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H5N1

Yiannis Mostrous
Yiannis Mostrous
PF News letter.com
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Usually, bird flu viruses don't transmit from person to person. But that could be changing.

A day doesn't go by without news of the potential for a global influenza pandemic. The most quoted example is the 1918 influenza outbreak (which killed about 40 million people worldwide) and the similarities between it and the highly pathogenic strain of the virus now (H5N1).

Avian influenza, or bird flu, is a contagious animal disease caused by type-A strains of the influenza virus that primarily infect birds. It first appeared in a lethal form in Hong Kong (HK) in 1997, resulting in three human deaths while HK's authorities destroyed 1.5 million chickens.

People in China, Vietnam and Thailand experienced the same symptoms in 2003 and early 2004, and 100 million chickens were destroyed.

The countries that have been able to better contain and react to the disease have been the ones where chickens are bred primarily in commercial operations. Japan and South Korea have had more success compared to China and Vietnam.

China, in particular, has a big problem. It has 13 billion chickens, of which more than 60 percent are raised on small farms and house yards.

The H5N1 strain causes flu-like symptoms in humans, ranging from a sudden high fever to head and body aches and fatigue. The patient may then experience breathing difficulties and develop a cough. As oxygen is increasingly cut off from the brain, coma and death may follow.

According to health organizations, humans can be more at risk if they're simultaneously infected with human- and avian-flu viruses. In that case, the disease can quickly spread around the world with humans being extremely vulnerable, especially in the absence of vaccines. The problem here is that the current global capacity for vaccine manufacturing is 200 million to 300 million doses annually.

At the same time, governments around the world have so far committed $1.4 billion to stockpile the antiviral drug Tamiflu made by Swiss-based ROCHE. Several have committed to developing and stockpiling vaccines that could be effective against H5N1 pandemic flu.

The US government, in particular, has committed $283 million this year alone for influenza research, surveillance and vaccine acquisition.


Opportunities

It's clear that, even if the worst scenario doesn't materialize, the world is entering a period where global health scares will become an important part of everyone's life. The interconnectivity of global economies will make sure of that. Positioning a portfolio to take advantage of this will become increasingly important.

Growth Portfolio favorite Bayer (NYSE: BAY) is one of the companies that will benefit due to its poultry antibiotic Baytril. Although the Food and Drug Administration has banned the drug's use in the US, the rest of the world continues to utilize it. Buy Bayer up to 44.

The second big pharmaceutical company with an antiviral product (Relenza) similar to Tamiflu is United Kingdom-based GlaxoSmithKline (NYSE: GSK). The company has the capacity to produce 30 million doses of flu vaccine and it's building a capacity of 80 million more.

In addition, GlaxoSmithKline recently acquired capacity for 70 million doses from ID Biomedical (NSDQ: IDBE) of Canada, which is one of the smallest companies to generate good returns from the avian flu story.

It's expected that GlaxoSmithKline will be generate more than $800 million of sales from flu vaccines in the next five years. ID Biomedical has been selling a lot of its vaccines to the Canadian government and it is expected to continue doing so. Buy GlaxoSmithKline under 52 and, as a speculative play, ID Biomedical up to 30.

One more speculative play is US-based BioCryst Pharmaceuticals (NSDQ: BCRX), a small Alabama company. It has an antiviral drug called Peramivir that will begin human testing in January. If successful, the drug could be the third option after Tamiflu and Relenza. Buy BioCryst up to 18.

Sanofi-Aventis (NYSE: SNY) provides more than half of the world's flu vaccines and is planning to produce an avian flu vaccine, too. Its flu vaccines generated more than $600 million in sales last year, and the company remains a play in the growing vaccine market. Buy Sanofi-Aventis up to 43.

Public health monitoring is also becoming big. Governments around the world have decided to increase financing of rapid detection and managing of avian influenza outbreaks.

A variety of companies that provide diagnostic testing services to poultry producers and humans will see expanding opportunities. Two of the smallest (and more volatile) players in this space are Idexx Laboratories (NSDQ: IDXX) and Affymetrix (NSDQ: AFFX).

The former offers poultry and general livestock diagnostic testing; the latter has developed a new diagnostic technology for acquiring, analyzing and managing complex genetic information. Buy Idexx Laboratories up to 68 and Affymetrix up to 45.

Finally, a study by the US Centers for Disease Control and Prevention has concluded that a pandemic influenza outbreak in the US could result in 314,000 to 734,000 additional hospitalizations and 18 million to 42 million outpatient visits, consequently increasing hospital orders for medical suppliers.

In addition, and given the increase in sanitary measures (e.g., masks, anti-microbial skin cleansers) in Asia during the SARS outbreak, sales of medical supplies of this kind in the event of a global influenza scare should increase dramatically. Our preferred company in this area is Johnson & Johnson (NYSE: JNJ). Buy Johnson & Johnson up to 65.

Yiannis Mostrous will be available to take your questions until Monday, November 14. Please use the form below to submit your questions.

 
 
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