Tekmira (TKMR) is the Vancouver-based drug company that has seen its stock price soar this month due to the outbreak of Ebola in West Africa. Tekmira is developing a drug to treat Ebola utilizing its RNA interference methodology. Long investors in the stock have doubled the value of their shares since the outbreak became front-page news, less than a month ago. They have over-estimated what effect the outbreak will have on Tekmira.
What has changed is that new attention has been focused on drug manufacturers who are attempting to develop a cure for the disease. There presently is no FDA approved drug that has proven efficacy in treating Ebola.
What has NOT changed is that it takes time and money to develop and receive approval for a commercially viable drug. Three phases of trials on humans is the standard protocol, a process that takes years and would ordinarily cost in excess of $100 million. The recent outbreak may allow some drug to be used before completing that process for humanitarian reasons. Ebola is a deadly disease.
The problem for the bulls right now is they think that somehow if the outbreak spreads or worsens, that will be good for TKMR. Simply wrong. The outbreak has put additional attention on its experimental drug. It may even sell a few vials, if it has any inventory on hand. But the outbreak is not going to accelerate their approval process to overnight. Large commercial sales of the drug will not happen until the drug gets its approval in the ordinary course. The longs somehow see a 1 to 1 correlation between new patients in West Africa and money for TKMR. That just is not the case. We all of course hope their drug works, or someone's drug works. But that can only be determined over time, perhaps less time as a result of the outbreak, but we are still talking years, certainly not weeks.
The other aspect to note is that the outbreak does not increase the market size for the drug. The outbreak will surely have been contained by the time any of the experimental drugs currently in use receive their approvals. Once approved, governments and health organizations will buy and stockpile some drug. But that amount is based upon their constituent population, not the size of the West Africa outbreak. The amount they will buy is unlikely to be materially larger than if the outbreak had not occurred. Like flu vaccine, it is bought and stored in quantities based upon the statistical probability of it being needed.
Tekmira could become a much more valuable company if and when its Ebola drug is eventually approved. It is the approval that will add value to the investment. The outbreak will neither increase nor diminish its chances for approval. Only time and trials will impact that outcome. Tekmira's likelihood for success has not increased as a result of this outbreak, nor will those chances diminish if it is brought under control. As the outbreak is eventually brought under control, this reality will be realized by retail investors, who will then appreciate that little has changed with the development of this drug as a result of the outbreak.
The rush to get in the stock has become a frenzy, with price and average trading volume soaring in the month of August. You would think the outbreak occurred in August, wouldn't you? It actually first occurred in Ghana in December 2013 and by March of 2014 the World Health Organization had acknowledged that an outbreak had occurred in Ghana. By mid-April, cases had shown up in Liberia, Sierra Leone and Mali. And on July 26, the WHO reported the disease had spread to Nigeria. What happened with the outbreak in early August is unclear to me as to why the stock would take off at that point. Possibly that it occupied more of the headlines. But if the existence of an outbreak truly does impact the fortunes of a drug stock, the stock should have been moving at the beginning of the year, not the beginning of this month.
Tekmira recently reported quarterly results, which were below market expectations, and those results do impact the stock in a very real way. Tekmira is a fine company and has other drugs in its pipeline and its RNA interference technology looks promising. That, together with their Ebola vaccine they are working on, are the reasons to buy the stock. Those aspects of the company have not changed in the past three weeks as investors have just recently started to clamor about the now eight-month-old Ebola outbreak. The issue at hand is not to do with Tekmira, it is to do with investors who have jumped on a recent headline about an eight-month-old event and pushed up the stock price well ahead of itself.
I am short the name via puts, as I expect investors to realize that an outbreak does not affect the development of a drug to treat the outbreak. Tekmira, the company, is pretty much the same company it was at the beginning of August. But its stock price today is vastly different. I expect most of the gains due to the Ebola frenzy will be given back.
Disclosure: The author is short TKMR.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.