Navarro’s Big Economic Picture

It was another up week on Wall Street, albeit on relatively uninspired volume.  Fundamentals suggest, however, that risk to reward favors cash until the current trend breaks to the downside.  There’s just not that much upside left; and with Xmas approaching, a lot of money managers who will have made their target because of the Fall rally will be cashing out.   Be careful, then, particularly if you are long.

Switching gears, let’s talk a little bit about currency trading – as I did at a seminar this last weekend.  Currency trading is coming into its own as online trading platforms are now available to the retail consumer, and the market is becoming democratized.  Shades of the online stock trading revolution of the 1990s.

Besides technological simplicity, there are a number of other good reasons to consider trading currencies.  One is that you can focus on a much smaller universe of trading instruments than stocks.  A second reason is that its another way (other than investing in ETFs) to reach beyond the U.S. market.  A third is that you can hedge the U.S. dollar, which is in a bear market decline due to large budget and trade deficits.

If nothing else, you may find it helpful to tune in to the dollar-yen, dollar-euro, euro-yen movements as they presage much of what will happen in the stock market.

This Week’s Market Movers
The big news will be on the inflation front as the PPI flies on Tuesday and the CPI on Thursday.  With oil and commodity prices falling along with housing prices, it’s hard to imagine a scenario where we get an unexpected spike in inflation.  

Navarro’s Portfolio Shorts and Longs 
I like cash again this week.  Short sellers will be trying to time the top.  As last week demonstrated, that’s always a risky business…

Vaino’s Biotech Corner: Breathing in the Relief

Novadel Pharma (NVD) got some good news on November 3rd when the FDA approved their version of inhaled nitroglycerine (Nitromist) to treat angina.  Rights to this product have been licensed to Par Pharmaceuticals (PRX).  Novadel will receive a milestone payment as well as royalties. 

Novadel’s business model is to apply their inhalation technology to deliver existing drugs.  The two main benefits of inhaled drug delivery are avoiding the metabolic destruction of the digestive system and faster absorption into the body.  That is, an inhaled drug starts to work faster than a pill.

Novadel’s pipeline is surprisingly robust, particularly for a company whose stock trades at less than half the price of a Big Mac and has a market cap of only $65M.  In addition to the recently approved Nitromist, they have submitted a New Drug Application (NDA) to the FDA for an inhaled version of Glaxo’s anti-nausea drug Zofran.  Also, they are on track to submit NDAs in 2007 for inhaled versions of the popular sleeping pill Ambien and of migraine treatment Imitrex.  

Novadel has already licensed rights to inhaled Zofran to Hana Biosciences (HNAB) and will receive royalties if the drug is approved.  While licensing to other companies means they share revenue, it also gives them a ready-made sales force.  This is critical for such a tiny company, with fewer than 25 employees.

The Market either didn’t notice or was little impressed by Nitromist’s approval.  To be clear, Novadel is a penny stock.   It trades a bit over $1.25 with average daily volume just over 100,000.  

Nitromist is bound to be substantially more expensive than nitroglycerine tablets, so it’s hard to say if sales will be substantial.  I think the important point is that Nitromist’s approval bodes well for the rest of their pipeline in that it proves they can get their technology  (and they’re not selling new drugs, they are selling a technology) through the FDA.

In particular, I really like the inhaled form of Zofran.  Glaxo reported 2005 sales for Zofran of about $1.6 billion.  Now, as I see it, one of the problems with administration of Zofran is that it’s done orally.  Think about it: A patient is having difficulty keeping anything in their stomach and you want to treat them by putting a drug in said organ?  I’m not a real doctor, but that just doesn’t make sense to me.  The inhaled form not only gets the nausea medication into the body faster, but it doesn’t further upset the stomach.  That’s just smart.  Getting relief faster from migraine headaches (which often cause nausea as well) and falling asleep faster also sound like good ideas.

Penny stocks are always risky but the more I learn about NVD, the more shares I’m buying.  It is illiquid and may be subject to drastic price swings. While FDA approval of inhaled Zofran is not assured, I think their recent approval for Nitromist strongly improves the odds.  If they can get the second approval next year and file another NDA this stock could easily be trading above $10 in a year or two.

Peter Navarro is a business professor at the University of California-Irvine, and can be contacted at pn@peternavarro.com. Matt Davio is a managing partner at the hedge fund, Red Rock Capital Fund, and be contacted for hedge fund services at redrock@peternavarro.com.  Andrew Vaino is a Ph.D. chemist currently teaching at The University of Maine.

DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.