Aug. 23 (Bloomberg) -- GlaxoSmithKline Plc and Novartis AG, two of the world's biggest vaccine makers, may have bet on the wrong technology in the race to develop a better flu shot.

The drugmakers are building U.S. factories to grow influenza virus in animal cells as an advance over the decades- old technique of making flu shots using chicken eggs. Now a small, privately held biotechnology company may leapfrog ahead of them with a more advanced method using DNA.

Losing the flu-shot race may be the latest in a series of setbacks to hurt the world's second- and fourth-biggest drugmakers. The Glaxo and Novartis plants are part of a $1 billion U.S. initiative to produce millions of inoculations within six months of an outbreak of a deadly flu. Closely held Protein Sciences Corp., with 40 employees, is close to winning approval for a method that would cut the time at least in half.

``The advantages of recombinant DNA are speed of production and volume of production,'' said David Fedson, a former director of medical affairs for Paris-based Sanofi-Aventis SA, the world's biggest vaccine producer.

Basel, Switzerland-based Novartis, which bought U.S. vaccine maker Chiron Corp. last year, has lost 9.5 percent of its market value over the past 12 months. The company's shares gained 35 centimes to 63.6 Swiss francs at today's close in Zurich. Its diabetes pill Galvus was delayed by U.S. regulators, and its painkiller Prexige was withdrawn from Australia on concern it may cause liver damage.

London-based GlaxoSmithKline, which began selling its shots in the U.S. during a vaccine shortage, has lost 12 percent of its value since May 18, when its top-selling diabetes drug Avandia was linked to elevated risks of heart attacks. The company's shares rose 3 pence to 1,290 pence in London.

Tough Investment

Investing in flu vaccine is a gamble for drugmakers as big as Glaxo and Novartis. The world market for seasonal influenza vaccines amounts to $2 billion a year, a third as much as the asthma drug Advair/Seretide generated last year for Glaxo and half as much as Novartis's sales of the blood-pressure medicine Diovan. The U.S. has stepped in with research grants, supply contracts and higher payments to encourage suppliers.

Governments are trying to reduce the threat to public health that may be posed by a global pandemic of a deadly virus such as the H5N1 strain that has spread across Asia to Africa, the Middle East and Europe since 2003. Health officials say a worldwide outbreak among humans is inevitable. Fifty million people died in a 1918 influenza pandemic.

Novartis's European Approval

Novartis is investing $600 million to build a cell-based flu-shot plant in Holly Springs, North Carolina. The company won a $221 million grant from the U.S. government for clinical trials of the vaccines. Glaxo is creating a similar factory in Marietta, Pennsylvania, in a facility acquired in 2005 from Wyeth for an undisclosed sum. Glaxo is getting $275 million in U.S. funding.

Cell culture probably ``won't be a factor'' if a pandemic occurs within the next three or four years because large-scale manufacturing isn't available, said Alice Hunt, a Glaxo spokeswoman.

Novartis and Brussels-based Solvay SA, which also received funding from the U.S., have won approval to sell animal cell- based shots in Europe. The process is safer, faster and more reliable than egg-based production, said Klaus Stoehr, head of Novartis's influenza division.

MedImmune, a unit of London-based AstraZeneca Plc, said today it licensed gene technology for making flu shots to Novartis. The technology, called reverse genetics, speeds development by allowing scientists to work with harmless segments of DNA from highly dangerous influenza viruses, such as H5N1.

Funding for DNA Shots

Even in an influenza pandemic, flu shots would probably contribute less than 1 percent to Glaxo's annual revenue, said Linda Bannister, an analyst at Edward Jones & Co. in Des Peres, Missouri.

Now the U.S. is preparing another round of funding for companies including Protein Sciences and publicly traded Novavax Inc. to develop flu shots using recombinant DNA.

``We were told they could produce a vaccine in less than 12 weeks after the start of a pandemic,'' Robin Robinson, director of pandemic influenza countermeasures for the Health and Human Services Department, said in a telephone interview.

Protein Sciences inserts flu genes into cells from a corn- eating caterpillar. The cells are then induced to make proteins that when injected into humans trigger a protective immune response. In the technique Glaxo and Novartis are developing, mammal cells are used to generate whole flu viruses, which are then modified to make influenza vaccine.

Biogen Co-Founder

Twenty-year-old Protein Sciences in Meriden, Connecticut, founded to produce pesticides, is owned by 450 shareholders, including the drugmakers Wyeth, based in Madison, New Jersey, and Diamyd Medical AB, based in Stockholm, according to Manon Cox, Protein Sciences' chief operating officer. The chief executive officer, Daniel D. Adams, 67, was a co-founder and the first CEO of Biogen Inc.

Protein Sciences may get U.S. market clearance for a seasonal vaccine next year. The Food and Drug Administration has offered the company an expedited, six-month review of its application, a process that usually takes a year.

The former Sanofi official Fedson estimated that factories around the world using Protein Sciences' recombinant DNA approach could make two doses of vaccine in three months for 3 billion people, almost half the world's population. That's 10 times as much as could be made in conventional egg-based flu- shot plants, he said.

Cell culture ``is an amazingly stupid investment to make for the future,'' said Protein Sciences' Cox. ``It's as if we're still living 100 years ago and recombinant DNA was never developed.''

To contact the reporter on this story: John Lauerman in Boston at jlauerman@bloomberg.net

Last Updated: August 23, 2007 12:56 EDT