It was not the talk Dr. Michael Ossi planned to give when he was summoned to Washington in the fall of 2003 to brief health officials on Capitol Hill.
Dr. Ossi, an infectious disease expert with British pharmaceutical giant GlaxoSmithKline PLC, had been asked to meet with government officials on how to respond to a deadly problem unfolding halfway around the world.
In Asia, entire flocks of birds were dying from a virus called H5N1, better known as avian flu. A particularly virulent strain of influenza, H5N1 had for years been confined mostly to birds because their higher body temperatures provided an ideal environment for the bug to proliferate.
But pockets of people were becoming infected in Asia, setting off alarm bells for health officials around the globe. When it spread among humans, the consequences were unusually fatal. Roughly 60 per cent of those infected with H5N1 died, making it three times deadlier than the 1919 Spanish Flu, according to the World Health Organization.
Dr. Ossi came to the hastily arranged gathering of health officials and academics expecting to talk to them about his company's research into anti-viral drugs and flu vaccine. But the health experts clustered around a handful of tables were not interested in hearing about the science behind such products. They had much more pressing concerns.
They only had one question, Dr. Ossi recalls: "How much can you make and how fast can you make it?"
It was a watershed moment for him. For most of his career, working in vaccine research - indeed, most research related to the prevention and treatment of infectious diseases - was a ticket to obscurity at a big drug company. The high stakes and big profits for companies like Glaxo were not in vaccines, but in multibillion-dollar blockbuster drugs: the Wellbutrins, the Zantacs and the Valtrexes.
But the world was changing. Shoehorned into that meeting room in Washington were mathematicians from top universities, charged with calculating how many people could be protected in a pandemic; ethicists who would debate who should get medicine first in the event of a shortage; and public health officials struggling to find a way to cope with potentially tens of millions of infected people. Their urgency made it clear to Dr. Ossi that the quiet, unprofitable world of vaccines was about to be given more prominence in government than it had in decades.
H5N1 would alter government approaches to pandemic planning. But it would also create a new and unprecedented opportunity for the global pharmaceutical industry. It was, as Dr. Ossi recalls, "an obvious commercial opportunity" for the drug companies - one that is reshaping their businesses.
In a matter of a few years, flu shots have gone from being a marginal, money-losing business to a massive profit generator for a small number of global companies, as governments and the public hasten to protect themselves from getting sick.
Between 2004 and 2007, vaccine sales across the industry soared an average of 32 per cent each year, with flu vaccine leading the way. That is roughly four times faster than any other pharmaceutical product.
In a year that will be remembered for widespread public worry about the H1N1 virus, or swine flu, vaccines have become a $24-billion business. Analysts predict the global vaccine industry will top $40-billion by 2012. For companies like Glaxo, Sanofi-Aventis, Merck & Co., Novartis AG and Pfizer Inc., the fear of a pandemic has translated into a financial windfall that has been years in the making. Worldwide, nearly 1 billion doses of H1N1 vaccine have been ordered in 2009.
This is the story of how that happened - how Flu Inc. grew out of nowhere, transforming a once struggling business characterized by lab closures and lawsuits into a high-profit industry in less than a decade, and of the steps the pharmaceutical industry has taken to ensure the dollars keep flowing.
The change is driven by a new way of thinking in government about how to approach future threats of a flu pandemic. Health officials have begun to see merit in pursuing a strategy of stockpiling vaccines, even at a much higher cost per dose than they paid in the past.
Behind all this, of course, is a public that demands to be protected from the worst strains of influenza. This year, about 40 per cent of Canadians got the vaccine for H1N1 - the highest adoption of a flu shot the country has ever seen. Those shots are responsible for limiting the spread of the disease and, most likely, for saving lives. But even as the H1N1 threat subsides after killing more than 400 people in Canada, the business of fighting flu is arguably still in the early years of its growth.
"It was a new market, created by this pandemic scare," Dr. Ossi said.
How the flu vaccine industry was built
Vaccines have always been a business. They've just never been a very good business.
"We were losing money," said Claude Vezeau, former chief executive officer at Montreal-based IAF BioChem International, Canada's largest maker of vaccines in the 1990s. "All vaccines were losing money."
The problem has been rooted in the cumbersome process of vaccine production and in the public's complacency. Alan Davies, the head of Canada's famed Connaught Antitoxin Laboratory at the University of Toronto, once lamented: "People are willing to pay more for a bottle of headache tablets than they are for a vaccine that will protect them for many years." Connaught, too, was a money-loser.
The idea of inoculating people against disease dates back to 1796 when British doctor Edward Jenner noticed that milkmaids appeared to be immune to smallpox because of their exposure to a mild form of pox carried by cows.
Dr. Jenner took puss from a lesion on the hand of a milkmaid and inoculated a young boy. When the child didn't become ill with smallpox, Dr. Jenner deduced that a small dose of a disease could protect a person from a more serious illness (the word vaccine is derived partly from "vaca," the Latin word for cow).
More than two centuries later, making vaccines on a large scale remains challenging. Vaccines are still made primarily from tiny bits of pathogens, the disease-causing agents of a virus. It can take months to get the formula right, and flu viruses are always changing. The manufacturing process is also clunky and relies on techniques developed 50 years ago in which a virus is injected into chicken eggs to multiply.
Here's how the process works: Like any virus, flu will only grow in living cells. One of the best places to grow it is in fertilized chicken eggs. (Pigs and humans are also good, but less practical.) Eleven days after the egg is fertilized, a hole is drilled into the eggshell and the virus is injected into the fluid surrounding the embryo. After the virus infects the embryo, it multiplies. Machines then crack open the eggs and the virus-filled fluid is removed.
The virus is chemically inactivated, usually with formaldehyde, and used as the "antigen" of a flu shot. Antigen is short for antibody generator. When injected into the body, it's the antigen that provokes an immune response that remembers the code of the virus that is attacking the body.
The antigen-making process can take months because the eggs have to be at the right maturity. The virus also grows slowly and it can take as many as three eggs to make one shot of flu vaccine. Then there are the chickens that produce the eggs - they have to be kept in steady supply, and healthy, since producing enough vaccine for an entire country can take millions of eggs.
"It's very cumbersome to make flu vaccine," Dr. Ossi said.
Heavy regulation and a lack of a broad customer base - governments are the primary buyers - left many drug companies with little incentive to make vaccines. Why spend time on such a low-margin business as vaccines when a company could make a fortune developing a new blockbuster drug?
In Canada, where vaccine making was once largely left to public institutions, the picture was no brighter. The country's largest facility, the Connaught lab, earned fame as the site of Frederick Banting and Charles Best's insulin discovery. But it struggled financially for years before being bought by French drug giant Sanofi-Aventis.
Canada's other large vaccine facility, the Institute Armand-Frappier in Quebec City, didn't fare much better. By the mid 1980s, its owner, the University of Quebec, could no longer shoulder the financial burden, and the facility was sold to Mr. Vezeau's IAF BioChem - which also struggled.
How the world changed for vaccines
But all of that began to change with the first hint of a pandemic on the other side of the world.
The outbreak of H5N1 in Hong Kong in 1997 was relatively small - just 18 people who handled birds - but six of them died. Such a high death rate drew immediate attention from medical experts around the world. Fears of a much bigger death toll began to percolate at government levels.
Like many countries, Canada began working on a pandemic preparedness plan. Led by John Spika, a senior infectious disease official at Health Canada, federal and provincial bureaucrats began drawing up models of a potential outbreak that could kill up to 58,000 Canadians and do $30-billion worth of damage to the economy. The key to fighting such an outbreak, they believed, was securing an abundant supply of vaccine.
Dr. Spika and others in the vaccine community warned that if a serious pandemic broke out, countries would close their borders and hoard vaccine. Governments began setting aside money in federal budgets for pandemic preparations. Ottawa also began negotiating a long-term vaccine supply agreement with BioChem, which had the only flu vaccine facility in Canada.
For Mr. Vezeau at BioChem, pandemic planning was a godsend. Suddenly, he had the attention of government officials. "We were losing money, so we went to the government and said, 'Listen, for this to be a viable manufacturer, we need to increase the price of our vaccine," Mr. Vezeau said. They got a higher price.
The government pursued contract negotiations with BioChem on a deal that was potentially so lucrative it began to push the value of the company higher. Before it was even signed, Shire Biologics stepped in and purchased BioChem in 2001. Soon after, the company signed a 10-year pact with Ottawa that would see the Quebec facility responsible for producing flu shots for every Canadian in a pandemic.
Dr. Spika called the deal "a cheap insurance policy" for the country. At a price tag of $300-million, it was more money than the vaccine maker had ever seen before.
Other vaccine companies began to negotiate similar large-scale contracts in dozens of countries, from Switzerland to France and even such smaller nations as Iceland.
However, one problem remained for the vaccine manufacturers as governments around the world began doling out money for contracts. The process was slow and hard to use on a mass scale. "They have to use chicken embryos and there isn't enough supply of those readily available to be able to make tons of vaccine," Dr. Ossi said.
Fighting pandemic flu with vaccine made from eggs alone would be a losing battle, many believed. Companies needed to find a way to increase the amount of vaccine that could be produced in order to capitalize on the growth. And that particular discovery was already in the works.
The problem with making vaccines
For years, scientists had tried to find a faster way to make vaccines. They chased a variety of theories, including isolating the DNA of a virus, which many researchers believed would unlock new ways to fight infections. But at its main vaccine facility in Rixensart, Belgium, Glaxo had found a way to make vaccines more potent using another kind of technology: adjuvants.
Adjuvants are like superchargers for vaccines. They are mild contaminants that cause the body to respond with a more intense immune response. When paired with antigens, the adjuvant liquid can make the vaccine's impact stronger. This allows for more doses to be produced from less antigen.
The word itself comes from the Latin "adjuvare" which means to help or aid. But adjuvants, like so many scientific discoveries, were stumbled upon almost by accident.
Testing on different batches of vaccines often found that some worked better than others. In cases where there was a slight contaminant present in the mix - something as simple as using dirty lab materials - researchers found there was an enhanced immune response from the body to that dose of vaccine.
Thus the adjuvant industry was born, with contaminants such as oils, salts and virosomes (which are bits of influenza virus that do not replicate) added to vaccines.
"It allows us to decrease the antigen content, which allows us to multiply the capacity," said Philippe Monteyne, senior vice-president of global vaccines development at Glaxo. "And of course, multiplying the capacity has some impacts on the business side," boosting profits.
Adjuvants allowed companies to pump out more, but it is also a higher-margin business than antigens.
Significantly more than half the price of a dose of flu vaccine is attributable to the adjuvant, though Glaxo doesn't disclose the exact figures. "That's why vaccines became so attractive," Mr. Monteyne said. "Most of the value in our case is put on the adjuvant technology."
For the drug companies, the new interest in vaccines by governments looking to get as many flu shots as they could buy, and the scientific advances of adjuvants, came at an opportune time.
Many drug makers were starting to worry about the long-term viability of megadrugs like Lipitor, a cholesterol fighter, and Zantac, an ulcer treatment, that have a finite period of patent protection. When the patents expire, the market is flooded with cheaper generic versions. The big drug companies needed a new source of revenue, and the advent of large-scale vaccine manufacturing looked promising.
With the value of vaccines on the rise with the fears of avian flu, the drug companies also liked something else about the resurgent business: they had it to themselves.
Because vaccine making is so expensive - a new plant can cost up to $1-billion (U.S.) - companies like Glaxo, Novartis and Sanofi-Aventis didn't have to worry about a rash of new entrants cutting into the flu vaccine business as governments ordered millions of doses.
"The barriers to enter the market are extremely high," said Mr. Monteyne in Belgium. "You don't become a vaccine maker over night. That's why we have a few big players, and very few only." That meant the giants could push hard to increase prices. And they did.
Sanofi-Aventis expects to earn close to $6-billion (U.S.) in vaccine revenue next year and double its sales by 2013. This quarter, sales of H1N1 vaccine alone will top $500-million. It is suddenly a good time to be a flu shot maker.
"Vaccines, vaccines, wonderful business," Chris Viehbacher, the Canadian-born CEO of Sanofi-Aventis, told investment analysts on a conference call a few months ago.
It didn't take long for such calculations to be made in other boardrooms around the globe. The companies began acting quickly to expand: Novartis spent $5-billion to buy U.S.-based flu vaccine maker Chrion. Britain's Astra Zeneca paid $15-billion for Medimmune, and Glaxo purchased the old BioChem vaccine operation in Quebec for $1.4-billion.
With 22 per cent of the market, Glaxo was now the global leader in vaccines. And with that clout came the power to influence governments, who were already fearful about not having enough vaccine supply in the event of a pandemic.
How vaccines are sold and prices are set
In the summer of 2008, Canadian Finance Minister Jim Flaherty's staff prepared a briefing note for an upcoming meeting with the head of Glaxo's Canadian operations, Paul Lucas.
Glaxo had been lobbying several governments around the world to get higher vaccine prices and access to massive cash reserves countries were setting aside to cope with a pandemic threat.
"We understand that Mr. Lucas would like to discuss how GSK could further contribute to Canada's pandemic preparedness, including [Ottawa]setting aside $400-million as a contingency fund," the note said, according to documents obtained by Ottawa researcher Ken Rubin.
Mr. Flaherty held the purse strings on any national pandemic plan and subsequent vaccine purchase from Glaxo. The company had a message for the minister: "GSK has been critical … contending that the proposed vaccine price is too low," Mr. Flaherty's staff told him.
Indeed, the company had already been lobbying governments well before then. Since the late 1990s, prices for flu vaccine in North America have soared from $2 per dose to as high as $12 in 2007. The price has recently fallen back to about $8 as buying volumes increased in the face of H1N1. But that's still a healthy margin, as some analysts estimate it costs about $1 to make each dose.
The company does not discuss its costs, but Mr. Monteyne said the cost of a flu shot is flexible depending on whether the buyer can pay more. "We have a tiered pricing strategy," Mr. Monteyne said. "It is mainly based on the level of income of the country."
Beyond just selling crates of vaccine, Glaxo also wants to sell full-service protection - pandemic readiness packages. And the industry's desire to build a stable business out of vaccines, along with the emergence of adjuvants, has led to perhaps the most significant shift the industry has seen in decades: the creation of vaccine stockpiles.
Switzerland was the first country to jump in. In October, 2006, with fear over H5N1 at fever pitch, the Swiss signed a contract with Glaxo on a stockpiling deal that called for 8 million doses of avian flu vaccine, slightly more than one shot for every citizen.
Then, in a new kind of move for the industry, the Swiss reserved future space on the production line for another 8 million doses if needed. That meant Swiss health authorities had priority in line at Glaxo's factories if a second dose were needed.
This emerging business - pre-pandemic treatment - was rounding into shape. Glaxo began trade-marking the names of vaccines along those lines, registering its vaccines as Prepandrix.
Other nations soon followed the Swiss with deals of their own, locking up huge sales for Glaxo.
There was just one problem: the H5N1 pandemic never happened. The virus stayed mostly with animals. The Swiss were left with one of the world's largest stockpiles of unused H5N1 flu vaccine. Glaxo's sales of avian flu vaccine fell 54 per cent in 2008, as countries realized their stockpiles weren't needed.
This was a problem for the vaccine makers, who were looking to build an enduring revenue stream rather than simply capitalizing on flu fears to gain a temporary spike in sales. Glaxo's new CEO, who had been elevated from the ranks of the company's vaccine division, understood this.
How the new vaccine market was born
Barely a year into his tenure as Glaxo's chief executive officer, Andrew Witty outlined the company's achievements during a conference call in October. Quarterly profit was up 30 per cent from a year earlier, orders for H1N1 flu vaccines had topped 400 million doses and the company was close to becoming the world's largest vaccine maker.
"I think the momentum of this business is going in the right direction," Mr. Witty told analysts. In short, Glaxo's big bet on vaccines was bearing fruit. And perhaps most surprisingly, the Swiss were buying again, despite having spent millions on H5N1 vaccine it never used.
This, Mr. Witty explained, was the brilliance of the new vaccine market. Glaxo had turned the Swiss situation into an opportunity to sell more vaccine.
Because adjuvant could be paired with any antigen, the leftover stockpiles could be used for other outbreaks by simply plugging in a different antigen, depending on which virus looked most threatening.
Once a country bought a large supply of adjuvant, it was locked in as a buyer for Glaxo's antigen for years to come. Countries were not just vaccine buyers now; they were subscribers, coming back annually to the company for more and different types of shots.
"If you go with an adjuvanted technology, you can actually keep a stockpile of your adjuvant and then simply rotate a new antigen in at the last minute," Mr. Witty said.
That is basically what the leading countries like Switzerland did.
"The real business is a business of stockpiling. It is not a reactive market. It is something that is proactively being built with governments," Mr. Monteyne said.
Other countries, including Canada, took notice of what the Swiss were doing. In the past 12 months, the number of countries using such stockpiling methods has grown to 60 from less than 10. When H1N1 broke out and temporary vaccine shortages occurred, Canadians learned that the federal government has become a big buyer of adjuvants.
As far as the vaccine makers are concerned, adjuvants are the future because they encourage countries to stockpile what they've bought from the drug companies. Asked by an analyst whether the company could keep generating the record vaccine profits it saw in 2009, Mr. Witty didn't hesitate: Yes, it could.
"What's been created this summer is essentially a stockpiling marketplace, which over a period of time will have to be refreshed," Mr. Witty told analysts. "And that's exactly where we see there being some kind of steady state" for the vaccine industry.
New fears over H1N1 were the catalyst to a completely new way of buying and selling vaccines that many countries are expected to follow. Flu shots are now a product for the masses. Non-seasonal flu shots such as H1N1 could become a yearly norm.
Soaring vaccine sales are also pushing companies to chase profit in other types of shots. The race is now on to develop blockbuster vaccines, defined as those that bring in more than $1-billion annually. Two recently developed vaccines - Prevnar for pneumonia and Garasil for cervical cancer - have become blockbusters, selling close to $2-billion a year.
For now, though, the flu is the driver of all of this.
Flu Inc. is fed by the worry of the unknown, the fears of government that the next pandemic lies just around the corner, or tucked away in some far off area of the world. In the case of H1N1, the threat of illness for 40 per cent of the country was real enough that they went for the shot, sometimes lining up for hours to get it. And that has spawned a new business.
"We are just at the early days of a new era which is just exploding," Mr. Monteyne said. "The whole vaccine industry is changing."
Dr. Ossi sees it as a permanent shift in habits. "The volume of vaccine that countries are asking for has gone up exponentially," he said.
"How many people got flu shots five years ago? Even the very high-risk people out there - the elderly, with chronic lung disease - only 60 per cent of those were vaccinated. Otherwise, many healthy people never thought of getting the flu vaccine.
"Now, all of a sudden, there's a huge demand and a lot of people are jumping on the bandwagon. It's something that will continue for good now. It's a new marketplace."
The Globe on H1N1
- In depth: A closer look at how the virus works
- H1N1 v. seasonal flu: How to tell the difference
- Discussion: Swine flu myth busters
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- Q&A: Our public health reporter answers your questions
- Resources: Reliable information from across the Web
- Full coverage: News, video and analyisis from the Globe's team