Inside Wall Street: Looking to the Bio-Defense Sector as Nuclear Fears Mount


The calamitous earthquake and subsequent tsunami in Japan should now call attention to an almost-ignored group of young biotechs. Known as the bio-defense group, these companies develop treatments for, among other things, exposure to radiation resulting from nuclear accidents or attacks.

The sector attracted a lot of interest after 9/11 and a number of companies emerged to develop protective biodefense drugs and products. But with the waning of dark headlines about terrorist threats, investors have tended to put them on their low-priority list.

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That may be about to change. The growth potential of these little-known companies could be huge. The U.S. government remains concerned about a surprise terrorist strike, and has stepped up funding for the development of treatments in the event of a chemical, biological, or nuclear attack. However, the funding thus far has been fairly small and hasn't stirred much excitement on Wall Street. But events in Japan will no doubt refocus interest in these companies -- investors usually pay attention when the headlines get scary.

From Unknown to "Must Own"

Some analysts are anticipating a scramble among large institutional investors for these biodefense stocks following the Japanese earthquake. Also known as "anti-terrorism" biotechs, they will be touted as the next "must-own" stocks as the threat of a meltdown in Japan's nuclear reactors looms large.

Whether or not they really are "must-own" stocks, they do deserve a place in investment portfolios, considering the undiminished threat from al-Qaeda, the raging problems in the Middle East, the relatively cheap valuations, and now, of course, the tragedy in Japan.

Among such companies are Siga Technologies (SIGA), which is developing therapeutic products for biological warfare defense, including an orally administered antiviral drug that targets viruses such as smallpox; Aeolus Pharmaceuticals (AOLS), which is developing medicines against acute radiation syndrome in the lungs and gastrointestinal tract; and Cleveland BioLabs (CBLI), which is developing protectants against the effects of radiation leaks, and a number of anti-cancer drugs.

The U.S. government is the largest source of funding for academic institutions and biotech companies conducting biodefense research and producing vaccines and immunotherapies directed at potential agents of bio-terrorism.

The government's concern is reflected in the 2004 passage of the BioShield Act, which created Project BioShield to fund countermeasures against a chemical, biological, radiological or nuclear attack. The project has set aside $5.6 billion for the next 10 years for the government purchase of next-generation medical countermeasures, including improved vaccines, diagnostics, and therapeutics. The budget includes grants from the Department of Health and Human Resources to biotechs developing such bio-defense products. That $5.6 billion budget may now look insufficient. Already, there is talk among some senators for the need to bump up the nation's preparedness in the wake of the nuclear crisis in Japan.


Siga Technologies has been one of the largest recipients of government grants and contracts. Since 2003, it has been awarded grants of about $64 million and contracts for its lead smallpox drug candidate worth about $75 million. That's one reason why Siga's stock bolted to a 52-week high of $15.66 a share on March 8, 2011, from a low of $6.03 on June 9, 2010. Although the stock has sagged to around $12 since then, some analysts believe the stock could climb to the low $20s, primarily because of the government's confidence in Siga's smallpox antiviral drug. The Department of Health has informed Siga that it might seek to procure 1.7 million doses of its smallpox drug, which analysts estimate would bring as much as $500 million in revenues for Siga.


Aeolus Pharmaceuticals is still very much below the radar screen of investors as it's a micro-cap stock with a tiny market value of $30 million. But its stock has tripled from 25 cents in late June 2010 to 75 cents this week. It spurted briefly to an all-time high of $1.10 a share in late February, when the Department of Health's Biomedical Advanced Research and Development Authority (BARDA) unit awarded the company a five-year $118 million contract to further develop its product, AEOL-1050, for the treatment of Acute Radiation Syndrome.

The contract provides an initial grant of $10.4 million in the first year-period, and up to an additional $107.5 million in other options that BARDA could choose to exercise. Thereafter, procurement contact for its AEOL-1050 product for the U.S. Strategic National Stockpile could follow once the Food and Drug Administration's approves such a procurement under an emergency scenario, which some analysts value at several hundred million dollars.

In addition to the product's lead indication as a medical countermeasure against acute radiation, Aeolus is also pursuing its potential commercial opportunities as an adjuvant to cancer radiation therapy to prevent or limit the side effects of radiotherapy, says Aeolus CEO and President John McManus. The product is also being studied by the National Institute of Health's NIAID unit (National Institute of Allergy and Infectious Diseases) as a countermeasure against exposure to chlorine and sulfur mustard gas, he adds.

Specifically, AEOL-1050 is a broad catalytic ant-oxidant designed to reduce stress, inflammation, and subsequent tissue damage from radiation exposure. The company says the product could have a profound beneficial impact on people who have been exposed to, or are about to be exposed to high doses of radiation. AEOL-1050 has already performed well in animal safety studies. It has shown statistically significant survival efficacy in an acute radiation-induced lung injury model, according to McManus. Aeolus has completed two Phase 1 clinical trials in 50 patients, demonstrating the drug to be safe and well tolerated, he adds.

Mark Lappe of Efficacy Capital, a major investor in Aeolus, says the company's lead product, AEOL-1050, has "multi-billion dollar opportunities" as a medical countermeasure to radiation chemical exposure as hundreds of thousands of people would be affected if a nuclear detonation or radiological attack occurred in any major city in the U.S.

In a nuclear attack, people who are less than a mile away could survive the initial blast, but they would suffer damage in the lungs, gastrointestinal tract, and bone marrow. BARDA is seeking a treatment for civilians against such damages. McManus says AEOL-1050 did well in preventing lung damage in tests on mice, rats, and monkeys, which was in part why the company won the BARDA contract.

Cleveland BioLabs

Cleveland BioLabs was awarded a $45 million contract in September by the Deptartment of Defense's Biological and Medical Systems to develop and stockpile its chief product, Protectan CBLB502. It is a "radioprotectant" molecule with multiple medical uses to reduce injury from acute stresses, such as radiation and chemotherapy. The company says the molecule mobilizes various natural-cell protecting mechanisms that induce protection and regeneration of stem cells in bone marrow and intestine.

CBLI's stock soared to a 52-week high of $9.60 Monday morning -- from a 52-week low of $2.80 on June 9, 2010. Some large institutional investors have already acquired stakes in Cleveland BioLabs, including EOS Partners, which owns a 2% stake, and Goodnow Investment Group, with 1.3%.

In view of the deepening nuclear crisis in Japan, Wall Street will undoubtedly take another look at this small biodefense group.

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