Business Analysis: Big drug companies look to vaccines as a cure to their growth problems

The drugs are working for GSK
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The Independent Online

GlaxoSmithKline has just snapped up its US vaccines development partner Corixa for a cool $300m (£160m), signalling confidence not only in its own pipeline of exciting new jabs to prevent cervical cancer and other diseases, but also in the global market for vaccines.

GlaxoSmithKline has just snapped up its US vaccines development partner Corixa for a cool $300m (£160m), signalling confidence not only in its own pipeline of exciting new jabs to prevent cervical cancer and other diseases, but also in the global market for vaccines.

Sales of vaccines account for just 2 per cent of a world pharmaceuticals market worth an estimated $500bn last year, and they have long been seen as the poor cousin of more traditional drugs. But there are signs that this is changing and that vaccines are again generating more scientific, political and industrial interest.

The cash bid for the Nasdaq-listed Corixa was at a 48 per cent premium to the prevailing share price. The Seattle firm manufactures a compound called MPL, derived from certain bacteria, which is used in a wide variety of vaccines to boost their potency.

Most significantly, MPL is used in GSK's experimental vaccine Cervarix, which the company believes can prevent at least 70 per cent of cervical cancers and which Jean-Pierre Garnier, the chief executive, believes could be one of the biggest-selling pharmaceutical products ever. The acquisition of Corixa brings control of a crucial piece of the product in-house and means GSK will have one less stream of royalties to pay to a third party. If Cervarix really is a multi-billion dollar product, those savings alone should make Corixa look a snip.

MPL is a component, too, in GSK's new hepatitis B vaccine Fendrix, and in yet-to-be-launched vaccines for flu, herpes and malaria.

Analysts welcomed the acquisition yesterday, in part because it brings control of the manufacturing of a vital component of Cervarix under GSK's direct control.

Vaccines, because they are derived from living organisms, are notoriously difficult to produce and their manufacture is heavily regulated to protect public safety. This makes their development and production very expensive, and is one of the main reasons for the pharmaceutical industry's disinvestment in vaccine development over many years.

The vaccines segment of the industry is now largely carved up between five players, led by Sanofi-Aventis (trading as Aventis Pasteur, after the French scientist who discovered that micro-organisms cause disease) with GSK closing fast. A revival of interest in this area has given GSK the confidence to concentrate its next "research and development day" - a sort of teaching session for the City on upcoming drugs - on its vaccines business.

And it won't just be investors' eyes on GSK that day, because vaccines are a political topic now too.

When inspectors from the UK's Medicines and Healthcare Products Regulatory Agency (MHRA) visited a vaccines factory in Speke, just outside Liverpool, last October, they discovered that its owner, Chiron of the US, was unable to guarantee the sterility of the batches of flu vaccines manufactured there. And when the MHRA shut the factory, it caused a crisis for the US flu vaccination programme, which was just gearing up for the winter. Chiron was due to provide half the country's flu vaccine doses. The consequent shortages prompted a scramble to find alternative suppliers, soul-searching as to why there was relatively little slack in the system, and Senate hearings into ways of reversing the years of lack of investment in new vaccines manufacturing capacity.

Politicians have also become involved because of the threats of a bioterrorist assault. The US government ordered 155 million doses of smallpox vaccine from the UK biotech group Acambis in the wake of the 11 September terrorist attacks, and the G7 group of industrialised nations agreed at the end of last year to co-ordinate a global "vaccines bank" to aid each other in the event of a bioterrorist attack. Ways to simplify the regulatory requirements of vaccine manufacture are on the agenda within the US Food & Drug Administration, but drug companies have argued that pressure on vaccine prices and uncertainty over government orders are the main discouragements to investment.

Margins on widely used vaccines are estimated at about 15 per cent, compared with mid-30s percentages on drugs. But some analysts hope this gap can be closed, in part because of the new political realisation of the importance of vaccines, and in part because of advances with the sorts of vaccines being developed.

Paul Diggle, an analyst at the life sciences-focused investment bank Code Securities, said a new generation of vaccines were technically more difficult to produce and had become more specifically targeted at disease areas.

He said: "These vaccines will be more likely to be considered like drugs than as mass products where tenders are for the cheapest products possible. Anything up to $30,000 per year might not be an unreasonable price for an advanced product. The upper end of the vaccines arena is moving into drug price territory, and the returns that companies are now hoping for from new vaccines could be much more similar to the rest of their business."

Vaccines work by stimulating a response from the immune system, teaching it to create antibodies which can then be used to fight a real infection. In most cases, they are used as prevention, but they can also be used to fight existing infections. Many companies are now working on potential breakthroughs in the treatment of cancer, where several vaccines in human trials appear to be able to stimulate the immune system to fight tumours and potentially offer a safer alternative to the damaging chemotherapies currently used. Cancer vaccines will be able to command premium prices, the industry believes.

Lehman Brothers calculates that global sales of vaccines have been growing at 19 per cent a year since 1999, twice the rate of sales growth for the rest of the pharmaceutical industry's products. In the US, the most profitable market, the outperformance is even greater. Although that growth could slow, as the paediatric market is saturated, there is forecast to be compensating growth in adult vaccinations, as governments realise it is more economical to prevent infection than to treat it.

In several ways, the US's concern to encourage capacity in flu and other vaccine manufacture mirrors the dilemmas long discussed by campaigners for work on third world diseases including malaria.

Drug companies have been looking for financial incentives before they push forward their development of a malaria vaccine, and appear to be rallying around a scheme whereby governments in effect underwrite development costs by committing in advance to buy a fixed number of doses for distribution by aid agencies.

The drugs are working for GSK

Jean-Pierre Garnier was at it again at a dinner for analysts after last week's first-quarter results from GlaxoSmithKline. The chief executive was talking up the prospects for Cervarix, a vaccine against cervical cancer, and promising exciting new data on its effectiveness. The last time Dr Garnier toured analysts, the most respected in the City quadrupled his sales forecasts for Cervarix to $4bn a year.

That data came through yesterday, suggesting that it may be effective not just against the virus which causes 70 per cent of cervical cancers, but also against strains linked with a further 12 per cent. If those early-stage trial results are borne out, they would immeasurably strengthen GSK's hand as it seeks to get governments to agree to a mass immunisation programme with doses of Cervarix priced at a premium to vaccines for less deadly diseases.

The data comes just a long weekend after the well-received agreement to buy Corixa, its development partner in Cervarix, and less than a week after financial figures which showed the company beating sales and profit forecasts. GSK is also close to solving manufacturing problems in Puerto Rico which have forced two of its best-selling drugs off the market.

GSK shares were up a further 28p at 1,340p yesterday. They are now up 10 per cent since the start of the year.