Toby Smith: “Product X Kills Bugs Dead”

By Travis Johnson, Stock Gumshoe, February 9, 2008

This one is a teaser that we’ve actually looked at before, but I’m getting a lot of email on it so perhaps it got lost in the shuffle — it was solved as part of a multi-part teaser a while back, and it remains one of Tobin Smith’s favorites — and the subject of his “ChangeWave Rant” today.

So what is it? I’ll copy some of the info here from the prior solution, but (thanks to the comments from readers) fix a couple misspellings:

The last time we saw this, and it was just a week or two ago, it was under the headline, “Killer germs = killer profits (Was $11.40. Now on sale for $3.40)”

This was one of the “99% Sure Things to Double Your Money” that Smith was ranting about earlier, all as part of his contention that if you buy these kinds of microcap stocks now, when so many of them have gotten 50% haircuts over the past year, then you’ll probably double your money this year when things return to “normal.” That’s a pretty optimistic view of “returning to the mean,” assuming that beaten up microcaps will be in favor, and that specifically these particular ones will be in favor, in a relatively short period of time.

But that, and the specific business models of the companies, is what Toby is selling for ChangeWave MicroCap.

This is a company that has a “super oxidized water” treatment to kill infections, with the latest tease backup being its ability to kill the dreaded MRSA (methicillin resistant staph aureus) that’s currently running through pretty much every school system in the country from what I can tell, and that has clearly been a major problem in hospitals for many years (it has run through my family, and it’s no picnic).

This company is Oculus Innovative Sciences (OCLS) — it actually trades on the regular ‘ol Nasdaq, and it’s even covered by a couple niche analysts (one buy and one market perform as of last year).

Their product is called Microcyn, and it is indeed a super oxidized formulation as teased, and the prices over the last year match up (again, they hit that $11+ a while ago, back in July).

I don’t know anything about the product, though it looks to me like they’re still pretty early on getting it approved and used — they have a phase II trial for some kind of diabetic foot infection treatment using the product, and no doubt they’re exploring other avenues as well, but from what I can tell you’re not going to run into Microcyn at your local hospital anytime real soon.

One reader wrote in to say that this is essentially the same thing as hydrogen peroxide, and another that oxidized water to treat infections doesn’t require FDA approval, so you might want to look into all this stuff — I’m not a doctor and can’t make any fine distinctions between products like this without putting in more time on this company. I do know that they’re in a FDA trial for a specific infection treatment (diabetic foot infection), but I don’t know what that means for other uses of their formula.

I know that MRSA is a huge problem, but I also know that lots of other things kill this bug — several kinds of super antibiotics kill it in people, good ‘ol bleach kills it on surfaces, etc., so it might take some time and research to understand exactly what the competitive advantage of this company’s product is. They just released their quarterly earnings and clinical update this morning, and the shares have already run up signfiicantly since the last time Smith teased it in an email — they’re up 25% or so from when I first wrote about them on January 28 following an email ad.

The risk to this teaser recommendation seems to me to be similar to situations we’ve encountered many times before — the case is ably made that there is a problem to be solved (MRSA infection), and that this company has a solution to the problem (their Microcyn product), and that there will be money to be made in solving this problem. What doesn’t get mentioned, in this ad or almost any other, is whether there are also other solutions to the problem (other products, other procedures, developments from other companies) that might marginalize this product.

They’ve got close to a dollar a share in cash, though they’re certainly not profitable. I haven’t dug further on this one, but if you’ve taken a moment to run through the OCLS filings, or have any experience with the company or their competitors, I’m sure we’d all be delighted to hear from you.

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