By AVI SALZMAN - Barrons.com
Hospital supply companies and niche drug makers, among others, could see big gains if an outbreak materializes.
AS HEALTH CARE PROVIDERS and government leaders ramp up their preparations for the swine flu, investors are doing likewise.
Some companies, including providers of diagnostic tests, hospital supplies and antivirals, could prosper from the nation's misery if the flu comes back this fall with a vengeance. And in the longer-term, makers of more advanced vaccines and other health care companies could also see gains in earnings and share price.
Stock prices have already factored in swine-flu preparations, but a few companies could see more gains as the flu spreads. Among the potential stock winners: Gilead (ticker: GILD), which gets a portion of the proceeds from Tamiflu sales; Masimo (MASI), which makes devices that measure the oxygen in blood; Becton Dickinson (BDX) and Johnson & Johnson (JNJ), which make medical supplies; and mask-maker 3M (MMM).
If the swine flu (known officially as H1N1) arrives with the kind of infectious capability that President Obama's advisers expect, it will spread misery across the country, and in certain corners of the stock market.
Table: Investment Antidotes to the Swine Flu Among the sectors that could be hit hardest: companies with exposure to the travel industry, the retail industry (particularly companies dependent on mall traffic), and group entertainment like movies.
Companies in those sectors are not generally talking about the impact of swine flu publicly right now, and they tend to have other more pressing concerns. But that doesn't mean they're immune.
"This will have an effect on an already anemic economy," says Steve Brozak, president of brokerage firm WBB Securities. "People are not going to go out. The retail sector could be hit hard."
Some of those sectors retreated when swine flu first emerged publicly in April. Between April 24 and 27, airport services, hotel and airline stocks all declined by at least 10%, according to a Barclays Capital review.
To be sure, the disease has not apparently grown more deadly as it has wound its way through China and South America. Whether it mutates into a deadlier form is a key unknown. But experts convened by President Obama anticipate a second wave of swine flu in the United States, potentially hitting the U.S. this month with between 30% and 50% of the population falling ill and up to 1.8 million being hospitalized in the coming months.
Analysts tend to think any market volatility related to the flu will come in September or December (when the flu traditionally hits), though some companies have already seen their shares soar on flu worries. BioCryst Pharmaceuticals (BCRX), which was trading at about $1.50 when reports about the flu surfaced in April, is now trading above $10. It's experimental antiviral drug permavir has shown some effectiveness and was recommended for fast-track FDA status by the president's council.
Novavax (NVAX) likewise has seen huge growth following positive Phase II results for its vaccine. Given the likelihood of a flu outbreak by the end of the year, however, the possibility that experimental treatments will be used widely is still relatively small, analysts said.
With vaccines still weeks away from wide deployment, doctors will likely be turning to antiviral drugs to combat flu symptoms. Roche's (RHBBY) Tamiflu and GlaxoSmithKline's (GSK) Relenza have helped diminish the effects of the flu, and the government has stockpiled millions of doses to be used once the flu hits again. The best way to invest in antivirals, however, might be to buy biopharmaceutical company Gilead Sciences, which gets a royalty payment for each dose of Tamiflu that Roche sells.
"If the government's scenario plays out, the antivirals could get depleted and one would imagine the government would want to build them up again," says Jim Birchenough, an analyst at Barclays. "In that case, the money goes right to Gilead's bottom line."
Birchenough sees $2 or $3 of upside to Gilead stock if the flu hits as expected, or more if it's worse than expected. Gilead has lagged competitors since the market began to rally, with the stock rising 1.7% in the past six months, versus 18% for other biotech companies. Its shares are now trading at about 16 times expected 2010 earnings.
The government and health care providers are also stocking up on medical supplies, which could benefit some companies. Just last week, Becton Dickinson announced that the Department of Health and Human Services had agreed to purchase up to $52 million in syringes, needles, and other equipment from the company to prepare for the swine flu. Other companies, including Johnson & Johnson and 3M, which makes infection-control masks, could also see gains.
Sean Lavin, a medical technology analyst at Lazard Capital Markets likes Masimo, which makes pulse oximetry monitors that attach to patients' fingers and gauge the oxygen in their blood.
"We could see significant stocking orders in the third quarter, as we saw in the first quarter, even if the flu never returns," Lavin wrote in a recent report. He rates the stock at Buy.
Covidien (COV), which also makes the pulse ox monitors, could likewise get a sales boost, but the devices are a much smaller percentage of Covidien's revenue.
Doctors have also been ordering more diagnostics equipment to prepare for the flu, says Tony Butler, an analyst at Barclays. He sees companies like Meridian Bioscience (VIVO), Thermo Fisher Scientific (TMO), Life Technologies (LIFE), Inverness Medical Innovations (IMA), Becton Dickinson, Luminex (LMNX), and Qiagen (QGEN) getting a boost from increased demand for diagnostics, though in most cases the companies will only see a few pennies of extra earnings per share. Nonetheless, those gains haven't been priced into the stock yet, Butler says.
In the longer-term, the swine flu will likely force the government to spend more money to prepare for the next outbreak. Vaccines, for instance, are currently made from eggs, but the government has invested billions in creating vaccines using more advanced techniques. Those vaccines, made by companies like GlaxoSmithKline, Novartis (NVS), and Sanofi-Aventis (SNY), may not be ready for this outbreak, but will be an important weapon to combat future diseases.
Any swine-flu related investment, however, should be considered speculative. The flu could come back with a vengeance, or it could essentially peter out by the winter. The same goes for the stock prices of the companies that sell products to combat it.