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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | JANUARY 14, 2004
By Lisa Miller Biotech's Babies: Doing Well by Doing Good As Big Pharma pulls out of the low-margin vaccine business, upstart outfits are exploiting new technologies to tap niche markets Thanks to the unfortunate pairing of an abundance of flu and a dearth of flu shots this season, the humble vaccine industry is now suffering the kind of public scrutiny normally reserved for its sexier cousin, Big Pharma. For decades, vaccine makers could count on reaping steady, if unspectacular, profits as each new year promised a fresh batch of kids needing immunizations. But incentive-stifling price controls, liability fears, and greener pastures elsewhere finally prompted a massive flight of big drug companies out of vaccines. The figures tell the story: In 1967 there were 26. By 1996, that number had shrunk to eight. Today, only four big players survive. While the industry may appear stagnant to outsiders, major changes are already under way -- thanks in part to a slew of small and midsize biotechs that see the big companies' exit as an opportunity for the little guy. EYE OF THE BEHOLDER. One reason for this optimism is the simple fact that one outfit's spare change is another's windfall. "The revenues from a vaccine division are like a rounding error to a Merck (MRK )," says Sharon Seiler, vice-president and senior biotechnology analyst with Punk, Ziegel & Co. "But," she adds, "it's very profitable for a small company." According to Seiler's data, over the first three quarters of 2003, Merck made about $800 million on vaccines -- a meager 6.2% of total revenues over that period. Similarly, for GlaxoSmithKline (GSK ), Wyeth (WYE ), and Aventis-Pasteur-MSD (AVE ), vaccines accounted for between 5% and 10% of total revenues -- mere pocket change in comparison with Big Pharma's earnings from other drugs. Biotechs like Chiron (CHIR ) have greeted the larger players disinterest with glee. The California-based biotech garners more than 33% of total revenues from vaccines, pulling in about $400 million over the first three quarters of 2003. A leap to Merck's totals would reflect a growth spurt of 100% -- definitely not something that Chiron or its smaller peers would dismiss as a "rounding error." Biotechs won't be content to simply pick up the profits Big Pharma left behind, however. They want more, and signs suggest they might get it. The vaccine industry as a whole is growing, pushed by a combination of expanded immunization recommendations from governments, emerging niches in rich countries' consumer markets, immunization programs in the developing world, and concerns about bioterror attacks. TARGET: TB. Since the early 1990s, the global vaccine market has expanded by about 10% per year on average -- from $2.9 billion in 1992 to $6 billion in 2002 -- according to a report by Mercer Management Consultants. That rate is expected to continue or even accelerate, as companies craft new vaccines to tackle diseases never previously addressed. A report released by the Institutes of Medicine last year lists 23 prophylactic vaccines the industry expects to develop by 2010. These include vaccines for Epstein-Barr, multiple sclerosis, and sexually transmitted diseases such as chlamydia and human papilloma virus, the latter a risk factor for cervical cancer. Such high-value vaccines are the key to future revenue growth, because the pricier products are increasingly coveted by the developed world, which has the money to pay for them. Mercer estimates that rich-country demand already accounts for over 80% of revenues, but only 12% of volume. Meanwhile, the developing world also is looking more interesting, because private foundations are pouring money into vaccine initiatives there. PUSH AND PULL. Tuberculosis is one of the hot targets, with millions of dollars moving from organizations such as the Bill & Melinda Gates Foundation to groups like the Aeras Global TB Vaccine Foundation -- run by a former Merck clinical director, Jerald Sadoff -- which is developing new TB vaccines for use in poor countries (see BW Online, 12/4/03, "TB: Battling an Old Foe's Resurgence"). Also important are efforts to make sure suppliers can afford to sell to these traditionally low-profit markets. This attempt by foundations to address not only the "push" of R&D but also the "pull" of adequate profits is paying off. In some instances, suppliers are lowering prices while increasing production volumes. In other cases, foundations are willing to pay more for newer vaccines, thus giving suppliers incentives to stay in the game. Public health is not the only area where small and midsize biotechs can find new opportunities. Governments' military needs are also opening doors. For example, Bavarian Nordic, a Denmark-based biotech, is targeting the biodefense market with its work on smallpox vaccines. The 100-employee company has contracts with the German, British, U.S., and Greek governments, and is expanding its manufacturing facilities to make sure it can meet current demand and to reassure future clients that will have the capacity to continue doing so. "Governments aren't going to give orders to a company with good products if it can't manufacture," notes Peter Wulff, Bavarian Nordic's president and CEO. "Governments are looking for certainty of delivery." TINY FOES. Governments are also looking for vaccines unrelated to the threat of biological warfare. Soldiers are routinely exposed to naturally occurring diseases when serving in faraway places, and military planners want to stockpile arsenals of vaccines capable of foiling those unseen enemies. A report by the National Academy of Sciences in 2000 urged the military to work closely with the biotech industry to develop fast, small-scale production methods for vaccine development. Other wish-list items included edible vaccines, and vaccines tailored to genotypes, so each soldier can get the formulation most effective for him or her. If all this new money –- from governments, foundations, and individual consumers -- is the grease for the machine, technology is the power that actually makes things go. "The technology has changed, so we're talking about a different cat than we used to be," says Dan Adams, CEO of Protein Sciences, a Connecticut-based biotech that's developing vaccines for SARS and influenza, among other projects.
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