The race is on for a cure for the flu and Novartis (NVS) is in the lead for developing a synthetic vaccine. Can the race for a cure provide growth and increased revenues for this company?
There has been a multitude of reports regarding the race for a cure for the flu and the breakthroughs in Biotechnology and in the field of synthetic vaccines. However, much of this information has been passed over by the mainstream media. Keep reading on why this investor and the smart money is long on Novartis.
The Current System of Vaccination
No one can really talk about the flu with out talking about the great Spanish Flu pandemic of 1918. It is the worst outbreak of the influenza in modern times and it is estimated that it killed between 20 to 50 million people. To put that outbreak into perspective, the SARS crisis of 2003 killed less than 1,000 people; however, the true cost came in the impact on the global financial system which current estimates place at $30 billion.
Currently all mainstream media is reporting about the Flu is that it is the Flu season and that the vaccines are now available. But, here in lies the problem, the technology for developing current vaccines is decades old and further, the vaccines are becoming less and less effective. In a recent report, new research is showing that the vaccine is now only about 59% effective in adults and decreasing.
This year's flu season is particularly relevant and gives an ironic view to modern times. Despite advances in medical technology that have allowed us to create the vaccines we use today, there have been similar technological advances in other areas; the reality is that advances in global travel and commerce have outpaced the advances in vaccinations. Global travel is now at an all time high that makes the reality of another pandemic, like the Spanish Flu of 1918, even more likely.
The Race For The New Cure
As a direct result of the decreasing efficacy of current vaccinations, there is an ongoing race for a cure. This race is occurring in the filed of synthetic vaccines which was impossible until the successful sequencing of the human genome. These new forms of vaccines stem from fragments of man-made DNA. In short, these new synthetic vaccines are created in a lab where they are "programmed" to specifically seek out and destroy the flu virus, or any other designated disease for that matter.
The current leader in this race for a new synthetic vaccine is Novartis.
Novartis entered the synthetic vaccine field back in 2010, joining forces with a little known offshoot of Craig Venter's pioneering work in sequencing the human genome: Synthetic Genomics Vaccines. This partnership is a three-year deal in which Novartis agreed to create synthetic seed viruses specifically designed to attack the flu. They still have a year left on that contract and based largely on their successful partnership Novartis opened a $1 Billion production facility in Holly Springs, North Carolina. However, what is not well known is that this venture was backed heavily by the Department of Homeland Security. Novartis was willing to spend $1 Billion on a new production facility simply because Novartis already had contracts in place with the Federal Government that would more than adequately cover these astronomical costs.
According to Reuters, "In 2006, the U.S. Department of Health and Human Services provided more than $1 billion in contracts to six manufacturers to develop cell-based flu vaccine technology in the United States... In 2009, spurred by difficulties in growing vaccine for the H1N1 swine flu pandemic, HHS provided Novartis with nearly $500 million to build the first U.S. facility capable of producing cell-based vaccine for seasonal and pandemic flu in the United States."
Furthermore, as late as 2011, Novartis admitted that they had already begun making "huge" stockpiles of vaccines - specifically at the Federal Government's request. Here is a key point missed by most: these massive stockpiles of vaccines can be used without the Food and Drug Administration's usual approval process, and the Federal Government is spending hundreds of millions of dollars to procure this vaccine.
Given the profitability inherent in the pharmaceutical field, it is no wonder that there are multiple players vying for market share. Here are a few of Novartis's key competitors.
Inovio (INO) is a relative new player to the field of Biotechnology but it has already acquired some heavy weights in the field as well as financial backing by a group affiliated with Bill and Melinda Gates. Currently the CEO of Inovio is J. Joseph Kim, an award winning scientist and former executive at Merck (MRK).
Inovio is working on a universal flu vaccine. What makes Inovio a contender is the unique methodology of delivery that they have developed. It is called "electroporation," and it is a process by which an electrical charge is administered that forces the cell membranes to open and accept the "synthetic" virus. Pursuant to resent press releases, most of its efforts are currently focused on its "SynCon" vaccine platform with a focus on its cross-strain protective antibodies. While this is certainly promising, it is important to note that Novartis is the only company that is currently in production of a synthetic vaccine for human consumption and the only one, currently, with a Government contract to do so.
With a market cap of a mere $100 million and with a stock that trades at only about 70 cents per share, Inovio is not, as of yet, a true threat to Novartis. I would almost be willing to suspect that Novartis might make an attempt at acquisition of Inovio in the future. Smart money is keeping an eye on this "penny stock" for a possible long position in the near future.
Vical (VICL), like Inovio, has a former Merck executive at its helm. Founded in 1987 as an offshoot from the University of California-San Diego, this small-cap biotech firm has already been successful in securing approval for two of its products. However, these products are currently only approved for use on animals. But if you consider that one of its products is approved in Canada to fight a virus so virulent that it could wipe out entire schools of Salmon, one can only imagine the efficacy of a human vaccine counterpart. With this type of success look for Vical to aggressively pursue approval of "Allovectin," a skin cancer treatment, which is already in phase three clinical trials for human use.
The upside for Vical is that its synthetic vaccine is already in the early stages of clinical trials. With a market cap of a little over $300 million and about $80 million in cash with no debt, this company can prove to be a real contender.
Currently working on a universal "flu" vaccine, Sanofi (SNY) entered into a licensing deal with the University of Pittsburgh last July. Interestingly enough, this never made the mainstream news. According to Ted M. Ross, the vaccine they are developing "is adaptable to any delivery method…and it would protect against whatever strains of seasonal flu [that] happens to be circulating, and it can be produced in a little as four months."
If it proves to be true that Sanofi can produce in as little as four months, Sanofi will be a real contender who can corner a large market share simply based on delivery times.
Current estimates are that the global influenza vaccines market was valued at $3.5 billion in 2011, and is forecast to grow at a Compound Annual Growth Rate (CAGR) of 5.8% over the next seven years, to reach $5.2 billion in 2018.
Furthermore, in 2011 the United States Government alone spent over $5 billion on children's vaccines:
If you keep in mind that according to government records, Novartis was given $500 million by DSHS to build its production facility they have over $450 million in contracts with the government, you will realize that the production facility in North Carolina was practically paid for before they even started building it. At a zero cost sum game, Novartis stands to make billions from their brand new production facility. This is the one factor that sets Novartis above all of its competition.
The Bottom Line
Despite the fact that there are other competitors in the market, Novartis still remains the leader in the race. Out of all of the players, Novartis is the only one currently manufacturing a synthetic Flu Vaccine for the Federal Government in a brand new facility that is already paid for. If recent contract award amounts are any indication, Novartis is making hundreds of millions of dollars just in supplying the government. If you further consider the current stage of clinical trials, this same vaccine should be available for general public use within the next several years and only further ad to Novartis's profitability.
With continued multi million dollar funding by the Federal Government, ground-breaking research and a $1 billion production facility, all signs point to a buy on Novartis. At the time of this writing Novartis has a market cap of $158 billion, is trading at about $68 per share with a P/E of 12 and a dividend rate of 3.8% or $2.48 per share, and for these reasons the smart money is long on Novartis.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.