Greetings, and welcome to the February issues of Condor Monthly! In What's New at Condor Capital, we introduce Dina Korznikova and explain our class action litigation policy. In From the Portfolio Manager this month, we discuss Gilead Sciences and our outlook on it for the next several years. In this month’s Financial Planning Corner, we analyze the recently passed Deficit Reduction Act of 2005 and its affect on Medicare, Medicaid, and federal student loan programs.


What's New at Condor Capital

Condor Capital is pleased to announce the addition of Dina Korznikova to our staff. She is a recent Rutgers University graduate with a degree in economics. Dina will be assisting Andrew Novick in the client services department, focusing on the development of college funding and retirement analyses. She will also be a member of the research committee. Please join me in welcoming her!

Important Information Regarding Class Action Lawsuits

Investors that bought or sold a stock named in a class action lawsuit will likely receive information on the lawsuit and materials to file a claim whether or not you are actually eligible to participate in the suit. In fact, you may have received materials relating to lawsuits involving Solectron and Royal Ahold recently. However, most of our clients are not eligible to participate in these suits, no action is required, and the litigation materials for these companies can be discarded. Note that we have filed on behalf of the few clients that were part of the class. Additionally, you may have received materials relating to a lawsuit against AOL Time Warner. Many clients were eligible for this suit and we have already submitted initial claim forms. This was a very complicated filing and we suspect that some clients may get a notice saying their initial claim was rejected due to insufficient documentation. Again, no action is required on your part as we will automatically take corrective action.

Traditionally, Condor has always attempted to file appropriate claim forms for any stock involved in a class action lawsuit in a Condor-managed account. However, it is clear that more class action lawsuits are being initiated against publicly traded companies than ever before. Due to the high administrative cost and limited recovery, we may need to revise our policy concerning class action lawsuits. Please watch for future communication on this issue.


From the Portfolio Manager

Gilead Sciences (GILD)

About Gilead Sciences:

Gilead Sciences is a recent addition to clients' portfolios. The move is part of our overall effort over the last few years to focus on specialized areas of the healthcare industry, such as biotechnology and generics, while de-emphasizing traditional pharmaceutical companies with heavy generic exposure and lack-luster pipelines.

Overview

Gilead is a biotechnology concern that specializes in infectious diseases, including the flu, HIV, hepatitis, and infections related to AIDS. The firm's HIV franchise dominates the industry. It currently markets Truvada which is a once-a-day regimen combining two of its other drugs. Once-daily dosing greatly increases patient compliance. All of Gilead's HIV drugs are NRTIs, which inhibit an enzyme that allows HIV to replicate. They are also part of the preferred highly active anti-retroviral therapy (HAART) regimen, according to guidelines published by the Department of Health and Human Services. Preferred regimen status is one of many reasons Gilead's Truvada now gets about 23% of new NRTI prescriptions and a sizable chunk of the $7 billion HIV antiviral market. Recent trials comparing Truvada to GlaxoSmithKline's Combivir have supported Truvada's superior efficacy and safety profile. Patients should gradually switch to Truvada as more data is published and after the FDA grants Gilead permission to promote Truvada using this new clinical information.

HIV Is A Growing Concern

Globally, the rate of HIV infections continues to rise. The Centers for Disease Control and Prevention recently increased their estimate for the number of annual HIV infections in the U.S. from 40,000 to 50,000. While a majority of the newly infected are the inner-city poor, higher infection rates are being witnessed in the gay white male population and among drug abusers. With the introduction of safer drugs, more patients are starting therapy at an earlier stage of the disease.

Superior Pipeline

Through a joint venture to combine Bristol Myers Squibb's Sustiva and Truvada in one pill, Gilead is aiming to create an all-in-one HIV treatment - a product that no company has managed to create thus far. The new drug is an integrase blocking drug which may offer doctors a new strategy to kill resistant strains of HIV that emerge in an estimated 76% of AIDS patients treated with drugs. Due to the superior dosing convenience, up to one-third of patients could eventually switch from Glaxo's treatments. This triple-pill is expected to launch in 2007 and may become the #1 HIV drug in the world.

Tamiflu

Sales of Gilead's Tamiflu drug have surged worldwide as avian flu spreads. Tamiflu is the only currently approved product that has shown effectiveness against avian flu. Gilead recently negotiated higher royalties from Roche, which markets Tamiflu.

Growth

We expect Gilead's earnings to grow in excess of 20% over the next 5 years.


Financial Planning Corner

Deficit Reduction Act

On February 8, 2006, President George W. Bush signed the Deficit Reduction Act of 2005 (S.1932, DRA) into law. In a statement announcing passage of the DRA, the President stated that although the economy is strong and we are seeing the fifth year of uninterrupted economic growth, "we need to look at challenges down the road and respond with wise policies now," and the biggest challenge to the budget now is to reduce mandatory federal spending on entitlement programs. He added that, "Medicare, Medicaid, and Social Security are now growing faster than the economy, faster than the population, and nearly three times the rate of inflation." Implementation of the DRA will save taxpayers almost $40 billion over the next five years, averaging out to about $300 per taxpayer. Although the DRA was passed into law without much fanfare, the act makes some important changes to the Medicaid, Medicare, and the federal student loan programs, which could have significant implications. The DRA is a complex new law, and the provisions listed below are only a few of the changes implemented by it.

Medicaid:

Changes created by the bill make it much more difficult to qualify for nursing home coverage:

• The look-back period is lengthened from three years to five. This applies to any assets transferred at less than full market value after the enactment of the bill so that the individual can qualify for Medicaid.
• A loan or a mortgage is considered a transfer of assets and is subject to the look-back period, unless the repayment is actuarially sound and cannot be cancelled at the time of the lender's death.
• The start of the penalty period for transferred assets shifts to the date on which the individual would have qualified for Medicaid coverage of nursing home care (if the transfer had not occurred). Thus, any transfer of assets for less than full market value, made within the last five years, will disqualify the applicant from Medicaid-covered nursing home care for a period of time after he or she is institutionalized. Hardship waivers for the period of ineligibility still apply in certain cases.
• Opportunities for individuals to intentionally shelter their assets to qualify for Medicaid are now limited, since the act requires states to change treatments of certain transfers.
• The cap on the amount of home equity someone may have and still qualify to receive Medicaid is now set at $500,000, although states have the discretion to raise this to $750,000. This will be waived, however, for applicants with spouses or dependent children who reside in the home. Seniors can still take a reverse mortgage or a home equity loan to reduce the amount of equity in the home and still be eligible.
• Annuities are counted as resources unless they are irrevocable and nonassignable, actuarially sound, and have equal payments without deferral or balloon. Additionally, the state would have to be named a remainder beneficiary of the annuity, although it could be secondary after a spouse or a minor or disabled child.

Medicare:

Provisions are intended to save money and limit opportunities for fraud without degrading the quality of care to needy individuals.

• Higher-income seniors are required to pay additional premiums for Medicare coverage in conjunction with the Medicare Act of 2003.
• Planned increases in payments for home health agencies are cancelled and deductibles for certain medical procedures are eliminated.
• Service contracts for maintenance and repair on durable medical equipment (special walkers, chairs, and beds) are eliminated and only needed maintenance and repair can be covered.
• Caps are placed on outpatient therapy services in most circumstances, including coverage for home oxygen therapy.

Federal student financial aid programs:

Overall student loan costs could be reduced by nearly $22 billion, while simultaneously expanding student aid by $10 billion.

• Interest rates for Stafford (student) and PLUS (parent) loans are modified (typically higher fixed rates).
• Origination fees for borrowers of both subsidized and unsubsidized student loans are reduced.
• Loan limits for subsidized Stafford loans for first and second-year students, as well as unsubsidized Stafford loans for graduate and professional students, are increased.
• A new grant program is created to provide more funding to full-time students who are U.S. citizens, which will supplement the existing Pell grant.
• Prepaid tuition plans are now treated as assets instead of as resources in the formula used to determine federal financial aid.
• FFEL consolidation loan borrowers are prohibited from receiving a subsequent Direct Loan consolidation except in very limited circumstances.
• The early repayment status loophole that enabled continuing students to consolidate while they are still in school and the ability of married students to consolidate their loans together have both been eliminated.
• Guarantors are required to pay a 1% guarantee fee on the loan balance to the Federal Student Loan Reserve Fund, which will effectively eliminate most guarantee fee waivers, thereby increasing student costs.