By Jonathan D. Rockoff and Peter Loftus
Amid rising concern about the threat of influenza pandemics, three big drug makers announced deals Monday that give them rights to new flu vaccines, placing bets on one of the pharmaceutical industry’s brightest, but riskiest, segments.
The deals reflect the growing conviction among pharmaceutical executives that vaccines against a variety of maladies, long an industry stepchild, will become an increasingly important source of growth to replace aging blockbusters that are poised to lose patent protection.
Vaccine sales are growing faster than sales of other prescription medicines and are largely immune to the generic competition that is already costing drug makers billions of dollars in revenues on their top-selling treatments.
Vaccine sales are growing faster than sales of other prescription medicines and are largely immune to the generic competition that is already costing drug makers billions of dollars in revenues on their top-selling treatments.
Moreover, government agencies both in the U.S. and around the world are increasingly reliable buyers of vaccines as they seek to stockpile medicines that could help protect the public in case of a major flu outbreak.
“If you have a new vaccine for a new type of meningitis or swine flu, that clearly is a major public-health issue and, therefore, the willingness to pay is going to be greater,” said Murray Aitken, senior vice president of health-care insight at IMS Health.
In one of the deals, Johnson & Johnson paid €302 million ($441 million) for an 18% stake in Dutch biotech company Crucell NV, in order to jointly develop vaccines. In addition, Abbott Laboratories confirmed it will acquire a unit of Belgian conglomerate Solvay SA for €4.5 billion in a deal that includes a vaccine-making business. And Merck & Co. said it obtained from Australia’s CSL Ltd. for an undisclosed sum the U.S. marketing rights to a seasonal flu vaccine.The deals follow Pfizer Inc.’s accord earlier this year to acquire Wyeth, one of the relatively few big pharmaceutical companies known for its vaccine expertise.
Low prices, high costs and fear of lawsuits prompted most large drug makers to abandon the vaccines business in the 1980s and 1990s. Flu vaccines involved “a clunky old egg-based process fraught with difficulty, and the economics stunk,” said Alan Shaw, a former Merck vaccines researcher who is now chief executive of VaxInnate, which is trying to make flu vaccine in E. coli bacteria.
Big drug companies have re-entered the business as prices have risen and researchers develop new technologies for improving production. Merck’s Gardasil, for human papillomavirus, costs $130 a dose, and Prevnar, a pneumococcal vaccine from Wyeth, costs nearly $84 a dose.
“Other companies have decided that they really missed out on that tremendous growth opportunity,” said Margie McGlynn, president of vaccines and infectious diseases at Merck, which never left the business. With the deal to sell the Afluria seasonal flu vaccine in the U.S., Merck would market eight of the 10 vaccines recommended for adults.
Flu vaccines typically average $10 to $20 a dose. Despite their low price, analysts say companies like them because they provide a steady source of revenue. Vaccines are expected to generate $21.5 billion in sales by 2012, according to Sanofi-Aventis SA, a leading vaccine maker.
Vaccines are especially attractive to drug companies looking to Brazil, China and other emerging markets for growth. Governments are seeking vaccines to protect their populations from a potential flu pandemic. They also view other vaccines as good values, since for as little as $10 a shot the injections prevent illnesses that would cost far more to treat. Companies, meanwhile, say the relationships forged in selling vaccines can benefit sales of their other products.
J&J will be working with Crucell on the development of a vaccine that would protect against all flu strains. “If we developed a universal vaccine, then there would be no need anymore for annual change of the vaccine and probably no need anymore for annual vaccinations,” said Paul Stoffels, J&J’s global head of pharmaceuticals research and development.
Vaccines still carry risks for the companies. Some lawyers are trying to circumvent government efforts, such as a “vaccines court” in the U.S., that shield drug makers from vaccine-related litigation. Foreign governments like Russia have pushed companies to lower their prices. And despite improvements, manufacturing remains difficult and complex. Seasonal flu vaccines, for instance, are tough to produce because they are made inside chicken eggs.
Yet there have been so many deals involving big pharmaceutical and smaller vaccine businesses over the past several years that “there are not many companies left” to be bought, said Holger Rovini, lead analyst for infectious diseases at Datamonitor, which advises drug companies on the vaccines market. One remaining potential target, he said, is Baxter International Inc., which is making an H1N1 flu vaccine.
Baxter declined to comment.
For Abbott, vaccines are only part of the rationale for the Solvay deal. In announcing the transaction, Abbott CEO Miles White said he hopes acquiring the company’s pharmaceutical assets — which include cholesterol remedies, hormone treatments and a pipeline with new drugs for hypertension and Parkinson’s disease — will help dispel concerns about the company’s future profit growth.
Analysts have been particularly concerned about the company’s reliance on the arthritis drug Humira, which accounts for 15% of its revenue, but which has suffered significantly slowing growth in recent quarters.
Investors responded warmly to the acquisition, pushing Abbott’s shares up 2.6% to $48.58 in 4 p.m. composite trading on the New York Stock Exchange.
Derrick Sung, analyst with Sanford C. Bernstein & Co., said the deal will boost Abbott’s bottom line and help it expand into emerging markets — an increasingly important strategy as pressures have mounted recently on the U.S. prescription-drug market, long a major profit driver.
But Credit Suisse’s Catherine Arnold, while acknowledging the profit boost, said she would have preferred to see Abbott pursue “more strategic assets that would add better long-term growth.”
Write to Peter Loftus at peter.loftus@dowjones.com
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