Take Lipitor – the world’s best-selling cholesterol drug – for example. Each $3 Lipitor pill only costs Pfizer about $0.25 to make. So the company collects 90% profit margins.

One way the drug industry has learned to reap those outsized rewards with less risk is through “me-too” drugs. Me-too drugs are essentially copycats – like generics but with fat margins.

For example, after Pfizer’s (PFE) Viagra wowed the market, Eli Lilly (LLY) and Bayer jumped into the fray. Now the market has three drugs – Viagra, Cialis, and Levitra – to treat the same condition. Viagra and Cialis fetch more than $1 billion per year. Levitra, the laggard, still generated $500 million in 2007 sales.

But the me-too well is running dry. These days, the FDA won’t approve new drugs unless they offer a clear advantage over what’s already on the market. Recently, me-too drugs vying to compete with Merck’s Januvia (a diabetes drug) and Gardasil (a cervical cancer vaccine) faced serious setbacks. Neither drug satisfied the FDA’s higher standards.

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Now a new class of drugmakers is taking a slightly different tack: They pick existing drugs and make them better. So a company might make a drug available as a pill rather than an injection. Or it might change a three-pill daily regimen into a once-a-day routine.

These so-called “specialty pharma” companies start with what works and go from there. With thousands of drugs on the market, specialty pharmas have no shortage of lucrative products to choose from. Here’s an example of how it works

Until recently, many schizophrenics had to struggle with a complex dosing routine that included capsules of Risperdal (a popular treatment option). So Alkermes (ALKS), one of the biggest specialty pharma outfits, collaborated with Johnson & Johnson, Risperdal’s maker, to create Risperdal Consta.

The new version is a bimonthly injection, and it generates more than $1.2 billion in revenue a year. Besides Alkermes, investors can choose from a handful of pure-play specialty pharma outfits

Specialty pharmas boast profit margins almost as big as the brand-name drug business 70% or higher. And by modifying drugs the FDA has already cleared, they take on much less risk.

Recently, the industry has far outperformed the general market These five stocks are up 3.5% over the last three months, while the S&P is down 8%. I’ve been busy digging through the short list in search of the best company. If you are looking for a low-risk way to get in on the lucrative drug business, this is a great place to start.

Good investing,

George Huang, editor, S&A FDA Report

Source: Where to Earn Monopoly Profits, Minus the Risk

How to Short Sell a Biotech

Dr. George Huang

“I believe the investors who bought the stock near $2 yesterday just fed quarters to the slot machine...”These were my words of warning to S&A FDA Report subscribers back in early May. The company in question is Discovery Labs (DSCO), an incompetent biotech trying to win approval for its lead drug Surfaxin.

Investors crush biotech stocks when FDA decisions don’t go their way. Our FDA Report strategy is to take advantage of the market’s harsh reactions by picking up good companies on the cheap. Trading biotechs during such turbulent times can be very lucrative, if you know what you’re doing…

When we looked back at the last seven years, we found high-quality biotechs can generate one-year average returns of 75% after a negative FDA decision. Of course, low-quality companies usually only have farther to fall…

At the end of April, the FDA rejected Discovery Lab’s Surfaxin for the third time in as many years – setting the drug’s hope for approval back several months. The company’s stock fell 50% that day.

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Like many FDA Report subscribers, I was itching for a juicy trade. And on May 5, Discovery said it wouldn’t need to conduct any more clinical trials. It claimed that after resolving minor manufacturing issues, final approval would come in September.

But I knew more trouble would come. You see, the company didn’t have any of the qualities we look for in a good biotech trade: a low price, a promising pipeline, an easy answer for the FDA, and good management…

At about $200 million in market cap, and about $50 million in cash, the company was not cheap. I knew Discovery would need another round of financing before it recorded any revenue from Surfaxin, which is the only substantial drug in its pipeline.

Given its clinical data portfolio, Surfaxin – which treats respiratory distress syndrome in premature infants – unquestionably works. The problem is, Discovery can’t manufacture the drug to the FDA’s liking. All three rejections focus on the company’s inability to meet FDA manufacturing standards.

And after three rejections, and promises of quick approvals each time, I don’t trust Discovery’s management one bit.

You would think after the third setback, the market would be thinking the same thing. It wasn’t. Gullible investors flocked back and drove the stock up 30%.

Then sure enough, last week, the other shoe dropped. After speaking with the FDA, Discovery learned it wouldn’t even be able to submit its response until September, let alone have the drug approved as it originally announced.

Investors who were tempted into buying the stock after the setback are already down about 15%. But I believe more pain is in store for Discovery shareholders…

Surfaxin may or may not get approval by December. But in this difficult market, an approval will likely meet with a yawn. Any setback, on the other hand, will no doubt lead to another massive drop. The downside risk is way too high. Any hint of another hiccup, and Discovery will find its shares cut in half.

When we pick up bruised biotechs, we only buy if we see four things: a good price, quality managers, plenty of drugs in development, and an easy resolution to the FDA’s concerns. With Discovery, we found just the opposite…

The company has questionable management, shaky finances, and no drug pipeline. Throw in a picky FDA unlikely to accept whatever Discovery has to offer, and you have the perfect recipe for another share-price meltdown.

Good investing,

George

Source: How to Short Sell a Biotech

David Dreman made one of the greatest calls in stock market history. In 1980, Dreman told investors to buy stocks.

Dreman didn’t just tell a few clients or friends to buy stocks. He literally wrote the book on buying stocks in 1980. He called it Contrarian Investment Strategies. And he said, “The stock market appears cheap by nearly every historical standard.”

Saying “buy stocks” was bold stuff. Stocks hadn’t made money in 17 years. But Dreman was absolutely right. After 17 years of losses, the stock market started the longest bull run in recorded history, which stretched from 1982 until 2000.

Fast forward to 2008. Dreman is guarded, but optimistic again. In the upcoming issue of Forbes (dated May 5) he says: “Frightening as the markets look today, there will come a time when the liquidity crisis ends and today’s prices for bank stocks look, in retrospect, like bargains.”

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Today we have a unique opportunity to invest with David Dreman. It’s not often that you can get in with one of history’s great investment managers at 85 cents on the dollar… and potentially pocket more than 60% gains in two years. But we can today, through the Dreman Value Income Edge Fund (DHG).

Dreman’s fund is a safe play. It pays 11.67 cents a month in dividends ($1.40 per year). Always has. As of the end of April, the fund’s price was $13.69, so the dividend yield on the fund is over 10%.

Interestingly, the actual value of the stocks and bonds the fund holds is $16.07 per share (as of the end of April). So by buying in at $13.69, we’re able to buy in at a 15% discount.

Dreman’s Value Income Edge Fund is a bit of a strange beast…

The goal of the fund is maximum returns with minimum variability. That’s exactly the way I want to invest. Dreman isn’t just sitting in stocks, waiting for them to go up. To achieve his goal, Dreman invests in a unique way…

He invests roughly 65% in bonds and 65% in stocks. You’re probably thinking, “That math doesn’t add up.” You’re right. David balances it out with a 30% “short” position in stocks.

David splits his stock positions: half long, half short. And sometimes he borrows a little bit of money to leverage his gains. So he has three strategies going on at once… an income strategy (bonds), a “long” strategy, and a “short” strategy.

The goal, of course, is to minimize risk.

The income strategy portion helps pay the big dividend. The stock strategy – where David buys extremely undervalued stocks – will provide significant gains when the market gets going again. And the short strategy should continually add a few percentage points per year to our returns.

So here’s how we get to 60% in two years…

So if we could buy today at $13.69, and realize $22.44 (that’s $19.44 plus $3 of dividends), we’d make more than 60% – safely – in two years.

Dreman can do better than that. With nearly four decades of experience, he knows what he’s doing.

It’s not often we can buy David Dreman’s management for 85 cents on the dollar – and earn a 10% dividend yield. So you ought to consider the Dreman Value Income Edge Fund today… with the conservative goal of earning a safe return of 60% over the next two years.

Better yet, you should consider our Monthly Dividend Program. Right now, Dreman’s Value Income Edge Fund is in our Monthly Dividend Program’s Top 10 list… along with nine more of the best high-yield opportunities that will pay you monthly dividend checks.

Good investing,

Steve

P.S. Funds like Dreman’s are one of the great tools of the Monthly Dividend Program. It’s a quick course that provides a list of the 10 best monthly income opportunities in the world and teaches you how to find other opportunities for yourself. Click here for the details on how to sign up.

Consider Basilea, a Swiss drugmaker focused on antibacterial and antifungal remedies. The company’s lead drug, ceftobiprole, is a promising treatment for complicated skin infections. But last month, the FDA issued the company and its Big Pharma partner, Johnson & Johnson, an approvable letter – the regulator’s notorious maybe-yes/maybe-no ruling.

Without pausing to see if the company can satisfy the agency’s concerns, investors dumped the stock. It fell from 187.40 Swiss francs to 148.50 on the day of the ruling. It closed yesterday around 150.

But these dramatic, emotional reactions give us excellent opportunities to profit. Our own Dr. George Huang has developed a proprietary method for trading these approvable letters. It’s a strategy that offers huge upside and very limited downside.

The FDA will issue 55 more rulings in 2008, and we have exact dates for all of them. The next one happens on Tuesday. Dr. George Huang has written a primer explaining his system, and we’re offering the primer and his new trading service at a big discount that ends this Monday. To learn more about Dr. Huang’s S&A FDA Report, click here…

Oil trades for more than $117 per barrel, and for the first time China, India, Russia, and the Middle East will consume more crude than the U.S.

The International Energy Agency estimates the emerging markets will consume 20.67 million barrels a day this year, a 4.4% increase. Meanwhile, U.S. consumption will fall 2% to 20.38 million barrels a day. We doubt oil prices are going anywhere but up.

Look at the chart below (courtesy of U.S. Global Investors) showing international oil consumption per capita. Every country’s oil consumption exploded following the industrialization of that country… except China. China has not even begun to whet its oil appetite. Wildcatter T. Boone Pickens thinks we’ll see $125 oil, but according to this chart, it could go much higher

Oil consumption per capita, 1900 to present

Ali al-Naimi, Saudi’s oil minister said, “Limited capacity along the entire supply chain is the real source of current global supply tightness and represents the greatest threat to ensuring adequate energy to fuel future economic growth.” Al-Naimi says the world needs more infrastructure investment to find new oil wells. Saudi Arabia is the third major oil-producing nation to warn of shortages. This month, a Russian oil executive announced his country’s oil production has peaked, and Nigeria claimed its output may fall by one-third due to under-investment.

One thing is for sure: Americans are going to see their standard of living fall dramatically as prices for energy continue to rise. And no amount of solar-panel rebates is going to change this harsh fact.

Alberta, Canada, is one area with sufficient energy supplies. Alberta has a patch of land the size of Florida containing more oil than all of the Middle Eastern countries combined. The oil is mixed with dirt, and harder to process. But with oil at $120, it is worth trying to sort the dirt from the oil.

Canadians will invest $22.2 billion over three years on Alberta infrastructure. Most of this investment will relate to natural gas, which is becoming the most important fuel source in the region. Matt Badiali noticed the Alberta trend early and has several recommendations in his S&A Oil Report portfolio with operations in the region. But he recently discovered a little-known Canadian oil patch that may prove to be even more profitable for investors who get in now. To learn more, click here…

Regards,

Porter Stansberry and Dan Ferris

After 13 months of testing, we’ve finally launched our newest research service – The S&A FDA Report.

Our medical specialist and veteran trader, Dr. George Huang, created a breakthrough trading technique for exploiting approvable letters – a government-triggered phenomenon in the stock market. Based on his proprietary technique, you can actually learn when the potentially biggest trades of the year will happen, months in advance.

We’re going public with Dr. Huang’s new strategy in less than two weeks. In the meantime, we’re offering our readers first dibs. And you only pay half price. To learn more, click here…

At last week’s Jekyll Island meeting, our friend and fellow publisher Doug Casey made a convincing case for buying real estate in… Burma. Sure, a military junta is in power, but it won’t be there forever. Meanwhile, Burma’s beachfront land is every bit as pretty as Thailand’s but it costs about a tenth as much. All you’d have to do is ingratiate yourself with the generals in power, something that shouldn’t cost more than a few million dollars.

Doug also likes cattle land in Argentina and, along with partners, has recently purchased more than 250,000 acres in Salta.

The real estate meltdown hypothesis holds the economy will radically slow and sink into a recession (or even the worst depression since the Great Depression) as subprime losses lead to prime real estate defaults and then a decline in commercial real estate, too. I see two glaring problems with this hypothesis…

First, “Dr. Copper” hasn’t gone along with the global recession predictions. Copper, and base metals in general, have remained strong, even hitting new highs. Second, the commercial real estate collapse doesn’t seem to be materializing. In fact, after suffering late last year, several commercial real estate investment trusts seem to be rebounding strongly.

Our best commodity recommendation? Get long heroin. According to sources in Afghanistan, farmers there have replaced their traditional poppy crop with wheat. Inflation is looming – even for junkies. While we suspect we’re a long way from a top in commodities in general, it does give us pause when wheat is a better cash crop than poppies…

I believe the trade of the next decade will be shorting long-dated U.S. government bonds…

With the amount of inflation the Fed is producing and with the global economy showing signs of strength (oil and copper prices), it’s a sure bet the yield on the long-dated government bond will, sooner or later, spike much higher. Right now, yields on the 30-year Treasury bond are bouncing off their lows, at just over 4%. Considering inflation, as officially measured, is higher, there’s simply no way these low rates are sustainable.

ConocoPhillips and BP are spending $25 billion to $30 billion to build a pipeline to carry Alaska’s gas to Canada and the U.S. The pipeline will move about 4 billion cubic feet of gas per day. The first destination is the Alberta oilsands in Canada – the biggest proven reserves outside Saudi Arabia.

Alberta needs enormous amounts of natural gas to get oil out of the ground. Companies are currently pumping 825,000 barrels per day. That number is expected to quadruple by 2025.

George Soros, the billionaire you love to hate, told reporters the U.S. administration “failed to perform their job… This is a man-made crisis and it’s made by this false belief that markets correct their own excesses. It will take much longer for the full effect of the decline in the housing market to be felt.”

Soros sounds like he wants to ride the “government-has-to-do-something” bandwagon. When times get tough, the “public” will clamor for the government to “do something.” Whatever it does, it won’t be good.

What’s Buffett buying now? Well, his most recently disclosed new position has been built up over the past six months. Buffett has bought a million shares of reinsurer Munich Re Group, according to a German newspaper report. Buffett bought 3% of Swiss Re in January.

Editor Sean Goldsmith recently headed up a project to uncover every company in the world that pays a monthly dividend. Then, he spent the last six months with the help of Sjuggerud, Dyson, and myself, to figure out a system that shows you which Monthly Dividend Payers will deliver you the biggest monthly checks. For example, one stock has sent out a check for 453 consecutive months. Another has returned 388% over the past five years, including a paycheck for shareholders, every single month.

For more details on Goldsmith’s complete list of the Best Monthly Dividend Stocks… and his recent research, click here.

Regards,

Porter Stansberry and Dan Ferris

This excitement spreads like a wildfire.

When biotech stocks get going, they can rage out of control for months. The Datastream Biotechnology index exploded higher in four triple-digit (or more) rallies in the last 30 years.

Timber, on the other hand, is a nightmare for trend followers.

For starters, timber companies are perpetually unpopular. Cutting down trees conjures an image of wastelands and spotted owls with no homes. The sector rarely becomes the subject of cocktail parties, and never in a positive light.

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Now, don’t get me wrong, I’m not saying timber companies are never an attractive investment… They often are. However, the sector is unlikely to experience a snowballing, triple-digit rally like some of its sexier peers.

Take a look at the following chart…

High Volatility Leads to Whipsaws, Making Trend-Following Impossible

As you can see, the Datastream Americas Forestry Index looks “messy.” Timber often experiences large volatility, and the trend is hard to decipher.

This is a poor situation for trend following.

If you try to buy after a sharp spike, you almost always get punished by a whipsaw. (A whipsaw is a term used to describe a “fake-out” for trend followers. Specifically, it’s when a stock begins to rally – triggering a buy for these speculators – and then falls, forcing you to sell at a loss.)

When sizing up a trend, you must first figure out if the sector is well-behaved for trend following.

Throughout my research, I’ve discovered many great cyclical sectors. Timber’s not one of them, so it’s not suitable for trend speculating. However, timber is almost always in a slow, steady uptrend. You aren’t going to make hundreds of percent in a year buying it, but if you want a sector you can buy and forget about for a decade, timber is a good place park some cash.

Good investing,

Ian Davis