1. The Fragility of the U.S. Vaccine Supply Frank A. Sloan, Ph.D., Stephen Berman, M.D., Sara Rosenbaum, J.D., Rosemary A. Chalk, B.A., and Robert B. Giffin, Ph.D. n engl j med 351;23 www.nejm.org december 2, 2004

2. Decline in Companies Producing Vaccines The number of companies that produce vaccines for the United States has declined markedly since the 1960s. Today only five companies produce all routine vaccines for this market, and for each of eight of these vaccines — including the measles, mumps, and rubella (MMR); diphtheria, pertussis, and tetanus (DPT); and polio vaccines — there is only one supplier. Should one of these suppliers cease production, it could take years to have a replacement vaccine licensed and publicly available.

3. Why so few suppliers? Several explanations for the small number of vaccine suppliers seem plausible. Developing a new vaccine is costly and risky. It can cost $700 million to bring a new vaccine from concept to market. Phase 3 trials for pneumococcal vaccines and Haemophilus Influenzae type b vaccine required tens of thousands of subjects. Some have suggested that the licensure requirements of the FDA are excessively stringent and unnecessarily limit the entry of new suppliers into the market. Unlike pharmaceutical manufacturers, vaccine producers must obtain a license in advance to produce a vaccine at a particular site, and the FDA encourages creation of commercial production capacity before the license is granted, a stipulation that puts the company at substantial financial risk. Vaccine suppliers also undergo frequent FDA inspections of their production facilities. Individual product batches require separate approval for release, and slight modifications to production processes or even the packaging of products may trigger expensive product reviews. The FDA requires frequent upgrades of vaccine production to reflect state-of-the-art manufacturing processes. This regulatory approach is likely to increase the costs of producing vaccines, add to the uncertainty of rewards for investment in research and development and in production capacity, and discourage the entry of new suppliers.

4. Immunization Coverage and Costs Even though most children and adults have private insurance that covers immunization, 11 million children and 59 million adults have private insurance that excludes immunization. Even patients who have coverage for immunization often face substantial copayments, deductibles, or both. There is a general trend toward increased sharing of the cost of vaccines with patients. Twenty years ago, when full immunization of a child cost little, vaccine coverage and cost sharing were perhaps not critical to access. Today, when the recommended four doses of pneumococcal conjugate vaccine cost more than $240, the financial burden on many families is substantial.

5. Proposal from IOM The IOM study committee proposed a subsidy mechanism coupled with a requirement that all public and private insurers cover the vaccines eligible for the subsidy. It targets the subsidy to vaccines that are most beneficial to society by varying the amount of the subsidy according to the level of benefit. Two important principles. –First, the subsidy should be high enough to stimulate significant investment in the vaccine. –Second, the subsidy should not be allowed to vary in response to fiscal pressures — the industry must have full confidence that the subsidy will be there once the vaccine is released.

6. Optimal Price from Purchasers’ Point of View R&D Spending, x Expected Benefits, Costs, Resources q(x)b q(x)p q(x)c R+D Cost Consumer Surplus Production Cost Profit x** x** maximizes q(x)(b-p) 45  Source: McGuire (2003)

7. Key: Must determine prices Calculate prices and subsidize if necessary. Calculated prices range from current price levels to about twice the amount of current levels, depending on the degree of incentive for research and development that is provided. Although subsidies that are calculated in this manner may result in substantially higher prices for vaccines, such prices are warranted, in the IOM committee’s view, because of the important benefits of vaccines to society and their potential for undervaluation by the market. Vaccines have strong spillover effects — for instance, since they prevent the spread of contagious diseases, they benefit those who are not vaccinated as well as those who are. Consequently, some people will avoid the cost and inconvenience of getting vaccinated and rely on others to maintain community protection. Such products tend to be underused unless the government promotes them. Thus, subsidization has a clear economic rationale.

8. Reference McGuire, Thomas, G., “Setting Prices for New Vaccines (in Advance),” International Journal of Health Care Finance and Economics 3 (2003): 207-224.