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Flaherty Financial News Newsletter
Volume 2 Issue 6
December 8, 2008
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in this issue
Bob Flaherty's Favorite Stock for 2009: ADL with a P/E of ONE.
CORT's solution for the dilemma of anipsychotic drugs that cure now but may kill later.
Four Splended Efforts: BPAX, GNBT, HMBT & MYMX
Disclaimer
Bob Flaherty's Favorite Stock for 2009: ADL with a projected P/E of ONE!
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The greatest stock market and asset deflation crash of our lifetimes is creating opportunities all over the globe. Future investments, until the market recovers and micro-and small-cap companies can raise capital more easily, must be viewed not only for their promising potential but whether their existing team can raise the capital to keep them going. We are going to see a lot of failures and emergency bailout shotgun marriages until investor confidence returns. Still for bargain hunters who assemble a diversified batch of emerging growth stocks selling at bargain basement prices, the survivors' gains should be exceptional. I go where the brave dare not go. If you wish to come along, here is a new idea with a projected 2009 P/E of ONE.

AMDL Inc. (AMEX-ADL-0.82) sports a ridiculously low stock price with a P/E of just ONE. In the correction it has fallen 78% in the latest 12 months and 85% since its $5.58 of October 2006. At the November Rodman & Renshaw conference my son Brian and I listened to new dynamic turnaround Chairman and CEO Douglas MacClellan who was on the job all of a week and came away impressed. 
Is this too good to believe? Guidance given in Doug's presentation for 2009 improved to revenues of $60 million to $76 million, and income of $11.6 million to $14.6 million before currency translations, which will either help or hurt. With around 16.9 million shares outstanding that would be an earnings per share range of $0.68 to $0.86. At a recent stock price of $0.82 that is a projected 2009 P/E range (ignoring currency translations) of 1.3 to   1.0. ADL is trading about 34% of 2008 projected sales and only 20% of 2009 sales guidance where similar stocks typically trade at 2 times sales or better. ADL has a huge market opportunity, rapid 100% sales and earnings growth, proprietary technology and demonstrated success both in the U.S. and China.

Admittedly, ADL's past performance has not been perfect, and past profit projections by previous management have been missed. The company may be growing too fast and Chinese accounting leaves a lot to be desired. However, my old friend Sir John Templeton was willing to put up with such flaws for an irresistible projected P/E of two.  Here new CEO Doug MacLellan may deliver on a projected P/E of One!

The new CEO does have housekeeping to do. Margins must be improved and operations reorganized and switched around, which he is doing. Headquartered in Tustin, CA, ADL develops manufacturers, distributes and sells over 180 diagnostic, pharmaceutical and nutritional products. Included is its FDA-approved DR-70 in vitro diagnostic test which is the first colorectal cancer diagnostic test to be approved by the U.S. FDA in over 20 years. So ADL has significant operations in both China and the U.S.

AMD has two U.S. FDA GMP approved & ISO 13485-certified manufacturing plants and four cGMP pharmaceutical manufacturing facilities in China and a sales distribution network that successfully delivers its portfolio of specialty pharmaceutical products to more than 36 key markets in China that serve over one million people. 

Highlights from Doug MacLellan's presentation include geographic expansion from the current 36 to 100% of China's 168 cities with over one million people. That will mean new marketing and distribution acquisitions and probably additional products to sell too. The company's products already go from detection kits, cosmetics, anti-aging products to some cancer therapeutics. It also plans to expand its operations outside of China. This management clearly has a lot on its plate.

Considering how fast ADL is growing, Doug MacLellan will face many challenges. The biggest is how will he raise growth capital when his stock price is so low? But he is a seasoned international business executive with 24 years of China business deals, 10 of those focused on the pharmaceutical industry. He has a good team supporting him. A solid 2009 with good profits and positive cash flow would improve ADL's outlook dramatically. If management delivers on what was in Doug's presentation, this stock should be a big winner. 

In fact, ADL is Bob Flaherty's favorite stock for 2009. At other companies I know of several projected P/Es of two, but only ADL has a projected P/E of ONE. The ghost of Sir John would return to chastise me if I passed this one by. Besides the Flaherty family motto is Fortune Favors the Brave!
CORT's solution for the dilemma of antipsychotic drugs that cure now but may kill later.
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At a November Rodman and Renshaw conference I found myself listening to founder and CEO Dr. Joseph K. Belanoff, M. D. whose Corcept Therapeutics Inc. (Nasdaq:CORT-0.97) was presenting. I heard a revelation.
 
Obesity is often named the number one health problem in the U.S. because it can lead to other diseases and shorten life by decades. The average life span of someone who is morbidly obese is something like 55. Yet a major contributor to this problem is seldom discussed. Using antipsychotic drugs can help bring patients' minds back into normal ranges, but sometimes their bodies blow up like balloons. 
 
The CEO flashed a chart of some drugs, their makers and then noted his company had the desire to do something about this undesirable side effect. The drugs were: olanzapine Zyprexa (Eli Lilly and Company), risperidone Risperdal (Johnson & Johnson), quetiapine Seroquel (AstraZeneca), clozapine Clozaril, (Novartis), ziprasidone Geodon (Pfizer) and aripiprazole Abilify (Bristol-Meyers Squibb.)
 
After the meeting I went outside for a brief one-on-one with this CEO who is one of many unknown entrepreneurs trying to change and world and do well for his company too. Joe Belanoff is currently a clinical faculty member and has held various positions in the Department of Behavioral Sciences at Stanford University.
 
Bob F:
I was struck by the fact you discussed a problem that I haven't heard anyone else discuss. That is Abilify (to treat bipolar disorder) and some other anti psychotic drugs cause some users to gain to gain weight and become morbidly obese. You mentioned some patients die early. Can you help deal with this?
 
Joe B:
The real issue is this: antipsychotic medications have a real metabolic issue. All of them are labeled for the problem of diabetes and metabolic effects and to varying degrees they all cause weight gain. Even the ones that cause less weight gain can often cause a lot of weight gain in an individual. It really is a problem for clinicians because they know they are giving their patients a problem even if they are dealing with the psychiatric symptoms. At this point in our industry it is one of our single biggest issues. We have medicines which are effective for one thing but create troubling side effects.
 
Bob F:
Take Abilify. If you stop taking it, you risk having what is called "an event" and undoing all the fine work you have been doing for perhaps a year or two. If you continue taking it, you can become morbidly obese. What do you do?
 
Joe B:
These days there is really very little that you can do. Another unfortunate thing about this dilemma is that even when people stop taking a drug some don't lose the weight. Once gained, it is very hard to take weight off.
This really is a problem for the whole industry. My hope as a clinician is there will be several different choices in the future. But at this point in time there are none.
We have begun work which showed in a human model that the prevention of this weight gain can be ameliorated with a cortisol blocking agent, in our case with the drug CORLUX. 
 
Bob F:
Some of these anti psychotic drug patents are expiring in a few years and adding something to them to prevent the weight gain would make sense.
 
Joe B:
It is really a potential strategy. Here is what it comes from. These medications ARE effective anti psychotics. If you could somehow reduce this metabolic Achilles heel you would be doing patients a great service. I hope that we will be able to demonstrate that or that someone else will.
 
For those who like bargains at $0.97 recently the stock of CORT is down 77% from its 12 month high of $4.29 and 91% from its all time high of $12.65 back in 2004. Success in its endeavors would produce stock gains many times higher and probably a new all time high in a normal stock market.
 
Interestingly, CORT's main mission is to engage in the development of GR-II antagonist drugs for the treatment of severe psychiatric and metabolic diseases. Corcept's lead product, CORLUX is in current in Phase 3 clinical trials for the treatment of the psychotic features of psychotic depression and the orphan disorder Cushing's syndrome. In addition, CORT is in preparation for trials for the mitigation of weight gain induced by antipsychotic medications. So far tiny CORT has received funding to research the weight gain problem from Eli Lilly.
As observers we are centering on the financial panic with its falling stock prices and often overlook that many entrepreneurs spend most of their entire careers focusing on important unsolved medical problems.  Let us hope financial backers and investors will continue to support efforts they consider worthy and help conquer many or our present medical ills. It is thrilling that so many are trying. We are also going to spotlight some other interesting efforts to conclude this newsletter.
Four splendid efforts:
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A tragedy of the financial panic and flight from risk is that the stocks of several very worthwhile efforts have fallen:
 
Here are four I particularly like both for what the management is trying to do and as investment homeruns if they succeed. The first three sponsored our past  newsletter write-ups on them  when their stocks  were much higher and the fourth simply fascinates me as an overlooked Gay Play which should be of  vast interest to the gay community.

 
Back in December 2007 my single favorite stock for 2008 was and is BioSante Pharmaceuticals (Nasdaq: BPAX-then 3.73, now 1.67).  Chairman and CEO Steve Simes continues to steer this pioneer in treating female sexual dysfunction toward the commercial goal post. Success will produce a product with annual commercial sales of over $1 billion. Because arch rival P&G has not even started U.S testing for safety of its products now being sold in Europe, BioSante should be the first to market in the U.S.A. Being first should make this exciting product a blockbuster. Right now Phase III trials for its LibiGel� are in progress. The goal is to bring sexual satisfaction to frustrated women as Viagra has for millions of men.
 
The market for women should be bigger than market for men. Will it even exist, you may ask? Right now many women are taking men's products because products more suitable for them are not for sale. If P&G does launch in the U.S, Simes believes his LibiGel� product can compete. P&G's European patch product can leave red blotches. His gel doesn't.
 
BPAX's team has shown determination, resilience and adaptability. It got an Elestrin product through the FDA to treat hot flashes in menopausal women. After its marketing partner was acquired and the acquirer had no interest in the product, Simes landed Azur Pharma as a marketing replacement. BPAX just received $3.3 million and if sales materialize could take in as much as $144 million. That will be peanuts compared to LibiGel� which has explosive potential.
 
BPAX remains an open Flaherty Special Situation BUY.  
 
Last issue mentioned Generex Biotechnology Corp. (Nasdaq:GNBT-0.60) pioneering oral insulin absorbed through the lining of the mouth.  Big rivals have dropped out as their sponsored entries delivering through the lung appeared to cause cancer.  Now Generex's oral product has just started   being sold commercially in India. GNBT does many other interesting things like delivering some medicine in the form of chewing gum.  But for now the spotlight is on this effort to pioneer oral insulin.  Management continues to make steady progress.   GNBT stock, which has an all-time high of $22, is way way down 93%.  In April 2008 Flaherty Special Situations recommended it at $1.04. It is still a BUY
 
Finding an artificial blood substitute is like the search for the Holy Grail and CEO art Bolton of HemoBioTech, Inc. (HMBT.OB-0.95) continues to seek it. Over $1.5 billion has been spent as over a dozen mostly giant prior pioneers tried but dropped out when their products proved toxic. That is, they killed people. But there is a global shortage of blood because of accidents, war, medical needs, lengthening life spans and an ever increasing world population. Meanwhile, diseases like HIV and hepatitis make our natural blood supply more questionable.
 
The commercial global market for an artificial blood substitute would be $25 billion and discovery of one would take its place beside the Salk vaccine and Antibiotics. There is little daily trading in HemoBioTech stock and it is being ignored by the media and by investors. It does need to raise millions to get the stage where the product will attract a large wealthy strategic partner. Currently the product is being tested in India and hopefully soon in the U.S. If successful, this product would be one of the most important breakthroughs of this century.  
 
Also because of its work developing the blood substitute with the help of Texas Tech, HemoBioTech has received an exclusive world license from Texas Tech to market purification technology to remove pathogens, (including viruses and prions such as Mad Cow disease) from animal-derived fluids meant for human use.  By itself this offshoot would be important. But for now the focus must be on carrying on the work on the artificial blood substitute.
One of the most thrilling efforts ever and so far it is being ignored. This open June 2008 Flaherty Special Situation at $1.00 is still a BUY.
 
A Gay Play: My friend Ray Dirks had me break bread with a Swiss-based Mymetics Corporation (MYMX.OB-0.13) that is trying to develop a vaccine to prevent AIDS.  Since it was recognized in l981 over 25 million worldwide have died from the disease and another 33 million are currently infected with HIV.  Here too the big companies have tried to develop an AIDS cure and failed miserably. A vaccine would let a lot of sexually adventurous people do safely what they are not supposed to do and also save millions of lives. Alas, MYMX also needs to raise many millions to prove enough so that some rich White Knight will ride in and finish the job.  Besides AIDS, MYMX is developing a vaccine for Malaria, an old ill which continues to take a terrible toll every year.
 
Wealthy Swiss backers have taken this startup this far and maybe they will continue to ante up if others don't. Maybe not. People of a Gay persuasion would like to see a company like this make it. An enormous amount of capital and effort already has been devoted to AIDS.  This one is too interesting not to let you know about. Just suppose with some extra venture support it could work!
 
New Jewels to make us drool! 

 
Two investment giants who have gone to their reward shaped much of the way I look at stocks of all sizes. Sir John Templeton and the late Ralph Coleman, Jr., founder of OTC Review, now Equities Magazine, used to argue that if you bought a stock with real value low enough and were correct that it had enough staying power to weather a storm, at some unpredictable time in the future when it became popular you could sell for a nice sometimes fabulous gain. You just had to have the guts to buy when it was a bargain and forget about it until the cold turkey became a hot potato. So easy to say; so hard to do.
 
Bob is still bursting with new ideas! Everywhere upset CEOs complain of recently depressed stocks which are unbelievably undervalued and a screaming bargain. Of the seven stocks we covered just last issue; five have declined even further in price. Two have P/Es low enough jewels to make us drool. DRI Corporation (Nasdaq:TBUS-0.91) has a trailing 12 month P/E of slightly over 4. China Direct Inc. (Nasdaq:CDS-1.51) has a trailing 12 month P/E of 2.1 and expects higher sales and earnings next year.  Proven performer Bridgeline Software (Nasdaq:BLSW-0.72), with a market cap which is under 40% of its trailing 12 months revenues, is another stocking stuffer.  Naturally, the global storm will affect this trio as it will everyone else, but judged by their intrinsic value in a normal year, all are super values. China Direct also is interesting because it is a proxy for the tremendous value I see in the stocks of China in general. Unusually high annual growth rates and incredibly low P/Es. Someday in the future I think the stock of each of this trio will be up over 200% and probably a lot more.
 
While the mass media screams about the recovery of the large indexes, micro cap stock prices are in dire straits, generally invisible to all but a few of us micro-cap mavens. That is because first, there is a flight from risk, and this means switching from risky tiny stocks to larger ones. Second, hedge funds are liquidating stocks, starting with their smallest to cover margin calls and their own fund redemptions. After all, hedge funds were only supposed to go up. Third, developmental stocks which need to raise more capital to grow or even to survive next year are in dire straits because many investors are frozen with fear and funds retain their own reserves to convince outsiders they are solvent. Most lenders will only give you more money when you don't need it.
 
Tax Time Thinking.
  Those lucky (?) readers who have big capital gains this year as their mutual funds sold stocks with big gains to handle hedge fund redemptions, need tax losses. So it is prudent for them and also for everyone to look at our remaining stocks and decide if they should be held or if they should be sold for tax losses to offset any gains.
 
In June 2008 Flaherty Special Situation put out a BUY on USCS.OB then $0.165 and now $0.05. CEO Bob Dultz has assembled an attractive junior gold with important finds and states it should be fine as long as gold stays above $600. Long term it should and the current flight from risk will pass. US Corp remains a BUY.
In June 2008 we also put out a BUY on ITEX.OB, then $0.89 and now $0.50. We continue to believe barter leader ITEX is an ideal base for rollups and remains a BUY. Management knows what it is doing.
 
FOR WHOM THE SELL TOLLS!
Last newsletter we put out a SELL on QPC Lasers, which had excellent technology but made the only management's uncorrectable error of running out of cash. In better times, QPC could have raised growth capital. But for tiny tots these are terrible times.
 
Tiny start ups which need to raise capital are in dire straits today. Our world has changed dramatically since last summer when we put out a recommendation of GTXO.OB, then $2.67 and now $0.16. A recent sponsored report reiterated that the stock of that tracking devise maker could soar to $3.30, but so far orders and sales have come in a lot slower than we had originally expected. The same is true at our recommendation on Brite-Strike (BSTI.PK) then $0.52 and now $0.014. BTSI has a wonderful little tactical attacker repellant blinding flashlight and some wonderful ideas to help reduce assaults on women. But as a car needs gas, tiny start ups need capital to grow and BSTI's team simply didn't raise enough to make its ideas come true -at least so far. With a sigh, for those who need tax losses we would also SELL BSTI.
 
As for our open BUYS we expect when the stock market recovers to someday put out SELLS on each at a fine profit above our original recommendation price. Like the sun, the next bull market will also rise.
 
MERRY CHRISTMAS AND A HAPPY NEW YEAR!
While we hope to get out at least one other issue before yearend,  in case we don't my son Brian and I wish each and every reader a happy and peaceful holiday and a prosperous 2009 -Bob Flaherty & Brian Flaherty

Disclaimer: 
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Disclaimer: This newsletter contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, and actual circumstances, events or results may differ materially from those projected in such forward-looking statements. We caution readers not to place undue reliance on any forward-looking statements and to supplement these profiles with the company SEC filings and their own research. The smaller the company the greater the risks. So be aware that there is risk in every company you buy. We do not guarantee all the information in this newsletter is correct or will be updated. Remember some errors are inevitable. Reproduction without written permission is forbidden. No one at Flaherty Financial News is a shareholder of any individual company profiled in this issue and our policy forbids editorial from buying or selling any stock mentioned until this issue is out at least ten business days, which would be December 19, 2008. No one paid a fee to be featured in this newsletter. Early this year we did turn out a company sponsored reports on BioSante, Generex and HemoBiotech, and we do own five year options in HemoBioTech. We also wrote sponsored reports on BSTI, GTXO, QPCI were we put out a sell in this issue. The payments for both buys and sells are spelled out in those reports which are on our website for those who wish to review them. We have tried to be objective, but may have failed. We are not stockbrokers engaged in buying or selling and you readers must decide the merits of each company yourself and whether to invest. And above all, we at FFN remain journalists and we will always try to put the interests of our readers first. 
Bob Flaherty, Editor.
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