Pandemic and resulting demand boost value of vaccine makers

Vaccine firms now attractive acquisitions
Pandemic and resulting demand boost value of vaccine makers
From The Economist
Sun. Oct 4 - 4:46 AM


A seasonal flu shot is administered in Boston this week. The largest U.S. supplier of seasonal flu vaccines says it is running behind on shipping those vaccines, partly because of the crunch to produce millions of doses of the swine flu vaccine. (Elise Amendola / AP)





The logic in favour of purchases of vaccine firms seems irrefutable. The world is in the grip of a swine-flu pandemic, which will probably infect 40 per cent or more of the human race.

Vaccines are likely to be in demand for some time. And the vaccine business has high barriers to entry and, in recent years, attractive margins.

Little wonder that three such acquisitions were announced this week. Abbott Laboratories, an American drugs firm, said it will pay $6.6 billion to acquire vaccines and other pharmaceutical interests from Solvay, a Belgian firm. Johnson & Johnson, an American drugs giant, agreed to pay 302 million euros ($438 million) for an 18 per cent stake in Crucell, a Dutch biotech firm known for its vaccine technology.

And Merck, another American drugs giant, revealed that it had bought marketing rights for a flu vaccine made by Australia’s CSL. These are the latest in a series of deals.

In 2007 AstraZeneca, a British drugs firm, bought MedImmune, a vaccine-maker, for over $15 billion. Part of the justification for Pfizer’s $68 billion purchase of Wyeth earlier this year was the latter’s expertise in vaccines.

This is quite a change. Until a few years ago most vaccines were priced cheaply, so financial returns were poor. The technology used to make them was often decades old (for example, chicken eggs rather than modern cell cultures are used to make influenza vaccines).

A number of big companies sold off their vaccine-making divisions because they regarded vaccines as commodity products.

Three important trends have changed that picture, and help explain this week’s frenzy of deals. First, the industry has managed to persuade governments and insurers that new vaccines against afflictions such as the human papilloma virus and pneumococcal disease would be worth $100 or more, rather than the standard few dollars a jab, since they would help prevent diseases that would be much more expensive to treat.

Better economics has brought with it investment in better technology, such as "adjuvants" that improve a vaccine’s performance even as they reduce the quantity of active ingredients required. And innovators are working on cell-based manufacturing techniques that promise to be quicker and more reliable than using eggs.

Pandemic influenza scares provided another boost to the business. Repeated outbreaks of avian flu in recent years have prompted widespread fear that a new strain might develop into a global scourge. So when swine flu came along, governments the world over wasted no time in ordering vaccines.

Manufacturers have been racing to bring vaccines to market in time for the winter flu season in the northern hemisphere. This week Switzerland’s Novartis announced that it had won European approval for its swine flu vaccine and France’s Sanofi Pasteur delivered the first cases of its rival product.

The United States-based Centers for Disease Control and Prevention expects widespread availability of swine-flu vaccines in a month or so.

So is this a bonanza in the making for vaccine manufacturers? In the short term the answer is yes, especially because governments are throwing money at vaccine-makers to stimulate an expansion of capacity. This is especially true in the U.S., which is a huge net importer of vaccines.

This alarms U.S. health officials, because governments typically force vaccine-makers to sell all their output domestically in times of crisis.

Yet there are reasons for caution, despite the favourable omens. Even more than with conventional medicines, getting new vaccines from the lab to the clinic has traditionally involved long lead times and huge capital investments. Another potential snag is oversupply.

A few weeks ago a study concluded that patients needed only one shot of vaccine against swine flu, not two as previously thought. Public health officials cheered, but vaccine firms suddenly saw half their potential "full price . . . sales go down the drain (any spare vaccines will now benefit the needy in poor countries, who pay lower prices). It also appears that swine flu mutates slowly, so annual jabs may not be needed.

A deal announced at the end of September by GlaxoSmithKline and the Brazilian government hints at the difficulties. In return for greater access to the giant emerging market, the British firm has agreed to sell its vaccine for pneumococcal disease at prices that will fall from over $15 now to just $7 in 10 years.

It also agreed to hand over the technology for making the vaccine, and to put additional money into local research into a vaccine for dengue fever.