Zika - Numerous Battlefronts/Investment Opportunities

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Includes: BASFY, BAYRY, CHD, DD, DOW, GD, GSK, LLL, LMT, MON, MRK, NLNK, NOC, PFE, RBGLY, RTN, SNY, SYT, XON
by: Henry Miles

Summary

Every week the seriousness and spread of Zika becomes more alarming.

New structures and more funding are required to fight it and other tropical diseases.

Investors would be well-advised to keep an eye on these developments.

The Migration North

Two months ago, I pointed to the financial imperative arising from the migration of tropical diseases. Ebola, Dengue Fever, and the Chikungunya and Zika viruses have been known for years. However, it has only been relatively recently that they began their march west and north.

Zika is transmitted by Aedes mosquitoes and through human sexual contact. In adults, the disease may lead to Guillain-Barre syndrome and paralysis; infected pregnant women can give birth to children with head deformities and severe, heart-breaking, brain damage called microcephaly.

International and national health agencies are alarmed by the seriousness and spread of Zika. In the Americas, the disease is now actively transmitted in 38 countries and territories. Although the disease has so far only reached the US through travelers, the Aedes mosquito is native to southern states. Scientists are concerned that summer weather may spread the disease up the eastern seaboard and across the gulf states. By way of perspective, Zika was unknown in Puerto Rico in December. Within 2 months, by February, the island's public health officials declared the disease an emergency. By the end of this year, they project that it could infect 20% of the Puerto Rico's population.

Six Categories of Defense

Let's call it six general categories of defense against Zika: 1) Clothing and repellents, 2) Insecticides and larvicides, 3) Abstinence or condoms, 4) Mosquito sterilization, 5) Genetically-altered mosquitoes, and 6) Vaccines. Everyone knows that a quick way to keep from being bitten by bugs is to cover and goop up. From what I hear, DEET is flying off the shelves as kids and families head south on Spring Break. The chemical has been manufactured for 50 years and is widely distributed. DEET is recommended but offers only temporary protection against pervasive air-borne vectors.

Insecticides and larvicides are finding wide usage in population centers and resorts; we've all seen the images of suited-up men with masks and foggers. However, they are considered to be only moderately effective because breeding grounds are often hard to find and mosquitoes have apparently developed resistance to some / many chemicals. For those interested, BASF (OTCQX:BASFY), Bayer (OTCPK:BAYRY), Dow (NYSE:DOW), DuPont (NYSE:DD), Monsanto (NYSE:MON), and Syngenta (NYSE:SYT) and are among the largest insecticide manufacturers.

Condoms are probably more realistic than abstinence and they have been used effectively to control other sexually-transmitted diseases of which we are all aware. Therein lies the issue - these solutions only protect against diseases that are sexually-transmitted, they do nothing to stop transmission via the virus' primary means, mosquitoes. For those who may not know Church & Dwight (NYSE:CHD) other than through their branded products such as Arm & Hammer and OxiClean, the company is the largest manufacturer of condoms in the US leading with their Trojan brand. I believe that British firm Reckitt Benckiser (OTCPK:RBGLY) is the largest such manufacturer globally through their Durex brand.

Mosquito sterilization is often referred to as the "Sterile Insect Technique" aka "SIT". In this procedure, male mosquitoes are exposed to radiation rendering them infertile, the idea being that the population will eventually implode. According to Joe Ballenger, entomologist, the technique has been around for a half a century and has found some success combating Screwworms, and Tsetse and Mediterranean Fruit flies. That said, as I understand it, radiation frequently kills male mosquitoes and the infertile ones that survive may not be as attractive to females. Without the 'multiplier effect' from failed breeding, the effectiveness of SIT is diminished, perhaps substantially. Brazil is reported to be preparing to irradiate mosquitoes. I am unclear as to whether the technology to do so will be provided through the Canadian firm, Nordion now owned by Sterigenics International (private), or by the International Atomic Energy Agency.

With "Genetically Modified Organisms" or "GMO" mosquitoes, the DNA of male mosquitoes is changed such that they will live to produce offspring that die before reaching adulthood. The GMO technique has been piloted in Brazil and elsewhere resulting in the reduction of Aedes mosquito populations by 80 - 90%. Intrexon (NYSE:XON), through its Oxitec subsidiary, has established a leadership position in GMO mosquitoes.

Finally, vaccines have been effectively deployed to control many diseases including Anthrax, Cholera, Diphtheria, Measles, Mumps, Pertussis, Polio, Rabies, Rubella, Small Pox, Tetanus, and Yellow Fever. The rap on safe vaccines is that they take years to develop and test. However, by leveraging institutional know-how / learning curves and through new development techniques, firms may be able to introduce safe vaccines faster. The major vaccine manufacturers include GlaxoSmithKline (NYSE:GSK), Merck (NYSE:MRK), Pfizer (NYSE:PFE), and Sanofi (NYSE:SNY).

There is no silver bullet at least not in the short-run; all of these techniques are being used or pursued to bring Zika under control. They will be introduced at various times, in various places, until progressively more effective solutions are available and deployed.

The Medical-Industrial Complex

The evolution of disease-fighting alliances is fascinating if somewhat hidden from public view. Take the Oxford University scientists who first experimented with GMO mosquitoes to fight Zika. They soon formed a company by the name of Oxitec, short for "Oxford Insect Technologies", only to later sell out to a US company, Intrexon. With support by investors and commercial leadership, Intrexon has moved things forward to the point that national and international health agencies are on the cusp of approving its GMO mosquitoes for additional trials and wider use.

But as much progress as they have made, Oxitec/Intrexon will have to push their structural model a lot further. A comparable case in point is found in the Canadian developers of an Ebola vaccine who sold out to NewLink Genetics (NASDAQ:NLNK) only to then admonish them to ally with a much larger company; Merck as it turned out. The challenge of scalability is daunting when it comes to commercializing medicines to fight a potential epidemic much less a pandemic. For example, it's a tall order to produce the 175 million flu shots required in the US every year. But, it's well beyond that to wage war against a rapidly spreading disease such as Zika that could infect many more people in many more countries.

And, as noted earlier, it's not just about Zika. Worldwide travel and global warming may have modified our environment such that other known, unknown and undetected diseases may be near to 'breaking out'. If the traditional forms of medical alliances are enough, then under these extraordinary circumstances they must evolve faster. Moreover, they may have to look more like the military-industrial complex wherein much closer ties exist between governments and contractors; ties not unlike those between the Department of Defense and companies like General Dynamics (NYSE:GD), L-3 Communications (NYSE:LLL), Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), and Raytheon (NYSE:RTN). For those who remain unconvinced, take a few minutes to read last week's statement from the Director-General of the World Health Organization.

At the same time, an order of magnitude or more funding will be required. Money will be needed to conduct R&D and set up the production infrastructures to deliver solutions. For starters, President Obama has requested $1.8 billion to fight Zika; many other countries must also find significant resources. Part of this commitment will come from, and flow back to, corporations and their shareholders. Heads up, investors.

A Few Words About News

Because information on these topics is evolving rapidly, I scan news sources daily while touching base with various medical and financial experts. I also have set "Favorite" links to credible subscription and free sites that report on these issues as well as to primary sources including the National Institutes of Health, the Centers for Disease Control, the Food and Drug Administration, and the World Health Organization. Of the hundreds of items out there, just three will illustrate this month's news cycle surrounding Zika and how it affected the price of just one stock, XON:

· On Sunday, March 6th, the New York Times ran a substantial front page article in their Business Section about Intrexon and their / Oxitec's GMO mosquito technology. The next day, on Monday, March 7th, XON's stock price jumped 5.0%.

· The morning of Friday, March 11th, the FDA announced their preliminary findings that GMO mosquitoes are environmentally safe and called for 30-days of public comment. XON closed up 2.4%.

· On Friday, March 18th, Intrexon Chairman and CEO Randal Kirk gave an interview on CNBC's "Power Lunch" in which he said that the firm is only waiting for a "sales permit" to move more aggressively forward with its GMO mosquito program in Brazil. XON closed up 3.6% on the day.

Two of these news items set expectations for upcoming actions that could move the needle again for Intrexon: a) formal approval from the FDA to begin a trial in the Florida Keys, and b) Brazil's go-head. If and when Congress approves the President's funding request this too could spur stocks in companies working on Zika solutions.

Disclosure: I am/we are long DD, GD, GSK, LMT, MRK, NOC, PFE, RTN, SNY, XON.

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: As always, be sure to consult experts in making your investment decisions. Early and clinical-stage companies are especially risky; promising technologies are expensive to research, develop, test, and deliver. Many such firms run out of cash and capital before they reach market meaning that investors can get all but wiped out. Never invest more than you can afford to lose.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.