The 2012 to 2013 flu season has reached what is officially at pandemic levels. The government report last week showed that more than 7% of the deaths in the prior week were tied to flu-related symptoms. The flu shot was also deemed “only” about 62% effective. This is tragic. Last week we identified the death care industry winners for this year. This morning we have a similar report from Canaccord Genuity, but this research call is identifying the pharma winners.

The firm believes that flu season is likely to get significant airtime on upcoming conference calls. After getting several questions around where the leverage is within specialty pharmaceuticals, the firm expects that the interest will grow further. Randall Stanicky, identified Hi Tech Pharmacal Co. Inc. (NASDAQ: HITK) as the best flu play within the firm’s coverage.

There were two other Buy-rated winners: Pernix Therapeutics Holdings Inc. (NYSEMKT: PTX) and Perrigo Co. (NASDAQ: PRGO). They are the most exposed, with about 15% to 20% of sales coming from cough and cold for each.

Hi Tech Pharmacal Co. Inc. (NASDAQ: HITK) was listed as the best play for those looking for flu-driven upside. Stanicky said, “We met with management from all three companies last week and the flu season impact theme was front and center in each meeting.” Here are four issues identified:

(1) We see as much as $0.25 (~17%) of fiscal 2H earnings support with modest sequential EPS improvement built into Street estimates for the upcoming quarter

(2) Instead of moving higher, Street EPS have come down meaningfully over the last five weeks for the upcoming fiscal 3Q and 4Q (-5% for Jan and -10% for Apr)

(3) The stock hasn’t reacted to the strong flu season and is flat from early Sept.

(4) HITK is off the radar for many given its cap size at about $500 million and limited coverage from only 4 sell-side brokerage firms.

On Perrigo:

[S]trong flu season can add support but we’re still cautious on upcoming fiscal 2Q relative to guidance we see ~$0.10 of upside from a “strong” flu season relative to the “normal” season that is in guidance, assuming the season holds. It will help but there are broader near-term EPS concerns. Per our mid-December meetings we’re still cautious going into the Dec. quarter and nothing has changed post our meeting last week, despite the stock volatility. Another way to look at it is if the Mucinex 600mg remains delayed, the upside from a stronger flu season will roughly offset the impact of the delay per our model.

On Pernix Therapeutics:

[F]lu will add a positive P&L tailwind though recent M&A is the overriding stock driver. With two sizable transactions announced in the last two months in Somaxon as well as Cypress and Hawthorne, the stock and P&L are clearly more levered to M&A. That said, a strong cough and cold season will provide some added support and we continue to like the overall PTX story following our breakfast with management last week.

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