Even as Americans worry about Ebola, another virus with a long and deadly history is about to hit the U.S. Flu season is approaching. Every year, there are between three million and five million severe influenza cases around the world, with up to half a million people dying from flu or its complications, says Dr. John Anderson, general manager and senior vice-president of bioCSL, a wholly owned subsidiary of suburban Melbourne’s CSL (CSL:AU) that is a major supplier of flu vaccine in Australia.
CSL is now aiming to become a more important part of the global fight against the flu virus. The company today announced it had reached an agreement with Novartis (NOVN:VX) to buy the Swiss drugmaker’s influenza vaccine business for $275 million. The deal, which the companies expect to close in the second half of next year, would make CSL the world’s No. 2 producer of flu vaccine, behind only Sanofi Pasteur (SAN:FP).
Flu shots may be important, but they’re not very lucrative: Novartis last year sold $527 million worth of flu vaccines, but that wasn’t enough to make the business profitable. Novartis spent $144 million on R&D for flu vaccines and ended up with an operating loss of $138 million, according to data released by CSL today. The sale by Novartis comes as part of the company’s broader exit from the vaccine business. As Novartis noted in its statement announcing the CSL deal today, in April GlaxoSmithKline (GSK:LN) agreed to acquire all of the vaccine division of Novartis, excluding influenza.
CSL bought the money-losing Novartis business at a price “substantially below the book value of the unit, resulting in a $1.1 billion impairment” to Novartis, Bloomberg Industries analyst Sam Fazeli wrote in a report published today, Oct. 27. “The flu vaccine unit was unprofitable and a significant drag on Novartis’s vaccines business.”
Still, CSL says it can do better. The acquisition should begin adding to earnings “within 2-3 years,” the company said in a presentation today, adding that the purchase from Novartis should make CSL a bigger player in the U.S. market. Over the next three to five years, say Anderson, the enlarged CSL’s vaccine sales should reach about $1 billion. The deal “will transform bioCSL and make us into a much larger global player,” he says.
One attraction of the Novartis deal for CSL is the Swiss drugmaker’s facility in Holly Springs, N.C. In June, the U.S. Food and Drug Administration gave its OK to start production at Holly Springs, the first facility in the U.S. to produce flu vaccines using cell-culture technology rather than the traditional method of using chicken eggs. Cell cultures are more flexible, “enabling the potential to scale up production quickly to develop large quantities of vaccines in the event of a pandemic,” Novartis said in a June 16 statement.
The cost of the North Carolina investment was about $1 billion, split between the U.S. government and Novartis, says Anderson. The Swiss drugmaker has also invested in trials of FluceIvax, the flu vaccine made from the cell cultures rather than chicken eggs. Those will go to CSL, too. “Novartis has spent a lot of money on the clinical programs, and we will get the benefits of that,” says Anderson.
Luckily for CSL, it can afford to be patient. While bioCSL gets about $150 million in revenue from its influenza vaccine business, CSL Behring, the subsidiary that develops pharmaceutical products from blood plasma, accounts for the bulk of the parent company’s revenues, bringing in more than $4 billion.
