Obama & Co. to Turn Pharma Switch to 'On'?

When we published our recommendation of CEL-SCI (AMEX: CVM) shares on Wednesday morning of this week, we really had no idea some of you would be able to exit at our target price of 40 cents by Thursday afternoon. I've triple-checked it since then though, and it's true - there were a few transactions with bids of 40 cents early on Thursday. Congratulations to those of you who locked in that 42% gain. 

However, the vast majority of you are either still in a trade, or perhaps not even in a trade yet. So, I'm going to 'reload' the recommendation today just to make sure we're all on the same page - with the same target, and same stop. 

This time though, I'm going to explain the big reason why now (as in this coming Monday) may be a great time to become a CVM owner. 

Why didn't I tell you about this on Wednesday? Two reasons. One, I first wanted to whet your appetite for their cancer drug Multikine. And two, I had to do some further research on today's rationale, just to make sure I understood it perfectly. 

Well, I did that legwork, and I have to say there really is a potential boon waiting in the wings for CEL-SCI. It stems from the likely stimulus bill our government and President-Elect are developing as I write this. To call it a potential game-changer wouldn't be overdoing it. 
 

There Is Such a Thing as Overnight Change

I don't know how closely all of you follow this kind stuff, but I know I've been keeping very close tabs on Barack Obama's plans to stimulate the economy. There have been several ideas mentioned, and a few of them seem to keep resurfacing. Those are the ones I think will ultimately 'stick'. 

More important to us as investors, if one proposed part of the plan - or something like it - is passed, I think CVM could get turned on like somebody flipped a switch. 

Here's the basic gist...

For the same reason banks, automakers, insurance companies, and many other industries needed monetary help, biotech and pharmaceutical companies could use a shot in the arm too. Congress now recognizes the economic (and public health) benefit from helping the pharmaceutical sector. Better yet for us, Washington actually appears willing to do something about it.

The idea being kicked around to help foster ongoing drug development isn't 'free money' like the big banks got, but it does have a 'cash now' component. 

All pharmaceutical companies working on new drugs tend to lose money in their early stages. Once developed, however, sales of that drug more than make up for those early losses. 

There's another silver lining behind those losses - they can be used to offset further taxable company gains... in the future.

So what?

The whole point of a stimulus package is to stimulate things now - not later. So, one of the ideas being posed to Congress as part of the stimulus bill is essentially a government buyout of pharmaceutical companies' future losses. Basically, instead of using those tax-break-providing losses in the future, the government will simply give those companies cash (well, a check) in exchange for not using those losses to reduce taxable income in the future.

Now, it's not going to be a dollar-for-dollar buyout... probably not even close. However, even giving pharma companies 30 cents on the dollar to not use their carry-forward losses could be huge for the industry.

For some companies the plan may not make sense, if they're, say less than a year or so away from being profitable anyway. Offsetting any taxable income in the future makes the most fiscal sense for them, as they may not need cash right now. 

For other companies - like CEL-SCI - that kind if cash infusion may be enough carry them through the end of their 'research' phase and all the way to a 'revenue-bearing' status. In other words, many of these companies may not have to raise funds ever again, and there would be no doubt about being capitalized well enough to complete a drug's development; it just depends on the dollar amounts involved. Therefore, this potential stimulus could possibly generate tons of confidence in companies who see a light at the end of their drug's development tunnel. 

I firmly believe that CEL-SCI's Multikine - already approved for Phase III - is such a drug, and that CEL-SCI could be one of the optimal beneficiaries of such a bill. Needless to say, my speculative side is really getting warmed up.
 

Time is Critical

Time is critical though, as I said in Wednesday's newsletter. The President-Elect has mentioned multiple times he plans on rolling out a stimulus plan as soon as possible; it wouldn't surprise me if he inked a bill the day after he's inaugurated. 

It will also need to work its way through the House and Senate, but guess what - as of January 6th, the "Fiscal Year 2009 Omnibus Appropriations Package" (otherwise known as the stimulus plan and budget) is already being worked on by these guys. The goal is to have something in place by the time Obama is sworn in on the 20th. Like I said, it wouldn't shock me to see something signed on the 21st. 

Since we really won't know what the bill will look like until after the fact though, the time to pull the trigger on this admittedly-speculative idea is soon. Why? Once we do know what the bill actually is, everyone else will know too... meaning there could be a flurry of demand for some of these stocks, and we may not be able to step in at 30 cents. 
 

Reality Check

Now that I've gotten you excited, I want to reel you in a little as well. I don't know if these tax breaks and payouts are going to happen. They certainly could, and it looks relatively likely, but nobody really knows for sure. Yet, I still fully believe owning CEL-SCI shares is a high-odds proposition. 
 

Think about it in these terms... 

If the stimulus described a moment ago doesn't pan out, you'd still own an incredible long-term investment. Remember, Teva Pharmaceuticals (NASDAQ: TEVA) and Orient Europharma have already made cash investments in Multikine's development. Aside from a vote of confidence, they also provided cash. So, if CEL-SCI doesn't get the government check, I'm confident they can get cash elsewhere if needed. And don't forget, Multikine is ready for Phase III, and it proved very effective during Phase II. 

However, the bigger potential upside is that CEL-SCI pockets a government check, and partially or fully pays for Multikine's Phase III testing. They may never have to raise funds again; depending on how much money - if any - is granted...Multikine's testing could be completed and the drug could start driving revenue well before they use all that cash.

In other words, there's lots of upside, very little downside. 

With or without the tax-based stimulus check though, CEL-SCI is just plain undervalued relative to their potential. I see it as a win-win situation either way, with one of the possible 'wins' being huge, and soon.