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On Rummy and Runny Noses

Alex Constantine - November 2, 2009

Flu fear

Commentary: Look who's profiting from this year's flu season
By Brett Arends, WSJ.com

BOSTON (MarketWatch) -- How much could Donald Rumsfeld make from this swine flu panic, anyway?

I put a call into his office, but the former Secretary of Defense doesn't want to comment. (His staff says Rummy is hard at work on his memoirs. Ominous news for the GOP: The book is penciled in to hit the bookstores next fall -- just around the time of the mid-term elections).

Rumsfeld is the highest profile figure associated with Gilead Sciences Inc. (NASDAQ:GILD) , the California biopharma behind the Tamiflu vaccine. He is the company's former chairman, and at the last disclosure a few years back still held a stake in the company worth somewhere up to $25 million.

One thing we know for certain: Flu times are good times at Gilead. No stockholders anywhere stand to make as much from flu panic.

"The biggest beneficiary to the world's dilemma with the H1N1 virus is Gilead Sciences," says a report from research firm BWS Financial, Inc. Gilead will be in a sweet spot if swine flu turns into mass panic, it says. "We believe (Gilead) remains the true investment on the H1N1 theme."

Gilead licensed its Tamiflu vaccine to pharmaceutical giant Roche back in 1996, but gets lucrative royalties on sales. Gilead's revenue from Tamiflu came to about $400 million during the bird flu panic in 2006-2007, BWS estimates.

An analysis by Deutsche Bank predicts Gilead will get about $195 million revenue from Tamiflu just in the fourth quarter of this year, and another $137 million in the first quarter of next year. Deutsche argues that Wall Street has so far underestimated the likely gains. (Deutsche's analysis is based on results from Roche, which has just reported its third quarter figures. Gilead gets its cut from Roche's sales one quarter later.)

Tamiflu is only one part of the business. Gilead is a broad biotech company. But Wall Street loves a story, and if the H1N1 virus, commonly known as swine flu, causes a stampede this winter Gilead could get a lot of attention.

The irony about flu vaccines is that they may not even work. A very plausible takedown on the flu vaccine business was published recently in The Atlantic. Read here. But don't expect that to hurt demand. Everyone and their aunt will probably be crowding into emergency rooms at the first sign of a runny nose this winter, demanding treatments, regardless of any effectiveness.

In the so-called home of the brave, the easiest thing to sell is fear.

Gilead stock was only about $16 four years ago. But in 2005 it took off, after the Bush administration responded to the bird flu panic by ordering large quantities of Tamiflu. It has since tripled to about $46.

On the advice of government counsel at the time, Mr. Rumsfeld recused himself from all decisions about Tamiflu and pandemic preparedness. But the rules should really forbid him, or any Secretary of Defense, from owning shares directly at all.

Gilead's booming stock price has generated a lot of windfalls at the company. According to the most recent public filings, executives and staff are sitting on share and option awards that may be worth about $1.6 billion at current levels. That would be, remarkably, an average of $400,000 per person for the 4,000-employee firm, although of course the benefits are hardly distributed equally. Chairman and Chief Executive John Martin made $11 million a year in each of the last two years, and booked a personal profit of $28.5 million by exercising stock options just in 2008.

The Tamiflu connection is proving good news for left-wing conspiracy theorists. In his last financial disclosure as defense secretary, more than two years ago, Donald Rumsfeld revealed he still owned a stake in Gilead worth somewhere between $5 million and $25 million. Since then Gilead shares have risen by nearly a half. Of course, we don't know what -- if anything -- he holds now.

Is it too late to get in on the action? Maybe. Gilead shares, at around $46, look pretty reasonably priced at 17 times next year's forecast earnings. But call options offer a leveraged bet on further swine flu hysteria: For $3 a share you can buy a $50 call good at any point between now and next May.


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