Tony Sagami has a new trading service being launched that focuses on Asian stocks, called The Asian Century — it appears that his old service, Asia Stock Alert, has gone quietly into the good night without me noticing, as have several of the newsletters that rode the Chinese dragon both up and down over the past half dozen years.
Like Robert Hsu, whose letters (China Strategy and Asia Edge) died a year or two ago, Sagami touts his Asian heritage and his “boots on the ground” research as he visits companies in person and learns the ins and outs of the investment opportunities. And this new letter of his apparently gets heavily into options, too, including a new option trade on one of the companies that might benefit from the latest bird flu scare … so we’ll try to ID that one for you.
The new service, by the way, is $2,500 a year (if I remember correctly, his old newsletter was less than $500 a year … so this one must be better, right? Right?)
OK, well, in case you haven’t been watching the news we’ve got a new possible influenza pandemic to worry about — it’s a bird flu outbreak that’s been deadly already, and while it hasn’t yet transmitted from human to human (which is a requirement for developing a real pandemic), it could always evolve and folks are clearly worried. The CDC has a brief explanation of the virus here — if you remember H1N1, this is a different strain — H7N9.
And every time there’s a potential pandemic flu virus, or something similar like SARS, there’s a profit to be made in the companies who treat the disease or can vaccinate against it. Or at least, a potential profit — enough to get people looking for the companies who might benefit and the “story stocks” who might ride the wave of interest and spike higher.
There are also bigger societal and economic impacts, of course — another big one is that every time we’ve had a bird flu epidemic, there’s a panic about what to do with poultry companies. If China culls its chicken flocks, as seems fairly likely, the companies who own those chickens lose a lot of money … and if there’s a panic about eating chicken as a result (eating cooked infected birds apparently doesn’t spread the disease, but they tell you not to eat ’em anyway), or the flu spreads by wing around the globe, as the first bird flu did to some extent, global chicken prices could drop. If that’s the case, the big global exporters might dip to bargain prices for patient and contrarian investors — as happened with the Brazilian chicken companies during the bird flu panic last decade.
But what we’re talking about today is the treatment of the disease — and the pharma companies that would theoretically profit.
Sagami points out a few important things about this new virus (new in humans — it’s a known bird flu strain), including the fact that it’s spread by mobile pigeons as well as more contained chickens, that the spread to humans has come quickly and the virus apparently mutated quickly, and that the Chinese are in a panic (you can see the free article that includes his tease here, FYI).
And he identifies three potential winners from this “panic” … the first two he gives to us for free …
“Winner #1: The Chinese FDA has given fast-track status to an anti-influenza drug called Peramivir from BioCryst Pharmaceuticals (BCRX).
“Winner #2: Those fortunate enough to be diagnosed early can be effectively treated with Tamiflu, which is made by Roche Holding A.G. (RHHBY)”
The CDC report indicates that this particular strain can also be effectively treated (if caught early) by zanamivir, the other major flu drug — that one’s sold by GlaxoSmithKline (GSK) as Relenza, so you can toss that on the pile as well if you like … though it’s an open question what sales would be for those drugs if we get more government stockpiling of flu medications. Roche did have a huge year for Tamiflu in 2009 during the Swine Flu panic, generating sales of almost $3.5 billion for that one medication because of huge government orders. More recently, Tamiflu sales for this past flu season were probably less than a quarter of that amount, even with a really bad US influenza outbreak, so government stockpiling is a big deal — though there has also been a bit of a controversy over Tamiflu safety and efficacy over the last year or so.
I didn’t know much about BioCryst before today, but it is a very small company that fell off a cliff when enrollment was suspended for their Peramivir drug’s Phase III trial last Fall and the stock lost about 2/3 of its value in the course of a couple weeks. The suspension was for ineffectiveness, not for safety, this is what they said in their press release:
“the independent data monitoring committee (DMC) recommended that the study be terminated for futility. No unexpected adverse events were identified and the DMC expressed no concerns about the safety of peramivir”
So, after having enrollment in a study “terminated for futility,” what happens? Well, the Chief Medical Officers did note, with some candor, that “We are proceeding with a full analysis of unblinded data from the trial… however, it is unlikely that peramivir development for US registration will continue.”
This drug is aimed at severe flu cases, where the patient is hospitalized, and it was on a fast track from the FDA to speed up human studies and, potentially, approval — but that “fast track” designation came seven years ago, so it doesn’t always mean we’ve got sunny days ahead for a stock. That fast track status drove the stock to $20 during the mid-2000s bird flu panic, by the way, and this stock seems to ride the pandemic chatter so there may be trading opportunities (the stock shot up during all three of the big waves of flu panic over the last 15 years — 1999-2000, 2005-2006, and 2009), but I have no idea whether or not there’s any hope of actual revenue in their future… or whether BCRX can shoot up yet again on this latest fear (it looks like the bounce in the stock has gotten smaller each time, and each bounce has been short-lived, but you never know).
The company is a disaster financially, as with pretty much any early stage biotech — they’ve churned through about $400 million in investor capital in their 19 years as a public company (“early stage” doesn’t have to mean “young” — a biotech can be a money-losing startup for decades) and have never generated any revenue to speak of, so if there is a positive reaction and a spike in the shares, well, I expect folks will be sellin’ em. Unless BioCryst expects some inflow of cash from a partner agreement or something this year, they’ll need to sell stock again soon — from a quick look at their cash flow statement it appears they would have run out of cash in the fourth quarter if they hadn’t sold $18 million in stock. Though not having that expensive Peramivir trial to run in the last quarter might help with the cash burn.
On the positive side, BCRX is still in talks with the FDA about salvaging a new drug application (NDA) for Peramivir … and if you want to be ghoulish about the word “positive” it seems likely that the Chinese will produce a lot of Peramivir pretty quickly — which would theoretically bring a lot more data about efficacy, but —
— and this is really important for BCRX bird flu speculators —
— it does not appear that BioCryst actually has any patents in China or anything to do with the companies who are applying for approval to manufacture or distribute the drug there, so they wouldn’t benefit directly if Peramivir sales in China skyrocket (more from TheStreet.com on that here), they’d probably need demand for Peramivir to take off in the U.S., too, a tough row to hoe if you’re had a study “terminated for futility.”
So the Chinese apparently gave fast track to Peramivir, but not “Peramivir from Biocryst Pharmaceuticals” as Sagami indicates.
And for “Winner #2”, Roche is a $200 billion company, so even a windfall sales year for Tamiflu wouldn’t move the needle very far … even if it may be a fine “big pharma” investment for lots of other reasons. We’re also just now learning this morning that some of the H7N9 patients are showing up with a mutation of this flu virus that resists Tamiflu (and, to a lesser degree, Relenza), so apparently the bugs are still changing as fast as we can fight ’em, maybe the antivirals are finally hitting the same problem with viruses that antibiotics have had for decades with mutating drug-resistant bacteria: heavy use of antibiotics causes the bacteria to mutate to work around them. Bad news for human health, and probably bad news for Tamiflu too. (I haven’t researched that at all, just a supposition.)
Which leaves me thinking those two free picks are worth about what we paid for ’em.
What, then, is the “secret” third “winner” touted by Sagami?
Here’s how he describes it:
“Winner #3: There is a third option and one that has even more potential. A little-known Chinese vaccine company that has technology, expertise and the favor of the Chinese government.
“I recommended that my Asian Century subscribers pick up some call options on this stock for peanuts last Friday. Those could rise 100%, 200%, 300% or even more if the disease continues to spread.
“Of course, there is no such thing as guarantees in the investment business, but I believe that the risk/reward trade-off is extremely attractive.”
OK … so, a little known company, that’s Chinese, that has a government connection (though everyone does in China, so that doesn’t help much), and that is big enough and active enough in US trading to have options trading available?
Even the mighty, mighty Thinkolator can’t be 100 percent certain on this one … but it looks like this is very likely Sinovac Biotech (SVA), which to the best of my knowledge is the only Chinese vaccine company that meets those criteria very well. And it’s also a stock I know Sagami knows pretty well, since he touted some trades in this one during a past Chinese flu panic.
SVA had a really big move in the shares on March 14, well before the latest bird flu panic really heated up last week, and that was on a reaction (and briefly, a dramatic overreaction) to their positive news on a vaccine for a much less serious ailment (hand, foot and mouth disease) — the stock briefly went up by 50% or more during that day before settling in with a 15-20% gain. And I suppose that vaccine news was good, though there are questions about whether the disease is severe enough or the market big enough (SVA is really a China-only company from what I can tell, at least so far), to have this turn into a real “company maker” of a vaccine.
So perhaps that’s why SVA hasn’t reacted dramatically to the flu news at the moment — though it certainly did so during the 2009-2010 swine flu news cycle, when the stock went up by several hundred percent before gradually giving up those gains.
One thing that has me doubting this a little bit is that the options open interest is not huge in any of the contracts for SVA — though that might be explained by the fact that this is a startup newsletter, and an expensive one, so he probably doesn’t have a huge number of readers acting on his recommendations just yet. SVA is trading at about $3.75 right now, so the most likely options trades on this are probably the April $5 calls, if you want to bet on a really dramatic spike over just the next week or so (the expiration is April 19), or the July $2.50 or $5 calls, both of which have at least a few hundred in open interest and some trading volume. I’m certainly not suggesting that you go out and trade these, both are pretty short-term and wild speculations on a stock that itself is very small and speculative, and has already doubled over the last year (the market cap is now about $200 million).
SVA has not shown any real indications of revenue growth over the past few years, and they’re quite reliant on Chinese government purchases, but they do have some revenue and they have eked out a couple of profitable quarters during that time — so they’re not blowing through crazy amounts of cash like some biotechs do. They have added a little bit of debt over the last few quarters, but they haven’t been selling a lot of stock and they continue to have a decent cash position and plenty of flexibility for their continued gradual expansion of manufacturing capacity for their additional vaccine lines — and they trade at less than 2X book value, so there is some argument to be made that their valuation is not absurd, despite the lack of consistent earnings.
Whether or not they’re actually going to get a profitable bird flu vaccine business out of this latest possible pandemic is another question — on that, I have no idea. China is a good market for vaccines in some ways, with lots of people living close together under tight state control the government has a huge interest in mass health interventions for infectious diseases or potential panic situations, but it remains to be seen whether SVA will become a real financial story or just a “story stock” that could possibly bounce because they happen to make flu vaccines in China.
Sinovac is a logical place to go for flu vaccines in China — they did create vaccines for both the H1N1 and the H5N1 outbreaks, and much of their current revenue comes from seasonal flu and Hepatitis vaccines, though it sounds like the vaccine market is a bit competitive and challenging on the ground in China and they have to sell both direct to private paying customers and to the large state and local Chinese governments (at, one assumes, different prices). They’re not talking publicly about bird flu at the moment, their latest press releases have been about expected growth coming from their hand, foot and mouth disease (Enterovirus 71) vaccine that’s expected to be approved pretty soon, and the mumps vaccine that they expect to be selling by next year.
So … if you want a pure play on Chinese vaccine development that trades in the US, Sinovac is it — and it’s even pretty reasonably priced. It’s just not really profitable yet, and may not achieve pricing power to become really profitable — I don’t know the ins and outs of that business to know what it will take for them to become profitable. The one analyst whose estimates are available to Morningstar expects them to lose seven cents a share this year and four cents a share next year, which doesn’t mean that they can’t do better than that … but it does mean that the business is less than super-robust unless you think they’re going to tool up for a massive H7N9 vaccine and get soem headline attention soon, or unless you think their Enterovirus and Mumps vaccines are going to be big revenue drivers.
What do you think? Interested in pricking your skin with this one, or want to pass? Have a better Chinese vaccine maker that you think is a stronger match for the tease (or a better bet regardless of what Sagami says)? Let us know with a comment below.
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