Here's his report:

When I saw the numbers reported by the National Health and Nutrition Examination Survey last month, it hit me like a mad rush to the buffet table at a Jenny Craig convention. I did two things.

1. I dug up my old research files on a drug company developing a powerful anti-obesity drug.

2. I checked its current stock price.

The stock—Regeneron Pharmaceuticals (REGN:NASDAQ)—was cheap, trading for just US$12.90 a share… and had a gut-busting US$299 million in cash sitting in the bank.

But more importantly, their anti-obesity drug was in Phase III… and had already demonstrated very significant results. In fact, the numbers are so good that if it were approved today, it would immediately overtake the two major weight-loss drugs currently on the market.

I’ll explain in a minute how the company’s drug—Axokine—could become the biggest selling drug in history… and how its stock could gain 500% (at least). But first let me tell you why this drug will turn the company into a profit machine for your portfolio.

Diet or die!

Think about it—the fact that Fen-Phen destroyed your heart valves and was potentially fatal wasn’t enough to stop women from taking it. And when Fen-Phen was finally banned in 1997, a multimillion-dollar black market sprang up literally overnight.

Xenical and Meridia—the only FDA-approved anti-obesity drugs currently on the market—are huge cash cows… even though they aren’t exactly thwarting the fat epidemic in the U.S.

Xenical and Meridia reduce patients’ weight by 13 pounds and 10 pounds on average, respectively. But that’s after a full year of taking the medication. Yet these two drugs generate a combined US$800 million in sales per year!

US$800 million sounds like a lot of cash—and it is. But it’s just a small fraction of the fat pie.

Regeneron’s drug currently in Phase III clinical trials is not only safer than Xenical and Meridia, it could be 3 to 4 times more effective at taking the pounds off!

I’m betting that if the drug gets approved, the company’s stock could rise at least 500%. And that’s conservative.

Get into their heads

Regeneron is developing Axokine for the treatment of obesity.

The way Axokine works is by tricking the hypothalamus, a primitive region of the brain that’s important in many human urges, including hunger, thirst and sex.

Axokine’s mechanism is similar to that of leptin, a compound secreted by fat cells to signal the brain that the body has an adequate supply of calories.

Leptin gained public notoriety when it was widely reported that knockout mice that made no leptin protein (known as ob/ob mice) were morbidly obese but returned to normal weight when given exogenous leptin.

Amgen is developing leptin in humans, but has experienced limited success in clinical trials to date. Obese people actually over-express leptin (there’s a higher-than-normal concentration of leptin in the blood and brains of obese people), suggesting that obesity is a condition of relative leptin resistance rather than leptin underproduction.

Could be 3 to 4 times better than anything on the market

In a Phase II clinical trial, obese people lost an average of 10 pounds during a 12-week treatment period with Axokine.

And here’s the juice: The weight loss seen at 12 weeks for Axokine was superior to what was seen at six months with Xenical and Meridia.

If patients on Axokine can shed 10 pounds in every 12-week period, it’s possible they could lose 30 to 40 pounds in a year.

A Phase III pivotal trial for Axokine began in 2001, and approximately two thousand patients are enrolled in the study.

Two additional studies initiated as part of the Axokine Phase III program were designed to assess Axokine’s function after short-term dosing periods and to measure weight change after cessation of short-term Axokine treatment.

A separate clinical trial was initiated in June of 2002 to assess the safety and efficacy of Axokine in overweight and obese individuals with Type 2 Diabetes Mellitus.

Peripheral markets

Diabetes is just one byproduct of the obesity epidemic, but it’s a huge one. Approximately 150 million people throughout the world have Type II diabetes, and it is estimated that this number will rise to over 200 million by the year 2010 and 300 million by 2025.

Several studies have indicated that loss of body weight can significantly reduce the progression of obesity-related disorders, including diabetes.

It's time to reload the biotech portfolio

As you probably know, investors in biotechs made a fortune during the biotech and med-tech boom of the late 1990s. If you were with me then, you enjoyed gains like:

Aviron +244%

Medco Research +33%

Medco Research (2nd pos.) +78%

Geron +57%

Interpore +46%

Connectics +156%

LCA Vision +671%

VISX +70%

Cubist +21%

Gene Labs +85%

Inhale Therapeutics +124%

Millennium Pharma +191%

Alexion Pharma +140%

Genome Therapeutics +133%

Gilead Sciences +94%

Gene Logic +113%

Aviron (6th pos.) +238%

Geron (2nd pos.) +117%

But times have changed… biotech stocks are again the redheaded stepchildren of the renewed market upswing. And I couldn’t be happier.

Quite frankly, the last time I saw biotech valuations this attractive was about 1995. During that year, the broader market was emerging from the stealth bear market of 1994.

Biotechs were coming off one of their worst-performing years ever—thanks to Bill and Hillary’s attempt at a national healthcare plan. Many biotechs were trading either at or near their cash positions.

Enough cash to choke a pig

Today, dozens of promising biotechs find themselves trading at cash. Human Genome Sciences (HGNS:NASDAQ) was once the biotech that was going to save the world from every known disease. Today, HGSI trades at a market cap of US$1.46 billion… and has a cash position of US$1.42 billion.

Millennium Pharmaceuticals (MLNM:NASDAQ) has a market cap of US$2.1 billion… and a cash position of US$1.8 billion. Inhale Therapeutics trades at a market cap of US$317 million with a cash position of US$313 million. And Medarex has a market cap of US$261 million… and a cash position of US$402 million!

But it’s more than just cash sitting in the bank.

Not only have institutions been net buyers of biotech stocks, corporate insiders have been buying in the open market!

That’s why I’m beginning to look at biotech stocks with potential blockbuster drugs in the pipeline, reasonable valuations, and sizeable cash positions sitting in the bank.

And it’s why I’m jumping on Regeneron Pharmaceuticals (REGN:NASDAQ).

I know the Regeneron story well.

In fact, I played it twice back in 1999 and 2000, and my members walked away with profits of 171% and 10%.

But I think that’s a drop in the bucket compared to what’s coming.

The great race

Think about this for a minute—if people are so desperate to lose weight that they’re willing to have part of their stomach surgically removed so they’ll be physically incapable of overeating, how much do you think they’ll be willing to spend on a magical diet pill?

Trust me when I say that marketing directors at biotech and pharmaceutical companies know what an effective anti-obesity drug is worth.

It would be a blockbuster.

In fact, it would probably be the biggest selling drug of all time. Even bigger than Viagra.

That’s why companies have been seeking a “silver bullet” weight-loss drug for years. And that’s also why anti-obesity and diet drugs—even weak and dangerous ones—have been huge moneymakers.

With a market valuation of just US$655 million, I think this stock could triple inside of 18 to 24 months (when it’s expected to apply to the FDA for approval)… and rally 50% to 100% by the first quarter of next year—when the Phase III results will be known.

Heck, since the government released its obesity findings on October 8, the stock has rallied 23%.

November through February have historically been the best months to own biotechs (because of the various high-profile medical conferences that take place around the U.S. then). I would expect Regeneron to participate in any rally.

Buy it under US$16 a share. n