The threat of a global H1N1 flu pandemic has led governments and companies around the world to stock up on vaccines in preparation for the potential outbreak. But as “swine flu fear” grips much of the planet, there is perhaps no better time for investors who are immune to the panic to invest in the businesses providing the H1N1 vaccines and other flu treatments.

Vaccine makers and pharmaceutical giants previously in the business of making regular flu shots will be the first companies to see their profits soar as a result of the potential outbreak, analysts say, noting that the H1N1 vaccine will be in high demand. Initially, H1N1 had only affected pigs, but the virus began spreading to humans this past April. Consequently, the World Health Organization reports that more than 340,000 people have been infected with the H1N1 virus, and 4,100 have died as a result.

Without knowing how widespread H1N1 will become, G-7 countries are aggressively stockpiling vaccines, says Claude Camiré, a senior health-care analyst with Toronto-based Paradigm Capital Inc. “They don’t want to run out of inventories,” he says, noting that flu viruses of this magnitude can be considered to be economically disruptive.

As an example, Camiré points to the impact of the 2003 severe acute respiratory syndrome pandemic on the economies of Asia and Toronto. “There is a major [economic] impact with these flus,” he says. “We didn’t have vaccine or drugs for SARS then; and they are still doing clinical trials in case SARS comes back.”

If H1N1 isn’t contained, it could spread to a third of the world’s population — two billion people — Camiré says. “There won’t be enough supply for everyone,” he adds, because manufacturers can produce only about 700 million doses in time for the high flu season, which lasts from mid-October through January. This means that manufacturers can raise their prices for the vaccine, he adds, as governments are desperate to contain the contagion.

As the situation stands, the large pharmaceutical companies have come up with effective H1N1 vaccines rather quickly, primarily because the process of creating a vaccine for that virus is identical to that of the regular flu, says Maher Yaghi, vice president and intellectual property analyst with Montreal-based Desjardins Securities Inc.

“The flu business is their bread and butter. They have the big facilities to do flu shots. They know that it is prime time, so they got started early,” he says, noting that firms began trials for the H1N1 vaccine up to six months ago.

Before October, profiting from the H1N1 virus was a waiting game, as most companies were unable to begin distributing their vaccines without the U.S. Food and Drug Administration’s approval. “Because H1N1 is a new flu strain, [manufacturers] had to do studies to show the FDA that their vaccines work,” Yaghi says. “By now, the vaccine should be on the market; but because companies had to take that extra step of doing efficacy studies, they will only be shipping inventory out by [mid-October].”

Of the companies whose vaccines have been approved and in distribution, Paris-based Sanofi-Aventis SA is one to watch. On Sept. 15, the FDA approved its influenza A (H1N1) 2009 monovalent vaccine. Sanofi-Aventis began shipping that vaccine to the U.S. government, as well as to other governments, on Sept. 29. So far, the U.S. has ordered 75.3 million doses.

Sanofi-Aventis’s revenue for the six-month period ended June 30 rose to 14.6 billion euros (US$19.4 billion) from 13.6 billion euros in the same period a year prior. Its net income for the recent six-month period was 2.9 billion euros (US$3.9 billion), up from 2.6 billion euros for the six months ended June 30, 2008. Sanofi-Aventis’s shares trade as American depository receipts on the New York Stock Exchange.

Another big player to keep an eye on is Middlesex, England-based GlaxoSmithKline PLC. Unlike its competitors, GSK will benefit two-fold from the spread of H1N1. In addition to making a vaccine against the flu, the company also manufactures Relenza, a product for treating the virus once it has been contracted.

“[Relenza has been] shown to be effective in strains of flu, as well as having high acceptance within the health-care community,” says Damien Conover, a pharmaceuticals equities strategist with Chicago-based Morningstar Inc. and editor of the Morningstar Health Observer.

@page_break@Currently, GSK has contracts in place to supply 195 million doses of its H1N1 adjuvanted vaccine. It has also secured a US$250-million order with the U.S. government to supply H1N1 pandemic products.

GSK’s sales for the six months ended June 30 totalled £13.5 billion (US$20.2 billion), up from £11.6 billion for the same period a year prior. The increase in sales was primarily due to financial restructuring. Net income for the first half of this year was £2.6 billion (US$3.9 billion), virtually unchanged from the net income recorded for the same period in 2008. GSK’s shares are listed as ADRs on the NYSE.

London, England-based AstraZeneca PLC is also expected to benefit from the battle against H1N1. In June 2007, AstraZeneca acquired Gaithersburg, Md.-based MedImmune Inc., a company that specializes in creating immunization programs for viruses.

The acquisition gave AstraZeneca a huge advantage in producing an H1N1 vaccine with economies of scale, Yaghi says. To date, the company has received 40 million orders worldwide for its live attenuated influenza vaccine, otherwise known as FluMist, to combat H1N1. FluMist received FDA approval on Sept. 15.

Among those orders, the U.S. Department of Health and Human Services has requested 29 million doses of FluMist. Unlike other vaccines, FluMist is sprayed into the nose rather than administered by injection, and the vaccine is aimed at those aged between two and 49.

AstraZeneca’s revenue was US$15.7 billion in the six months ended June 30, up slightly from US$15.6 billion in the same period a year prior. Its net income was US$4 billion for the first half of 2009, an increase from $3.1 billion a year prior. Its shares currently trade as ADRs on the NYSE.

From an investment standpoint, the impact of producing an H1N1 vaccine will appear on drug companies’ income statements by the end of the fourth quarter or, at the latest, by the end of the first quarter ending March 31, 2010, Yaghi says: “The bulk of sales will happen in October, November and early December, as the vaccine is ineffective if taken after January.”

Up to that point, however, drug companies can name their price for the vaccines, Camiré says, as the supply/demand equation is tipped in their favour.

Although Yaghi says the huge profit margins resulting from H1N1 vaccines and medications will be seen only in the short term, as he expects the virus to be contained and eventually die out, others such as Camiré believe the related profits will extend to the longer term.

“From time to time, we have those pandemic flus that resurge,” Camiré says, pointing to the avian flu virus, or H5N1, that spread throughout Asia earlier this decade. H5N1 is a strain of the flu that usually affects chickens and other birds; the disease transferred to humans, causing 262 of the 442 infected to become fatally ill, according to the WHO.

“The avian flu is still going around, and there are some people being impacted. Right now, it’s weak and its threat level is very low; but it could come back,” Camiré says, noting that H1N1 could share a similar fate.

This leaves more than enough opportunity for the five or six major drug companies producing flu vaccines out there, Conover says. And governments are not limiting their orders to one manufacturer, he adds, which leaves a slice of the global pie for every player to capture.

In terms of effectiveness, all the vaccines are similar, he adds, which means that effectiveness won’t be a factor for a government in deciding from which manufacturer to buy the H1N1 vaccine supply.

Rather, Camiré says, long-standing relationships and facility location are what make the difference.

“The Canadian government will most likely buy from Sanofi-Aventis and GSK because they have plant facilities in Canada,” he says, noting that the location in which a company places its plant “is typically where they are first favoured to win a vaccine contract.” IE