For example, EBITDA margins (earnings before interest, tax, depreciation and amortization, a proxy for cash flow) for the vaccine division of GSK Biologicals are in the low 40-percent range, compared with 35 percent in its other businesses. Because of higher capital expenditures (and the resulting depreciation expense), the margin deteriorates at the EBIT level to 26 percent, but it remains close to the 30-percent margin of the core business.

Besides these pricing and scale issues, the public sector is taking substantive steps to spur development of new vaccines and creation of capacity for existing vaccines. In high-income countries, bioterrorism and pandemic flu initiatives are fueling private-sector investment. Governments are issuing long-term purchasing contracts, and increased funding has become available for discovery.

In poorer nations, public and non-profit support is helping to create a viable market. The Bill & Melinda Gates Foundation has led the way, giving over $1.5 billion to form and develop the Global Alliance for Vaccines and Immunization (GAVI). Typical of the initiatives funded by GAVI and the Gates Foundation is the Malaria Vaccine Initiative, which has partnered with GSK to develop a malaria vaccine for poorer nations, in a fashion that benefits all parties.

Healthy Expansion

New Investment

The improved financial environment has not been lost on pharmaceutical companies, biotechnology firms, and the broader investment community. The vaccine market is expected to more than double between 2004 and 2009 (see "Healthy Expansion"). Increased R&D spending has helped fill the pipelines of the major vaccine companies (see "Pipeline for the Leading Manufacturers").

Pipeline for the Leading Manufacturers

Promising candidates are in development in a variety of disease areas, including HPV, also known as the cervical-cancer vaccine; herpes simplex virus; influenza; HIV; and severe acute respiratory syndrome (SARS). In addition, companies are working on defense-oriented products, such as anthrax and smallpox vaccines. Analysts project that 75 percent of Merck's vaccine business will be composed of new products over the next five years. As a result of this activity, vaccines are expected to make up a growing share of the total revenue of major firms. At Merck, for example, vaccines should grow from less than five percent of revenues today to more than 16 percent by 2009 (see "A Growing Part of the Portfolio").

A Growing Part of the Portfolio