03/18/2007
3/18/2007
VOLUME 291
Companies featured in the current edition of the newsletter: ADSX, BSGC, CGXP, CVM, EMIS, ENZ, GNBT, GSHF, HSOA, HYTM, IRBO, PTCH, RTK, USAT
The struggle continued last week for investors as a vulnerable market gave ground to mixed economic signals. Stronger inflation readings off-set soft economic data to help drive stocks lower for the week. The Dow lost 165 points for the week increasing its year-to-date loss to 2.8%. The Nasdaq declined 15 points increasing its year-to-date loss to 1.7 %. In similar fashion, the S&P fell 16 points contributing to a 2.2% decline this year. The Russell decreased 6 points equating annual losses to 1.1%.
Conflicting readings for the economy are creating an emotional market as investors continue to speculate about the direction of short-term rates. It is not clear if the current economic weakness, further highlighted last week by disappointing retail sales figures and continued problems plaguing the sub-prime lending market, is enough to justify an interest rate cut to help prevent a further slowdown. With the federal deficit shrinking by 25% for the firsts five months of the fiscal year, combined with the stronger-than-expected February industrial production reading of 0.1% versus an anticipated 0.3% last week, policy-makers may sit on the sidelines until a clearer overall picture is presented. Even declining consumer sentiment and decreasing oil prices that reached six-week lows below $57 per barrel last week may not be enough to sway the FOMC to lower interest rates when it meets this week.
Last week, the Dow and S&P 500 reached new five-month lows on Wednesday, while the Nasdaq set a new four-month low. Investors should keep Wednesday’s intra-day lows in mind this week as areas of potential support. They include 11926 on the Dow, 2331 on the Nasdaq and 1363 on the S&P 500.
What should investors look for in the upcoming week? Earnings pre-announcements could begin as the first quarter nears a close. On the earnings front, Monday after the close Oracle (NASDAQ: ORCL) releases earnings. On Tuesday, Morgan Stanley (NYSE: MS) reports results before the opening with Adobe Systems (NASDAQ: ADBE) posting numbers after the close. Wednesday morning investors will seek guidance about the strength of the housing market from KB Home (NYSE: KBH) as it reports earnings before the opening. Thursday before the opening, industry leader FedEx (NYSE: FDX) releases numbers with Nike (NYSE: NKE) announcing results after the close. Automatic Data Processing (NYSE: ADP) holds an analyst meeting on Thursday.
February Housing Starts and February Building Permits will be released on Tuesday before the opening bell. Wednesday morning Weekly Crude Inventories will be reported, with a great deal of focus being centered on the FOMC policy statement coming later that day. Thursday prior to the opening, Weekly Jobless Claims will be announced and February Leading Indicators will be released shortly after the opening. To close out the week, Philadelphia Fed President Plosser speaks to bankers on Friday.
The conference schedule starts off with Lehman Brothers hosting its three-day 10th Annual Global Healthcare Conference in Miami beginning on Monday. A.G. Edwards begins its two-day Energy Conference on Tuesday in Boston. On Wednesday JP Morgan starts its two-day Gaming, Lodging & Restaurant Conference in Las Vegas. The two-day 2007 Retailing Leaders Conference sponsored by Merrill Lynch starts Wednesday in New York.
It was a volatile week of trading in shares of Home Solutions of America, Inc. (NASDAQ: HSOA), a provider of recovery, restoration and rebuilding/remodeling services to commercial and residential areas, as the stock reached an intra-day 52-week low of $4.29 on Wednesday, before surging to an intra-day high of $5.50 on Thursday on heavy volume after the company announce a $25.5 million restoration services. On Friday, the company reported fourth quarter and year-end results for 2006 that were in line with the earnings warning the company delivered a week earlier. To be sure, the magnitude of the Q4 “miss” was disturbing (company reported revenue of $34.7 million versus mid-November estimate of $57.5 million as it said delays in funding in New Orleans slowed sales) although the Q4 EPS number of $0.05 include a 2 cent one-time expense to increase reserves for receivables, and another penny in costs that are unlikely to recur. However, full-year results still showed EPS of $0.43, a 72% increase from the year-earlier with solid revenue growth. There are several reasons, however, why we believe there is a compelling opportunity to own the stock at current levels (trading at 12 times trailing ’06 EPS). First, are the recent contract wins (Fireline subsidiary announced $35.5 million in new contracts last week; total 2007 backlog reported in earnings release was $108 million, excluding estimated $39 million in Interior Products Manufacturing and Services Division revenue; revenue for 2006 was $127.2 million). Company management appears to have created realistic expectations, forecasting Q1 revenue of $35-40 million and net income of $0.09 to $0.11 per diluted share, without providing full-year guidance, which would have likely left investors skeptical. Management appeared contrite on its call and to understand that it needed to hit its guidance, which appears conservative for Q1, to regain credibility. While investors may remain skeptical until the company reports its next quarter’s results (scheduled for mid-May), the company indicated on its call that it was pursuing a number of large projects which could serve as near-term catalysts for the stock. Note that short interest is approximately 35% and the stock put in a strong “double bottom” last week, a trend that has favorable technical implications. The stock also snapped a six-day streak of making lower intra-day highs. The stock rose 36 cents to close the week at $4.96.
Volume Alert: Shares of Enzo Biochem, Inc. (NYSE:ENZ), a company engaged in the research, development and manufacture of innovative health care products, traded 3.3 times average volume on Friday and broke through their 50-day moving average, surging 6.2% on Friday. Earlier in the week, the company announced operating results for its second fiscal quarter for the period ended January 31, 2007. Revenue grew 5% to $10.6 million from the corresponding year-ago period, primarily as a result of higher sales at Enzo Clinical Labs. Higher R&D costs from increased clinical trial activity at Enzo Therapeutics combined with higher legal expenses relating to patent litigation contributed to increased net losses that amounted to $4.9 million or $0.14 per share for the quarter, compared with net losses of $4.4 million, or $0.14 per share from last year. The recently announced relationships with Aetna and United Healthcare/Oxford by Enzo Clinical Labs helped improve performance at this division as revenues increased by 12.5% to $9 million for the quarter, with operating results significantly improving to a loss for the quarter of $100,000 compared to an operating loss of $600,000 a year ago. Continued competition and litigation-related activities continued to affect the company’s Life Sciences division as revenues for the quarter fell to $1.6 million from $2.1 million a year earlier, although increases in royalty income partially offset the loss of revenue. Operating profits increased to $0.6 million, compared to $0.4 million in the year-ago period. The company continues to execute its stated goals for therapeutic products as treatments for Crohn’s disease and NASH are progressing well. Intellectual property was further bolstered last quarter as the company was issued two patents covering technological developments applicable in the field of molecular diagnostics. Enzo ended the quarter with approximately $111 million enabling the company to make acquisitions to support future growth at Life Sciences and to expand the development of its therapeutic platforms. Furthermore, Enzo Therapeutics reported that it has treated the first patient in a Phase I/II clinical trial of the company’s gene therapy for HIV-1 (Human Immunodeficiency Virus-Type 1) infection. The goal in the new study is to determine whether the procedure will create enough HIV-1 resistant CD4+ cells to defer disease progression to AIDS. Share rose 81 cents for the week to close at $14.99.
Shares of Hythiam, Inc. (NASDAQ: HYTM), a provider of comprehensive behavioral health management services, fell nearly 7% on Friday on more than twice average volume after the company reported disappointing sales results for its fourth quarter ended December 31, 2006. HYTM had revenue of $1 million, up 173% from the year-earlier period, but below analysts’ estimates of $1.3 million. Net loss for the period totaled $10.8 million, or $0.27 per share, compared to a net loss of $8.4 million, or $0.24 per share, in the same period last year. It would be hard to make the case that the company has had any meaningful sequential revenue growth in sales of PROMETA, its protocols for treating drug and alcohol addiction through the brain, in 2006. It is also understandable, as many of the catalysts for the ramp in sales (company guidance of $14 million for 2007 excluding the acquisition of CompCare) are expected in the near-term, including increased adoption of PROMETA as a result of pilot programs in various states including legislative adoption and funding initiatives underway for PROMETA in Hawaii and Texas, the first expected criminal justice reimbursement for PROMETA which should be received by the company’s licensee in the state of Washington before the end of its fiscal second quarter., contributions from new outpatient PROMETA Centers recently opened, the execution of several relationships with commercial and governmental third-party payer organizations and perhaps most importantly, the first scientific data on the PROMETA protocols for alcoholism from a study at Cedars-Sinai, as well as the first double-blind placebo-controlled study results on PROMETA. Favorable results from either of the latter two events could trigger significant revenue growth as it will allow the company and its licensees to make powerful marketing claims on the efficacy of PROMETA. With the pullback last week, shares are now down 32.6% from the intra-day mid-January high, representing an attractive entry level, particularly with a number of near-term catalysts present. Shares fell 78 cents to end the week at $7.06.
Sometimes trading in a stock has us scratching our heads. Emisphere Technologies, Inc. (NASDAQ: EMIS), a biopharmaceutical company pioneering the oral delivery of otherwise injectable drugs, said last week that its auditors issued a going concern clause in its 2006 annual report over worries that it has insufficient capital to meet working capital requirements past September 2007. The news should have come as little surprise to anybody who read the company’s 10-K that was filed two weeks earlier, as the 10-K had identical language and the company said in its year-end conference call that it had enough funding to operate until September without raising additional capital. The company was required to issue a press release due to the Nasdaq’s rule. On the “news” the stock fell 23.8% last week. While the company will likely have to raise capital in the near-term, last year it was in even a worse predicament, when it had approximately one month of capital left and raised more than $32 million in May, without a discount, triggering an 18% rise in the stock the next day. While it is impossible to predict what terms of a deal might look like, two of the company’s institutional investors own approximately 24% of the company’s stock on an as converted basis, suggesting that it is unlikely they would allow it to fail. The company also has two advanced partnered programs with Novartis, one of which recent began Phase III for the treatment of osteoporosis with an oral form of salmon calcitonin (Novartis pays all of the expenses associated with the trial). The other advanced program with Novartis is for the treatment of osteoporosis. Speculation has centered around Novartis commencing a Phase III trial in that area shortly. Shares fell last week to their lowest level since September, 2005 closing at $3.45, down $1.08.
Rentech, Inc. (AMEX: RTK), a developer of technologies that transform under-utilized energy resources into valuable and clean alternative fuels, said last week that it had received a special use permit from Jo Daviess County in Illinois authorizing its subsidiary, Rentech Energy Midwest Corporation, to convert its ammonia fertilizer plant into a facility that will produce ultra clean fuels as well as ammonia fertilizer. This approval sets the stage for the initiation of the construction of what is expected to be the first commercial scale plant in the United States that will produce ultra clean Fischer-Tropsch fuels, ammonia fertilizers and electricity utilizing clean coal technologies. The stock ended the week at $2.64, up 19 cents.
Volume Alert: Shares of USA Technologies, Inc. (NASDAQ: USAT), a developer of cashless vending and energy management products, traded over 5 ½ times average volume and above its 50 day moving average for the first time since February, as investors bid up the stock after the company announced that its common stock has been approved for listing on The NASDAQ Capital Market, and will commence trading under its current trading symbol “USAT”, on Monday. Additionally, the company announced that it has completed a $10 million private placement of common stock and warrants with S.A.C. Capital Associates, using a portion of the proceeds to repay $1.6 million in convertible senior notes maturing December, 2008. The repayment of these notes will save the company approximately $190,000 annually, further strengthening the company’s financial condition. Recently, the company also repaid $4.3 million in convertible senior notes, maturing in June 2007, December 2007, and December 2008, saving the company approximately $500,000 for the calendar year 2007. The listing on NASDAQ will improve the awareness of the stock within the investment community, and coupled with the company’s improved financial condition, could prove to be the catalyst for a significant upward move in share price. Shares gained 80 cents for the week to close at $7.00.
Applied Digital (NASDAQ: ADSX), a leading provider of identification and security technology, announced a number of key events last week for three of its subsidiaries. Majority-owned VeriChip Corporation signed on 18 diabetic patients to its VeriMed Patient Identification System at an Atlanta Diabetes EXPO sponsored by the American Diabetes Association. VeriMed RFID microchips were implanted by physicians in conference attendees who signed up for the voluntary procedure. The VeriMed Patient Identification System uses the first human-implantable passive RFID microchip in combination with a handheld RFID scanner and a secure patient database, provides immediate access to important health information for patients who arrive at an emergency department unconscious or otherwise unable to communicate. Additionally, VeriChip achieved a significant milestone last week after reporting that 65 new hospitals have agreed to participate in the VeriMed Patient Identification System network bringing the total number of enrolled hospitals to more than 500. With more than 500 hospitals now enrolled, the company is on schedule to meeting its stated year-end goal of 800 hospitals in the VeriMed network. Also last week VeriChip’s CEO and the Chairman of ADSX acquire stock via open-market purchases of VeriChip. Separately, another one of Applied Digital’s majority-owned subsidiaries, Digital Angel Corporation reiterated full year 2007 revenue between $73 and $78 million. The company expects significant opportunities as it capitalizes on its leadership positions in the companion pet, livestock tagging and SARBE businesses. Lastly, ADSX’s wholly-owned subsidiary Government Telecommunications, Inc. was one of three recipients awarded for the Networx Transition Support Services Task Order for the U.S. General Services Administration. The order is for a one-year period, with a one-year option and two six-month options for renewal where the contract has a total value of $22 million for the three awardees. Shares ended the week at $1.50, down 1 penny.
Drug delivery company Generex Biotechnology Corporation (NASDAQ: GNBT) reported results of operations for the three-and six-month periods ended January 31, 2007. According to the company’s 10-K, sales for the quarter rose 3.8% and increased 110% for the six-month period primarily as a result of the company’s Glucose RapidSpray product continuing to penetrate both the U.S. and Canadian markets since its introduction in August 2006. Net losses for the three-month period improved significantly to $5.1 million from losses of $14.4 million. Losses for the six-month period improved to $8.8 million from $23.4 million, primarily due to the decrease in interest expense and loss of extinguishment of debt pertaining to convertible debentures last year. While Generex’s flagship product Generex Oral-lyn has recently been launched in Ecuador, the market awaits the commencement of late-stage trials to being in Canada in Fall 2006. The past quarter has been very busy for Generex’s Antigen Express subsidiary as it moved its breast cancer vaccine into Phase II trials (has not been announced publicly via a press release) and an avian flu vaccine into Phase I. This subsidiary also made plans to initiate a Phase I study of a prostate cancer vaccine later this spring. The company ended the quarter with a very solid balance sheet of approximately $45 million of cash and short-term investments. Additionally, the company continues to expand its patent coverage as it received newly issued patents in Canada and Europe. The Canadian patent titled “Pharmaceuticals Solubilized in Aerosol Propellant” relates to a formulation with a pharmaceutical agent solubilized in a propellant which can be administered buccally or into the lungs using a metered dose spray applicator. The European patent titled “Pulmonary Drug Delivery” relates to an improved delivery system for the administration of large-molecule pharmaceuticals such as peptidic drugs, vaccines, and hormones, which may be administered by means of an aerosol into the mouth for buccal or pulmonary applications. The patent will take effect in several European countries including Germany, France, and the United Kingdom. Generex currently holds an aggregate of 82 patents worldwide and has an aggregate of 60 patent applications pending in various jurisdictions. The stock declined 6 cents for the week to close at $1.65.
BigString Corporation (OTCBB: BSGC), a provider of user-controllable email services, said last week it had partnered with Vidiac, Inc., an Internet broadcast company, to create a service that enables users to deliver video emails in a secure format. As a result, BigString’s email platform will be available to the 2,000 web sites and hosted domains that Vidiac currently powers. This strategic pact results in the integration of Vidiac’s video broadcasting platform into BigString Corp’s websites. By allowing customers to start their own YouTube-style websites, Vidiac currently streams up to 2 million videos a day, and has up to 4 million unique users a month. BigString can benefit significantly from this alliance as the popularity of YouTube and similar venues and media outlets continue to grow. Less than a year after its launch, YouTube has become a media giant in its own right and was awarded Time Magazine’s Invention of the Year for 2006. Vidiac represents a significant opportunity for BigString to expand its customer base and create additional exposure for its advertising partners. The stock closed at $0.31, down 2 cents for the week.
GreenShift Corporation (OTCBB: GSHF), a company devoted to facilitating the efficient use of natural resources, announced last week that its majority-owned subsidiary, GS AgriFuels Corporation, acquired approximately 85% of Sustainable Systems, Inc.’s capital stock for roughly $12.6 million. Sustainable Systems owns an oilseed crushing facility in Montana and produces and sells high oleic safflower, sunflower, canola and other high value vegetable oils. Sustainable Systems is currently expanding its oilseed extraction and refining capability from 300 tons per day to 600 tons per day. As a result of this purchase, the development of GS AgriFuel’s oilseed crush biorefineries and related biomass to energy development projects will significantly accelerate. Greenshift Corporation also reported that its majority-owned subsidiary GS CleanTech Corporation was featured in the 2007 First Quarter issue of Distillers Grains Quarterly under an article titled “Corn Oil Extraction Opens New Markets.” The article discussed corn oil extraction as the newest trend in ethanol production to increase the value of process plants’ coproducts, and highlighted GS CleanTech’s Corn Oil Extraction System and its different methods of extraction offered to customers. Shares were unchanged for the week, closing at $0.086 cents.
IR BioSciences Holdings, Inc. (OTCBB: IRBO), a development stage biotechnology company, reported that its wholly-owned subsidiary ImmuneRegen BioSciences, Inc., announced that its proprietary compound Radilex may meet the new requirements of the expected Department of Health and Human Services (DHHS) Request For Proposals for medical countermeasures to treat Acute Radiation Syndrome or radiation sickness. Radiation sickness is a serious illness that occurs when the entire body (or most of it) receives a high dose of radiation, usually over a short period of time. Many animal studies have shown Radilex to protect mice from lethal gamma irradiation, as well as a number of bacterial and viral infections. The company is meeting with DHHS within the next two weeks to discuss the upcoming opportunity and provide an update on its development program. The market opportunity for products that treat Acute Radiation Sickness could be substantial. Since the window of opportunity to treat radiation injury is short, any product that treats this condition would likely need to be stockpiled for availability for high-risk populations. Note that shares of Hollis Eden Pharmaceuticals plunged earlier this month after the company said the government rejected its radiation drug. IRBO closed at $0.14, down 1 penny for the week.
Junior energy company Patch International (OTCBB: PTCH), appears to be moving towards its next stage of development, after announcing the sale of its interest in certain oil sands assets and oil and natural gas properties in Western Canada to Great Northern Oilsands Inc. for approximately $3.0 million (Cdn.) in cash and stock. The company also reported that it has switched auditors and is now using KPMG. Activity in the stock remains high, and with the company recently completing a private placement of approximately $20.0 million (U.S.), the shares of Patch International are worthy of keeping a keen eye on. Despite the news, shares fell 22 cents to close at $2.21.
On the Wires: CEL-SCI Corporation (AMEX: CVM), developer of new immune system based treatments for cancer and infectious diseases, presented at the Biotech/Pharma/Healthcare On-line Forum last week where CEO Geert Kersten discussed the company’s lead product, Multikine, and how the company has FDA go-ahead to start a global Phase III clinical trial in advanced primary head and neck cancer patients.
SPECIAL SITUATIONS:
Ceragenix Pharmaceuticals Inc. (OTCBB: CGXP) $2.44
A preferred situation for any young, growing company is to have the opportunity to generate revenues that can cover some, if not all, of the company’s operating expenses, while developing other leading candidates. With FDA-approval received last year for one of its prescription topical creams (EpiCeram), Ceragenix Pharmaceuticals is on its way working itself into this enviable position as revenues start to happen while development of its lead product candidate is still underway.
Ceragenix currently is focused on two leading technology platforms, with the first having a core focus on dermatology called Barrier Repair Technology (BRT) that treats atopic dermatitis (eczema) and other skin conditions characterized by a disrupted skin barrier function and the second centering around a new class of compounds called Ceragenins that may be developed into antimicrobial medical device coatings, contact lens solution disinfectants, antimicrobial wound dressings and prescription drug products.
The company has licensed from The Regents of the University of California the- worldwide exclusive rights to commercialize the BRT technology and has developed a topical cream, EpiCeram to treat atopic dermatitis and improve dry skin conditions and relieve and manage the burning and itching associated with such disorders. It is anticipated that initial sales of EpiCeram will commence in 2007. The company is also developing a topical cream called neoCeram to treat the skin of premature infants. The company hopes that NeoCeram will be able to reduce the length of stay in the NICU for these infants as well as reduce the rates of sepsis. The company expects to begin a clinical study for NeoCeram later this year.
Atopic dermatitis affects over 15 million Americans and is the most common childhood skin disorder, where over 65% of children who develop this condition do so by 6 months of age. The skin’s first line of defense is the skin barrier function, which is made from three key lipids. The skin barrier function forms a mechanical defense against skin irritants and bacterial infections while also helping to retain skin moisture. People with eczema are lacking one of these three lipids and as a result, have a disrupted skin barrier function leading to dry, itchy, cracked skin which can then lead to further degradation of the skin’s barrier. This market is large where researchers at the National Institute of Arthritis and Musculoskeletal and Skin Diseases project that U.S. health insurance companies spend more than $1 billion per year on atopic dermatitis.
EpiCeram may also have applications for cancer patients receiving radiation therapy who are at risk for skin barrier damage and often suffer radiation dermatitis as they undergo radiation treatment that, if severe enough, can result in an interruption of their course of treatment. Another potential market is end-stage renal disease patients who suffer from dry, cracked skin and moderate to severe Pruritus as they undergo hemodialysis treatment.
The company’s second technology platform Ceragenin has been licensed from Brigham Young University, where early stage research has shown that the lead compound, CSA-13, is highly effective at clinically relevant concentrations against a broad spectrum of bacterial infections. Ceragenix is currently developing Ceragenins for use as medical device coatings to prevent hospital acquired infections and as topical antibiotics. This market opportunity can be very lucrative for the company due to the sheer size and unmet market need. According to the U.S. Centers for disease Control and Prevention, almost 2 million patients in the U.S. get an infection in the hospital each year and about 90,000 of these patients die each year as a result of their infection. Many of these infections are linked to medical devices that are made of artificial materials that serve as a platform for the growth of bacteria when placed in the body. Earlier this month Ceragenix reported very impressive early results demonstrating that a catheter treated with a Ceragenin compound showed virtually no biofilm formation in a 21-day study, with the duration of 21 days significantly standing out compared to currently available antimicrobial coatings and treatments that are generally efficacious for only 7 to 10 days.
Investors have a lot to look forward to from this exciting company in the near-term. In addition to product launches, further clinical studies filings, and more details about possible uses for Ceragenins in ophthalmology, results for the company’s clinical study evaluating the efficacy of EpiCeram in comparison to a mid-strength topical steroid in treating 112 patients with moderate to severe eczema, are expected over the next few weeks which could be a significant catalyst for the stock.
