Recent Developments Plus Short Interest Could Push Star Scientific's Rally Even Higher Print E-mail
By Scott Matusow, @scottmatusow   
Monday, 10 December 2012 02:36

icon_tradethesisVirginia based Star Scientific (NASDAQ: STSI) engages in the manufacture, distribution, and sale of consumer products, dietary supplements, and dissolvable tobacco.  The company publishes a mission to promote maintenance of a healthy metabolism, as well as to reduce the harm associated with the use of tobacco at every level. 

The company also has continued to pursue the development, implementation, and licensing of the technology behind its proprietary StarCured tobacco curing process, which substantially prevents the formation of carcinogenic toxins present in tobacco and tobacco smoke.  Over the last several years, through its wholly owned subsidiary, Rock Creek Pharmaceuticals, Star Scientific has been engaged in the manufacturing, sale, and marketing of two nutraceutical dietary supplements, and the development of other nutraceuticals and pharmaceuticals. Nutraceutical is defined as a food or food product that reportedly provides health and medical benefits, including the prevention and treatment of disease. At first glance, this company appears to focus on the prevention of tobacco related addictions.  However, this focus appears to be changing with the company evolving into something even bigger involving treatments for Alzheimer’s and other diseases.  Let’s take a closer look at the direction Star Scientific is going and the investment potential.

This past week, Star Scientific had news stating the company’s new research related to anatabine has been accepted and published in the European Journal of Pharmacology.  This is an ingredient in Star Scientific’s product named Antabloc, a product that targets inflammation. Anatabine is one of the minor alkaloids found in plants such as the tobacco plant.  This has been shown to affect MAO (monoamine oxidase) activity which is thought to be responsible for a number of psychiatric and neurological disorders when dysfunctional. Anatabine is found in cigarette tobacco and smoke, and is absorbed in the human body after tobacco use.

In a series of studies initiated by Star Scientific and Rock Creek, researchers at the Roskamp Institute demonstrated that anatabine can suppress brain inflammation in animal models of Alzheimer's disease, inflammation in the blood in mice, and inflammation induced in human blood once removed from the body.  

In one study, the highly inflammatory molecule LPS, which is released from bacteria during human infections, was injected into mice.  Subsequently, there were large increases in inflammatory molecules in the blood, spleen, and kidney as expected.  However, when co-treated with anatabine there were statistically significant large decreases in these inflammatory molecules in the blood, spleen, and kidney. The spleen, in particular, showed marked suppression of inflammatory molecule release during co-treatment with anatabine.

In addition, the Roskamp Institute team showed that in a mouse model of Alzheimer's disease, supplementation with anatabine resulted in a significant suppression of inflammatory markers, especially a marker called TNF-Alpha, which is known to be raised in Alzheimer's disease. This finding complements a previous study by the Roskamp Institute showing reduction of the amyloid protein in this mouse model of Alzheimer's after treatment with anatabine. The reduction of the accumulation of amyloid and inflammation in the brain are known to be intimately linked, one increasing the other. Therefore, anatabine's reduction of both amyloid levels and inflammation encourage the hypothesis that anatabine may be a useful treatment for Alzheimer's disease.

Dr. Michael Mullan, the CEO and President of the Roskamp Institute stated, "Anatabine continues to demonstrate widespread anti-inflammatory properties in a broad array of pre-clinical models. Given the commonality of inflammatory systems in rodents and humans, there's much reason to expect that anatabine will demonstrate similar properties in humans.  In fact, the team went on to demonstrate that in human blood inflamed with LPS, the presence of anatabine dramatically dampened the inflammatory response, a result also included in the paper."

Paul L. Perito, Star Scientific's Chairman, President and COO, stated, "Our research partner, the Roskamp Institute, has once again secured publication of its cutting edge science in the prestigious European Journal of Pharmacology.  This publication underscores the worthy productivity of Dr. Michael Mullan (MD/PhD) and his talented cadre of research scientists, who have better illuminated another contour of anatabine's anti-inflammatory properties.  It is one thing to know that our anatabine compound has biological effects; it is far better to have mechanistic data that supports appropriate use and offers a mechanism for those effects." 

The reason why this is critical is because inflammation in the brain appears to be a big reason for several diseases, most notably for Star Scientific’s purposes in Alzheimer’s disease.  According to the National Institute of Health in Bethesda, MD, inflammation clearly occurs in pathologically vulnerable regions of the Alzheimer's disease (AD) brain, and it does so with the full complexity of local peripheral inflammatory responses.  In the AD brain, damaged neurons and neurites provide obvious stimuli for inflammation. Cumulated over many years, direct and bystander damage from AD inflammatory mechanisms is likely to significantly exacerbate the very pathogenic processes that gave rise to it. Thus, animal models and clinical studies, although still in their infancy, strongly suggest that AD inflammation significantly contributes to AD progression. By better understanding AD inflammatory and immuno-regulatory processes, it should be possible to develop anti-inflammatory approaches that may not cure AD but will likely slow the progression or delay the onset of this devastating disorder.

A human clinical trial analyzing the effects of supplementation with Star Scientific's anatabine compound on individuals with mild to moderate Alzheimer's disease is currently in progress at the Roskamp Institute.

In addition to the Alzheimer potential for Star Scientific, the company also has completed tests for a potential product also using anatabine for the treatment of thyroid dysfunction. Johns Hopkins University School of Medicine scientists believe they know why Star's anatabine compound Anatabloc works.  John Hopkins is the location where the thyroid research and human studies have been funded by a grant from the Walton Family Foundation.

Testing and peer review has been conducted on Anatabloc, and theoretical explanations have appeared in such leading journals as Endocrinology as to why Antabloc should work in patients with thyroid dysfunction and arthritis.

In early October 2012 Johns Hopkins University School of Medicine was expected this release of the human thyroid study using the dietary supplement Anatabloc.

We are now in Q4, but the data has not yet been released. I decided to look into the delay, and my anonymous sources tell me we might see positive results announced as early as this week. If the results are positive as rumored, this would take Anatabloc from "working in theory," to the compound showing clear data that it does in fact work.

Another product line also containing anatabine is the smoking alternative dietary supplement, CiGRX, developed by Rock Creek Pharmaceuticals. The use of anatabine rather than nicotine replacement therapy is related to the half-lives of nicotine and anatabine. The latency of needing a cigarette (LTNC) among regular smokers was less than two hours compared to the half-life of anatabine which is 10 hours.

Anatabine appears to mimic the brain activity that occurs when you take in nicotine, but is not addicting in the same way that nicotine is. Yerba mate leaves are brewed into a tea beverage that is consumed daily by millions of people in a number of countries in South America. Mate is a mild stimulant and appears to work with anatabine to help reduce the urge to smoke.

So within minutes of popping a CigRx into your mouth, the ingredients in the dissolving lozenge are going to work to make your brain think you are getting nicotine, without the nicotine.

We think although Star Scientific is spending a lot of resources in other areas currently, this is still an opportunity for them to expand.  Smoking continues to become more socially unacceptable.  In addition, many states have outlawed the ability to smoke in public buildings, including bars and restaurants.  So, no matter how addicted to nicotine, it’s becoming very difficult for most people to continue the habit.  The only other choice of course is to reduce or eliminate the habit.  This product from Star Scientific can help to achieve that.

Because of the legal implications surrounding smoking, Star’s related products can move forward in a positive direction.  For one thing, the FDA is giving preference to companies that can avoid the addictions to harmful drugs and similarly denying companies approvals if the products display this characteristic. 

Just last week, Zogenix (ZGNX) had its drug Zohydro rejected by the FDA.  The painkiller is stronger and new version of hydrocodone. It was voted down by an 11-2 vote with one voter not participating. The FDA received the suggestion of a government pain expert panel over their rejection since the painkiller was reported to cause high levels of abuse.

Although Star Scientific has opportunities in this tobacco addiction and health area and has received favorable FDA rulings on these products in the past, I believe its compound Anatabloc is the most important for the company going forward.

Regarding the company cash situation, it appears the CEO is on board considering a recent transaction where he invested his own money and took a very large pay cut.  On November 15, 2012, Star Scientific CEO Jonnie R. Williams and several long term shareholders invested $20 million in the Company through the exercise of outstanding warrants. Mr. Williams also announced that he would reduce his salary to $1 per month starting January 2013 until the Company becomes profitable.

Another event that can take away some uncertainty, the company has settled an ongoing legal dispute with Tobacco Company, Inc., or RJR (RAI), that began in 2001. The Company and RJR entered into a settlement of that litigation on September 21, 2012. Along with taking away uncertainty for investors, this can reduce the expense related to paying lawyers which is a good thing for Star Scientific. 


Shares Short (as of Nov 15, 2012):


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Considering the high short interest listed above, Star should make for a nice short term long based trade. I also consider the possible positive news regarding Star Scientific’s human thyroid study a catalyst opportunity trade that could result in a stock price considerably higher than Friday's closing price of $2.92. Furthermore, I would expect Rock Creek Pharmaceuticals, Inc., Star's wholly owned subsidiary, to begin enrolling for its Clinical Phase II shortly thereafter.

My price target opinions:  Short term, $3.40 -$3.60, Long term, $7.

Dislcosure: Long STSI

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