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Gnostam LLC PO Box 960 Inverness, CA 94937

March 26th, 2011 Newsletter

Independent Investment Advisor

STOCKS TO OWN NOW: In short three main areas: Energy [Gas producing & pipelines]; Semiconductor; PLAB Biomedical. CELG, GILD ENERGY AND GAS PIPELINES: EL PASO, [EP] El Paso’s Pipeline Group is the nation’s leading interstate natural

gas pipeline franchise as measured not only by mileage, but more importantly, by access to key supply regions and major consuming markets as well as by unparalleled connectivity to those markets. EP transports more than a quarter of the natural gas consumed in the US each day through our 42,000 mile interstate natural gas pipeline system.

El Paso Exploration & Production Company is a leading domestic natural, [Continued on page 3]

Figure 1. El Paso Underground gas storage plant, Arizona.

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Gnostam LLC performance Graphs

Gnostam was established in February 2004. Since inception the annualized rate for return for a client portfolio managed by Gnostam LLC has returned a total 9.56%. For the period from January 2007 to date, the managed portfolio has returned an average of 1.53% vs. -‐2.55% of the S&P 500. Please see table below.

Chart 1 Gnostam Performance

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gas producer with a substantial footprint in the emerging shale plays across the United States and international developments in Brazil and Egypt. EP is active in all phases of the E&P value chain: exploring for, acquiring, developing and producing natural gas and oil. El Paso’s pipeline network has its origin in the South and South West regions of the USA. Most of the major onshore interstate natural gas pipeline companies (see Table below) operating in the Southwest Region (Arkansas, Louisiana, New Mexico, Oklahoma, and Texas) are primarily exporters of the region's natural gas production to other parts of the country and Mexico, while an extensive Gulf of Mexico and intrastate natural gas pipeline network is the main conduit for deliveries within the region. More than

56,000 miles of natural gas pipeline on more than 66 intrastate natural gas pipeline systems (including offshore-to-onshore and offshore Gulf of Mexico pipelines) deliver natural gas to the region's local natural gas distribution companies and municipalities and to the many large industrial and electric power facilities located in the region. The profitability of pipeline business given its natural oligopoly status is subject to regulation. EP has been very aggressive in its penetration of the FERC and has many former FERC employees on its pay. Main Operating Statistics for EP: 26 Bcf/day capacity ~ 12% of US; 18 Bcf/day throughput [28% of gas delivered to US consumers which is by far the most profitable part of the business];

Chart 2. El Paso Piplelines in US

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Portfolio Changes and Recommendations for February 15th 2011

2011 will be a difficult year for investors. Too much money has come into the market, especially money that chases returns, such as mutual find money. There is almost no chance in my mind that the market will go much higher than it is at the moment. I would sell most stocks that are financial and related to housing, and retail. Instead, buy rare metal miners, gas pipelines and gas producers. Once the value of solar stocks has come down, they may be a place to look. Gas pipeline strong buys are as follows: Kinder Morgan, [KMI] El Paso, [EP] Williams Partners, [WPZ] Plains All America, [PAA] Most of these will be subject to consolidation in my view. I would add the following utility, UGI, which is a liquefied natural gas play. In genomic equipment and services, Life technologies, [LIFE] while expensive has an almost unique exposure to the high quality earnings from genomic research and genomic tools. If I were a Pfizer, this is the type of company I would want to acquire. Semiconductor Equipment has great potential for producing superior returns in the first quarter of 2011.

The following is a table of our best buys:

• Photronics [PLAB] 12.2 x multiple;

• Kulike & Soffa [KLIC] 11.9 multiple;

In Pharma:

• Gilead, [GILD] 11.55 multiple; • Celgene, [CELG] 18.96

multiple. Gilead is a straight up buy.

In Oil and Gas exploration, valuations of the deep-sea drillers [<4,000 feet] are attractive. With the new Petrobras find, there has been a re-deployment from the GoM to the deep offshore drilling areas off the coast of Brazil, and rates are expected to climb by 11% in 2011. Best choices are:

• Helix Energy, [HLX] 12.7 x multiple;

• Diamond Offshore [DO] 11.33 x multiple;

Solar Plays that may be of interest: LDK SOLAR, [LDK] $14.45 MEMC [WFR] is a buy FSLR is a short.

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EP also has the best-positioned gas franchise in the US pipeline market for supplying growth markets, namely NE, SE, Rockies and SW. From 2007-2010 EP has grown its reserved by 30% CAGR, with 3.4 Tcfe of proven reserves. EP has hedged its gas exposure as follows: 75% of gas production @$5.95~ 2011; 45% of gas production @$6.01 ~ 2012. Current price is approx $4 tcf. EP’s crude oil hedges have not been as successful, with 85% of crude production for 2011 hedged at between $86-$91/bbl, against current price of $105.45. EP has capex requirements for pipelines of $8bn, and $13.7 bn debt, with an operating cash flow of $1.8 bn in 2010, lower than in 2009 because of lower commodity prices. However cash costs $/Mcfe, were $1.78 which is a truly low cost of raw material, [sold at $5.95] or a gross margin of 234%. Given the concerns over nuclear safety, this is a stock to own for the long term, even if it does not offer high immediate capital appreciation. Revenue and earnings should rebound this year. Declining contributions from the El Paso Natural Gas and Tennessee Gas pipeline systems led to slightly lower top-line volumes for 2010. Meanwhile, rising costs weighed on profitability and sent the bottom line down 24% on a year-to-year basis. However, at this point, El Paso’s pipeline division has largely completed its $8 billion multiyear growth projects, and we look for those deals to begin bearing fruit in 2011. Multiple capital projects are expected to go into service this year. The 680- mile Ruby Pipeline is slated for completion in

July. Also in the works are the expansions of the existing TGP, SNG, and FGT pipelines. Finally, a new Gulf liquid natural gas re-gas plant is on track and it is al- ready fully subscribed under 20-year contracts. Earnings are estimated at $1.15/share for 2011, or 16 x valuation. Cash flow per share is approx $2.55/share or 7 x which is a good value for a cash flow stream which should grow by approx 6.6% over next 3 years. Assuming everything goes as planned, these developments should be accretive to 2011’s earnings. However, there’s a risk of delays due to the time needed to receive all necessary permits, as well as ongoing restrictions related to fish and game habitat and nesting in production sites. GILEAD SCIENCES: [GILD] In approx 20 years, Gilead has become a leading biopharmaceutical company with a portfolio of 13 marketed products, a growing pipeline of investigational drugs and more than 4,000 employees in offices across four continents.

Gilead’s primary areas of focus include HIV/AIDS, liver disease and serious cardiovascular/metabolic and respiratory conditions. The most profitable drugs in the world, are of course those which do NOT cure patients, but alleviate if not prevent the symptoms of the diseases they are indicated for, such as for HIV, and multiple sclerosis for example, [MS]. The magic of the these retroviral drugs for the companies who commercialize them is that they are used un a combination of approximately 2-3 drug combinations, and that, as they do NOT provide a cure, but slow

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Table 1: Current retroviral drugs on Market and patent expriry

Figure 3. How a retrovirus affects a living cell

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down the symptoms, they have to be taken by patients pretty much for the rest of their lives, thus offering far more profit potential than cures or vaccines. WHAT ARE Antiretroviral Drugs? Medications for the treatment of infection by retroviruses, primarily HIV. When several such drugs, typically three or four, are taken in combination, the approach is known as Highly Active Antiretroviral Therapy, or HAART. The American National Institutes of Health and other organizations recommend offering antiretroviral treatment to all patients with AIDS. Because of the complexity of selecting and following a regimen, the severity of the side effects and the importance of compliance to prevent viral resistance, such organizations emphasize the importance of involving patients in therapy choices, and recommend analyzing the risks and the potential benefits to patients with low viral loads. TYPES OF DRUGS: Antiretroviral (ARV) drugs are broadly classified by the phase of the retrovirus life-cycle that the drug inhibits. ▪ Nucleoside and nucleotide reverse

transcriptase inhibitors (NRTI) inhibit reverse transcription by being incorporated into the newly synthesized viral DNA strand as a faulty nucleotide. This causes a chemical reaction resulting in DNA chain termination.

▪ Non-nucleoside reverse transcriptase inhibitors (NNRTI) inhibit reverse transcriptase directly by binding to the enzyme and interfering with its function.

▪ Protease inhibitors (PIs) target viral assembly by inhibiting the activity of protease, an enzyme used by HIV to cleave nascent proteins for final assembly of new virons.

▪ Integrase inhibitors inhibit the enzyme integrase, which is responsible for

integration of viral DNA into the DNA of the infected cell. There are several integrase inhibitors currently under clinical trial, and raltegravir became the first to receive FDA approval in October 2007.

▪ Entry inhibitors (or fusion inhibitors) interfere with binding, fusion and entry of HIV-1 to the host cell by blocking one of several targets. Maraviroc and enfuvirtide are the two currently available agents in this class.

▪ CCR5 receptor antagonists are the first antiretroviral drugs which do not target the virus directly. Instead, they bind to the CCR5 receptor on the surface of the T-Cell and block viral attachment to the cell. Most strains of HIV attach to T-Cells using the CCR5 receptor. If HIV cannot attach to the cell, it cannot gain entry to replicate.

Maturation inhibitors inhibit the last step in gag processing in which the viral capsid polyprotein is cleaved, thereby blocking the conversion of the polyprotein into the mature capsid protein (p24). Because these viral particles have a defective core, the virions released consist mainly of non-infectious particles. Alpha interferon is a currently available agent in this class.[2] Two additional ones under investigation are bevirimat [3] and Vivecon. GILEAD FINANCIALS: Revenues for 2010 were $7.95 bn. Q4 2010 revenues were $1.998 bn. The main drugs that are under patent and marketed are: Triple, [HIV], Vireo [HIV, Hepatitis], Let iris [Pulmonary-arterial hypertension], Tami flu, [influenza], Arena, [angina],

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Embosomed [fungal infection], Cays ton [Cystic Fibrosis]. The current market size of the HIV market is, $12 bn. The current share of this market by Gilead’s patented drugs is around 54%, and rising as in the US 64% of all diagnosed HIV patients are on Gilead products. The market size will decline from 2012 as some of the drugs will come off patent and will be available generically. Gilead continues to develop its drug pipeline, especially in the area of Hepatitis, HIV and Cystic Fibrosis. RECENT DEVELOPMENTS: On March 22nd, GILD’s potential HIV treatment elvitegravir met its key goals in a late-stage study. Patients received once-daily doses of the drug candidate over a 48-week period or a twice daily dose of raltegravir, which is made by Merck & Co. under the name Isentress. Elvitegravir met the primary goal of "non-inferiority", or working as well as Isentress. In short GILEAD has an amazing product pipleline and has proven to be able to truly innovate in the area of high value added drug development. The market value of the HIV retrovir market is expected to shrink, as the early Glaxo and Abbott drugs come off patent. It costs on average $10,000-$15,000 per patient per annum. This is well below the cost of interferon and Copaxone [MS drugs] which can cost between $30,000 -$50,000 per patient per annum, and which have long patent protection cycles for TEVA and the other drug companies in the MS space, namely Biogen and

Novartis. GILEAD AS AN INVESTMENT: Still a buy at these prices. Huge cash flow, 2.8 billion in cash from operations, with a deep intelligence of where to use this cash to buy the next generation of block buster drugs. Today Viread is taken by eight out of 10 newly diagnosed AIDS patients, usually as part of two combo pills that Gilead sells. Its combined sales last year were $4 billion. Gilead didn't introduce a totally new drug class based on stunning biological insight, as Glaxo did with AZT (the first AIDS drug), Merck with its cholesterol drug Mevacor or Genentech with Avastin for cancer. But it made HIV drugs more convenient and less horrible to take. Gilead liberated patients who once had to take as many as a dozen pills scattered throughout the day. Now some can take one daily pill that contains all three of the drugs needed to control the virus.

This has given Gilead a $40 billion market capitalization, bigger than that of Eli Lilly (nyse: LLY - news - people ), whose sales are four times greater. Over five years its stock has outperformed those of Google Exxon and every big drug company except for Celgene ''What's still unappreciated,'' says Gilead Chief Executive John Martin, ''is that you want to simplify therapy so people take all the pills. If you take a partial dose, the virus develops resistance and comes back.

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Gnostam LLC 5731 Kirkwood Place N Seattle, WA 98103 USA E-‐mail: [email protected] www.gnostam.com

Disclaimer:

The information and any statistical data contained herein have been obtained from sources which we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice. Gnostam LLC and/or its shareholders, directors, officers and/or employees, may have long or short positions or deal as principal in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. The securities mentioned in this report may not be suitable for all types of investors. ALL investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions. You are free at all times to accept or reject all investment recommendations made by the Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for the successful performance of an investment and we are expressly prohibited from guaranteeing accounts against losses arising from market conditions.

Past performance is no guarantee of future results, and current performance may be lower or higher than the performance data quoted.

Investment Disclaimer All investments involve different degrees of risk. You should be aware of your risk tolerance level and financial situations at all times. Furthermore, you should read all transaction confirmations, monthly, and year-end statements. Read any and all prospectuses carefully before making any investment decisions. You are free at all times to accept or reject all investment recommendations made. All products sold are subject to market risk and may result in the entire loss to the client's investment. (For example: excessive withdrawals may result in the depletion of your account). Please understand that any losses are attributed to market forces beyond the control or prediction of Gnostam LLC. As you know, a recommendation, which you are free to accept or reject, is not a guarantee for the successful performance of an investment and we are expressly prohibited from guaranteeing accounts

gnostam march 26 2011 1

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