Investors gain as biotechs climb with flu fear

NEW YORK, Sept 11 (Reuters) - Dire predictions and rising anxiety about a swine flu pandemic just might make some investors richer.

Small biotechs racing to produce vaccines have fattened investors' wallets, while the companies themselves have enjoyed renewed funding at a time when credit has been in short supply for risky businesses.

"It gives many of these small companies a renewed lease on life," said Leerink Swann biotech analyst Joseph Schwartz, who contributed to Leerink's extensive report for investors on the impact of the H1N1 virus on stocks across healthcare sectors.

"We've seen some really small companies, whose shares have languished over several years, get a decent pop and often for very modest data, often preclinical (animal testing) or very early human data," Schwartz said.

While many vaccines in development will not be ready in time for the coming flu season and several may never come to fruition, that has not stopped investors from parlaying the flu fear factor into hefty paydays by buying up shares of small players with lots of room to grow.

"These tend to be very thinly traded stocks, so once prospects of a potential market opening up for their programs that could become drugs some day arises, people rush in. And the market already seems to be assuming that many of these companies do succeed," Schwartz said.

Whether such optimism is warranted, shares of Biocryst Pharmaceuticals Inc(BCRX.O), for example, are up more than 700 percent this year, while Novavax Inc(NVAX.O) shares have more than tripled in 2009.

Biocryst is developing an intravenous antiviral drug similar to Roche's (ROG.VX) Tamiflu and GlaxoSmithKline's (GSK.L) Relenza that could be useful in the hospital setting. Novavax is awaiting a green light to begin human testing of a novel H1N1 vaccine grown in caterpillar cells.

"For sure in 2009 the H1N1 issue has raised the prices of some smaller biotech stocks," said John Sullivan, Leerink's director of equity research.

"At the same time, the overall market has improved and investors have become more comfortable with risky stocks like emerging biotech stocks. For small biotech companies that have exposure to H1N1, the effect has been compounded," he added.

Leerink has developed a Swine Flu Index (SFI) that measures the impact of H1N1 news -- such as the World Health Organization declaring a pandemic -- on stocks of companies large and small with flu exposure, whether through marketed products, experimental vaccines in development or distribution of flu medicines.

"We wanted to help our investing clients understand H1N1 better as it relates to healthcare stocks," Sullivan said.

According to the report, companies in the SFI have given investors about a 175 percent return so far this year.

The SFI gives added weight to companies with more H1N1 exposure, but the report said that even an equal-weighted index would have provided investors with a 101 percent return on their money. By comparison, the S&P 500 Index .SPX is up about 15 percent in 2009, although it has risen more than 50 percent from March lows.

The returns on the SFI have been predominantly driven by a select few biotechnology companies that have developed antiviral vaccines targeting the swine flu. These companies, like Biocryst and Novavax, are expected to generate the majority of their 2009-2010 revenue from swine flu contracts, the report said.

And the urgency of many governments to build stockpiles of flu treatments to protect their populations as the H1N1 strain makes its way back to the Northern Hemisphere has kept investor interest in companies working on vaccines at a fever pitch.

Schwartz cautioned that there is still great uncertainty surrounding any experimental treatment, including promising vaccines developed using faster new cell-based technologies rather than traditional vaccines made using chicken eggs.

"The newer methods seem likely to take several years at least to displace the egg method," he said.

Still, with the likelihood of swine flu, and preparation for the next outbreak, being at the forefront of health news for some time to come, the prospects for illness-gotten gains, especially through investing in small biotechs, remains high. (Editing by Steve Orlofsky)