Avian Flu–A Coming MegaShift

07/21/2006 12:00 am EST

Focus:

Michael Murphy

Former Editor, New World Investor

Medical stock expert Michael Murphy shares his fears of an impending bird flu pandemic and the seemingly-weak response by governmental authorities worldwide. Here is his view of the actions investors may take to prepare…

 

“One of the surest MegaShifts we are invested in is heavy government spending to prepare for a bird flu pandemic. Recent news that frozen poultry meat from a bird flu-infested area of China was smuggled into Michigan for sale to 300 Chinese restaurants and grocery stores brought the story even closer to home.

 

“Federal officials learned of the problem in early June,but didn’t alert state officials until June 20. Officials seized birds and destroyed the meat without testing it first. And they staged a second raid July 6, but found that some of the quarantined food had been switched.

 

“What scares me is realizing that the state would keep it secret for three weeks that contaminated poultry might have made it to some grocery stores and restaurants. This is probably what we can expect–we will find out too late or not at all about these situations.

 

“After last week’s confirmed outbreak in Spain, the UK decided to stockpile 10 million doses of a bird flu vaccine–the surest way I know to make the H5N1 virus mutate into a vaccine-resistant form. China is making the same mistake. The Chinese government said that they will boost health care spending in rural areas by $1.25 billion, or 10 yuan per person, which is not enough to buy a box of aspirin, even at Chinese prices.

 

“We’ll be out of these stocks at significantly higher prices before then, but this should make it clear that avian flu truly is a MegaShift, not a fad. In order to make more Tamiflu, invented by Gilead Sciences (GILD  NASDAQ), Roche will be shipping the active ingredient to a plant in Germany to make gelatin capsules of the drug. More production equals more royalties. GILD reports earnings after the July 20 close, and I am expecting strong sales of Truvada (a combo-HIV pill) and the weaker dollar to drive revenues and earnings above the consensus $662 million in sales and 53 cents a share in earnings. September-quarter guidance should also be above consensus as Tamiflu royalties flow through with a one-quarter lag, and the company may raise its guidance for 2006.

 

“Continue to buy the January 2008 $50 GILD call LEAP (YGDAJ) under $16 for my $30 target. The January 2007 $60 call LEAP (GDQAL) is a higher risk and higher return. Buy under $9 for a $20 target.”

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