StreetTalk: Investments in Avian Flu Soar

You can't swing a dead yellow-bellied sapsucker without running into an investment speculator whooping it up over the impending bird flu bonanza. Sure, there's been a big potful of money earmarked for avian bird flu vaccines, both public and private. In March, Health and Human Services Secretary Michael Leavitt announced that the federal government plans to spend $3.3 billion on bird flu initiatives, about half of that on a vaccine.

States are getting into the act, too. In Maryland, Governor Robert Erlich broke ground on a new bird flu vaccine laboratory in Rockville. The lab is capable of producing 150 million doses of flu vaccine annually.

Brian O'Connell

Trust me, investors notice these things. Shares of Cel-Sci Corp. skyrocketed in early April after the small biotech company announced that its vaccine might be a stopgap measure to immunize people during the period it takes for a bird flu vaccine to take effect. The stock rose 22% on the news.

That's not an isolated incident. Novavax, the flu vaccine manufacturer based in Malvern, Pa., saw its stock climb to a 52-week high last October after media reports that the bird flu epidemic had escalated in countries like Turkey, Rumania, and Russia; and even Great Britain (where a lone parrot shipped from South Africa was found to have the disease).

BioCryst Pharmaceuticals of Birmingham, Ala., which had a now-disbanded partnership with Johnson & Johnson to develop a vaccine, also saw its stock fly to new heights, hitting a five-year high of $18.42 a share in October on the same news that drove up Novavax's stock.

One of my favorite economists, Donald Luskin, has written a great deal on the investment opportunities in bird flu vaccines. As Luskin—and many scientists—points out, if the H5N1 virus makes the expected jump from birds to humans, a pandemic could follow.

Here is a list of the companies included in the index:

"If H5N1 makes the jump to human-to-human transmissibility, then watch out" says Luskin. "People can stay away from birds. But they can't stay away from each other. And because H5N1 is so biologically unusual, the human race has no natural immunity to it." Luskin estimates that such a pandemic could take the lives of 16 million Americans—the equivalent of World War III.

Scientifically, current vaccines don't work all that well. Scientists need to plot a biological road map from the disease and, until we see such a viable strain in humans, that becomes a future activity.

That hasn't stopped both companies and global governments from opening their pocketbooks to prevent such a pandemic—and that's where the investment opportunity comes into the picture.

Luskin has developed a useful benchmark to see exactly how biopharm companies are profiting from bird flu vaccine technologies. His "Avian Flu Index" comprises 21 companies engaged in vaccines, testing, therapies, and non-fowl food production. Since launching the index on August 31, 2005, Luskin's index is up a spectacular 64% through March, 2006, far and away higher than the American Stock Exchange (Amex) Biotech Index, which was up 18% over the same period Not a bad year for biotech stocks, is it?.

While Luskin says he will add more firms to the index as more companies get involved with bird flu vaccines, 64% is hardly chicken feed. Perhaps that's why President Bush has asked for $7.1 billion in avian bird flu vaccine spending, to stockpile an antidote that could be given to all 300 million or so American citizens.

Uncle Sam has already delivered $162 million in funding to many of the biopharm companies listed in Luskin's index. And more cash is on the way. But American biotech companies have some catching up to do, so the money will surely help.

Most of the heavy lifting on bird flu vaccines has been done by overseas companies, most notably Sanofi-Pasteur, a French biotech firm. Early tests on the company's flagship H5N1 vaccine look very promising. Especially encouraging is the recent news that Sanofi-Pasteur has added another ingredient to its flu vaccine that seems to heighten the impact of the vaccine by allowing scientists to use less antigen in its doses. This seems to boost the potency of lower doses. The new ingredient, called alum, allows an individual dose to be lowered from 90 micrograms of antigen to 30 micrograms of antigen. A follow-up study on 300 participants showed that the enhanced vaccine could mean providing more doses to more people.

The antigen dilemma is a big issue to biopharm companies. Says Dr. Carlton Turner, president and CEO of Carrington Laboratories, which is also in the bird flu vaccine hunt, "Policymakers from around the world are responding as best they can to the threat of an H5N1 avian flu pandemic. The challenge lies in trying to find the right antigen, producing enough of it to protect the world's population and then finding a way to deliver it to large populations efficiently."

FAILURE IS NOT AN OPTION

No matter what happens, the stocks of companies involved in bird flu research are in that rare environment, where even bad news isn't enough to slow such stocks down.

Consider Luskin again. He notes that when Sanofi disclosed some disappointing results for one of its clinical trials with avian flu vaccines, investors barely blinked. Even with the bad news Luskin's index was still up 1.3% for the day, primarily because the disappointing results with Sanofi just meant that more money would have to be thrown at the problem. Call it the classic "failure is not an option" strategy.

Still, if you're considering taking the plunge into bird flu-themed stocks, be careful. While scientists do believe there is a good chance that avian flu will hit American shores later this summer (the virus is literally carried airborne by migrating birds, whose flight patterns take them west in the warmer season), if the virus does not pan out, then you'll be left holding the bag.

That's what happened to the SARS panic in 2004. There was a San Diego company, Vical, Inc., which produced a speedy vaccine for the SARS virus that intrigued traders and investors. But when the SARS virus fizzled, the company's stock price plummeted.

"There are so many unknowns and a lot of hype," said A.G. Edwards analyst Al Goldman in an interview with the Associated Press in December 2005. "The avian flu potential is something that you can't get your arms around because no one knows if—or when—a pandemic is going to happen."

The truth is, a pandemic is already brewing on Wall Street. When there's money to be made, it's always wise to watch the birdy.

Celebrity author and business/finance commentator for CNN and Fox News, Brian O'Connell has written for The Wall Street Journal and Newsweek, 79 Radcliffe Drive,Doylestown,PA 18901,267.880.3144, fax 267.880.1939, brian.oco@verizon.net