It didn't take long.
We went from hearing about swine flu mentioned in passing on the evening news to President Barack Obama announcing he wanted to commit $1.5 billion toward fighting it.
In fact, it took less than a week.
Before physicians and epidemiologists had much of a chance to look at an evidently new swine virus -- now labeled "H1N1" so as not to offend Muslims or the U.S. pork lobby -- the President was already telling us how the federal government would deal with it.
The answer, of course, was with money.
It is, so far, our nation's collective good fortune that the overwhelming majority of U.S. cases have proven to be mild, mostly dangerous to the very young or elderly. Panic has yet to rear its head. People in Mexico, where the virus is exacting a death toll, are staying indoors and wearing surgical masks if they must venture out of doors.
The response stateside has been more measured. The best barometer for this is moms. If moms start voluntarily keeping kids home from school, that's when we'll know we have a real problem. As of yet, kids are in school where they belong (though a few schools in districts near the Mexico border have opted to close as a preventative measure).
To be sure, the flu is a serious matter. The 1968-1969 Hong Kong flu epidemic killed a million people. More recently, SARS had a profound effect on international business. And now, the World Health Organization has raised its global pandemic alert, saying the disease isn't containable and that health agencies must prepare for an outbreak. The international health agency raised its alert to a five on its six-point scale. The system, adopted in 2005, has been at level three since a 2007 outbreak of avian flu.
The worst-case scenario, a full-blown outbreak of a deadly flu virus spread human to human, is bleak: A true pandemic, one akin to the deadly 1918 strain, could kill 71 million people -- twice the population of California -- and wreak utter economic havoc. In fact, the World Bank says a serious deadly flu outbreak could evince a worldwide recession and rack up $3 trillion in costs.
I don't want to seem insensitive. This flu outbreak is serious, and I feel bad for the victims and their loved ones. But if our government and others around the world are going to prevent an escalation of this outbreak -- White House spokesman Robert Gibbs says the president wants to stockpile antiviral drugs -- then that's just one more example of how the government creates opportunities for investors.
So when the FDA lowers the minimum age for the morning-after pill, I have to ask what effect the move will have on sales of that Teva Pharmaceutical product. When the president says he wants to spend billions on digital-medical records, I wonder who's going to get rich writing the software. And someone's going to make money from all the roads the government is building and the wind farms it is subsidizing. There's opportunity everywhere, even in public-health disasters. (See below for more details.)
The two market leaders in the antiviral market are Roche's (NYSE: RHHBY) Tamiflu and GlaxoSmithKline's (NYSE: GSK) Relenza, according to Stephen Morse, an epidemiologist at the Mailman School of Health at Columbia University. Roche and Glaxo shares both trade over-the-counter as ADRs. Roche is based in Switzerland; Glaxo is British.
Several companies are involved in the swine flu epidemic. For instance, it was an Australian company, Biota Holdings, that licensed Relenza to Glaxo. A U.S.-based drug maker, Baxter International (NYSE: BAX), has asked the WHO for a sample of the virus to develop an experimental vaccine. Baxter already has a vaccine that protects against avian flu that it has sold to governments. Even non-drug companies are getting in on the action. A 3M spokeswoman says the company has added shifts in its factories to manufacture more surgical masks, which are flying off shelves around the world.
Significant stockpiles of various flu-fighting drugs exist -- many governments bought the drugs after the avian flu scare. Roche says the lead time for Tamiflu, from synthesis of the medicine to packaging, is eight months. Glaxo has already shipped additional doses of Relenza to Mexico. Of the two drugs, Relenza is thought to be most effective, though Tamiflu also works. Tamiflu, which is a pill, is also easier to take than Relenza, which must be inhaled. Roche, which posted 2008 sales of $39.5 billion, sold $3.5 billion worth of the drug to governments in 2006 and 2007.
Both of these companies have experienced short-term pops. The market always overreacts to big news. When swine flu fades from the headlines, these companies likely will lose whatever pop their stock prices saw.
The trick is to have a longer memory than the market. By the time the drug companies can make more doses of existing flu treatments or synthesize new vaccines, traders will have forgotten about it.
Health officials and bureaucrats, however, will not have forgotten about it. Not only will they be buying more, you can bet they'll make sure all the doses on hand stay current. (Coming to the rescue with expired Tamiflu would have roughly the same political blowback as, say, arriving in New Orleans two weeks after the hurricane had passed.) Glaxo and Roche could sell 500 million or a billion doses of flu treatment -- at least enough to treat the developed world. This will bolster earnings for several quarters.
What's more, Roche, Glaxo and Baxter are already selling at a discount to their historical valuation. One side effect of the flu outbreak will be to remind investors that these companies and their products are absolutely vital to world health, which will go a long way toward accomplishing two happy goals: One, it should increase the earnings multiple for each company to its respective five-year average and, two, it has the power to juice earnings. Roche and Glaxo don't have hundreds of millions in R&D costs to recoup. Tamiflu and Relenza were both discovered by other companies. U.S.-based Gilead Sciences invented Tamiflu (and now receives a 20% cut of sales). Roche and Glaxo merely bought the rights and have inked the deals to market the drugs. They merely have to ship the treatments and collect the money.
Markets, like any crowd, always overreact. Sometimes investors forget that there are still opportunities after the initial wave of panic subsides.