The following article originally appeared on February 11, 2014 — several readers have asked about the “blue blood” pitch for this “cancer cure” (there’s a reason why we use quotes there) so we’re putting it on top of the page in case you’re curious.
My opinion on this one is unchanged, I’m still pretty skeptical but the stock has gotten cut in half so perhaps they’ll try to drive it back up again.
What follows is unchanged from when it ran on 2/11/14
A couple days ago we started getting a deluge of new queries from subscribers about something called “blue blood” — teasing a company that was about to sign contracts with major pharmaceutical companies, and which had a “lockdown” on a secret “blue blood” protein that will cure cancer.
I was a little baffled at first, because I hadn’t actually seen the ad — but more folks kept asking what “blue blood” was, so I looked a little closer and finally did find that we had a copy of that email in the vast Gumshoe teaser vaults. So let’s solve it for you, shall we?
The newsletter being promoted here is Early Advantage, from Nick Hodge, and it’ll run you $499 per year at the current price. Dunno what else they may be investing in, but we can at least get you this answer for a better price. Like, more free-ish. Then you can think it over and discuss it on your own … feel free to subscribe to Early Advantage if you like, but don’t do so just to learn what the secret “blue blood” thingamajiggery is all about.
Here’s the opening of the pitch:
“Tiny Biotech Owns World’s Only Source Of Rare Cancer-Curing Chemical
“Early investors are looking to bank 300 times their money
“This urgent video has live footage of the company in action….
“At the center of it all is its main product, which is on a worldwide lockdown: ‘Blue Blood.'”
Frankly, that sounds like hooey. And probably the kind of teaser that should have us all running for the exits (or at the very least, hitting the delete key), but a core precept of Gumshoedom is that even if a stock is touted with ridiculous, overhyped promise — like curing cancer with a secret chemical that only they own — it doesn’t mean it’s worthless. We have to go into this with an open mind — it’s almost certainly not as good as the teasers say it is, but that doesn’t mean it’s bad.
So what is it? Honestly, once we were into the ad a few paragraphs and saw the little snippet of video for this “blue blood” business we had our answer quickly at hand … but we don’t want to spoil the surprise, so let me share a few more of the clues they tossed out for us:
“Amgen, Pfizer, Merck, Abbott, Bayer, and others pay $35,000–$900,000 for one gram of this molecule.
“A single biotech company trading under $3 controls the world’s only source.
“Its stock is already up 300%!
“Highly rich Blue Blood Protein — which really is blue — is extracted from one of the rarest and most endangered animals on the face of this planet… a sea snail called a Limpet.
“What makes this blood so unique and life-changing?
“Well, it’s a major component of over 100 vaccines and drugs currently going through clinical trials with the FDA. In other words, these drugs simply cannot work without Blue Blood… and there is nothing in the world that can replace it.
“And here’s the mind-blowing peculiarity in all of this…
“Blue Blood is so vital to breakthrough vaccines and drugs today… one gram of it can sell for up to $900,000.”
Sound familiar? Yes, this is our old favorite “miracle mollusk” tease reborn. Hodge is now reworking his (very successful, so far) tease for Stellar Biotechnologies (KLH in Canada, SBOTF on the pink sheets).
And yes, we’ve covered that one to death here in its run from 60 cents or so last Spring — Hodge started teasing it in May, I think, and we covered it then … it got as high as about $2 a share a couple times in recent months, and is recently at roughly $1.60.
I didn’t cover the stock much after that, but we had an eager bunch of folks discussing it — led for a while by our own “blind squirrel,” Jim Skelton, as he started a discussion thread on the site and followed it up through last month with many, many detailed comments. There’s a lot more in that thread than I can tell you about Stellar, but there’s also a lot more optimism about Stellar in that thread than I could come up with.
Stellar Biotechnologies is essentially a pharmaceutical supplier — they have created an aquaculture and harvesting technique for extracting Keyhole Limpet Hemocyanin (KLH), which is apparently a very widely used protein for stimulating an immune response, and is of use particularly in vaccines but also as a tool for delivering other drugs.
My initial sense of the stock back in May was that it was tiny enough and a good enough story to be driven quite high by Nick Hodge and his relentless boosterism … but that the possibility of real volume production of their product or any kind of dramatic sales growth was very far away.
I may be too conservative on this point, I like the model of Stellar Biotech — develop a supply of a high-quality “drug carrier” (the KLH protein, in this case — which is produced from their aquaculture farm full of Keyhole Limpets, with Stellar’s primary “uniqueness” coming from their ability to harvest this hemocyanin from the limpets without killing them or decimating the shrinking wild population), then make money by both selling the ingredient to drug companies and by using their unique offering as leverage to get royalties on future products that are made using this chemical. It’s a great idea. It’s just that even if they are successful, it’s a long way off.
[As an aside, I like the model but I’m a lot more comfortable with the much larger biotech stock in my portfolio, Ligand (LGND), that has a somewhat similar business model (though more of a “prospect generator” that also is an ingredient supplier) but is already generating millions in royalties. Unfortunately, LGND is now a growth darling and ain’t exactly cheap at the moment.]
Stellar’s latest investor presentation is on their website here, and they do well in talking up the potential markets for their KHL — with dozens of clinical trials using this ingredient currently underway. From the presentation, I can’t tell whether they’re getting potential royalties on any of these drugs, or just potentially making long-term supply arrangements — the word royalty only comes up for their own proprietary stuff, like their potential clostridium difficile vaccine (that one is still in the lab, not in the clinic, and therefore probably at least many years away from real human results being known).
If they’re not going to earn royalties on any of the drugs in the KLH pipeline that are currently in late-stage clinical trials (I haven’t asked them), then their revenue for the next several years will be dependent on sales of the material to the firms who are making these drugs and vaccines. So I won’t guess about which of these drugs might be approved or even reach high-volume clinical trials, but we’ll look quickly at it from the other end — how much can they produce, and what will they be able to charge for it?
Hodge teases the fact that this hemocyanin is priced at up to $90,000 a gram, but it’s available now from Sigma Aldrich for $75 for 20mg — which would be $3,750 per gram. I don’t know whether a pharma company would expect to pay a premium over that amount in order to get guaranteed supply, or would demand a discount for taking up much of the production, or whether there’s something better about that expensive gram, but $3,750 is a LOT less than $90,000.
At $3,750, Stellar Biotech would be able to hit revenues of $75 million if they sell 20kg a year — 20kg is their goal production level over the next six or seven years, but that seems to be the “stretch” goal, the goal by 2017, according to comments in a press release last year, is annual production of 5kg. If they do reach 5kg, over the next three years as they hope, that would mean potential sales — at that lower, current $3,750 price per gram — of just under $19 million.
$19 million is approximately how much money KLH lost over the last twelve months, according to Yahoo Finance’s numbers … so put that way, a cynic would say that if they can keep their costs under control and not have costs rise dramatically over the next three years as they expand capacity (in my quick look at recent filings, I see no announcement of what their current production level might be), then they might be able to break even by 2017 on material sales… but it doesn’t sound like limpet aquaculture is necessarily “low cost” so expansion might be pricey. Whatever their production level is right now, it costs more than it brings in according to their latest quarterly filing but, again, we don’t know whether they’re currently producing 100 grams or 2 kg per year, or more or less, and we don’t know what they’re charging per gram.
The optimist, on the other hand, would say that they’re going to get better prices as competition for bulk delivery of this material begins because of approval of high-volume drugs requiring this hemocyanin … or that they will make strides in their own clinical trials or begin to receive milestone or royalty payments on drugs that use KLH (again, I have no idea what their deals with pharma companies are like, or whether they’re anything but a material supplier to any of these firms). There may be ammunition for the optimist’s take, too, in their partnership with Amaran, which invested in KLH in December and is partnering with them on two cancer drugs in clinical trials … I just don’t know much about the science or timeline there, and I don’t know enough to be confident in the uniqueness or value of this particular hemocyanin as a drug carrier protein (we have, at least, been told that it can’t be created artificially just yet — the molecules are apparently too big and complex. Whatever that means).
I know we’ve got plenty of folks who have traded Stellar Biotechnologies on both sides here in Gumshoedom, so let’s hear your updated thoughts — feel comfortable with Stellar as a long-term stock in this range? Feel like it’s going to run again, or has the story lost its mojo? Let us know with a comment below.
If not, just click here...