Global Economics

How Big Pharma Profits from Swine Flu


Once spurned by drugmakers as low-margin and risky, vaccines to fight diseases such as H1N1 are now a growing business for Novartis and others

Swiss pharmaceutical giant Novartis gave U.S. efforts to combat pandemic influenzas a boost with the Nov. 24 opening of the country's first large-scale cell-culture manufacturing plant. Located in Holly Springs, N.C., the Novartis plant, backed by $487 million in federal funding, represents a major milestone in using biotech production technologies to replace the 50-year-old manufacturing process based on growing vaccines in eggs. "This technology has the potential to leapfrog the traditional egg-based approach, increasing the reliability and productivity of vaccine production," says Novartis Chairman and Chief Executive Daniel Vasella. Novartis (NVS) is one of two vaccine manufacturers using the newer cell-based methods. The Novartis plant will produce flu vaccines in dog kidney cells instead of chicken's eggs, shaving around one month off the estimated three to six months needed to create vaccines using eggs. According to Novartis, the plant will be able to crank out 50 million doses of seasonal flu vaccine and 150 million doses of pandemic vaccine for the U.S. within six months of the declaration of a pandemic. However, it will be 2011 at the earliest before the factory is able to start making cell-based vaccines. Adjuvants and the H1N1 Vaccine

Still, any future increase in capacity is welcome news for the U.S. The current shortage of H1N1 (also knows as swine flu) vaccinations in the U.S. has highlighted the need for newer, more reliable vaccine development technologies. Though 50 million doses of the H1N1 vaccine have been distributed to date, that's only enough to reach about one-third of the 160 million Americans that the Centers for Disease Control would like to see inoculated. A big part of the problem is that the U.S. Food & Drug Administration, unlike its counterpart in Europe, has yet to approve use of adjuvants, which are additives that increase the body's response to vaccines, lowering the required dose. Novartis already makes cell-based seasonal and H1N1 flu vaccines with its own licensed adjuvant at a factory in Marburg, Germany. The Novartis seasonal vaccine is approved in Europe and Japan, and the pandemic vaccine recently won regulatory approval in Germany and Switzerland. Vasella says the trials have shown that using adjuvants could potentially double or even quadruple the vaccine supply. "Some 45 million doses of the cell-based vaccine with adjuvant have already been safely administered, so it is quite established in other countries," say Vasella. He's confident that cell-based technology will eventually be approved in the U.S. And if the pandemic suddenly explodes, the FDA would likely act quickly to approve the use of adjuvants. The Resurgence of Vaccines

It wasn't too long ago that vaccines were deemed the poor relation of the pharmaceutical industry. Their complexity and high manufacturing cost—coupled with relatively low margins and risk of major litigation—deterred all but a handful of players, including Novartis, Britain's GlaxoSmithKline (GSK), France's Sanofi Aventis (SNY), New Jersey's Merck (MRK), and Wyeth—now a unit of Pfizer (PFE). 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."


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