Everyone is looking at speculative opportunities stemming from the possibility of a pandemic flu outbreak. The obvious longs - vaccine and treatment companies - and the obvious shorts - travel and some agricultural commodities - made their moves Monday. Is there anything left to short or even go long?
It all depends on the severity and duration of this outbreak. Mexico is a third world country with a marginal -- and I am being kind - public health infrastructure and a capital with incredibly poor air quality, a probable factor in the death rate of people with the flu and living in Mexico City. And to better understand how this could progress, or end, let's look at what is going on.
Swine flu, first identified in Mexico, has spread to the US, Canada and many other countries. It is killing people - more than 150 in Mexico, according to press reports - and has raised the threat of a pandemic flu epidemic. What makes pandemic flu more dangerous than regular flu is its virulence - it kills - and the inability of current vaccines to prevent the spread of the flu. The last great pandemic - the 1919 outbreak that some people believed killed more than fifty million worldwide - was a strain of flu that was very virulent and, perversely, hit the healthiest the hardest. Signs that this may be the case with the current flu strain are making public health officials nervous.
The problem these authorities face is the lack of treatments and the lack of vaccines. The lack of treatments is a physical problem - Tamiflu has worked, to date, on this strain, but governments stopped adding to stockpiles less than two years after the last scare. The US has at least 50 million doses and we are better off than many in Mexico, where the situation is so amateurish and chaotic that family members of victims were not given Tamiflu. Another approved treatment, Relenza, is even in shorter supply. Prospective treatments such as Peramivir from Biocryst (NASDAQ:BCRX) are just that, prospective. What about mass vaccination? A vaccine for this variant of HN51 does not exist and cannot be produced in volume for many months, despite the claims of some soaring little biotech companies.
Speaking of companies and investment or short side opportunities - what of them? The pandemic flu scare a few years back put many companies on traders' radar and these stocks ran Monday morning. If the pandemic breaks out they are going higher - but if things calm down, some are shaping up to be great short opportunities.
Biocryst: They have a flu treatment - pandemic and regular - in mid stage trials. Due to previous trials for an oral version of the product - this one needs to be injected - this treatment, Peramivir, will get approval eventually. It is much more potent than Tamiflu. Under bio-defense legislation passed after the anthrax scare, Uncle Sam is allowed to stockpile and use a treatment after it has passed a twelve-person safety trial - and Peramivir has done this. In a real emergency the government could legally distribute this treatment.
Novavax (NASDAQ:NVAX): This vaccine company says it can make a new flu vaccine in roughly thee months - seeing is believing. They have a novel vaccine manufacturing system that enables the rapid manufacture of vaccines and are working on their own as well as assisting other companies. They burn cash faster than my twin sons (catcher, lacrosse goalie) in a sporting goods store and have committed heavily to a new development program in India with a pharma company partner, Cadila.
Crucell (NASDAQ:CRXL): Their business model is to become the "Intel inside" for vaccine makers. Their cell line technology platform - they create vaccines in the synthesized equivalent of human retina cells - is many times more efficient than traditional egg based vaccine production. Crucell is partnered with most of the major players in the vaccine business.
Cerus (NASDAQ:CERS): This company has the system - INTERCEPT - to clean blood and make it free of infectious pathogens independent of the health of the donor's blood. INTERCEPT has been shown to work on HN51 flu strains in laboratory work that has been published and subject to peer review. The system has been approved in 18 countries.
Gilead (NASDAQ:GILD): Tamiflu works on this strain of flu --- it is made by Roche but Gilead is the actual inventor of Tamiflu and receives a roughly $20 royalty on sales - 100% pure profit. Any uptick in government purchases for stockpiles or use puts a new floor under Gilead's already incredible profits, earnings and real cashflow.
What to go long, what to short? If this potential pandemic gets too real, these are all longs. But if it does not - let's hope so - the shorts here are Novavax and Biocryst. They do not have revenue, NVAX needs to worry about cash, BCRX does not, but these stocks have exploded and would probably sell off. The other companies - GILD, CRXL and CERS - continue to pop this week, and when this scare goes away, they too may be short candidates. Check back later.