5 Potential Pandemic Shorts

Everyone is looking at speculative opportunities stemming from the possibility of a pandemic flu outbreak. The obvious longs - vaccine and treatment companies - and the obvious shorts - travel and some agricultural commodities - made their moves Monday. Is there anything left to short or even go long?

It all depends on the severity and duration of this outbreak. Mexico is a third world country with a marginal -- and I am being kind - public health infrastructure and a capital with incredibly poor air quality, a probable factor in the death rate of people with the flu and living in Mexico City. And to better understand how this could progress, or end, let's look at what is going on.

Swine flu, first identified in Mexico, has spread to the US, Canada and many other countries. It is killing people - more than 150 in Mexico, according to press reports - and has raised the threat of a pandemic flu epidemic. What makes pandemic flu more dangerous than regular flu is its virulence - it kills - and the inability of current vaccines to prevent the spread of the flu. The last great pandemic - the 1919 outbreak that some people believed killed more than fifty million worldwide - was a strain of flu that was very virulent and, perversely, hit the healthiest the hardest. Signs that this may be the case with the current flu strain are making public health officials nervous.

The problem these authorities face is the lack of treatments and the lack of vaccines. The lack of treatments is a physical problem - Tamiflu has worked, to date, on this strain, but governments stopped adding to stockpiles less than two years after the last scare. The US has at least 50 million doses and we are better off than many in Mexico, where the situation is so amateurish and chaotic that family members of victims were not given Tamiflu. Another approved treatment, Relenza, is even in shorter supply. Prospective treatments such as Peramivir from Biocryst (BCRX) are just that, prospective. What about mass vaccination? A vaccine for this variant of HN51 does not exist and cannot be produced in volume for many months, despite the claims of some soaring little biotech companies.

Speaking of companies and investment or short side opportunities - what of them? The pandemic flu scare a few years back put many companies on traders' radar and these stocks ran Monday morning. If the pandemic breaks out they are going higher - but if things calm down, some are shaping up to be great short opportunities.

Biocryst: They have a flu treatment - pandemic and regular - in mid stage trials. Due to previous trials for an oral version of the product - this one needs to be injected - this treatment, Peramivir, will get approval eventually. It is much more potent than Tamiflu. Under bio-defense legislation passed after the anthrax scare, Uncle Sam is allowed to stockpile and use a treatment after it has passed a twelve-person safety trial - and Peramivir has done this. In a real emergency the government could legally distribute this treatment.

Novavax (NVAX): This vaccine company says it can make a new flu vaccine in roughly thee months - seeing is believing. They have a novel vaccine manufacturing system that enables the rapid manufacture of vaccines and are working on their own as well as assisting other companies. They burn cash faster than my twin sons (catcher, lacrosse goalie) in a sporting goods store and have committed heavily to a new development program in India with a pharma company partner, Cadila.

Crucell (CRXL): Their business model is to become the "Intel inside" for vaccine makers. Their cell line technology platform - they create vaccines in the synthesized equivalent of human retina cells - is many times more efficient than traditional egg based vaccine production. Crucell is partnered with most of the major players in the vaccine business.

Cerus (CERS): This company has the system - INTERCEPT - to clean blood and make it free of infectious pathogens independent of the health of the donor's blood. INTERCEPT has been shown to work on HN51 flu strains in laboratory work that has been published and subject to peer review. The system has been approved in 18 countries.

Gilead (GILD): Tamiflu works on this strain of flu --- it is made by Roche but Gilead is the actual inventor of Tamiflu and receives a roughly $20 royalty on sales - 100% pure profit. Any uptick in government purchases for stockpiles or use puts a new floor under Gilead's already incredible profits, earnings and real cashflow.

What to go long, what to short? If this potential pandemic gets too real, these are all longs. But if it does not - let's hope so - the shorts here are Novavax and Biocryst. They do not have revenue, NVAX needs to worry about cash, BCRX does not, but these stocks have exploded and would probably sell off. The other companies - GILD, CRXL and CERS - continue to pop this week, and when this scare goes away, they too may be short candidates. Check back later.

Comments

[RNA:]

it was 1918:

"the 1919 outbreak that some people believed killed more than fifty million worldwide"

it is H1N1:

"A vaccine for this variant of HN51 does not exist and cannot be produced in volume for many months"

20%:

"Gilead is the actual inventor of Tamiflu and receives a roughly 20$ royalty on sales"

Apr 29 04:18 AM

[Dan Grundig:]

I agree with your premise that the recent swine flu hype has created some viable shorting opportunities. NVAX and BCRX shares have skyrocketed to multiples of last week’s pre-hoopla prices on sheer speculation that they may reap some swine flu-related benefits.

On the other hand, I find your choice of CRXL and GILD as potential shorting candidates due to the swine flu panic baffling. Both of these are established, profitable companies that have had steady high growth in revenue and earnings over the past 5 years. GILD has had no price run-up since the panic began, on normal volume. CRXL shares have risen around 10% since late last week; some of the appreciation may well be thanks to the swine flu situation, but since hitting 5-year lows in October 2008, CRXL has climbed steadily, gaining ~125%. Neither GILD’s nor CRXL’s fortunes rests on the swine flu pandemic. If anything, I could argue that they have far more to gain than lose no matter how the situation plays out.

Apr 29 08:20 PM

[David White:]

I can agree that some of the reaction is overblown. At the same time, some of the above stocks may have deserved higher prices, but had been beaten down by the negative forces in the stock market recently. A company like NVAX might well succeed in making a swine flu vaccine. If they did so in 3 months, it could make the company. It doesn't seem like a high percentage play to bet against something like this. Even if it takes them a little longer, they may still reap benefits. For a little known company, the saying, "any publicity is good publicity", seems particularly apt.

The order by President Calderon to close all non-essential businesses in Mexico for 5 days (May 1-5) may give investors a better way to play the swine flu. Plus it seems likely this is just the tip of the iceberg. Airlines, restaurants, cruise lines, malls, credit card companies, etc. will be hurt when people try to avoid crowds to avoid the swine flu. Travel to Mexico is already being hurt. Airlines are already getting hit fairly hard.

Companies like COF, BAC, C, etc. seem likely to be hurt in several ways: 1) they will lose business due to people avoiding public places (and travel); 2) the decrease in business productivity and spending is likely to deepen the recession, which will mean more NPL's; and 3) the likely consequential higher unemployment rate (certainly even staying at home for 5 days as Mexicans have been asked to do qualifies in this area) will lead to still higher charge off rates. There are likley many more issues that I haven't mentioned. However, the above reasons, plus a recent run up in banking stocks, indicate that there is likely to be a strong pull back in this area.

On May 4 we will find out for sure about the stress tests. So far it is rumored that many banks will be asked to raise more capital based on these tests results. Since lawmakers have been calling these stress tests "too close to current conditions", this may really point out the fact that the banking system is still in bad shape. Plus to raise capital many banks will often issue new stock shares or new bonds. Either of these actions should cause the banks' stock prices to go down. Share dilution normally has that effect. Add to this the fact that the market is in a near term overbought condition. Then you get the recipe for a sharp near term down movement, especially in banking stocks.

This will be even more true of banking stocks with large credit card businesses. These will be hurt dramatically with a swine flu pandemic. The weekend will likely bring worsening news on the flu pandemic front (or perhaps two weeks from now if the Mexicans are going to stay home for the next 5 days). Ken Lewis a few weeks ago said that the credit card business was souring quickly. This statement was before the advent of the swine flu epidemic. As the ever more likely "swine flu pandemic" -- the WHO raised the warning level to 5 yesterday -- takes shape, the weakness in the credit card business will become ever more evident. A company like COF, which already had worsening NPL's in its other business, will likely really get hit. It has shown that it can move dramatically. I expect we will see that again soon. It has benefitted recently from the V and MA results, but this has largely been an investor misconception. V and MA get paid per transaction. They don't risk their money. The banks are the ones that get hit with the charge offs, not V and MA. This run up for "false reasons" will likely lead to a still bigger move downward in this area. Plus the swine flu will negatively effect V and MA too, so these stocks won't be confusing people about the credit card business.

Apr 30 01:27 PM

[Freya:]

The coming week will not be pleasant for anyone who decided to short anything. Since the Virus does not manifest itself for 7-10 days, how many are actually infected have the Possibility of lighting up the rest of the States.

Meanwhile Canada has a confirmed Person to Swine infection. The Virus appears to have changed.

Avian Flu, person to person, rare. After about 3 years only 421 confirmed infected worldwide.

As of a week, Mexico alone 476 confirmed infected, person to person is normal. Person to swine, first case.

My opinion: Pandemic will be announced this week.

May 03 01:00 AM