Remember those bio-defense stocks that Wall Street totally embraced after the Sept. 11 terrorist attacks? When Congress passed the Project BioShield Act of 2004, it encouraged a raft of companies to engage in developing bio-medical countermeasures to protect Americans from so-called bio-terrorists. Companies in this group attracted investors with their potential to combat attacks that use chemicals, anthrax, smallpox or even nuclear radiation as weapons.

Well, investor interest in bio-defense companies ultimately flamed out as government funding for their projects wasn't adequate. And eventually fear gave way to complacency, and to most people bio-terrorism has come to seem like a thing of the past.

Now, though, some analysts and investors believe the bio-defense group will stage a comeback because they expect government financing for these projects will start gaining more attention under the Obama administration. In his State of the Union address, the president unveiled a plan for a quicker response to bioterrorism threats and attacks. He asked government leaders to rethink their plans for medical countermeasures so that quick, reliable and affordable antidotes will be available during any public health emergency.

"It seems like the government will finally step up to the plate and show real concern and support," says one investment manager who has started accumulating shares of some bio-defense plays.

Regaining Traction

Jason Kolbert, analyst at National Securities who tracks bio-defense companies, says shares of the group's leaders have been under downward pressure. PharmAtene (PIP), which is developing biological and chemical defense products, has slumped to a low of $1.13 a share on Dec. 11, 2009, from a 52-week high of $4.31 on Sept. 10, 2009. It has edged up since to just $1.97.

But Kolbert is optimistic that shares of selected bio-defense stocks will start gaining traction as government agencies, such as the Department of Defense and National Institutes of Health, step up the awarding of contracts to purchase anti-terrorism biological products. And the government has been stockpiling large quantities of medicine and medical supplies to meet any public health emergency. The medicines are expected to be delivered to any state in the U.S. within 12 hours after an attack or emergency situation.

Here are three stocks that some analysts believe have the best chances of participating in the next bio-defense upswing:
  • Siga (SIGA), whose chief product, ST-246, is an orally administered small-molecule antiviral that targets smallpox.
  • Aeolus Pharmaceuticals (AOLS), which is developing products against biological, chemical and radiological weapons.
  • Soligenix (SNGX), whose bio-engineered vaccine is designed to protect against the effects of ricin toxin, a lethal biological agent.
Siga is close to achieving its first commercial success, says Kolbert, predicated on getting a purchase contract from the Biomedical Advanced Research and Development Authority (part of the Health and Human Services Department) for its ST-246 smallpox vaccine. Since 2003, Siga has received about $35.8 million from the National Institute of Allergy and Infectious Diseases (NIAID) to help develop the product.

Siga's stock, which hit a 52-week high of $10 a share on Nov. 30, 2009, has tumbled to $6.47. Kolbert figures it's worth $12, based on projected cash flows for its ST-246 smallpox vaccine.

Aeolus, whose stock has rallied to a 52-week high of 55 cents a share on Oct. 22, 2009, from 15 cents on Mar. 2, 2009, is way undervalued, figures Kolbert. Aeolus is developing AEOL 10150, a medical countermeasure against the effects of acute radiation syndrome and mustard and chlorine gas in the lungs.

Soligenix's microcap stock has been on the go, leaping from 10 cents on Apr. 24, 2009 to 37 cents on Sept. 21, 2009. Chrystyna Bedrij, analyst at Griffin Securities, rates the stock a buy with a 12-month price target of $1.40. "Soligenix is the world leader in ricin toxin research, and its vaccine, Rivax, has shown to be well tolerated and immunogenic in a Phase 1 clinical trials in normal volunteers," says Bedrij.

Ricin and the bacterial agent anthrax are emerging as the most prevalent agents against which the U.S. is trying to develop bio-defenses, says Bedrij. Soligenix has been granted $9.4 million by the NIAID to help develop the product.

Big Bets by Some Big Names

These bio-defense stocks are hardly household names, but some large institutional investors are beginning to nibble. BlackRock Institutional Investors and BlackRock Fund Advisers have accumulated a combined stake of about 4% of Siga's stock. The biggest Siga stakeholder is Ronald Perelman, who owns 14%.

At Aeolus, XMark Opportunity Partners has built up a 53% stake, and Efficacy Entities owns 20%.

At Soligenix, Sigma Tau Finanziari is the biggest stakeholder, with 24.5% of the stock, and Biotex Pharma Investors owns 9.5%.

While Siga, Aeolus, and Soligenix are little known microcap stocks, and duly depressed (in price) at that, the big bets by large investors do lend some credibility to an otherwise overlooked group.

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