Tuesday, December 01, 2009

Shoring Up Defenses

As President Obama practices his speech before the cadets at West Point and the rest of the country, we are checking in on another front in the various wars and deployments against terrorism. Remember it was the threat of violent malcontents who had holed up in Afghanistan that got us into that quagmire in the first place. The Bush Administration (AKA Dick Cheney) was convinced the country was under imminent threat of more attacks, including the use of pathogens such as anthrax as bioweapons.

The low-cost, easy-transport characteristics of anthrax, plague or small pox pathogens, makes such things excellent materials to do extensive damage without putting a dent in the terrorism budget. Even though there has been no incident since September 11, 2001, it probably is not a good idea to allow ourselves to be lulled into a state of complacency.

That is why Congress passed legislation in 2004 to fund Project Bioshield with $5.6 billion dollars over ten years. The Department of Health and Human Services (DHHS) was charged with establishing a National Strategic Stockpile of vaccines, antibiotics and therapeutics to meet the threat of bio-attack. A new office within DHHS, the Biomedical Advanced Research and Development Authority (BARDA), was implements the Congressional directive. So far DHHS reports letting out nine contracts to development and acquire so-called “biodefense countermeasures.”

DHHS has put 17 countermeasures on the shelves aimed at 6 CBRN (Chemical, Biological, Radiological and Nuclear) agents. They claim to have enough small pox vaccine to inoculate the entire U.S. population.

The second from the top on the priority list is anthrax, which many believe is really the powder of choice for the ambitious terrorist. DHHS claims there are 4.4 million courses of anthrax vaccine in the stockpile and that another 6.3 million courses are on order. This is far short of the goal of 25 million courses. Only 40 million individuals can be covered with the antibiotic regimens in the stockpile for those who become anthrax infected.

The shortfall in protection against anthrax is the first leg in our investment thesis for PharmAthene, Inc. (PIP: NYSE AMEX), a developer of biodefense countermeasures. PharmAthene has yet to go commercial with any of its candidates, but in our view its portfolio looks promising. Top of the list is SparVax, a second-generation anthrax vaccine that requires fewer doses over a shorter period of time than the first generation shots now being used by the U.S. military.

PharmAthene is waiting on pins-and-needles (no pun intended) for a decision by BARDA on a contract to finalize development and supply another 25 million doses of second generation anthrax vaccine to the National Strategic Stockpile. The company is not alone in seeking the contract valued at $400 million to $600 million. Emergent Biosolutions, Inc. (EBS: NYSE) has also thrown its hat in the ring, probably counting on its previous experience in supplying the stockpile with the first generation anthrax vaccine, BioThrax.

Some investors might think it makes sense to back the incumbent. However, Emergent has had problems with its Gen2 anthrax vaccine that brings into question whether they can meet BARDA’s requirements for long shelf life. Unlike PharmAthene, which has been fairly transparent about its development progress, Emergent has been mum about recent progress with BioThrax.

Next post on the other legs in our PharmAthene investment thesis….

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. Crystal Equity Research has a Speculative Buy rating on PIP shares.

No comments: