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The Zika trade: some biotechs are set to win big

On Monday 1 August, Florida governor Rick Scott said the state is now looking at 14 cases of mosquito-transmitted Zika virus.

Vaccination
Source: Bloomberg

This marks the first active cases of locally transmitted Zika virus reported in the US. While the world has been very concerned about Zika as it has spread throughout Latin America, unfortunately, due to the bias of English-speaking Western media, Zika concerns are likely to dramatically increase now it has affected the US mainland. As such, while certain stocks with potential Zika treatments saw bounces earlier in the year, they have begun to rally again as the full force of US medical research funding starts to step into gear.

Going long a basket of Zika-related biotechs may be the best way to trade this opportunity. An equal-weighted basket of longs in BioCryst (BCRX), Intrexon (XON), Inovio (ION), Cerus (CERS) would provide exposure to those that outperform and a hedge against those that don’t. The major risk is BCRX and CERS both report earnings today 4/08, while XON and INO report earnings on 8/08, which are huge event risks for biotechs. For those interested in picking up the stocks it may be better to wait for inevitable dramatic earnings reaction before entering a position.

Zika virus only has symptoms in 20% of cases, and when present are often mild and subside within seven days. The major worry is that a pregnant mother can pass the virus onto her baby in the womb, and Zika does have very serious effects on unborn babies, most notably microencephaly. Microencephaly is where the brain does not develop properly resulting in a smaller than normal head, which are the disturbing images that have caused dramatic media show reels. And regrettably, the first Western baby born in the US with such a defect with an English-speaking mother that can be interviewed live on US national TV is likely to set the 24-hour news networks into a paroxysm of panic that will whirr the cogs of major pharmaceuticals and governments worldwide into action.

Four companies who could potentially benefit

It is far from clear which method will be best in combating Zika, certain companies that were working on vaccines for other mosquito-based diseases are quickly trying to reapply it to Zika. And there are growing calls for a significant US federal government response, which could dramatically increase funding towards all potential solutions.

AUM-XON-040816

XON – Intrexon (5 buy, 3 hold, 0 sell)

Intrexon bought out Oxitec in 2015, which has the most unusual method for fighting Zika and mosquito-borne diseases in general. They have engineered a process where they can give a mosquito a self-limiting gene, such that it would mate with other mosquitoes and their offspring would not survive into adulthood. The stock was up 8.2% yesterday.

AUM-CERS-040816

CERS – Cerus (6 buy, 0 hold, 0 sell)

Zika can be transmitted by blood, and as such whole blood donations have been banned in Zika-infected parts of the world. Cerus has the INTERCEPT device that can deactivate the Zika virus in human blood, which is already on the market.

AUM-INO-040816

INO – Inovio (5 buy, 0 hold, 0 sell)

Inovio and its partner GeneOne Life Sciences got the go ahead in June to begin the Phase 1 trial of their potential Zika vaccine on humans.

AUM BCRX 040816

BCRX – BioCryst (4 buy, 4 hold, 1 sell)

BioCryst got added NIAID (National Institute of Allergy and Infectious Diseases) funding for their BCX4430 drug in June, which has demonstrated survival benefits in nonclinical studies of infectious diseases such as Ebola and Zika. The stock has now gained 40% in two days.

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