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.)
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