Unfashionable vaccines offer value for money

Regular readers of MoneyWeek will be well aware of our interest in the unfashionable. That's because when a sector is unfashionable, more often than not, it's also inexpensive. For that reason, with the Dow Jones hitting new highs, we're going to consider an overlooked corner of the pharmaceuticals industry: vaccines.

Until recently, the City consensus was that vaccines were an uninteresting backwater of the drugs trade. This was partly due to the sector's historically low-profit margins, and partly because of the belief that because vaccines are generally administered infrequently, they are inherently less profitable than drugs taken on a daily basis. However, these objections no longer appear to have any merit.

Consulting group Wood Mackenzie has examined the vaccines market in its recent report, A Renaissance in Infectious Disease Vaccines. It concluded that there are several factors behind the renewed interest in the market. A key point is that vaccines are now seen as a viable way to tackle an ever-growing number of diseases. Better scientific methods and production capability are an important element behind this renaissance. The mapping of the human genome has provided new targets for vaccine developers, leading to breakthroughs in areas such as human papilloma infection, influenza and meningitis. There is also better global access to vaccines, with increasing wealth and private and public aid.

Meanwhile, governments have realised that prevention of disease is generally much more cost-effective than treatment, and they are increasingly prepared to pay a premium for one-off solutions.

What does all of this mean in hard figures? The report suggests that the global vaccines market will reach a value of $18bn by 2010, from $9bn in 2003. That's a compound annual-growth rate of almost 11% between 2005 and 2010, compared to just 7% for the pharmaceutical market overall. This should translate into improved revenue and profitability for the individual companies involved.

All of this is not lost on the big pharmaceutical firms. With medical journal The Lancet recommending that European authorities follow the lead of the US and vaccinate schoolgirls aged 11 and 12 against the sexually transmitted virus that causes cervical cancer, vaccines such as Merck's Gardasil and GlaxoSmithKline's Cervarix are set to be huge success stories. And Wyeth's Prevnar vaccine for childhood pneumococcal disease, such as pneumonia, meningitis and bloodstream infections, promises to be the first billion-dollar vaccine.

These are just the latest additions to a range of successful products that include the now familiar winter flu jab, which has seen shortages both in the US and UK in recent years; the smallpox vaccines, demand for which has grown with the war against bio-terrorism; and the many millions of doses of potential vaccines that have been ordered to combat any outbreak of the deadly H5N1 bird-flu.

Effective though vaccines from the likes of Merck and GSK might be, they are not going to change the overall picture for pharmaceutical giants such as these. However, a number of smaller and therefore higher-risk companies have a shot at making a name for themselves in this area. We examine the best below.

Three small providers putting prevention on the map

Vaccine producer Acambis (ACM, 188p) is currently making a loss, but importantly for money-burning firms such as these, its cash is rising after a $19m settlement with Novartis over yellow-fever vaccine Arilvax. This and a $30m US government smallpox vaccine contract seem to have assured its future, while positive data from trials of its West Nile and Japanese encephalitis vaccines mean its pipeline is in good shape. The share price has fallen sharply over the past year and despite recent rallies is well worth checking out.

Aim-listed Allergy Therapeutics (AGY, 100p) is developing a vaccine, Pollinex Quattro, to treat a wide range of allergies with just four vaccinations. Already used in Europe, it generated almost £24m sales last year. The group's prospects are based around one product, which makes it high risk, but some analysts believe the share price should be double the current level.

Another Aim stock, Lipoxen (LPX, 22.5p), made its name developing technology that makes protein-based drugs last longer in the body. It has 13 products in pre-clinical testing, including vaccines for pneumococcal disease and rabies, while its Hepatitis-E vaccine is entering clinical trials. The firm numbers biotech giant Genentech among its clients, but as with most companies of this size, the shares are a high-risk bet.