Novartis Flu Vaccine Ban: Who Wins?

by James Brumley | October 31, 2012 8:49 am

If Novartis (NYSE:NVS[1]) were a Looney Tunes character, what happened to it last week would be the equivalent of an anvil landing on its head. Only in this case, it’s no laughing matter. Real investors lost real money and, worse, real lives might have been put at risk.

Sales of two of its flu vaccines — Agrippal and Fluad — have been halted in Spain, Canada, Switzerland, Austria, Germany, Italy and France after small particles were found to have developed in some of the vaccine’s vials the company had in its possession.

Still, while it’s a high-profile mistake, the impact of the alleged stumble may be far smaller than the market has assumed. Let’s take a further look.

The Foul-Up(s)

Having one of your products banned in one country due to safety concerns is never a good thing. Having one of your products banned in seven countries (with perhaps more on the way) can be downright miserable.

According to the company, during a routine pre-release quality analysis of Agrippal and Fluad, Novartis observed visible protein aggregates in one batch, and immediately held the distribution of the batch in question. Novartis conducted an internal investigation and shared its assessment, which supports the quality and safety of the vaccines, with the Italian Medicines Agency (AIFA). At that time, Italy’s governing body became the first to halt use of the vaccine pending further review.

If this seems a little familiar, that’s because Novartis AG is the same company that was forced to stop production of its migraine medicine Excedrin for a while in the middle of the year when quality concerns were raised. The company also froze production of one its pet products as well as an athlete’s foot therapy — also thanks to quality issues.

It was the two troubled flu vaccines, however, that put the kibosh on the stock last week, knocking 4% off its value after news of the bans started to come out.

It’s all academic at this point, though. What investors really want to know, now that the damage is done, is how much Novartis loses — and who wins.

Now What?

Believe it or not, Novartis’ entire vaccine library only generates about 5% of its annual sales. That’s “only” $2.8 billion of the $57.5 billion in revenue the pharmaceutical maker has generated through the past four quarters. And only about a quarter of its vaccine revenue stems from flu shots, so there’s only $718 million in jeopardy with the ban on Agrippal and Fluad in effect. Point being, the fiscal risk here is actually pretty small; the company’s reputation is in more jeopardy.

Still, that’s $718 million up for grabs. Who’s waiting in the wings to win that business?

Potential Winners

The Favorite: Europe isn’t necessarily aiming to be protectionist, but it makes sense that the region would fill Novartis’ shoes with another local pharma manufacturer. That puts Sanofi (NYSE:SNY[2]) and GlaxoSmithKline (NYSE:GSK[3]) at the top of the list.

French corporation Sanofi makes an almost confusing number of influenza vaccines, including Intanza (IDflu), Panenza, Humenza, Fluzone and Vaxigrip (Mutagrip), with each aimed at a slightly different scenario based on age and need. UK-based GlaxoSmithKline makes the popular Fluarix vaccine.

Contenders: While European manufacturers have the inside track, that’s not to say an American company can’t squeeze its way in. Indeed, depending on the demand and perceived need for a flu vaccine this year, the medical community (and governing bodies) may welcome any and all sources for flu shots. That puts Baxter International‘s (NYSE:BAX[4]) Preflucel in the mix, as well as Merck (NYSE:MRK[5]).

Sure, Merck isn’t exactly the first name you think of when you think of flu shots, but they’re in the game as a distributor of Afluria — made by CSL Biotherapies, a subsidiary of CSL Limited (NYSE:CSL[6]). Most investors may not realize it, but CSL is actually one of the biggest flu vaccine manufacturers in the world. It just doesn’t market much of anything under its own name.

A Dark Horse: While CSL Limited is one of the more compelling ways to play Novartis’ stumble, it’s also only available via the Australian stock exchange, and therefore may be out of reach for some investors. The next-best way to tip-toe into the influence vaccine market may be through AstraZeneca (NYSE:AZN[7]).

Like Merck, AstraZeneca isn’t exactly a high-profile name in the flu vaccine world. Its Medimmune subsidiary makes the FluMist spray vaccine, however, which was approved for sale in Europe last year.

The Last Word

While these are all tempting picks, capitalizing on a company’s mistake by buying shares of another company may not be worth the trouble in this case. It’s very likely the five companies or partnerships discussed here could simply split the $718 million that Novartis AG doesn’t look like it will be able to earn this flu season. That isn’t a big amount to begin with and it won’t even be a drop in the bucket if it’s split between the five names in the global flu vaccine race.

UPDATE: At the time this story was published, seven countries had halted use of two Novartis AG flu vaccines. Since then, Canada and Switzerland have lifted those bans.

As of this writing, James Brumley did not own a position in any of the aforementioned securities.

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