The Avian-Flu Bull Market

Jim Cramer likes to say "There's always a bull-market somewhere" and in the short-term he's right; it's wherever he says it is.  This is particularly obvious when he's making buy-calls on small-cap stocks that react violently to him, like when he made CMGI (NASD: CMGI) nearly double one evening last spring.

Now, it's Avian-Flu time, and he's telling his viewers to get into Biocryst Pharmaceuticals (NASD: BCRX) on the bases of an early-stage vaccine that the company has.  For calmer heads The Biotech Stock Blog casts some serious doubt on this company's valuation:

BioCryst’s influenza product, peramivir, is a drug that previously failed in Phase 3 clinical trials. The drug, which was previously tested as an oral drug, has been resurrected based on preclinical studies that showed the injectable formulation can be used to treat avian flu. Given the concerns of an impending pandemic, there is widespread speculation that the U.S. government will stockpile this drug for emergency use. While not completely out of the realm of possibility, there are significant obstacles that first must be overcome, including proving peramivir is safe and effective and winning a government contract.

In terms of the safety and efficacy peramivir, it is not known whether the drug will work in humans as an injectable. All that is known is that the drug successfully treated avian flu in preclinical studies in mice. There is still the possibility that safety issues could emerge in humans or it is simply not efficacious. (Preliminary results should be available by year end.)

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What is the stock telling us in relation to these questions? Today, BioCryst closed with a market value of over $390 million. The company had about $40 million in cash as of June 30, 2005, and is burning about $20 million per year. The company also has an early stage drug Fodosine that is being evaluated in a variety of niche leukemias. These assets combined are arguably worth no more than a couple dollars per share, resulting in an implied value for peramivir of about $350 million, excessively optimistic in my opinion.

An NPV of $350 million, for example, implies $900 million of sales next year at a 50% gross profit and discounting back 15%. If you assume there is risk associated with the company realizing future cash flow from peramivir, then the implied future cash flow is considerably larger. For example, handicapping the likelihood of BioCryst winning a government contract and selling product next year at 50%, implies BioCryst sells $1.8 billion worth of peramivir next year!

Obviously, Avian Flu could be a problem, and there'll be money for whomever comes up with a solution, but this kind of advice is just gambling, not investing; and when a stock like this, has had such a run, the odds for the bettor are pretty bad.