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Baltimore, Maryland

• The anatomy of profit potential: A look at today’s medical wonders,
• A $19 billion digital hospital opportunity, an FYI on RNAi,
• Global markets rally, regaining confidence the worst is over and more…

Jonas Elmerraji, reporting from Baltimore, Maryland….

Two days ago, on April 15th, President Obama discussed taxes – both the few that he plans to reduce and the many that he plans to increase. The President also offered a few words about what he planned to do with the proceeds of his various tax hikes. Healthcare spending ranks high on the list. So, as investors, we shouldn’t waste time getting mad, we should get even.

There are few industries whose fates are as directly linked to Uncle Sam as healthcare. Many biotech and medical stocks live and die by Federal health budgets, and with Obama’s official health plan released to the public not so long ago, millions of investors are wondering just how the plan will affect shares of their favorite companies.

In President Obama’s budget, he outlined three areas where public dollars will be used: the implementation of health investment technology, medical research, and Medicare spending.

Health IT was a hot topic during the election, and it continues to draw federal dollars now that Obama’s in office. “We will make sure that every doctor’s office and hospital in this country is using cutting edge technology and electronic medical records so that we can cut red tape, prevent medical mistakes, and help save billions of dollars each year,” said the President.

He’s following up on that promise by providing $19 billion in tax dollars to help hospitals go digital. And in kind, companies that provide electronic medical record technologies (most of whom are small-caps) are seeing increased interest from investors. One small-cap stock that has benefited from that interest is Quality Systems (NASDAQ: QSII), up more than 30% in the last month.

Medical research is another area where small-cap stocks are seeing a resurgence of interest. There are scores of small cap pharmaceutical stocks that are researching and developing the latest drug treatments for everything that ails us, and they’re poised to tap into the government funding for researching medical treatment effectiveness.

Medicare is the final place where Uncle Sam’s health dollars could trickle down to your portfolio. You see, most private healthcare and health insurance companies bill Medicare for services provided to patients it covers. Included in the mix are a number of small-cap names — WellCare (NYSE: WCG) and Amerigroup (NYSE: AGP), for example.

When the government commits to expand Medicare funding, it can mean big things for these Medicare contractors. Not only do they have the chance to increase volume by admitting more government-sponsored patients, but they become ripe targets for acquisitions by larger health insurers like UnitedHealth Group (NYSE: UNH).

Want to make money on healthcare stocks? Invest your money where the government’s spending theirs, and your chances of profiting from small cap stocks are unquestionably higher.

In the column below, our colleague, Patrick Cox, editor of the Breakthrough Technology Alert, examines another timely investment opportunity within the medical field…

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RNAi’s Buyout Deals: Who Will Benefit?
By Patrick Cox

There’s been so much stem cell news recently, I haven’t written a lot about the other major breakthrough area in medicine. That is, of course, RNA interference (RNAi). So I’d like to rectify that oversight.

For those of you who are not familiar with RNA interference, here’s what it is and how it works: DNA is, in a sense, the operating system software for our cells. As such, DNA does not directly interact with genes. It’s too important to risk corruption through unnecessary exposure. Instead, DNA operates by sending out chemical instructions. These instructions are in the form of complex RNA molecules. They are similar to double-stranded DNA, but are usually single stranded.

Basically, these extraordinarily complex RNA molecules control gene activity or expression. This is important because nearly all diseases are either caused or cured by the proteins produced by genes. You can, therefore, think of the ability to increase or decrease the production of these proteins as an on/off switch for diseases.

The remarkably young science of RNA interference is based on the accidental discovery that it is possible to flip these switches. The remote control, so to speak, for these switches consists of portions of RNA molecules. Because these portions are recognized as invaders by the body, they provoke the rejection of larger disease-causing RNA molecules. The other side of the coin is “RNA activation.” This is the process that increases gene expression.

The birthday of the science, according to many, was in 1998. That was the year when scientists Craig Mello and Andrew Fire published their paper on RNA interference in nematode worms. The paper earned them the Nobel Prize in physiology or medicine in 2006.

RNAi companies, unlike stem cell firms, have grown very rapidly. Many have already been gobbled up by Big Pharma companies, positioning for a foothold in this promising new field.

Unlike regenerative medicine (think: stem cells), RNAi scientists and companies sidestepped the legal and ethical scrutiny that has hobbled some stem cell companies. Now the legal situation has been clarified and embryonic stem cells have been replaced for therapeutic uses by iPS and parthenogenetic cells. As a result, we can expect important stem cell companies to make similar deals with Big Pharma companies.

Regardless, many RNAi companies already have significant capitalization and Big Pharma partnerships. Even at that stage of their development, however, they still have profound transformational potential. For example, I would have added RNAi pioneer Sirna Therapeutics to our portfolio. Sirna, however, was acquired in 2006 by Merck & Co. Inc. in a deal worth $1.1 billion.

That deal, the largest in the RNAi space so far, was followed by others:

Anglo-Swedish pharm firm, AstraZeneca Intl., made a $400 million deal with a European RNAi firm, Silence Therapeutics. Alnylam formed a $1 billion partnership with Swiss giant, Roche. The high-water mark for RNAi stockholders, however, is still the Sirna Therapeutics acquisition by Merck in October 2006.

As I’ve said repeatedly, RNA interfering molecules work. There is no question that they flip the switches they’re supposed to flip. The challenge, however, is getting them to their target genes before they are recognized and destroyed by the body’s immune system. Various companies are homing in on specific delivery solutions now. There are, however, many different solutions to the delivery problem. Each gene switch has its own special considerations and there is no “one size fits all” solution.

Most of the new RNAi companies have been founded specifically to develop RNAi therapies. Opportunity abounds in this sector. But beware; the failures will be as spectacular as the successes.

P.S.: I’ve just told my readers about a company that has remade itself into a major RNAi player. In fact, it has a CEO and chief scientist who were at the heart of the single biggest deal in the history of RNAi tech. This team’s stock rose from under $2 to $13 in only 15 months. Get all the details on this firm, and other transformational tech wonders here…

P.P.S. We started out with over 500 available positions on my Breakthrough Technology Report mailing list. Now, after landing some huge profits early on, word seems to have gotten out. We’re down the last 36 spots (maybe less by the time you read this). If you want in, you’ll have to be quick. I do hope you can join us.

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[Rude Endnote: U.S. markets rose for a second day yesterday, lending confidence to investors in both Europe and Asia who bid up their own indexes overnight.

Here in Asia, Japan’s Nikkei 225 stacked on another 1.74% while Hong Kong’s Hang Seng and the Aussie All Ordinaries rounded out their weeks on a positive note, though both finished only slightly higher for the day.

Over in Europe, major indexes were awash with green last we checked. London’s FTSE was heading towards half a per cent gain while Germany’s DAX and France’s CAC were up by 1% and 0.7% respectively.

Over in the commodity pits, oil still hangs on around the $49 per barrel mark. Gold, however, fell again overnight. You can pick up an ounce of the precious metal right now for less than $880.

Well, that’s it for another week in Rude. We hope you enjoyed our coverage of the markets and that you won’t hesitate to send us your own thoughts.

We’ll catch you tomorrow for our regular weekly wrap.

Until then…

Cheers,

Joel Bowman

The Rude Awakening
aussiejoel@the-rude-awakening.com