BioCryst and Avian Flu: Underappreciated Call Option or Just Overhyped? (BCRX)

The topic du jour in biotechnology is avian flu. Any company with a tie-in to treating, preventing, or diagnosing this disease has recently been the focus of excessive speculation. The poster child of this fervor is BioCryst Pharmaceuticals (ticker: BCRX). After seeing Jim Cramer touting the stock last night on CNBC's Mad Money and watching the stock close up almost 16% today after doubling over the past couple months, I realized someone had to step forward and provide some lucidity to the story.

BioCryst's influenza product, peramivir, is a drug that previously failed in Phase 3 clinical trials. The drug, which was previously tested as an oral drug, has been resurrected based on preclinical studies that showed the injectable formulation can be used to treat avian flu. Given the concerns of an impending pandemic, there is widespread speculation that the U.S. government will stockpile this drug for emergency use. While not completely out of the realm of possibility, there are significant obstacles that first must be overcome, including proving peramivir is safe and effective and winning a government contract.

In terms of the safety and efficacy peramivir, it is not known whether the drug will work in humans as an injectable. All that is known is that the drug successfully treated avian flu in preclinical studies in mice. There is still the possibility that safety issues could emerge in humans or it is simply not efficacious. (Preliminary results should be available by year end.)

The remaining issue is whether or not the U.S. government will stockpile peramivir in case of an avian flu outbreak in the U.S.; again there are significant questions to be answered. Can supplies of currently FDA-approved drugs, like Tamiflu, be made to adequately address an avian flu outbreak? Can vaccines to prevent avian flu infection be made in time to head off an outbreak? Will funds be available to stockpile medicines to treat and prevent avian influenza? (Project Bioshield is for stockpiling vaccines and treatments related to a terrorist attack. Avian flu is not identified as a potential terrorist weapon.) The bottom line is: there are significant risks Biocryst selling peramivir.

What is the stock telling us in relation to these questions? Today, BioCryst closed with a market value of over $390 million. The company had about $40 million in cash as of June 30, 2005, and is burning about $20 million per year. The company also has an early stage drug Fodosine that is being evaluated in a variety of niche leukemias. These assets combined are arguably worth no more than a couple dollars per share, resulting in an implied value for peramivir of about $350 million, excessively optimistic in my opinion.

An NPV of $350 million, for example, implies $900 million of sales next year at a 50% gross profit and discounting back 15%. If you assume there is risk associated with the company realizing future cash flow from peramivir, then the implied future cash flow is considerably larger. For example, handicapping the likelihood of BioCryst winning a government contract and selling product next year at 50%, implies BioCryst sells $1.8 billion worth of peramivir next year!

Any way you slice it, the expectations for BioCryst are wildly optimistic based on the current stock price. This is not to say that peramivir does not ultimately become a successful drug or that there isn’t money to be made on BioCryst. Ultimately, however, reality will come back to the stock and the fast money will go elsewhere. When the music stops, you don’t want to be the one without a chair.

BCRX chart.

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