged another $1 billion deal. This time, the pharma giant is Japan’s largest bio firm, Takeda Pharmaceuticals Inc. This time, no stock changed hands at all. I was already enthusiastic about Arrowhead Research Corp. (ARWR: NASDAQ) when I first spoke with president and CEO Chris Anzalone. He embodies, I believe, the new entrepreneur. He holds a Ph.D. in biology from UCLA, but his focus is on business opportunities created by the convergence of technologies. Before taking the helm at Arrowhead, he founded and ran the Benet Group, which funded and assisted several important biotech startups. Takeda will give Alnylam over $100 million upfront and another $50 million in near–term payments. With commercialization, the total value of the deal is expected to hit the billion–dollar mark. This deal does not give Takeda pure long–term exclusivity in regard to Alnylam products. This is the nature of these emerging markets. They require a high degree of expertise in a variety of fields. In fact, lack of interdisciplinary skills is a major limiting factor in today’s markets. Alnylam ended last year with $450 million in cash, and its management is formidable. Looking five years out, I am convinced that other technologies and discoveries will make RNAi even more effective than the experts expect. Of course, something new could come along that could change everything, but that’s not how I’m betting. In the not–too–distant past, the problem facing entrepreneurs was the relative scarcity of new ideas and technologies. Even nonspecialized entrepreneurs could keep track of tech developments pretty well. An important breakthrough would be publicized and accounted for. Everybody found out and had time to integrate it into their business plans. Alnylam peaked in October at $37.35 and then dropped back down as low as $21, but is back up to $32. That is still a good price for a long hold on a stock that could duplicate or surpass legendary biotech performers like Amgen and Genentech. For a few dollars — split adjusted — you could have bought Amgen a decade ago. It eventually topped out at $100 per share. Alnylam could pay off just as well. The short term could be rocky, as the market sorts out the housing collapse and credit troubles. The long run, however, looks better than it ever has. Today, the opposite is the case. There are so many research breakthroughs taking place that it is a full–time job just to keep track of them. Furthermore, many are understood completely by an extremely limited number of people directly involved in the research. This creates new sets of problems. One is that scientists wrapped up in their own research have time for little else. If someone is racing to be the first to solve a problem, it is impossible to deal with anything else. If only a handful of scientists understand your research, how do you find the time to educate and convince nontechnical financial people to fund your work? Recommendation: Buy Alnylam Pharmaceuticals (ALNY: NASDAQ) up to $37 per share. Breakthrough “Cancer off Switch” No. 2: A Stock Worthy of the Hype While I hate the exclamation points and big fonts used to hype stock picks, I have a nanotech/biotech company that absolutely merits the hype. Rather than pulling out the superlatives, however, I’ll just describe what it is and what it does. When you’ve read about it, I think you’ll join the chorus. Just don’t tell your friends about it until after you’ve put in your buy order. Researchers typically work extremely long hours. Most of those who are successful have little time for anything else. For them, it may be impossible to take the time to identify related and synergistic breakthroughs. I talk to CEOs of emerging tech companies on a regular basis. Often, I find that I know more about competing technologies than they do. It’s not really surprising, though, as they are so focused on their own work. This lack of a broader perspective can, however, be a serious problem, because entrepreneurial scientists may miss out on other technologies that could enhance the value of their work. Alternatively, it is possible that a promising development can be leapfrogged. I guarantee that there are billions of dollars being spent right now on research that is legitimately exciting today, but will be obsolete before it reaches market. This next company has already made significant progress in the RNAi field. It is a company with the demonstrated foresight to apply nanotech solutions to the problem of delivering RNA inhibitors. One hurdle before RNA blockers can be economically produced, however, is devising a means of delivering RNA inhibitors efficiently. To work optimally, RNA inhibitors must be delivered in exactly the right manner. Fortunately, this company has made significant steps 2 Now, add to the scientific knowledge problem the need to master sophisticated financial and tax knowledge. I don’t know how one person could cover all those bases. It is, I believe, highly improbable that we will ever see another Thomas Edison. He did it all, but both the science and the tax code were simpler in those days. Today, a company that expects to navigate through all the hazards associated with emerging technologies will need a crew of specialists who can put all the pieces together. CNTs have thermal qualities comparable to diamonds. They’re stronger than steel. Electrically, they conduct better than copper and are faster than silicon. The problem, though, was that the [intellectual property] was muddy — very distributed. So in 2005, we started NanoPolaris, rolled up some basic IP from various universities and then acquired Unidym — which was founded by nanotechnologist George Gruner of UCLA. Then, last year, we acquired CNI, started by Rick Smalley. Between a Venture and Mutual Fund This put manufacturing and applications in one company. Smalley, incidentally, was the father of carbon fullerene sciences. The most famous fullerene is the buckminsterfullerene or “buckyball.” His Nobel Prize is in recognition of such. More importantly, he held central CNT patents that are now controlled by Arrowhead. However, Anzalone stresses: “We own the patents, but we’re not a patent shop. We are building companies.” That’s what R. Bruce Stewart had in mind when he founded Arrowhead Research. Now the executive chairman of the board, his background is in investment banking and tech startups. To the Arrowhead crew, he added a truly impressive group of scientists from varied disciplines. These include celebrity scientists and key patent holders. Arrowhead acquires or spins off subsidiaries dedicated to specific technological markets, but maintains dominant financial control. As a group, it works to put the various tech and financial pieces together in the most profitable manner. At the time of the acquisition, a commentator for the important IEEE Spectrum described the results as putting Unidym in the same category as a few big IP holders like IBM, NEC, Intel and Stanford University. The difference, however, is Arrowhead stock is still at the ground floor. But Anzalone states confidently, “We believe we control that entire market.” Anzalone told me that his model is somewhere between a venture capital firm and a sector mutual fund. “Our model differs because we retain the large upside potential of a pure play. We have over 50% ownership of all of these enterprises. If one of our subs goes public, we can make hundreds of millions. This is not a purely theoretical use of CNTs that Arrowhead is counting on, however. The company is going after the huge and growing flat–panel and touch–screen market. At present, the technology in use is ITO (indium tin oxide). The problems with ITO are straightforward. It is scarce, brittle and costly. “Here’s the opportunity we continue to see,” Anzalone says. “There is an unprecedented amount of good science in the nanosciences. We view nano as a second Industrial Revolution. It’s not just products. Incorporating technologies across sectors will revolutionize the way sectors do business and, once they mature, affect everybody.” Anzalone believes he can replace ITO in transparent conductive surfaces with his carbon nanotubes product. Obviously, this would be enormously disruptive and would require industrywide restructuring. My question for Anzalone, therefore, was why it isn’t happening even faster. Why are so many remarkable discoveries not turning into real products and profits faster? “We are disruptive,” Anzalone admits, “but the market wants to change. The industry knows ITO has to be replaced. That wind is at our backs. Also, we can apply rolls of our CNT surface directly to glass and plastic for a fraction of the ITO costs. We are more robust, and even now, before scaling, our costs are comparable with ITO.” “The reason,” he says, “is that the process has depended on individual entrepreneurs — which is grossly inefficient. Most entrepreneurs are not scientifically literate. Of those,” he asks, “how many have experiences in multiple industries? “We see an opportunity in institutionalizing this process — big boxing. We are systematically stamping out these companies to fully extract value from the nanotech/ biotech revolution. That’s where the big hits are going to come in the next five years.” Though he won’t name the companies, he says Arrowhead has partnerships with big players in the industry. “We believe we will have our first touch–screen this year and LCDs in 2009. Moreover, this is a platform play, and there are a thousand other plays.” He also makes the point that Arrowhead, unlike other nano/bio pure plays, is able to scale a technology quickly because of the various subsidiary companies. With affiliated companies in so many areas, Arrowhead can better control the commercialization process. I suspect he’s correct. While the CNT screen market could be an enormous win for the company, it is actually a Unidym spinoff that first caught my attention. Unidym has birthed several other companies that could become superstars. One is Aonex Technologies, which partnered with the prestigious Sandia National Laboratories to develop the technology to grow gallium nitride structures Of the big boxes Anzalone speaks of, Unidym is probably the most developed. Unidym is dedicated to carbon nanotubes (CNTs). Anzalone says: 3 (over, please) the singularity wave. on its own proprietary substrates. This allows the production of blue LEDs at extremely competitive prices. The industry is worth about $4 billion per year at current costs, but this could grow wildly with lower prices. Anzalone says he expects Aonex to be acquired, to the benefit of Arrowhead stockholders. Recommendation: Buy Arrowhead Research Corp. (ARWR: NASDAQ) up to $3.15. Breakthrough “Cancer off Switch” No. 3: A Nanotech Breakthrough That Will Grow Millionaires Like Weeds Ensysce Biosciences Inc. is another important spinoff. This is where the “Cancer off Switch” comes into play… Broadly speaking, nanotechnology deals with matter at the atomic and molecular scales. Atomically precise manufacturing (APM) is the real business of making things using nanotechnology. There is no more exciting area for investors to be in right now. Ensysce concentrates on medical therapeutic applications of CNTs. Armed with Unidym licenses based on Richard Smalley’s fullerene research, Ensysce has funded studies regarding the use of CNTs to small interfering RNA (siRNA). The program is led by Bruce Weisman of Rice University and Garth Powis from the University of Texas M.D. Anderson Cancer Center. But picking APM winners is not a slam–dunk. We are at a stage in nanotech that can be very frustrating if you forget the big picture. We are tantalizingly close to seeing a swarm of startups with world–changing products come out. These products will provide investment opportunities unlike anything ever seen before. The problem, though, is that sitting on the edge of your seat can be difficult. You can jump the gun. Worse, you can lose patience and give up. By delivering siRNAs in nanotech packages, it is possible to place them where and how they are most effective. In some cases, they can simply be injected directly into the bloodstream. Because some drugs, such as cancer treatments, are toxic themselves, the use of lower doses is extremely useful. When you factor in the savings from lower doses of extremely expensive drugs, this microscopic nanotech siRNA delivery system is, in my opinion, huge. The big picture is that Arrowhead holds a majority interest in the patent on “derivitizing” fullerenes. As a result, it appears to control the market for use in future medicines. Don’t do it. The reason is that not only will APM create new opportunities, but it will destroy many existing industries. Just as light bulbs and AC electrical power created huge opportunities, they razed whole sectors. Lucrative businesses crumbled, taking their investors’ fortunes with them. Arrowhead also controls another subsidiary, Calando Pharmaceuticals, which is also doing groundbreaking research on RNAi technology. Calando already owns a significant patent portfolio. Furthermore, it will happen sooner than most expect, and it will happen very quickly. Tracking APM and other transformational markets is not just a matter of making money. It is a matter of not losing money. It could even be a matter of financial survival. I promise you that many people who think they have diversified safely will find their former wealth in new hands. My goal is to make sure that you don’t wake up one morning to find that your portfolio consists of buggy whips and chemical–based photographic film. Arrowhead is now acquiring Anzalone’s former company, Benet, to get Leonardo Biosystems and Nanotope Inc. Leonardo controls a cancer drug delivery system developed by Mauro Ferrari, probably the most famous cancer scientist. Nanotope’s cell–regeneration technology is so cutting edge that it sounds like science fiction. On Arrowhead’s Web site, I watched a video of a rat walking, not perfectly, but with all four feet only six weeks after having its spinal cord surgically severed. So I dug a little deeper… An Emerging Nanotech Materials Star The treatment, a peptide sequence with a small lipid tail, is injected directly into the spinal cord. There, it self– assembles into nanofibers. Spinal cord injury is only one small part of this technology’s promise, however. Different peptide sequences produce different results, such as remarkable healing properties. We are at an uncomfortable stage right now in APM. We see the huge winners on the horizon. Closer in, we have a number of extremely promising players. We know some of them are going to use the expertise they’ve built to take advantage of the transformational opportunities just arriving. As I said earlier, I don’t like the exclamation points and big fonts used to describe stocks. Still, they’re warranted here. I’m astonished that this stock hasn’t already taken off, but I’m thankful it hasn’t. I would note, by the way, that I’m putting a modest upper number on this buy signal, only because people keep track of these things. I suspect that five years out, it would have been a bargain at many times its current price. This is a company poised to ride For that reason, I believe it is time to start picking up the rising stars. I’m after companies that show excellence in management, as well as its decisions regarding emerging markets. I’m looking for companies with substantial research funding, proven research scientists and management teams willing to walk barefoot on glass if necessary. I want undervalued companies able to survive and ride the flood of 4 be one small pill. Altair says it will minimize side effects, as well, leading to better compliance. nanotech opportunities that will wash away skeptics in the next few years. Ideally, this company will not yet have landed the big contracts that drive up its stock price, but it can make its case to a cold–eyed analyst. This and other products under development show an aggressive and intelligent approach to finding opportunities to exploit the company’s nanoparticle expertise. The company is Altair Nanotechnologies Inc. (ALTI: NASDAQ)… This is a scrappy, but very talented company. It could very well succeed big in this early and unpredictable nanotech market. While not directly involved with RNAi, the company’s work with phosphate binders associated with kidney disease and its progress with APM will surely lead it in the same direction of Alnylam and Arrowhead. Altair is co–developing a phosphate binder for human renal disease. Eventually, molecular filters will solve the phosphate problem associated with kidney disease. In the meantime, however, there is a real need for an easy–to–take phosphate binder without side effects. Though the consequences of not taking phosphate binders can be deadly, patients often neglect their medications. Partly, this is due to the large size and number of the pills needed. Others blame side effects such as aluminum dementia and hypocalcemia. These paths, like so many others in the biotech and emerging technology fields, are converging. And we will be sitting on the three biggest players. All three should have a huge impact on the “Cancer off Switch,” which could each churn out 300% profits or more for you. Altair is testing a lanthanum–based microparticle phosphate binder. Microparticles increase the drug’s surface area and binding capacity, so the typical dose would Recommendation: Buy Altair Nanotechnologies Inc. (ALTI: NASDAQ) up to $3.75. 5 © 2008 by Agora Financial, LLC. 808 St. Paul Street, Baltimore, MD 21202. All rights reserved. No part of this report may be reproduced by any means or for any reason without the consent of the publisher. The information contained herein is obtained from sources believed to be reliable; however, its accuracy cannot be guaranteed. 400R032278 www.agorafinancial.com