Cafe Hayek: The Cause of the Vaccine Shortage?

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October 17, 2004

The Cause of the Vaccine Shortage?

Russell Roberts

The Washington Post has a front page story on why there are only two pharmaceutical companies making vaccines. The starts by mentioning Wyeth Pharamceuticals, a company that dropped out last year when it found itself throwing out 7 million vaccines that went unsold.

So the first reason for why the vaccine business is so unattractive is that sometime you can't sell everything you make. That would suggest that there should only be a handful of bakeries in America and flower vendors and sellers of fish, three examples of many where it's hard to sell your product if demand falls short of expectations. Yet these industries are thriving.

The company's exit is part of a long, slow industry-wide flight away from flu vaccine, which has simply become more trouble than it's worth.
"It shouldn't be surprising to anybody," said Gregory A. Poland, director of the vaccine research group at the Mayo Clinic, in Minnesota. "In fact, I marvel that there are companies willing to stay in the business."

Even under the best circumstances, vaccines have never been very attractive investments. The global market for them is about $6 billion a year, compared with $340 billion for drugs. Thirty years ago, more than a dozen companies made flu shots. Five years ago, the number was down to four.

So it's a small market. That's reason number two. But for some reason, there were over a dozen firms in this small market before. Even a few years ago, there were four. And who wouldn't want to split or dominate a $6 billion market. There are only two producers of flu vaccine left. What's happening?

The articles goes on to explain that making flu vaccine is complicated because there's uncertainty:

Besides being contagious and deadly, flu virus mutates easily. Each winter gives the microbe a new opportunity to infect humans with slightly different versions of itself. These opportunities are augmented by the fact that three types of virus -- two influenza A strains and one B strain -- are circulating to one degree or another at all times.

The vaccine is made of a weakened strain of virus of each type. Generally, at least one strain each year undergoes so much mutation that it needs to be replaced by an "updated" version in the next year's vaccine. Consequently, a new flu vaccine formula has to be drawn up each year.

That's just one reason flu vaccine isn't very popular with vaccine makers. There are others.

That's three reasons and counting. Here's another.

For more than 40 years, flu vaccine has been made by injecting virus into fertilized chicken eggs. It's no accident that Wyeth's shuttered plant, and Aventis's operating one, are both in Pennsylvania, the state with the third-largest egg production in the country. Each egg must be hand-inspected and hand-injected. One egg grows enough virus for 4 or 5 doses of vaccine. Millions are needed. The final shot is three vaccines packaged as one: two strains of influenza A and one of B.

Each round of production using this old-fashioned technology is known as a "campaign." The name is well-chosen. They have some of the risk, time pressure and uncertainty of political races and military attacks.

So reason number four is that it's complicated because the production process itself is complex.

We're now a little over halfway through the article and we have four reasons for why so many producers have exited the market. But all of these reasons were there five years ago when there were four producers and I'd guess that most or all of them were there 30 years ago when there were over a dozen producers. None of the reasons given have anything to do with anything that's changed recently that has made vaccine production increasingly less attractive.

Here comes reason number five:

The uncertainty, though, isn't just at the production end. It is also in the market.

In 1999, supply and demand were evenly matched -- only 400,000 doses of 77 million went to waste. The next year, though, 8 million were thrown out. In 2001-02, 10 million doses were pitched. The next year (Wyeth's last) the number was 13 million. Last winter, despite a run on vaccine in an earlier-than-usual flu season, 4 million doses, out of 87 million made, were discarded.

So the market hasn't been working as well lately. Hmm. Wonder why. Normally when there's uncertainty about demand, price rises to compensate suppliers for the extra risk. And consumers are happy to pay that higher price to make sure the supply is there. Why is this market falling apart?

The waste is particularly hard for vaccine makers to stomach because their profit margin is small. Flu shots are essentially commodities -- identical products made by numerous companies and differing only in price. Because much of the vaccine is bought in huge orders by government agencies, the price is low.

Ah, reason number six. We're about 3/4 of the way through the article, but now we find something that might actually explain what has changed about the vaccine business

Because much of the vaccine is bought in huge orders by government agencies, the price is low.

Now we'd like to know two things, but they're not in the article. The first, has the proportion of flu vaccine bought by the government increased over the last thirty years? The last five? I bet it has. I'd like to see the numbers. And what about the price? Has government paid roughly the same amount or has it negotiated tougher and tougher deals in hopes of saving money? The answer may be hidden in the earlier quote:

The waste is particularly hard for vaccine makers to stomach because their profit margin is small. Flu shots are essentially commodities -- identical products made by numerous companies and differing only in price.

But we know they don't differ only in price. They differ enormously in reliability. And it's a very complex production process. There shouldn't be a small profit margin. It's too risky a business. I'd bet that the profit margin has been shrinking because of price pressure from the dominant purchaser, the government.

And finally, reason number seven:

Over three seasons, Wyeth lost $50 million from unsold flu vaccine. It was also facing millions of dollars in required improvements to keep its plant up to standards required by the Food and Drug Administration.

Have the standards stiffened? Have the results been worth it? Here's one article that says yes and no.

The bottom line: the vaccine business is less attractive than it used to be. If we want to make it more attractive, either prices have to rise or regulations have to relax. My guess is we're going to end up with more government involvement not less.

A market-based economy is hard to sustain unless people understand how it works.

Posted by Russell Roberts in Health, Prices | Permalink

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