Migrating Tropical Diseases = Global Investment Imperative

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Includes: GSK, MRK, NLNK, NVS, PFE, SNY, XON
by: Henry Miles

Summary

Serious diseases are moving out the tropics in part because of global warming.

Almost all countries will come under threat socio-economically from these diseases.

This creates an investment imperative for/in providers of vaccines and other solutions.

Global Warming and Disease

Consider this: a) A few weeks ago, The National Oceanic and Atmospheric Administration / NOAA and NASA announced that 2015 was by far the hottest year on Earth since record keeping began in 1880, b) Severe mosquito-borne viruses including Dengue Fever and Zika are migrating north; they are no longer confined to Africa, South America, Southeast Asia, and Oceania, and c) The largest economies in the world now join other countries in being under threat from these tropical diseases.

This information began to hit home with me on a recent escape to Hawaii that was seeing cases of Dengue Fever. Dengue is transmitted by mosquitoes, infects millions of people globally every year, and results in bone-crushing pain and sometimes death. Florida, Texas and other southern states have also already seen home-grown cases of Dengue.

About the same time, Hawaii also reported a single case - the US's first case - of the Zika virus. In the time it took me to draft this article, Arkansas, California, New York, Virginia, and European countries also reported cases all brought in by people traveling in the tropics. Zika is also transmitted by mosquitoes, one that is native to the southern US. The virus is suspected of leading to paralysis in adults and causing horrific birth defects including head disfigurement and brain damage. Within just the last few weeks, the Centers for Disease Control and Prevention have cautioned pregnant women and women planning on becoming pregnant to postpone travel to Brazil, Mexico, Central America, the Caribbean and other countries that Zika has invaded. El Salvador is recommending that women not get pregnant until 2018. The World Health Organization has called an emergency meeting saying that Zika is growing "explosively" and "will spread across the Americas".

Fighting Disease / Resources

The Gross Domestic Product of the United States is about $18 trillion representing over twice the GDP of all of Africa and South America combined. North America and Europe's combined GDP comes in at about $50 trillion or 5 times more than the total of Africa and South America. Northern countries have the resources to mount a full-scale attack against tropical diseases, a topic that received a lot of attention at the World Economic Forum in Davos, Switzerland two weeks ago.

With apologies to the epidemiologists out there - I am not one, please chime in - diseases spread to humans in a variety of ways including person-to-person, animal-to-person, insect-to-person, person-to-insect-to-person and so forth. The trick, as I understand it, is to: a) find the origin of the disease, b) determine how it spreads, c) either stop it at its source or prevent the vector from passing on the pathogen, or d) immunize people against the disease.

There are lesser ways to fight such diseases including by creating physical barriers with clothing, face masks and sleeping nets, or with chemical deterrents such as repellants and insecticides. These approaches find use when the threat is not all that great and/or when nothing else is available. However, they are topical and temporary.

There are two primary ways to fight such diseases. The first involves genetically modifying the vector such that they can no longer transmit disease. While the concept of GM is appealing, as with mosquitoes for example, concerns have been raised about the complete effectiveness of such solutions as well as about the broader effects of GM on the ecosystem. Still, the use of GM mosquitoes is gaining attention when vaccines can't be delivered or when action is required on multiple fronts.

Which leaves the second primary option, vaccines. In this approach, inert pathogens are introduced to the body that trigger a natural immunity to bacteria, viruses or fungi. Vaccines have been used for decades to protect people from Anthrax, Cholera, Diphtheria, Measles, Mumps, Pertussis, Polio, Rabies, Rubella, Tetanus, Yellow Fever, and other diseases. Vaccines can be very effective. By way of illustration, the smallpox vaccine did its job so well that it hasn't been used in the United States since 1972. That said, vaccines have eluded scientists in their fight against some diseases.

Strategic Investment Imperative

As I have said in earlier SA articles, I believe alpha-level performance may result from, "big, developing, scientific, socio-economic, and political patterns and trends that have not yet been reflected in the price of related equities". The threat of tropical diseases proliferating and migrating rises to this level.

Let's reconnect the dots - global warming, the spread of serious tropical diseases, including diseases that are not currently preventable or treatable, within and into countries that have much to lose by their presence, including some that have major resources to deploy, including toward the development of vaccines and GM solutions. These circumstances have and will continue to bring together:

· Governments and public agencies like the World Health Organization, the National Institutes of Health and Centers for Disease Control and Prevention in the United States, and Brazil's Ministry of Health that are already taking leadership positions.

· Research universities such as the Universities of Texas and Glasgow that have scrambled teams on Zika, and non-profits that are supporting disease research such as The Bill & Melinda Gates Foundation that is working to defeat Malaria.

· Small corporations such as NewLink Genetics (NASDAQ:NLNK) that has licensed an Ebola vaccine developed by Canadian government scientists, and Intrexon Corporation (NYSE:XON) that is moving forward with a GM solution to Zika in Piracicaba, Brazil.

· Major pharmaceutical companies such as Sanofi (NYSE:SNY) that is perhaps the largest vaccine producer in the world and has developed and is testing / distributing a Dengue vaccine in China, Mexico, and Brazil and is considering developing a treatment for Zika as is GlaxoSmithKline (NYSE:GSK).

Whether an investor focuses on GM mosquitoes or human vaccines is a matter of personal choice when considering issues of risk / reward. As I have said in earlier posts, I prefer to focus on transnational companies for the competitive advantage and diversification protection they offer. Accordingly, I now own all the big pharma vaccine companies including Sanofi and GlaxoSmithKline as well as Merck (NYSE:MRK), Novartis (NYSE:NVS) and Pfizer (NYSE:PFE).

Governments, universities, non-profits, and small-cap firms all will continue their R&D of vaccines to meet this developing crisis. However, I am of the mind that they generally do not have enough market clout and, therefore, must rely on large-cap pharmaceutical companies for production and distribution. We have seen this in the recently announced alliance between Merck and NewLink with respect to an Ebola vaccine.

PFE

NVS

SNY

MRK

GSK

Price / Earnings

23

23

19

13

7

Price / Sales

4

4

3

4

3

Dividend Yield

3.7

3.4

3.9

3.6

5.6

52-Week Low/High

28-36

76-107

39-55

46-62

37-49

Current Price

30

78

42

50

41

Beta Coefficient

.9

.6

1.0

.6

.9

Click to enlarge

Beyond transnational pharmaceutical / vaccine companies, my interests lie in five other areas of strategic investment: 1) Water management companies given global warming and mounting supply/demand imbalances, 2) Japanese auto manufacturers given the weak Yen and their impressive commercial record with R&D, 3) Upstream food companies given stable ag commodity prices / supply and demand, 5) Property & casualty insurers given inelastic demand and industry consolidation, and 4) Military defense companies given superpower tensions and the threat of terrorism.

For those interested, in my first article on SA entitled Strategic Investing - Lead Not With Numbers, I began to provide evidence that strategic investing can result in alpha-level returns.

Disclosure: I am/we are long GSK, MRK, NVS, PFE, SNY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Numerous overlapping resources were used in the preparation of this article that are accessible by searching on the particular topic(s) of interest to you. There are no sure things when it comes to investments of this kind. Be sure to do your due diligence in consultation with a competent financial and other adviser(s).