Vaccines - Boring, Profitable, Evergreen

Vaccines conjure up youthful memories (at least in my youth) of sugar cubes with polio vaccine and tuberculosis vaccines that caused scars.

In the 1990s, the Clinton administration wrecked the domestic vaccine industry - that is not a political statement, it is a fact - and the industry was moribund and the population increasingly at risk. Then 9/11 happened and the subsequent anthrax attacks in the United States.

The world, including the United States, began to wake up -- and then two other, more important, events happened in 2005. First, Avian Flu was identified and began to kill people; second, Bill and Melinda Gates intensified their efforts with the help of their foundation to wipe out some terrible diseases through the development of new vaccines.

The opportunity for the next five years revolves around these two events - government efforts to prepare for pandemics and terrorism, and other efforts like the Gates' to eradicate disease in third world countries.

Experts view pandemics in a manner similar to the weather - they are hard to predict in the short run, but the World Health Organization (WHO), and other organizations and experts, are absolutely convinced a flu-type pandemic is a "when" not an "if."

Warren Buffet views a WMD (weapon of mass destruction) attack as a "when" not an "if". Rather than argue the point, governments around the world are beginning to prepare. Forget recent headlines about pandemic flu, because the actual investment opportunity is preparedness.

Pandemics are major, almost spontaneous outbreaks of infectious disease that affect large populations. The definition used by the U.S. Centers for Disease Control is the best for our purpose: "An epidemic occurring over a very wide area (several countries or continents) and usually affecting a large proportion of the population".

What diseases frighten governments and healthcare officials the most, creating the greatest opportunity for investors? Asian Avian Flu and smallpox, the latter the result of a bio-terrorist attack.

Outta Hand? Then I Guess It's Time to Act!

You gotta love our politicians! They wait until the problem is out of hand then blame the private sector for not having an immediate solution, when solutions take years to research and develop and, for the most part, are made unprofitable because of the government's policy in the first place.

The politics of public health and serious, short-term health events -- a severe flu outbreak or new type of flu, a rare and deadly Third World illness or even a terrorist event -- dictate the amount of public money that is spent. The market for vaccines is arguably several times the size of the world's population. Realistically, though, the market size is decided by the level of government attention to a health problem and, by extension, government spending on the problem.

This approach has made the country, and the world's current vaccine infrastructure, embarrassingly fragile. Most of the world's flu vaccine is created in cultures using eggs as the medium. It's not the newest technology and events since 2005 have helped create breakthroughs in new manufacturing systems based on something called cell line technology.

Cell-line technology is best described as the mass production (in bioreactors) of vaccines,
rather than the mass production of vaccines in chicken eggs. The leading vendor of these systems has crated a host medium for making vaccines in a bioreactor based on the replication of the human retina. These bioreactors, kept in a room no larger than a small dining room, can make up to 12 million doses of a vaccine per month - and if it were the egg-dependent process it would require a vastly larger area.

In late 2006, a new law was signed by President Bush to repair the broken system and it was called Project Bioshield. Billions of dollars spent before this were wasted on efforts that did not produce a useable vaccine. Now, the department of Health and Human Services has a fund, similar to a venture fund, to push projects along and has also granted vaccine manufacturers immunity from liability for four years - something critical to the development of new vaccines.

The leading vaccine company in the world is GlaxoSmithKline, but given its size, this new business will not push it into double-digit growth, The real winners in this market will be those companies developing new vaccines and new vaccine manufacturing technology. Companies to watch include Iomai (IOMI), Acambis (ACAM) and Crucell (CRXL).

Bottom line: I like this marketplace and have written about several companies in this space in my letter, the ChangeWave Biotech Investor. I've done so, in part, because of its minimal risk for a biotech, and the potential for lots of upside. The U.S. government, post 9/11, post anthrax, and, most importantly, post Katrina, is not going to remain unprepared -- and it will buy vaccines when they become available and when they expire, or are used up, the government will buy them again.

That is a lot of dough.

Simply put, vaccines for everything from Avian Flu to small pox and malaria are the new evergreens that will produce revenues and cashflow for winning biotech companies going forward.