There are few better examples of where technological innovation has improved prospects across therapeutic areas, to the potentially enormous benefit of mass populations, than in vaccinations. It looks to us as if the many decades in a wilderness characterised by ebbing demand, pressurised prices and microscopic margins are being consigned to the past.
Driven by ongoing concerns regarding the possibility of an influenza pandemic (which has not gone away with the media headlines), the continuing threat of a bio-terrorist attack and increased governmental spending, around the world, on immunisation for an increasing number of diseases, resources and funding continue to be poured into infrastructure and development. The consequence has been that technological change has identified new, more specific, entry points in the ever evolving battle against disease. Vaccine manufacturers now have greater scope than ever to claim an increased share of therapeutics.
Who Are The World’s Largest Vaccine Manufacturers?
| Company | % of Total Rev 2005 | % of Total Rev 5-Yrs |
| Glaxosmithkline (GSK) | 6 | 15 |
| Astra / Medimmune (MEDI) | 2 | 25 |
| Merck (MRK) | 6 | 20 |
| Novartis (NVS) | 2 | 20 |
| Sanofi (SAN) | 9 | 12 |
| Wyeth (WYE) | 8 | 12 |
The scope for traditional and non-traditional vaccine manufacturers to gain entry into therapeutics opens the door to an entire new suite of products with specific indications for mass immunisation from which superior and lasting profit margin improvements can be derived. Catalysts for new markets include: the threat of ‘flu pandemic, the threat of bio-terrorism, the opportunity created by mass-immunisation programmes around the world, and the scope for premium priced products to tackle previously unmet need in specific therapeutic areas such as cervical cancer, respiratory infection, heart disease, HIV / AIDS, meningitis, hepatitis and many, many, more.
Clearly the attraction here lies not just in immunisation as an attempt to head-off disease, but to tackle disease directly once it has already been contracted. Although products are more costly, increased effectiveness in treating a disease already contracted raises the scope for improved prevention rates in the future, as well as the scope for higher profits for manufacturers.
Vaccines: out with the old, in with the new
According to the World Health Organisation there are now in excess of 75 vaccines in development, the consequence of cell-based production derived from technological innovation, aimed at targeting a range of diseases from HIV / AIDS, pneumonia and cervical cancer through to products aimed at those wishing to stop smoking. Increasingly the traditional mass market for vaccines, disease prevention in the very young and the elderly is moving to the back burner. Mass-produced immunisation products are typically lowly priced and enjoy only very thin margins.
According to GlaxoSmithkline the manufacture of HPV product Cervarix and Merck, producer of rival Gardasil, the potential market for vaccination-based products targeting specific therapeutic areas is enormous.
32m women between the ages of 11 and 26 would be eligible to receive the shot, creating the clear potential for both to become blockbuster products in just a few years time. Significantly, new generation vaccines target a much wider demographic audience and where products target individuals in the prime of their lives, higher prices tend to be forthcoming.
Vaccines: One ‘Flu Over The Cuckoo’s Nest
Vaccine production has been galvanised by the increased awareness on the part of national governments that more must be done to support faster manufacturing and improved stockpiling of products aimed at massimmunisation of populations in the event of a major ‘flu pandemic.
Governmental programmes tend to be pretty formulaic, increasing spending to raise standards of healthcare on farms and in rural areas. Secondly, funds are channelled into monitoring outbreaks when they occur in an effort to contain the disease. Evidence from the Spanish ‘Flu outbreak in 1918 indicates that around 30% of local populations need to be inoculated to prevent the rapid spread of disease and, by extension, the creation of a pandemic. Although stock piles of products such as Tamiflu are being created more investment in cell technology is required in order that large quantities of product can be produced sufficiently quickly to ensure that effective treatment of mutating disease takes place.
Bird ‘Flu, or H5N1, has dropped off the newspaper headlines of late, following a scare earlier in the year, however, just because we don’t read about it doesn’t mean that it’s gone away for good. Data from the World Health Organisation (WHO) indicates that in 2004 there were 45 confirmed cases of H5N1 and 30 deaths. In 2005 there were 95 cases and 40 deaths. In data through to June 2006 the number of cases had fallen to 87 but the number of deaths had actually increased to 59, mainly in Asia.
In spring 2006 the US Department of Health and Human Services awarded $1bn in five year contracts aimed at developing modern manufacturing capacity sufficient to produce trivalent (existing ‘flu vaccines are manufactured using three strains) product with sufficient flexibility to grow the pandemic strain in an emergency. As part of the award Novartis won $220m to become the first company to develop a cell-based facility in the US from which 50m doses of trivalent product can be produced annually, rising to 150m monovalent doses within six months in the event of a pandemic outbreak occurring.
Investors should be aware, however, that governments having committed funding to the development of such facilities are likely to stockpile supplies of vaccines, raising the possibility of idle capacity once orders have been fulfilled. For companies involved in the manufacture of vaccines one of the key risks pertains to exposure to governmental orders when the latter represent the only customer for the product. Vaccine manufacturers such as Acambis have been adversely impacted by an absence of customer diversity and consequent volatility in order flow. The pharmaceutical sector is concerned too, as the creation of additional manufacturing capacity raises the possibility that product prices might have to be cut if governmental demand is insufficiently continuous to ensure ongoing production. Far from shying away from this potential problem the pharmaceutical industry has worked hard to develop alternative sources of demand to offset the threat of idle vaccine manufacturing capacity.
Vaccines: Bio-Terrorism threat
Few things are more likely to send a shiver down the spine than the thought of a terrorist incident involving biological or chemical weapons. With relations between Russia and the West cooling markedly, the Gaza Strip dissolving into another round of near-anarchy and ongoing anti-Western feelings running high in both Iraq and Afghanistan the world feels less safe than at any time since the end of the cold war. Little wonder then that Western governments have been playing safe and increasing budgets aimed at defence against a biological terrorist threat.
Investment has been made in both drug development and stockpiling finished vaccines.According to the WHO bio-defence funding increased from $53m in 2001 to $1.6bn in 2004 and in the United States $5.6bn is to be committed to Project BioShield over the next ten years (see table below). The Project provides the US administration with the scope to fast-track the development and stockpiling of vaccines in particular against Anthrax, Smallpox and Botulinum Toxin.
Disease BioShield Budget
Anthrax $1,400
Botulinum Toxin $1,800m
Smallpox $1.900m
Ebola $260m
Plague $220m
Total: $5,580
Existing Vaccines Benefiting From Immunisation Programmes
Having spent much of this note extolling the opportunities for vaccines businesses outwith the traditional area of mass immunisation of the very young and the elderly, it should be pointed out that organisations such as the United Nations, the World Bank, the G8, the Global Alliance for Vaccines and Immunizations and the Gates Foundation have invested considerable time and funding into immunisation programmes, particularly in the under-developed world. Survival rates have improved over the past forty five years, however, according to the United Nations 11 million children still die before they reach five. While poverty and malnutrition remain key contributors to still appallingly high mortality rates the United Nations aims to make a significant difference to the extent to which diseases such as malaria, polio, hepatitis, measles and TB cut swathes through indigenous populations by mass immunisation programmes using existing stockpiles of pre-produced vaccine.
The Gatesf-ounded Global Alliance for Vaccines and Immunization estimates that it has received about $3.5bn from developed Western governments and anticipates more. It calculates that it has already prevented 1.7m deaths in the world’s poorest countries since inception in 1999 and hopes to save a further 5m over the next ten years. Whilst saving lives is unquestionably a good thing, more mouths to feed puts pressure on already limited resources in these very poor countries and also raises a question regarding continued financing for newer low priced vaccines aimed at targeting specific diseases which have hitherto proved almost uneconomic to produce.
If UN and WHO targets are to be achieved it is clear that governmental spending is going to have to increase still further over the next decade. According to both the WHO and GAVI the funding shortfall already amounts to about $15bn.
Vaccines To Target Specific Therapeutic Needs
Perhaps the most interesting and potentially lucrative development for the world’s vaccine manufacturers has been the extent to which technological revolution has resulted in the development of the ability to use vaccination to target specific therapeutic areas. The scope to treat patients already suffering from illness, rather than simply preventing illness from spreading represents a potential transformation in the outlook for the industry.
Pharmaceutical companies are already in the process of channelling substantial proportions of their R&D budgets into therapeutic vaccines aimed at cervical cancer, HIV / AIDS, heart disease and alzheimers in addition to new products to encourage the body’s own immune system. Development here remains in its infancy but is expected to gather pace over the next decade. For an industry already under immense pressure brought about by key products moving off patent, increased concerns regarding product safety and rising governmental pressure to drive drug prices down the outlook for vaccines businesses may yet emerge as the pharmaceutical sector’s saving grace.
By Jeremy Batstone, Director of Private Client Research at Charles Stanley