Is Chugai Pharmaceutical (4519 JP) really a Swine Flu play?

I am back after couple weeks of vacations. I was not able to work on my blog but I still found a way to stay in touch with the market. Since my last article the market has been on a bullish mode and, at the moment, investors do not seem ready to call it a top. However, I believe we are not far from the top as investors are getting more worried about bad news as they were couple weeks back.

But anyway, today, I am going to write a quick note about the Swine Flu and what, I think, it means for a company like Chugai. Like many of you know, for the past few days all we have heard about is the sanitary crisis that started in Mexico and that is spreading around the world. The situation is dramatic in Mexico; the government there has decided to close all restaurant, bars and public places until further notice. Schools are closed at least until May 6 but it is more than probable the deadline will be pushed back further.

So here we are with a sanitary crisis named Swine Flu spread to humans and birds from pigs. It is similar in a way to the Bird Flu people become familiar couple years back in Asia. It was called the H5N1 virus and the only vaccine was the Tamiflu from Roche. Roche being Chugai’s parent company, the Japanese pharmaceutical company benefited greatly from the Bird Flu. Governments around the world decided to build inventories of Tamiflu in case another sanitary crisis caused by the H5N1 virus would reappeared.

Monday, Chugai’s stock price soared almost 15%. As much as I am not surprised to see such upside move I would warn you of things. First, investors, who bought the stock on Monday, are certainly hedge funds that are in there for a quick profit. In terms of fundamentals, there are too many unknown to see many long term institutional investors jumping into a stock like that. That alone would keep me away from this stock. Second, media and doctors have commented on this new virus, called H1N1, and at the moment it seems there is not real vaccine for this Swine Flu. It is probable that the Tamiflu is a close vaccine and that scientists might be able to use the Tamiflu to find a cure for the H1N1 but so far nothing is clearly identified to be a vaccine for the disease.

It is still probable that Tamiflu being the closest vaccine for such sanitary crisis, governments around the world will look to build inventories of Tamiflu but as of today it would not help fight against the Swine Flu. Few analysts have commented recently on the news and came up with a possible demand of 50 million Tamiflu vaccines, which would increase Chugai’s operating profit by more than ¥7 billion. To me it is still a flip of a coin to come up with such numbers and it is too much risk for not that much upside given the increase of the stock price the past two days.

In conclusion, I understand there will be some volatility in Chugai’s stock price in the coming days or weeks and that maybe you can catch another 10-20%. However, the down side seems to be larger than the upside, especially since Roche reported disappointing news recently about another drug, Avastin. There is, therefore, no real fundamental base for buying the stock today, just the possibility of a short term gain on t he back of this new sanitary crisis.