Sinovac Biotech (SVA – AMEX)

Dear Bottarelli Research Member,

Boy am I glad that we bought our protective DJX October 126 Puts (DJW VV) on Monday for $1.60. As the Dow fell 280 points on Tuesday the 28^th, these puts traded as high as $2.60, good for a 2-day return of 62.50%. In situations like this, where a position quickly gains over 50% on an intra-day basis, please do not hesitate to take your profits off the table. If anything, sell half of your position at the 50% profit mark (to secure a quick gain) and then hold the remaining half of the position for further gains.

Looking ahead, I still don’t believe the selling is over. As I’ve mentioned to Bryan in our weekly strategy discussions, I feel that we’ll re-test the August lows – and then establish a strong bottom around the 12,600 level. So if you’re still holding your protective DJX put position, you’ll be in fine shape. Just be sure to lock in your profits during any forthcoming sell-off. After all, once we establish a bottom at 12,600, I believe we’ll rally into the close of the 2007 calendar year, perhaps breaking our yearly high of 14,000 by Christmas.

Now that you know my market forecast for the next four months, let’s dive right into this week’s new pick. Trading for only $3.08 per share, today’s pick is a China-based biopharmaceutical company that focuses on the manufacture and commercialization of vaccines that protect against infectious diseases.

I have known about this company for about four years, and they are now on a path that I believe will soon bring three new vaccine products to market. The ace-in-the-hole on this investment is that this company is not regulated by the U.S. Food and Drug Administration (which is notorious for being extremely slow, in my view). Instead, this $3.08 company is governed by the China State Food and Drug Administration (SFDA) and they’ve just been granted fast-track status to begin a new clinical trial involving human volunteers on Pandemic Influenza Vaccine (H5N1).

What type of market potential could that mean for this small stock?

Consider these statistics:

• Influenza (commonly known as the flu) is an acute respiratory infection that is very contagious. In a typical flu season, 5% to 10% of the world’s population is infected. That’s upwards of 300 to 600 million people!
• Influenza epidemics typically occur during the winter months and are responsible for as many as 200,000 hospitalizations and 36,000 deaths a year in the United States alone.
• Influenza viruses may also cause a “pandemic,” where illnesses and deaths from influenza-related complications increase dramatically worldwide. Since the influenza virus tends to mutate constantly, it is very difficult to treat. Therefore, there is no effective cure. Vaccination is the only effective defense against influenza outbreaks.

If you remember last year’s flu season, you’ll probably recall that a worldwide flu vaccination shortage made it difficult to even get a flu shot. Priority was given to children and the elderly, and it looks like we’ll see similar shortages again this year.

But that’s just the beginning of the story. Just this month, this company announced an exclusive promotion agreement with GlaxoSmithKline’s China investment unit. I must say, I’m sure GlaxoSmithKline realized the enormous potential of these vaccines, and I surely want to be along for the ride.

With the flu season right around the corner, and results from this company’s human trials expected to be released in early 2008, I feel the time to jump on board is now. I’ll let Bryan fill you in on the rest of the details (including their latest earnings report, which saw revenues nearly triple), but believe me, I think this should be an easy double in the short term. Over a 24-month time frame, you could see this $3.08 stock trading in the $12.00 to $15.00 range, so let’s establish a position now.

The company is Sinovac Biotech (SVA – AMEX). Given the recent market volatility, let’s take a small position under $3.00 a share and ride the upside momentum leading into flu season and their new human trial.

UPDATES

Melco PBL Entertainment (MPEL – NASDAQ): I continue to be bullish on MPEL especially leading into next year’s Olympics in China. I firmly believe MPEL stands to benefit greatly from the influx of people coming into China, so maintain your position.

JA Solar Holdings (JASO – NASDAQ) & Solarfun Power Holdings (SOLF – NASDAQ): Both of our solar playslook to be hitting their sweet spots again. We’ve all witnessed JASO’s incredible upside momentum, and you can bet it’ll do it again as solar demand continues to expand on a global scale.

Torrent Energy (TREN.OB): This was last week’s recommendation, as I’m sure you know. And if you have not yet listened to their investor Web cast, I urge you to do so. In short, they just turned down an offer from Marathon Oil (MRO – NYSE) because it was too low. They also mentioned that they’re in talks with another major oil firm (which they could not disclose it at this time). Folks, if anything materializes here, we could have some big news on the horizon.

Echelon Corporation (ELON – NASDAQ): Things just keep getting better and better for this stock, and I believe that our timing has once again paid off. The stock shot up over $3.00 yesterday on news that a Russian energy provider will deploy ELON’s metering technology to 375,000 customers. Plus, the stock has continued to rally throughout the market volatility, which is a very strong sign for this rapidly growing gem. ELON is a “must own” that should be bought on any weakness.

Upstream Biosciences (UPBS.OB): I’m trying to be patient with this one, but I must admit it’s beginning to wear thin. They just released news about a buyout a technology platform that combats Tropical Parasitic diseases. They also intend to begin screening compounds against malaria and tuberculosis, so there is no doubt that technology could be welcomed by the entire medical field. I surly hope something gets them going – and soon. But for now, let’s continue to hold.

Lighting Science (LSGPE.OB): They just announced that OSRAM Semiconductors, a world leader in LED technology, will use Lighting Science’s low bay fixtures for a special lighting project in Raleigh, North Carolina. As I mentioned, we are early on this one, and this last dip was bought up very heavily. Therefore, I would use any dips to add to the position. After all, this is just the beginning of the LED trend, and we want to be the first ones on board. Note that the company changed their symbol from LSGP to LSGPE, so please make a note of this change on your symbol tracker.

With that, I’ll hand things over to Bryan. Enjoy your holiday weekend!

Sincerely,

Chiron Corporation was Granted the Primary Contract to Supply the United States With Flu Vaccines, and They Were Acquired by Novartis (NVS – NYSE) on April 20^th 2006 for $48.00 Per Share In Cash.

That Same Potential is Now Available on This New $3.00 Small-Cap Play.

Founded in 1999 and is headquartered in Beijing, Sinovac Biotech is a beginning-stage biopharmaceutical company that’s actively developing vaccines to protect against infectious diseases that currently do not have any cures.

Using two state-of-the-art research facilities that span nearly 10,000 square meters, SVA has a product pipeline that includes the following three vaccines:

• Healive: A vaccine for Hepatitis A.
• Bilive: A vaccine for combined Hepatitis A and B.
• Anflu: A vaccine for split flu.

Hepatitis A is an infectious disease of the liver that’s commonly transmitted by contaminated food. Considering the sub-par health standards in China, the need for this vaccine is quite evident. Healive is the first hepatitis A vaccine developed by Chinese scientists – which ended China’s history of having no Hepatitis A vaccines. Healive became a new drug in 1999 and was launched in 2002.

Hepatitis B is a more serious inflammation of the liver and has caused current epidemics in China, Asia, and Africa. Chronic hepatitis B may cause liver cirrhosis, which may then lead to liver cancer – a fatal disease with very poor response to chemotherapy. Sadly, 3% to 6% of the world’s population is currently infected with this virus, highlighting the constant demand for a vaccine like Bilive.

In fact, Bilive is the first (and currently only) combined Hepatitis A and B vaccine developed by Chinese scientists – and the SFDA issued a production license for marketing Bilive on January 7^th 2005. Bilive has only one direct competitor in the world – a vaccine by GlaxoSmithKline called Twinrix – but this vaccine is only approved for adult dosages in China. Furthermore, Twinrix is very expensive, and so only a few thousand sales have been recorded since its launch. This solidifies Bilive as China’s premier vaccine in the combined Hepatitis A and B market niche.

Anflu is a split influenza vaccine that was issued a production license on July 27^th 2005. Just recently, Sinovac signed an agreement with GlaxoSmithKline (GSK – NYSE) to co-promote Anflu, solidifying Sinovac’s position as the most active Chinese vaccine manufacturer.

As you can see, all three vaccines have just recently received licensing approval, and their sales are really starting to ramp up. As of August 17^th 2007, for example, SVA announced that these three vaccines nearly tripled their first half revenues. In comparison with 2006, the first six months of 2007 showed Sinovac’s sales increase 189% to $13.5 million. A year earlier, SVA lost nearly $1 million. That’s quite a one-year turnaround. Leading the way was Healive, which sold 2.45 million doses totaling $13.5 million in revenue. And since Sinovac’s gross margins are 86%, the company’s vaccine business model enjoys a very strong return.

Now here’s the thing: SVA’s three combined vaccine products currently support their $24.19 million in trailing three month revenues and $123.62 million market cap. And considering the company’s continued growth of their vaccine franchise, this alone could warrant a strong investment opportunity. But the real investment play here is the massive potential of SVA’s three new vaccine products.

You see, SVA also develops vaccines for the SARS virus, the H5N1 strain of pandemic influenza virus, and the Japanese encephalitis virus – and that’s the catalyst that could make this a home run investment. Let me tell you a little about each new vaccine…

New Vaccine Candidate #1: Pandemic Influenza Vaccine (H5N1)

As Mark mentioned above, the flu kills 36,000 people in the United States each year, and recent health studies show that the virus is becoming more and more resilient to current vaccine strains. H5N1 is a particularly concerning flu virus because each year, different strains become dominant. Because of this high level of “mutability,” the virus is very hard to treat, making flu vaccines only good for about 12 months. And since there is no effective cure, vaccination is the only defense against outbreaks of influenza, making the threat of an influenza pandemic a recurring event.

A “pandemic” occurs when a new influenza virus emerges and starts easily spreading – typically by coughing and sneezing. Because the virus is new, the human immune system has no pre-existing immunity, making it likely that people who contract pandemic influenza will experience a much more serious disease. Case in point, the following three pandemics occurred in the previous century:

• Spanish influenza in 1918 killed 40–50 million people worldwide. It was one of the deadliest disease events in human history.
• Asian influenza in 1957 caused 2 million deaths.
• Hong Kong influenza in 1968 caused 1 million deaths.

And the scary part is this: Given the nature of the H5N1 strain, the world may be on the brink of another pandemic. You see, health experts have been monitoring this new and extremely severe H5N1 strain for almost eight years, and they all agree: If H5N1 should evolve into a contagious virus, a new pandemic could begin. Every country in the world would be affected.

The H5N1 strain first infected humans in Hong Kong in 1997. It caused a total of 18 cases, which lead to six deaths. Since mid-2003, this virus has caused the largest and most severe outbreaks in poultry on record. And since then, over 100 human cases have been confirmed in Cambodia, Indonesia, Thailand, and Viet Nam. More than half of the people who contacted this virus have died.

Once a fully contagious virus emerges, its global spread is inevitable. Pandemics in previous centuries have circled the globe in six to nine months – and that came at a time when international travel was done by ship. Considering today’s international air travel, experts estimate that the H5N1 virus could reach every continent in less than three months.

In short, we must be prepared in case a new pandemic happens. Since most people will have no immunity to this new virus, widespread illness will be guaranteed. A substantial percentage of the world’s population will require medical care, and vaccine supplies and antiviral drugs are the two most important medical interventions during pandemics. And as you know, SVA is the one company positioned to be the primary vaccine supplier to Asia and the Pacific Rim – offering millions of people first line of defense.

And that’s the thing: As you read this, Sinovac Biotech is one of the leading firms for providing China’s exploding population with a H5N1 vaccine. The stock is only $3.00 right now because nobody is worried about influenza. But the second a few cases are diagnosed, the national media will blast this urgent medical situation into the limelight, and shares of SVA could soar.For only $3.00 a share, the upside potential far outweighs the downside risk. And remember, that’s only one of three new vaccines in development!

New Vaccine Candidate #2: SARS Vaccine

SARS is a severe acute respiratory disease in humans. There has been one major pandemic to date – between November 2002 and July 2003 with 8,096 known cases and 774 deaths. SARS started in Guangdong Province in November of 2002. After spreading for several months, it affected the population in ten counties and districts. Sinovac is the first and currently the only company in the world to have been granted permission to begin clinical trials for a vaccine to prevent SARS. In fact, they are the only company in the world to have successfully completed a Phase I trial.

New Vaccine Candidate #3: Japanese Encephalitis

Japanese encephalitis is a mosquito-borne infection primarily located in southeast Asia and the western Pacific. The course of this disease lasts about two weeks, and it can result in death within one week after infection. Children under 10 years old unfortunate enough to contact it could experience serious neurological disorders such as paralysis, dementia, malformation of limbs, and convulsions. At present, there is no JE-specific therapy (other than supportive care in a hospital), making a strong case for a stockpile of SVA’s vaccines.

Now, when you combine the growing revenues from SVA’s three current vaccine products with the tremendous upside potential of SVA’s three new vaccines candidates, the case for owning this $3.00 stock appears quite strong. Add into the equation the fact that we’re buying right as we lead into flu season, and that’s the cherry on the sundae.

As a point of reference, the United States government ordered enough flu vaccines in 2006 to treat 4 million people – and that was still way under the total vaccine demand. Chiron Corporation was granted the primary contract to supply these vaccines, and they were acquired by Novartis (NVS – NYSE) on April 20^th 2006 for $48.00 per share in cash. That’s the potential of this new $3.00 small-cap play.

As Mark said above, he expects a quick double – with a potential of $12.00 to $15.00 within two years. That’s a 400% gain from current levels, so let’s certainly add SVA to our small-cap portfolio now.

PLAY: Buy shares of Sinovac Biotech (SVA – AMEX) at or under $3.25, good for the week.

Sincerely,