Monday, April 27, 2009

Swine flu: Who actually benefits? - CSFB

Credit Suisse notes Roche and GSK could see an EPS benefit of ca 0.5% for every incremental
$200M of flu related sales. Roche/Chugai/Gilead are the most likely to benefit (through increased Tamiflu sales) although GSK may also gain (through increased Relenza sales). In the longer-term, companies with pandemic flu vaccine know how may be able to develop a pandemic vaccine, and we may also see an increase in overall influenza vaccines. The main pandemic and seasonal manufacturers are GSK, Sanofi- Aventis and Novartis.

Mexico is in the midst of a flu outbreak which is believed to be due to a novel strain of swine flu (H1N1). Swine flu is typically not transmissible from human to human but in this case appears to have become transmissible. Given its novelty compared to prior influenza viruses in humans, it appears to be relatively more severe than the usual flu outbreaks and has resulted in multiple deaths in Mexico. This week, there have been several cases of the same strain identified in the south-western US, raising fears that at the WHO that this could develop into a flu pandemic. Like the avian flu, this virus appears to be susceptible to a specific type of anti viral medicine of which there are two available Tamiflu (Roche/Gilead) and Relenza (GSK/Biota) and both are recommended treatment options. Tamiflu is the better known and has enjoyed much stronger sales with peak sales of U$2.2B in 2006 due to government stock-piling. Roche pays Gilead a 22% royalty on sales and GSK pays Biota a 7% royalty.

Sanofi Aventis's Lovenox is manufactured from heparin sourced from pigs. US Lovenox is made from heparin sourced from North America. In addition, Sanofi has FDA approval for heparin from a Chinese source which can be used if required. Ex-US Lovenox is sourced from China, Europe and the US. The manufacturing process for Lovenox allows for viruses and prions to be identified and eliminated, and swine flu is a common virus. CSFB therefore believes that Sanofi's heparin supply for Lovenox should remain safe. If governments around the world start culling pigs, the risk to Sanofi-Aventis would increase but they consider this unlikely given that the spread of swine flu is now from human to human.

Although all of the companies show very similar theoretical EPS upside from a similar increment of influenza related sales, Roche has shown the highest historic sales contribution from Tamiflu in the past.

Notablecalls: OK, let's get something straight - NVAX, HEB, SVA etc. will all run on this swine flu hype but I strongly suggest you don't overstay your welcome in these. Yes, NVAX was a $10+ stock during the bird flu scare but that does NOT mean it will be a $10 stock again when pigs attack.

The real beneficiaries are likely to be the big players like Roche and GSK (GILD to some extent) but the stocks are just too sleepy to have any real actionable upside.

I see GILD up 3 pts early on - come on, this one has a $40+ bln. market cap. Get a grip, people.


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