Health Affairs, 24, no. 3 (2005): 635-642 doi: 10.1377/hlthaff.24.3.635 © 2005 by Project HOPE	New Online   Senate Health Reform Bill   Rewarding Providers   Public Option Policy Brief   Health Reform & Abortion   Delivery System Reform

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Infrastructure

Factors Affecting U.S. Manufacturers’ Decisions To Produce Vaccines

Abstract

 
Recent supply interruptions of childhood vaccines have had negative impacts on U.S. public health policies and vaccine delivery. To understand how manufacturers perceive production incentives and disincentives, the Centers for Disease Control and Prevention (CDC) met with the four pharmaceutical firms that sold vaccines through CDC-negotiated contracts during 2002 and 2003. These meetings shed light on the regulatory burden, high costs of the delay between initial investment and sales, and higher costs of new technologies versus older vaccines. All four manufacturers are investing more in research and development because new technologies have advanced their ability to create vaccines not thought possible before.

Stable vaccine supplies are essential for meeting current and future public health immunization goals. This assurance of supply is even more critical in the face of emerging infectious diseases of dire consequences, such as avian influenza. To increase CDC policymakers’ understanding of how manufacturers perceive production incentives and disincentives, the CDC, through the NIP, held a series of discussions during 2003 with the four large pharmaceutical firms that sold vaccines through CDC contracts during 2002 and 2003. Here we report information from those interviews from the manufacturers’ perspective only. We do not present the perspectives of the many other interested stakeholders: the Food and Drug Administration (FDA), physicians, professional medical organizations, parents, the ACIP, other advisory groups, and the CDC. Before reporting the meeting results, and to place the results in context, we provide a brief description of the economics of U.S. vaccine markets.³

Background: Industry Structure And Shortages

Top Background: Industry Structure... Study Methods Study Results Discussion NOTES

 
Supply. Four FDA-licensed pharmaceutical companies supply all nine routinely recommended childhood vaccines approved by the CDC, the ACIP, American Academy of Pediatricians (AAP), and American Association of Family Physicians (AAFP): hepatitis B (HepB), diphtheria-tetanus-acellular pertussis (DtaP), Haemophilus influenzae type b (Hib), inactivated poliovirus (IPV), measles-mumps-rubella (MMR), varicella (Var), pneumococcal conjugate (PCV7), hepatitis A (HepA), influenza (flu), and a few other combination vaccines containing these antigens.⁴ There are few vaccine manufacturers partly because of the expense and time of FDA licensing procedures for both domestic and international manufacturers, which also limits potential substitutes, and partly because mergers have created a market with fewer pharmaceutical manufacturers in general, including those involved in vaccine and biologics production.⁵ Each vaccine is its own mini-market, with only one or a few licensed manufacturers, because different vaccines cannot be substituted for one another.

Domestic companies may have fewer incentives than international companies because international competitors can sell non-FDA-licensed vaccines to the world market in addition to their U.S.-licensed sales. Domestic manufacturers are also facing increasing competition from international companies that produce FDA-licensed vaccines overseas for U.S. markets. Pharmaceutical companies based outside the United States that produce FDA-licensed vaccines garner revenues from international sales of products that are not FDA licensed.⁶ Further, FDA-licensed vaccines are predominantly produced in overseas plants and brought back for U.S. sale.

Demand. The three sources of demand (government, large public/private purchasers, and small private purchasers) are differentiated by the amount of vaccine purchased. The level of demand affects manufacturers’ ability to negotiate prices with suppliers. In economic theory, the power to negotiate prices is associated with the amount of supply demanded. Ability to negotiate prices from the demand side is not the same as receiving a small discount at the supplier’s discretion.

Government has some power to negotiate prices with manufacturers because more than half of all childhood vaccines produced for U.S. sale are purchased by state and local public health departments through CDC-negotiated contracts. There are other large private and public buyers, such as health maintenance organizations (HMOs) or the Indian Health Service, but their market share is much smaller than that purchased through CDC contracts, so we assume that their power to negotiate prices may be more limited too. The rest of the market is made up of small purchasers with no power to bargain on prices: physicians, hospital clinics, long-term care facilities, and so forth. Ultimately, patients demand (and receive) vaccine from government, HMOs, physicians, clinics, and other facilities, but they do not purchase directly from the manufacturer and have no power to negotiate prices.

Shortages. From fall 2000 through summer 2004, the United States experienced nationwide shortages of six recommended childhood vaccines: tetanus-diptheria (Td), DTaP, MMR, Var, PCV7, and Hib. For adults and children, influenza vaccine supply did not keep pace with demand during 2000, 2001, and 2004.⁷ Reasons for the shortages varied for each vaccine, but a major contributing factor was the small number of manufacturers. This is felt most dramatically when a vaccine has only one manufacturer; when this happens, a problem with the production process immediately disrupts supply. However, even when a vaccine has two or three manufacturers, supply disruptions still can occur when one manufacturer has a problem and the others, with limited production capacity or inventory of their own, cannot quickly make up the shortage.

Study Methods

Top Background: Industry Structure... Study Methods Study Results Discussion NOTES

 
Between July and September 2003, the CDC, through the NIP, held separate meetings between NIP researchers and each of the four FDA-licensed vaccine manufacturers. Manufacturers were represented by a mix of medical researchers and public relations experts. A list of questions was circulated in advance to serve as a generalized discussion guide.⁸ After each meeting, the NIP drafted a summary for all participants to review for accuracy.

The points made in the results section are those that the four manufacturers agreed upon, unless otherwise noted. Comments that were specific to a single manufacturer are not included. All of the statements that follow are composites and do not represent quotes or opinions of any single company representative.

Manufacturers’ comments are organized under the headings "Price," "Market share" (quantity), and "Costs." Some of the comments affect more than one category but are placed in only one to avoid repetition. Added context or explanatory statements are in parentheses with italicized text.

Study Results

Top Background: Industry Structure... Study Methods Study Results Discussion NOTES

 
Price. Production of current vaccines. The manufacturers stated that federally negotiated prices on some recommended vaccines are limited by congressional price caps. (Since these meetings, price caps have been removed from all but two vaccines.) These caps prevent manufacturers from recouping revenue to cover vaccine production costs, such as annual license renewal fees and changes in production requirements.

Manufacturers also stated that the downward pressure on prices created by caps and governments’ ability to negotiate prices, combined with rising regulatory and production costs, is a disincentive to produce and market older vaccines.

Research and development. The manufacturers stated that prices of new vaccines must be set to account for all of the vaccines that do not make it to market.

Market share. Production of current vaccines. Manufacturers made the general point that if vaccines are sold at low government prices, revenue must be made up by increased market share. This is primarily because vaccine sales are limited when compared with sales in the broader pharmaceuticals market.

1. They also indicated that companies are positioning themselves to increase overseas sales. Two commented that this is because the Bill and Melinda Gates Foundation has provided substantial funding for vaccines in the developing world. Since the introduction of polio vaccine, demand for vaccines in the developing world has been high but inadequately financed. The funding now provided for some vaccines by the Gates Foundation has greatly changed that balance.
   
2. None of the manufacturers was completely opposed to the Vaccines for Children (VFC) program or wanted to see it disbanded, although two manufacturers were more positive toward VFC than the other two. (VFC is an entitlement program providing public purchased vaccines to public and private pediatricians and clinicians vaccinating children who are uninsured, Medicaid eligible, American Indian or Alaska Natives, or underinsured with respect to vaccination and served in federally qualified health centers. Sales through VFC contracts represent slightly more than half of all vaccines purchased in the United States. When the program started in 1994, Congress placed price caps on then-current childhood vaccines. Since 1994, most price caps have been lifted, and there is pending legislation to lift the last two.) Two manufacturers were strongly opposed to so-called Universal States, which add monies to basic VFC and purchase vaccines for all of their children. These manufacturers argued that extending VFC to children of parents who could otherwise afford higher-price vaccines cuts into private market activity.
   
3. The manufacturers consider the more flexible contracting practices instituted by the CDC following VFC program implementation a positive change. (Prior to VFC, federal government contract sales went to the one low-price bidder. All manufacturers of a vaccine are now allowed to list their prices whether they are the low bid or not. They can change prices several times a year.)
   
4. Two manufacturers noted that a vaccine is required for only a fixed number of doses, while many other pharmaceuticals (such as blood pressure medications) constitute repeat sales to the same person. Therefore, vaccines would always have smaller market shares than medicines that require long-term use.
   
5. Two manufacturers stated that harmonizing FDA and European requirements would allow licensing of overseas vaccines for U.S. market sales. In turn, this could help alleviate domestic supply, stockpiling, and shortage problems by making substitutes available.⁹
   

Research and development.

1. Evaluation models used by manufacturers to determine demand for new vaccines look at vaccine target population; the epidemiology of the disease—that is, how extensive is the morbidity and mortality of the vaccine-preventable disease; the existence of simple, inexpensive alternatives that would diminish sales; and available vaccine development funding.
   
2. The manufacturers view vaccines as a growth industry; they said that sales are projected to increase in the next few years. The growth rate in sales of adolescent and adult vaccines is projected to be higher than in the child market. As a result, much of vaccine development is concentrating on new diseases such as human papilloma virus or herpes simplex virus.
   

Costs. Production of current vaccines.

1. Manufacturers noted that biologics are natural products and are therefore more difficult to produce with consistent accuracy than are manufactured drugs, so there is a higher production loss rate.
   
2. They also noted that FDA regulations ensure safe products, but they also increase costs. The manufacturers stated that FDA communication problems create some unnecessary costs. For example, the United States and Europe have similar licensing standards, but manufacturers feel that European regulatory officials communicate more openly.
   
3. Manufacturers commented that existing legislation is inadequate to cover the expense of lawsuits and liability costs.
   

Research and development.

1. Manufacturers stated that the nature of the regulation process creates very high sunk costs. (Sunk costs are expenses that cannot be recovered from sale of a facility once production of a specific vaccine has stopped.) Because vaccines are approved and licensed after facilities have been constructed and the entire production process is complete, there is a long lag time from production to sales. If the vaccine is not approved for sale, the facilities usually cannot be reused because most facilities are vaccine-specific.
   
2. They also commented that there is no incentive to build excess capacity in case of a production failure because start-up production costs are high; it is possible that facilities might be built but the product never be sold if the FDA withheld licensing. (This almost never happens, but the threat of not receiving licensing after a company invests in new construction does exist and was worrisome to all four manufacturers.)
   
3. Conferees stated that new vaccines are more complex than older ones, the production process is more costly, the lead times required are longer, and new vaccines are on the market for less time because they are replaced by new combinations, so there is less time than with older vaccines to recoup sunk costs.
   
4. They also commented that clinical trials are long and expensive and that the FDA does not allow the transfer of overseas results to the United States if the trials have not been monitored by the FDA. However, FDA-monitored trials are transferable from the United States to most European countries. This results in an incentive to produce U.S.-approved vaccines for the overseas market, but not the reverse.
   

Discussion

Top Background: Industry Structure... Study Methods Study Results Discussion NOTES

 
These meetings helped convey to CDC policymakers the challenges manufacturers face in producing current vaccines and bringing new vaccines to market. Several strong themes ran through the meetings: the regulatory burden, the high costs of the delay between initial investment and sales, and the higher costs of new technologies compared with those of older vaccines. However, the meetings also provided an optimistic picture of the future of vaccines. All four manufacturers are increasing their investment in research and development (R&D) because exciting new technologies have advanced their ability to create vaccines not thought possible even a short time ago.

There are three ways in which government could have a direct role in providing incentives to manufacturers to increase production and ensure supply: harmonize U.S. and European vaccine production standards and improve FDA communication; expand markets; and provide direct monetary or in-kind incentives.

Harmonization. Since 2003 both the U.S. Government Accountability Office (GAO) and the National Vaccine Advisory Committee (NVAC) have recommended that the FDA begin working with overseas governments to harmonize regulations. This recommendation was reiterated by several stakeholders at an NVAC subcommittee meeting held in Washington, D.C., 20–28 June 2004 (headed by Alan Hinman), to discuss recommendations in the recent Institute of Medicine (IOM) report on vaccine finance.¹⁰ The FDA responded to these recommendations in 2003 by setting up a committee to look into the harmonization process. At a recent meeting on vaccine supply (also hosted by NVAC on 24–25 January 2005), FDA representatives reported measurable progress toward streamlining manufacturing requirements, communications with manufacturers, and harmonizing U.S. and European standards for vaccine approval.

Market expansion. Recent government actions to protect public health will increase the demand for vaccines in a number of ways. First, the ACIP has made new recommendations for routine vaccinations, including vaccination of children with varicella and PCV7 vaccines. It also has added adults ages 50–64 and children ages 6–23 months to the existing flu vaccination recommendations.

Second, VFC has expanded the market by providing free vaccines for children meeting VFC criteria who are traditionally underimmunized. Since 1994, dose sales of routinely recommended childhood vaccines have increased steadily. In addition, private sales have kept pace with government sales. This is attributable partly to the increased number of ACIP recommendations and partly to increased childhood vaccination rates.¹¹

Third, there are now informal discussions under way in NVAC subcommittees to research the feasibility of a Vaccine for Adults (VFA) program that might fund adults not now able to purchase their own vaccines. There are also a number of vaccines targeted toward adolescents and young adults that are being reviewed for licensure by the FDA and ultimately for recommendation by the ACIP.

Production incentives. Production incentives can take numerous forms. For example, the CDC is working toward implementing the GAO recommendations to expand stockpiling to six months’ worth of recommended childhood vaccines.¹² However, manufacturers believe that they will be prevented from creating and holding vaccines in stockpiles in their own facilities because of Securities and Exchange Commission revenue recognition rules. These rules require that a sale not be credited on the company accounts until the product is delivered.

Other incentives exist in the economics literature that government might want to consider. These include making R&D funding available for new vaccines if current or new manufacturers, or both, agree to continue production of older vaccines for a period of time after the new vaccine has been approved; and subsidizing idle capacity that could be used in emergencies to produce recommended vaccines in case of failure in active production facilities.¹³

Study limitations. There were a number of weaknesses with this study. Manufacturers who do not contract through government were not included in the discussions and might have had different perspectives. Also, the position of the conferees might have been affected by their market area; for example, the two manufacturers most in favor of harmonization sell the most vaccines overseas.

Other unstated factors affect manufacturers’ perspectives. To some extent, the FDA’s regulatory process could help manufacturers maintain monopoly and oligopoly status by keeping some foreign competition out of the U.S. market. This allows each manufacturer to capture a greater share of the domestic market than if there were more competitors. Capturing entire markets for specific vaccines is one of the goals of manufacturers, which are expending sizable resources to develop new and unique vaccines. Monopoly markets tend to have higher profits because the developer does not have to share sales (or profits). Government contracts guarantee market share in advance of sales. Contracts also streamline and reduce the costs of manufacturers’ contracting and distribution processes.

While government has dual roles—spending tax dollars wisely and meeting public health goals by making vaccines available to the most appropriate populations—it cannot meet either goal without the pharmaceutical industry’s cooperation. Therefore, it is in the interest of public health policymakers to maintain a healthy working relationship with vaccine manufacturers. The FDA is already taking steps to address harmonization issues and improve communication with manufacturers during the approval process. NVAC is examining potential new programs to expand adult vaccination rates and the market share of vaccines in relation to other pharmaceuticals. Newer policies made with an understanding of manufacturers’ perspectives could help prevent some of the delay and shortage issues experienced in recent years.

Editor's Notes

 
Margaret Coleman (zby5{at}cdc.gov) is an economist with the U.S. Centers for Disease Control and Prevention (CDC) in Atlanta, Georgia. Nalinee Sangrujee is an economist with the Futures Group in Washington, D.C. Fangjun Zhou is an industrial engineer, and Susan Chu is associate director for science, at the CDC.

The authors thank Mark Messonnier, Gary Coil, and Rex Ellington of the National Immunization Program for their valuable input.

NOTES

Top Background: Industry Structure... Study Methods Study Results Discussion NOTES

 

1. National Vaccine Advisory Committee, "Strengthening the Supply of Routinely Recommended Vaccines in the United States: Recommendations from the National Vaccine Advisory Committee," Journal of the American Medical Association 290, no. 23 (2003): 3122–3128.[Abstract/Free Full Text]
2. Centers for Disease Control and Prevention, National Immunization Program, "2005 Childhood and Adolescent Immunization Schedule," www.cdc.gov/nip/recs/child-schedule.htm (14 March 2005).
3. For more background, see M. Pauly et al., eds., Supplying Vaccine: An Economic Analysis of Critical Issues (Amsterdam, Oxford, Tokyo, Washington: IOS Press, 1996).
4. Institute of Medicine, Financing Vaccines in the Twenty-first Century: Assuring Access and Availability (Washington: National Academies Press, 2004); and NVAC, "Strengthening the Supply."
5. Dealogic, Reuters, "Let’s Make a Deal: Ten Largest Corporate Acquisitions," money.cnn.com/2004/04/26/news/international/aventis_sanofi/lets_make_a_deal.gif (4 February 2005).
6. Annual financial reports: Glaxo Smith Kline, 2004, www.gsk.com/financial/financialreports.htm (10 February 2005); and Sanofi-Aventis, Interim 2004, Annual 2003, en.sanofi-aventis.com/investors/reports/P_investors_report.asp (11 March 2005).
7. "Notice to Readers: Delayed Supply of Influenza Vaccine and Adjunct ACIP Influenza Vaccine Recommendations for the 2000–01 Influenza Season," Morbidity and Mortality Weekly Report 49, no. 27 (2000): 619–622; and CDC, National Immunization Program, "Why Were There Shortages?" October 2004, www.cdc.gov/nip/news/shortages/default.htm (4 February 2005).
8. The questionnaire/discussion guide is available as an online appendix; see content.healthaffairs.org/cgi/content/full/24/3/635/DC1.
9. There are international substitutes for U.S. vaccines. See Immunization Action Coalition, "Vaccines and Biologics," www.immunize.org/izpractices/p5120.pdf (2 February 2005); and World Health Organization, "United Nations Prequalified Vaccines," January 2005, www.who.int/vaccines-access/quality/un_prequalified/prequalvaccinesproducers.html (2 February 2005).
10. IOM, Financing Vaccines in the Twenty-first Century.
11. See CDC National Immunization Program, "Recommendations of the ACIP," October 2004, www.cdc.gov/nip/publications/ACIP-list.htm (7 February 2005).
12. U.S. Government Accountability Office, Childhood Vaccines: Ensuring an Adequate Supply Poses Continuing Challenges (Washington: GAO, September 2002).
13. M. Kremer, "Creating Markets for New Vaccines: Parts 1 and 2," NBER Working Papers nos. 7716 and 7717 (Cambridge, Mass.: National Bureau of Economic Research, 12 May 2000).

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