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Vaccines: Back on the Front Burner

Europe, Business Weekly
by Kerry Capell

Once a neglected field, vaccine research is taking off due to fear of pandemics. And units such as Novartis' Chiron are where the action is

Compared with glamour drugs designed to battle cholesterol, high blood pressure, and depression, vaccines have long been the poor relations of the pharmaceutical industry. After all, ravages such as smallpox, polio, and measles were long ago cured. But now, thanks to the emergence of avian flu and other new viruses -- plus improved technology and better economics -- vaccines are becoming the global drug industry's next hot sector.

For proof, simply visit the Siena, Italy, labs of biotech Chiron, a unit of drugmaker Novartis (NVS). It was here, tucked between vineyards and farms in the Tuscan hills, that the world's first avian-flu vaccine was developed in 1998. "Back then, no one was interested," recalls Rino Rappuoli, the scientist who led the research. "Now it's a totally different story." With fears that the avian-flu virus sweeping Asia might evolve into a form that could easily jump to humans, governments are calling on vaccine manufacturers to find a solution.

Scientists in Siena have developed a vaccine with an ingredient known as an adjuvant that renders it more effective at low doses. That's a big advantage, given the current capacity constraints among vaccine manufacturers. Moreover, Rappuoli's team is also responsible for what's likely to be Europe's first seasonal flu vaccine produced from cell-based manufacturing. Expected to hit the market later this year, the cell-based vaccine can be produced much faster than conventional types, which require growing flu viruses in millions of chicken eggs.

POOR RELATION NO MORE. Such innovation is one of the main reasons Swiss pharmaceutical giant Novartis (NVS) ponied up $5.4 billion for Chiron in April, 2006. The global vaccine market is worth $10.8 billion today -- less than the nearly $13 billion in sales generated by Pfizer's (PFE) cholesterol-lowering drug Lipitor alone.

But analysts reckon the vaccine market will grow much faster than the market for prescription drugs. "We're in a period where pharmaceutical sales are growing at 5% to 6% a year," says Novartis Chief Executive Daniel Vasella. "In contrast, the vaccine industry is looking at nearly 20% annual growth over the next five years."

It's a dramatic change for a neglected corner of the giant global drug industry. Until recently, vaccines simply weren't a very attractive business. "Pricing was unattractive, margins nonexistent, and there was a constant fear of litigation," Vasella says. From more than 20 players in the 1980s, the field of manufacturers shrank to only five today -- France's Sanofi-Aventis (SNY), Merck (MRK) and Wyeth (WYE) in the U.S., Britain's GlaxoSmithKline (GSK), and Novartis.

PROFIT MACHINES. Today, the vaccine business is undergoing something of a renaissance. That's feeding an explosion of biotech startups targeting opportunities in everything from new methods of delivery to so-called therapeutic vaccines that treat diseases patients already have. In 1989, there were fewer than 10 biotech vaccine companies, but today there are nearly 200. The number of new vaccines in development also has more than tripled over the last decade, to 150 today. "It's proof that the business is waking up and becoming much more interesting," says Joerg Reinhardt, CEO of Novartis' newly-created vaccines and diagnostics business.

Credit a convergence of scientific advances, policy changes, and improved economics. Merck and GlaxoSmithKline paved the way in the late 1980s, when they developed genetically-engineered vaccines for Hepatitis B. Safer and more effective than previous drugs, they commanded premium prices that showed vaccines could be profit machines.

The picture has also improved thanks to tort reform and legislation that reduced liability risks for drugmakers. And the mapping of the human genome has exponentially increased the number of targets for new vaccines.

ESCALATING INFO. Novartis' new meningitis-B vaccine shows how far the industry has come. Scientists had previously managed to develop vaccines for other strains of meningitis, a potentially fatal infection of the nervous system, but the B strain, responsible for 50% of cases worldwide, proved impossible. Chiron's Rappuoli convinced Craig Venter, one of the leaders in the mapping of the human genome and the founder of Maryland's Institute for Genomic Research, to sequence the genome of meninigococcus B.

"In 18 months, we acquired more knowledge to develop new vaccines than in the past 50 years," Rappuoli says. Novartis is furthest ahead in developing a vaccine for meningitis B, and potentially will be the first to market a combination vaccine for meningitis strains for use in infants.

But it's flu vaccines that are expected to drive growth in the immediate future. Novartis is the second-largest flu-vaccine producer, with 11% of the market, well behind Sanofi-Aventis' 58% share. Contamination problems at Chiron's plant in Liverpool forced it to shut down production. Reinhardt, who reckons the problems will be fully resolved in time for next flu season, aims to close the gap.

CLOSING THE GAP. Things are already looking up. On May 4, Novartis was one of a handful of companies awarded multimillion dollar contracts by the U.S. Health & Human Services Dept. to work on cell-based production technologies as part of the government's avian-flu pandemic plan. Reinhardt says the company will use the $221 million contract from the HHS to fund the construction of a new cell-based plant in the U.S. that will supply the American market only.

With potential blockbusters in the pipeline, a new plant in the works, and substantial investment, sales at Novartis' vaccine business could rise from $1 billion to $3.4 billion by 2012, predicts brokerage Bear Stearns. Operating profits over the same period could zoom from $207 million to $1.4 billion.

"The old image of the vaccine business as all hassle no profit couldn't be more wrong," Vasella says. Now, drugmakers can do good and do well at the same time.