oh really - 15 million relenza doses , page-14

ousia's update For those who have been following my posts:

Media reports over the weekend quoted GSK's head of pharmaceutical operations saying that GSK would produce 15mill courses of Relenza this year (i.e., calendar 06). This number, which represents roughly 10% of global NAI demand, is below my estimates, but is probably accurate. In July 05, a GSK representative claimed that GSK had the ability to produce 20mill courses in 06, 30mill in 07, and 40mill in 08. At that time, the only plant capable of producing Relenza in quantity was the French plant (which received some basic ingredient from UK plants), so I understood those numbers to be indicative of the French plant's capacity alone. And since that time (July05), we have had the Melbourne plant recommissioned (opening ceremony today, I believe), and possibly also a plant in North Carolina, US. On this basis, I had assumed that the July 05 capacity numbers could be roughly multiplied by 3 to account for the two new plants. It now seems that the July 05 statement already reflected the increased capacity from commissioning new plants.

Because of Tamiflu resistance issues, GSK could easily shift 100mill+ courses of Relenza this year if it bothered to produce the drug in sufficient quantity and run a few clinical trials to support the drug, but a relatively low-ball production figure of 15mill is unfortunate since it may act to dull demand for the drug. If governments know in advance that the drug will never be produced in large quantity, they will taylor their orders accordingly and seek solutions elsewhere. This is probably GSK's intention, since it forces governments to focus more resourses on cell-based vaccines (which GSK has been investing heavily in recently).

Assuming GSK shifts 15mill courses in calendar 05 (probably 10mill from French plant plus 5mill from Aust plant), Biota will receive around $18mill in Relenza royalty payments in FY07. With additional MedImmune and Flu Kit revenue, $18mill in Relenza revenue should see Biota post a modest profit of $2-5mill for FY07. This year, and assuming there is no settlement, Biota will record a modest loss.

With some luck and perhaps some government/WHO pressure, GSK may double production in 07 to 30mill courses (perhaps 10mill from Aust, 10mill from France, and 10 mill from US), which will see Biota post a healthy profit in 08. But GSK's continued reluctance to see Relenza as an equal to Tamiflu – contrary to the best science – means that it is too early to bank on production figures above 15mill, even in 07.

(Given that GSK has already sold at least 12mill courses (but probably more) of Relenza this year, 15mill production might seem unrealistically low. But we should keep in mind that many stockpile orders are multi year orders. The 9mill French order, for example, will probably be filled over 18-24months. So GSK could easily take orders up to 30mill courses this CY and meet these orders with 15mill annual produciton).

As a result of all of the above, I see Biota as essentially fully valued for the foreseeable future and no longer hold my $3.20 price target. Keeping in mind that this is all a very fluid situation, I'm going to sit on the sidelines until either (1) I get firm evidence that the 15mill production figure is inaccurate, or (2) I sense that a positive settlement is imminent, or (3) GSK signals it is going to support IV Relenza.