NANOSPHERE, INC. & MERRIMACK PHARMACEUTICALS, INC.

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Hello Readers,

Since the last Newsletter, we closed four more positions; three for gains and one for a loss.

LIONBRIDGE TECHNOLOGIES (11/5/12). Closed position 11/5/13 at $5.35 for a 70% GAIN.

MINDSPEED TECHNOLOGIES (8/20/13). Closed position 11/6/13 at $5.02 for a 76% GAIN.

GALENA BIOPHARMA (8/20/13). Closed position 11/13/13 at $3.08 for a 57% GAIN.

VELTI (6/20/13). Closed position 11/5/13 at 27 cents for an 81% LOSS.

Some pretty nifty earnings news sent Lionbridge Technologies on a nice tear, and, exactly one year to the day we picked it, we closed the position for a pretty good gain. Our second time around with Mindspeed Technologies was indeed the charm as the stock rocketed on news it was being acquired by MACOM for $5.05 a share. It was also our second dance with Galena Biopharma that got a nice boost on positive news from a Phase 1 trial. And, we closed Velti, which proved to be a major disappointment, for a nasty loss.

Going into the holiday season, we don’t know what to think about the markets. There are some good signs that the averages could go higher, such as an increase in investor enthusiasm, which the contrarians will tell you is a warning sign. There are also some ominous disturbances, such as the slowdown and minor sell-off in many of the momentum stocks; and let’s not forget that Fed tapering may be just over the horizon. Currently, we see more downside risks, but, all too often, the markets do the opposite of what is expected.

Here are the headlines since the last Newsletter about companies in the Current Portfolio; dates in parentheses are when we first recommended them. We are not giving updates about companies on the “Endangered List” unless we feel the news to be highly significant.

Sequenom (SQNM)(11/5/13). Stock gets a pop on a pretty nifty earnings report; balance sheet still looks good.

Corinthian Colleges (COCO)(11/5/13). Earnings report within company’s guidance; balance sheet still looks okay.

GTX, INC. (GTXI)(10/20/13). Nvidia launches GTX 780 Ti. Balance sheet still looks okay as company provides update on Enobosam.

Agenus (AGEN)(10/20/13). Genital herpes vaccine succeeds in mid-stage trial.

Amicus Therapeutics (FOLD)(10/5/13). Balance sheet still looks very strong.

Durect Corporation (DRRX)(9/5/13). Balance sheet still looks good, and company seeks to strengthen it further with a $10 million secondary offering, which did slightly dampen recent stock run.

Transcept Pharmaceuticals (TSPT)(9/5/13). Balance sheet still looks strong as company plans to reduce expenses by trimming work force.

Towerstream (TWER)(8/5/13). Recent earnings news not bad but not great; balance sheet still looks good.

Solta Medical (SLTM)(8/5/13). Company hires investment banker as merger/acquisition rumors swirl. Recent numbers just so-so, as is balance sheet.

MeetMe (MEET)(7/20/13). Ranked number one fastest growing internet company in North America by Deloitte. Teams with Sprint’s Pinsight Media+. Reports new quarterly record in mobile revenue; balance sheet still looks okay.

Baxano Surgical (BAXS)(7/5/13). Recent numbers get a boost thanks to merger; balance sheet still looks good.

Commtouch Software (CTCH)(7/5/13). Releases pretty good quarterly numbers; balance sheet still looks okay.

InspireMD (NSPR)(5/20/13). Balance sheet still looks good.

Antares Pharma (ATRS)(5/20/13). Enters into exclusive U.S. agreement with LEO Pharma for OTREXUP in dermatology; may receive up to $20 million in milestone payments including an upfront $5 million. Balance sheet still looks very healthy. Company will present at Jefferies healthcare conference on November 21.

MELA Sciences (MELA)(5/5/13). Recent balance sheet not great, but company closes $6 million secondary offering that should help things.

Cytori Therapeutics (CYTX)(5/5/13). Recent numbers look okay, as does balance sheet. Receives $12 million for the first installment from the Lorem Vascular Partnership equity agreement, which is a recent licensing deal that could be valued at over $530 million in time.

Synacor (SYNC)(4/20/13). Acquires Teknision, leveraging its android development platform for expansion into mobile and android devices. Recently numbers so-so; balance sheet still looks strong.

iPASS (IPAS)(4/5/13). Teams with McGraw Communications to deliver enterprise ready WAN and Wi-Fi solutions. Cites improvement in open mobile growth in recent earnings report. Balance sheet still looks good.

Oncothyreon (ONTY)(3/20/13). Presents data from Phase 1 trial of ONT-10. Balance sheet still looks very healthy.

Echelon (ELON)(3/5/13). Recent earnings report upbeat; balance sheet still looks strong.

AlphaTec Holdings (ATEC)(2/20/13). Earnings report shows revenue growth, but losses need paring; balance sheet still looks good.

Apricus Biosciences (APRI)(2/5/13). Cash position still looks good. Signs exclusive pact with Laboratoires Majorell to market ED cream Vitaros in France, Monaco, and certain African nations. Expects to streamline approval path for Femprox.

GEVO, Inc. (GEVO)(1/20/13). Balance sheet still looks okay, but stock tumbles on production delays at biofuel plant in Minnesota.

Codexis (CDXS)(1/5/13). Sales numbers drop, but balance sheet still looks good. Company will exit biofuels.

Palatin Technologies (PTN)(12/5/12). Balance sheet still looks good. Announces option for license to Bremelanotide in Europe.

Limelight Networks (LLNW)(11/20/12). Recent numbers look okay; balance sheet still real strong.

Zynga, Inc. (ZNGA)(10/5/12). Several dozen news articles and stories.

ImmunoCellular Therapeutics (IMUC)(9/20/12). Balance sheet still looks pretty good.

SemiLEDS (LEDS)(8/20/12). Slates earnings call for November 19.

Overland Storage (OVRL)(7/20/12). Acquires Tandberg Data. Earnings news could have been better, ditto with balance sheet. Debt holders convert $10.7 million of debt into equity at $1.30 a share.

Aviat Networks (AVNW)(7/20/12). Upgrades MTN Ghana’s microwave backbone capacity.

Metabolix (MBLX)(7/5/12). Balance sheet still looks good.

Athersys (ATHX)(7/5/12). Balance sheet still looks good.

Rare Element Resources (REE)(6/20/12). Releases earnings report.

Capstone Turbine (CPST)(5/20/12). Recent numbers look pretty good, as does balance sheet.

Air Media Group (AMCN)(4/20/12). Sets earnings call for November 19.

Axcelis Technologies (ACLS)(4/5/12). Releases good quarterly numbers compared to a year ago; balance sheet still looks okay.

Anadigics (ANAD)(11/20/11). Recent numbers reflect good sales growth; balance sheet still looks good.

Synthesis Energy Systems (SYMX)(8/20/11). Starts getting methanol sales from its ZZ joint venture. Balance sheet still looks good.

Cover-All Technologies (COVR)(7/20/11). Mountain West Farm Bureau implements company’s policy.

On Track Innovations (OTIV)(6/20/11). Sets earnings news for November 26. Deploys NFC payment solutions to a consortium of banks in Hong Kong, Taiwan, and Macao. Receives purchase orders of more than $1 million for EasyFuel Plus. Signs its largest purchase contract for NFC readers, valued at more than $10 million.

GSE Systems (GVP)(4/20/11). Quarterly numbers not mind-numbing; balance sheet still looks sturdy.

Thermogenesis (KOOL)(4/5/11). Recent numbers got great; balance sheet still looks good.

Alpha Pro Tech (APT)(7/20/10). Releases pretty good earnings news; balance sheet still looks strong. So, why doesn’t the stock take off? Good question.

NovaBay Pharmaceuticals (NBY)(4/20/10). Company misses end point on Phase 2b trial and stock tanks, so we are placing this on the “Endangered List” and we be closing it, soon.

Qualstar (QBAK)(10/20/09). And, we are also placing this one on the “Endangered List” as recent numbers disappoint. This was a long wait for nothing.

Our picks for this Newsletter are a molecular testing company that many of you will remember and another biotech, both listed on the NASDAQ.

NANOSPHERE, INC. (NASDAQ: NSPH) – $2.49. Twelve-month hi-low has been $4.49 – $1.72. Based in Northbrook, IL, with about 150 employees, this molecular testing company has 75.3 million shares outstanding, $42 million in total current assets, $48.45 million in total assets, little debt, and $16.45 million in total liabilities. Institutional ownership is around 30%. One analyst rates the stock a “strong buy”, three as a “buy”, and two have it on “hold”. www.nanosphere.us

If memory serves us, this may very well be our third trip down the aisle with Nanosphere, Inc., and, as we recall, the first two times worked well. The company still has a healthy balance sheet and is at the low end of its 52-week trading range, and it still has a nice number of analysts covering the company.

Found in 1998, and public for nearly six years, Nanosphere makes an advanced molecular diagnostics platform, the Verigene System, that enable low cost and highly sensitive genomic and protein testing on a single platform. This system includes a bench-top molecular diagnostics workstation with nanoparticle technology that allows multiple tests simultaneously on the same sample. The Verigene System is used for testing infectious disease assays, human and pharmacogenetic assays, and ultra-sensitive protein assays.

Nanosphere is currently developing diagnostic tests for such conditions as cancer, neurodengenerative, cardiovascular and infectious diseases, as well as pharmacogenomics, or test for personalized medicine. The company believes its ability to detect proteins is at least 100 times more sensitive than current technologies, and could enable earlier detection of and intervention in diseases associated with known biomarkers and the introduction of tests for new biomarkers that exist in concentrations too low to be detected by current technologies.

This is another small biotech with scant revenues and mega-losses. For example, during the quarter ending 6/30/13, revenue was $1.8 million with $7.85 million in losses.

Nanosphere worked for us in the past, and, given the information at our disposal, plus the analysts’ interest, it should work, again.

Our 24-month target for the stock is $4.00 to $4.75.

For more information, contact, NSPH’s Roger Moody at 847-400-9021; rmoody@nanosphere.us

MERRIMACK PHARMACEUTICALS, INC. (NASDAQ: MACK) – $2.50. Twelve-month hi-low has been $7.50 – $2.05. Based in Cambridge, MA, with about 225 employees, this biotech has 102.2 million shares outstanding, $85.94 million in total current assets, $107.32 million in total assets, and $165.66 million in total liabilities, of which $30.59 million is long-term debt and $77.32 million are ‘other liabilities’. Institutional ownership is around 46%. Three analysts rate the stock a “strong buy” and two as a “buy”. www.merrimackpharma.com

Why go with Merrimack Pharmaceuticals, Inc., which appears to be drowning in liabilities, and is way off its IPO price from last May? This company appears to have too many weapons in its arsenal to ignore. Also, those liabilities do not seem threatening for the short or intermediate term, and it makes more sense to buy a stock at its low than when it is near its high.

Founded in 1993, and public for less than a year, Merrimack Pharmaceuticals is developing medicines for treating various cancers. The company uses its Network Biology proprietary systems biology-based approach to biomedical research. Its therapeutic oncology candidates in clinical development include MM-398, a stable nanotherapeutic encapsulation of the marketed chemotherapy drug irinotecan, which is in multiple ongoing Phase I, Phase II, and Phase III clinical trials for various cancers; MM-121, a fully human monoclonal antibody that targets ErbB3, a cell surface receptor implicated in cancer, which is in multiple ongoing Phase I and Phase II clinical trials; and MM-111, a bispecific antibody designed to inhibit ErbB3 signaling in cancer cells that are characterized by over-expression of the ErbB2 cell receptor, which is in multiple ongoing Phase I and Phase II clinical trials.

Merrimack’s product candidates also include MM-302, nanotherapeutic encapsulation of doxorubicin with attached antibodies that target the ErbB2 (HER2) receptor in Phase 1 clinical trial in patients with advanced ErbB2 positive breast cancer; MM-151, an oligoclonal therapeutic consisting of a mixture of three human antibody antagonists, which is in Phase I clinical trial; and MM-141, a human tetravalent bispecific antibody designed to inhibit signaling of the P13K/AKT/mTOR pathway initiated by the insulin-like growth factor 1 receptor (IGF-1R) and ErbB3, which is in Phase 1 clinical trial.

The company has collaboration and license agreements with Sanofi, Dyax Corp., PharmaEngine, Inc., Adimab LLC, University of California, the U.S. Public Health Service, and Selexis SA.

In early October, Merrimack completed enrollment of Neoadjuvant Phase study of MM-121 in HER2-negative breast cancer. Recently, the company reported some disappointing end-point results in one of its clinical trials, but, for now, this does not overly concern us, since the company as other promising product candidates.

Unlike other small biotechs, this one does garner some revenue, but still chalks up huge losses. For FY2012, ending 12/31/12, revenue was $48.9 million with $91.3 million in losses. For the quarter ending 6/30/13, revenue was $18.45 million with $30.1 million in losses.

Merrimack Pharmaceuticals seems to have a lot going on, and the stock appears ready for some sort of upward movement.

Our 24-month target for the stock is $4.00 to $4.75.

For more information, contact MACK’s Geoffrey Grande at 617-441-7602.

Look for the December 5, 2013 Newsletter to be posted on 12/1 or 12/2.

Happy Thanksgiving,

George

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