Health Care November 24, 2009, 3:26PM EST

How Big Pharma Profits from Swine Flu

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More recently, though, there's been something of a vaccine renaissance. That's partly because the industry is now facing serious challenges to its core prescription drug business. Some $135 billion in prescription drug sales will lose patent protection in the next five years, and there's little in drug companies' pipelines to replace those sales, says IMS Health (RX) consultant Alan Sheppard.

Vaccines are in the class of biological drugs, which are expensive and difficult to produce, but that makes them less vulnerable to generic competition from weaker manufacturers. Moreover, with blockbuster drugs harder to come by, the success of Wyeth's pediatric pneumococcal vaccine Prevnar, which now generates $3 billion plus in annual sales, proved that vaccines could be profitable.

With the $780 billion global prescription drug market growing at a sluggish 5% a year, many analysts reckon that the vaccine industry, which is forecast to climb 13% annually through 2012, offers the most upside potential. "More companies are investing in vaccines as a way of diversifying away from prescription drugs, and new technologies such as cell culture are enabling them to produce more sophisticated vaccines," says Michael Boyd, acting director general of the International Federation of Pharmaceutical Manufacturers & Associations (IFPMA).

Flu Vaccine Spurs Pharma Deals

Witness the slew of recent dealmaking centered on vaccines. Through its $68 billion acquisition of Wyeth, Pfizer is now in the vaccine business. On Sept. 28, Abbott Laboratories (ABT) splashed out $6.6 billion for Belgian flu vaccine maker Solvay, while Johnson & Johnson (JNJ) bought 18% of Dutch vaccine manufacturer Crucell (CRXL). GSK—which looks set to enjoy a windfall from swine flu vaccine—also recently inked a $2.2 billion 10-year deal to provide Brazil with its pneumococcal vaccine.

As emerging economies mature and health-care spending rises there, vaccines also offer drug companies attractive new markets. In June, GSK signed a $78 million joint venture with China's Shenzhen Neptunus Interlong Bio-Technique to develop flu vaccines. A month later, Sanofi acquired a majority stake in Indian vaccine maker Shantha Biotechnics, valuing the company at $824 million. And on Nov. 4, Novartis spent $125 million for an 85% stake in privately owned Chinese vaccines company Zhejiang Tianyuan.

A Seasonal Shot in the Arm

In the short term, at least, H1N1 vaccine sales will give a major lift to sales at the three major European vaccine makers. GSK says analyst predictions for $1.7 billion of H1N1 vaccine sales in the fourth quarter are broadly accurate, and similar numbers are forecast for the first quarter 2010. Novartis says it expects $700 million in fourth-quarter sales alone of its H1N1 pandemic vaccine. And Sanofi-Aventis says it expects H1N1 sales in the fourth quarter to hit $500 million.

But the flu vaccine business, notes Vasella, is seasonal and unpredictable. Longer term, other areas such as cancer or meningitis offer greater opportunity. Indeed, analysts say Novartis' two meningitis vaccines have multibillion-dollar sales potential. Novartis has much riding on their success, because analysts at Sanford C. Bernstein estimate that Novartis' vaccine and diagnostics will generate 2009 sales of $1.5 billion but post a loss of $257 million.

Vasella says increased investment in vaccine research and development, clinical trials, and manufacturing are the reason for the losses. The company, for instance, spent $200 million over the past three years building a second manufacturing site in Liverpool, England, dedicated to the production of the H1N1 vaccine supplied to the U.S. "These kinds of investments are only justified if as part of an overall long-term strategy," says Vasella. "We believe our investment will pay off."

Capell is a senior writer in BusinessWeek's London bureau .