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Big Gains to Be Found in New Vaccines

The Next Leg of the Biotech Bull Market

Written by Steve Christ
Posted September 23, 2010 at 8:08PM

Just as the ancients predicted, fall finally managed to arrive this week, a piece of celestial clockwork.

At precisely 11:09 p.m. Eastern Standard Time on Tuesday, the summer of 2010 officially gave way to the autumnal equinox.

With the inevitable frost on the pumpkin that this change of seasons brings, the flu season will arrive right along with it...

And like the stink bugs covering my window screens, it's as unwelcome as ever.

The swine flu scare of last year has dissipated — thankfully — but the larger fact is that the seasonal flu alone should be enough to make you worry...

According to the Center for Disease Control, the run-of-the-mill flu manages to claim 36,000 lives every year — tragic but true.

The race for new vaccines

That's one of the reasons why the race is on to develop new vaccine technologies.

The other, of course, is to head off a global pandemic like the one in 1918 that killed 20-40 million people worldwide before ending two years later...

While this may be big news to you, it's something the Big Pharma players have known about for years.

Vaccine development is simply one of the weaker links in the health care chain that keeps us safe.

That's why, as Johnson & Johnson (NYSE: JNJ) demonstrated last Friday, the vaccine portion of the biotech sector is gathering steam — just as I predicted it would (here, here, and here).

In fact U.S.-traded shares of Dutch biotech Crucell (NASDAQ: CRXL) rocketed 55% to $31.78 on Friday after the company revealed it is in advanced talks to be acquired by health care giant Johnson & Johnson for roughly $2.3 billion — the equivalent of $31.64 a share.

crxl

That offer would give JNJ full control of the company, since JNJ already owns 18% of the shares (purchased a year ago).

As a result, JNJ and Crucell have begun working on developing new therapies for the flu and other diseases.

Prior to a year ago, JNJ only had limited exposure to the vaccine market. But this acquisition promises to present upside growth for both companies, given Johnson & Johnson's deep pockets and Crucell's growing market share as the sixth-largest vaccine producer.

And last year, Crucell was awarded a $69 million U.S. government grant for developing a universal treatment for the flu — including strains resistant to Tamiflu, the medicine most commonly used to slow influenza infections.

Based in Leiden, Netherlands, Crucell is also working on treatments for people infected with rabies and an HIV vaccine.

"It's a fair price, but not a top price," said Rabobank Securities analyst Fabian Smeets on news of the deal.

And while that's good news for one of our core holdings in JNJ, it caps off what was a great week for the vaccine portion of the industry.

As the Crucell deal has clearly demonstrated, the Big Pharma push into the vaccine market through M&A activity is alive and well. In fact JNJ had to fight off Wyeth last year in its bid for Crucell before Wyeth itself was acquired by Pfizer.

And with $18.9 billion in cash and short-term investments as of June 30th, JNJ clearly has the resources to close these types of deals — as do all of the other big players.

The transaction would value Crucell at about 57 times this year’s estimated earnings, compared with a median multiple of about 36 times profit in biotechnology deals in the past year.

Needless to say, that's quite a premium.

But with competition from generic drugs getting more intense every day, vaccines are increasingly regarded by Big Pharma as a key revenue generator.

After all, the global market for vaccines totaled $22.1 billion last year (up from $19 billion in 2008) and will expand 9.7 percent annually in the next five years, according to Kalorama Information in a market research report released in August.

As a result, as analyst Larry Biegelsen at Wells Fargo said in a research note last week: “Crucell would give J&J a vaccine platform at a time when the vaccine business is becoming increasingly attractive because of its cost-effectiveness, limited exposure to generics and growth opportunities.”

The basis of the biotech bull market

Of course, we've been banging this drum for some time now: generic competition is a major force driving these biotech buyouts.

The other is, simply, that biotech is one of the economy's bigger growth areas.

According to TechNavio, the market for Pharmaceutical Biotechnology in the United States is forecast to reach $60.1 billion in 2013 from $44.7 billion in 2009 — thus growing at a CAGR of 7.7 percent over the period.

And despite the economic turmoil, biotechnology companies in the U.S., Europe, Canada, and Australia had a combined net profit of $3.7 billion in 2009 — a vast improvement from the $1.8 billion net loss in 2008.

All of which invites bids like the one French pharmaceutical giant Sanofi-Aventis SA put on the table for Genzyme Corp. (NASDAQ: GENZ).

Sanofi-Aventis has a standing all-cash bid of $69 a share for the company, which represented a 38% premium on the shares before the deal was announced.

It's opportunities like this one that make the biotech sector so attractive to investors these days — especially in the vaccine business.

And headed down the biotech pipeline is one such opportunity: a new generation of vaccine technology designed to put the flu and other diseases back in their place.

That's good news for flu sufferers and investors alike.

Your bargain-hunting analyst,

steve sig

Steve Christ
Editor, Wealth Daily

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