With the flu season fast approaching, two companies are hoping that a new drug that you spray up your nose will give them a shot in the arm.

The drug is FluMist, the first nasal spray flu vaccine that is being marketed as a convenient, less painful way to guard against the disease. Yet while the drug is as effective as a flu shot, its price is much higher. And FluMist can't be used by the people most at risk for the flu: the very young, the very old and the very sick. It has been approved for healthy people between the ages of 5 and 49.

These and a host of other issues represent challenges for

MedImmune

(MEDI)

, the Gaithersburg, Md., biotechnology company that has built its reputation on treating respiratory infections in babies, as well as for its partner

Wyeth

(WYE)

. Wyeth is a medical giant with a reputation for spending heavily and aggressively on drug marketing campaigns. Wyeth used to make a flu vaccine, but it dropped production last year, leaving two vaccine makers for the U.S. market.

The MedImmune-Wyeth team will spend $50 million during this flu season -- including $25 million on direct-to-consumer advertising -- to promote FluMist, which was approved by the Food and Drug Administration on June 17. The drug's official launch was Sept. 2. Promotions are due to hit the airwaves and print media starting Sept. 29, two weeks behind schedule.

Virtually all of the marketing money will come from Wyeth. Virtually all of the immediate impact will affect MedImmune, which had $848 million in sales last year -- about 80% from its respiratory infection drug. (Wyeth's revenue was $14.6 billion.)

MedImmune predicts that even its limited rollout of FluMist for the current flu season could add $120 million to $140 million in revenue. It says FluMist has the potential to produce annual sales of $1 billion from worldwide markets. Right now, the U.S. is the only market.

"It is no exaggeration to say that the future of MedImmune is closely entwined with FluMist's prospects," said Phil Nadeau of SG Cowen in a report to clients on Sept. 10.

"We believe that if FluMist continues to look like a winner through its first season, investors will bid up MedImmune and the stock will be a top performer."

MedImmune's stock has barely budged since mid-June. In fact, the stock has slipped from $39.73 on June 16, the day before the FDA approved FluMist, to $37.67 on Sept. 12. The stock had a stronger performance on Dec. 16, 2002, the day before an FDA advisory committee supported FluMist, when it closed at $24.99. A sampling of recent research reports by analysts with buy ratings on MedImmune show one-year price targets ranging from $42 to $58.

SG Cowen's Nadeau, who rates the company a strong buy, has plenty of like-minded colleagues. According to Thomson First Call, analysts have issued 10 buy, 11 hold and only three sell ratings. (Nadeau doesn't own shares of MedImmune; his firm makes a market in the company's stock.)

FluMist has "blockbuster potential," says one recent analyst's report. FluMist's sales "will surprise to the upside," said another report. "We continue to believe" that many analysts have "underestimated the earnings power of FluMist," said another recent analysis.

But there are some sharp differences between the people who move money on Wall Street and those who reimburse for health care on Main Street.

"This is a low-value pharmaceutical," said Dr. Robert Seidman, chief pharmacy officer for Wellpoint Health Networks of Thousand Oaks, Calif., the nation's second-largest health insurance company, covering 13.4 million people nationwide. "It's a convenience drug that doesn't provide any advantage over a flu shot."

Wellmark Blue Cross and Blue Shield, which covers more than 1.8 million people in Iowa and South Dakota, won't pay for FluMist. "The people who are in the most need are not eligible," said Dr. Mary Davis, vice president for quality management and medical director. "There's no net benefit to customers."

Davis explained that her organization's contract with employers and other customers says Wellmark reserves the right to refuse payment for something that is "solely for the convenience" of the customers.

Hefty Price Tag

FluMist "offers no clinical advantage" over regular flu shots and will carry a huge price tag compared with the $11 per flu shot reimbursement at Wellmark, says Davis. "If you have something that has a great

therapeutic advantage, then we can have a cost discussion," Davis said. "But where's the benefit?"

The intersection of money and medicine is crucial for FluMist, whose average wholesale price has been set at $46. Analysts say the price could run as high as $75 depending on where the dose is administered -- doctors' offices vs. pharmacy, geographic region, etc. That's well above the standard flu shot, which can cost $10 to $20.

Analysts have been building their investment models on the $46 price and on the expectation that MedImmune and Wyeth will be able to sell most of the four million to five million doses the companies say they can produce for this flu season.

Insurance Woes

The big questions: Will insurers pay for the drug? And how will reimbursement affect the behavior of healthy people for whom flu protection may not seem so important despite exhortations from public health experts.

David M. Mott, MedImmune's chief executive and vice chairman, told attendees Sept. 9 at a Bear Stearns health care conference in New York that he was "pleasantly surprised" that some insurers would pay for FluMist.

Mott -- who a few weeks ago self-administered the first dose of FluMist in the lobby of MedImmune's headquarters -- said he originally figured there would be almost no coverage for this year.

Now, said the father of four who is intimately familiar with the sights and sounds of vaccinations, insurers have indicated they would reimburse at varying levels for 15 million to 16 million patients. There are about 160 million eligible patients for whom FluMist is permitted by the FDA.

One of those insurers is UnitedHealthcare. "We have a brand that is predicated on consumer access and choice," said John Penshorn, director of capital markets communications for

UnitedHealth Group

(UNH) - Get Report

, the Minneapolis-based parent of UnitedHealthcare. "We're looking at an emerging technology. It's a new technology that some consumers want access to."

UnitedHealthcare, whose drug insurance umbrella covers about 11 million people nationwide, is treating FluMist as it would most drugs. Its health care plans use a three-tier system of copayments for its formulary -- the collection of drugs that it will cover. Generics, for example, would require the lowest patient copayment in the first tier. Newer, more expensive drugs for which there are cheaper and therapeutically equivalent alternatives would be in the higher tiers.

A person covered by UnitedHealthcare who goes to his doctor for a flu shot pays nothing other than the office copayment charged by the physician, Penshorn said. A typical flu shot costs $10, he said. But a person seeking FluMist from the same doctor would pay the office copayment and the third-tier -- or highest -- drug copayment. The typical third-tier copayment is $40, Penshorn added, with a range of about $15 to $50 depending on the plan negotiated by the customer.

Wellpoint also will reimburse for FluMist -- very grudgingly.

If a flu shot is covered by a Wellpoint plan, then FluMist will be, too, said Seidman, the company's chief pharmacy officer. But Wellpoint has just started sending a "significant physician communication" reminding participating doctors about the drug's limits and price. FluMist "does not add value commensurate with its cost," Seidman said.

Wellpoint's FluMist reimbursement -- which will be at the doctor's cost of acquiring the product -- is allowed because there is no specific language in contracts with customers related to the product. Flu vaccines and FluMist are included in a customer's basic coverage rather than in a separate drug plan with specific copayments.

"Our goal next year is if we cover flu vaccines, we won't cover FluMist," Seidman said. "We are reviewing the language" in Wellpoint's future contracts, Seidman added.

As with any product, Seidman said Wellpoint supports a doctor's decision to prescribe something "only when medically necessary." When asked what medically necessary circumstances would apply to FluMist, Seidman said, "I can't think of any."

The price issue may not be as troublesome as insurers believe, according to research by Wyeth, which conducted 20 pricing studies among 8,113 people -- consumers, pediatricians, primary care providers and pharmacists.

Wyeth discovered that consumers' sensitivity to price "is relatively flat" between $35 and $70 per dose, according to a recounting of the price tests in a Sept. 10 report by SG Cowen.

Wyeth said FluMist could attract 20% of the 5-to-49-year-old market with FluMist's price in that range, the SG Cowen report continued. Such market penetration would translate into 30 million doses, well above what MedImmune and Wyeth can produce during this flu season.

Still, Dr. Sharon Levine looks with concern at the cost of a flu shot in Northern California -- about $6 or $7 -- and the cost being quoted for FluMist -- about $50."You're trading convenience vs. the

higher cost and potential problems in administration," said Levine, a pediatrician and associate executive director of the Permanente Medical Group in Oakland, Calif. "At the moment, it doesn't add up."

Levine's organization covers 3.2 million people in an area stretching from Santa Rosa and Gilroy north to Sacramento and Fresno. The Permanente health plan treats flu shots as part of the basic package. Permanente won't prevent a doctor from prescribing FluMist, Levine said, but participating doctors are always informed about the costs and benefits of new treatments.

"The issue is not will we cover it but for whom does this new product make real sense from a health and economic perspective?" she added. "FluMist is essentially a niche product, and the niche has yet to be determined."

Wal-Mart Works a Deal

At the moment, the niche is convenience. MedImmune and Wyeth have secured a commitment from

Wal-Mart

(WMT) - Get Report

to carry FluMist in pharmacies at 1,000 of the giant retailer's 2,917 stores. "It's something we've been interested in for a while," said Danette Thompson, public relations manager for Wal-Mart. "Historically, we have offered flu shots on a hit-or-miss basis."

Wal-Mart won't provide flu shots this year, and Thompson declined to discuss what Wal-Mart will charge for FluMist. (Merrill Lynch analyst Eric Ende wrote clients recently that according to his discussions with MedImmune executives, Wal-Mart is expected to charge about $57 per dose.)

Thompson said flu shots had been offered on a store-by-store basis, whereas the FluMist campaign will be more organized. "It's convenient and cost-effective," she added. "We're targeting those folks on the go who are healthy."

Wal-Mart has put some limits on its offering of FluMist. Healthy people between the ages of 12 and 17 will need a prescription to receive FluMist; children between the ages of 5 and 11 aren't eligible.

The news from Wal-Mart and the Bear Stearns conference reinforced the already positive views of MedImmune for many analysts.

"We forecast an above

Wall Street consensus of six million units of FluMist sales in 2003," said Craig C. Parker of Lehman Brothers in a Sept. 10 report to clients. Parker, who has an overweight rating on the stock, said FluMist could provide $170 million in revenue for the company, well above MedImmune's predicted range of $120 million to $140 million.

Parker added that if other retailers emulate Wal-Mart by dropping flu vaccines and only offering FluMist, then demand for the drug "should be strong this season." Parker doesn't own shares; his firm makes a market in MedImmune stock and expects to receive or seek payment for investment banking services in the next three months.

Mark Schoenbaum, of U.S. Bancorp Piper Jaffray, said MedImmune and Wyeth's recent comments reinforced his strong buy rating. He had expected no insurance coverage of FluMist for the first flu season; now he believes the companies will sell five million doses of the product.

"We continue to believe that the Street has underestimated the earnings power of FluMist" and that MedImmune will beat Wall Street estimates for 2003 and 2004, Schoenbaum said. He doesn't own shares; his firm makes a market in MedImmune's stock.

SG Cowen's Nadeau told clients Sept. 10 that he was optimistic about FluMist, thanks in part to the fact that 35 states allow pharmacists to administer flu shots "without the involvement of a physician." He noted that MedImmune has predicted that 1.2 million doses will be sold directly through pharmacies this year. If pharmacists can make $10 or $20 per dose, that's a "strong incentive" to sell the drug, he added.

Despite much Wall Street optimism, Joel Sendek of Lazard Freres & Co. remains bearish on FluMist and maintains his sell rating on MedImmune. He predicts the company will derive only $86 million in revenue from the product during the flu season -- sales, royalty and milestone payments from Wyeth, and clinical reimbursements from Wyeth. That's drastically below MedImmune's projection of $120 million to $140 million.

Sendek believes that FluMist sales will be less than MedImmune and Wyeth predict, that the market for healthy people will be tougher to penetrate than the companies forecast, and that the weaker-than-expected demand plus the logistics of shipping the frozen vaccine will cause more than the typical 15% product returns experienced by vaccine makers.

"This is a consumer psychology exercise -- not a typical drug launch," Sendek said in an interview. "There's a potential misunderstanding on how big this market might be."

And the market will have plenty of flu vaccine on hand. The federal Centers for Disease Control and Prevention announced in August that companies will produce 85.5 million doses of vaccine for this flu season, allowing anyone who wants a flu shot to get one "regardless of age or health status."

Sendek said the Wyeth-MedImmune promotion campaign for FluMist will certainly raise consumers' awareness. "But will that cause a change in behavior on a massive scale? I just don't think the

companies' sales estimate will be met," said Sendek, who doesn't own MedImmune's stock and whose firm doesn't have an investment banking relationship with the company. "The high price is a deterrent."

Future Hurdles

After this flu season, Wyeth and MedImmune still face obstacles with FluMist. Although they can certainly increase production for the next flu season, they won't be able to sell the drug to higher-risk candidates for several years. (When the government warns that the flu kills 36,000 people a year, it points out that 90% of the deaths are in people 65 and older. The flu also causes 114,000 hospitalizations annually.)

The companies will commence clinical trials during the next flu season for people ages 50 to 64 and for children under age 5. If these Phase III trials -- the last of the tests before a product is submitted to the FDA -- are successful, FluMist could be ready at the earliest for the 2006-07 flu season, adding 47 million people to the potential market. Analysts expect the first overseas marketing approval -- the European Union -- could come in time for the 2005-06 flu season.

Another issue in the FluMist vs. flu shot debate is what these vaccines contain. Standard flu shots contain an inactivated -- or killed -- flu virus; FluMist is an attenuated -- or weakened -- live virus. That's why only healthy people can receive FluMist. The product is not permitted for people with an assortment of long-term health problems -- such as lung disease, disease and kidney disease; for people with weakened immune systems due to disease or use of medications such as steroids; or for pregnant women.

The Centers for Disease Control and Prevention also recommends that the flu shot is preferred over FluMist "for physicians, nurses, family members or anyone else coming in close contact with anyone with a weakened immune system."