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On the front lines of the flu fight
Drug companies leading the battle against a deadly flu stand in the spotlight as the risk rises. Investors, though, will find the stocks have already run up.
By Michael Brush
News about the avian flu gets more chilling at every turn.
Last week the deadly virus turned up in Turkey, Greece and Romania. Then came news from Vietnam that one of the drugs doctors hoped would slow the flu -- called Tamiflu -- might not work as well as expected.
So far, though, the worst fears haven't been realized. Avian flu, which to date has killed about half of those who contract it, has not passed from human to human. To date, victims seem to get the virus from poultry.
"The first time we observe Avian-flu infections unrelated to direct contact with birds or poultry, we should be damn nervous," says Jaap Goudsmit, the chief scientific officer at Crucell (CRXL, news, msgs), a Dutch company in vaccine research.
If avian flu spreads rapidly among humans, the consequences for the economy could be huge. Governments might restrict travel. That would hurt already-troubled airlines. Officials may also limit public gatherings -- a bad thing for cruise operators or hotel chains that get a lot of business from conferences and related travel.
For those investing vultures hoping to profit from all this bad avian-flu news, there's not much to do at this point. There are companies that stand to benefit from flu research and the stockpiling of medicines, but their stocks mostly reflect the potential benefits.
And the profit potential itself may be overstated. For example, in a widespread outbreak, governments might commandeer patents and available drug supplies, cautions Jerome Pfund, who follows biotech stocks for Sectoral Asset Management in Montreal.
Even so, I'll describe below what companies are in the mix, just in case the flu falls off the front pages and the stock prices fall back into a more reasonable range.
Waiting for a killer to evolve
Known by scientists as H5N1, the bird flu has infected 117 people and killed 60, according to the Centers for Disease Control and Prevention. The numbers are probably higher because of underreporting. So far, victims are usually people who come into close contact with poultry or with blood or fecal matter from poultry.
Human-to-human transmission remains the biggest fear. But will H5N1 make the leap? "I think it is a very high risk because it has happened in the past," says Rahul Singhvi, chief executive of Novavax (NVAX, news, msgs), one company researching bird-flu vaccines. "The virus is continually evolving, and there is no reason it wont evolve again."
No one really knows, of course, if it will. But that hasnt stopped speculators from snapping up shares of the companies that could profit if it happens.
Treating the sick
To manage an avian-flu outbreak, governments around the globe are stocking up on two treatments that help people recover faster from influenza. They are Tamiflu, developed by Gilead Sciences (GILD, news, msgs), which gets a cut of the product's sales from Roche (RHHBY, news, msgs), the company that makes and distributes the drug. The other treatment is Relenza, developed by a tiny Australian company called Biota (BTAHY, news, msgs) and marketed by GlaxoSmithKline (GSK, news, msgs).
Tamiflu and Relenza prevent influenza from spreading inside the body by targeting an enzyme called neuraminidase that the virus needs to move to new cells. Some tests show these drugs are effective against avian flu. Many governments favor Tamiflu, in part because it has a longer shelf life, of around five years, than Relenza's three years, says Sven Zimmermann of UBS Investment Research.
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A small company called BioCryst Pharmaceuticals (BCRX, news, msgs) is developing a similar drug called Peramivir, which would be cheaper than the existing treatments, says Steve Lee, who follows the stock for Wedbush Morgan Securities.
While it may seem like a big plus for these companies that governments around the globe are stocking up on their drugs, investors may be disappointed.
First, Roche and GlaxoSmithKline are big companies, so revenue from these drugs will barely move the needle, says Zimmermann. "We forecast Tamiflu will account for approximately 4% of Roches earnings per share in the second half of 2005 and 2% in 2006," says Zimmermann, while GlaxoSmithKline will only see "modest" gains from sales of Relenza.
Another problem: Tamiflu's five-year shelf life means there won't be a large amount of recurring revenue. Once the stockpiles are built up, sales are likely to slow until those stockpiles go bad. And the patent for Tamiflu will expire in 2016, after a few rounds of buying, says Eun Yang of Jefferies & Co. In the meantime, vaccines for avian flu could hit the market.
Add this problem: Gilead's stock already reflects its avian-flu ties, says Sunaina Murthy, an analyst at AIM Global Health Care Fund (GGHCX). Thats also likely the case with BioCryst, which has advanced 60% to trade above $16 because of interest in its potential avian-flu treatment.
Protecting the healthy
So far, no one has come up with a vaccine for avian flu, but France's Sanofi-Aventis (SNY, news, msgs) has made the most progress, says AIMs Murthy. The National Institutes of Health has reported early tests of its avian flu vaccine show promise. Clinical trials are continuing in the U.S. and Europe. The company is also bulking up its vaccine production capacity in the U.S. and France.
Analysts, however, are cautious on the stock because many of its leading products -- like Plavix for artery disease, Lovenox for blood clots and Actonel for osteoporosis -- may soon be available in generic form.
MedImmune (MEDI, news, msgs) announced in late September a collaboration with NIH to develop a vaccine against several kinds of influenza, including avian flu. The stock traded as high as $34 on the news. Its price ran so high that A.G. Edwards & Sons downgraded the stock from buy to hold.
U.K.-based Acambis (ACAM, news, msgs) is working on a vaccine that potentially could work against virtually all forms of the flu because it targets a protein sequence common to the viruses. But UBS Investment Researchs Zimmermann thinks it could be five to seven years before the product hits the market.
Chiron (CHIR, news, msgs) has some promising vaccines in development, but its stock is stuck in a tight range because of a standing $40-a-share offer for the company from Novartis (NVS, news, msgs).
The front lines of innovation
We often face shortages of flu shots because the pharmaceutical industry still relies on a time-consuming process that uses chicken eggs to grow viruses before turning them into vaccines, says Jeff Bender, a University of Minnesota professor with the Center for Infectious Disease Research & Policy.
Vaccine production could slow even further with a widespread outbreak of bird flu. Infected birds would be killed, reducing the supply of eggs.
So the key is to find new ways to make vaccines, says Bender.
One company that may help is Crucell, which has a technology called PER.C6 that uses human cell lines to develop biopharmaceutical products. Crucell is working with Sanofi-Aventis to produce an Avian flu vaccine using PER.C6 cell lines. Clinical trials are scheduled to start next April. "It is quicker and more reliable because you dont need eggs," says Goudsmit, the chief science officer at Crucell.
Novavax, a small company based in Malvern, Pa., is exploring innovative ways to produce vaccines. Its system extracts genes from a virus and then uses insect cell lines to rearrange those genes into forms that trigger immune systems against the virus. Novavax says this process has created a vaccine that works against avian flu in rodents. But the company wont venture a guess on when a vaccine might come to market.
Like many bird-flu plays, these stocks have advanced in recent weeks. Buying them now is a bet that more bad news will come. Its impossible to know, of course, if that will happen. So a safer approach might be to wait for these stocks to retreat because of a lull in the flow of bad news, and then take positions in these companies working to keep the bird flu at bay.
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