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BMO Nesbitt Burns report: An Investor's Guide to Avian Flu

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  • BMO Nesbitt Burns report: An Investor's Guide to Avian Flu

    Part I of the BMO Nesbitt Burns report:
    An Investor's Guide to Avian Flu
    http://www.bmonesbittburns.com/economics/reports/20050812/avian_flu.pdf

    The New Killer Flu

    The World Health Organization has officially certified that the disease known as Influenza A type H5N1 is now endemic among birds and animals in Asia. That means, WHO asserts, that for at least the next decade, there must be continuous monitoring, response and mitigation (control measures including education, vaccination, and changes to animal husbandry and food production). It also means that each outbreak must receive appropriate emergency response to prevent a global pandemic.

    There are, to date, no vaccines proven to protect against this relatively new virus, and it is doubtful that standard vaccine manufacturing processes will be able to deliver a sufficient number of doses of any product that will be effective.

    Only nine nations have the capacity to produce flu vaccine on a commercial scale. The US learned last year that it has to rely on foreign flu vaccine manufacturing facilities even for its annual production of flu shots. There is only one large-scale US plant, operated by Sanofi-Pasteur. That facility is also working on the development of a new cell culture process for producing a vaccine for H5N1. This experimental technique would reduce the current total dependence on chicken egg-based vaccine production techniques that have worked quite effectively for fifty years. That process, which typically takes 4-6 months, can probably not be speeded up for a pandemic, and is dependent on the availability of sufficient supplies of eggs?which may not be the case in a pandemic. Problem: H5N1 is a new kind of challenge, because it is up to 100% lethal for chickens?living and in embryos. ?Normal? flu viruses, when injected into chicken eggs, produce antibodies that, when killed, are the
    bases for vaccines. Vaccine culture to H5N1 requires adapting the virus strains to grow in eggs, a significant additional hurdle.

    The (potentially) good news is that Sanofi-Pasteur, operating under contract with the US National Institute of Allergy and Infectious Diseases, has progressed to the stage of testing a vaccine that offers promise. We shall not know if the vaccine is effective for several months, although the director of the Institute, Dr. Anthony Fauci, said last week, in an enthusiastic story carried on the front page of The New York Times, that the vaccine had passed preliminary tests and could be used in the event of a medical emergency. The next day, perhaps in response to criticism from some prominent epidemiologists, The Times ran an editorial that poured some cold water on its own report. ?The rub is that the dose needed was so high that the amount of vaccine stockpiled and soon to be on order by the federal government would protect only a few million people. That would be pathetically inadequate coverage should a pandemic strain of influenza emerge globally, endangering virtually everyone in its path.?

    ?Health officials are nearly unanimous in warning that the mere development of an effective vaccine is no guarantee of success against a pandemic. One uncertainty is whether this particular vaccine, intended to combat an existing strain of avian influenza, would work against a pandemic strain that had mutated greatly.?

    ?Another concern is that the current production capacity for influenza vaccine is so limited and so fragile that it can barely cope with a normal flu season?It will be urgent to develop new production techniques and a more robust industrial base?.So keep your fingers crossed that no pandemic emerges for the next several years.?

    Dr. Michael Osterholm, director of the University of Minnesota?s Center for Infectious Disease Research and Policy, author of recent articles in The New England Journal of Medicine and Foreign Affairs (whom we have consulted in the preparation of this report), said, in response to Dr. Fauci?s announcement, ?We?re starting, from these results, with the amount of antigen needed to immunize a person standing at twelve times what?s needed for a typical flu vaccination.? He also raised doubt about the testing procedures, which concentrate on adults over 65 and children, who are at most risk from typical influenzas. ?The H5N1 strain may not fit this pattern; mortality rates in the 1918 flu pandemic were highest in otherwise healthy adults,? he noted. (See our discussion of that outbreak on p. 14)

    The Known Knowns

    1. Pandemics

    A pandemic is an infectious disease that spreads across many countries within a short time, a sort of epidemiological form of instant globalism. It can be a catastrophic pandemic, such as the Black Death (1345-50) or the 1918 Influenza (now listed as Influenza A/H1N1), or a mild pandemic, such as the world flu pandemics of 1957 and 1968. Epidemics are local, or regional occurrences.

    Pandemics have historically originated in East Asia and spread across the world in a process that can take years. Mortality statistics on past plagues are therefore subject to extensive revisions as historians try to reconstruct data from countries that kept few, if any, reliable statistics on the numbers of infected persons and the mortality rates.

    The Black Death is now thought to have killed roughly one-third of Europe?s population before retreating?. to recur, with diminishing impact, on several occasions.

    2. Flu Pandemics

    According to Dr. Julie Gerberding, Director, Centers for Disease Control and Prevention:

    ?For an influenza virus to cause a pandemic, it must meet three major criteria: (1) possess a new surface protein to which there is little or no pre-existing immunity in the human population; (2) to be able to cause illness in humans; and (3) have the ability for sustained transmission from person to person.?

    She continued: ?So far the H5N1 virus has met two of these three criteria, but it has not yet shown the capability for sustained transmission from person to person.? That criterion is today, by our definition, a Known Unknown.

    There are three types of flu virus, A, B, and C. Influenza has been around for as long as we have records. Hippocrates wrote of it 2400 years ago. Although no one is sure how it got its name, some believe that it was called influenza del freddo (the influence of cold) by Italians in the 19th Century, who noticed that the same sickness came each year with the cold weather.

    Millions of people are infected with flu each year. In the US, despite large-scale vaccination, an average of 36,000 people die because of flu, or flu-related diseases. Those most at risk from these epidemics of ?normal? flus are the very young and the elderly.

    Scientists believe that three times in the past century influenza A viruses have undergone major genetic changes, resulting in pandemics? 1918, 1967, and now.

    3. The 1918 Influenza

    Estimates on worldwide deaths from this catastrophe range all the way from 25 million to 100 million. Some experts believe it killed more people than the Black Death.

    Estimated American deaths were 675,000, ten times as many as those killed in action in World War I. Of the American soldiers who died in Europe, roughly half perished from flu. Globally, the numbers of people killed were far more?perhaps seven times?the number who died as a direct result of the four years of the War. The published projected average lifespan of Americans fell by 10-12 years in a few months.

    The US mortality rate was roughly 2.5%, but rates in some countries abroad were far higher: India?s was 5%. Even at that ?low? American rate, it was 25 times deadlier than ordinary flu. (According to Gina Kolata, who published a book in 1999 on the 1918 Influenza, even at the low end of estimated deaths worldwide, it killed more than twice as many people in a few months as AIDS had killed through 1997. Historian Alfred Crosby says it ?killed more humans than any other disease in a period of similar duration in the history of the world.?)

    It was known as the ?Spanish Flu? because of how hard it hit Spain. Some epidemiologists believe that the virus originated in China, migrated, and then mutated into a potent new form at a military base in Kansas. It circulated in army camps in March and April, and rode with the troop ships to Europe. It was still a ?mild? flu that sickened people for three days. In August, it re-emerged in mutated form as a lethal virus in Boston. In that form it swept around the world. It returned to Europe with the troop ships, which became known as Death Ships. Doctors called on President Wilson to halt troop shipments. He had caught the flu in its earlier, mild form, and refused to accept the appeals.

    For those who think this was just a particularly nasty flu, think again. Patients? faces turned purple as they gasped for breath and coughed blood, while their feet turned black. They died in a form of drowning as their lungs filled with fluid. In his publications, Dr. Osterholm notes that the 1918 flu was particularly lethal for persons aged 20-40. Apparently, this is because those people have survived the childhood diseases and their bodies? immune systems are strong. This means, paradoxically, that their bodies are forced into a fatal overdrive when attacked by a previously-unknown disease. This brand-new pathogen unleashes ?a classic immunologic storm?a cytokine storm?.in 24 to 36 hours their lungs just become bloody rags.?

    In a cytokine storm, the autoimmune process runs wild, and the victim is, in effect, killed by his body?s immune responses. The immunologically fittest die at a faster rate than the unfit. In pondering this information, we thought back to what we remembered of Boccaccio?s description of the plague in Florence in his classic Decameron, published in 1350. He wrote, ?But what gave this pestilence particularly severe force was that whenever the disease mixed with healthy people, like a fire through dry grass or oil, it would run upon the healthy.?

    In America, Philadelphia was the hardest-hit city: out of a population of almost 2 million, almost 13,000 died?11,000 in October alone.

    It was already killing people across the state when, despite warnings from health officials, the city went ahead with a big parade to promote sale of war bonds. Two hundred thousand people watched. The next day, 635 case of flu were reported, with 139 deaths. Within days, the city proclaimed an epidemic, ordering the closing of churches, schools and theaters. Because the supply of coffins was exhausted, hundreds of corpses were dumped into group graves. The Bell Telephone Company ran full-page ads asking subscribers to cut back on telephone usage because 800 operators?27% of its employees? were absent from work due to flu.

    4. The 1976 Swine Flu ?Fiasco?

    When Private David Lewis died at Fort Dix, the autopsy disclosed that he had a particularly potent form of flu. Four other soldiers had been hospitalized, but they recovered.

    It was identified as a form of swine flu. Doctors at the Centers for Disease Control considered the evidence, then went to President Ford with a call for mass inoculations. They were joined by America?s star epidemiologist?Dr. Jonas Salk, of polio fame.

    The President listened to them and prevailed on Congress to appropriate special vaccination funds. An emergency large-scale vaccination program was approved and implemented, with full backing from the drug industry and the medical profession. Forty million people got shots.

    But the ?epidemic? never happened, and the vaccination was halted. Hundreds of those vaccinated developed serious neurological side effects, including the rare Guillain-Barre disease, and many of them, or their survivors, sued the government.

    It turned out to be just another of Gerald Ford?s hard-luck experiences in his brief term of office, and a contributor to his defeat by Jimmy Carter in what was (until 2000), the narrowest margin in a Presidential race of the century. Carter?s choice as Secretary of Health, Education and Welfare, Joseph Califano, called it Ford?s ?fiasco,? and that label stuck.

    To this day, many prominent American and WHO epidemiologists speak with horror about the public rage against the epidemiologists? errors in 1976. Publicly, they warn about what could happen if the virus mutates successfully into a reprise of 1918, but are careful to point out that ?there is no imminent threat.? Privately, they express fear, but don?t wish to put themselves in the position that the only way they can be sure of keeping both their public respect and their jobs is if the world is ravaged by a plague.

    5. Influenza A (H5N1)

    This virus was first identified in terns in South Africa in 1961. (The world is lucky it hadn?t mutated into lethality, because no bird species travels further than terns?who migrate between polar regions.) Until recently it was a virus that was present in birds and mammals, but it rarely killed them. Its first known infection of humans came in 1997, when it emerged in Hong Kong, killing six of its 18 victims. In response to effective crisis management by the Hong Kong government, the outbreak was halted, to re-emerge in 2003. H5N1 is a zoonotic disease, which means an illness that is capable of moving from animals to infect humans. It originated with birds, moved to mammals, and began infecting humans after years of mutation. That process involves differing strains of virus reassorting their RNA through combining with each other within one host? ?the learning process.?

    Reassortment is one reason why WHO worries about the implications of H5N1?s infection of millions of migratory Asian birds: when they return south from Siberia, they will have the opportunity to mix with resident birds who are infected with a different form of the virus, raising the possibility of large-scale recombination to achieve the right structure of amino acid shells for highest virulence. To reach pandemic status, the virus would reassort with another influenza virus within a person, thereby learning transmission.

    Perhaps the most highly-publicized case of mammalian death to date from H5N1 came from a zoo in Thailand, where 147 (out of 418) tigers died. Sudden large-scale deaths of members of a wellknown endangered species guaranteed heavy media coverage. But the tigers are a tiny percentage of the victims of H5N1. This outbreak has already been serious enough to force the culling of 120 million birds in Southeast Asia in 2004. Such large-scale culling is effective at destroying birds carrying the virus. However, East Asian governments give minimal or zero compensation to the luckless peasants whose flocks are destroyed. However successful this process may be at slowing the progress of the disease, it hardly operates as an incentive to report outbreaks.

    Given the history of past pandemics (and SARS), WHO has long feared that the next lethal outburst would originate in Vietnam or China, where hundreds of millions of people live in daily contact with birds and/or pigs. Those animals have been the incubators of past killer viruses.

    As Dr. Osterholm notes, ?It is sobering to realize that in 1968, when the last influenza pandemic occurred, the virus emerged in a China that had a human population of 790 million, a pig population of 5.2 million, and a poultry population of 12.3 million; today, these populations number 1.3 billion, 508 million, and 13 billion, respectively. Similar changes have occurred in the human and animal populations of other Asian countries, creating an incredible mixing vessel for viruses. Given this reality, as well as the exponential growth in foreign travel during the past 50 years, we must accept that a pandemic is coming?although whether it will be caused by H5N1 or by another novel strain remains to be seen.?

    In its current form, H5N1 has achieved (as noted earlier in discussion of a possible new vaccine) a 100% mortality rate with chickens, and with some flocks of migratory birds. Previously, birds carrying a flu virus were mostly asymptomatic.

    With the outbreak in May which killed migratory birds in the Qinghai nature reserve in China, the virus has expanded its geographic range with remarkable speed. Previously, it had been killing wild birds in Southeast Asia; in recent weeks, reports of migrant deaths have come from Kazakhstan, Tibet and Mongolia. The first Russian outbreak was in Novosibirsk, Siberia; since then, the virus has been moving westward toward European Russia.

    According to The Moscow Times.com, Russia?s Emergency Situations Ministry reported on August 10th that the number of deaths among domestic and wild birds in Siberia was just 15 overnight, compared with a total of 5,583 in mid-July. ?The country?s top epidemiologist, Gennady Onishchenko said it was too early to draw any conclusions. ?We would have been drinking champagne by now if it had been pinned down.?....There were also fears among veterinary officials that migrating birds could take the virus to other countries. ?It is possible that they have already spread it??a senior veterinary official told Interfax. ?They fly not only over Siberia but along the far eastern coast on to the United States.??

    (chart showing the locations of outbreaks)

    To date, few humans have been recorded as victims, although WHO is skeptical that Vietnam, China and North Korea have been scrupulous about identifying or reporting H5N1 victims. Since cremation is the preferred burial technique in those countries, WHO has obvious problems in assembling conclusive evidence through post-mortems. To sum up the unsatisfactory state of scientific knowledge about Asian outbreaks: WHO lacks adequate evidence about WHAT number of people and animals have been infected, WHEN infections and deaths occurred, and WHERE they occurred, which is WHY epidemiologists fear the worst.

    A typical WHO comment came from spokesman Peter Cordingly at the flu conference in Malaysia in July: ?Billions would fall sick, billions more would be too afraid to go to work, leading to a collapse of essential services.?

    On August 5th, WHO reported that, of the 112 humans infected to date, 57 have died. (Press reports since then have increased the death count from Vietnam.) To date, China is virtually the only country in East Asia which has not admitted to any human infections. It has reported large-scale bird deaths and has denied reporters and investigators access to some remote regions where avian flu outbreaks have been reported.

    Sustained human-to-human transmission has not occurred to date. There have been two cluster deaths?the first in Thailand in 2004, where an infected child may have communicated the disease to her mother and aunt, and, most recently, in a suburb of Jakarta, where three family members died. Initially, this looked like person-to-person infection. However, three other family members did not catch the virus. The victims appear to have been infected through exposure to chicken droppings in their backyard, although their family does not keep chickens.

    There have been several international conferences this year about H5N1 risk. At each, scientists pled for rapid development of crisis response among participating governments, plus major increases in funding for testing costs, vaccines (human and animal), antivirals, culling, and health care providers. Needed changes to farming and food processing practices also require funding, to reduce what scientists call the ?mixing bowl? problem where numerous breeds of animals are kept together in markets and sold live. The amounts pledged for these responses have been disappointing to WHO and to epidemiologists in other countries. They lament that it is much easier to get governments and the public alarmed about ebola, West Nile Disease?or even meningitis?than a potential killer flu. It?s too bad the authorities can?t give it some Crichtonesque name that will arouse the populace to a new plague.

    The Known Unknowns

    Two years ago, SARS was the new disease that could threaten the world. It was first identified in rural China. When infected animals were sold and eaten by humans, it crossed the species barrier, spreading to five countries within 24 hours, and to more than two dozen countries within months. Sherry Cooper recounts the impact of that outbreak in detail. A flu epidemic that had any resemblance to 1918 would make SARS look trivial. It would easily infect more people in an hour than all the victims of SARS, and kill twice as many people in a day as SARS killed in six months.

    So SARS? effect on the global financial system is a useful starting point for investors in thinking about H5N1. What are the lessons? What should we expect?

    1. Quarantining and Controls

    Governments will not hesitate to impose quarantining, including requiring people who may have had exposure to the virus to stay within their homes, denying landing rights to planes and ships from countries where the disease is spreading, forcibly isolating people showing suspicious symptoms, banning concerts, parades and sporting events, and making businesses liable for enforcing such emergency rules on their staffs. The populace will accept restrictions as long as the initial panic lasts, but when the strains on the health care system and the economy become too painful, and new infections don?t seem to be appearing, the populace resists government controls. Singapore is constituted to manage an epidemic: most other democracies, of all stripes, are not.

    2. Financial Market Reactions

    Because so few people actually remember the 1918 pandemic, and because it occurred against the backdrop of ?The War to End All Wars,? most people are unwilling to believe that ?mere flu? could be lethal on a scale reminiscent of Black Death. That probably means that the stock market reaction would take a little longer to develop than if the pandemic were some supposedly more fearsome disease. That might be a window of opportunity for those who understood the challenge H5N1 offered. WHO flatly predicts that stock markets would close once a pandemic was confirmed, but that forecast probably assumes a sequential response?with Asian markets closing first, and North American and European markets staying open until local business closures and soaring death rates precipitated panics. What can we learn from behavior of financial markets in 1918?

    Answer: very little.

    ?The War to End All Wars? was the overarching preoccupation for people in Europe and North America. Although flu infection and death rates were shockingly high on those continents, the overwhelming majority of deaths occurred in Asia, Europe and Africa, and most of those deaths went unreported for years.

    That pandemic didn?t hit at a time when international trade as a % of world GDP was at an all-time high, and when financial and economic information was instantly disseminated worldwide to investors who could trade stocks, bonds, commodities and currencies around the clock, around the world.

    Nor did it hit at a time when just-in-time inventory management and global supply chains characterized all major economies?and all major manufacturing, transportation, distribution and merchandising organizations. The expansion of free trade in the past two decades both facilitated and drove this trend toward creation of global supply chains. This wasn?t the case in 1918. The world had experienced remarkable growth in free trade in the late 19th Century, but this had given way to a revival of protectionism and, in the case of Prussia, Austria and Italy, to a growing reliance on autarky. National self-sufficiency had become fashionable before the war, even in Britain. The US had a wide array of protectionist barriers in place to shelter its manufacturers and farmers from foreign competition.

    Thus, flu didn?t come to a world characterized by economic interdependence and economic cooperation, or to a corporate world prospering through internal transfers of goods and services across international boundaries.

    Contrast that world with ours. The very strength that has made this economic recovery a global phenomenon able to integrate China and East Asia into its processes, with mutually reinforcing exchanges of goods, services and capital is our global Achilles heel. It makes the economy and financial markets more vulnerable should a pandemic that kills many millions across East Asia force quarantines and stock market closures. The analogy that may be most relevant for our situation is the pattern of mortality statistics of the 1918 pandemic: according to historians, the physically healthiest demographic cohort?persons 20-40?had the worst mortality statistics, because its strength was its weakness in face of this new kind of pathogen. The healthiest sectors of today?s global economy are precisely those most at risk from a pandemic.

    Among the best-performing sectors in global financial markets in this millennium have been the commodity stocks, whose performance depends, in large measure, on continued economic strength in Asia, particularly China. A runaway pandemic would hit commodity prices especially hard. The combination of collapsing demand from China and India and the likelihood of a collapse in demand for housing and cars in the OECD nations would mean prices of base metals and steel would plunge, probably reversing their entire post 9/11 rally. Oil prices would also plummet, because of the ending of the China boom and because of the sudden reduction in the number of consumers in the OECD. There would be no rush into precious metals from other financial assets, if only because high global death rates would mean large scale estate liquidation of jewellery.

    In 1918, few countries had anything that could be called a health care system. Health care was mostly a local responsibility, financed from personal wealth and public charity.

    However, based on the evidence that flu overwhelmed American and Canadian hospitals and health care providers in 1918, (and on what SARS did to Toronto, as discussed by Sherry Cooper), the lack of meaningful surge capacity in health care systems worldwide would mean enormous economic impact in a new pandemic. Rates of both absenteeism and death would be sharply higher than should be necessary. Income and profitability of businesses of all kinds would suffer. Financial institutions would be under enormous pressure to sustain their services, due to employee absenteeism and chaotic financial markets.

    Attendance at public events, such as theme parks, sporting events and movies would collapse?if not banned outright. Patronage in restaurants (particularly Asian-style restaurants), hotels and bars would plummet. In one respect, our era would be better-positioned to manage a pandemic than the world of 1918: a surge toward internet-based merchandising among the bedridden and the merely scared would shift buying patterns. Staying indoors would be the course of prudence, and e-commerce would find millions of new users?if, that is, UPS, the postal ser vice and Fedex were actually able to maintain some acceptable level of delivery services during the pandemic. Does that mean investors should assume technology stocks in general would be a haven?

    The answer is surely ?No.?

    Information technology and broadband equipment stocks would be extremely vulnerable, for at least three reasons:

    First, they have high p/es and high betas and, in most cases, pay no dividends;

    Secondly, they are heavily integrated into East Asian economies, particularly China and Taiwan, both as component suppliers and contract manufacturers, and are therefore heavily at risk from supply chain disruptions;

    Thirdly, much of their sales growth has come from that region, so they share the commodity producers? problem that a severe economic contraction there would be severely painful for their top and bottom lines.

    Soaring death rates would puncture the housing bubble and create vast housing oversupply. Apartment owners would slash rates to try to replace deceased tenants. As prices of houses and condos fell, the many millions who had bought their properties with little or no money down would default, exacerbating the rate of price decline. Based on 1918 experience, the effect would be most severe in the major cities, where infection and death rates would be higher than in smaller centers.

    Tamiflu to the Rescue?

    The only antiviral agent which experts think could save lives if H5N1 breaks out into pandemic is Tamiflu. An antiviral agent is not actually a vaccine, although it can prevent infection if taken prophylactically. It is, therefore, strongly recommended for persons traveling into a region where there are known flu outbreaks. If taken within the first two days after the first onset of symptoms, it reduces the severity of the disease. Already, the WHO has called on Roche, its producer, to supply 250,000 units for health care professionals worldwide. We understand Roche plans a major donation of pills. One possible complication is litigation brought against Roche by Gilead, the US biotech company which originally developed the drug and licensed it to Roche. (Gilead claims Roche has not done enough to promote Tamiflu). Roche produces the drug in one plant in Switzerland, whose output was doubled in 2004 and will be redoubled this year. The extensive publicity about Tamiflu?s unique efficacy has naturally created enormous pressure on Roche to expand its production.

    Roche plans to start making the drug in as many as six US plants this fall. The US government has announced the goal of purchasing twenty million treatment courses of ten pills each. Another possible constraint on supply: if H5N1 breaks out in China, and the Chinese economy is disrupted, this could cut off shipments to Roche of a key ingredient in the manufacture of Tamiflu.

    The Unknown Unknowns

    Reading the extensive literature on pandemics, one is struck by how devastating they have been to the societies that suffered through them. That doleful historical record raises questions about the viability of some political systems if a 1918-style influenza with a death rate somewhere between 1% and 50%?however temporarily?were to ravage Asia. Asia has no supply of vaccines, although China does have some stocks of Tamiflu. There was rage in China during the SARS troubles, because the regime exacerbated the effect of the disease through its cover-ups. A disease that was infecting thousands of people a day and spreading rapidly across the Asian land mass would, perhaps, give a new kind of challenge to the various kind of autocracies and limited democracies in Asia. Avian flu is, according to reports, spreading rapidly across North Korea as this is written, but it is unlikely that anything could bring down the Kim Jong Il regime.

    China?s regime might totter, but unless the populace concluded that their leaders had prevented control of the pandemic through their mendacity, it is likely that the Communist rulers would stay in command?of a noticeably smaller population.

    If the disease broke out, how would the world allocate output of vaccine and Tamiflu, when all the companies who produce the precious products are headquartered in North America and Europe? Would the governments of the industrial countries whose factories would be working overtime to supply vaccines, antivirals, antibiotics, and masks permit those products to be exported?

    Would currency values swing in response to perceived levels of infection and mortality among the nations with tradable currencies? Or would they respond more closely to perceptions about the impact on their of goods and services?

    We are making no recommendations on Gilead or Roche, or, for that matter, companies such as coffinmaker Hillenbrand. Governments could be under extreme pressure to prevent corporations from ?profiteering? from catastrophe. Yesterday, in Lancet, the British medical journal, some Asian doctors called for stripping patents from Tamiflu, and from another antiviral drug, Relenza (made by Glaxo SmithKline) that they believe should also be stockpiled. We also make no recommendations on life insurance stocks, because the impact of a pandemic would vary from company to company depending on the nature of its reinsurance arrangements, and the percentage of its coverage sold under term contracts. There is, however, no doubt that life insurance share prices would be very vulnerable.

    How long would it take for the pandemic to run its course? Since it would spread faster than any previous virus because of the level of airline, automobile, bus and ship travel in the world compared to earlier pandemics, perhaps it would run its course far quicker?like SARS. In previous pandemics, the virus?s lethality tended to decline as its rate of infection increased, as if it had ?decided? that it was more efficient to keep its hosts alive than to kill them.

    Conclusion

    As this essay was being prepared, we were pleased to read, in the Financial Times of August 5th, an editorial ?How to nip the flu pandemic in the bud.?

    Here is an excerpt:

    ?The next few months will be critical for the battle to avoid what could be a cataclysmic flu epidemic, killing millions of young people and costing hundreds of billions of dollars in economic disruption?If the WHO is to stand a chance of success, there are two critical requirements. The first is that national flu surveillance systems work well?and countries do not suppress news of an outbreak, as China did with the early SARS cases?Secondly, prophylactic courses of Tamiflu, the only antiviral drug likely to work against the infection, must be given immediately to many thousands of people in the locality of the outbreak. Roche?is negotiating a substantial donation to the WHO..and with Tamiflu manufacturing facilities currently overstretched, filling the international stockpile should take priority?Judging from the panic over SARS, a flu pandemic would have a devastating impact on the global economy. It must be worth investing in something that increases even modestly our chances of avoiding such a catastrophe.?

    In order to fight flu at home, we must collectively fight it abroad. ?Homeland security? doesn?t apply in pandemics, as the Europeans learned during the Black Death, and as Americans learned in 1918.

    We present these observations in hope that they will contribute to public discussion about the wisdom of allocating meaningful levels of public funds to pandemic response. Dr. Osterholm cites a useful analogy: one reason nobody died when the Air France jet crashed at the Toronto airport was the swift and successful response from well-equipped emergency crews.

    All that equipment and all those people have been maintained at great public cost, even though they haven?t been needed on more than handful of occasions over many years. Was all that spending unnecessary during the years no jets crashed?

    A pandemic will come sometime. If we are fortunate, it won?t come before we have put the resources and systems in place to confront and control it.

    When the Black Death invaded Europe, such central governments as existed had virtually no power to organize defenses against the plague. Each of the cities and towns was essentially left to its own devices. Religious rites, self-flagellation, execution of Jews and other desperate measures were tried. (Finding scapegoats seems to be a pandemic habit: German terrorists were widely blamed in America for the 1918 flu.)

    In 1918, there were hospitals, nurses and doctors and care-givers. Next time, we shall have antibiotics, antivirals, and maybe a vaccine. Beyond these pharmaceutical defenses, we shall have international, national and community organizations, and will be able to follow the global progress of the disease through the media.

    Those resources are greater than what our forebears could muster. But, then, there are more of us, crowded into much bigger cities, in a world where people traverse the globe in a day, bringing goods, services, information, capital?and, in some cases, viruses.

    Y2K triggered a worldwide response, and the expenditure of more than $100 billion. The business community, believing its own survival was at stake, did everything the experts asked, based on those experts? appraisal of the risks. Maybe a significant proportion of that effort and expense was wasted, but the desired result was achieved?not even a glitch. Shouldn?t the business community get engaged once again?

    The 1918 catastrophe was over in months. Soon, the world had entered the roaring 20s, and from that sustained outburst of economic activity and a booming stock market, there were hordes of newly-rich people? and many of the Old Rich had become fabulously rich.

    They were the lucky survivors.

    This time around, it will not be necessary to rely on luck to protect the value of one?s portfolio. Cash, put options on volatile stocks, high-quality bonds, and high-quality dividend-paying stocks of companies with minimal exposure to the risks we have described will be the best survival packs. They will provide the survivors of the pandemic with the capital to take advantage of the wide array of cheap assets that will?however temporarily?be available after the virus has joined its predecessors in whatever resting places the world has on offer.

  • #2
    Re: Part I, BMO Nesbitt Burns report: An Investor's Guide to Avian Flu

    There's nothing like reading the whole report complete with tables, etc. Food for thought. Food for discussion.

    I'm glad some are thinking ahead.

    Comment


    • #3
      Re: Part I, BMO Nesbitt Burns report: An Investor's Guide to Avian Flu

      Thanks Mellie:

      Excerpts from above:
      "WHO flatly predicts that stock markets would close once a pandemic was confirmed, but that forecast probably assumes a sequential response—with Asian markets closing first, and North American and European markets staying open until local business closures and soaring death rates precipitated panics."

      I have been saying that the stock markets would close at some point and that trying to "play" this market would be very risky.

      "Cash, put options on volatile stocks, high-quality bonds, and high-quality dividend-paying stocks of companies with minimal exposure to the risks we have described will be the best survival packs. They will provide the survivors of the pandemic with the capital to take advantage of the wide array of cheap assets that will—however temporarily—be available after the virus has joined its predecessors in whatever resting places the world has on offer."

      I still emphasize cash because of its liquidity and the high opportunity costs of investing in other financial vehicles. For those stuck in retirement plans, I like 2 year U.S. treasury notes. There will many "cheap" assets to acquire if you survive with most of your capital after the pandemic.

      In fact, it will be a financial renaissance.

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      • #4
        BMO Nesbitt Burns report: An Investor's Guide to Avian Flu

        We provide analyses and forecasts of the global economy and financial markets, for the investment and business decisions of BMO's retail, institutional, corporate and government clients.


        This is an economic update to her data.

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