The next swine/bird/dog/giraffe flu hysteria trade

The most recent hysteria peak was back in August/September 2009 and built over the course of the summer (April onwards). It’s building again – or will be very soon. Regardless of whether or not you’re convinced how much of a problem it really is, the World Health Organisation (WHO) showed last time that they’re prepared to stimulate overreaction in order to prevent under-reaction. Overreaction means over-investment by government and large businesses in preventing the potentially damaging effects. Doctor’s offices and hospitals reported thousands of masks and boxes of tamiflu being delivered that they didn’t need. As the media hype about this quietened down, do did the stock prices of the small biotechs that benefitted from the panic. This has already happened more than once.

The fact is though that it’s very difficult to know exactly when the time will be right for the next burst – and I’m not really going to try. It’s too much of an unpredictable mix of epidemiology, government panic, and media/public hysteria. There are a few good places to follow real flu related events. This twitter account is a good place to start. Here’s a nice map of the spread of recent reported/confirmed H1N1 cases.

The big boys don’t really benefit much, short-term, from the hype even though the reality is that they’re the ones providing most of the vaccines and anti-viral drugs; Tamiflu (Roche and Gilead; GILD) and Relenza (GSK). Baxter (BAX), AstraZeneca (AZN), Sanofi-Aventis (SNY), GSK and Novartis (NVS) are making most of the vaccine. I’m happy to recommend all of these. They all represent decent long-term investments though (well not so much Gilead) albeit because of their many other things in their pipelines.

But this is not really what this post is about. Here are some of the little guys that really get the short-term bounce from the hype that we can trade – some of them are: Novavax (NVAX), AVI Biopharma (AVII), Generex Biotech Corp (GNBT), Biocryst (BCRX) and Hemispheryx Biopharma (HEB), Vical Inc., (VICL) and Sinovac (SVA). There are others too. Many of these are down 50% since the last period of hysteria. I’d be a buyer of all of these here although they might require some patience followed by a timely exit strategy. They are not without risk. SVA, for instance, is clearly a long way from a technical base.

I’m less interested in Insmed (INSM) in this space – not sure they’ll be around to benefit. Human Genome sciences (HGSI) is in this pot too but in contrast to Insmed, HGSI recently benefitted too much from other events so I wouldn’t be a buyer here – at least not for this reason. HGSI (and Elusys) also have anthrax treatments in the pipe. I’m not sure I’d be willing to advise investment in the next crazy panic on that one, especially if some guy is planning on spreading it via his underpants!

Disclosure: At the time of writing this (Jan 3^rd, 2010) I don’t own any of these stocks but I will be building positions in several of them over the course of the next few weeks/months.

Transition Therapeutics (TTHI) - short

Transition Therapeutics (TTHI) – Alzheimer’s treatment drug (amyloid plaque blocker (allegedly)) based on schyllo-inositol (a coconut palm extract). Clinical trials stopped on 2 higher does, continuing on lower. Given it’s a sugar analogue, could just be doing something very simple like making the BBB more porous or altering neuronal metabolism in some weird way, thereby giving spurious results in animal models. Could actually be causing further brain damage in humans and the 9 deaths associated with the administration of the compound slightly support this possibility. The links between blood sugars (and diabetes) and the development of Alzheimer’s are known, but not at all well understood. It is possible that sugars of this type actually increase the risk of the disease. They are seen to naturally increase in the brains of alcohol-related encephalopathy patients although I think it’s not clear if this is part of neuronal damage/symptoms or a symptom in terms of a positive/protective metabolic response to the alcohol abuse. Either way, very very doubtful this 250mg trial of s-inositol will prove successful. Of course it would have been good to have predicted this when TTHI was at $8 (I wasn’t paying attention!) – now at $3.50 it seems a bit late. Much of the costs here have been borne by Elan (ELN) here. But a look at a 4-year chart of Neurocrine (NBIX), for example, will show what happens when clinical trials of a drug for a one-trick brain-drug pony, fail (clinical trial extension of insomnia drug indiplon announced May, 2006 – price $60 to $20 that week. Now at $2.60).

Granted, Transition do have a type-I diabetes drug (TT-223, a peptide-like, gastrin analogue compound) in phase-II with Eli-Lilly (LLY). Novo-Nordisk (NVO) had the first shout on partnership here and pulled out. In my eyes, NVO are the diabetes drug experts and the fact they pulled out, even after phase 1 had been paid for therefore hugely decreasing the risk, is a bad sign for this drug. Funding has also been pulled by the JDRF in the past too. Also, it’s not clear it’s really showing any useful efficacy beyond several other current treatments. Plus they only have 80 patients in the trial which is never going to be enough to satisfy the FDA of anything. I’m generally not a fan of peptide-like drugs either and having them develop long term affects like increasing pancreatic beta-cell growth (see INGAP and DiaPep227 failures) seems even more fanciful. Anyway – PII results for this drug coming next year too.

I would be a short of TTHI here and expect a 90% fall over the next 12-24 months for a short-side ten-bagger.

Disclosure: I am not myself short of TTHI at the time of this post.