Swine Flu Impact on Anti-Viral Sales

Highlights include Roche Pharmaceuticals (RHHBY), Gilead Sciences, Inc. (GILD - Analyst Report) and GlaxoSmithKline plc (GSK - Analyst Report).

Use of Tamiflu and Relenza Will Come from Stockpiles

The anti-viral drugs Tamiflu and Relenza are thought to be the most effective treatment option for Swine flu. As a result, governments are releasing stockpiles of the two drugs, most of which was built up over the past three years following the Avian flu fears in 2006.

Tamiflu is sold by Roche Pharmaceuticals (RHHBY). Sales in the first quarter 2009 were $347 million worldwide, of which Roche noted that $264 million were pandemic stockpiling and $84 million were from seasonal use.

The large majority of this stockpiling came from Japan at $217 million. Sales in Japan were up 1200% in the first quarter thanks to the stockpiling. By comparison, U.S. sales in the first quarter were only $13 million, down 94% year-over-year, as much of the U.S. stockpiling too place in 2007 and 2008.

Over the past several quarters, sales have been difficult to forecast based on significant variability in government stockpiling. For example, worldwide Tamiflu sales in 2007 were $1.7 billion, of which $1.3 billion was pandemic stocking and $0.4 million was seasonal use. These numbers declined significantly in 2008 as stockpiling was only around $219 million of the total $562 million worldwide sales.

Gilead Sciences (GILD - Analyst Report) receives a 20% royalty on worldwide Tamiflu sales. But given the huge swings in Tamiflu sales quarter-over-quarter, it is difficult to gauge just how much Gilead will benefit from Tamiflu Swine flu use.

Yesterday, the U.S. Center for Disease Control (CDC) announced it was releasing 12 million doses of Tamiflu from stockpiles to combat the Swine Flu outbreak. These doses of Tamiflu released by the CDC is about 25% of its stockpile. This is product that was purchased from Roche probably back in 2006 or 2007, so we don't expect to see any benefit to Gilead in the second quarter.

In fact, since Gilead receives a royalty from Roche on a one-quarter lag, any benefit from an increase in seasonal use, or the CDC looking to re-stock what it released yesterday, would not show up until the third or fourth quarter at Gilead.

As a result, we do not recommend buying Gilead's stock today based on Swine Flu. If the outbreak continues, and more governments around the world start to release stockpiles of Tamiflu, we could see an increase in re-stocking occur later in 2009 or 2010. This would begin to hit Gilead's bottom-line in 2010 and 2011.

GlaxoSmithKline (GSK - Analyst Report) shares are up today as well. The company makes Relenza, an inhaled anti-viral drug that is commonly administered prophylacticly in children. Relenza sales, much like Tamiflu, have been difficult to forecast given big swings in government orders.

For example, sales of Relenza in 2008 totaled only $103 million worldwide, down over 80% from $522 million in 2007. However, in the first quarter 2009, the UK and Japanese governments both placed significant stockpiling orders, and sales totaled $324 million. The CDC has a substantial stockpile of Relenza on hand as well for big orders in 2007.

In 2007, U.S. sales were $258 million, of which a large portion was stockpiling. Still, if fears continue to snowball over Swine flu, we would expect Relenza sales to skyrocket in the coming quarters as parents choose to vaccinate their children at greater rates.

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