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The Wuhan Virus and Research-Focused Biotech Companies

The U.S. stock indices are filled with small pharma and biotech stocks that are purely research-oriented. Most of these companies don't even have revenues and are entirely focused on building a strong pipeline of drugs and vaccines to counter various diseases that are affecting mankind.

The problem with these companies is that their low or nonexistent revenues result in a weak investor perception as the qualitative benefits of their research cannot be measured tangibly. However, with the outbreak of the Wuhan coronavirus, the importance of investing in the research of such companies is suddenly a hot topic in the investor community, which is why many of these stocks have seen their prices rise.

A very interesting observation in this regard is that the Health Care Select Sect SPDR ETF has appreciated from levels around $89 in November 2019 to more than $103 as of Feb. 18, which is a remarkable 15% growth for a fund that is totally focused on healthcare stocks.

The Wuhan coronavirus

In terms of official numbers, there have been over 73,000 cases of the Wuhan coronavirus, which are mostly concentrated in China. Other Asian countries like Singapore, Japan, Thailand and South Korea have also reported more than 30 cases each. Taiwan and France have recently confirmed their first coronavirus-related deaths.

The problem is no longer just in China. Researchers at Imperial College London, who advise the World Health Organization, estimated that Wuhan had anywhere between 1,000 to 9,700 symptomatic cases as of January. They are predicting the world will reach a total of 300,000 coronavirus cases in the coming weeks. In fact, there are concerns that the number of cases in China is undercounted. One of the researchers, Jonathan Read from the University of Lancaster, has estimated that only about 1 in 20 infections of the Wuhan coronavirus are being detected, for two main reasons. The first is that there are not enough health care workers to test the entire country, and the second is that coronaviruses are famous for having a staggering percentage of cases that show little or no symptoms.

If one looks at the economic impact of the virus, the data is saddening. Airline stocks, travel companies, tourism, manufacturing and many other sectors which have any kind of direct or indirect link with the Chinese market have been hit badly. Chinese employees have been forced to work from home to contain the spread of the virus, and this has affected the overall labor productivity of the country. Chinese markets have crashed and the global ones are not doing too great either, with major conferences, expos and events across the world (such as the Mobile World Congress) getting either canceled or delayed.

Benefitting from the stock market situation

Healthcare investors have tried to make the most out of the situation by investing in large pharma and biotech companies like Gilead Sciences (NASDAQ:GILD) and Regeneron Pharmaceuticals (NASDAQ:REGN), which is why their prices have seen some appreciation.

However, one important element that needs to be looked at is the emerging biotech companies that are focused purely on research. Some of these companies are trading at ridiculously low valuations, but their research capabilities are unbelievable.

Take NanoViricides (AMEX:NNVC) for example. The company is among the only names that have actually started working on developing a drug that can treat the Wuhan coronavirus. CEO Dr. Anil Diwan had earlier worked on research associated with the Middle-East Respiratory Syndrome (MERS), another type of coronavirus. Dr. Diwan believes that with some governmental support, as well as support from international agencies, they could progress rapidly on this front, as they have already identified some candidate ligands in their chemical library which could be used in the treatment of the Wuhan coronavirus. This is the reason why the stock zoomed up from levels close to $3 to over $17 in such a short period of time.

Interestingly, the stock is now close to $7 levels and is still valued cheaply given the huge research potential and existing products in development such as its topical cream for shingles.

Another interesting micro-cap within the anti-viral research space is Inovio Pharmaceuticals (NASDAQ:INO). The company has tie-ups with a number of well-known universities for research and is working on clinical studies of its proprietary SynCon immunotherapies for wide variety of diseases, including HPV (human papillomavirus), cancers resulting from HPV, glioblastoma multiforme hepatitis B virus, hepatitis C virus, HIV, Ebola , MERS and Zika. Its stock has also seen huge appreciation since the Wuhan coronavirus outbreak owing to its MERS exposure.

Among the other interesting research-oriented micro-cap picks is Co-Diagnostics (NASDAQ:CODX). Given that one of the biggest challenges associated with the Wuhan coronavirus is that cases are not being diagnosed on time, this Utah-based company, which sells reagents used for diagnostic tests that function via the detection and analysis of nucleic acid molecules, appears very relevant. This is the reason why investors have bought the stock heavily since the outbreak.

Key takeaways

The immense appreciation in the Price-to-Tangible-Book-Value for these companies over the past three months is quite evident. Currently, NanoViricides appears to be valued the lowest among the three companies, but all of them have great potential in the long term.

It is important for investors to understand that buying shares of such companies is not some kind of philanthropic way of funding research and benefitting mankind. Given the kind of appreciation that these stocks have shown in the past few months, it can be a highly profitable investment, resulting in multi-bagger returns. With the whole coronavirus situation looming, such companies may provide an excellent opportunity for investors with enough risk appetite.

Disclosure: No positions.

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This article first appeared on GuruFocus.