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Avoiding death is a great motivator. Last year, 80,000 people died in the United States alone from flu associated deaths. This was the highest number of flu-related deaths in decades and far above the CDC estimate entering the season. The flu also hit more varied age groups in the United States than usual in recent times. Additionally, 900,000 people were hospitalized for the flu in the U.S. last year.
These astronomical numbers grabbed my attention. In my area of Pennsylvania, last year there were flu triage tents in the two nearby hospitals' parking lots to accommodate the hordes of flu victims. Children were banned from visiting family in hospitals because of the epidemic. Unfortunately, a preventive flu vaccine will only lower your odds of getting the flu by forty percent.
Is there an ethical way to invest in the deadly flu epidemic? I wondered. A strong possibility seems to be the new antiviral medicine, Baloxavir, discovered by the Japanese company Shionogi and co-developed with the global pharmaceutical company Roche. This new antiviral is the first significant flu treatment in twenty years.
This new antiviral is a single dose drug which acts within one day in contrast to the world's current standard antiviral, Roche's Tamiflu (oseltamivir), which requires ten doses spread over five days. Additionally, some strains of the flu have been growing resistant to the old antivirals. The new antiviral is faster and cheaper. The new drug cuts the communicable period. Shionogi's new flu antiviral has performed well in testing and already been approved for use in Japan. The U.S. FDA granted the drug priority review and is supposed to reach a decision by December 2018 for allowing its use in the United States. There is always the risk that the FDA could reject its use. Or, the roll out in the United States could be delayed.
In sum, there's a new product which helps alleviate misery and prevent death on a mass scale. How much is it worth to save tens of thousands of lives and to try to get almost a million people out of the hospital faster? The new antiviral appears to be a superior product. Competitors are working on alternatives, so there is possible future risk. However, the flu epidemic is a major problem now which needs addressing now. If one decides to invest, one could either buy Shionogi stock or Roche stock or both.
Shionogi discovered the drug but developed it with Roche and sold Roche worldwide licensing rights (outside Taiwan and Japan) in return for an undisclosed amount of money and royalties.
The deal is great for Roche. While the new drug is a competitor to Roche's Tamiflu, Roche's competitors had been cutting into the Tamiflu market with generics. In the recent past, Tamiflu has brought in between $700 million and $3 billion in sales annually depending upon the severity of the flu season.
Roche (RHHBY) is a large 202 billion dollar market capitalization company with 55 billion dollars in annual revenue.
Its stock price has been on a slight downward trajectory for the last four years and is currently trading just below 30 dollars per share. It does pay a nice dividend. A successful new flu drug should give the company a boost though it would be only a small slice of its annual revenue.
Shionogi (SGIOF) while having created Crestor, and other medicines, and having been incorporated almost a hundred years ago is still a much smaller company. It has a market cap of just under 20 billion dollars, and has 3.25 billion dollars in annual revenue. It is approximately one tenth the size of Roche with less than one tenth as much revenue. Its stock has been on a very slight downward trajectory for the last four years as well. It has recently been trading at about 64 dollars per share.
These two stocks have not been good investments this year, or the last five years. Investing in them because they have a great new product, with a good moat, which solves an important problem is still a risk. Yet, both are stable companies. The exact royalty agreement that Roche will pay to Shionogi on the new antiviral is, as far as I could discover, unknowable to the public making it difficult to value the new drug's potential pay off. Still, given the relative sizes of the two companies, and Shionogi's already having the authority to sell the drug in Japan, I would suggest that Shionogi would be the company to look at as the major beneficiary. Fear is a great motivator, and I know I would buy some of the new antiviral this winter if I come down with the flu-- if the FDA would let me.
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