A Descriptive Analysis of the Supply of Vaccines

1
A Descriptive Analysis of the Supply of Vaccines

• By
• Richard J Arnould
• Emeritus Professor
• And
• Larry DeBrock
• Professor of Economics
• University of Illinois-Urbana-Champaign

2
Background and Motivation

• NAS-CDC STUDY
• CONCENTRATE ON CHILDHOOD VACCINES
• SHORTAGES AND SUPPLY INTERRUPTIONS
• DESCRIPTIVE
• TRADITIONAL IO
• Describe structuregood data
• Construct and test explanatory hypotheseslimited
  data
• Antidotal Evidence
• Speculation

3
Outline

• OVERVIEW OF VACCINE MARKETS
• INTERNATIONAL MARKETS
• DEMAND CONDITIONS
• DELIVERY AND PRICING SYSTEMS
• R D
• FACTORS RESPONSIBLE FOR STRUCTURE

4
Supply Interruptions

• SOLE SUPPLIERS
• RECENT FLU VACCINES 2004 (Contaminated
  Production)
• 2000-2001
• Tetnus
• MMR
• Varicella
• Pneumococcal Conjugate
• May 2002
• DtaP
• Td
• MMR
• Varicella
• PCV
• July 2002
• Hib

5
Vaccine Market

• COLLECTION OF MARKETSNO SUBSTITUTION
• SMALL AND STABLE DEMAND-BIOLOGICS
• 4 BILLION WORLDWIDE
• 2 OF WORLDWIDE PHARMACEUTICAL MARKET
• FROM BEGINNING UNTIL 19855 CHILDHOOD
  VACCINESCURRENTLY 13.

PRODUCTION IN THE US
6
U.S. Vaccines by Number of Licensed Producers
7
Exit from / Entry into Industry

• EXIT
• SINCE 1933146 VACCINES APPROVED IN US
• 62 WITHDRAWN
• REASONS
• BETTER VACCINE DEVELOPED
• ECONOMICMORE LATER
• ENTRY
• 1990S
• 139 NEW APPROVALS
• 2 PER YEAR (GROSS)
• MANY PRIOR APPROVALS IN OTHER COUNTRIES

8
Demand

• STABLECLOSELY RELATED TO BIRTH RATE 11,000/DAY
• Flu-closely related to predicted
  subpopulationsinfants elderly
• 1994-2002--1 BILLION TO 4 BILLION

9
Reasons for Growth

• SAFER VACCINES
• NEW VACCINES EASIER TO ADMINISTER
• NUMBER OF REQUIRED VACCINES/DOSES
• INCREASED COVERAGE

10
Delivery

• THREE TIERPRICE DISCRIMINATION/BARGAINING POWER
• GOVERNMENTCDC, VFC, NIH, DOD, STATES, OTHER
• HMOS
• SMALL PRIVATE
• EXAMPLE OF PRICES OF DTP
• SMALL PRIVATE--5.54
• GOVERNMENT--1.40

11
State Policies

• UNIVERSAL POLICY
• VFC AND UNINSURED
• PUBLIC PURCHASE TO PRIVATE PROVIDERS
• MUCH GROWTH IN LOW PRICE GOVERNMENT PURCHASES

12
RD Activity

• MUCH ACTIVITY
• 2000 350 R D PROJECTS
• 188 PRE CLINICAL
• 158 CLINICAL TRIALS
• 1997 1.4 BILLION SPENT IN US
• 46 FINANCED BY VACCINE SALES
• SPONSORS
• GOVERNMENT
• ACADEMIC INSTITUTIONS
• LARGE SUPPLIERS
• SMALL BIOTECH COMPANIES

13
Reasons for Small Number of Suppliers

• HIGH FIXED COSTSVC 10-15 TC
• ESTIMATED TOTAL COST OF NCE 300M 11 YRS
  NEGATIVE CASH FLOW (GRABOWSKI AND VERNON, 1997)
• VACCINES MORE COSTLY TO DEVELOP
• PRODUCT LICENSE
• ESTABLISHMENT LICENSE
• Batch Testing
• COSTS AND ENTRY-High cost-limited entry
• LIFE CYCLE
• R DNUMEROUS FIRMS
• PRODUCTION AND DISTRIBUTION
• INITIALLY 3-5
• MATURE 1-2
• SMALL MARKETS RELATIVE TO ECONOMIES OF SCALE
• LITTLE INCENTIVE FOR ENTRY IF FIRM IS NOT IT THE
  INITIAL RACE

14
ROI

• US MARKET SMALL
• MARKET FOR PRILOSEC LARGER THAN ENTIRE VACCINE
  MARKET
• MODEST GROWTH
• NEW PRODUCTS/NEW PACKAGING PRICING/REGULATORY/LIAB
  ILITY
• HIGH LIABILITY COSTSNational Childhood Vaccine
  Injury Compensation Act (1986)

15
Pricing and ROI

• LOW PRICES
• PRICE DISCRIMINATION
• GOOD CITIZEN
• CONTRIBUTION TO MARGIN 44
• (COMPARED TO 46 FOR OTHER PHARMEUCITALS, MERCER)
• VACCINES MORE CAPITAL INTENSIVE
• ROYALTY PAYMENTS TO BIOTECHS
• (15 FOR HepBMercer)
• ROI STABLE TO INCREASING OVER PAST DECADE
• (GRABOWSKI AND VERNON)

16
Conclusions

• COST STRUCTURE CONSISTENT WITH MONOPOLY OR
  DUOPOLY
• LOW RETURNS RELATIVE TO OTHER PHARMACEUTALS
  EXPLAINS EXIT PATTERN
• MORE GOVERNMENT PURCHASES COULD RESULT IN LESS
  PRIVATELY FUNDED R D.
• LIKIHOOD OF MORE PRODUCERS
• EXPAND GLOBAL MARKETS
• REDUCE REGULATORY COSTS
• REDUCE LIABILITY COSTS