It was just recently that I wrote about MedImmune (NASDAQ:MEDI) in my article Bargain Hunting in Big Biotech. At the time that article was written, one of the uncertainties surrounding the company was whether or not Wyeth (NYSE:WYE) would back out of the FluMist partnership. That question has now been resolved with the termination of the agreement earlier this week.
This is a near-term negative for MedImmune due to the earnings hit. Earnings-per-share guidance for 2004 has dropped from $0.50 to $0.60, to between $0.42 to $0.49, as MedImmune's research and development expenditures have increased. What remains uncertain is whether or not sole ownership of the FluMist franchise will turn out to have a positive impact on EPS in the long run. Additionally, I have concerns about whether or not the resources put into the development of the refrigerator-stable CAIV-T formulation are ever going to be recovered.
Management has stated that the FluMist launch was a disappointment due to pricing, the frozen formulation, and a label restricting use to the 5-49 age group. All of these problems should be solvable with the clinical development of CAIV-T. CAIV-T is refrigerated like the standard influenza shot so that limitation is eliminated.
Also, Wyeth has phase 3 data demonstrating superiority of CAIV-T to the standard vaccine in children. MedImmune is going to conduct an additional trial in support of the data to make its case to the FDA seeking the drug's approval for use in young children. So it appears that all of FluMist's shortcomings can be adequately addressed with CAIV-T.
To get CAIV-T on the market, MedImmune is going to spend $400 million developing the drug over the next three years. That is a serious R&D investment. Even assuming that CAIV-T is approved with an expanded label, I am not certain that the product will be sufficiently profitable to generate an acceptable return on its development costs.
MedImmune's management cites that CAIV-T can be a $500 million drug in the U.S. and an $800 million drug worldwide. If those sales materialize, then clearly, the current R&D investment will have been worth it. Even after subtracting out cost of goods, marketing expenses, and the royalty to Wyeth, the drug will be highly profitable at those sales levels.
However, if those sales forecasts turn out to be overly optimistic, then this will not be a wise R&D investment at all. If CAIV-T's sales fall far short of forecasts, the costs of its development may never be recovered. What I am curious about is the breakeven point on the drug. Unfortunately, that is near impossible to determine without knowing the royalty rate to Wyeth and the expected marketing expense to support the product launch.
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Fool contributor Charly Travers does not own shares of any of the companies mentioned in this article.
