Why Star Scientific Inc. Shares Were Clobbered

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Star Scientific (NASDAQ: STSI  ) , a developer and marketer of non-nicotime nutraceutical dietary supplements, tumbled as much as 22% after confirming the receipt of an FDA warning letter on Dec. 24 concerning two of its consumer products that utilize anatabine.

So what: According to Star Scientific's press release, which came out on Tuesday, the FDA has issued a warning letter regarding the marketing of Anatabloc and CigRx which both utilize anatabine, a substance which the Food and Drug Administration believes should be regulated since it is a new ingredient that would have necessitated "premarket notification to the agency." The FDA's contention is that Star Scientific is marketing two currently unapproved drugs/products on its website. Star Scientific has pledged to cooperate fully to resolve these issues.

Now what: It's bad enough that Star Scientific has been burning through cash for years, but to add the potential to remove its best-selling products from market might be the straw that breaks this camels' back. On Tuesday, the company also announced a $15 million credit facility, which should help the company finance its operations with only $8.4 million in cash left as of its most recent quarter and the company burning through more than $20 million in cash each year. Keep in mind that FDA warning letters don't always end poorly, as Star Scientific may just wind up with a slap on the wrist and be allowed to continue to market its products while obtaining all appropriate licensing. On the other hand, the company could also face hefty fines and the withdrawal of its products. Until we know exactly what sort of punishment the FDA is going to levy, I don't see any other recourse aside from avoiding Star Scientific altogether.

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  • Report this Comment On January 02, 2014, at 3:55 PM, Brinks2 wrote:

    found at fda.gov:

    http://www.fda.gov/ForConsumers/ConsumerUpdates/ucm378845.ht...

    "Can a Dietary Supplement Treat a Concussion? No

    On this page:

    The Claims

    Exploiting the public's rising concern about concussions, some companies are offering untested, unproven and possibly dangerous products that claim to prevent, treat or cure concussions and other traumatic brain injuries (TBIs).

    In December 2013, FDA issued a warning letter to Star Scientific, Inc., for marketing its product Anatabloc with claims to treat TBIs. FDA continues to monitor the marketplace for products with similar fraudulent claims, and will take appropriate regulatory action to protect the public health." END

    Comment

    What is really strange is that the Department of Defense was co-sponsoring some of the Traumatic Brain Injury studies using Anatabine SEE http://tinyurl.com/qg2qy76

    Department of Defense award (W81XWH-07-01-0759) to Dr. Crawford

    The Roskamp Foundation

    Department of Veterans Affairs

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