SmartMoney: AS HEALTH AUTHORITIES step up warnings about the potential spread of avian flu to humans, investors decided that influenza-test maker Quidel (QDEL: 13.65, +1.74, +14.6%) is nothing to sneeze at. Shares of the San Diego company shot up 14.6% to close at $13.65 Monday on the heels of sobering words about an inevitable global epidemic from the head of the World Health Organization. Quidel's stock has quadrupled from its 52-week low of $3.45 set on April 26.
"It is only a matter of time before an avian flu virus — most likely H5N1 — acquires the ability to be transmitted from human to human, sparking the outbreak of human pandemic influenza," says Lee Jong-wook, director-general of WHO. "We don't know when this will happen. But we do know that it will happen. This is the time to build global consensus. This is the time for every country to prepare their national action plan — and act on it."
Quidel commands about 48% of the flu-testing market with its Quick Vue test, which detects the presence of the more common influenza A and B viruses in patients' nasal swabs. While the diagnostic test isn't specifically designed to identify bird flu, some researchers have reported success in using Quick Vue to detect the H5N1 strain of the influenza virus as well.
Enthusiasm for the shares expressed Friday by Jim Cramer on his investing advice television show, "Mad Money," might've added to the interest in Quidel on Monday. The often voluble commentator said the stock's primary appeal is its "buzz," which will continue to affect price action "as we keep talking about the flu," according to a summary of his remarks on the web site TheStreet.com, which Cramer founded.
That's a risky stock-buying proposition, even if Quick Vue is acknowledged as the best diagnostic test on the market. Steve Brozak, a biotechnology analyst with San Diego-based brokerage WBB Securities, warns that flu-related products go through seasonal cycles and are increasingly driven by news of global bird flu worries.
"Lots of smaller-cap companies go out there and get into the information dissemination business, and this is a situation where there are simply no easy answers," Brozak says. "That means there are no easy investments." (Brozak doesn't own shares of Quidel; WBB Securities doesn't have an investment-banking relationship with the company.)
Quidel, whose sales are projected to climb 19% this year to an estimated $91 million, sold $27.2 million worth of Quick Vue tests in 2004, according to Zarak Khurshid, an analyst at Pacific Growth Equities in San Francisco. The tests account for one-third of the company's revenues. Quidel's earnings are on track to reach 25 cents a share for 2005, up from a penny in 2004. (Khurshid doesn't own shares of Quidel; Pacific Growth doesn't have an investment-banking relationship with the company.)
Quidel's share price has experienced a few sharp spikes this year. The stock climbed nearly 22% in a four-day stretch from April 26 to April 29, and it's seen other big leaps throughout the summer and fall. However, many of the jumps have been accompanied by quick selloffs, indicating that Quidel might be a favorite of short-term traders. Short interest on the stock, an indication of how many traders think it's headed for a tumble, has been on the rise since July.
Khurshid says Chief Executive Caren Mason has exited underperforming operations and tightened distributor relationships in the U.S. and abroad, which has strengthened fundamentals. The company also settled a patent dispute in May with competitor Inverness Medical Innovations (IMA: 24.87, +0.65, +2.7%), and reported successes in Australian clinical trials. But the improvements in Quidel's business don't match the heady stock gains.
"We would expect the company to benefit if the 'test-and-treat' paradigm was more widely adopted by physicians in the event of antiviral therapy shortages," Khurshid writes in an email response to questions. "We expect the stock to continue to trade up in-line with its typical seasonal pattern." (Quidel's shares generally perform better as flu season approaches and taper off during nonflu months).
The big question for long-term Quidel holders is how global concern over the bird flu hitting human populations on a large scale will sustain investor interest. WHO statistics show 63 people have died of bird flu since December 2003 out of 124 who were infected with the disease. Lee Jong-wook, the WHO chief, on Monday opened a special meeting on curbing the spread of a possible pandemic. He notes that the 1918 pandemic, which killed as many as 40 million people world-wide, resulted from an altered avian flu virus. Lesser outbreaks of flu in 1958 and 1968 left a total of three million dead and were considered to be "mild" pandemics, he says.
WHO's urgency mirrors the comments last week by President Bush, in which he outlined a $7.1 billion response plan to combat a potential pandemic if human-to-human transmission becomes widespread. "It is vital that our nation discuss and address the threat of pandemic flu now," Bush said in an Oct. 31 address at the National Institutes of Health in Bethesda, Md., adding that "if we wait for a pandemic to appear, it will be too late to prepare."
The level of concern over avian flu nationally and globally only amplifies the potential volatility in these types of stocks, says Brozak.
"This is an area of investing that cannot be divorced from government leadership and policy," he says. ""But it really becomes a kind of casino-type mentality, and that's unfortunate."
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"There's no company that we have uncovered so far that we believe we can advocate the purchase of based on its diagnostic treatment, or even relating to future potential paradigm shifts on the evolution of their technology for treatment," says Brozak of WBB Securities. |
