Friday, February 24, 2006

Anthrax, Vaxgen, and the Big Apple

After a respite, anthrax is back.

A Manhattan dance troupe leader was recently infected with anthrax after inhaling spores from raw animal skins he brought to the city from Africa to make drums, officials said Thursday morning.

Criminal intent or no criminal intent, this anthrax revival has us thinking of one thing: Vaxgen (VAXG), our pure-play on the bioterror boom.

Vaxgen's story is a before-and-after. At first, Vaxgen had an AIDSVAX vaccine that was intended to be a preventative vaccine to fight the HIV virus. Ultimately, the FDA shot it down.

Shares of Vaxgen naturally tanked. Then one day, investors woke up to a new company that had shifted its focus to developing anthrax vaccines and biologic products for the prevention/treatment of human infectious diseases.

In its 10 year life, Vaxgen has never brought a product to market. It hasn't made a dime since 2003 -- what they made that year was chicken feed. But, On November 4, 2004 the U.S. government forked over $877.5 million to Vaxgen so they could produce the world's first anthrax cure.

We believe Vaxgen will be taken over as soon it gets closer to bringing something to market. M&A activity in the biotech sector is breaking out like wildfire -- with highly liquid balance sheets and anemic pipelines, Big Pharma's in an acquisitive mood.

In sum, our government has earmarked $6 billion dollars for biodefense and given Vaxgen -- once a division of oncology powerhouse Genentech (DNA) -- the biggest chunk of that pie. Vaxgen's suitors must surely be watching.

Who's got an appetite for Vaxgen? Our guess is Wyeth (WYE), a major global player in vaccine development. We don't like chasing stocks strictly on takover speculation, but in Vaxgen's case, it's just too compelling to ignore.

At this point, the best thing for a Big Pharma to do is take a minority stake in Vaxgen and see how things pan out over the next 12 months.

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