No one feels this way more than nutritional supplement companies. And rightly so…

Until a 1996 piece of legislation, the FDA ruled the supplement industry with an iron fist. If a pharmaceutical company developed a drug that performed the same remedy or other function as a supplement or vitamin, the FDA would approve the drug and ban the supplement 9 out of 10 times.

The bill took some of the FDA’s power away, but that didn’t stop the agency from banning certain substances. As one industry insider notes, “With the FDA’s help, drug companies take traditional herbs, extract their main actives and turn it into drugs.”

[Note: By “main actives” she was referring to the chemical or compound that offers health benefits, which is found naturally in the plant.]

The drug company usually does this through synthetically manufacturing the chemical or compound to form a drug. The FDA will ban the source (the plant) and approve the drug.

As Mike Adams of Natural News notes, “It would be like Big Pharma patenting vitamin C, then the FDA claiming that all oranges and lemons were adulterated with drugs because they naturally contain their own vitamin C.”

As ridiculous as this method is, it’s been the agency’s weapon of choice, especially when dealing with herbal and traditional supplement companies.

As recently as February of this year, the FDA banned vitamin B6, or pyridoxamine, by “declaring it to be a drug.” Meaning this naturally-occurring vitamin, which is found in fish and chicken, is illegal unless a (presumably major) drug company develops it. Pyridoxamine, as a supplement, was used to prevent the progression of kidney disease.

This is nothing new; the FDA has been playing this game for years. But as the saying goes, if you can’t beat ‘em, join ‘em. That’s why a new breed of potential drugs is shaping up…

Many supplement companies are commencing clinical trials on their formulas. This recent outburst of new players probably won’t fragment the pharmaceutical industry, but it does give penny stock investors a few more opportunities.

Previously, the only major catalysts for supplement companies were commercialization of its products and earnings reports. Now, they can use the FDA as a benefit instead of a burden. We already know what an FDA approval can do for a company…

The Fastest-Growing Niche Segment in the Supplement Industry

One tiny, but fast-growing, segment of this niche industry is traditional Chinese medicines (TCM). In the western world, the number of countries recognizing TCM as legitimate is increasing. According to People Daily, a China-based newspaper, more than 120 countries have set up TCM institutions or clinics. Just in the U.S. there are 53 schools of TCM.

More specifically, Chinese herbal medicine use is growing at an astronomical rate. Some estimate this growth at 20% in the western world. In the U.S., California is leading the way, with the majority of herbal clinics and practitioners of TCM. Many U.S. health insurers are now recognizing and including TCM into their coverage.

With the fast growth of herbal medicines and the recent moves by the herbal supplement industry, we see large upside for a select few companies… The next big gains from this niche field will no-doubt be a penny stock. We’ll keep you updated…

Sincerely,
Jim Nelson

April 15, 2009

The “All-Natural” Way to Play Penny Pharma was originally featured in the Penny Sleuth.

There are two main aspects, I said.

First, these companies are all trying to improve people’s lives. Some are searching for treatments or cures for some of the worst diseases that plague society. Others are looking for better, cheaper ways to deliver those treatments to different parts of the world.

Second is the “pop.” Millions of investors watch these tiny biotechs as they begin clinical trials, announce partnerships with big pharmaceutical firms and submit new drug applications with the FDA. And millions more scramble to buy shares when good news is announced.

This good news can send the share price through the roof in a matter of hours. Naturally, it’s nice to already be sitting on shares while everyone else is still uncertain about the company’s future.

With these two points in mind, let’s examine a $260 million biotech I’ve been watching…

For the past several years, Inspire Pharmaceuticals (ISPH: NASDAQ) has proven to be very skilled at losing money. But now, it could be turning a corner with several new drugs in its pipeline.

One of its most promising candidates is a yet-unnamed drug aimed to treat cystic fibrosis patients. Cystic fibrosis, or CF, is a hereditary disease that causes lung and pancreas problems, eventually causing disability and early death.

Inspire’s CF candidate is currently in Phase 3 clinical trials and has been granted orphan drug status. This designation is handed down by the FDA to encourage the development of drugs for rare (or “orphan”) diseases affecting less than 200,000 people in the United States.

Orphan drugs have relatively small demand, so the FDA grants companies that produce them some perks. If Inspire’s new CF drug is granted approval, the company will have seven years to exclusively market the drug. That’s seven years and millions of dollars that no one else will be allowed to touch.

Another new drug in the works at Inspire is called Bilastine, an allergy drug comparable to Pfizer’s popular drug Zyrtec. Inspire bought the rights to develop Bilastine from Faes Farma, presumably to compliment other allergy medications in its portfolio.

Currently, Inspire markets along with the company Allergan two drugs that treat dry-eye and allergies. Inspire’s own dry-eye drug — called Prolacria — is still waiting for approval from the FDA. Approval for this drug has been delayed in the past, so it would not be wise to consider this a lock by any stretch of the imagination.

Of course, any negative news relating to Prolacria and it’s approval will negatively affect the short-term price of Inspire. It’s very difficult to judge how trained doctors and other experts will view a certain drug. From what we’ve seen, its unnamed cystic fibrosis drug is a much more promising candidate. However, this drug is not as far along as Prolacria in the approval process.

When weighing your options with this company (or one like it), it is important to project different scenarios that could play out in order to determine the best course of action.

In this case, we have a $260 million drug developer that’s been losing money for some time. It has enough cash to carry it through a couple more years, and very little debt. Its revenue grew to $37 million last year, besting 2005 by about 60%.

There’s our foundation. Now we have two separate scenarios for Inspire and how it will affect us if we were to invest…

In our first scenario, Inspire’s dry-eye drug Prolacria passes additional FDA scrutiny and is granted approval. Its unnamed CF drug follows suit 18 months later and affords the company yet another revenue stream. Inspire gains its financial footing sooner than most expected, and its share price rises.

The second scenario is not as pleasant. In this one, major flaws are found with Prolacria and the drug is dropped altogether. Shares take an immediate hit and do not begin to recover until promising news about the CF drug’s progress emerges months, if not a year or two later. The company begins turning a profit in a few years with the help of this drug and Bilastine, which begins to earn a small share of the allergy medication market.

These two scenarios, while different, are both equally possible. Each one has Inspire emerging from the red, just at different times.

While any investor would immediately hope for the first option, it’s important to be prepared for the second. This isn’t a stock to pick if you’re only willing to settle for fast gains.

Best,
Gunner
March 26, 2007

Small-Cap Medical Companies was originally featured in the Penny Sleuth.