ISIS Pharmaceuticals (ISIS – Nasdaq)

Dear Bottarelli Research Member,

After another wild week, our protective DJX October 126 Puts (DJW VV) have once again pulled their weight. On two separate occasions, these puts have jumped from our original $1.60 entry price up to $2.60, good for a 62.5% gain in a falling market. This was a great opportunity to take half of your profits off the table, and from the e-mails I have received, this is exactly what many of you have done. Fantastic trading.

Now, on the eve of the biggest Fed decision since Ben Bernanke took over for Alan Greenspan, I urge you to continue using these puts to hedge against a falling market. Hold your remaining half of this position, but also place a protective stop at $0.80. If the market rallies on the Fed news, this will limit any losses. And with our protective strategy set for another week, let’s dive right into this week’s newest pick!

Using a $14.00 stock that’s on the move, we are once again jumping into the pharmaceutical sector. This company has a very strong pipeline geared towards cardiovascular and metabolic diseases using their special RNA technology. They’re also involved in a Phase II clinical trial that showed positive results in June for both lung and prostrate cancer – and their list of licensing and collaboration agreements contains many of the world’s top firms. For example, they currently have deals with Pfizer, Amgen, Eli Lilly, Merck, Alnylam Pharmaceuticals, Ercole Biotech, Rosetta Genomics, and Bristol-Myers Squibb. In fact, while preparing this very letter, they just announced another major collaboration with Johnson & Johnson (JNJ – NYSE) to develop and market drugs for metabolic diseases such as type 2 diabetes and obesity.

This partnership alone offers this company a $45 million up-front licensing fee and as much as $230 million in additional milestone payments.

With a strong pipeline and major partnerships in place, I believe that a possible buyout could be in the works. But what really stood out was their stock chart, as this company has moved aggressively higher throughout the recent market swings, and the upside gains are just beginning. The company is called Isis Pharmaceuticals (ISIS – NASDAQ) and let’s add a half-position now under $14.55 per share.

Bryan will fill you in on the complete details, but first let’s address some position updates.

UPDATES

Polymet Mining (PLM – AMEX): Our polymetallic play has signed a comprehensive labor agreement on their 100%-owned NorthMet Project. I hope you have been buying on dips, because I expect to see upside movement on this one right into production.

Solarfun Power Holdings (SOLF – NASDAQ): The stock seems to be turning the corner thanks to a strong earnings report. What really caught my eye was the fact that they shipped two and a half times their first quarter 2007 volume of PV modules. Looking ahead, they expect this expansion to continue, and as an investor, this is something you love to hear.

Nevtah (NTAH.PK): We haven’t heard much from these guys as of late, but this signals to me that they’re doing exactly what they should be doing: Attending to business and proving their technology. With oil prices hitting $80.00 per barrel, I think we’re positioned well here, and I urge you to continue holding.

Sinovac Biotech (SVA – AMEX): SVA reported that they’ve commenced vaccination of volunteers for their Phase II clinical research study for their pandemic influenza H5N1 vaccine. As I mentioned, these results will be out early next year, but don’t wait for these results to be announced. If we experience a flu outbreak, the Chinese FDA is not going to sit idle. Rather, they’ll move very quickly and SVA will be the prime beneficiary.

JA Solar Holdings (JASO – NASDAQ): JASO announced another big supply boost for their solar wafers. If you have been buying the dips at $30.00 that both Bryan and I have outlined, then you have full understanding of how quickly this greased hog can fly. Solar continues to gain momentum, so I would not be shocked to see JASO trade in the $65.00 level within the next year.

WorldWater & Power (WWAT.OB): These guys keep getting orders from everywhere! Their most recent is a deal to build a photovoltaic system that provides electricity and water pumping power for the Valley Center Municipal Water District (VCMWD) in California. They also teamed up with Prime Solar Senergy of Barcelona to be their exclusive representative in Spain. Folks, make sure you own this company! For those of you that jumped into the first round, we saw explosive profits quickly – so use this dip to add to your position. We are now going into the second inning with WWAT and their future is extremely bright.

On that note, here’s Bryan with all the exciting details on Isis Pharmaceuticals.

Have a good week!

Sincerely,

“A biotech best known for failure may have invented the most powerful cholesterol drug ever.”

- Forbes, August 17^th, 2007

A few things stick out when I look at Isis Pharmaceuticals (ISIS – NASDAQ).

First and foremost, they currently have 17 drugs in Phase I and Phase II clinical trials. This tells you that the company has diversified their business model by casting a wide net – researching potential drug treatments ranging from heart disease to AIDS to cancer.

Secondly, they’ve done a wonderful job of hedging their operational risk by collaborating with the best healthcare companies in the world. (You can see their full list of collaboration partners in Mark’s introduction listed above.) This offers ISIS shareholders the comfort of major backers should any one of their 17 potential drug candidates show signs of blockbuster sales potential.

And third, they’ve just secured one of their biggest deals within the last week. This could be the trigger that pushes shares aggressively higher. But to fully understand ISIS, we must first begin with a discussion of the term “antisense,” because clinical data suggests that antisense technology has the potential to create an entirely new sector in the pharmaceutical industry.

As a general definition,antisense is a functional genomic tool used to identify highly specific drugs for a wide range of diseases. You see, the pharmaceutical industry’s primary quest in new drug discovery is drug specificity.For example, the more precisely a drug interacts with its intended target (and not with unintended molecules) the more likely that drug is to produce the desired treatment outcome without unwanted side effects.

This high level of drug specificity is the primary allure of antisense drugs.

In contrast to traditional drugs (that treat conditions based on the shape of proteins and charge interactions), antisense drugs interact with their intended targets based on information contained in their genetic code. Because of this higher level of specificity, antisense drugs have the potential to be much safer than traditional drugs, potentially creating an entirely new way of treating today’s top diseases.

Without boring you with the intricate scientific details, the antisense receptor, called RNA, is particularly useful because it allows virtually any molecular target to be accessible to antisense drugs. For example, many of today’s leading causes of death do not have treatments because they’re considered “undruggable” by traditional small-molecule technology. The reason they’re undruggable is because these targets contain proteins that are very similar in structure. As a result, traditional drugs are unable to distinguish between harmful and non-harmful proteins. On the other hand, antisense drugs can discriminate between targets based on their genetic sequence, so the universe of potential targets is significantly greater.

When you invest in Isis, you’re investing in their antisense product pipeline. It’s by far their most valuable asset, and that’s the important thing to recognize on this play. As you read this, Isis has successfully developed, tested, and commercialized the world’s first antisense drug called Vitravene.

Vitravene treats a condition called cytomegalovirus (CMV) retinitis in people with AIDS, and to be honest, it’s not that big of a market. But that’s not the point. What’s important is that Vitravene’s approval was critically important to ISIS because it demonstrates that antisense drugs can be effective in the treatment of local diseases – offering the potential for additional antisense drugs to gain market approval both here in the U.S. and in other regulatory agencies around the world.

Now that Isis has demonstrated that antisense drugs are capable of meeting the criteria for commercial use by the FDA and European regulators, the company’s goal is to advance multiple antisense drugs in parallel – providing it with many opportunities for clinical success. That’s where Isis currently stands with their 17 drugs in development. And of those 17 antisense drugs, the one that could prove to be the blockbuster for Isis is the company’s cholesterol-lowering drug called ISIS 301012.

ISIS 301012is an injectable antisense drug that reduces the production of a protein, ApoB100, responsible for the transport of LDL (bad cholesterol) through the bloodstream. Isis has already presented clinical data from some small phase II study that showed that ISIS 301012was an effective cholesterol-lowering agent. Some experts even thought that the findings showed that ISIS 301012 was more effective thanblockbuster statins like Pfizer’s Lipitor!

Based on these promising results, Isis is currently implementing a two-part attack plan for developingISIS 301012.First, they are developing it as a treatment for patients with familial hypercholesterolemia (FH). This is a rare genetic disorder that causes people to suffer from very high cholesterol levels, ultimately leading to heart disease at a very early age.

One patient suffering from FH is Randall Nottingham, a 49-year old financial analyst. He’s married with two boys, and was diagnosed with FH when he was only 18. Throughout his life, his bad cholesterol level was 500 milligrams per deciliter, quadruple the normal level. Over the last 30 years, no treatments were able to lower his cholesterol levels, so he’s been traveling 100 miles every month to Cincinnati to have his blood drawn, cleansed, and put back into his body in a grueling 3-hour treatment. Can you imagine having your blood drawn out and cleaned every single month of your life?

But now, a once-a-week injection from ISIS 301012has lowered Mr. Nottingham’s bad cholesterol to below 100 milligrams. That’s the lowest level ever for a patient with the severe form of hypercholesterolemia. This is a very good indication that Isis is onto something big. Very big.

But even more important, Isis believes that ISIS 301012 could be used as a treatment for people who cannot control their high cholesterol levels with current statin therapy. Since these patients cannot control their high cholesterol levels, they’re at high risk for heart disease, the number one killer in America. So as you can see, this is a huge commercial market opportunity for Isis. 600,000 Americans could be candidates for this treatment, and Isis plans to start a pivotal study of both treatments before the end of the year.

Since extensive testing will require big clinical studies and lots of marketing dollars, Isis expects to sign and announce a new partnership arrangement in the first half of next year. The day this new partnership is announced, you could witness a very large up-move in ISIS. But that’s only the tip of the iceberg.

If ISIS 301012 proves to be successful after testing thousands of patients with high cholesterol, Isis could capture a $35 billion market for cholesterol drugs.Since ISIS is currently trading for only $14.00 per share, you can clearly see the tremendous upside potential here. 10 to 1 returns are not out of the question.

So if that’s the case, why is the stock currently trading for only $14.00 per share?

That’s a very good question. For one, Isis is unprofitable and has struggled for years. So until more extensive testing shows positive results, it’ll be off the radar of Wall Street. Also, since high cholesterol is a chronic condition, Isis will have to present longer-term data before declaring ISIS 301012 a success.

Plus, there are also concerns about toxicity, which could lead to liver damage. But then again, statins are well known to cause elevated liver enzymes in some cases, and that hasn’t stopped these drugs from bringing in nearly $20 billion in sales per year. So maybe this concern is overblown.

The bottom line is this: Isis controls a large patent estate on antisense technology, and a rash of world-leading experts are beginning to think that the potential for huge success looks more and more likely. Just listen to some experts:

In the August 17^th issue, Forbes says, “A biotech best known for failure may have invented the most powerful cholesterol drug ever.”

James Stein of the University of Wisconsin-Madison calls ISIS 301012 “the hottest drug on the horizon.”

And Dr. John Kastelein, an expert on lipid disorders from the Academic Medical Center of the University of Amsterdam, said ISIS 301012 could be a “revolutionary” treatment for patients with uncontrolled high cholesterol.

Based on these promising developments, more and more world-leading companies are collaborating with Isis. For example, a partnership between Alnylam Pharmaceuticals (ALNY – NASDAQ) just placed $26.5 million into Isis’ coffers. This helped Isis announce a significant improvement in their full-year financial performance – cutting their operating loss by about $20 million.

Not only that, but while preparing this letter, Isis announced a new collaboration with Ortho-McNeil (a unit of Johnson & Johnson) to develop treatments for metabolic disorders like type 2 diabetes. Under the terms of the deal, Ortho-McNeil will pay Isis $45 million in up-front licensing fees. They’ll also provide research and development funding, which could lead to Isis receiving more than $230 million in milestone payments for development approvals and royalties on sales.

When you put everything together, it’s easy to see why ISIS has doubled in the past year. Just one of their 17 potential drug treatments could capture a $35 billion cholesterol drug market. Even if the other 16 candidates fail miserably, ISIS shareholders will reap handsome returns off ISIS 301012. After all, with the stock currently trading for a $1 billion market cap, it’s clear what a $35 billion drug could mean to their price valuation. Hint: Increase it at least 35 times over, assuming an earnings multiple of only 1x sales.

Conclusion: After years of inactivity, ISIS is now gaining some serious upside momentum, and we want to be along for the ride. So here’s your newest small-cap play…

PLAY: Buy shares of ISIS Pharmaceuticals (ISIS – NASDAQ) at or under $14.55, good for the week.

Sincerely,