An Investor Update from Olivier Garret, CEO, Casey Research

Your First Must-Own Biotech Stock for 2011

When I asked my friend and colleague – the "Biotech Skeptic" – why he wants me to share his first biotech pick for 2011 with you, he said you should see the proof for yourself.

He wants you to read his in-depth analysis about why this is such a strong company. About why their growth prospects are so good – both in terms of technology and business growth.

After that, decide for yourself if you agree with his analysis and think his advice is worth following (you can even track the company and watch the gains investors make to see just how powerful his advice is).

So here's the pick – along with the "Biotech Skeptic's" analysis.

       Isis Pharmaceuticals (NASDAQ: ISIS)

To understand what makes Isis such a promising investment, you have to understand four things:

1. The Nobel Prize-winning discovery that opened biotech's "new frontier"
2. How Isis sparked a drug discovery revolution on biotech's "new frontier"
3. Why Warren Buffett would love the Isis business model
4. The growth trigger

I'll cover each in detail.

The Nobel Prize-Winning Discovery That
Opened Biotech's "New Frontier"

A Nobel Prize-winning study published in the journal Nature in 1998 shook our understanding of genetics and opened up a "new frontier" in medicine. It was the discovery of a previously unknown molecule inside cells called RNAi.

At the risk of oversimplification, here's how RNAi works.

One of the most basic functions of RNAi is to work like an email spam filter. When everything in your cells is working right, your DNA sends an RNA message to your ribosomes. That RNA message is either given a "go" or a "no go" by RNAi to get passed through to the ribosomes. If it's given a "go," your ribosomes interpret DNA's message to create protein – the building blocks of your body.

The way viruses and other parasites work is by sending bad RNA messages – spam – to cause ribosomes to build copies of the virus instead of healthy proteins. Well, RNAi's job as the spam filter is to separate out the virus's unhealthy messages from the healthy RNA messages sent by the DNA. This filtering is one of the fundamental mechanisms our bodies use to fight off viruses including the cold and flu.

But that's not RNAi's only function.

RNAi also filters healthy RNA messages to direct development and gene expression. By filtering some RNA messages and not others, it controls which proteins are made and how your body develops. It also controls which proteins are NOT made, and what genetic traits DO NOT develop – meaning even if someone were genetically predisposed to develop a certain disorder, RNAi could block that disorder from developing.

As soon as medical researchers saw what RNAi was doing to control genetic expression, they realized...

If you could control the function of RNAi – and use it to filter out certain harmful genetic signals – you'd be able to treat and even cure many devastating and previously untreatable genetic diseases!

Not only that, there are a slew of other diseases that RNAi could be used to filter out – providing even more opportunities for breakthrough medical treatments.

The more the "Biotech Skeptic" learned about RNAi – and the companies translating these scientific discoveries and theories into real, working treatments – the more he realized...

... This will lead to both substantial gains in the field of medicine...

... And substantial gains for investors.

So he set out to find the companies working on using RNAi to create medical breakthroughs. He took the companies he found and ran them through his rigorous investment screening criteria (the same criteria used to generate 84% average annualized returns and a 90% win ratio, as described above).

And that's when he found Isis...

How Isis Sparked a Drug Discovery Revolution
on Biotech's "New Frontier"

Isis took what scientists learned about how RNAi could filter certain genetic signals... And created a reusable platform for battling many of the worst, most life-threatening and debilitating genetic disorders.

Before Isis created their platform, drug discovery was pretty much a "stab-in-the-dark-10,000-times-and-hope-to-come-up-with-something" process.

But now the platform Isis created allows researchers to turn off RNA messages one by one - using the RNAi filtering process to "block" that message - and see the results. And because there are only a limited number of RNA messages that can be created based on the human genome, it's more like opening a series of boxes to find out which contains the prize you're looking for.

It's a much faster, more efficient, and more repeatable process for finding breakthrough treatments. And it's proprietary to Isis.

It works, too. Isis has 22 drugs in various stages of development, with a primary focus on treating cardiovascular, metabolic, and severe neurodegenerative diseases, plus cancer.

Why Warren Buffett Would Love
the Isis Business Model

Here's where this gets really good for investors.

The "Biotech Skeptic" is quick to point out that even a group of genius researchers who have discovered a new treatment breakthrough can lose investors money -- and quickly, too. So you can't bet on a biotech company's technology, treatments, or new discoveries alone.

To make you money, a biotech company needs to have:

• Proven products. As mentioned above, Isis has developed a proven platform for discovering treatments, with 22 products in various stages of development.
• Strong management teams.  As you'll read below, Isis' management know what they're doing, as they've created a "moat" business model around their unique platform that even Warren Buffett would love.
• Strong balance sheets and growth projections. At first glance, Isis may not look so hot in this area, based on their most recent announcement of increased operating losses year over year. But Isis still has about $450 million in cash on hand, even with heavy investments in regulatory filings, and in research and development. And as they keep inking new deals in line with their "moat" strategy, the "Biotech Skeptic" is extremely bullish on their growth prospects, and reassured by their continued financial stability.

And here's the "moat" business strategy Warren Buffett would love.

First off, Isis' platform for using RNAi's mechanism to screen out harmful genetic messages is proprietary and patent-protected. That means they have a competitive advantage backed by force of law.

And based on this platform, they are capable of generating a broad pipeline of drugs, each unique to a specific RNA target, each designed to treat a disease where there are patients with significant unmet needs.

Not only that, they're discovering more drugs and treatments than they have the resources to develop themselves. So their business strategy involves licensing their drugs to partners prior to late-phase development and commercialization, eliminating the costs associated with a traditional sales and marketing force, and building a broad base of license fees, milestone payments, and royalty income.

This model has more advantages than just the revenue stream it creates. Isis, by signing license agreements with several big companies, shields itself from takeover. That is, if a licensee wanted to swallow Isis, they'd find themselves contracted to develop drugs for some of their major competitors – obviously not an ideal situation.

Each of these advantages – a proprietary platform, serving unmet market needs, licensing for ongoing revenue, and takeover protection – forms another "moat" around Isis, protecting them from competition and preventing them from being susceptible to many of the dangers of traditional biotech companies.

The Growth Trigger

Here's what will make Isis take off.

While Isis has created nearly two dozen treatments based on its revolutionary platform, so far only one has made it all the way through the regulatory maze. The big rewards for the company – and investors – will happen soon, as each of the 22 treatments still in their pipeline get regulatory approval and are made available for sale.

Here's a snapshot view of Isis' current pipeline:

• Two treatments are in Phase III trials (the last step before going to market) – one cholesterol and one cancer treatment
• Seven are in Phase II trials – including treatments for MS, cancer, and type 2 diabetes
• Six are in Phase I trials
• And seven more treatments are in preclinical trials, including many that have already been licensed by major pharmaceutical companies like Bristol-Myers Squibb and GSK

As these work their way through the regulatory maze, each represents a substantial profit potential for Isis. With significant cash on hand and high motivation to push these treatments through to market, Isis is positioned to see dramatic growth in the coming months.

Here's the "Biotech Skeptic's" recommendation on Isis.

Buy ISIS at market, at any price under $11 (see the current portfolio of Casey's Extraordinary Technology for the target exit price).

Two More Biotech Stocks
to Own for 2011

Isis isn't the only favorite of the "Biotech Skeptic" for 2011. In fact, he discovered two more biotech stocks that could...

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