A major flu pandemic is on the way, health officials say. The rapidly evolving and extremely deadly avian flu has prompted many government leaders to call for an all-out effort to defend the country against an outbreak. Senate Majority Leader Frist has likened the challenge to a “Manhattan Project for the 21st century.”

In a recent column, I identified two companies, ID Biomedical (IDBE $22.36) and Chiron (CHIR $35.95), as being at the forefront of producers making a vaccine capable of warding off the avian flu, known also as H5N1.

Countries around the world are taking another safeguard: stockpiling large quantities of anti-flu medication. Though this seems an obvious approach, the effectiveness of various medications against the rapidly evolving flu strain is changeable and tough to determine.

There are four drugs licensed by the FDA for the treatment or prevention of influenza – amantadine, rimantadine, Relenza, and Tamiflu. Unhappily, it appears that H5N1 strains are already becoming resistant to the first two of these anti-flu potions.

Nonetheless, this quest is in high gear, and the producers of the latter two products should gain from spending in this area. Supplying anti-flu medications may be especially essential because of the avian flu’s virulence, which has resulted in an unprecedented mortality rate. More than 100 people are known to have contracted the avian flu from birds; about half have died. Also, because of the disease’s tenacity, infection may require extra-long treatment.

It appears that humans have never before encountered the avian flu strains; thus, they have little natural resistance to the virus. Consequently, the entire population may be at risk, not just the very old or very young.

A leader in the creation of influenza drugs is Biota (BTA.AX $.85), which licenses GlaxoSmithKline (GSK $48.24) to produce its Relenza drug. Biota, a tiny research company headquartered in Australia, is suing GSK for hundreds of millions of dollars. The company charges in the lawsuit that GSK has failed to adequately promote Relenza sales.

Nonetheless, the company recently announced that the German government had ordered 1.7 million packs of Relenza – one of the first-ever large-scale stockpiling efforts. The order represented a quantity seven times larger than last year’s total sales, and gave some indication of the impact such stockpiling could have on this small company.

The company expects that other countries may follow in Germany’s footsteps, especially since a review in the medical journal Lancet cited the drug as having fewer side effects and better resistance characteristics than its main competitor. The chief executive of Biota, Peter Molloy, is quick to endorse widespread stockpiling of all available drugs, since capacity is limited and emergency buying could be impractical.

Management projects that industry sales of flu anti-virals could total as much as $3 billion over the next two years. Capturing any significant share could substantially boost Biota’s royalty income. Meanwhile, the company is also developing second-generation flu drugs in partnership with Daichi Sankyo, as well as potential therapies for the common cold.

Relenza’s principal competitor is Tamiflu, created by Gilead Sciences (GILD $42.50) and produced under license by Roche (RHHBY.PK $68.55). Gilead is a leading biopharmaceutical company founded in 1987. The company produces treatments for a number of infectious diseases, including Hepatitis C and HIV, and began to earn a profit in 2003.

Britain has announced its intention to purchase 14.6 million units of the Roche product over two years. (Are you beginning to wonder what America is doing?) Like Biota, Gilead is unhappy with Roche’s efforts to market Tamiflu, and has taken steps to terminate its licensing agreement.

Gilead’s stock is up 28% over the past year, despite some disappointing news on certain HIV drugs. Analysts are mixed on the stock, though most are looking for higher earnings next year, of $1.70 on average, up from an estimated $1.49 this year.

Phil Nadeau of SG Cowen is neutral on the shares, given a limited number of new drugs in the company’s pipeline. Though the company’s near-term growth outlook is good, and despite an excellent anti-HIV franchise, Mr. Nadeau’s work suggests that Tamiflu growth may not justify the current price of the shares.

Frank DiLorenzo of Standard & Poor’s has a strong “buy” recommendation on the stock, mainly based on the prospects for the company’s anti-HIV franchise. He expects the dispute with Roche to be resolved.

Encouragingly, in the past few weeks, several Asian countries announced a plan to stockpile Tamiflu. In July, the U.S. National Institute of Allergy and Infectious Diseases announced that Tamiflu had been successful in boosting the survival rates of mice infected with the avian flu. These results suggest that Gilead will be at the forefront of any discussion of flu preparedness.

And in America at least, we will be ready to treat any mice that happen to catch the flu.