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Rumsfeld Profits From Bird Flu Scare

Fortune Magazine/Nelson D. Schwartz | November 2 2005

A year ago Tamiflu was known, if at all, as an obscure remedy for influenza, which doctors typically treat with bed rest and chicken soup. Today, with panic mounting over a potential bird flu pandemic, it's the most sought-after drug in the world, as everyone from suburban soccer moms in the U.S. to health officials in London and Taipei scramble to stockpile the pill. At the moment, it seems, virtually the entire world is on sick-chicken alert.

"One dead parrot in the U.K. and four dead ducks in Romania does not mean the pandemic has arrived," says William Burns, head of the pharmaceutical division of Roche, the Swiss company that manufactures Tamiflu. But the appearance in Europe of the H5N1 strain of bird flu—which has already infected 121 people in Asia, 62 fatally—has set off a stampede for the medicine and created a contagion of stock market speculation about Roche and the California biotech firm that first developed Tamiflu, Gilead Sciences. Despite worries about Tamiflu's effectiveness, the phenomenon is a reminder of just how quickly fear can spawn greed: The potential profit windfall for the drugmakers seems to be growing daily, and shares in both Roche and Gilead are surging.

Among the beneficiaries of the run on Tamiflu is Secretary of Defense Donald Rumsfeld, who was chairman of Gilead from 1997 to 2001 and owns at least $5 million of the stock, which has jumped from $35 in April to $47. Former Secretary of State George Shultz, who is on Gilead's board, has sold more than $7 million worth of Gilead in 2005.

As the bird-flu issue heated up earlier this year, according to a senior Pentagon official, Rumsfeld considered unloading his entire Gilead stake to avoid any perceived conflict of interest. He sought the advice of the Department of Justice, the Securities and Exchange Commission, and the federal Office of Government Ethics. When those agencies didn't offer an opinion, Rumsfeld consulted a private securities lawyer, who advised him to hold on to the stock and be vocal about his earlier recusal from all matters involving Gilead, rather than sell and run the risk of being accused of insider trading. Holding on has paid off—it's made the Pentagon chief, already one of the wealthiest members of the Bush cabinet, at least $1 million richer. In late October, Rumsfeld had the Pentagon's general counsel issue instructions on what he could and could not do in the event of an epidemic.

Gilead developed Tamiflu on its own, then licensed it to Roche in 1996 to get help manufacturing and marketing it. But Gilead has complained for years that Roche wasn't aggressive on either front. In June, Gilead, which receives royalties equal to about 10% of Tamiflu sales, took the unusual step of terminating its licensing agreement with Roche and going into arbitration to win back exclusive rights to the drug.

Roche CEO Franz Humer rejects Gilead's claims that his company neglected Tamiflu. He points out that Roche has doubled Tamiflu production since last year, and will double it again next year. What's more, Humer is confident the two companies will come up with a compromise that leaves Tamiflu in Roche's hands. The most likely scenario would be that Roche simply coughs up more in royalties to Gilead. That prospect has Wall Street very excited. Analyst Sapna Srivastava of Morgan Stanley says she's been getting calls from brokers who want to know whether to buy Tamiflu, as well as shares of Gilead. "It's suddenly become a stock everyone knows and talks about."

And interest goes well beyond Wall Street. Already drugstores are finding demand for the drug, well, contagious. "We've got doctors getting it for their families, sometimes a double treatment," says pharmacist Joseph Damin of Spencer Pharmacy in Scarsdale, N.Y. In late October, Roche halted delivery of the drug to the U.S. and Canada, to prevent hoarding and make sure there's still some Tamiflu left when the normal flu bug arrives this winter.

While the soccer moms may be going overboard, the people who really should be worrying about the threat seem remarkably blasé. Although governments in Europe are buying enough Tamiflu to cover a quarter of their population—and the Pentagon has already ordered $58 million worth of Tamiflu for U.S. troops around the world—the U.S. government has purchased only 4.3 million doses of Tamiflu and another anti-viral, Glaxo's Relenza, enough for just 1.5% of Americans. Despite months of debate about an additional multibillion-dollar purchase, Congress and the White House haven't agreed on a final plan.

Making tons of Tamiflu isn't easy. The drug is derived from the pods of Chinese star anise plants in a yearlong process that is expensive and dangerous—at one stage the stuff is highly explosive. "It's not like you press the button in the morning and in the afternoon Tamiflu falls out," says Humer. "We don't yet have a firm order from Washington ... words are not enough."

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