Remember to Buy This Company:
It Has the World's Best Treatment for Alzheimer's.
Do It Now, or You Could Miss This Chance at a Fortune.
By Jonathan Kolber

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Memory. It's crucial to everything we do and much of who we are, yet scientists are only just beginning to understand it.

For most of us, memory is something we take for granted. For others, it is a continuing source of frustration and even pain.

Most Americans came to fully appreciate the pernicious disease known as Alzheimer's when it was announced that former President Reagan was suffering from it. We watched as a man who had been known for his remarkable memory and communication skills slowly deteriorated. In a poignant final correspondence, he felt obliged to mention how he had written it without assistance from his wife, Nancy.

There are various theories as to what causes Alzheimer's. A gene called ApoE is thought to significantly increase risk. It's clearly age related and hereditary.

Regardless of the cause, once the condition has developed, it's generally considered irreversible and very difficult to treat or even manage. Medications are available, but the side effects are so severe that many people must discontinue use within six months. Even worse, they do nothing to arrest the progress of the disease.

That's the bad news. The good news is that today you can invest in a company with a far better Alzheimer's treatment.

It's got a world-class management team that just invested more of its own money into the pre-IPO private placement. It's got outstanding relationships with 21 top universities and the Mayo Clinic. It's got sufficient cash, and a really smart business model for how to use that cash. Small wonder they're investing: I figure you stand to make at least 30 times your money from this investment.

I'm talking about Neuro HiTech Pharmaceuticals (NHPI: OTCBB). It's a brand-new public company with a unique twist on a product thousands of years old…

Recalling the Extraordinary History of this Startup

NHPI was founded in 2006 by marrying an old, dormant public company with a new pharmaceutical developer. It was done through a reverse merger.

A reverse merger (sometimes called a shell merger) is an exotic yet perfectly legal way to take a company public. Here's how it works.

Start with a public company that's basically defunct. It acquires a private company with great upside potential. The private company is the "real" company in the deal, so stockholders control the new entity. Typically, after the merger, the company's name is changed back to that of the private company or to something new.

Reverse shell mergers are kind of like nuclear power. They're one of the most powerful securities tools. Used unwisely, they can lead to all kinds of fraud and abuse.

Used wisely and ethically, they can be a wonderful tool for legitimately accelerating the path through the Byzantine SEC bureaucracy. They let companies go public quickly and at low cost. I look for the wise ones. NHPI is one of those.

The history of the public company is irrelevant, because prior to the merger, it had no operating history and therefore no pre-existing liabilities. The new entity is considered clean, a newborn public company.

NHPI started trading as a new public company on Feb. 2, 2006. Ordinarily, I don't recommend IPOs to my readers, because I prefer to wait for them to come back "down to earth." But in this case, I decided to make an exception.

The reason is that this company is addressing a problem that will be of riveting importance to every member of the baby boomer generation. It's that big.

Remember the Hula-Hoop Craze? Prepare for the Huperzine Craze

If there's one wasting condition that terrifies aging people more than any other, it's Alzheimer's disease. It's been called "a slow death of the mind."

Most people would be prepared to do almost anything to prevent its onslaught and would view a safe medication without side effects as a godsend.

The substance behind the company's promising technology is Chinese club moss. It's been drunk as a tea for thousands of years and is reputed to increase mental acuity.

In the 20th century, Chinese researchers became interested in this herb and discovered an active ingredient called huperzine. Their research indicated that it was effective against several medical conditions, one of them being Alzheimer's disease.

In 1996, chemists at the Mayo Clinic became interested in how this compound works. They studied it, and not only figured out the mechanism, but developed an analog compound that's eight times more effective.

Six U.S. and international patents resulted from this research, and exclusive rights to use them for medical purposes have now been licensed into the company.

The primary compound sailed through the FDA-sanctioned Phase I clinical trials and showed no toxicology problems or significant side effects. It's now in Phase II, and is replicating a very encouraging Chinese study. (Below, I'll tell you more.)

Now let's look at the size of this market.

A Multibillion-Dollar Market That's Growing Fast

Alzheimer's and dementia-related conditions are considered the third leading cause of death in the United States, behind cancer and heart disease. Alzheimer's and related drug sales were over $1.8 billion in 2005. According to IMS Health, they are expected to reach $5 billion by 2010.

In addition, researchers have recently identified a "precursor" condition to Alzheimer's disease (AD), called mild cognitive impairment (MCI). MCI is characterized by significant memory lapses, but none of the other symptoms typical of AD. 80% of MCI cases progress to AD. MCI affects 4 million people in America.

According to IMS, there are four major drugs on the market that target Alzheimer's and MCI: Aricept (Pfizer), Exelon (Novartis), Reminyl (Janssen) and Namenda (Forest).

Broadly speaking, these drugs fall into a category called acetylcholine inhibitors. That means they interfere with a particular neurochemical pathway that affects communications between nerve cells.

One of these companies has already had preliminary discussions with NHPI about acquiring rights to its huperzine drug.

It's understandable that they'd want to come shopping early. That's because NHPI has acquired solid intellectual property rights.

Some of the Best Patents Around

The company has exclusive licenses for medical use of six patents held by the Mayo Foundation for Medical Education and Research (associated with the Mayo Clinic). This includes two "composition of matter" patents and four process patents for huperzine, its analogs and derivatives.

Process patents are recipes for assembling things that are new and useful. On the other hand, composition of matter patents are generally used to protect specific chemical structures, including reasonable variants.

One of the patents covers a huperzine analog that appears to be eight times more effective a acetylcholine inhibitor as natural huperzine, which appears to already be as effective as prescription inhibitors.

Quantity of patents is much less important than quality. Patent attorneys have told me that as many as 99% of issued patents are worthless. Indeed, many are so poorly written that they could be broken by determined litigation.

The Mayo Clinic is one of the most respected medical research institutions in the world. It has been patenting and licensing its breakthrough medical discoveries for well over a century. If there's an institution in the world whose patents can be presumed to be of high quality, it's the Mayo Clinic.

However, it's one thing to come up with a transformational technology. It's quite another to survive when you're a minnow swimming with sharks.

Forgettable Competition

Ordinarily, it would concern me that not one but four Big Pharma companies have drugs on the market with which huperzine will be in direct competition.

In this case, I think it's the competitors who must fear being eaten.

Huperzine has several huge advantages:

?           With conventional Alzheimer's disease medications, only 15-40% of patients treated show any improvement. This implies that at least 60% of patients are in need of a drug such as huperzine

?           With most patients, conventional drugs must be discontinued within six months. Alzheimer's is a lifelong condition

?           All conventional drugs can cause extremely unpleasant side effects, including nausea, vomiting, sweating and even liver toxicity.

In addition to the above, huperzine is a smaller molecule with a lower molecular weight. This makes it uniquely suitable for delivery via the transdermal patch, which eliminates any need to swallow the drug.

In a study of 100 physicians, 97% indicated that they would prefer to prescribe transdermal delivery, as opposed to oral medication. Their reasons include:

?           More frequent delivery of the drug, allowing for lower effective dosages

?           Less need for caregiver attention

?           Greater patient acceptance

?           Less chance of forgetting to take medication.

In addition, preliminary research indicates that the huperzine compound:

?           Is more effective in improving cognitive function, and works longer at lower doses

?           Not only increases the brain's acetylcholine levels, but also levels of other important neurotransmitters, like dopamine and noradrenaline

?           Unlike other acetylcholine inhibitors, actually protects brain cells from further decay.

This last point is important not only with respect to Alzheimer's, but huperzine also has military and national security significance.

The company has a cooperative research and development agreement (CRADA) with the U.S. Army. Clinical work has been done at Walter Reed Hospital to determine huperzine's efficacy against nerve gas.

Once the company achieves FDA Phase III clearance, it's quite conceivable the Army will single-source this drug to be taken as a prophylactic by troops who are at risk of being exposed to nerve gas. It could also be stockpiled for homeland security purposes.

In the world of FDA-speak, Phase III clearance is tantamount to market acceptance. It's the green light to begin selling not only in the United States, but in much of the world, which follows the FDA's lead.

How likely is Phase III clearance?

The Phase I results showed no severe side effects. (There were several minor instances of fatigue and headache, probably due to caffeine deprivation). In fact, the Phase I results were so impressive, and the principal investigator so well respected, that 20 top U.S. universities are participating in the Phase II study. That's the highest number I've seen in recent years.

I wanted to confirm all this, so I spoke with a world-renowned expert in Alzheimer's. Because huperzine is currently under investigation, he isn't comfortable being named in this article. Nevertheless, he told me the evidence suggests that "It should be ideal throughout the course of treatment."

While it's great that this drug shows the potential to be both safer and more effective than the competition, the drug's properties are only part of this company's risk profile.

Every early-stage company carries serious risks. But in this one, they're harder to find than most.

Could This Be the Deal Without Hair?

Longtime readers know that I'm fond of citing my venture capital friends' adage that "There's a little bit of hair on every deal." The reason for this adage is simple: Just about every early-stage deal has some problems. If it didn't, the investment opportunity would already be closed.

A friend of a friend brought this deal to me just as the company was on the verge of its IPO. He's one of the lead investors. Imagine my surprise when he told me this was a deal without problems. I was skeptical.

What if the compound doesn't work as promised? The chances of this are minimal, both due to the Chinese history and its Mayo Clinic pedigree. Also, the clinical trials to date are, as stated above, highly encouraging.

What is the likelihood the company won't have a defensible proprietary position? The patents originated at the Mayo Clinic, a world-class organization with a long history of commercializing intellectual property.

Might even better compounds or treatments emerge from other laboratories? This is always a possibility with emerging technologies. However, the company's scientists - including some of the leading Alzheimer's researchers in the world - are unaware of anything like this under development.

Further, the fact that the test compound appears to be totally nontoxic and is derived from natural sources gives NHPI a marketing edge over anything artificial that might be developed.

One item beyond the company's control is the supply of club moss, the source of huperzine. CEO Reuben Seltzer was forthcoming about this risk when I interviewed him. However, the company is following the tried-and-true path of major pharmaceutical firms in rapidly developing a synthetic molecule, a project now spearheaded by an eminent scientist affiliated with the University of Illinois. There's little question this will succeed; analog molecules have already been identified.

The only real concern I've found is with the stock itself. It's thinly traded. In addition, we can't get in at the insider price. (The "insider" price works out to $2.50 per share, not counting a warrant to purchase one additional share at $5 for every four shares purchased.)

I don't like paying significantly more than management, but sometimes there's no good alternative. Put this in perspective, these kinds of deals are not uncommon.

The dilemma is whether to wait for a possible after-IPO price dip or pay a slight premium now in the expectation the price will not dip, but instead rise much further.

As Alzheimer's patients don't seem to have a choice, I decided we don't, either. At $55 million, the company is still ridiculously cheap relative to its potential gains. If it dips down to the insider price level without good reason, we'll probably buy more.

Further, the company has expressions of interest from several reputable broker-dealers about doing a secondary offering in the near term. The intent would be to raise up to $20 million.

Assuming this happens - and I believe it will - the benefits are threefold. First, it will significantly increase the liquidity of the stock. (That's important if we ever need to sell our stock before the company is acquired.) Second, it will increase awareness of the company among the institutional community. Third, it will give the company a financial cushion and capability to diversify by acquiring additional promising compounds.

Management assures me it already has its eye on several such compounds, but is understandably reluctant to say more. These should be viewed as bonus opportunities.

Now let's look at how NHPI's approach to sources and uses of capital differs from traditional Big Pharma concerns. It's remarkable and exciting.

Virtually Assured Profits

There's a new game in town among early-stage biotech and pharmaceutical companies. It's called the "virtual company."

The essential idea is to focus on and leverage the core competencies. These companies are primarily engaged in the identification, screening, acquisition, research and development of intellectual property.

By staying focused on this mission and outsourcing practically everything they can, such companies keep their overhead costs down and their burn rates low. Quite often, key personnel such as scientists are on the payroll of other organizations.

This means less capital is needed, which results in less dilution and better profits for investors. It also greatly increases the chances of success, since running out of money is one of the greatest risks faced by early-stage companies.

Such companies never intend to manufacture or market a product. Call them "intellectual property factories."

They're well aware that little companies first developed virtually all of the new drugs now being manufactured and marketed by Big Pharma. Big Pharma knows it too, and is continually on the prowl.

The basic business strategy, then, is to serve as a kind of incubator of new drug compounds. Once the little company has taken a promising compound through the arduous FDA approval process, it can reasonably expect one of two things to happen. A member of Big Pharma will either buy the company outright at a premium or license the compound and pay royalties.

Both can produce a big win for early investors. Multiples of a dozen times your money or more are not uncommon.

That's provided the medicinal compound in question actually delivers on its promise. This in turn depends on wisely choosing test compounds in the first place, hiring and supervising the right researchers and proper management. So how is the management?

Management With a Mind to Succeed

Insider buying is one of the best predictors of future price appreciation. Even better is when the insiders agree to purchase stock that's "locked up," meaning they can't sell it until a period of time has elapsed.

NHPI has very sophisticated senior management. What's most impressive is management's willingness to purchase shares for cash that will be locked up for a year. Clearly, these gentlemen believe in their ability to add significant shareholder value.

Looking at their backgrounds, it's easy to see why:

Mark Auerbach, chairman, has been executive chairman of Par Pharmaceutical Co., Inc., a $1 billion company, and director of Optimer Pharmaceuticals, Inc., which has a portfolio of late-stage anti-infective products and a range of preclinical antibiotics from a carbohydrate drug discovery platform.

Reuben Seltzer, president and CEO, has held that position since 1996. Since 2001, Mr. Seltzer has been president and managing member of Marco Hi-Tech JV LLC, a raw materials and ingredient distribution company serving the pharmaceutical and dietary supplement industry. Since 1992, he has been a director and consultant for Hi-Tech Pharmacal, a $320 million pharmaceutical company founded by his family. (Although Mr. Seltzer will continue his other relationships, he assures me that NHPI

will be his No. 1 priority.)

John D. Abernathy was from 1995 until his retirement in May 2004 chief operating officer of Patton Boggs LLP, a law firm. Previously, he was a managing partner of the accounting firm BDO Seidman. Mr. Abernathy has served on the board of directors of Par Pharmaceutical since 2001 and as a chairman of its audit committee since 2003.

Great management and technical expertise is crucial. But equally important is financial survivability.

Let's look at that.

A Burn Rate That's More Like a Flicker

One of the big problems with startup companies, especially those in the pharmaceutical sector, is that they hemorrhage cash. Phenomenal amounts of money are spent on overhead, including salaries, office space and incredibly expensive clinical studies.

By historical averages, it's not uncommon for a drug to cost $750 million in clinical testing before it reaches FDA approval. I mentioned above that NHPI is part of the new "virtual company" approach to product development.

It's a smart approach that's also being successfully used by our other Transformational Technology Portfolio companies HepaLife (HPLF: OTCBB) and PhytoMedical Technologies (PYTO: OTCBB). I believe it's a model of the future.

This approach radically cuts costs. That means greater chances for the company to overcome unexpected challenges, more cash to invest in other promising drug compounds and less dilution for investors.

How radically can costs be cut? In this case, almost to the bone.

The company outsources virtually everything. All of the management except the CEO is currently part-time. (This works with very seasoned people.) Executive salaries are budgeted next year at a paltry $230,000 - total.

The research is being done at Georgetown and associated universities and federal labs. Even the office space has, until now, been contributed by one of the partner/investor companies.

The net effect of this is that the company just closed $5 million in private equity, much of it from insiders, to cover its expenses for the next year and completion of the Phase II trials. That includes just $1 million for working capital, $1 million for completion of the Phase II trials, $1.7 million for development of the transdermal patch, and $425,000 for developing a manufacturing process.

If these weren't realistic numbers, the executives and original backers wouldn't have put in the money.

But they did. Further, senior executives such as CEO Seltzer and his associates wouldn't be committing their efforts for comparatively meager salaries of less than $200,000. But they are.

The reason is that they're confident of big gains on the stock. Very big gains.

A Clear View to Capital Appreciation

Ordinarily, I have to go through complex reasoning and make a number of assumptions to see how we can multiply our money. Here, that's not the case.

$1.8 billion of competing products were sold last year. This is a proven, established market. As stated above, based on the growth rates in the disease and population demographics, it's predicted to reach $5 billion by 2010.

Assuming the compound passes successfully through FDA Phase III clinical trials, next year, the company will either license it to a Big Pharma partner or be acquired outright. (This often happens during Phase II, but let's be conservative.)

If NHPI is acquired, it will be at a price at least 10-fold higher than the current market capitalization. We would be happy with a 10-bagger in the next year or two.

On the other hand, let's assume that management holds out for more profit. If they license the compound, they'll do so at a royalty rate in the range of 7-25%.

Figure the compound will pass through Phase III and hit the market by 2010 at the latest. It will be entering a $5 billion market full of aging products that do nothing more than manage the symptoms of Alzheimer's disease. They do not prevent the disease's progression. They cannot even be tolerated for more than six months.

What would you choose to take - one of those or something that actually works (especially if the newcomer were available via your choice of pill or transdermal patch)?

Conservatively, let's assume that the established players compete in the only way they can, by lowering price. Let's further assume that the ongoing Medicare crisis increases the price sensitivity of many patients.

In that case - and I consider this a worst-case scenario - the product would still seize 20% of the market. That's $1 billion in revenues, and at a very conservative 7% royalty rate, NHPI would realize $70 million in revenues.

As a virtual licensing company, I figure at least 85% of those revenues should fall straight to the bottom line. That's $59.5 million in profits.

At a reasonable price-to-earnings ratio of 30, the company would be valued at over $1.7 billion.

The company has 8.5 million shares, fully diluted. At a purchase price of $6.50 per share, that's a market cap of $55 million.

Assuming the market cap rises to $1.7 billion, the gain should be 30 times your money. However, I consider 60 times your money more likely. The reason is that I expect the royalty rate will be higher, the market share greater, or both.

Those are the kinds of profits with which we can live happily ever after.

What to Do Now

Buy Neuro HiTech Pharmaceuticals (NHPI: OTCBB) at $6.50 a share or better. As always, plan on holding your shares for years, not months, and do not chase the price.

Assuming you're a mature person, you may just be grateful to this company in the year 2011 for two reasons. First, you'll be delighted with the wealth that it's added to your bank account. Second, you'll appreciate that you've got the mental acuity to enjoy it.

To your profitable future,

Jonathan Kolber