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Despite Cutting Rates to Negative, Sweden’s Monetary Policy Still Very Tight

By
Rafi Farber
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Krona
  • Negative Interest Rates, or NIRP for Negative Interest Rate Policy, are now the norm in the Eurozone, Switzerland, Denmark, and now Sweden
  • NIRP essentially means that depositors pay money on their savings instead of earning a return
  • This discourages savers from saving in cash, encouraging spending instead
  • The aim is to jolt the economy by encouraging people to spend more sooner, increasing price inflation
  • Despite the effort, Sweden’s money supply has not increased substantially since 2007,
  • Government spending has not increased relative to GDP either

Sweden’s Riksbank, the world’s oldest central bank founded in 1668, has for the first time in its 347-year history brought its benchmark interest rate to negative, -0.1% to be exact. Depositors at the Riksbank, consisting of other Swedish banks, now have to pay the central bank to store cash there. The effect of this will be to encourage Swedish banks not to store cash at the Riksbank since it now costs money to do so, but instead to loan it out to borrowers.

In addition to bringing its benchmark rate to -0.1%, the Riksbank has announced a trial balloon of 10 billion Krona (kr) in bond buying. While that only amounts to $1.2B, in combination with negative rates it is a very aggressive – and dangerous – money-printing strategy.

On the news, the Swedish Krona fell 1.5% against the US Dollar and the Euro.

Krona

Sweden now joins Switzerland, Denmark, and the entire Eurozone in charging depositors for their savings. For their respective governments with heavy debt loads, this is quite a boon because now if the Swedish government under -0.1% interest rates issues a bond for, say, 1000 Krona, it will only have to pay 990 back at maturity. In the twilight zone, this would be the ideal way to get out of debt – borrow yourself back to solvency with negative interest rates!

It works on paper, that is until the market overwhelms the irrationality of NIRP and people stop buying bonds altogether, forcing interest rates through the roof over the furor of central bank monetary policy.

Interestingly enough, Sweden’s money supply did not increase at all through the beginning of the financial crisis in 2008. Though the last available report was issued in 2012, Sweden’s money supply stood at 3 trillion krona from 2007 until 2012. This means Sweden, despite going into NIRP, has one of the tightest monetary policies in the world, at least until 2012. Go figure.

Sweden Money Supply

In addition to strangely having one of the tightest monetary policies – if not the tightest – in all of Europe, Swedish government debt is also quite low at just over 40% GDP.

Sweden Debt to GDPSpending is also stable relative to GDP, and has fluctuated between 51% and 55% of GDP for nearly a decade.

Sweden Spending to Gdp

Conclusion – while Sweden is now wading into NIRP, it still has one of the most conservative monetary and fiscal policies in the world.

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Patience Pays Off For Opko And Cocrystal Investors, Will It Also For Pershing Gold?

By
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Frost Opko

Teva (NYSE:TEVA) has a new chairman. As of February 5 and after four and a half years at the helm of the largest generics manufacturer in the world, Dr. Phillip Frost has resigned his position. This was announced back in June and is no surprise, and wouldn’t be all that noteworthy if not for the fact that other companies that Dr. Frost is heavily involved and invested in are suddenly making rather large upside moves.

Two of Frost’s companies in particular have been on a tear. One, Opko Health (NYSE:OPK), has increased 73% since the middle of December. Frost is both Chairman and CEO of Opko. Another, Cocrystal Pharma, (OTCBB:COCP) has increased 54% over the last 5 trading days.

Opko’s Recent Run, Patience has Paid Off

While Opko’s appreciation is at least explainable in terms of fundamentals, there is no obvious reason why Cocrystal would rise so fast and to such an extent. The fact that its rise has been almost exactly correlated with Frost’s official resignation from Teva may be coincidence, or there may be something more to it.

Frost has been Chairman and CEO of Opko since March 2007. He took over the company right on the cusp of the financial crisis, and weathered the startup through an 80% decline over a two year period. Opko’s stock didn’t get back to even under Frost’s tenure until February 2011, just under 4 years since assuming leadership of the company. From that point, it took yet another two years for the stock to finally move to a new trading range. Now, six long years later, OPK is up over 570%.

Opko is a bit of an enigma if you just look at its earnings statement. Annual losses have skyrocketed from $31M in 2012 to $114M in 2013, and look set to surpass $160M for 2014. However, the end of 2014 marked several critical milestones for the company that look to make 2015 a breakout year, with investors taking notice.

First of all, its lead product Rayaldee met endpoints in both of its Phase 3 trials reported late last year. Rayaldee is designed to treat vitamin D insufficiency in late stage chronic kidney disease (CKD) patients. These patients constitute a $12B market, and could transform Opko into a blockbuster company.

OPK Pipeline

Ironically, this very success is what is causing Opko, at this point at least, to bleed cash even faster. In March 2013, Opko acquired Cytochroma, and with it the rights to Rayaldee. With primary endpoints being met in both Phase 3 trials, the milestone payments to Cytochroma have gone up, significantly increasing Opko’s operating expenses. In other words, Opko is a victim of its own success, that is, until the point in time where Rayaldee begins break into its $12B addressable market.

As for the results themselves, Rayaldee corrected vitamin D insufficiency in 97% of treated patients versus 6% with placebo. Safety and tolerability data were comparable in both treatment groups. The reason Opko has risen so sharply of late could be a combination of these results in addition to the fact that Opko’s management, including Frost, is intimately familiar with pharmaceutical marketing channels and how to get a new product to patients by targeting physicians.

Though Opko is a startup biotech, it is not headed by a rookie executive staff by any means. It took 6 years and almost $622M in capital to get where it is, but chances look good that patience will pay off in this case.

Cocrystal Jumps 54% in a Week

Cocrystal Pharma, also one of Frost’s pet projects, is 22% owned by Frost which includes a 7.8% stake by Opko and a 14.3% holding by Frost Investments. Though Frost does not chair Cocrystal, he is a director, and is part of a team of insiders that hold approximately 72% of shares outstanding. Cocrystal is currently focusing on Hepatitis C antivirals among others, and is headed by a team that includes the founder of Pharmasset, which was acquired by Gilead (NASDAQ:GILD) for $11B in a deal that was catalyzed by – you guessed it – a hepatitis C antiviral.

COCP Chart

Cocrystal is still in the early stages of development, but has for some reason jumped from $0.50 to $0.70 in two days. While there is a chance the move could be temporary, patience and a 6-year wait did turne out well for Opko shareholders. Not to mention the precedent of an $11B acquisition of Pharmasset for a hepatitis C treatment. Having the founder of Pharmasset on your board certainly can’t hurt either.

Pershing Gold

There is yet another company that Frost is heavily invested in, but is getting much less attention, possibly because it is not in the pharmaceutical industry where Frost’s name has more influence. It is in fact a gold miner called Pershing Gold (OTCMKTS:PGLC). When people mention the name Dr. Phillip Frost, gold mining is not usually the first thing that comes to mind, and therefore his 15% ownership of the company tends to go relatively unnoticed. Neither does Frost’s name appear on the Pershing board of directors.

But unlike Cocrystal which just jumped seemingly for no reason other than possibly Frost’s resignation from Teva to concentrate on Cocrystal and Opko, Pershing does have some recent developments that could cause its stock, bouncing between $0.20 and $0.40 a share for three and a half years now, to break out of this range.

According to a February 4th press release, Pershing announced the discovery of a 2.24 ounces per ton intercept at its Relief Canyon mine in Nevada, considered extremely high grade. High grade is anything above one tenth of an ounce per ton. Nevertheless, the stock has yet to respond to the news.

Up until now, Pershing has burned through $111M in capital as a development stage gold miner. While comparing a gold miner to a startup biotech may be apples to oranges, $111M is less than 20% of what Opko spent to get to its current point. Could patience finally pay off for Pershing shareholders as well after over three years of the stock going nowhere?

 Market Exclusive Is a financial portal geared to engaging discussion on current financial topics. Market Exclusive is not an investment advisor. Please read our full disclaimer at http://marketexclusive.com/about-us/disclaimer/

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Why Greece Will Default

By
Rafi Farber
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Tsipras

Whether Greece will default in the coming weeks or whether the proverbial can will be kicked down the road again by some extension or other is uncertain. But in the end, Greece will default and leave the Eurozone. Why?

With all the hullabaloo and hoopla currently circulating about the grandstanding competition between Greece’s new government and the Troika, there are currently three realities that are not being dealt with by anybody. Not the new Syriza government, not the Troika, and not the media reporting on the fight between them.

Those realities are:

  1. The current bailout framework has not lessened Greece’s debt burden at all. Few acknowledge this.
  2. In order to survive financially, Greece has to repudiate, in some way, at least half of its existing debt.
  3. In order to continue to survive after repudiating at least some of its debt, the Greek government will have to spend less money than it did when initially getting itself into its current debt troubles.

The problem is, the Troika does not acknowledge #1. Further, nobody currently holding Greek debt wants any part of their assets impaired, making #2 impossible. The Greek government comprising the Alexis Tsipras/Yanis Varoufakis tag team has not indicated, in any way whatsoever, that they are willing to spend less money than their predecessors did while getting the country into this crisis in the first place.

Given that all three of these conditions are necessary in order for Greece to survive within the Eurozone without a Grexit, and given that not even one of these conditions is even acknowledged by both sides of the divide, means that default it inevitable and Greece is on its way out of the Eurozone.

The Crux of it – Spending versus Production

The crux of the whole problem lay in the fact that both sides – the Troika as well as the new Tsipras/Varoufakis led government –  all believe that government spending necessarily grows the economy. If Greece’s leaders are mired in the fallacy that public spending is necessary for economic growth, there is no way that they can extricate themselves from this crisis, ever, even if the bailout is extended indefinitely.

Only production can grow the economy. Not spending per se.
Only production can grow the economy. Not spending per se.

In fact, no spending of any kind ever grows an economy. It is production that grows an economy. The inherent logic of this statement is evident in the definition of the word “growth” itself. In order to grow, you need to have more things than you had before. Whether we are talking about cells in your body or people in your family or wealth in an economy, there needs to be more stuff tomorrow than there was yesterday. Otherwise, you are either static, or shrinking.

What is spending? Spending is simply the transfer of money for a good or service. It does not by itself produce anything, make anything bigger or smaller. It only transfers wealth within an economy through exchange. Whether someone, or some company or entity, produces from that point or consumes is its own choice. If consumption, then there is less stuff than before, and an economy shrinks. If production, then there is more stuff than before, and an economy grows.

In order to grow, Greece needs to produce things, not spend. Yes, spending is necessary for production, but every side in this conflict sees spending per se as necessary. And the spending that Tsipras wants is more government workers with higher pensions. Will that produce anything in the country? No, bureaucrats don’t produce anything. They only make rules. And they certainly don’t produce more by having higher pensions.

Given that nobody involved in this crisis is even talking about production, but spending, there is no way out but to start over. Once it defaults, Greece will have the option of keeping the Euro but without being able to borrow at all from anyone. The prospect of a Tsipras administration living strictly on tax income without borrowing in the debt markets is laughable.  Instead, Tsipras will leave the Euro to print his own Drachma and fund his promises that way.

From there, the front line will move to Italy, and the whole spending argument will begin again, with nobody focusing on production.

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Blackrock’s Stake in WPCS May Be Signaling an Imminent Takeover

By
Rafi Farber
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Blackrock
  • Blackrock just took a 6% stake in WPCS International
  • WPCS is a $3 million communications company with steady revenues
  • It was once valued at over $1 billion
  • Its profit margins have never been satisfactory for its industry
  • Blackrock’s stake may be signaling a takeover by a more efficient communications firm

Blackrock (NYSE:BLK) is the largest asset manager in the world, and for some reason it just took a significant stake in a tiny $3M communications company. Using the word “large” in reference to Blackrock doesn’t begin to describe its size. Blackrock has $4.334 trillion in assets under management. That’s 25% of the national debt. Or to put it in even more surreal terms, that’s 40% of the entire circulating United States M2 money supply according to Federal Reserve statistics.

Source: Company Filings
Source: Company Filings

That means, four out of every ten dollars circulating in the American economy today is under Blackrock management.

An aside, but if you want to know why price inflation has been so low, one reason is that 40% of the money supply is stuck behind the monetary dam that is Blackrock and fed to the capital markets instead of consumer markets.

Blackrock takes major stakes in companies all the time. In fact, on February 3 alone it filed no less than 155 Form 13G’s reporting 5% or more stakes in different companies. These acquisitions don’t tend to make the headlines. If they did, the news would be pretty boring.

However, sift through it and you’ll find something strange. One day previously on February 2, Blackrock took a 6% position in a small communications company called WPCS International (NASDAQ:WPCS). WPCS is a $3.2M market cap 23 cent NASDAQ listed stock, which is an enigma in itself aside from Blackrock taking a major stake in it.

WPCS International

If you’re wondering why WPCS is listed on the NASDAQ despite its tiny market cap and share price, it’s because WPCS wasn’t always so small. At its peak, WPCS was valued at $1.3B as recently as 2007. Its problem, even back then at its highs, was that it could not keep its costs down. Gross profit margins, even in the best of times, were razor thin.

Razor thin margins is of course perfectly fine if you’re in retail or restaurants and your competitors are also clinging to the same margins. It’s not perfectly fine if you’re in communications services where your market-leading competitors gross profit margins are consistently in the 70-75% range like SBA Communications (NASDAQ:SBAC) or American Tower Corporation (NYSE:AMT).

WPCS continues to pull in respectable business and revenues as a multinational company. It just never had the economies of scale to bring costs down in the face of competition and become comfortably profitable. So why did Blackrock take a 6% stake?

Office Depot, Staples a Clue?

Back in December, a small (certainly compared to Blackrock) $3 billion hedge fund called Starboard Value took a 6% stake in Staples (NASDAQ:SPLS), at the same time raising its stake in Office Depot (NASDAQ:ODP) to 10% from 8.6%. Two months later, Staples agreed to acquire Office Depot for $6.3B.

Starboard ValueGranted, Starboard was actively encouraging the two companies to merge, and positioned itself to profit in that event. Is Blackrock similarly positioning for a takeover of WPCS by a larger communications company with the capital and efficiency to take advantage of WPCS’s revenue stream?

By the numbers, WPCS looks like an attractive buy for a communications company with bigger gross profit margins. Consider: WPCS has a market cap of just $3.2M, but has liquid assets on its balance sheet of 4.5x that at $14.4M. Add to that the fact that WPCS just eliminated all of its secured debt by shedding a failed Bitcoin venture and is on track for over $35M in revenue for 2014, close to a 66% increase over 2013, it’s still alive if still inefficient and looks ripe for someone to take it over on the cheap.

The chances of WPCS, after years of failing to get costs down even at its peak, suddenly becoming sustainably profitable are slim. Blackrock knows this, and doesn’t normally invest in microcaps of WPCS’s size. It seems likely that the $4.3 trillion manager is anticipating a takeover soon.

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Varoufakis to Germans: “We are not corrupt…not yet.”

By
Rafi Farber
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Yanis Varoufakis

Greece’s scrappy Finance Minister Dr. Yanis Varoufakis had an interesting message for the German people in an interview with German television on February 5th. While being interviewed by Tagesschau, he was asked a simple question. “What does Greece have to offer its European partners?”

Varoufakis answered simply. “We do have one thing going for us. We are not corrupt. Not yet.”

Varoufakis’ angle on the current standoff between Greece and its creditors seems to be simply this: We’re new, we have no governmental experience, we’re not the ones who got Greece into this mess, so give us until the end of May to work out a deal and I’m sure we can work something out.

Back in 2012, before Varoufakis became a household name in financial circles, he was spreading the gospel of Greek Tragedy, namely that the current Greek recession was not simply a recession but a catastrophe.

“I do not use the word ‘crisis’ for a very simple reason. Greece has had a catastrophe. An implosion. A humanitarian crisis if you will.” His considered opinion according to earlier interviews is that the Eurozone will not survive the exit of one of its member states, and therefore must not go in that direction.

Varoufakis views the so-called Greek crisis not as one centered on Greece per se, but as a European crisis in which Greece is the canary in the coal mine.

“Imagine if we were in South Dakota in 1931, and we were talking about the South Dakota crisis. How sensible would that be? It wouldn’t be. There was a financial crisis in the United States of America, in all the Western world. This is crisis of the Eurozone. The reason you are talking to me is that Greece is the canary in the mine. It’s very weak. That’s why it dies first. But it’s not responsible for the methane in the mine that has caused it.”

Varoufakis’ ultimate plan has always been to default within the Eurozone, and in order to cushion any one holder of Greek debt against heavy losses, unify the European banking system so there are no longer any Greek banks or Spanish banks, only Eurozone-wide Eurobanks. This would bring the Eurozone one step closer to a political union that former Fed Chairman Alan Greenspan said would be necessary if the Euro is to survive as a single currency.

Who holds Greek bonds these days? Source: Forbes
Who holds Greek bonds these days? Source: Forbes

A banking union in Europe would effectively mean that Greece’s losses would be diluted by spreading them throughout the Eurozone’s financial system. In other words, it will be another form of bailout, paid for by European citizens through bank losses throughout the continent.

However this catastrophe as termed by the newly minted Greek Finance Minister is resolved, somebody will be taking hundreds of billions in losses, somewhere. The question is, will those losses result in a breakup of the single currency, or will they be diluted into the oceanic European banking system through a banking union?

And if a banking union does happen, will that lead to an ultimate political union with the Eurozone being governed by a single, mammoth central government? Headed by whom? And how?

 

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Will Regulators Destroy Office Depot Merger with Staples?

By
Rafi Farber
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Staples vs Office Depot
  • Office Depot is a failing company by the numbers
  • Staples is a success
  • Regulatory agencies still have to decide if they can merge
  • If regulators say no, and Office Depot eventually goes bankrupt, and Staples buys the assets…
  • Isn’t that the same thing?

Office Depot (ODP) just accepted a deal by Staples (SPLS) to buy the company for $6.3B. Will the government let it go through?

Beginning in September 2006, Office Depot began falling into the Office Gutter, and has not yet extricated itself.

Office Depot Chart

In 2006, Office Depot made just over $500M in earnings and had made, as a company, $3.4B until that time. The next year its earnings tanked to $400M due to increased business expenses. In 2008 it lost $1.5B, and since then has not had a profitable year except for 2011, where it earned a paltry $60M in profit.

Staples, on the other hand, weathered the Great Recession rather well, with net income dropping 19% from 2007 but staying strongly positive at $800M. Earnings are down 37% from their peak in 2012, but unlike Office Depot, it’s still making money.

The bottom line is this: Since becoming a company, Staples has made $7.2B. Office Depot has lost $900M. With Staples’ earnings plateauing and Office Depot bleeding cash, now looks like a good time to merge.

Except, regulators have to approve the merger because it might break “antitrust” laws. Antitrust law says that companies cannot merge to create a “monopoly”. The problem is, what defines “monopoly” is entirely subjective, and will be decided by bureaucrats on a whim. An Office Depot / Staples merger has been prevented in the past. If it is prevented this time in order on the pretence of protecting consumers then Office Depot will continue losing money and could even go bankrupt.

It would be a case where the law mandates company losses, by preventing Office Depot from saving itself.

The frivolity of antitrust laws can be seen in the following hypothetical: What if Office Depot were to just suddenly announce it was disbanding and sell all its assets to the highest bidder? Are they allowed to do that? Just quit? It’s the same thing as a merger, because somebody ends up with the assets. Or are they just supposed to dynamite all their stores so as not to merge with another company and break antitrust laws?

The old joke about antitrust goes like this: Three guys are sitting in a jail cell. They start telling each other why they were arrested. One says he set his prices too high because his competitors were bad and he was arrested for price gouging. Another says he set his prices too low because his competitors were too good and was arrested for lowballing. The third says he set his prices exactly the same as his competitors and worked together with them and was arrested for breaking antitrust laws.

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US Government Has its Way with S&P

By
Rafi Farber
-
S&P

The credit raters at S&P just got beat by the US Government to the tune of $1.5 billion. What happened here is a case of extortion, dishonesty, and revenge.

In August 2011, S&P downgraded US Government credit for the first time, down from AAA to AA+. For accumulating the largest debt in world history, you’d think it’s about time. Then, in February 2013, the Federal Government sued S&P for allegedly overrating certain mortgage backed securities, or MBSes, that it alleges caused the financial crisis of 2008.

Mortgage backed securities can be a bit difficult to understand, so before we get into the specifics of this settlement, here are the basics of MBSes. If you take a loan from a bank to buy a house, the right to your monthly payments is now worth something. Whoever owns the mortgage, owns your monthly payments. The bank you got the loan from, assuming you got it before 2008, inevitably sold the loan to Fannie Mae or Freddie Mac, so when you pay your mortgage, the money ultimately went there.

Fannie Mae and Freddie Mac were government sponsored enterprises, or GSE’s. They ended up owning most of the mortgages in the end because the banks always sold to them and they bought it all. A lot of these loans all bundled together from different mortgages constitutes an MBS. An MBS only has value if the people that took the loans that make up the MBS can pay them back. Otherwise the MBS is worthless.

So, after the S&P downgrade of the US credit rating, the US government sued S&P, and only S&P, for giving these MBSes a AAA rating just before everyone figured out they were worthless, sincethose taking out mortgages couldn’t repay them. Other rating agencies gave these same MBSes a AAA rating, but they weren’t sued. The US Government claims this is a coincidence.

Looking at it from the inside out though, the whole thing is convoluted. All these MBSes became the property of the Federal Government, more or less, through Fannie and Freddie, the two government sponsored enterprises which bought them. So in order to take revenge on S&P for downgrading US Government credit, the US sues S&P for overrating the MBSes that the US Government itself was sponsoring through Fannie and Freddie? If the Feds are unhappy that S&P overrated MBSes, why are they upset that S&P downgraded the US debt?

There is no consistency here. And now S&P has settled with the Feds to the tune of $1.5B in what was originally a $5B lawsuit.

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Capstone Could Succeed with AEM-28 where Aegerion and Sanofi Failed

By
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capstone

Cholesterol-reducing statins like Pfizer’s (NYSE:PFE) Lipitor may be the best selling prescription drug class in history, but for one kind of cholesterol disease, statins are just a pharmacological drop in the bucket.

 

Homozygous familial hypercholesterolemia (HoFH), though an ultrarare genetic disease at only 1 in 1,000,000 births, makes the liver completely incapable of metabolizing cholesterol. Lipids build up in the blood at levels so high that the blood is actually cream colored, and in order to survive, patients need to physically filter cholesterol out of the blood by a process similar to dialysis, or else get a liver transplant.

 

Only recently have two prescription drugs been approved to treat HoFH, but neither of them are grad slams, as they say. The first to be approved was Aegerion’s (NASDAQ:AEGR) Juxtapid in December 2012. It works by blocking a protein called MTP, which prevents very low density lipoproteins (VLDLs) from being secreted by the liver. Though the blocking mechanism is slightly different from run-of-the-mill statins, this is the same medical mechanism as Lipitor, in that it blocks cholesterol from being synthesized by interfering with liver function.

 

Juxtapid was approved after data on only 23 patients indicated a 50% median drop in LDL. 23 may sound like a small number but when the patient base is 1 in 1,000,000, it’s about 8% of the entire US HoFH population. Juxtapid sells decently, having totaled $155.2M in sales since its commercial launch, or roughly $89M a year so far.

 

The main problem with Juxtapid though is the side effect profile. Not all HoFH patients can even tolerate it (29 patients were enrolled in the trial and only 23 tolerated the drug at all) and for those that can, according to the FDA:

 

Juxtapid carries a Boxed Warning regarding a serious risk of liver toxicity because it is associated with liver enzyme abnormalities and accumulation of fat in the liver, which could potentially lead to progressive liver disease with chronic use. Juxtapid also reduces the absorption of fat-soluble nutrients and interacts with several other medications.

 

From an investment perspective, the financial numbers are important to take note of. Juxtapid was incredibly expensive to develop. To give a rough idea of how expensive, Aegerion had accumulated losses of $193M by the time Juxtapid was approved. When it finally was, the stock eventually rose from $20 to a high of $97.83 in October 2013. But sales have not been enough to keep the company net positive yet, and the stock has since crashed down to pre-approval levels. The drug is also ludicrously expensive at $300,000 a year. It would have to be if it cost hundreds of millions to develop and there are only around 300 people in the country that even have the disease.

 

The second drug approved for HoFH is Sanofi’s (NYSE:SNY) and Isis’ (NASDAQ:ISIS) Kynamro. If one can even call Juxtapid a sort-of success, maybe, Kynamro is so far a failure. Approved just one month after Juxtapid, Kynamro works similarly, except it blocks a different protein crucial for cholesterol synthesis in the liver. It was approved based on a trial of 51 patients with an average LDL-C reduction of 25% over 26 weeks of treatment. The placebo arm of the trial, however, saw a reduction of 21%. So really not much of an improvement over sugar pills, if any.

 

Couple that with the same scary-sounding FDA warning of serious side effects and the fact that Juxtapid had better trial results, and you can see why sales were so abysmal that they were not even publicly reported by either Sanofi or Isis. (Sugar pills at least don’t have any side effects, and they work almost as well according to the data. They also don’t cost $176,000 a year like Kynamro.)

 

Clearly then, the HoFH population is still in serious need of a drug that works well and does not have any serious side effects, and with any luck does not cost $176,000 – $300,000 a year. Enter Capstone Therapeutics (OTCMKTS:CAPS) and its lead HoFH candidate AEM-28. AEM-28 stands for Apolipoprotein-E Mimetic 28. Apolipoprotein-E, or apo-E is the protein that malfunctions in the livers of HoFH patients, which makes them unable to metabolize cholesterol. AEM-28 is a simple chain of 28 amino acids that act as a mimetic of apo-E, meaning it mimics its function, though is not the same molecule. It basically completes the missing link in the livers of HoFH patients, enabling them to actually metabolize cholesterol.

 

Think of it as insulin for diabetics, except AEM-28 metabolizes fat instead of sugar. Diabetics can’t produce their own insulin to metabolize sugar, so they inject an analog, and it works well enough. Same here with AEM-28 and fat.

 

The crucial difference between AEM-28 and either Juxtapid or Kynamro is that AEM-28 does not interfere with or block liver function. It simply enables it. Instead of blocking cholesterol from being produced, it enables cholesterol to be metabolized. And since it is a mimetic of a naturally occurring protein only 28 amino acids long, it is cheap to produce and manufacture, and there are no known systemic side effects. Capstone estimates that a registrational trial will cost around $10M.

 

A phase 1/2 study reported positive safety and efficacy data just last month: Specifically a 56% drop in VLDL versus placebo, and a 55% drop in triglycerides over placebo within 12 hours of treatment.

 

The next step is a phase 2/3 registrational trial, but first Capstone needs the money to get it started. It currently has $3M on its balance sheet but will need to raise more, or get a partner, to go to the next step.

 

If AEM-28 can do better than Juxtapid for HoFH, with little to no systemic side effects and at a fraction of the cost, then gains could be similar to Aegerion from trough to peak, except sustainable. From there, the big question is can AEM-28 also be applied to the heterozygous form of the disease as well, which affects 1:500 instead of 1:1,000,000?

 

Answering these questions will take time and money, but so far, so good for Capstone, and encouraging news for HoFH sufferers in particular.

 

Market Exclusive Is a financial portal geared to engaging discussion on current financial topics. Market Exclusive is not an investment advisor. Please read our full disclaimer at http://marketexclusive.com/about-us/disclaimer/

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Syriza May have Won, But Greece Still Has No Money

By
Rafi Farber
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syriza-3

The debate around Syriza’s victory today is centering around the end of so-called “austerity”. The assumption seems to be that Syriza will end this policy as promised, and Greece’s national budget will no longer be “austere”. Logically, then, this means that the budget will be expanded, i.e., Greek government spending will increase because Syriza says so.

The question is how will that be possible? Greece has no money, and the European Central Bank (ECB) will not give it any money on Alexis Tsipras’s – Syriza’s leader’s – terms. While Syriza may have won – possibly even enough for an outright ruling majority without any coalition partners, the European Central Bank still holds the printing press.

The will of the people cannot overcome reality, no matter how united that will is. An appropriate analogy might be a new CEO voted in to lead a bankrupt company on promises that he will give every company employee a raise. How, exactly? Well, what he can do is default on the company’s current debt, and then print his own “money” and give it out to his employees. How much would that new money be worth though? Chances are, not much.

Defaulting on current debt and handing out new money to appease voters would be the equivalent of a Grexit. No more Euros, the Greeks would begin printing their own money on the off chance that it will buy something without hyperinflating within weeks or days. The other option is to stay in the Euro, which would mean either toeing the line with the ECB in order to keep Greek debt from falling to zero. This would spell the end of Syriza’s election promises.

 

The other option, which seems to be that of Syriza’s probable candidate for Finance Minster Yanis Varoufakis, is to default on all bonds but stay in the Euro. In that case, “austerity” would become real bona fide austerity, because nobody would buy Greek bonds any longer, and the Greek government would have to operate on tax revenues alone. The budget would have to be slashed by much more than it has been since “austerity” began.

greece-government-spending

The chart above plots Greek government spending from 2005 until the present. While there is a downtrend beginning in 2010 from the time austerity began, it is only slight. From peak to trough, it decreased €11137.7M to €7116.6 per quarter, a maximum decrease of 36%. If Greece defaults but stays in the Euro, it will have to be cut by much more, because without access to bond markets, budget deficits will not only be undesirable – they will be impossible, as no one will lend any money to finance them.

Greece, Syriza especially, is between a rock and a hard place. If they go through with their plan to end “austerity”, the ECB will cut them off. At that point, they will either have to print drachmas and risk hyperinflation, or else stay in the Euro and rely solely on tax revenue to finance themselves.

Those are the options. There aren’t any others.

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Russia Increases Gold Holdings to 13% of Foreign Reserves

By
Rafi Farber
-
Nabiullina

As the Ruble began crashing last October due to falling oil prices, Russia had to defend its currency from complete collapse. A unit of currency, if unbacked by any commodity, is a claim on the economic output of a State. Russia being the largest exporter of oil in the world, it is understandable that a collapse in the price of oil would lead to the collapse of the currency of the largest oil exporter. From the chart below, it is clear that oil and the ruble/dollar exchange rate generally move inversely.

Oil Ruble

In order to defend the currency, Russia’s central bank head Elvira Nabiullina raised interest rates to the current level of 17%. In addition to that, Russia began selling its foreign exchange reserves for Rubles, retiring the Rubles in an attempt to prop up the exchange rate still further. Russian foreign reserves are now down to $385B, the smallest amount since 2008, but still substantially higher than they were at the turn of the century.

Russia Forex

The only thing that Russia did not do is sell its gold reserves to defend the Ruble. In fact, the Bank of Russia actually added 600,000 ounces to its holdings, upping its total reserves to 13% of foreign exchange reserves. The fact that the Bank of Russia added to its gold hoard in December in itself is not unique. But the fact that it added to its gold hoard at the expense of defending the Ruble while it was in total free fall, certainly is.

In order to increase its gold reserves, Russia had to sell some of its foreign currency in order to obtain it – forex it could have used to further defend the Ruble, but chose not to. What this says is that increasing its gold reserves was for some reason more important to Russia, under the administration of Nabiullina at least, than defending the Ruble itself.

The real question is why. If Nabiullina is loathe to sell the Bank of Russia’s gold reserves even in a full-fledged currency crisis, when would she think it is a good idea to do so?

Nobody knows for sure, but the real answer might be never. In that case, what Russia is doing, for all intents and purposes, is to back the Ruble with gold. While buying gold does not provide any short term boost to the Ruble on international exchange, it would provide stability in the long term to the Russian currency, especially if made directly convertible at a fixed rate.

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