Taking down Pfizer — hasn’t that already been done? At least, if you think a drop of 60% or so in share price over five years for a “blue chip” company is a “takedown.”
But that’s the promise of a recent issue of the Penny Sleuth free email newsletter — and to find the details about this small drug developer they’d like you to first subscribe to Penny Stock Fortunes (is that newsletter any good? Three folks have reviewed it so far, jump in if you have an opinion).
Penny Stock Fortunes picks, well, penny stocks — something that you can find a dozen different definitions for. In most cases, investors consider penny stocks to be any stocks that are either priced in pennies (or fractions of pennies) or priced under $5 a share, under $100 million or $500 million in market cap, traded over the counter or on the AMEX or on the pink sheets … really, it all depends who you talk to. But the commonality is that these are tiny companies that most people haven’t heard of, and … every once in a blue moon … they turn into big(ger) companies and make people rich. Of course, whenever the moon is more of a whitish color, they tend to take all your cash and turn it into compost.
But that’s neither here nor there — penny stock investing is about gambling, and lots of people like gambling. I even take a flier on one or two of these kinds of companies myself every now and then — they’re often fun to research, it’s nice to fantasize about your possible riches, and, if you’re right, they make you feel smarter than everyone else. Which is why they’re both fun and dangerous.
More dangerous is the standard sales pitch that Greg Guenthner usually makes for his Penny Stock Fortunes newsletter — he calls his system the “CXS Multiplier,” and it’s apparently what is going to get you a yacht and a fancy new car after starting off with just a few hundred bucks.
The way this “system” works is this: You buy a few shares in one penny stock, and watch it multiply by a couple hundred percent. Then you take those profits, and put them into the next penny stock, which will also go up by a ridiculous amount, and then another, and another, and another. Guenthner gives a “chain” of examples in his ad that shows “how much money my system is capable of making.”
“STEP 1: $200 in China Development Group turns into $1,114 – a $914 profit.
“The CXS Risk Avoidance Strategy advises you to remove your original $200. Using money you’ve gained, you have now eliminated the risk of losing the investment you started with. From now on, everything you gain is pure profit. You’re playing with house money.
“STEP 2: $914 in NaviSite Inc. quickly multiplies to $3,234.
“STEP 3: $3,234 is plugged into International Assets Holding Corp., where it becomes $7,688.
“STEP 4: Acorda Therapeutics, a perfect Money-Multiplier, takes your $7,688 and grows it to $56,621.
“STEP 5: Sirna Therapeutics turns your $56,621 into $111,154.
“STEP 6: The $111,154 quickly becomes $548,408 with HandHeld Entertainment Inc.
“STEP 7: And you break a million when Halozyme Therapeutics Inc. grows your $548,408 into $1,235,361.10.”
Now, to be fair, he does preface this by saying that …
“This is going to be an extremely hypothetical example. And although the numbers are actual numbers of real companies, it probably couldn’t happen in real life. But it will show you the power of my system so you can appreciate it and evaluate its usefulness to you. “
But of course, readers who are looking for their next great investment will be looking at that $200 to $1.2 million run … they’re not going to be looking at the “extremely hypothetical” bit, one might guess. Greed gives you a tremendous ability to read selectively, which is part of what this kind of marketing relies on.
And while we’re at it, I’ll share the Gumshoe system — it uses the same basic design.
Step 1: Go to Vegas (or whatever casino is most convenient — they’re everywhere now), pull out a wad of cash, and sit down at the roulette table.
Step 2: Bet a couple hundred bucks on a roulette number.
(If you lose, go to the ATM and repeat step 2 … but we won’t start keeping track of your returns until you pass Step 2 successfully)
Step 3: If you win, bet all those winnings on another roulette number
(if you lose, back to the ATM again)
Step 3: If you win again, bet all those winnings on yet another roulette number.
Step 4-7: Repeat step 3.
Important: Don’t forget to stop playing one roll of the wheel before you lose!
Of course, this isn’t really a fair comparison — because if you’re playing roulette in Las Vegas, you’ll be getting free drinks.
(P.S. The disclaimer is, um, don’t really do any of that, please).
OK, so that’s a bit harsh, it is possible to make money on penny stocks — I don’t know if the odds are any worse or better than they are for roulette, but I do know that the siphoning of your wallet that takes place in a casino is at least all done out in the open — they know their system is rigged so nicely in their favor that they don’t have to cheat you. That’s not always the case with penny stocks, which can sometimes, for all we know, be nothing but shell companies that spit out press releases.
The argument of a penny stock newsletter will always be that the editor knows how to pick the best companies — and that this can reduce the risk. Intellectually, we know that this is something that should be possible, since penny stocks are essentially unknown to most investors and are far too small to attract institutional money and analysts, so the folks who can understand them well should be able to find undiscovered gems. A good analyst who specializes in reviewing these companies should be able to do pretty well. Whether that “should” and that “possible” are ever realized is, of course, a whole different question.
So what is it that Guenthner is now recommending? Finally we get to the clues that we saw in the Penny Sleuth ad …
“But believe it or not, there’s a much smaller company that can top the numbers of even the biggest drug giant. It’s a penny stock pharma play with a market cap that doesn’t even approach $100 million. We don’t think it’ll stay this way for long, considering the company just signed a commercialization agreement worth more than its entire market capitalization.
“You simply won’t come across a deeply discounted pharma stock such as this very often. The market has managed to overlook quite a gift…”
OK, so that’s nice — a very small company with a big deal. A good start. What else?
“The company designs products to fulfill unmet and underserved medical needs in the pain-management niche. The company is particularly focused on breakthrough cancer, post-operative, back, orthopedic injury and burn pains. Despite the advances in medicine, the company insists treatments for these types of pain continue to be an underserved medical need.
“But that’s not even the main reason we think you should be excited about this company… You see, The company penned an agreement in January worth up to $71 million that includes double-digit royalties on future sales of its new pain drug once it wins approval.
“Out of the $71 million, the company collects $12 million in upfront cash payments from a European pharmaceutical developer for the commercialization rights to its flagship product.”
And they go on to say that the company has a drug candidate that’s in Phase III trials in the US. So what is it?
Well, thanks to the suggestion of an intrepid reader the Thinkolator didn’t have to fire up for very long on this project … this is almost certainly …
Javelin Pharmaceuticals (JAV)
This is a teensy company — market cap is about $75 million, with almost half of that in cash. That cash number probably doesn’t reflect the recent deal that’s teased, which did bring in $12 million in upfront cash and could bring in that $71 million in royalties and milestone payments in the future — but it also doesn’t reflect the last quarter’s worth of spending on expensive clinical trials, and JAV has lost about $40 million in the previous twelve months, so we’ll have to wait for their next earnings release to know exactly what their current position might be.
Javelin did sign a $71 million deal with Therabel Pharma for the right to market their main product, Dyloject, in Europe. Dyloject is a special formulation of diclofenac that is apparently prescribed for postoperative pain. According to their press releases this formulation is IV-ready and cheaper and easier to administer in the hospital, and gets good results. It is approved for use in the UK, in Phase III trials in the US, and they probably made the deal for European rights in order to help finance the rest of their clinical and pre-sales work in the US, they said it “extends their cash” until 2010. That makes sense, if they’re in a Phase III trial now they’re probably burning money like crazy, and the focus for many such small pharmaceutical companies is keeping the company in the black until they can market a drug in the US.
Other than that, I am certainly not a pharmaceutical expert and I don’t know much about the drug — it does sound like it might be a reasonable speculation, if only because it has already been approved in one country and it has garnered enough attention to get a marketing deal for europe. And the fact that it’s a pre-existing drug that has just been reformulated means that maybe they’ll be less likely than some other drugs to get ugly surprises in late clinical trials … that’s a fierce “maybe.” Their announcement of their positive Phase 3 trial results from early December is here, but it appears that they’re now working on an “open label safety study,” whatever that means, and they’re planning to submit their new drug application to the FDA in the “second half” of this year.
So … are you interested in taking a flier on a company with a new(ish?) IV pain drug? Feel like digging in to see what kind of hair is growing, if any, under the press releases at Javelin? Let us know what you find … the ad campaign is probably getting a little attention for this stock, the shares are already up substantially over the past few days — they mostly traded in the $1.12 range last week, and are changing hands at $1.25 as I type this.
If there’s something real to this company the price may well go up some more, I have no idea … but if the only reason for this price gain is the attention from Greg Guenthner, it wouldn’t be at all surprising to see the shares dip back down in short order.
The shares have had two little spikes over the past few months — one when the Phase 3 results were announced in December, when the shares jumped dramatically and got over a dollar, and one when the company presented at a conference and shortly thereafter announced that $71 million deal, which helped push the shares briefly to nearly $1.50. Of course, keep in mind that these shares spent the early part of 2008 in the $3 range until the world fell apart last Fall, and in previous years they were substantially higher still.