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Up and down (and up?) with FluMist and Netflix

1 November 2004

[In response to this update, Stan Davis sent along a personal note on going to Canada to get a flu shot, which I've posted here]

At this time last year, Netflix was soaring and FluMist was floundering.  Now the roles seem poised to reverse, providing concrete reminders of volatility, economic dynamism and the impermanence of advantage.

The new need for FluMist

In June, 2003, MedImmune, a biotechnology company based in Maryland, received FDA approval to sell a flu vaccine administered as a nasal spray, rather than as a shot.  MedImmune partnered with Wyeth Vaccines and called their product FluMist.

Last November, as the world was gearing up for the 2003/4 flu season, I wrote an update titled “The failure of FluMist.”  At the time, FluMist’s problems were numerous.  Two among many:  the FDA had approved the spray only for those between the ages of 5 and 49, and the price was much higher than the injectable flu vaccine available in doctor’s offices and free clinics.

By the end of the last flu season, MedImmune had sold only 400,000 vaccines, less than ten percent of its original projection of 4 to 6 million.  Last November, MedImmune CEO David Mott contemplated killing the product completely. 

Fortunately, he didn’t.

In early October, Chiron announced that it wasn’t going to be able to deliver 48 million flu vaccines to US customers.  British regulatory authorities closed the Liverpool factory that had manufactured more than half of the 80 million flu vaccines destined for the United States. 

FluMist’s competitive landscape has thus changed dramatically.  In 2003, FluMist had to compete against injections that were less expensive and easier to administer.  This year, these vaccines will be much scarcer, and demand for FluMist will rise.

Thanks to FDA restrictions on the product, FluMist is now aimed precisely at the group that will have the most difficulty getting the conventional vaccine.   FluMist is not approved for people over 49 years old, so these older, high-risk patients don’t have FluMist as an option.  These older patients are the ones waiting in line for conventional vaccines.

Waiting in Line in California – October 2004

 At the same time, the low risk groups approved for FluMist usage can take the vaccine in good conscience, without depriving someone in a higher risk group of a flu vaccine. 

While MedImmune didn’t kill the product, the company did scale back its production.  It will only be producing 3 million vaccines for this flu season, compared with an estimated 48 million vaccine shortfall.  It’s not possible to increase production of the vaccine at this late date.

By next year it’s possible that the problems with the conventional vaccine will be ironed out.  But Chiron’s troubles represent a $60 mm windfall to MedImmune, and ensure that this year’s FluMist supply will be well-used.

Netflix -- a victim of its own success

“The next year will be painful for investors, but great for consumers”

Netflix CEO Reed Hastings in The New York Times

The business that Netflix pioneered, renting DVDs by subscription, continues to grow and gain converts.  Unfortunately for Netflix, this growth has attracted very large competitors.

On 24 October, Netflix initiated the first price war in the industry.  It announced that it was reducing the prices of its subscription services by 18%, effective 1 November.  Blockbuster followed with a similar reduction the next day.  Just four months ago, in June, 2004, Netflix had actually raised the prices of its services by about 10%, so October’s price reduction was quite a nasty surprise to investors.

Netflix cut its prices in response to a rumor that Amazon.com was planning to enter the business.  While Netflix has 2.2 million subscribers, Amazon’s customer base is 40 million.  Amazon declined to comment on its plans, though company spokeswoman Patty Smith told The New York Times that many of the retailer's customers have encouraged the company to launch a DVD rental service.

In the past, Netflix has argued that its distribution structure and efficiencies give it an edge against its competitors.  Mike Schuh of Foundation Capital, one of the earliest financial backers of Netflix, noted in The New York Times in 2003 that "the barriers to entry in this market are low, but the barriers to profitability are extremely high."

Netflix has been profitable for several years, and its third quarter 2004 numbers exceeded expectations.  With the announced price reductions, the company will be breakeven, at best, in 2005.

For Netflix investors, what’s remarkable is how rapidly the attractiveness of a standalone Netflix is fading.  Netflix stockwas trading at $36 on the first of July; the stock is currently trading at around $9.50.  Netflix stock has declined more than 75% in the last 9 months.

There’s an old saying in Silicon Valley:

“The pioneers are those with the arrows in their backs”

Netflix’ initial success prompted competitive entry.  These competitors, from Amazon to Blockbuster to WalMart, will make it extremely difficult for Netflix to sustain high levels of profitability in a DVD-by-mail business.       

More Information:

1. Last year’s update on FluMist: http://www.biz-architect.com/the_failure_of_flumist.htm

2. My most recent update on Netflix was called “Tryin’ to get Older:”

http://www.biz-architect.com/netflix_tryin_to_get_older.htm

3. Here’s a link to a recent New York Times article on Netflix that highlights some of the recent news stories: http://www.nytimes.com/2004/10/25/technology/25ecom.html?oref=login

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