The recent outbreak of the deadly Ebola virus in Western Africa is now the worst on record, and public health officials are desperately searching for new ways to combat this serious threat to global health. As a result, developmental-stage biopharmas working on this rare disease, like Inovio Pharmaceuticals (NASDAQ:INO), NewLink Genetics Corp. (NASDAQ:NLNK), Tekmira Pharmaceuticals (NASDAQ:ABUS), and Sarepta Therapeutics (NASDAQ:SRPT), have all generated significant interest among investors lately. That said, I think there are three good reasons to shy away from buying these stocks simply because of their experimental Ebola therapies.
Reason No. 1
Every couple years, we hear about a rare disease that has started to spread and now poses serious health risks to humans all over the globe. Not too long ago it was H1N1, aka "swine flu." After a few weeks of media attention, however, swine flu promptly disappeared from the media's lexicon seemingly overnight. And remember Middle East Respiratory Syndrome (MERS)? Same story.
The key question for potential investors is the following: Is Ebola likely to become a global health threat? My frank answer is "no." First, the Ebola virus is extremely rare, with less than 10,000 confirmed cases in this latest outbreak.
Next, the way in which Ebola is transmitted lends itself well to containment. Specifically, the virus is initially spread from animals to humans, and can only be passed from human to human after a patient begins to show signs of infection. Rigorous monitoring programs should thus be sufficient to contain this disease -- just as they have done so in past outbreaks. In fact, a recent article appearing in The New England Journal of Medicine detailed how insufficient control efforts early on have been the main reason this outbreak has dwarfed previous ones.
Reason No. 2
Because better screening procedures should dramatically reduce the scope of the current outbreak soon, we are unlikely to see an experimental vaccine become widely available in time to play much of a role in current control efforts. According to GlaxoSmithKline's experts on the matter, the earliest any of these developmental vaccines could complete the required clinical testing process is by 2016. While Tekmira's promising Ebola vaccine is now being manufactured on a limited basis, you should bear in mind that this unapproved product will only be used as a treatment of last resort. In short, we are years away from seeing an Ebola vaccine that would be used as a front-line treatment on a large scale.
Reason No. 3
Perhaps one of biggest reasons to be cautious with this group is that they are all clinical-stage companies with limited resources. Specifically, they tend to have huge cash burns because of their clinical programs and a corresponding lack of revenue generating products. At the end of the day, all of these companies are heavily dependent upon dilutive financing to fund their operations; a practice that dampens shareholder value. So even if one of them ends up, way down the road, successfully leading the charge against Ebola, you will probably never make a bunch of money off of it.
Why biotechs are getting involved in the fight against Ebola
Ebola is undoubtedly a serious disease in need of new treatment options. Because of its rarity, however, the commercial potential hasn't been high enough to entice many companies to pursue this indication with gusto, at least until now. Sarepta, for example, mothballed the development of its Ebola treatment two years ago, and has only recently shown much interest in this program.
Why are these developmental biotechs racing to cure Ebola now? My take is that the push by NewLink, Inovio, Sarepta, Tekmira, among others, to fast-track their experimental Ebola candidates is linked to the government's increased willingness to provide funds for this research. Since this outbreak spread to the U.S., the Centers for Disease Control and Prevention, and the Department of Defense, have been pouring money into the search for a vaccine.
In conclusion, I don't think the huge spikes in share price among companies working on Ebola treatments -- like the 24% jump in NewLink shares last week, are justifiable given that Ebola is unlikely to transform any of these companies into a huge winner.
George Budwell has no position in any stocks mentioned. The Motley Fool recommends Apple and Gilead Sciences. The Motley Fool owns shares of Apple, Gilead Sciences, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.