Smokin’ Stock on the Move; Star Scientific rallies as Investors Temper
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    Smokin’ Stock; Star Scientific surges on Upcoming Market Launch of two products

    Star Scientific Inc. (Nasdaq: CIGX) shares soared 9.3% to $3.96 yesterday after the company reported that the U.S. Food and Drug Administration (FDA) cleared the way to market two of its products. The company’s shares jumped to $4.19 during March 23 intraday trading, their highest value since June 2009, and continued their climb this  morning, up nearly 1% to $3.98.

    CIGX, which has sold dissolvable smokeless tobacco products since 2001, reported that the FDA’s Center for Tobacco Products notified the company that its lozenges Ariva-BDL and Stonewall-BDL products are not subject to regulation under the 2009 tobacco law. CIGX has reported that the tablets contain tobacco’s addictive component, nicotine, and also “below detectable levels” of certain cancer-causing chemicals found in tobacco and its smoke. Accordingly, the company will move forward with marketing and distribution of these products.

    Beside the recent spurt, the stock has nearly doubled in March 2011, driven by two announcements, which imply that the company’s product candidate is investigated as a potential cure of Alzheimer disease, as well as the positive resolution of dispute with R.J. Reynolds Tobacco Company.

    First, the announcement that the U.S. Patent and Trademark Office upheld two of CIGX’s patents in a reexamination triggered the appreciation. The ‘649 and ‘401 patents, which cover the tobacco-leaf curing process, were at the center of patent infringement lawsuits against R.J. Reynolds Tobacco Company (RJR).  The jury returned a verdict in June 2009 for RJR, holding that there was no infringement of the two patents and that the patents were invalid due to anticipation, obviousness, indefiniteness and failure to disclose best mode. However, the recent confirmation of patent validity raises the chances that CIGX could get a favorable ruling on its appeal to June 2009 verdict.

    The dispute with RJR could bring the company more than a billion dollars in damages and royalty revenue. However, the ability to generate royalty payments is dependent upon the successful completion of the ongoing patent infringement lawsuit. Considering the possibility of additional appeals, the dispute could continue for at least another year.

    Second, CIGX’s subsidiary Rock Creek Pharmaceuticals reported that the Roskamp Institute of Sarasota, one of the top institutes for studying Alzheimer disease, approved to conduct a three-month, multi-site clinical trial with its RCP-006 nutritional supplement formula. The Institute has recently reported positive progress of their study of RCP-006, which causes a few analysts to claim that the company’s formula can play a significant role in Alzheimer disease treatment. While there is a wealth of clinical research needed to confirm the potential of RCP-006, CIGX could earn significant cash flows from out-licensing this formula to a bigger company. Rock Creek Pharmaceuticals targets the development of pharmaceutical products that have a botanical tobacco-based component designed to treat neurological conditions, including Alzheimer’s disease, Parkinson’s disease, schizophrenia and depression.

    CIGX reported net sales of $0.85 million for 2010 compared with $0.71 million for 2009. The company’s revenue is derived primarily from the sale of smokeless tobacco products. CIGX has also reported a net loss of $28.3 million compared with a net loss of $22.8 for 2009. At 2010 year end, CIGX had approximately $12.6 million of working capital that included $13.2 million in cash.

    Smokeless tobacco attracts mostly former smokers. According to consumer research in the U.S., 50% of daily snus users are ex-smokers. Industry analysts have reported that the smokeless tobacco market has been expanding at a rate of approximately 2%-3% per year since 2003, while the cigarette market has been contracting over the same period. Considering the appeal smokeless tobacco has in the light of an increasing number of smoking bans, combined with the perceived health benefits and its impressive growth rates, it is little wonder that the leading cigarette manufacturers have been eager to secure their piece of the pie, preferably by means of acquisitions of smokeless tobacco companies, but also by launching a number of snus line extensions of their flagship cigarette brands.

    The recent developments could enhance the company’s revenue generating potential over the short term with the introduction of Ariva-BDL and Stonewall-BDL products. Over the next 12 months, the eventual favorable resolution of RJR litigation could expose the company to additional cash flows, which can near a billion dollars range. Meanwhile, the long-term prospects of the company are also linked with the successful development of RCP-006 as a potential cure for Alzheimer’s. To conclude, the successful evolution of these activities could significantly boost CIGX valuation going forward.

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