The President's Avian Flu Plan: Boon or Bust for the Speculators? (BCRX, GILD, QDEL, RHHBY)

Yesterday, President Bush outlined his $7.1 billion National Strategy of Pandemic Influenza. The intent of the plan is to prevent or limit an influenza pandemic from entering the United States, stopping or limiting a pandemic domestically, and preparing the country’s infrastructure in the event of a pandemic. Given the fervor surrounding avian flu, does the President’s flu plan support the run-up in avian flu-related stocks?

As stated in the National Strategy, which is available at Pandemicflu.gov, the President’s plan consists of three “pillars�?:

• Preparedness and Communication: Activities that should be undertaken before a pandemic to ensure preparedness, and the communication of roles and responsibilities to all levels of government, segments of society and individuals.
• Surveillance and Detection: Domestic and international systems that provide continuous “situational awareness,�? to ensure the earliest warning possible to protect the population.
• Response and Containment: Actions to limit the spread of the outbreak and to mitigate the health, social and economic impacts of a pandemic.

The Preparedness and Communication pillar includes organizing the country’s infrastructure, producing and stockpiling vaccines, antivirals and other medical material, and advancing scientific knowledge and accelerating development. The President proposes a total of $6.15 billion to support this pillar, which consists of:

• $2.8 billion to accelerate development of cell culture manufacturing technology
• $800 million for development of new treatments and vaccines
• $1.52 billion to stockpile vaccine
• $1.03 billion to stockpile antiviral medication

The goal of the Surveillance and Detection pillar is ensure rapid detection and surveillance of influenza outbreaks both domestically and internationally. This pillar calls for $251 million in funding.

Finally, the Response and Containment pillar is focused on developing a plan to contain outbreaks worldwide while maintaining the economic infrastructure of the country, which would entail distributing medical supplies, such as vaccine and anti-viral drugs as well as assessing and addressing the surge of demand on the public healthcare system. The plan calls for $651 million to fund this effort.

What does this plan mean for investors? Although drawing conclusions is purely speculative, the President’s plan in its current form could represent a potential boon for companies with a rapid and accurate influenza diagnostic test while suggesting a potential bust for companies pursuing novel antiviral therapies.

The National Strategy states that to ensure rapid reporting of outbreaks, the U.S. will:

“Develop and deploy rapid diagnostics with greater sensitivity and reproducibility to allow onsite diagnosis of pandemic strains of influenza at home and abroad, in animals and humans, to facilitate early warning, outbreak control and targeting of antiviral therapy.�?

As a result, Quidel (ticker: QDEL) would benefit the most, in my opinion, if the government seeks to stockpile influenza diagnostic tests.

On the other hand, companies with early stage antivirals stand to benefit very little, if at all, from the proposed strategy. Absent from the President’s plan was the mention of accelerating the development of and/or removing regulatory barriers for novel antivirals, like BioCryst’s (ticker: BCRX) peramivir. The National Strategy states:

• “Vaccination is the most important element of this strategy, but we acknowledge that a two-pronged strategy incorporating both vaccines and antivirals is essential. To establish production capacity and stockpiles in support of our containment and response strategies, we will:
• Encourage nations to develop production capacity and stockpiles to support their response needs, to include pooling of efforts to create regional capacity.
• Encourage and subsidize the development of state-based antiviral stockpiles to support response activities.
• Ensure that our national stockpile and stockpiles based in states and communities are properly configured to respond to the diversity of medical requirements presented by a pandemic, including personal protective equipment, antibiotics and general supplies.
• Establish domestic production capacity and stockpiles of countermeasures to ensure:
• Sufficient vaccine to vaccinate front-line personnel and at-risk populations, including military personnel;
• Sufficient vaccine to vaccinate the entire U.S. population within six months of the emergence of a virus with pandemic potential; and
• Antiviral treatment for those who contract a pandemic strain of influenza.
• Facilitate appropriate coordination of efforts across the vaccine manufacturing sector.
• Address regulatory and other legal barriers to the expansion of our domestic vaccine production capacity.
• Expand the public health recommendations for domestic seasonal influenza vaccination and encourage the same practice internationally.
• Expand the domestic supply of avian influenza vaccine to control a domestic outbreak of avian influenza in bird populations.�?

I already know what you bulls are thinking, “There is limited manufacturing capacity for Tamiflu and, as a result, not enough Tamiflu available for stockpiling. To make up for the shortfall, the government will stockpile peramivir.�? Gilead (ticker: GILD) on its third quarter conference call states otherwise:

“We cannot comment on Roche's recent public statements regarding the array of alternatives available to them for increasing manufacturing capacity, but we do want to reiterate that, as the inventor of the compound and the Company that developed the manufacturing method that was transferred to Roche, we are well versed in the technology and with all aspects of the manufacturing process. We are confident that should it become necessary, Gilead and our third-party manufacturers will be capable of manufacturing Tamiflu in significant quantities.�?

In other words, both Gilead and Roche (ticker: RHHBY) are addressing the shortfall in production capacity.

Moreover, we are not in imminent danger of an avian flu pandemic. We have not seen the H5N1 virus mutate to a form that is transmissible from humans to humans; so there is ample time to address the Tamiflu capacity constraints and build stockpiles.

Although there is undoubtedly more work to be done before a plan to deal with an influenza pandemic is finalized and implemented, in it’s current form, the President’s National Strategy of Pandemic Influenza represents a potential boon for companies with products to diagnose influenza and a potential bust for companies with early stage novel antiviral drugs.

Related:

• Articles on Roche, Gilead, BioCryst and Quidel.
• The complete list of biotech stocks (and links to articles about them) covered by The Biotech Stock Blog
• A list of full conference call transcripts available on the Seeking Alpha Network.

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