Drugs produced by chickens could be made more cheaply than using traditional bioreactors.

NEW YORK (CNN/Money) - Manufacturing drugs in factories is expensive. So why not have chickens do it instead?

Viragen (up $0.01 to $0.46, Research), a Florida-based biotech, is developing a method to produce drugs inside chickens, rather than expensive bioreactors. At Viragen, the chickens have become the bioreactors, and the factories have turned into "Hilton" quality chicken farms, said Dr. Helen Sang, project leader.

"Our aim is to make drugs in hens' eggs, but the drugs will all be protein drugs," said Sang, a senior scientist with the Roslin Institute, the Scottish research center that brought us Dolly the cloned sheep. "What we are looking for is a new way to produce the protein that would be cheaper and, more importantly, produce high-quality products."

Vaccine makers have been culturing drugs inside eggs for at least 30 years. But unlike the vaccine makers, Viragen's scientists don't wait for the hen to lay the egg. Using a process called avian transgenics, Viragen's scientists bioengineer the chickens with an artificial gene, which directs the hens to lay eggs with protein-based drugs inside the protein-rich whites, said CEO Charles Rice. Then, the scientists extract the protein antibodies from the eggs. There are various ways to extract the proteins, including centrifuge, or spinning the eggs until the protein is forced to the surface of the white. Meanwhile, the chickens pass on the drug gene to their offspring.

Viragen's flock of hens has already laid eggs laced with a protein antibody that fights skin cancer. Rice said this method, conducted with the Memorial Sloan-Kettering Cancer Center of New York, is still in preclinical trials.

Next, Viragen hopes to produce eggs containing insulin, the protein that occurs naturally in healthy people but must be artificially injected by diabetics to help control blood-sugar levels. Rice wouldn't project sales, but the potential is huge, considering the American Diabetes Association's estimate of 18.2 million Americans with diabetes, with another 1.3 million diagnosed annually.

Viragen would contract its biochickens to drug makers who need help producing protein-based drugs. Rice said that Viragen might be able to help Genentech (down $2.02 to $87.50, Research), a California biotech, produce Herceptin, a gene-targeted treatment for breast cancer, and Rituxan, a treatment for non-Hodgkin's lymphoma.

"If Genentech runs short of production facilities for Herceptin, we can breed a few hundred more chickens at our chicken farm," said Rice.

Viragen's chickens each lay about 250 eggs per year. The company is experimenting with producing multiple doses inside a single egg, said Sang, but she added, "We don't want to be greedy."

Rice said Viragen would receive 20 to 50 percent of a drug's sales when it contracts production for another company, focusing on blockbusters, or drugs with blockbuster potential. This explains Rice's interest in Genentech: Herceptin sales totaled nearly $500 million for Genentech in the first nine months of 2005, about a 40 percent jump from the same period last year, while Rituxan sales totaled $1.3 billion in the first nine months.

"There's no product that I could envision working on with less than $1 billion market value," said Rice.

Eric Schmidt, analyst for SG Cowen, said that Genentech's capacity is maxed out, so they might be amenable to new methods of drug production.

"The potential opportunity for Viragen is that Genentech is running at 100 percent [capacity]," said Schmidt. "Their capacity is bursting at the seams. They might be receptive to new technology that would increase their input and decrease their cost."

However, large drug companies like Genentech are sometimes reluctant to switch their manufacturing methods because it could create complications with regulatory agencies, said Jason Kantor, analyst for RBC Capital Markets.

"There are a lot of alternative manufacturing technologies that are in development, including yeast, plant cells, whole plants, transgenic animals and, in this case, chicken eggs," said Kantor. "The big limitation here is that big companies are reluctant, from a quality control and regulatory standpoint, to change their manufacturing process. There is significant regulatory risk in trying to change manufacturing technology."

In addition to its work with avian transgenics, Viragen produces Multiferon, a treatment for viruses and cancers that is marketed in 10 countries outside the U.S. The company reported $278,000 in sales during the 12 months ended June 30, 2005, with a net loss of $26 million.

Correction: Viragen's sales were inaccurately reported in an earlier version of the story. CNN/Money regrets the error.

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To find out what Merck said about drug production in chicken eggs, click here.

The analysts interviewed for this story do not own Genentech or Viragen stock and their firms do not do business with them.