In general I try to rein in my natural optimism when posting about companies I own. I prefer to focus on the downside and let the upside take care of itself. I do try to provide balanced input and avoid hyperbole. But not today. For once I want to unleash my wildest optimism and ride my unbridled enthusiasm to a heady conclusion. Please understand that as this is a fantasy view, I have not been diligent in my fact checking and have made many assumptions. I don’t take this seriously and neither should you.

What’s the upside for Biota.

The first target is 60 million Relenza courses. That’s almost certainly in the bag at least while the current swine flu influenza scare prevails. At around $1.75 a course that’s $105M in royalties. Though I note analysts are forecasting 1/2 to 1/3 that amount.

The next target is 160 million annual Relenza courses. At around $1.75 a pop that’s $280M in annual royalties. Less cash burn of $35M and you get $245M EBIT. Apply conservative multiple of six for a $1.5B target market capitalisation. Biota currently have 178M diluted shares outstanding.

The heady target is a complete reversal of Tamiflu dominance, with first Relenza and then LANI dominating the influenza anti-viral market. Roche’s Tamiflu peaked at CHF2.6B (AUD$3B) in sales in 2006. The upside here won’t come from increased quantity as my rough calculations show even 160M annual courses a year is unlikely. Upside would come from increased royalties and revenue. Biota receives 7% on worldwide sale of Relenza and 10% in Australia, whereas Gilead receives 20% from Roche for Tamiflu. While I assume (dangerous I know) Biota will have to split royalties with Daiichi Sankyo a 20% deal would up the royalty to 10%, which is a 40% increase. As LANI is a one off dose there is also potential in a higher sales price, just as Roche has managed to sell Tamiflu for more due to the marketed benefit of a tablet. Once again that is an assumption. [see update below on US moving to 50/50 Relenza/Tamiflu]

The reversal of Tamiflu’s dominance is achievable due to some influenza strain’s increasing resitance to Tamiflu. Reports are already surfacing of swine flu resistance to Tamiflu.

The current CHF:AUD exchange rate is 1.155. Another surprising fact is Tamiflu is more expensive than Relenza, so the same volume of sales will not translate to the same revenue. That linked article provides a great historical comparison of oseltamivir phosphate by San Francisco-area Gilead Sciences and sold by Roche and Biota’s zanamivir (Relenza). The wiki on zanamivir is also worth reading.

Comments from GlaxoSmithKline PLC (GSK) Chief Executive Andrew Witty

The firm is also ramping up production for relenza, a drug that can be used to treat the H1N1 flu, and will be capable of producing about 60 million packs a year in eight weeks.

‘Governments are really keen to build more stockpiles of relenza than they have in the past for various reasons,’ Witty said. ‘We’re also talking to regulators about a second form or delivery system for relenza, which will also massively increase capacity.’

Witty says the new method for production will involve a simpler device and allow GlaxoSmithKline to increase production capacity by another 100 million packs and make it easier to license the drug to other firms. He added that the firm remains open to licensing the technology to other generic drugmakers, but said the company has not been approached by any interested parties recently.

via UPDATE:Global Econ To Remain Weak For Some Time -Glaxo CEO – BEURS.NL.

GSK Press Release 1st May in UK, 4th May in Australia

Relenza (zanamivir)

GSK has been working with governments to supply Relenza, for use in a pandemic situation, since the global spread of avian influenza (H5N1) which began in 2003. Relenza has typically been used to diversify and add to government stockpiles of Tamiflu (oseltamivir).

Since 2003, Relenza has been supplied to 26 governments, including Australia for the purposes of pandemic stockpiling and on average the product constituted 13% of these stockpiles. Prior to the recent outbreak, the last significant order for Relenza was for 10.6 million treatment packs, which was delivered to the UK Government in April 2009.

In relation to the new influenza A (H1N1) strain, the WHO reported that the viruses obtained from the recent human cases were sensitive to oseltamivir and zanamivir but resistant to amantadine and rimantadine.1

GSK has therefore held discussions with governments around the world to ascertain demand for Relenza, including those countries most affected by the virus, such as Mexico and the USA. As a result, GSK has put in place a series of measures this week to manage existing stocks of Relenza and raise production levels:

• GSK has increased production levels for Relenza and is now set to produce between 50-60 million treatment packs of Relenza per year. Part of this production is from our Melbourne site in Australia. The company expects to achieve this rate of output (5 million treatment packs per month) within the next 12 to 14 weeks.

• As of 23rd April 2009, the company had fulfilled all orders received from commercial and public purchasers for Relenza. GSK currently has 6 million treatment packs of existing Relenza stock. This week, GSK prioritised orders to governments and is working with them to determine the best mechanisms for distribution of Relenza either through public or commercial routes.

• The company continues to maintain a close dialogue with governments to build stockpiles of Relenza. Going forward, all new orders will be met through an allocation of available stock and phased delivery of stock to be manufactured.

• To further expand production volumes, GSK is in active discussions with several other companies to increase manufacturing capacity of the product.

• In China, GSK is working with Simcere Pharmaceuticals as a further option to raise production levels of Relenza. GSK granted a voluntary licence to Simcere in 2006 to manufacture and sell products containing zanamivir, in China and a number of other countries, including all 50 of the world’s Least Developed Countries (LDCs).

via GlaxoSmithKline update: influenza A (H1N1) – GlaxoSmithKline Australia.

[Update: 18 July 09 "In other comments, Robinson [Dr. Robin Robinson, director of HHS's Biomedical Advanced Research and Development Authority (BARDA)] said: HHS wants to increase the proportion of zanamivir (Relenza) in the national stockpile relative to oseltamivir (Tamiflu), in light of a few recent instances of H1N1 resistance to the latter. The current split is 80% oseltamivir and 20% zanamivir; the agency would like to move to 50-50, but that will take time.”]

[Update: 19 July 09 H1N1 COUNTERMEASURES STRATEGY AND DECISION-MAKING FORUM

To meet the potential increased demand for zanamivir, GSK is exploring an alternative presentation, the Rotacap/Rotahaler, for which production is more rapidly scalable. Rotacap/Rotahaler could be available for emergency use only, and production would not affect the production of the Rotadisk/Diskhaler. GSK is in negotiations with FDA and others about investing in the Rotacap/Rotahaler presentation.
With its current equipment, GSK could produce 20 million treatment courses of Rotacap/Rotahaler in 2009. With more investment in tools and starting materials, it could produce 50 million courses by mid-2010. The maximum capacity would be approximately 100 million courses per year using GSK facilities only. Unlike the Rotadisk/Diskhaler, other manufacturers could produce the Rotacap/Rotahaler. If both presentations were produced, GSK could potentially provide 60 million treatment courses this year, and a maximum of 190 million courses per year.

Possible Downsides

• Sorry Biota bulls, I can’t not mention the possible downsides.
• GSK reports Relenza sales on 22 July. There is a small possibility these will not meet expectations. While I don’t see much chance of this anything is possible.
• Daiichi Sankyo are due to report LANI PIII results within a month or two. As with all clinical studies these could prove to be a bust and LANI may never see the light of day.
• Companies are working on faster vaccines for influenza. If the time to market for vaccines can be dramatically reduced then there will be considerably less need for anti-viral stock piling.
• While zanamavir and oseltamivir have different mechanisms it is possible that an increased use of Relenza will result in viral resistance just as it has with Tamiflu.

A combination of the above would send Biota’s prospects and share price plummeting.

More on Biota Holdings

Related posts:

1. Biota, Netflix and CV Therapeutics
2. Biota Holdings’ Relenza Royalties Tops Estimates
3. Biota Relenza Royalties and Production Update Overnight
4. Biota Hits Ball Out of Park
5. Briefing on $231M BARDA Contract Award to Biota
6. Swings and Roundabouts at Biota – LANI and RSV