Vaccines Are Good Business for Drug Makers
Published: October 29, 2004  (must register to view original article)

As the nation tries to comprehend this year's shortage of flu vaccine, many experts have explained that the vaccines business holds little allure for drug companies, because of low prices, strict regulations and uncertain demand.

But try telling that to Nabi Biopharmaceuticals, a small company in Boca Raton, Fla., which is testing one vaccine to protect patients in hospitals and kidney dialysis centers from potentially fatal bacterial infections and another to help people quit smoking.

Or tell it to Vical, a San Diego company trying to develop an arsenal of bioengineered vaccines for viruses like those that cause Ebola, West Nile and SARS.

Or tell it to Wyeth, a big drug maker whose vaccine Prevnar, used against the pneumococcal bacteria that can cause pneumonia, meningitis and ear infections, costs more than $250 for the four-dose treatment given to infants. Despite the price, the government has recommended that all infants get the vaccine, and insurers generally pay for it - as does the federal Vaccines for Children program for low-income families. Prevnar, with sales expected to top $1 billion this year, would be the world's first "blockbuster" vaccine.

Vaccines, it turns out, can make for pretty good business.

Even flu vaccines, despite challenges that include the need to reformulate the medicine each season, are potentially more lucrative than they used to be, with wholesale prices up fourfold since the late 90's.

"I am not one of those who think this is an industry plagued by low prices, because it's not true," said Anthony F. Holler, chief executive of ID Biomedical, a Canadian company whose excess inventory of flu shots might help augment the American supply this winter. "I just think that people are thinking of the business that occurred 10, 15 years ago."

The current shortage has more to do with past government and industry decisions, which reduced the nation's suppliers to two: Chiron and the vaccine unit of Sanofi-Aventis. That occurred in part because the business requires a heavy investment, which, economists say, tends to favor having fewer, big suppliers rather than many smaller ones.

Now, to help prevent shortages, the government is considering steps that include expanding the amount of flu vaccine it puts into an emergency stockpile for childhood vaccines. This was the first year the government decided to add flu vaccine to that stockpile. Another possibility is guaranteeing the purchase of a certain number of flu shots each year, possibly beyond what the industry is contemplating manufacturing. That might attract more companies to the business or induce existing ones to produce more than needed, providing some cushion in case one supplier runs into problems.

As those proposals indicate, the vaccine business is as complex as the market dynamics that drive it. That is why the medicines receiving the biggest push from the industry are likely to be ones with a perceived market in the United States, which spends more than half the world's drug dollars.

With American free-market forces so heavily in play, vaccines for malaria or other diseases that mainly afflict developing countries are not likely to be pursued except through philanthropic efforts. But with diseases that affect Americans, the combination of new technologies, higher prices and new target populations - adults, not children, for instance - are opening new vistas for the business, even as the older childhood vaccines generally remain lower-priced commodities.

"It's a tough business for older products," said R. Gordon Douglas, an industry consultant who ran the vaccine business for 10 years at Merck & Company. "It's a good business for new products."

The role played by government can be crucial to determining what vaccines get produced, at what prices and in what quantities.

For older vaccines used to prevent childhood diseases like mumps, measles and diphtheria, for example, more than half the doses are purchased by the federal Vaccines for Children program. Prices are capped so they rise no faster than inflation. At $10 to $30 a dose, such vaccines are not a growth market, which helps explain why there is only a single supplier for five of the eight recommended childhood vaccines and why periodic shortages still occur.

Like many of the older childhood immunizations, flu vaccines are considered commodities. But because most are sold through the private sector, there are no caps on prices.

In the late 1990's four companies supplied flu vaccines but two - Wyeth and King Pharmaceuticals - dropped out, citing low profits and heavy expenditures to meet increasingly stringent regulatory requirements to prevent contamination.

In the same period, however, demand for flu shots was on the rise as government health officials expanded the categories of people recommended to receive the vaccine. As a result of that demand and the reduction in the number of suppliers, flu vaccine prices have quadrupled since the late 1990's, to around $8 a dose wholesale.

That trend appeared to be attracting more companies to the field even before the recent shortage. Chiron, for instance, acquired a British flu vaccine company last year largely to enter the American market; it was problems at the British plant, not a lack of profit motive, that created Chiron's shortage.

And ID Biomedical of Canada had been planning to enter the American market in a few years, though the shortage might now speed its entry. Others, like Baxter International, have been weighing entering the market within a few years.

Various economic arguments can be made for why the government should play a role in promoting the use of vaccines. One is that they are among the most cost-effective modes of medicine. Preventing a disease - often, the inoculation lasts a lifetime - can be far less expensive than treating it once it develops and spreads. Economists have estimated that every dollar spent on some of the inexpensive childhood vaccines has yielded benefits as high as $27. But left to their own devices, individuals may not highly value vaccines because of the uncertainty that they themselves will ever get the disease.

Whatever the government's role, there are business obstacles for vaccines, including a much smaller market than with drugs. Total sales of all vaccines worldwide are around $8 billion, less than sales of Pfizer's Lipitor cholesterol-lowering pill alone.

And because vaccines are given to healthy people, safety and liability concerns can be greater than with drugs, which are given to sick people, who are willing to bear some risk of side effects to get better. Liability concerns drove many companies out of the vaccine business before Congress enacted a law in 1986 providing some protection to makers of childhood vaccines. Companies say they are still vulnerable on adult vaccines and are still being sued for the use of thimerosal, a mercury-containing preservative that has been largely removed from pediatric vaccines.

Potential liability is also on the mind of Merck, which hopes to get approval for a vaccine aimed at rotavirus, a cause of life-threatening diarrhea. The company is testing it on 70,000 children - an enormous number for a clinical trial - because the company wants to rule out a rare side effect that caused a rotavirus vaccine by Wyeth to be pulled from the market in 1999.

Merck, which recently withdrew its painkiller Vioxx from the market and has had several drugs fail in clinical trials, is counting three vaccines among the most important products it expects to bring to market in the next few years. Besides the rotavirus vaccine, there is one for human papilloma virus, which is believed to cause cervical cancer. The third is for shingles, a disease of adults caused by the chickenpox virus.

As Merck's efforts indicate, many of the newer vaccines aim at adult diseases. "In the next 15 to 20 years we're going to move from pediatric vaccines to adolescent vaccines and adult vaccines," said Vijay B. Samant, chief executive of Vical.

If, as some economists argue, vaccines are underused relative to their value to public health, then the government could have several roles.

Urging vaccination, as is done for childhood diseases, assures manufacturers of a market. And the government can buy vaccines for a stockpile, as it is now doing for vaccines for anthrax and smallpox.

But industry officials, like Wayne Pisano of Aventis Pasteur, the vaccine unit of Sanofi-Aventis, say the most important factor for a healthy vaccine business is higher prices. "You can't have high investment, high regulatory requirements and low prices," Mr. Pisano said.