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Suggested Citation:"5 Vaccine Supply." Institute of Medicine. 2004. Financing Vaccines in the 21st Century: Assuring Access and Availability. Washington, DC: The National Academies Press. doi: 10.17226/10782.
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Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

5 Vaccine Supply Vaccines have eradicated smallpox and polio and prevented deadly and disabling diseases in thousands of Americans. Given their histori- cally low cost and important benefits, vaccines represent one of the out- standing bargains in health care. Nonetheless, the vaccine supply today is surprisingly fragile. lust how fragile it is was brought to national atten- tion by severe vaccine shortages in 2001 and 2002, which affected 8 of the 11 routine childhood vaccines. Such shortages have the potential to result in serious outbreaks of disease and can erode public health programs and infrastructure that have taken years to build. But the greatest threat is that the discovery and development of future vaccines, many of which are now well within reach, will be delayed or abandoned. This chapter reviews the vaccine market in the United States and the context within which it functions. Discussed in turn are the size and growth of the vaccine market, vaccine production and the associated cost structure, research and development, concentration in the vaccine indus- try, regulation of the industry, pricing, vaccine shortages, the stockpiling of vaccines, and CDC contracting. The chapter ends by describing the key barriers to a well-functioning vaccine supply system. SIZE AND GROWTH OF THE VACCINE MARKET Vaccines are a very small enterprise relative to the pharmaceutical industry overall: vaccine revenues constitute only about 1.5 percent of global pharmaceutical sales (Batson, 2001~. Global sales of all vaccines combined are roughly equivalent to the individual sales of such familiar 107

108 FINANCING VACCINES IN THE 21ST CENTURY pharmaceutical products such as Lipitor, Prilosec, and Zocor (Marketletter, 2002~. In just three decades, the number of firms supplying routine vaccines to the United States dwindled to 5 companies that today produce all of the routinely recommended childhood and adult vaccines. U.S. vaccine sales are estimated to be about $1.5 billion per year, one- quarter of the global vaccine market (about $6 billion per year) (Mercer Management Consulting, 2002~. Most of the vaccines sold in the U.S. mar- ket are produced by four large pharmaceutical companies: Aventis Pas- teur, GlaxoSmithKline, Merck, and Wyeth. Two of these companies- Merck and Wyeth are U.S.-based; the others are based in Europe. A fifth, smaller company based in the U.K., Powderject, supplies adult influenza vaccine to the U.S. Vaccines represent a small fraction of the business of the four large companies and increasingly must compete with the com- panies' pharmaceutical divisions for internal resources (Arnould and DeBrock, 2002~. Mercer Management Consulting (2002) estimates that the global mar- ket for vaccines (childhood and adult) has grown approximately 10 per- cent per year since 1992. Globally, a significant proportion of the growth during the decade of the l990s was the result of the worldwide effort to eradicate polio. The remainder of the market grew at an annual rate of only about 1 percent (Mercer Management Consulting, 2002~. In the United States, 72 percent of the growth in revenues in the early l990s resulted from the introduction of new vaccine products and 10 percent from the increase in the measles-mumps-rubella (MMR) dosage (from one to two doses) from 1990 to 1995 (Mercer Management Consulting, 1995~. More recently, the introduction of childhood pneumococcal vac- cine in 2000 nearly doubled the U.S. vaccine market. Pediatric vaccines constitute the majority of the vaccine market (about 70 percent). Traditional childhood vaccines, such as MMR, polio, and diphtheria-tetanus-acellular pertussis (DTaP) which represent the core of the U.S. national immunization system are viewed by the vaccine industry as low-margin commodities. Projections of strong vaccine indus- try growth, however, spurred by new developments in recombinant technologies and other advances, have stimulated renewed interest in vaccines. Much of this interest is directed toward new therapeutic and cancer vaccines and adult vaccines for targeted risk groups. Some have suggested the possibility of a $10 billion market by 2010 (Hirschler, 2002~. But the ability to bring new vaccines to market still involves extraordinary technical and regulatory challenges. Maintaining producer interest and stable sources of supply of routine childhood vaccines remains a signifi- cant challenge (Arnould and DeBrock, 2002~. Large, multinational producers sell vaccines through a two-tiered pricing system. Prices in developed countries are high current prices in

VACCINE SUPPLY 109 western Europe and the United States are comparable while a large vol- ume of vaccines is sold to the developing world at significantly lower, essentially marginal-cost prices. High-income countries generate about 82 percent of vaccine revenues but represent only 12 percent of doses (Batson, 2001~. This system serves the needs of both the multinational com- panies and the developing countries. The large volume of global sales permits the vaccine companies to exploit economies of scale in produc- tion while earning high returns on sales to developed countries. Euro- pean multinationals typically produce hundreds of millions of doses, while American companies produce tens of millions of doses (Mercer Management Consulting, 1995~. This disparity in volume has resulted in higher average production costs in the United States than in Europe. (See also the later section on cost structure.) VACCINE PRODUCTION A large number of vaccines are licensed in the United States by domestic firms and foreign suppliers, taking into account multiple combina- tions, as well as vaccines that are not routinely used (see Tables 5-1 and 5-2~. Some manufacturers are more active than others. For example, Wyeth has 16 licenses for vaccines in the United States and Merck has 13, while seven manufacturers have only 1. While many pharmaceuticals are manufactured with relatively stan- dardized chemical engineering processes, vaccine manufacturing is less standardized and less predictable. It often involves the complex transfor- mation of live biologic organisms into pure, active, safe, and stable immu- nization components. Highly sterile, temperature-controlled environ- ments are needed at each manufacturing step, and many vaccines must be maintained within a narrow temperature range during storage and deliv- ery referred to as the cold chain. Vaccines approved by the Food and Drug Administration (FDA) are subject to high standards of safety and quality assurance, including rigorous and pervasive review procedures in which each individual batch of vaccine is licensed a procedure not re- quired for pharmaceuticals (Hay and Zammit, 2002~. In addition, once in production, each batch must be tested and ap- proved prior to release. Vaccines require both a product license applica- tion (PLA) and an establishment license application (ELA), while new pharmaceutical products ("new chemical entities" or NCEs) require only the former. The ELA certifies that the facilities, equipment, and personnel involved in the manufacturing process meet FDA standards and Current Good Manufacturing Practices. Furthermore, to obtain a facility license for a vaccine, a company must first create full production capacity for that vaccine (see the discussion below) (Hay and Zammit, 2002~.

110 FINANCING VACCINES IN THE 21ST CENTURY TABLE 5-1 Domestic Producers of Vaccines for the U.S. Market u.s. Company Generic Name Approval Date Bioport Corporation (Michigan Department of Public Health) Wyeth (Wyeth Laboratories, Inc.) Bioport Corporation Bioport Corporation Bioport Corporation Wyeth (Lederle-Praxis) Merck & Co. (Merck, Sharpe, and Dohme) Merck & Co. Wyeth (Praxis Biologics) Wyeth (American Cyanamid) Merck & Co. Merck & Co. Biogen Wyeth (Wyeth Laboratories) Wyeth (Wyeth Laboratories) King Pharmaceuticals (Parkedale Pharmaceuticals) Merck & Co. Merck & Co. Merck & Co. Merck & Co. Merck & Co. Bioport Corporation Greer Laboratories Wyeth (Wyeth Ayerst) Merck & Co. (Merck, Sharpe, and Dohme) Wyeth (Lederle Laboratories) Wyeth (Wyeth-Lederle) Wyeth (Wyeth-Lederle) Wyeth (Wyeth-Lederle) Wyeth (Wyeth-Lederle) Hollister-Stier Laboratories Wyeth (Wyeth-Ayerst) Chiron (Behringwerke) Bioport Corporation Merck & Co. Merck & Co. Bioport Corporation anthrax vaccine adsorbed cholera vaccine diphtheria and tetanus toxoids and pertussis vaccine adsorbed diphtheria and tetanus toxoids adsorbed diphtheria toxoid adsorbed haemophilus b conjugate vaccine haemophilus b conjugate vaccine haemophilus b conjugate vaccine and hepatitis B (recombinant) vaccine haemophilus B vaccine haemophilus vaccine hepatitis B vaccine hepatitis-A vaccine, inactivated hepatitis-B vaccine influenza virus vaccine influenza virus vaccine influenza virus vaccine measles and mumps virus vaccine live measles and rubella virus vaccine live measles virus vaccine live measles, mumps, and rubella . . . virus vaccme . eve mumps virus vaccine live pertussis vaccine adsorbed 1970 1952 1998 1970 1998 1988 1989 1996 1990 1985 1982 1996 1989 1945 1961 1998 1973 1971 1963 1971 1967 1998 plague vaccine 1994 pneumococcal 7-valent conjugate vaccine 2000 pneumococcal vaccine polyvalent 1977 pneumococcal vaccine polyvalent poliovirus vaccine live oral trivalent poliovirus vaccine live oral type I poliovirus vaccine live oral type II poliovirus vaccine live oral type III polyvalent bacterial vaccines rabies vaccine . . rabies vaccme rabies vaccine adsorbed rubella and mumps virus vaccine live rubella virus vaccine live tetanus toxoid adsorbed 1979 1963 1962 1962 1962 1999 1982 1997 1998 1970 1969 1998

VACCINE SUPPLY TABLE 5-1 Continued 111 u.s. Approval Company Generic Name Date Wyeth (Wyeth-Lederle) typhoid vaccine 1952 Merck & Co. varicella virus vaccine live 1995 Bioport Corporation (Michigan anthrax vaccine adsorbed 1970 Department of Public Health) Wyeth (Wyeth Laboratories, Inc.) cholera vaccine 1952 NOTE: Includes vaccines with active licenses that are not in production, e.g., cholera, plague, and oral polio vaccines. SOURCE: Tufts Center for the Study of Drug Development, 2002. COST STRUCTURE1 The costs of vaccine production include research and development (R&D) costs; costs related to the regulatory approval process; ongoing regulatory costs; plant costs, including depreciation; marketing costs; vari- able costs for labor, production, equipment, and supplies; and liability costs (Arnould and DeBrock, 2002~. Although there are substantial differences between development costs for vaccines and pharmaceuticals, the latter provide a useful benchmark. It has been estimated that, between 1980 and 1984, R&D and the regula- tory approval process generated an average of 11 years of negative cash flow for NCEs introduced in the U.S. pharmaceutical industry (Grabowski and Vernon, 1997~. DiMasi et al. (1991) estimate the mean out-of-pocket cost for a successful NCE at $32 million in 1987 dollars; when discovery, clinical testing, and failure costs are included, this figure rises to $115 million, while the inclusion of time and interest costs results in an esti- mate of $231 million (more than $300 million in 1997 dollars) (Grabowski ~ Information on the costs and revenues associated with vaccine production is difficult to discern from the public record. The committee sought this information as part of its fact- finding effort by commissioning background papers on the vaccine industry (Arnould and DeBrock, 2002; Fine, 2003; Lichtenberg, 2002), corresponding with the five companies that produce recommended vaccines for the U.S. market (Aventis Pasteur, GlaxoSmithKline, Merck, Powderject, and Wyeth), inviting testimony in committee meetings from vaccine representatives, and conducting private interviews with company officials. This process yielded a substantial amount of qualitative information in support of the committee's analy- sis of the relationships among costs, revenues, returns, and investment in research and de- velopment (R&D). But verifiable, quantitative information on costs, revenues, and profits is lacking; and this lack of information represents an important limitation of this study.

2 FINANCING VACCINES IN THE 21ST CENTURY TABLE 5-2 Foreign Producers of Vaccines for the U.S. Market u.s. Approval Company Country Generic Name Date Statens SerumInstitut Denmark diphtheria toxoid 1998 Statens SerumInstitut Denmark tetanus and diphtheria toxoids 1998 Statens Serum Institut Denmark tetanus toxoid 1998 Aventis (Pasteur Merieux France acellularpertussis DTP 1992 Connaught) Aventis (Aventis Pasteur) France Bacillus Calmette-Guerin 1990 (BCG) live vaccine Aventis (Aventis Pasteur)) France BCG vaccine 1998 Aventis (Aventis Pasteur) France conjugated haemophilus 1993 influenza b and diphtheria, tetanus, and acellular pertussis vaccine Aventis (Aventis Pasteur) France tetanus, diphtheria,polio and 2002 pertussis (cPDT) vaccine Aventis (Aventis Pasteur) France diphtheria and tetanus toxoids and pertussis vaccine adsorbed 1978 Aventis (Aventis Pasteur) France diphtheria and tetanus 1984 toxoids adsorbed Aventis (Aventis Pasteur) France diphtheria and tetanus 1997 toxoids adsorbed Aventis (Aventis Pasteur) France diphtheria and tetanus toxoids 1978 adsorbed, for adult use Aventis (Aventis Pasteur) France haemophilus B conjugate vaccine 1987 Aventis (Aventis Pasteur) France haemophilusb conjugate 1993 vaccine (tetanus toxoid conjugate) Aventis (Aventis Pasteur) France haemophilusb conjugate 1996 vaccine/diphtheria, tetanus toxoids, acellular pertussis vaccine in combination Aventis (Aventis Pasteur) France influenza virus vaccine 1978 Aventis (Aventis Pasteur) France meningococcalpolysaccharide 1978 vaccine, group A Aventis (Aventis Pasteur) France meningococcalpolysaccharide 1978 vaccine, group C Aventis (Aventis Pasteur) France meningococcalpolysaccharide 1981 vaccine, groups A, C, Y and W-135 combined Aventis (Aventis Pasteur) France pertussis vaccine 1978 Aventis (Aventis Pasteur) France poliovirus vaccine inactivated 1987 Aventis (Aventis Pasteur) France poliovirus vaccine inactivated 1990 Aventis (Aventis Pasteur) France rabies vaccine 1980 Aventis (Aventis Pasteur) France rabies vaccine 1991 Aventis (Aventis Pasteur) France smallpox vaccine 1978 Aventis (Aventis Pasteur) France tetanus toxoid 1943

VACCINE SUPPLY TABLE 5-2 Continued 113 U.S. Approval Company Country Generic Name Date Aventis (Aventis Pasteur) Aventis (Aventis Pasteur) Aventis (Aventis Pasteur) Takeda Chemical Industries, Ltd. Research Foundation for Microbial Diseases Akzo Nobel (Organon Teknika Corp.) Cheil Jedang Berna Sa (Swiss Serum and Vaccine Institute) Berna Sa (Swiss Serum and Vaccine Institute) GlaxoSmithKline (Smith Kline Beecham Biologicals) France France France Japan tetanus toxoid tetanus toxoid adsorbed yellow fever vaccine acellular pertussis vaccine concentrate Japan Japanese encephalitis virus vacine inactivated Netherlands BCG vaccine South Korea hepatitis-B vaccine Switzerland tetanus toxoid adsorbed Switzerland typhoid vaccine live oral 1978 1978 1978 1991 1992 1989 1988 1970 1989 UK diphtheria and tetanus toxoids 1997 and acellular pertussis vaccine adsorbed GlaxoSmithKline (Smith UK hepatitis AInactivated and 2001 Kline Beecham Biologicals) Hepatitis B (recombinant) vaccine GlaxoSmithKline (Smith UK hepatitis B vaccine (recombinant) 1989 Kline Beecham Biologicals) GlaxoSmithKline (Smith UK hepatitis-a vaccine, inactivated 1995 Kline Beecham Biologicals) Powderject Pharmaceuticals UK influenza virus vaccine 1998 (Medva Pharma) Statens SerumInstitut Denmark diphtheria toxoid 1998 Statens SerumInstitut Denmark tetanus and diphtheria toxoids 1998 Statens Serum Institut Denmark tetanus toxoid 1998 Aventis (Pasteur Merieux France acellularpertussis DTP 1992 Connaught) NOTE: Includes vaccines with active licenses that are not in production, e.g., pertussis monovalent and hepatitis B-Cheil Jedang vaccines. SOURCE: Tufts Center for the Study of Drug Development, 2002. and Vernon, 1997~. A more recent study by DiMasi indicates that the out- of-pocket cost of an NCE has escalated to $403-$802 million (2000 dollars) when the time lag between investment and market release is capitalized (DiMasi et al., 2003~. Total development costs of bringing a vaccine to market are roughly similar to those for drugs and can be higher (Grabowski and Vernon, 1997~. As part of the initial approval process, the FDA requires that the

4 FINANCING VACCINES IN THE 21ST CENTURY vaccines used in Phase III clinical trials be produced in a facility that will be used for commercial production if the vaccine is approved. As a result, manufacturers must frequently invest more than $30 million in the pro- duction facility prior to product approval (Grabowski and Vernon, 1997~. Vaccine development costs have also risen as a result of the increased time it takes to achieve licensure, as well as larger FDA-required Phase III clinical trials for many recent vaccines (see Box 5-1~. The size of clinical trials depends on a number of variables (Foulkes and Ellenberg, 2002), including the rates of disease and anticipated adverse events. The average size of clinical trials has increased over time (as has been the case for drugs) to provide an adequate base for identifying rare adverse effects during vaccine development. One industry expert estimates that a new vaccine costs $700 million from initial research to commercial production (Clarke, 2002~. In addition to the requirement for early facility invest- ments, production facilities for vaccines tend to be more capital-intensive than those for pharmaceuticals. On the other hand, vaccines tend to have higher success rates than pharmaceuticals and may be characterized by faster development times (Grabowski and Vernon, 1997~. Once a vaccine has been approved, the production process involves high fixed costs relative to variable costs. Fixed production costs, exclu- sive of up-front R&D and sales labor, represent 60 percent of total produc- tion costs for vaccines (Mercer Management Consulting, 2002~. These fixed costs are not affected by changes in production volume. They are associ- ated primarily with quality assurance activities, administrative labor, de- preciation, and other manufacturing overhead. Industry representatives have indicated that increased regulatory requirements have resulted in increased costs for quality assurance employees relative to production employees. Semivariable costs make up 25 percent of total costs, exclud- ing R&D and sales labor. Semivariable costs are batch costs that are con- stant per batch regardless of the number of batches (Mercer Management Consulting, 2002~. Specific examples of batch costs are test animals and labor for production and testing. The remaining, variable, costs account for only 15 percent of total costs; examples of such costs are vials, stop- pers, labels, packaging, and in-source components. The costs of producing licensed vaccines have increased over the last decade as a result of several factors: mandatory removal of the mercury- containing preservative thimerosal, increased burdens associated with regulatory enforcement, a variety of improvements in vaccines that have been incorporated into existing products, both voluntary and mandated upgrading of production facilities, and increased direct provider shipment costs under new CDC contract arrangements (Hay and Zammit, 2002~. Modern vaccines are also subject to constant updating and improvement, such as new stabilizers and new production technologies, as a result of

VACCINE SUPPLY 115

116 FINANCING VACCINES IN THE 21ST CENTURY scientific advances. The MMR vaccine that is currently produced for the U.S. market is far different from the version produced in 1971, having been subject to an array of technical improvements (Arnould and DeBrock, 2002~. While the costs of producing vaccines have generally been increasing, the revenues from vaccine sales have remained relatively constant. The revenue potential of vaccines is limited by the small number of vaccina- tions usually required. Many prescription drugs are taken by patients for years; most vaccines are administered between one and four times over a lifetime. Furthermore, vaccine production costs do not necessarily decline over time. A key factor that contributes to higher production costs is the rigid batch inspection process, which makes it difficult for companies to achieve more efficiency through a learning curve and to enjoy cost reduc- tions related to process improvements (Grabowski and Vernon, 1997~. Pressures on revenues have resulted from CDC's ability to negotiate dis- counted federal contract prices, federal price caps on certain vaccines since 1993, the gradually increasing public share of vaccine purchases (at dis- counted prices), and the addition of price competition to the government contracting process. The principal exceptions to this revenue picture re- late to two fairly new vaccines varicella and pneumococcal conjugate- which are priced higher than earlier vaccines. RESEARCH AND DEVELOPMENT In 2000, the leading global vaccine companies spent about $750 mil- lion on R&D (Mercer Management Consulting, 2002~. This figure is sig- nificantly smaller than the $26.4 billion allocated to pharmaceutical R&D worldwide (Arnould and DeBrock, 2002~. The United States has been responsible for the discovery and development of two-thirds of the world's new vaccines in the last 20 years. The major contributors to vaccine re- search in the United States are companies conducting industrial research, government agencies (the National Institutes of Health [NIH] and the Department of Defense [DoD]), and the academic institutions they fund. There were 285 vaccine R&D projects ongoing in 1996 (not including HIV vaccine efforts), of which 133 were in the clinical trials phase (Grabowski and Vernon, 1997~. Mercer Management Consulting (2002) reports that this activity had increased by 2000 to nearly 350 R&D projects 188 in the pre-clinical trial phase and 158 in clinical trials. The rate of U.S. approval of vaccine licenses has also been increasing. Between 1997 and 1999, 17 new licenses were approved, compared with 8 licenses between 1990 and 1992 (Mercer Management Consulting, 2002~. A recent IOM study identifies additional vaccines that are expected to be devel- oped by 2010 (IOM, 2000b) (see Box 5-3~.

VACCINE SUPPLY 117 Industrial Research The National Vaccine Advisory Committee (NVAC) estimates that vaccine sales financed 46 percent of the $1.4 billion spent on vaccine R&D in 1995 (CDC, 1997~. Vaccine R&D is conducted by both large and small companies. Large companies spent an estimated 15 to 20 percent of their product sales about $650 million on R&D in 1995. Many small biotech- nology firms, ranging in size from 36 employees (Antex Biologics, Inc.) to over 1,600 employees (Immunex Corporation), are also involved in vac- cine research. Their total sales range as well, from $500,000 (AVAX Tech- nologies, Inc.) to almost $1 billion (Immunex Corporation). In 1995, small companies invested $250 million in vaccine R&D (CDC, 1997~. Some biotechnology firms receive funding directly from the govern- ment to develop vaccines for the military, such as vaccines against diar- rhea and gastroenteritis. Other firms are subsidiaries of larger pharma- ceutical companies or may be partially owned by another firm. Many small vaccine start-up companies receive a significant portion of their funding through venture capital (Arnould and DeBrock, 2002~. Some firms focus solely on vaccine research, while others emphasize multiple approaches to a single type of disease. Major targets of current research include respiratory diseases, viral hepatitis, sexually transmitted diseases (STDs), herpes virus diseases, parasitic diseases, fungal infec- tions, and cancer vaccines. A recent breakthrough in research on the hu- man papilloma virus (HPV) holds the promise of eliminating cervical can- cer (Schultz, 2003~. Vaccines in the pipeline, including recombinant vaccines for HIV, herpes simplex, diabetes, and infertility (see Box 5-2), are increasingly complex (Mercer Management Consulting, 2002~. One of the major areas of recent research is vaccines for STDs and vaccines that can be effective in children. Extensive effort has been fo- cused on finding a vaccine for HIV to stop the worldwide spread of the virus. Scientists have learned a great deal about how the immune system works through this research. This knowledge has spurred research on can- cer vaccines, and the market for such vaccines is projected to grow signifi- cantly through 2007. R&D projects are frequently aimed at diseases for which vaccines are not yet available (see Table 5-3~. But a substantial amount of research is also directed toward vaccines that would be improvements upon or com- binations of existing licensed vaccines, as well as directly competing vac- cines. Considerable research is also directed toward new methods for ad- ministering vaccines, such as the recently FDA-approved nasal spray form of influenza vaccine (FDA, 2003~. Despite these signs of commercial interest, product development is increasingly costly relative to the market potential of vaccines. The ab-

118 FINANCING VACCINES IN THE 21ST CENTURY sence of a market capable of supporting production costs and providing an adequate return on investment, for example, has hampered the devel- opment of vaccines for malaria and other diseases that affect primarily the developing world (Kremer, 2000b). In 2000, the Global Alliance for Vaccines and Immunization (GAVI) was founded in part to respond to the need for vaccines in developing countries. GAVI is also interested in improving technologies for administering vaccines in the difficult envi- ronments commonly found within developing countries.

VACCINE SUPPLY 119 TABLE 5-3 Deaths from Selected Diseases Not Yet Preventable by Immunization Disease Deaths (000) % AIDS 2,285 27.5 Tuberculosis 1,498 18. Malaria 1,110 13. Rotavirus 800 9.6 Shigella 600 7.2 EnterotoxicE. cold 500 6.0 Respiratory syncytial virus 160 1.9 Schistosomiasis 150 1.8 Leishmaniasis 42 0.5 Trympanosomiasis 40 0.5 Chagas disease 17 0.2 Dengue 15 0.2 Leprosy 2 0.0 Total deaths 8,319 100.0 SOURCE: Arnould and DeBrock, 2002, adapted from Kremer, 2000a. Government Support The government is involved in vaccine R&D in numerous ways. Among the federal entities supporting R&D, the most important is NIH, which is responsible for identifying and supporting the development of potential vaccines. The FDA oversees the regulatory process for bringing a new vaccine to market. The CDC is the largest single buyer and dis- tributor of vaccines in the United States. DoD conducts its own research on vaccines and supports research at academic institutions, focusing pri- marily on vaccines for military and bioterrorism applications. The U.S. Agency for International Development (USAID) has a limited role in sup- plying vaccines to other countries, largely by providing grants to institu- tions in the developing world. The government encourages investment in R&D through a combina- tion of push and pull strategies. Push programs involve the use of public resources to support research, whereas pull programs reward the devel- oper after a project has been successfully completed. The most important push strategy is funding of vaccine research by NIH, which is responsible for approximately one-third of all vaccine re- search funding (Arnould and DeBrock, 2002~. Although some NIH re- search is conducted internally, most of the work on vaccines is supported through grants to academic institutions and health-related agencies. The

20 FINANCING VACCINES IN THE 21ST CENTURY National Institute of Allergy and Infectious Diseases (NIAID) is the pri- mary vaccine research entity within NIH. NIAID funding for basic vac- cine and bioterrorism research in 2002 was $2.4 billion. NIH allocates about 60 percent of its funds to basic research, with the remainder sup- porting clinical trials. In 1988, NIH provided an estimated 14 percent of all funding for preclinical pharmaceutical R&D and 11 percent of funding for clinical trials (Arnould and DeBrock, 2002~. The most salient pull strategy employed by the government is the use of patents to protect property rights, which encourages R&D in many areas, including vaccines (Kremer, 1998~. Patents are awarded to an indi- vidual or firm that establishes legal proof of original discovery and gener- ally prohibit anyone but the patent holder from marketing the product for a period of 17 years from the patent award date. With a guaranteed period of market exclusivity, the patent holder can capture monopoly profits that subsidize the R&D costs involved in obtaining the patent and compensate for the expensive regulatory hurdles related to safety and efficacy.2 Absent patent protection, competitors would simply imitate or reverse-engineer the product without paying for the original R&D costs and charge a marginal-cost price shortly after marketing approval, eroding the originator's profits and substantially diminishing the incentives for inno- vation. Moreover, under the patent system, the monopolist is rewarded with profits in the market that are roughly proportional to market demand and societal willingness to pay. This solves the other problem involved in rewarding innovation: how the government or the public can determine or monitor what a patent is actually worth. While patent protection treats vaccines and drugs in a similar fashion, some have argued that patents are not as relevant in vaccine development (Arnould and DeBrock, 2002~. The reasoning is that other barriers to com- petitive entry such as the long production start-up cycle, the level of business risk, the monetary investment required to achieve product and plant licensure, and the steep learning curve with respect to regulatory oversight are of greater importance than patents in sustaining the pro- duction of vaccines. Further, as with pharmaceuticals, an increasingly stringent process for clinical trials and FDA approval can reduce the effective patent life of a vaccine product.3 The patent system also has economic limitations. 2Patents may sometimes be awarded for different vaccine products that are close substi- tutes, as is sometimes the case with pharmaceutical products. In these cases, monopoly prof- its may not be obtained. 3To encourage the marketing of drugs that may have been patented long before potential FDA approval, the Waxman Hatch Act guarantees a minimum of 5 years of exclusive mar- keting to the patent holder for any FDA-approved pharmaceutical.

VACCINE SUPPLY 121 Patents restrict output and raise prices, which means that some consum- ers will not benefit from vaccines that are under patent. Many patients who would be willing to pay the competitive price of vaccines, and more, will forego monopoly-priced vaccines. Another pull strategy is to subsidize or otherwise increase prices (Kremer, 2000a). The margin by which prices exceed costs including investment in R&D and production costs determines profitability, and also finances new R&D and sends a signal to the industry about future returns that can be expected from current investments (Grabowski and Vernon, 1997~. To a certain extent, the government's strategies for stimulating R&D are blunted by the length and cost of the FDA regulatory process that is designed to foster safe and effective products. Furthermore, the extent of government purchasing power in the marketplace has held prices down, reducing incentives for R&D. As noted by Kremer (2000a), even if vaccine manufacturers received full market price on every dose sold, vaccines would still remain socially undervalued; that is, the price that individual buyers in a competitive market would be willing to pay would be less than the price society would be willing to pay for the benefit derived from vaccines. INDUSTRY CONCENTRATION The rate of concentration in the vaccine industry has increased over the last four decades. Between 1966 and 1977, half of all commercial vac- cine manufacturers stopped producing vaccines; and the exodus contin- ued into the 1980s and 1990s. Between 1967 and 1980, the number of manufacturers licensed to produce vaccines for the U.S. market dropped from 26 to 17 (Cohen, 2002~. Of the nine producers leaving the U.S. mar- ket during this period, eight were domestic firms (Sing and Willian,1996~. These declines have continued in recent years. By 1996, a total of eight firms and laboratories were producing recommended childhood vaccines for the U.S. market (Sing and Willian, 1996~. In 2002, only four firms re- mained (GAO, 2002~. Similar exits have occurred among manufacturers of adult vaccines. The most recent of these was Wyeth's discontinuation of its influenza and pneumococcal polysaccharide vaccines (Wyeth Phar- maceuticals, 2002~. Three major factors influenced structural changes in the U.S. vaccine market from the mid-1960s through the early 1980s: (1) new FDA regula- tions, starting in 1972, that required evaluation of all previously licensed biological products (rather than submit data for evaluation, many firms simply withdrew from the market and requested that FDA revoke their licenses "without prejudiced; (2) growing concerns about liability; and

22 FINANCING VACCINES IN THE 21ST CENTURY (3) poor returns on investments relative to pharmaceutical and other prod- (IOM, 19931. More recent observers have ucts in the corporate portfolio cited underlying economic reasons particularly selected aspects of the cost structure of vaccine production relative to the size of the U.S. mar- ket for the small number of suppliers in the U.S. childhood vaccine mar- ket. An analysis by Grabowski and Vernon (1997) focuses on four such factors: regulatory costs, liability costs, R&D costs, and low risk-adjusted returns relative to pharmaceutical products. Other observers of the recent decline in the number of producers of U.S. childhood vaccines have cited similar factors in market departures, including new safety-related require- ments (removal of the mercury-containing preservative thimerosal), regu- latory compliance issues, and investment decisions based on the larger portfolio of parent companies (GAO, 2002; Orenstein, 2002a). The diminishing number of vaccine manufacturers has reduced the number of vaccine products within the U.S. market. Of the 146 vaccines approved since 1933, 62 were subsequently withdrawn from the market (see Table 5-4~. Some withdrawals represent replacement decisions, whereby an approved vaccine was replaced by a more effective or safer product. The diphtheria-tetanus-whole-cell pertussis (DIP) vaccine, for example, was replaced by the safer acellular pertussis version, DTaP. (Box 5-3 illustrates trends in the supply of DTaP.) Combination vaccines have also been introduced, replacing "single-indication" vaccines in vac- cination schedules. Much current R&D and product testing is directed toward expansion of combination vaccines because they generally reduce the number of doses and the administration costs of vaccination, even though they may be more expensive (Ellis and Douglas, 1994; see also Chapter 3~. What is more troubling is the effect of economic factors on the with- drawal of vaccine products that are viewed as unprofitable or yield low returns relative to the production of pharmaceutical products. In some cases, demand for older vaccines is not strong enough to warrant contin- ued production.4 Another reason for exit arises when the costs of vaccine operation and regulatory compliance are too great to support more than one producer. Often the result can be one or two suppliers, or no supplier, of the entire specific vaccine segment, as is the case with the vaccine for indicators of Lyme disease. The changing structure of the U.S. vaccine industry reflects an inter- national trend. As noted earlier, five multinational producers dominate global vaccine sales, although many small foreign producers exist as well. 4The producer of a vaccine for Lyme disease, for example, pulled out of the market be- cause of inadequate product demand.

VACCINE SUPPLY TABLE 5-4 Approved Vaccines Withdrawn from the U.S. Market 123 Company Country Name Generic Name Merck & Co. (Merck, Sharpe, and Dohme) Wyeth (Lederle) Eli Lilly Bayer Corp. (Cutter) Pfizer (Parke, Davis and Co.) Merck & Co. (Merck, Sharpe, and Dohme) Wyeth (Lederle) Bayer Corp. (Cutter) Wyeth (Lederle) Wyeth (Wyeth Laboratories) Wyeth (Wyeth-Lederle) Merck & Co. (Merck, Sharpe, and Dohme) Pfizer (Parke, Davis and Co.) Pfizer (Parke, Davis and Co.) United States United States United States Germany United States United States United States Germany United States United States United States United States United States United States Bristol-Myers Squibb (E.R. Squibb) United States Eli Lilly Merck & Co. Pfizer (Parke, Davis and Co.) Wyeth (Lederle) antitoxin Merck & Co. (Merck, Sharpe, and Dohme) Pfizer (Parke, Davis and Co.) United States United States United States United States United States United States Wyeth United States Pfizer (Parke, Davis and Co.) United States Pfizer (Parke, Davis and Co.) United States Delmont Laboratories United States Pfizer (Parke, Davis and Co.) United States Pfizer United States Pfizer United States Pfizer United States GlaxoSmithKline (Glaxo Wellcome) United Kingdom tetanus toxoid staphylococcus toxoid tetanus toxoids tetanus toxoid tetanus toxoid typhus vaccine cholera vaccine plague vaccine Rocky Mountain spotted fever vaccine smallpox vaccine (vaccinia) tetanus toxoid influenza virus vaccine influeza virus vaccine diphtheria and tetanus toxoiuds and pertussis vaccine adsorbed 6-valent pneumococcal vaccine diphtheria and tetanus toxoids diphtheria and tetanus toxoids and pertussis vaccine adsorbed diphtheria and tetanus toxoids gas gangrene polyvalent cholera vaccine diphtheria and tetanus toxoids and pertussis vaccine diphtheria toxoid adsorbed poliomyelitis vaccine adenovirus vaccine polyvalent bacterial antigens adenovirus and influenza vaccines combined aluminum phosphate adsorbed Polio vaccine, live, oral Type 1 Polio vaccine, live, oral Type 2 Polio vaccine, live, oral Type 3 BCG vaccine continued

124 TABLE 5-4 Continued FINANCING VACCINES IN THE 21ST CENTURY Company Country Name Generic Name Merck & Co. (Merck, United States typhoid vaccine Sharpe, and Dohme) Pfizer (Parke, Davis and Co.) United States diphtheria, tetanus toxoids, pertussis vaccine absorbed, poliomyelitis vaccine Merck & Co. (Merck, United States smallpox vaccine Sharpe, and Dohme) Wyeth (Lederle) United States measles vaccine Aventis (Aventis Pasteur) France smallpox vaccine Merck & Co. (Merck, United States measles-smallpox vaccine, live Sharpe, and Dohme) Wyeth (Lederle) United States typhus vaccine Wyeth (Lederle Laboratories) United States diphtheria and tetanus toxoids and pertussis vaccine adsorbed Wyeth (Wyeth Laboratories) United States diphtheria and tetanus toxoids adsorbed Wyeth (Wyeth Laboratories) United States diphtheria and tetanus toxoids adsorbed for adult use Wyeth (Wyeth Laboratories) United States diphtheria and tetanus toxoids adsorbed Wyeth (Wyeth Laboratories) United States diphtheria and tetanus toxoids adsorbed for adult use Wyeth (Wyeth Laboratories, Inc.) United States diphtheria and tetanus toxoids and pertussis vaccine adsorbed Wyeth (Lederle) United States tetanus toxoid adsorbed SOURCE: Tufts Center for the Study of Drug Development, 2002. As a result, five of the current recommended vaccines in the United States have only one producer, and the others have either two or three. Prior to the 1980s, vaccine markets had regional, not global, leaders. Pasteur- Merieux and SmithKline led the European market, Merck and Lederle- Praxis were major suppliers for the U.S. market, and three Japanese firms (Takeda, Eisai, and the Research Foundation of Osaka University) were the major suppliers for the Japanese market. By the early- to mid-199Os, global acquisitions, mergers, and joint ventures had reshaped the indus- try as a whole (Mowery and Mitchell, 1995~. The decline in the number of vaccine producers reflects the consolida- tion that is occurring within the pharmaceutical industry as a whole. But it is also driven by the decisions of pharmaceutical companies to drop vaccines from their product portfolios. A rash of such exits occurred in

VACCINE SUPPLY 125 the 1980s as a result of growing concern about liability exposure. In re- sponse, Congress passed the National Childhood Vaccine Injury Act in 1986, a no-fault damage award system designed to compensate victims who experienced adverse consequences from vaccine products, as well as to protect companies from litigation that might disrupt the production of vaccines with social benefits. Recently, litigation over thimerosal, an ethyl

26 FINANCING VACCINES IN THE 21ST CENTURY mercury-containing vaccine preservative, has raised questions about the effectiveness of the vaccine injury award system. The use of novel legal theories designed to circumvent the National Childhood Vaccine Injury Act is a source of deep concern to the industry (GlaxoSmithKline, 2002; Merck, 2002; Pisano, 2002~. The rate of exit from the vaccine industry raises two chief concerns. The most immediate of these is the lack of backup capacity should a manu- facturer experience production problems or other disruptions. When Wyeth opted out of the production of DTaP in 2000, for example, the sud- denness of the firm's withdrawal left competing firms unable to fill the gap, resulting in a 2-year shortage of the vaccine. Production efforts by other companies to compensate for such a supply disruption can take well over a year (Pisano, 2002~. Longer-term concerns include the potential for the exercise of market power by the remaining firms and the potential for the total loss of supply of a vaccine product. Industry observers have consistently issued warnings about the threats posed by the sole-supplier situation and the potential for supply interruptions given the existence of single producers of many vaccines, including 10 of the 15 recommended childhood vaccines (DeBrock and Grabowski, 1985; Arnould and DeBrock, 1993~. The number of producers continues to decline as the number of vaccines provided by a single sup- plier increases (see Table 5-5) (CDC, 2003g). REGULATION Safety review is the responsibility of the FDA's Center for Biologics Evaluation and Review (CBER). Careful monitoring for purity and qual- ity is required for vaccines, which are produced from or use living cells and organisms, as well as complex growth materials taken from living sources. Subtle changes in materials, process, or environment alter the final vaccine product and can affect its safety or effectiveness. Each batch must be carefully tested for composition and potency through a batch release process. Unlike other drugs, vaccines are used on healthy people to prevent disease; and as a result, vaccine production is subject to higher standards of safety than is the case for pharmaceuticals (Crawford, 2002~. Vaccine manufacturers have stated that while the regulatory guide- lines (Current Good Manufacturing Practices) governing the production of vaccines have not changed substantially over the last decade, signifi- cant shifts have occurred in the interpretation and intensity of enforce- ment of those guidelines by CBER (Merck, 2002; Pisano, 2002~. In a pre- sentation to the committee, one industry representative illustrated this situation using a metaphor from baseball: "It's not that the strike zone has

VACCINE SUPPLY 127 TABLE 5-5 Number of Producers of Selected Vaccines for the U.S. Market, 2003 Vaccine Number of Producers Haemophilus influenzue type b Influenza Hepatitis A Hepatitis B Diphtheria and tetanus toxoids and acellular pertussis (DTaP) Measles-mumps-rubella (MMR) Tetanus toxoid Tetanus-diphtheriaa Inactivated poliovirus Varicella (chickenpox) Pneumococcal conjugate (PCV-7) Meningococcal 1 Pneumococcal polysaccharide (adult) 1 3 2 2 2 2 1 l aA small amount of Td is produced by the Massachu- setts Public Health Biological Laboratories. SOURCE: CDC, 2003g. changed; it's the way it's called." According to the vaccine producers, the new approach to enforcement reflects limited knowledge of vaccine manufacturing processes and important differences between pharmaceu- tical and vaccine facilities. Even minor changes in packaging may require a complete product review and relicensing of a vaccine production facility. The FDA can also change requirements suddenly. Thimerosal is a good example (Freed et al., 2002b). Although levels of ethyl mercury did not exceed accepted guidelines, the FDA in 1999 required the removal or reduction of thimerosal in all pediatric vaccines. This decision necessi- tated major changes in production and bottling processes, including the replacement of multidose vials with single-dose vials that have different fill-volume requirements. Estimates of the impact of this change on prod- uct losses range from 20 to 30 percent for certain vaccines (Aventis Pas- teur, 2002~. PRICING Substantial variations occur in vaccine pricing that reflect the volume of sales and the market power of the buyer. As a general rule, most indi- vidual clinicians, clinics, and hospitals pay list price or near list price to

28 FINANCING VACCINES IN THE 21ST CENTURY purchase vaccines. Large group purchasing organizations, state consor- tia, and health plans can negotiate discounts of up to 15 percent (Mercer Management Consulting, 2000~. The federal government has historically negotiated discounts of 40- 50 percent below list price, although the discounts have been lower for the most recent vaccines. Federal contract prices averaged 75 percent less than catalog prices in 1987 and 50 percent lower in 1997 (IOM, 2000a). In contrast, discounts for varicella and pneumococcal conjugate vaccines were 9 and 22 percent, respectively, in 2002 (Orenstein, 2002b). Box 5-4 presents details on the vaccine purchasing practices of the Veterans Ad- ministration and DoD. The committee identified two significant concerns with regard to vac- cine prices. First, as noted earlier, the prices of new vaccines are very high relative to those of older vaccines, and these higher prices present signifi- cant problems for federal and state health budgets, clinicians, and con- sumers. Immunization rates may decrease when costs become too bur- densome to the payor. The second concern is that some vaccine prices are too low and do not encourage desirable levels of investment in R&D and production capacity. Federal contracts for several vaccines are subject to price caps that have held price increases to no more than the rate of infla- tion since 1994. The price cap has been cited in particular as the major obstacle to the negotiation of a government contract for the tetanus toxoid vaccine. Detailed historical prices are shown in Table 5-6; trends in vac- cine prices in current (2002) dollars are illustrated in Figure 5-1. Vaccine price trends fall into four distinct periods.5 Up to and during most of the 1970s, vaccine prices were comparatively low and stable. Prices even decreased slightly for many vaccines during the 1970s. The second period began in 1982, when prices increased sharply and continued to rise until the early 1990s. For example, an increase of 2,847 percent in the price of DTP occurred during the 15-year period 1977-1991 (IOM, 1993~. The third period occurred during the 1990s, when prices tended to be stable and in some cases declined. However, new vaccines appeared on the market, in some cases (e.g., inactivated poliovirus [IPV] and DTaP) replacing older vaccines at higher prices. For example, the DTaP contract price of $11.01 in 1992 was almost double the DTP price of $5.99. The fourth period, characterized by the introduction of new vaccines at dramatically higher prices, began in the mid-199Os with the release of the varicella vaccine at a federal contract price of $32.70 per dose. This new pricing model continued with the introduction in 2000 of the new 5This discussion is based on price data supplied by CDC (20021; 2003d).

VACCINE SUPPLY 129

130 FINANCING VACCINES IN THE 21ST CENTURY TABLE 5-6 Federal and Private Prices of Vaccines Per Dose, 1983-2002 (nominal prices, excise taxes excluded) Td Hib Hepatitis B Hepatitis Year Federal Private Federal Private Federal Private Federal 1983 1984 0.08 1985 0.08 1986 0.08 1987 0.08 1988 0.15 11.00 13.75 1989 0.09 6.00 13.75 1990 0.81 4.80 14.55 7.66 1991 0.09 5.16 14.55 7.43 1992 0.12 5.34 15.28 7.13 1993 0.11 0.83 5.32 14.82 7.11 1994 0.13 1.00 4.20 15.25 7.34 16.17 1995 0.13 1.00 4.76 15.13 7.68 17.09 11.17 1996 0.13 1.00 4.98 15.13 7.91 17.59 11.15 1997 0.13 NA 4.55 14.07 8.06 16.84 11.08 1998 0.14 1.00 4.73 15.40 8.36 20.09 11.75 1999 No contract 2.50 4.36 15.67 8.25 23.74 11.18 2000 No contract NA 4.45 15.67 8.27 24.42 11.15 2001 No contract NA 5.19 15.67 8.25 21.54 11.15 2002 No contract NA 6.70 15.67 8.55 21.54 11.15 2003 No contract NA 7.76 18.98 8.5 22.95 11.28 pediatric pneumococcal vaccine at $43.50 per dose (the list price was $58.00~. Prices of older vaccines, on the other hand, have remained stable, despite considerable new investment in upgrading of facilities and the removal of thimerosal. However, the recent stability of pricing for older vaccines may be disrupted by the development of new combinations of individual vaccines and of existing vaccine combinations. For example, GlaxoSmithKline recently received approval for its DTaP-IPV-Hepatitis B combination. The initial list price of this new vaccine is only a few dol- lars higher than the sum of the prices of the separate vaccines, but the long-term pricing strategy for such new combinations is not yet clear. The increase in the public share of vaccine purchases also affects prices. Because of deep government discounts, the expanding public mar- ket for vaccines results in lower average prices for their manufacturers. In addition, when contracting for the purchase of vaccines, the Veterans Administration (VA) penalizes firms for increasing prices charged to its nongovernment customers. For any increase in price higher than the con-

VACCINE SUPPLY 3-2002 131 Pneumococcal Hepatitis A Varicella PCV-7 Conjugate late Federal Private Federal Private Federal Private Federal Private 3.24 NA 2.94 NA 2.94 NA 2.94 NA 2.92 NA 3.21 NA 3.37 10.03 3.35 7.66 L7 3.24 8.17 )9 11.17 11.17 No contract 8.17 ;9 11.15 28.45 32.70 41.41 No contract 8.17 34 11.08 28.45 33.65 40.66 3.72 9.12 )9 11.75 24.49 33.65 40.98 3.80 9.57 74 11.18 25.17 34.66 43.51 5.46a NA L2 11.15 27.45 36.39 44.81 44.02 58.00 5.61a NA ;4 11.15 27.45 38.39 44.81 45.24 58.00 No contract NA ;4 11.15 NA 40.69 44.81 45.24 58.00 No contract NA 35 11.28 29.68 43.33 57.36 47.5 58.75 No contract NA continued sumer price index, the VA reduces the allowable Federal Supply Schedule (FSS) price that can be paid under federal contract. This practice has re- sulted in FFS vaccine prices as low as $0.01 per dose. SHORTAGES Over the past 20 years, the nation has experienced two major periods of vaccine supply shortages. The first was related to the product liability crisis of the mid-1980s, when production of DIP vaccine was curtailed as a result of manufacturers leaving the U.S. market. The second period of supply shortages lasted from fall 2000 to summer 2002. During this pe- riod, the United States experienced nationwide shortages of five child- hood vaccines that protect against eight of the eleven childhood diseases prevented through routine immunization (GAO, 2002) (see Table 5-7~. The recent shortages affected most of the manufacturers of childhood vaccines,

132 TABLE 5-6 Continued FINANCING VACCINES IN THE 21ST CENTURY MMR OPV IPV DTP Year Federal Private Federal Private Federal Private Federal 1983 4.70 11.30 0.58 3.56 0.42 1984 5.40 12.08 0.73 4.60 0.65 1985 6.85 13.53 0.86 6.15 2.21 1986 8.47 15.15 1.68 8.67 3.01 1987 6.32 17.88 1.14 8.07 3.13 1988 12.23 19.67 1.07 7.78 3.90 1989 12.23 19.67 1.63 9.11 3.40 1990 10.27 19.63 1.63 9.45 2.35 1991 10.89 20.85 1.71 9.11 1.69 1992 10.89 20.85 1.80 9.62 7.30 NA 1.43 1993 10.89 16.41 1.87 9.85 7.52 14.38 1.33 1994 11.25 20.85 1.92 10.18 7.48 14.67 1.41 1995 11.56 21.43 1.98 10.18 4.99 14.67 Replaced 1996 11.87 25.56 2.03 10.18 5.20 14.67 1997 12.12 27.75 2.08 10.18 5.46 14.67 1998 12.33 23.33 2.11 10.18 5.79 14.67 1999 12.44 25.21 2.15 10.18 6.04 14.67 2000 12.83 25.94 Replaced by IPV 7.00 14.67 2001 13.28 25.94 7.50 14.67 2002 13.39 25.94 8.05 14.67 2003 13.74 32.48 9.21 21.78 NA = Not Available aAdult vaccine only, since there was no contract for the childhood vaccine because of the price cap. NOTE: All prices represent the lowest-price packaging option for each supplier. For 1992 with three of the four experiencing supply problems during the period (Orenstein, 2002b). Supply problems were especially severe for vaccines that are in con- tinuous demand, such as those for tetanus and influenza. In March 2000, there were two major producers of tetanus vaccine in the United States- Aventis Pasteur and Wyeth-Ayerst and no shortages. By early lanuary 2001, Wyeth had ceased production of the vaccine, leaving Aventis as the only suppliers Aventis could not scale production up rapidly enough to 6Brichacek (2001) indicates that the Wyeth pullout from manufacturing the tetanus vac- cine may have been related to a June 2000 issue with the FDA concerning acellular pertussis vaccine.

VACCINE SUPPLY 133 DTP DTaP Influenza late Federal Private Federal Private Federal Private 0.42 0.45 0.65 0.99 2.21 2.80 3.01 11.40 3.13 8.92 3.90 6.47 3.40 6.09 2.35 6.09 1.69 5.41 1.03 NA 1.43 5.41 6.45 No contract 1.82 ;8 1.33 5.48 5.37 6.97 No contract 1.82 '7 1.41 NA 5.42 11.53 No contract NA '7 Replaced by DTaP 5.71 11.27 1.72 NA '7 9.50 11.27 1.53 NA '7 8.28 14.63 1.61 NA '7 7.05 14.69 1.54 2.15 '7 7.00 14.69 2.14 2.15 '7 7.00 14.72 2.37 NA '7 8.34 15.33 4.41 NA '7 9.87 15.56 5.53 5.00 78 10.31 17.40 5.53 6.50 and later, prices indicated are weighted averages based on the number of doses ordered at each price (calculations by the IOM committee). Previous years' averages supplied by CDC. SOURCE: CDC, 20021, 2003d. meet demand and was forced to ration supply (Arnould and DeBrock, 2002~. Several of these shortages were severe enough that the Advisory Com- mittee on Immunization Practices (ACIP) recommended suspension of booster doses for tetanus-diphtheria (Td), DTaP, and pneumococcal con- jugate. Shortages were most severe for Td and pneumococcal conjugate, for which there was a 40 percent shortfall in doses shipped. Shipments of varicella decreased by 26 to 29 percent. The stockpile of MMR was drawn down by 700,000 doses, but shipments were still off by 15 percent (Orenstein, 2002a). There were delays in adult influenza vaccine in the two previous seasons, and severe shortages of tetanus toxoid affected the availability of doses for adult boosters and emergency use. By fuly 2002, these shortages, with the exception of pneumococcal conjugate, had

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VACCINE SUPPLY TABLE 5-7 Vaccine Supply Status in 2001-2002 135 Supply Problems No Supply Problems · Tetanus-diphtheria · DTaP · MMR · Varicella (chickenpox) . Pneumococcal 7 valent (PCV- 7) Haemophilus influenzue type b (Hib) Hepatitis B IPV Hepatitis A Meningococcal polysaccharide Influenza Adult pneumococcal SOURCE: Orenstein, 2002c. ended; supplies of pneumococcal conjugate vaccine are expected to re- turn to normal in 2003 (CDC, 2003h). No reports of regional outbreaks of preventable infectious diseases occurred during this period of vaccine shortages. However, shortages place stress on the fragile public-private partnership that delivers vac- cines to the public. Public compliance with the recommended schedule can be threatened by the lack of vaccines and sudden changes in the sched- ule resulting from shortages. CDC reports that, as a result of the tetanus vaccine shortage, 52 percent of states suspended school immunization laws (Orenstein, 2002a). Given the recent intensity of antivaccine rhetoric, school administrators find themselves in an uncomfortable role as en- forcers of laws that they themselves may not adequately understand. In a recent poll of school nurses, the majority of respondents indicated their belief that children may be receiving too many vaccines (Lett,2002~. These trends may make it difficult to reinstate school laws that are suspended as a result of shortages. It is too soon to determine whether the recent shortages were a one- time event or an early sign of a recurring pattern. An important structural risk factor in supply disruption the limited number of suppliers has not changed. With only four suppliers for all universal childhood vac- cines and monopoly suppliers of four of those vaccines, the United States remains highly vulnerable to disruptions in manufacturer production. Vaccine shortages appear to result from specific and apparently unre- lated causes rather than a single overriding factor (GAO, 2002; NVAC, 2003) (see Table 5-8~. Vaccines affected by the shortages are both new, such as pneumococcal conjugate, and long-standing, such as MMR; and shortages have affected both sole-supplier and multiple-supplier vaccines. Some explanations for the shortages that have been advanced by the in- dustry include problems associated with removing thimerosal from the production process, compliance with increasingly stringent Current Good

136 FINANCING VACCINES IN THE 21ST CENTURY TABLE 5-8 Vaccine Shortages and Their Causes Vaccine Immediate Cause of Shortage Shortage Period DTaP Two producers withdrew in 2000: Baxter 4th quarter 2000 to acquired North American Vaccine and 3rd quarter 2002 withdrew its DTaP product. Wyeth withdrew as of January 2001. The two remaining suppliers, GSK and AvP, had insufficient capacity to supply full demand. AvP experienced production slowdowns due to the removal of thimerosal. Td In January 2000, Wyeth withdrew from 4th quarter 2000 to production of tetanus vaccine. 3rd quarter 2002 MMR Merck, the sole producer, interrupted January 2001 to production to address issues related to July 2002 Current Good Manufacturing Practices. 700,000 doses were borrowed from the stockpile. Varicella Production ceased from September 2001 to 4th quarter 2001 to November 2001 because of scheduled 2nd quarter 2002 modifications to production facilities, which took longer than expected. Pneumococcal Unexpectedly strong demand overwhelmed October 2001 to conjugate supply, combined with a January 2002 present production bottleneck. Influenza Multiple manufacturers had difficulty growing one of the flu strains, combined with increased demand due to a recommendation change (reduction in the age of the primary target group from 65 to 50) and quality control issues at Parkdale and Wyeth. 2000-2001 flu season Vaccine production was delayed; only two-thirds 2001-2002 of the supply was available by October. flu season SOURCES: DTaP and Td: Fine, 2003; other: Mason, 2002. Manufacturing Practices, disruptions due to plant renovations, unantici- pated high demand for new vaccines, and sudden withdrawals from the market by producers. The FDA licensure process may create a structural barrier to rapid adjustment of output to address sudden shortfalls in sup- plies. The agency's requirement for full-scale production capacity before

VACCINE SUPPLY 137 licensure is granted may tend to fix minimal excess capacity at start-up. Combined with the stringent entry requirements and lead times for licen- sure, little flexibility to adjust production remains (Arnould and DeBrock, 2002~. There is also evidence that other developed countries, while not experiencing the critical shortages of the United States, are characterized by capacity constraints that could lead to shortages (Mercer Management Consulting, 2002~. Some have sought a relationship between vaccine pricing and short- ages (Orenstein, 2002c). As shown in Table 5-9, however, short-run corre- lations between vaccine prices and shortages are not apparent. Prices for vaccines with supply problems are generally higher than those for vac- cines without such problems. A more meaningful relationship would in- volve profit margins, yet even this relationship may be confounded by other variables. STOCKPILES The vaccine stockpile program consists of an inventory system of stor- age and rotation contracts negotiated with manufacturers. Initiated in 1983 to establish a 6-month strategic reserve of each universally recommended vaccine, the program was initially funded with Section 317 funds. By 1988, stockpiles had been developed for six important vaccines and combina- tions (DTP, tetanus toxoid [TT], Td, oral poliovirus [OPV], IPV, and MMR). The Omnibus Budget Reconciliation Act (OBRA) of 1993 allowed VFC federal entitlement funds to be used for stockpile purchases, but ap- proval from the Office of Management and Budget (OMB) is required for this purpose. CDC began to target purchases toward vaccines with sole suppliers to minimize financial risk. Multiple withdrawals from the stock- piles occurred between 1984 and 2002, mainly as a result of temporary TABLE 5-9 Vaccines With and Without Supply Problems (2002) With Supply Problems Without Supply Problems Contract Catalog Contract Catalog Vaccine Price Price Vaccine Price Price Td a $7.50 avg. state IPV $8.25 $15.42 DTaP $10.58-$10.65 $17.12 Hib $5.75-$8.00 $15.25-$18.95 MMR $15.53 $28.35 Hep. B $9.00 $21.40-$24.20 Varicella $39.14 $49.13 PCV-7 $45.99 $58.75 aPrice capped at $0.144; no contract could be negotiated. SOURCE: Orenstein, 2002c.

138 FINANCING VACCINES IN THE 21ST CENTURY manufacturing problems. The most recent drawdown was 700,000 units of MMR in 2001 (see the discussion of shortages, above). Of ten vaccines that CDC has targeted for stockpiling, only three were stockpiled in 2002 (Lane, 2002~. Building up the stockpiles to full strength and possibly increasing their capacity could help alleviate the shortages discussed earlier (GAO, 2002~. Rebuilding the stockpiles would require substantial investment and OMB clearance. GAO has also recommended legislation that could autho- rize the use of VFC stockpiles for non-VFC-eligible recipients in cases of national shortage. But even at full strength, the stockpile program pro- vides only a temporary buffer in cases of serious supply disruption. Given the time required for licensing a new facility and ramping up production, the stockpiles would be inadequate in the face of a total manufacturer withdrawal. No government contingency plan exists for this prospect. Stockpiles are also costly. Moreover CDC has been conservative about developing stockpiles to minimize financial risk from, for example, a change in vaccine recommendations that could render a stockpile useless. Examples of such changes include the switch from OPV to IPV, the elimi- nation of thimerosal from certain vaccines, and the future replacement of individual and exisiting combination vaccines with new combinations. CDC CONTRACTING Each year, CDC negotiates a federal contract for the purchase of ACIP- recommended childhood vaccines. CDC does not directly purchase vac- cines; state and local grantees are each given a vaccine budget for the purchase of vaccines at the negotiated contract prices. With that budget, states can purchase, store, and redistribute these vaccines from their own depots or through contracts with pharmaceutical distribution companies. Some states allow clinicians to choose among competing vaccine prod- ucts. States can also purchase vaccines under the CDC contract for non- VFC vaccines for other federally authorized state programs. Of the 52 per- cent of vaccines purchased under the federal contact, 35 percent are for the VFC program, while the remaining 17 percent are purchased by states using both Section 317 funding (10 percent) and state funds (7 percent) (Orenstein, 2002b). Several factors in addition to negotiating leverage determine the con- tract prices. For some vaccines (OPV, IPV, Haemophilus influenza type b, Hib, MMR, DTP, DTaP, Td, adult pneumococcal, and hepatitis B), there are statutory price caps that were imposed at the time VFC was enacted to prevent rapid escalation of prices. The price caps hold vaccines to their price on May 1,1993, plus an annual inflation adjustment. DTaP and hepa- titis B are no longer subject to the cap. Vaccines that were approved after

VACCINE SUPPLY 139 the enactment of the VFC program have never been subject to a cap. These include hepatitis A, influenza, varicella, and pneumococcal conjugate (CDC, 2002m). Vaccine companies do not always bid the maximum price of the cap. For example, Merck has always bid the maximum for MMR, while Aventis Pasteur has consistently bid below the cap for IPV, despite its monopoly on that product (CDC, 2002m). CDC has also introduced competition into the contract design. The original "winner take all" contracts were initially replaced with a mul- tiple-supplier contract that guaranteed the largest market share to the low- est bidder (all Section 317 and half of VFC purchases). In 1998, CDC intro- duced the current competitive approach, under which states can purchase from the supplier of their choice at the federal contract price. Manufactur- ers can attempt to increase their market share by lowering their price sev- eral times during the contract period. Private-sector buyers purchase vaccines through both wholesale dis- tributors and direct customer sales. Clinicians typically pay high prices to distributors, but they are able to make small purchases when needed and benefit from business relationships with local distributors (Mercer Man- agement Consulting, 1995~. In contrast with childhood vaccines, the public sector purchases a very limited share of adult vaccines. For example, only about 2 percent of the 90 million doses of trivalent influenza vaccine sold in the United States in a single year is purchased through federal contracts Johnson, 2002~. The two U.S.-based manufacturers of influenza vaccine emphasize direct sales to end users instead of to distributors.7 The third manufacturer is based in the United Kingdom and relies on U.S. distributors. Also, bulk-purchase arrangements are common with adult vaccines. Many employers offer mass vaccination services in the workplace. One large mass vaccinator recently reported administering over 1 million doses during the 2001- 2002 influenza season. Premier, a group purchasing association represent- ing about one-third of the hospital beds in the United States, contracts for several million doses of influenza vaccine for its members each year (CDC, 2002n). BARRIERS TO A WELL-FUNCTIONING VACCINE SUPPLY SYSTEM This chapter has identified a number of barriers to a well-functioning vaccine supply system. These barriers are reviewed in turn below. 70ne of the two domestic producers recently dropped out of the influenza vaccine market.

140 FINANCING VACCINES IN THE 21ST CENTURY Exit and Concentration Concerns about the possibility of a total loss of supply of a critical vaccine are widespread. These concerns have spawned national debate and research on the reasons for the apparent fragility of vaccine supplies. For example, NVAC has held numerous discussions of and recently re- leased a report on vaccine supply (NVAC, 2003~. The Council of the IOM also issued a statement in 2001 calling for the creation of a national vac- cine authority to address this problem (IOM, 2001~. However, exit of manufacturers from vaccine production and the re- sultant concentration of supply cannot, by themselves, be considered a system failure. For example, substantial economies of scale combined with a limited U.S. market may mean that only one efficient producer can sur- vive for each vaccine. But recent vaccine shortages suggest that the indus- try may not be able to produce a stable supply under current conditions. Research and Development Maintaining a vital R&D enterprise has been a cornerstone of U.S. vaccine policy and the basis for patent regulations and NIH research fund- ing. Yet research has suggested that significant disparities exist between private incentives to invest in R&D and the social benefits of vaccines (Kremer, 2000a,b). Additional public support may be necessary to address these disparities if the full potential of vaccines as valuable tools of dis- ease prevention is to be achieved. As Kremer further points out, however, R&D depends on the expectation of firms that they will be adequately rewarded for their investment. Too many aspects of vaccine policy in the United States including government pricing polices, licensure require- ments, and regulation send negative signals to companies. While regu- lation and reasonable pricing are each important, achieving national policy goals requires that they be balanced and coordinated. There are many indications that the opposite is in fact the case. Barriers to Entry Perhaps the most important long-run solution to the fragility of vac- cine supplies is to ensure that multiple companies have access to the U.S. market. Although a large number of small domestic R&D firms and for- eign companies have applications pending for vaccine licenses in the United States, regulatory and cost barriers may inhibit the entry of many of these producers. For example, a company that has had a successful vaccine product in use for many years in Europe and Canada must con- duct full clinical trials as part of its U.S. license application rather than

VACCINE SUPPLY 141 drawing on efficacy and safety data from its current product experience. GAO (2002) has recommended expedited FDA review procedures. Imple- menting this recommendation would accelerate approval of new and com- petitive vaccines in the case of shortages and also reduce the total cost of bringing a vaccine to market. Regulation FDA product and facility regulations are important to the safety of the vaccine supply and the viability of the industry. According to industry experts, however, the impact of regulation has been costly, without clear evidence of corresponding improvements in quality (GlaxoSmithKline, 2002; Merck, 2002~. A government planning authority does not exist at a high enough level that can balance national objectives of safety, as em- bodied in the FDA's regulation of production, and availability, which depends in part on the regulatory burden faced by vaccine producers. Undervaluation of Vaccines Industry representatives frequently allude to the role of federal pric- ing policies as evidence of the undervaluation of vaccines. They suggest that the elimination of vaccine-preventable diseases has reduced the per- ceived threat of those illnesses and also decreased the perceived value of vaccines. Although substantial research has demonstrated the social ben- efits of vaccines, economic analysis suggests that vaccines are persistently undervalued (IOM, 2000b; Kremer, 2000a). The increased costs of newer vaccines such as pneumococcal conjugate at $176,000 per quality-ad- justed life-year saved has changed the picture dramatically. As a result, it is no longer possible to generalize across all vaccines in discussing so- cial valuation. Several proposals have been offered to reduce the gap between the social value and price of vaccines. McGuire (2003) proposes a method for setting an administered price of a vaccine according to its social benefit (see Box 6-2 in Chapter 6~. In McGuire's formulation, a preset price is determined that maximizes consumer surplus subject to profit maximiza- tion of the producing firm, based on an estimate of the social benefit of the vaccine. Putting this approach into practice would depend on the exist- ence of estimates of the average benefit of a vaccine. A recent IOM report (IOM, 2000b) presents a cost-effectiveness analysis of 26 candidate vac- cines, applying a common analytical framework for measuring the costs and effects of vaccine development and administration. Other authors have used a similar framework. Kremer (2000a) estimates that in the developing world, a vaccine against malaria would be cost-effective at

42 FINANCING VACCINES IN THE 21ST CENTURY $41 per dose; but that under the current purchasing system for develop- ing countries, producers would probably receive only around $2 per dose, which is too low to stimulate appropriate investment. On the other hand, it is clear that the prices of newer vaccines, such as pneumococcal conjugate and varicella, are considerably higher than those of their predecessors. This situation may reflect higher costs, higher prof- its, or both. Given the vaccine industry's recent pricing trends, under- valuation is a phenomenon that applies principally to older, routine vac- cines. FINDINGS The amount that the nation spends on vaccines appears to be insig- nificant compared with that spent on other medical and social interven- tions that may have lesser social benefits. While federal and state govern- ments must address the vaccine line item as an expense to be managed, a commitment of resources substantially higher than current levels may be justified to address persistent breakdowns in the vaccine system. The relationship between financial returns to the vaccine industry and future investment in production capacity and R&D is a fundamental con- cern addressed by this study. While proprietary industry information was not available to the committee, a large body of indirect and secondary evidence suggests that high development and production costs and stable revenues have constrained investments in new products within the vac- cine industry as a whole. While many new candidate vaccines are in early stages of development, the overall level of investment in vaccine products is too low to support the level of R&D that is desirable in light of the social benefits of immunization. The committee finds that · The U.S. vaccine market is small relative to total expenditures on personal health services and pharmaceuticals. The entire global market for vaccines is roughly equivalent to the sales of certain individual block- buster drugs. · The supply of U.S. vaccines is becoming highly concentrated, re- sulting in limited backup capacity in the event of supply disruptions. · Inadequate build-up of vaccine stockpiles has limited their reme- dial effect on recent shortages. The development of 6-month stockpiles would help avert short-term disruptions in supply but would not address more fundamental concerns, such as the continuing loss of suppliers from the industry. · The risks and costs to manufacturers associated with vaccine pro- duction have increased. Key factors include regulation, removal of the preservative thimerosal, and an increase in vaccine injury lawsuits.

VACCINE SUPPLY 143 · FDA resources for vaccine regulation have not kept pace with the growth and complexity of vaccine products. FDA regulation has shifted from a focus on science to a focus on enforcement. This shift may increase the risks and costs associated with vaccine production without increasing safety. · The pace of vaccine R&D, particularly in the discovery stage, is currently high, but commercial development is impeded by pricing and industry returns. Investment in production capacity for existing vaccines is especially problematic. · FDA licensure requirements including the increasing size of clini- cal trials, the requirement that companies build full production capacity before licensure, and the inadmissibility of clinical data from outside the United States for U.S. licensure create substantial barriers to entry. · The requirement for building full plant capacity in advance of ap- proval may limit fixed capacity and increase the chances of shortages. · Vaccine company investments in R&D on new vaccines are sensi- tive to prices and expected returns on investment. Ensuring socially de- sirable levels of R&D may necessitate prices that are substantially higher than current prices for most routine childhood vaccines. · By using its bargaining power to achieve substantial discounts in federal contracts, CDC may substantially undervalue vaccines and reduce industry incentives for investment in both R&D and short-run production capacity.

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The national immunization system has achieved high levels of immunization, particularly for children. However, this system faces difficult challenges for the future. Significant disparities remain in assuring access to recommended vaccines across geographic and demographic populations. These disparities result, in part, from fragmented public–private financing in which a large number of children and adults face limited access to immunization services. Access for adults lags well behind that of children, and rates of immunizations for those who are especially vulnerable because of chronic health conditions such as diabetes or heart and lung disease, remain low.

Financing Vaccines in the 21st Century: Assuring Access and Availability addresses these challenges by proposing new strategies for assuring access to vaccines and sustaining the supply of current and future vaccines. The book recommends changes to the Advisory Committee on Immunization Practices (ACIP)-the entity that currently recommends vaccines-and calls for a series of public meetings, a post-implementation evaluation study, and development of a research agenda to facilitate implementation of the plan.

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