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  Big Pharma has H1N1 fever

BENJ GALLANDER and BEN STADELMANN

Friday, November 27, 2009

Ah, the pitched fever of the Internet. What could be better for drug companies than a mainline to swine flu — er, H1N1 — panic? Combine this with traditional media fanning the flames and hysteria fills the air. The current atmosphere makes mad cow disease, bird flu and SARS all seem like veritable walks in the park.

Thrown in government and public participation, and the buzz leaps beyond an, um, "viral" phenomenon and seemingly takes on a life all its own, triggering a frenzy of spending that is filling the piggy banks of drug manufacturers.

As Bruce Carlson, spokesperson at Kalorama, which publishes surveys of the vaccine market, stated: "The vaccine market is booming. It's an enormous growth area for pharmaceuticals at a time when other areas are not doing so well." In fact, the global market for vaccines is currently about $20 billion and growing, and the H1N1 scare is the primary reason.

So, where might investors profit? Or is it already too late, given the strong moves by many of the majors in the field?

GlaxoSmithKline is enjoying a revenue boost of about $4 billion, or 10 percent, due to the latest pandemic declaration. However, trading above $42, it is pretty pricey, especially with the company's hefty debtload of roughly $28.5 billion. Even with revenues approaching $46 billion, this seems heavy. And while the dividend of 4.7 percent does arouse some envy, the lowly book value of $6 and change is slight given the stock price.

Novartis, which is also producing a vaccine, is equally unattractive for the Contra portfolio. Revenues are also north of $42 billion, with the debtload about one-third of that. Though the dividend is less appealing at 3.1 percent, the book value kicks in at a much more reasonable $23 and change. But it is trading near historical highs, knocking it off our excitement list.

Still struggling to get into the game is Bristol-Myers Squibb. By the time they arrive, it may even be too late. Still, this outfit might prove to be one of the better investments in the field. At about half the size of GSK and NVS, the company's debtload is relatively smaller, at less than one-third of revenue. And though the book value also leaves something to be desired, the dividend is fat at nearly 5 percent. However, a more reasonable entry point for us than the current level would be around $20, where it traded earlier this year, down from the current $25 range. Course, just about everything hovered at far lower levels, as winter turned to spring.

As the compound names of two of the three above suggest, this sector has been filled with takeovers and mergers. While in the long term these could fatten some bottom lines due to decreased competition, over the next year or two we may expect lots of write-downs to batter earnings.

Undoubtedly there will also be lawsuits cutting into some the drug makers' profits. This week in Canada, 170,000 doses from GlaxoSmithKline were recalled as they led to severe allergic reactions. In the litigious United States, some recipients of the swine flu vaccine during the 1976 outbreak developed Guillain-Barre Syndrome. This muscle disorder can be potentially fatal and/or result in paralysis. Thousands of people also suffered skin rashes and allergic reactions.

At least most side effects are only temporarily inconvenient. Hundreds of millions of birds and cows were destroyed due to bird flu and mad cow disease. And in Egypt, pigs were squealing for their lives as the authorities were convinced that their eradication would prevent H1N1. In Cairo about 300,000 pigs were slaughtered, apparently needlessly since there is no link between swine flu and swine, notwithstanding the name. Oopsie.

Speaking of side effects, those slaughters have damaged the earnings of the zabalin, rubbish collectors who garnered a major part of their livelihood by collecting refuse that would be fed to piggies. Perhaps worse, now that this garbage is not being consumed, it is becoming a major health hazard.

If the number of deaths from H1N1 remains low on a global scale, as it did with mad cow, bird flu and SARS, perhaps future scares will be met with more of a "Boy Who Cried Wolf" attitude, and governments will not be so quick to throw money at "cures" to contain possible plagues. Then again, maybe a low death toll will mean the vaccines will be declared a major success, not unlike the old man living on the 43rd floor of a condo who beats a drum to keep elephants away. Naturally, he has a perfect record.

However, at this time, whether H1N1 is a real terror or just another variant flu that does leave something akin to the normal degree of misery in its wake, governments will be leveraging their fiscal deficits to "protect" the people, while drug companies find a remedy to their debt-bloated balance sheets.


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