CALGARY, Canada -- Last week's report on Cardero Resources (TSX: T.CDU, Stock Forum) generated substantial feedback. It’s evident I should keep a focus on resource stocks. Especially as commodities markets accelerate. I can’t wait to hear what Thom Calandra finds out there in the Nevada desert.
Still, I like diversification and will keep an eye out for other sectors of interest. I've done very well over the years watching for stocks that trade at big discounts to their cash value and while those are difficult to find in a strong market, they do surface.
One I am going to throw out for you to research is Medwell Capital (TSX: T.MWC, Stock Forum, high of $0.255 since profiled to Ticker Trax subscribers). Because I am new to Ticker Trax, I would like to put a few companies out early so we can establish a track record.
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Medwell is a stock we currently follow through my microcap newsletter. Besides, I have presented it (in free articles) on Stockhouse a few times this past year (Both were scenarios while it traded below 30 cents Canadian).
During the course of the past year or so I have been picking away in the 20-cent range and now I own 75,000 shares. It’s a larger position than I like to own for a stock covered in a newsletter … but because I plan on holding it for another 12 to 18 months if necessary, I will have to tolerate my own biased opinion. At any rate, this is a stock in which I am in a serious love/hate relationship!
That being said, Medwell is one of those stocks that could provide a sense of security in a volatile market (because of a large cash position), and if its Spectral Diagnostics investment gets FDA approval, there is upside potential from here.
I have never spoken with the company. The senior management team treats the stock like it’s a private company. From what I can tell, the team does very little for pro-active corporate communications or investor relations. Based upon the way the stock has traded this past year, I suspect the only purpose of the IR is to fend off disgruntled shareholders. Insiders only own 12 percent and I am surprised institutional shareholders have tolerated this approach for so long.
Ninety nine percent of the time, I wouldn't waste my time with a company like this. However, if I had taken the same approach with YM Biosciences (TSX: T.YM, Stock Forum) in early 2009, I would have missed gains of almost 700 percent that following year. The absence of public interest was similar with YM … although the CEO cared about his stock price.
A pattern of trading and shareholder frustration can work to your advantage. In the case of Medwell, it probably has so many disgruntled shareholders that the stock has very good liquidity. Sellers, it would seem. That doesn't mean to say that six months from now you won't be another one of the Medwell-haters throwing in your own towel!
Medwell Capital
www.medwellcapital.com
Market Cap: Canadian$22 million/Cash & Investments: $40 million
•Shares outstanding: 91 million
•Cash & short-term investments: $30 million (33 cents/share)
•30 million shares of Spectral (TSX: T.SDI, Stock Forum; 33 cents) worth $10 million (11 cents/share)
•Total debt less receivables: $1 million (a penny a share)
My first question when I see a stock like this: how quickly is it burning through cash? In the case of MedwellCapital, it's controlled but administration is still running high. There is no question management is paying itself very well. Fortunately it is charging Spectral a decent sized management fee for getting them through the FDA approval process.
This was a company that had a partnership with Eli Lilly for an MS treatment and it cut one of the largest biotech licensing deals in Canadian history. The management team was successful in raising almost $300 million. When Lilly decided mid 2009 that the drug was not working as they hoped, it walked and left Medwell holding a large pool of cash. Shareholders were not so fortunate in that the share price collapsed from $2.75 to 28 cents overnight. That’s when I took a keen interest.
In 2010 Medwell decided to become a full-service provider in the health care industry: advising companies on strategy, financing, mergers and acquisitions, licensing transactions and technology development. The company announced in the spring it was hiring a leading health care investment banker as executive vice-president and managing director. Medwell must have one heck of a deal screening process because since that time, not one new investment has been announced for that large pool of cash.
For the time being, I am banking on Medwell's 30 million shares of Spectral Diagnostics to provide some lift in 2011. www.spectraldx.com
Spectral's objective (with the help of Medwell) is to obtain FDA approval for a Septic Shock treatment that has proven very successful in other countries; currently nothing is available in North America and SDI has the rights to the United States. If approved, the potential revenue is well in excess of $100 million annually. A month ago the company announced that (the Euphrates trial) had commenced and approximately 360 patients at 15 sites would be enrolled throughout the United States.
Few therapeutic options are available to treat more than 250,000 patients diagnosed with severe sepsis in the U.S. each year. The disease remains a leading cause of mortality. Toraymyxin has been used safely on more than 70,000 patients worldwide but formal trials have never been conducted.
Spectral is well funded with $17 million but rarely trades on the TSX. In 2010 it received the McMaster University industry partner of the year award for their work on treating sepsis.
In September, Cooper University Hospital in New Jersey in a Medical Report reported on a clinical trial it named EUPHRATES. "It is the most exciting new treatment option in decades, said Dr. Phillip Dellinger, a sepsis expert at Cooper. “The outcome of EUPHRATES has the potential to change the way sepsis is treated and to make a significant impact on this still deadly disease." www.cooperhealth.org
"Sepsis is a complex disorder that is difficult to define, difficult to diagnosis, and difficult to treat," said Dr. Dellinger. "When septic shock is present, it is most often characterized as an overwhelming and at times lethal, systemic response to an infection. In many patients, part of that response is triggered by the release of bacterial endotoxins."
Research has confirmed the link between elevated endotoxin levels and mortality in sepsis. This is the first sepsis trial ever, drug or device, to measure serum toxin levels and, when found to be elevated, specifically target removal. Despite decades of advancements, severe sepsis remains the leading cause of death in intensive care units. More than 200,000 deaths are reported annually in the United States as a result of sepsis.
CONCLUSION: What I find perplexing, maddening even, is that Medwell wants to become an "Advisory Leader" in the biotech and healthcare industry for Canada. In the mean time, its share price languishes. It’s one thing to say you can help a company work through the process of FDA approvals, etc. Yet if you cannot manage your own public vehicle properly, you’re missing a huge part of the equation. Someone obviously failed to mention this to Medwell.
It's very possible that investors could not care less about a company that manages and invests in biotech and healthcare start-ups. I often wonder why I also continue to sit on dead money. But then I take a look at past stocks like YM Biosciences that did so well for us, and Coolbrands. Coolbrands was another company I followed closely near 50 cents in early 2009 because of the large discount to cash. We got bored and took a double within six months because it was going nowhere. Three months ago it found the right deal and never looked back after its share price went vertical. Had a person sat on it from early 2009, he or she would have made 800 percent just by speculating on management and discounted cash.
These are not easy stocks to speculate on because they require more patience than most people have. I don't mind waiting them out, but there is no excuse when a management team (appears) to ignore share price and treat the company as if it were private. I am honestly surprised someone hasn't accumulated a large enough position in the mid-20-cent range to take control, liquidate the whole works and walk away with a huge gain. Maybe that's still coming.
My strategy is to own Spectral for zero cost by buying the discounted cash of Medwell. This not only provides significant upside potential on the Spectral trials during the next 12 months, but exposure to other healthcare trends should Medwell decide to put its $30 million to work.
Thanks for checking in with Ticker Trax, folks. – Danny Deadlock for Ticker Trax
Thom Calandra: Thanks, Danny.I’ve stuck with several biomedical and pharma companies for as many as six years … and nearly every one of them made up for lost time and delivered good to very good returns. But that waiting game – it can be a crying game; I can see that.
We’ll be back next week with more Ticker Trax – from me and from Danny Deadlock. In the meantime, I am poking around at an extremely speculative gold and copper project in Nevada.
I forgot to mention the other day in our Nov. 8 issue that Xtra-Gold, a former Planetary Prospect and one that I own, appears close to unveiling fresh drill results from its main Ghana concession. No time line on that … so we’ll be waiting. Another West Africa company cited in Ticker Trax recently, African Gold Group, published fresh drill results from its Mali concession this week. – Thom
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Ticker Trax™ is published by Stockhouse Publishing Ltd. Ticker Trax is an information service for subscribers and neither Stockhouse nor Thom Calandra nor Danny Deadlock is a broker or an investment advisor. None of the information contained therein constitutes a recommendation by Mr. Calandra or Mr. Deadlock or Stockhouse that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Ticker Trax does not purport to tell or suggest the investment securities subscribers or readers should buy or sell for themselves. Subscribers and readers of Ticker Trax should conduct their own research and due diligence and obtain professional advice before making any investment decisions. Ticker Trax will not be liable for any loss or damage caused by a reader’s reliance on information obtained in the reports. Subscribers and readers are solely responsible for their own investment decisions. Opinions expressed in Ticker Trax are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in Ticker Trax should be independently verified. The editor and publisher are not responsible for errors or omissions or responsible for keeping information up to date or for correcting any past information. Ticker Trax and Thom Calandra and Danny Deadlock do not receive from any companies that may be mentioned in Ticker Trax. Some of those companies are advertisers or clients of Stockhouse, the publisher. Xtra-Gold Resources was at one time a preferred client of Stockhouse for investment relations, marketing and other commercial but not editorial services, which are never guaranteed. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities that are discussed in Ticker Trax. PLEASE DO NOT EMAIL SEEKING PERSONALIZED INVESTMENT ADVICE. Copyright 2010 all rights reserved.