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4 Economic Aspects of Vaccine Innovation and Manufacturing This chapter explores economic aspects of vaccine manufacturing and development to determine whether a public policy based on market incentives provides the desirable levels of vaccine supply and innovation. The committee identified factors that tend to distort market incentives in the vaccine industry and evaluated specific policy options that could counteract their effects.* In his testimony before a congressional hearing in 1982, Jack Bowman, then president of Lederle Laboratories, estimated that the total cost of developing a vaccine for HemoPhilus influenzas tone b (a cause of meningitis) would be in excess of S50 million. At the same hearing. he said that the approximate cost to Lederle of a Program to 7 ~ = ~ ~ ~ or _ _ ~ _ ~ ~ develop a herpes vaccine would be about $30 million.- Estimates By the Institute of Medicine Committee on Issues and Priorities for New Vaccine Development indicate that these figures are not extraordi- nary. The expected average future cost of development for a variety of vaccine candidates evaluated by that committee was between $20 million and $30 million.2 These figures are within the range of the estimated S12 million spent to develop the pneumococcal vaccine, when ~ he 1 ~d ~ ~- I; ; ~ MARIA ~' ;~1 ~. ;~- 3 A large proportion of development costs (such as those incurred in field trials) usually are met by industry. Estimates indicate that industry was responsible for about 50 percent of the costs of development of the pneumococcal vaccine.3~4 Estimation of the total cost of developing a vaccine is difficult, in part because some expenditures, erg., funds for basic research, result in information that could have several different applications. Nonetheless, the above amounts demonstrate the approximate range of development costs. To put these costs in perspective, note that total sales for the "~&c =" ~ "= ~ ~ ~ ~ "^ ~ 1 ~ ant "= Ace ~ ~^ ~ &~= ~" ~ ~ is,` . *Further analysis of many of the issues discussed in this chapter will take place at a symposium on "Preventive Biomedical Technologies" projected for 1986. This symposium will focus on vaccines and is part of the "Technology and Society" series organized by the National Academy of Engineering. 45

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46 entire vaccine industry amounted to only $170 million in 1982. The costs and delays to fruition of research and development (R&D) projects for vaccines are similar to those associated with the development of other new pharmaceutical products, but the total revenue stream is substantially lower for vaccines. Occasionally, the annual earnings of one successful drug may be greater than several years of revenue for the entire vaccine industry.5 Two current trends in the vaccine industry are noteworthy. The first relates to the problem of assuring adequate and continuous supplies of vaccines. Between 1968 and 1977, more than half of the vaccine producers in the United States ceased production,4 and withdrawals have continued to the present.6 In many cases, this has meant that a particular vaccine is produced by only one supplier. Table 4.1 demonstrates the extent of the sole-supplier problem as of early 1984. (Appendix A lists all current vaccine licenses, irrespective of whether the vaccine is produced or distributed.) Events surrounding the decision by several vaccine manufacturers to stop marketing pertussis vaccine (described in Chapter 3) reflect the precarious nature of the current situation. Polio, measles, mumps, and rubella vaccines are each supplied by a single manufacturer. Lederle Laboratories was for a period the only commercial distributor ~ public health implications of this sole-supplier situation, for pertussis and other vaccines, also are explored fully in Chapter 3. The second important trend and the focus of this chapter is the apparent drop in some indirect measures of vaccine innovation activity by manufacturers. Precise documentation of the extent of this suspected decline in research and development (R&D) is difficult, in part because figures on vaccine R&D expenditures by specific companies are rarely available. Table 4.2 indicates that the percentage of total R&D devoted to biologics research (which includes vaccines) by the major pharmaceutical firms generally declined during the 1970s and early 1980s. The ratio of biologics R&D to biologics sales dropped, while the ratio of total R&D to sales for all pharmaceutical products increased slightly. Biologics R&D did not rise proportionally with biologics sales, but the increase in total pharmaceutical R&D has outstripped the rise in total sales. Between 1979 and 1982, expenditures for biologics R&D rose proportionally at nearly the same rate as those for total pharmaceutical R&D. Unfortunately, data are not yet available for 1983 and 1984. Anecdotal information indicates that both small and large companies may have begun investing in the application of promising new technologies for vaccine development (Chapter 2~; however, the lack of post-1982 data makes it difficult to determine the extent of these activities or if they will affect the trends noted above. Table 4.3 suggests that the historical pattern of new product introductions for vaccines is very different from that of pharmaceuticals. The latter exhibited a sharp downward trend in the early 1960s (after FDA regulations became more stringent), while 0t DTP vaccine. The .. . . .

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47 TABLE 4.1 Vaccine Groups and Firms Producing Them in Early 1984 Vaccine Firms Adenovirus, live, oral, types 4 and 7 Anthrax BOG Cholera vaccine Diphtheria and tetanus toxoids and pertussis vaccine adsorbedC Diphtheria toxoid Hepatitis B vaccine Influenza virus vaccine Measles virus vaccine, live, attenuated Measles and mumps virus vaccine, live Measles and rubella virus vaccine, live Measles, mumps and rubella virus vaccine, live Meningococcal polysaccharide vaccine, Groups A, C, A/C combined Meningococcal polysaccharide vaccine, Groups A, C, Y. W135 combined Mumps virus vaccine, live Pertussis adsorbed Plague vaccine Pneumococcal vaccine, polyvalent Poliomyelitis (inactivated vaccine, trivalent) Poliomyelitis, oral vaccine, trivalent Rabies Rubella virus vaccine, live Rubella and mumps virus vaccine, live Wyeth Laboratories, Inc. (for Defense Dept.) Michigan Dept. Public Health Connaught Laboratories Ltd. Glaxo Operations U.K. Ltd. University of Illinois ISVTSa Wyeth Laboratories, Inc. Lederle Laboratoriesb Connaught Laboratories, Inc. Michigan Dept. Public Health Lederle Laboratories Wyeth Laboratories, Inc. Mass. Public Health Labs Connaught Laboratories, Inc. Lederle Laboratories Merck Sharp & Dohmed Connaught Laboratories Inc. Wyeth Laboratories, Inc. Parke-Davise Merck Sharp & Dohme Merck Sharp & Dohme Merck Sharp & Dohme Merck Sharp & Dohme Connaught Laboratories, Inc. Merck Sharp & Dohme Connaught Laboratories, Inc. Merck Sharp & Dohme Michigan Dept. Public Health Cutter Laboratories, Inc. Merck Sharp & Dohme Lederle Laboratories Connaught Laboratories Ltd. Lederle Laboratories Institut Merieux Wyeth Laboratories, Inc. Merck Sharp & Dohme Merck Sharp & Dohme

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48 TABLE 4.1 (Continued) Vaccine Smallpox Tetanus Typhoid vaccine Yellow fever Firms Wyeth Laboratories, Inc. (for Defense Dept.) Michigan Dept. Public Health Mass. Public Health Labs. Connaught Laboratories, Inc. ISVTS Wyeth Laboratories, Inc. ' Connaught Laboratories, Inc. aIstituto Sieroterapico Vaccinogeno Toscano Sclavo. bDivision of American Cyanamid Corporation. CSee text' for recent changes. dDivision of Merck and Co., Inc. eDivision of Warner-Lambert Co. SOURCE: Food and Drug Administration, and Institute of Medicine survey of producers. vaccine introductions were gradual cumulative decline Typically, a decline in of manufacturers signifies either it has matured, or it is experiencing problems. If the decline stable over that period but have shown a since the mid-1970s.* the growth of an industry and in the number one of two events in its life cycle: is the result of natural changes in demand patterns, as In one muon discussed "smokestack" industries, efficiency is enhanced. Alterna- tively, a decline may indicate distorted incentives, e.g., a demand pattern that does not reflect the true benefit of the product. If such problems are causing an undesirable decline in the vaccine industry, government policymakers must decide whether and how to intervene. The remainder of this chapter provides a general overview of the economic structure of the vaccine industry, possible causes of unsatisfactory market incentives, and relevant descriptive statistics. *Data collection procedures for the two types of products are different-. Pha'rma'ceutical data are based on introduction dates; vaccine data are based on approval dates.

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49 ED 1 a' o CQ ·~. As c) I: u] . pa o - ~ u] - ~ - - ~Q us u] ·~. a) x a At: U] .~' o o .,. a) Ul U) a 4J . - x a ~3 ED U} a ~ ~8 U) to In ~ c) ... ... 0 0 0 0 ,, . - m a a) to U] ~ 0 4~ ~ ~ 0 ~ 48 EN .- of O JJ ·- 0 al _ U] I: ra 0 ~ .^ .~ ~ 0 -' ~ e 0 .^ m- In _ . - In ~ 0 ~ . - a ~ e. ~ ~ e 4 0 ~ ~ ED ~ - ~ _ . - 0 ~ ~ 0 ~ ~ ~ 0 al al _ ~o 0 C) ·- C' 0 . - m- ~n ~ _ · - 0 C ~ 0 ~ . - c) ~ e.^ ~a 0 .C ~ E~ P4 - \0 ~U~ CD ~U' ··. O O o ~D ~a' 000 _ ~ dP 44 0\ - _ _ dP dP O ~U~ r~ _ _ _ _ _ dO ~dP U. ~O U~ . - _ _ _ _ _ dP dP O U~ _ _ U~ o - r~ ~r~ · ·· ··~ ~0 ·~ a, ~r~ __ _ dPdP dP a ~o \00\ ~ __ _ _ _ dO dO U~ r~ _ _ OtDa ~c ~tD ····· ~·.. tDao ~o, ~r 0CX)0 ~U ~U~ r ~a' ~0 ~r ~_ .,' ~ 0 - 0 ~ ~n q~ ~ ~ 0 ~a a~ C X a) ~ C ~ ·- P. C C ~ U. q~ · 0 1 a. _I ~a. C 0 ~= 0 0 ~ ~ a' s a, ~ ~ a) u' _ C U2 ~ 0 i4 a Ll ~ ~ ~o .- ~ 0 C a, ~ 0 eq X 0` ~ a) ~ 0 1 ao a: ~ ~ ~ C · - 0 ~ ~ ~ C :E P4 0 - a, ~ Ul C ~ ~ 0 U] ·- ~ 0 al x ttS CP 0 .,' ~ 4 O O tn a u' u' C .- . X U1 ~ 0 a) c Ll O ~ C ~ U) ~ q~ ~ U] U] C C :~: ~ ~ JJ U] C ~a · - O U, C L4 .- ~ U' s 00 a s ~ . - 4 q~ U] 0 Q a 0 ~ · Q ol .- . - m~ O V L' ~1 O O Q ~C2 a U] ~a c 4~ ~n ~ O . - O . - ~: ~ a~ ·~ {t U] E~ O S Z Q. U] ~ _ ~ a a, ~ 3 ~ 4~ ,' ~n a) ~a u. ~ u, Q Q O O 54 ~1 Pd O ,4 U] Q ,. a' 0 S - o U) C O ~ . - O ~ ~ O 04 4J O C 0 ra C Q ~ O · ~5 · Ul o~ - a) Ul ,' ~ Q) O ~ O O . Q :>' C A5 ~ _I C o o ~4 oe .,, JJ ·,4 O O Q 6 C JJ o U: ~a :' U] U] u] c GS h :> ~ . a, ~U] O 1J S 4~ 0 a' 4 , _ U] U] ,' a~ o Ul -_1 o U~ CO cn C o .,. ~a .,' C o C) oc UJ _ a' Q -,1 ·` ~4 JJ U] C 3 _' 0 ~a S U] U] ~ UJ O S L, C ~ ~S Ll ~a - - Ul a ~u~ Qe z U) . Ll o a) :^ a' :> U) C o a' 1 01 r~ ·~ U2 ~4 £ o u' q ~: O P~ ~n .. ( ) ~: ~0 ~ b4 0 u,

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50 TABLE 4.3 New Product Introductions for Vaccines and Pharmaceuticals and Average Annual Rates Over 10-Year Periods Average Average Annual Annual Dates Vaccines Rate Pharmaceuticals Rate 1975-1983 0.77 18.0 1980-1983 4 80 1975-1979 3 83 1965-1974 1.50 15.9 1970-1974 11 1965-1969 4 75 84 1955-1964 0.60 40.0 1960-1964 6 152 1955-1959 0 248 1945-1954 0.30 33.3 1950-1954 2 205 1945-1949 1 125 1940-1944 3 67 NOTE: Comparisons are qualified by the fact that the vaccine data include only licenses still valid in December 1984, and thus overlook an introduction if the vaccine is no longer licensed. However, any bias introduced should be in the direction of overstating the relative introductions of later time periods. SOURCE: Committee interpretation of data supplied by Division of Product Certification, Food and Drug Administration, 1985; Pharma- ceutical Manufacturers Association, 1984. POTENTIAL CAUSES OF INDUSTRY DECLINE Several factors may be responsible for the symptoms of decline observed in the vaccine industry. These relate to issues of property rights, regulation, market size, and liability. Property Rights and Innovation The issue of property rights arises with any invention or inno- vation. Generation of the product may be expensive and time- consuming, while imitation, diffusion, and competition may be very rapid. In response to this problem, the government awards patent protection to inventors. The promise of a period of protection to

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51 recoup costs and earn a reasonable rate of return has led to an increased willingness to invest in innovation in many fields. In the vaccine industry, however, patent protection has been rare, and process patents are more common than the more effective product patents. A survey conducted by the committee of the manufacturers of 27 vaccine products found that they hold only 2 product patents, 1 product-by-process patent, and 7 process patents. The patent question is especially important in relation to optimism generated by the recent emergence of the biotechnology industry. Research on innovation in the economics literature has demonstrated that small firms can be a powerful force for technological change in an industry if they can foresee the patentability of their ideas.7 With patents, even firms without marketing channels or distribution sales forces can gain substantial returns from innovations via licensing. In the vaccine industry, this is quite important. while small biotechnology firms may not have the ability to reach a market large enough to recoup their investments in R&D, they can license their patents to large firms able to take advantage of economies of scale in marketing. Several recent developments may alter the patent prospects of future vaccines. The first relates to the fact that most vaccines are processed from or made from components of living organisms (unlike pharmaceuticals, which are usually synthesized from chemicals). In the past, the patentability of living organisms and their derivatives was not clear; however, in 1980, the Supreme Court in Diamond v. Chakrabarty, 447 U.S. 303 (1980), held that a living thing is patentable subject matter. Second, much vaccine-related research is conducted under government grants and in universities. Until recently, this situation often threatened the patentability of practical applications of the research because the research results were regarded as public knowledge; subsequent work could not satisfy the patent requirement of "non- obviousness. n Significant changes in government funding policies (in not automatically retaining patent rights) and in the internal practices of many universities (in actively pursuing patents for faculty inventions) may be reducing these problems. The third development that could affect investments in vaccine innovation was passage in 1984 of the Drug Price Competition and Patent Restoration Act (P.L. 98-417~. This act restores, for drugs and biologics, some of the time lost on patent life while the product is awaiting pre-market approval. It also provides that the first drug of its kind to win FDA approval immediately gets a 5-year period of protection from the marketing of a generic copy licensed on the basis of the first regulatory clearance. Biologics and antibiotics are not presently eligible for this 5-year protection period. If this situation is changed, the protection could provide an incentive to increase vaccine innovation; however, it also might mean that some new vaccines would be available only from sole suppliers for the 5-year period. These developments are too recent to further assess their effects on the vaccine industry.

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52 Regulation Current federal safety regulations, prompted by several tragedies in the pharmaceutical industry, represent a nonmarket barrier to innovation. These regulations provide significant benefits to society, but they also increase R&D costs and manufacturers' administrative costs for all pharmaceuticals. The magnitude of the disincentive posed by regulatory clearance costs depends at least in part on the anticipated product revenues. Safety and efficacy regulations force innovators to incur the heaviest expenses early in the development process. During several years of testing, the company is paying out "high-value dollars in expectation of returns that are years down the road. These future returns are significantly lower in real, present value terms than their nominal size may indicate. Market Size A particular product may be desirable to some potential customers and yet not commercially viable because its market is too small. One possible cause of inadequate market size in the vaccine industry is the systematic undervaluation of preventive treatment in the United States, discussed in Chapter 3. Also, vaccines may be undervalued because many individuals do not have access to adequate, balanced information on the benefits of preventive care.* Media coverage of vaccines often focuses on adverse reactions,8 hence, individuals may be more concerned about the risk of an adverse reaction than about the risk of contracting the disease. Another factor relevant to vaccine utilization is that vaccination of an individual conveys a benefit to other members of society by protecting them against disease. Thus, total benefits from immuni- zation programs may be greater than the sum of benefits to each recipient. Even when the consumer correctly perceives the personal benefits, the service may be underutilized when viewed from a societal perspective. As the percentage of the population that is immunized increases, an individual's chance of contracting a particular disease lessens, but the risk of adverse reactions remains unchanged. Many individuals in this situation will be tempted to be "free riders, n hoping that others will choose to be inoculated but concluding that it is not in their own best interest to do so. *Seat belts present an analogous phenomenon. Surveys of automobile drivers indicate that individuals consistently underestimate the risk of being in a serious accident; this apparently is one of the explanations for low seat-belt usage.9

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53 Liability and Risk All vaccines, even when properly produced and administered, have the potential to cause adverse reactions in some percentage of the population. Among the current problems faced by our legal system is whether and how to compensate those who incur these adverse reactions. In legal theory, vaccines are recognized as being "unavoidably unsafe, n but recently some courts have moved toward a strict liability standard, i.e., one in which the manufacturer is liable for all injuries caused by the product (see Chapter 6~. This has left manufacturers uncertain and apprehensive about their future liability. Concerns over liability exposure appear to act as a disincentive to the manufacture and distribution of vaccines, and may be affecting the willingness of some companies to undertake vaccine R&D (see Chapter 6) The liability situation also may engender a lack of support by manufacturers for large-scale immunization programs sponsored by the government, such as the swine flu program. In a survey of major vaccine producers undertaken by the committee, the manufacturers reported liability judgments to date. The respondents indicated that numerous suits and claims were pending. (These are discussed further in Chapter 6.) Submissions by the manufacturers indicate that vaccine operations are responsible for a disproportionate number of liability claims (about 40 percent? or related costs (e.g., insurance, about 60 percent) when compared with their pharmaceutical operations, even though the vaccines contribute significantly less to total sales (5 to 15 percent). Respondents reported that total defense costs over the past decade were approximately 8500,000 per firm, sometimes not including in-house counsel. Most manufacturers are self-insured for large amounts; outside insurance is used for protection above these amounts. The latter is reported to be increasingly difficult to obtain at acceptable premiums. The precise nature of the disincentives arising from liability is discussed in Chapter 6. For society at large and for the overwhelming majority of vaccine recipients, vaccination benefits dramatically outweigh the risks. Risks do exist, however, and the private sector may be unwilling to bear the cost of liability for these risks in the absence of some governmental or societal institution for risk-sharing. This could cause withdrawal from the market, i.e., failure of the market (in the broad sense) to ensure the supply of a desirable product. Possible approaches to compensation and liability problems are discussed in Chapter 8. DESCRIPTIVE STATI STICS Data in this section offer some insights into the status of the vaccine industry at the beginning of 1984. The precise situation at the time of publication (mid-1985) was unclear, especially regarding

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54 the DTP vaccine (Chapter 3~. The evidence is difficult to interpret, but there are some indications of a distortion of normal market Incentives. The Market and Participants Table 4.4 lists the vaccine manufacturers licensed in the United States and presents statistics on the number of product licenses TABLE 4.4 Vaccine Manufacturers Licensed in the United States as of Early 1984 Institution Number of Product Licenses Number of Vaccines Produced American Corporations Connaught Laboratories, Inc. Cutter Laboratories, Inc. Lederle Laboratories Merck Sharp & Dohme Parke, Davis and Company Wyeth Laboratories Foreign Institutions 10 1 12 18 1 IS Connaught Laboratories Ltd. 3 Glaxo Laboratories Ltd. Institut Merieux Tstituto Sieroterapico Vaccinogeno Tuscano Sclavo Swiss Serum Vaccine Institute Berne Wellcome Foundation State Governments Bureau of Laboratories, Michigan Dept. of Public Health Massachusetts Public Health Biologics Laboratories Universities University of Illinois l l 8 7 1 8a 1 11 10 1 12a l 6 l 6 5 1 aSee text and Chapter 3 for recent changes. Pertussis vaccine still produced but not distributed. SOURCE: Food and Drug Administration and Institute of Medicine survey of producers.

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55 TABLE 4.5 Nominal and Real Sales of Vaccines Produced for Human Use Nominal Sales Real Sales (millions of Percent (millions ofPercent Year dollars)a Change dollars)bChange 1967 36.6 36.6 1968 40.9 11.7S 39.37.37 1969 74.9 83.13 68.273.54 1970 84.7 13.08 72.86.74 1971 70.5 -16.77 58.1-20.19 1972 70.5 0 56.2-3.27 1973 83.0 17.33 62.411.03 1974 79.6 -4.10 53.9-13.58 1975 76.2 -4.27 47.3-12.29 1976 91.1 19.55 53.413.03 1977 99.4 9.11 S4.82.50 1978 104.5 5.13 53.5-2.30 1979 105.2 0.67 48.4-9.56 1980 95.0 -9.70 38.5-20.45 1981 130.6 37.47 47.924.55 1982 169.6 29.86 58.722.47 Value of vaccine products shipped by all manufacturing establishments (vaccine products are vaccines, toxoids, and antigens for human use). bAdjusted for inflation, expressed in 1967 dollars. SOURCE: U.S. Bureau of the Census. . issued and in use in early 1984.* Fifteen different institutions hold licenses for vaccines. Among the 12 commercial licensees, only 6 are domestic proprietary firms. Of these, two produce only one vaccine. Two of the remaining four (Connaught and Wyeth) suspended distribution of DTP vaccine after the information in Table 4.4 was assembled (Connaught subsequently resumed marketing in early 1985; see Chapter 3~. More than one quarter of all licenses held by private firms are unused. Table 4.5 presents sales figures for human-use vaccines between 1967 and 1982. In 1982, the total value of shipments of the domestic vaccine producers was $169.6 million. Nominal sales increased 363 percent between 1967 and 1982--a 60 percent increase in real sales (corrected for inflation). Between 1967 and 1982, a number of products were introduced to combat diseases for which vaccines previously had not been available. Unfortunately, it is difficult to obtain good data on the actual The only data available come from the International (IMS, Philadelphia, Pa.) database on hospital and drug store purchases. These data underestimate the size of the market because they do not include federal, state, or direct private physician purchases of vaccines.l° Despite this shortcoming, they sales by product. Marketing Services *A vaccine against H.influenzae type b was licensed in April 1985.

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56 TABLE 4.6 Percentage Sales Growth of Selected Vaccines 1977-1982 Percent Percent Year Product Nominal Growth Real Growth Introduced Rubella 9.9 -30.5 1970 Mumps -51.4 -69.2 1967 Polio 101.53 27.4 1961 Influenza 75.5 10.1 1945 SOURCE: International Marketing Services, Philadelphia, Pa. TABLE 4.7 Subgroups Market Share of Four Leading Firms by Major Vaccine Vaccine 1961 1967 1972 1977 1982 Rubella a a 1.00 1.00 1.00 Polio 0.90 0.885 1.00 1.00 1.00 Mumps 1.00 1.00 1.00 1.00 1.00 Tetanus a 0.658 0.957 0.987 0.996 DTP a 0.603 a 0.987 1.00 aData unavailable SOURCE: International Marketing Services, Philadelphia, Pa. can be used to evaluate percentage growth trends and the relative market power of firms in each product line if one assumes that the statistics generally reflect relative market shares of different vaccines.* Table 4.6 indicates that a few product lines have done quite well. Sales of pediatric vaccines would be expected to decline to correspond to the birth cohort once the backlog of potential recipients had been vaccinated. The concentration ratios presented in Table 4.7 show that between 1962 and 1982 the industry had very few firms in any given product market. The concentration ratio is defined as the ratio of sales of the top four firms to total market sales in a specified market. The four-firm concentration ratios for various subgroups of the vaccine industry were calculated on the basis of data supplied by IMS for domestic vaccine sales. The figures show very high levels of *Bulk federal purchases, the major potential distortion, are made only if a sole-supplier situation exists.

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,7 concentration. Only 12 commercial establishments hold licenses for vaccines in the United States. Even if these institutions were to divide the market equally, the structure would still satisfy the usual criteria for a loose oligopoly. However, the overall vaccine market is even more concentrated because it is fragmented into a variety of separate, noncompeting product lines, each with a relatively small number of producers. It is also clear that the concentration in the industry is increasing over time because of withdrawals. It is important to note that while the industry appears to be highly concentrated, a relatively high concentration also exists on the demand side. Table 4.8 provides a breakdown of the total doses of selected vaccines, as well as the percentages of the distributions that were administered in the public sector between 1972 and 1982. It is clear that the federal government has significant market power on the buyer's side, accounting for 40 percent or more of the total sales of some vaccines. Such buyer concentration can be a countervailing force against the potential market power on the supply side. Pricing Pricing data are available only for a distinct subset of the market: sales to the federal government. These data are sufficient, however, to provide insights into the pricing patterns of some vaccine products during recent years. Table 4.9 presents price data for federal contract purchases of selected vaccines between 1977 and 1983. The data include both absolute dollar amounts and the percentage changes from year to year. The last three rows give the consumer price index and the Bureau of Labor Statistics indexes of price charges in the medical care industry and in the prescription drug market in particular. These data show that the rate of price increases in the market for vaccines has, in general, outstripped the rise in prices for the economy as a whole, including the price indexes for medical care and drugs. It is significant to note that most of the price increase in the vaccine industry has occurred since 1978; indeed, many vaccines showed price decreases during the 1970s, as indicated in Table 4.10. Vaccines have risen in price relatively faster than drugs since 1978. The price of DTP vaccine, not included in Table 4.10, also rose significantly in the past two years.ll Many possible hypotheses could explain this observed pattern of behavior. Such pricing could reflect an industry now facing greater liability exposure. Alternatively, the prices could reflect a general Catching-up by industry members--greater cost pressures and R&D expenses, as well as liability, forcing firms to increase prices. In either case, the implication is that the preventive care offered through immunization has become a relatively more expensive form of health maintenance. It is important to remember, however, that none of the indexes in the last three rows take into consideration the change in quality of the products that are used to calculate the index. The effective

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61 units of health care provided by a one-unit purchase of the composite bundle of prescription drugs may have changed over the years, while the effective units provided by a unit of measles vaccine, for example, may be virtually unchanged. To properly compare the change in prices, more sophisticated empirical techniques must be employed. Congressional hearings were held in 1982 to examine the pricing of vaccines, but no single factor emerged as solely responsible for price increases.12 Research and Development Table 4.2 suggests that during the 1970s and early 1980s, commercial biologics R&D became a less attractive investment than R&D involving other pharmaceuticals. Whether the availability of new development and production technologies for vaccines (Chapter 2) has altered this trend is unclear. Unfortunately, available information on the rate of new product introductions (Table 4.3) does not distinguish between those that are totally new and those that are merely copies or minor improvements of an existing vaccine. Table 4.11 provides a detailed examination of the history of several of the more recent vaccine products licensed. The table shows that only 5 out of 18 recent licensures involved major innovations. The remaining licenses were "competitive" or "improve- ment" licenses. CONCLUSIONS While the available data are incomplete, certain conclusions can be drawn about the current economic situation of the U.S. vaccine industry. The number of manufacturers has declined steadily. During the 1970s and early 1980s, the proportion of total pharmaceutical R&D investment in biologics also declined (data are not yet available to determine whether this trend continued after 1982~. In addition, the pattern of new vaccine introductions has been considerably different from that of drug introductions in recent decades. Manufacturing of vaccines is highly concentrated and competition is very limited. Also, the sole-supplier situation poses a threat to the continued supply of some vaccines. Certain factors adversely affect the commercial attractiveness of vaccine manufacturing. As noted in Chapter 3, the potential market for vaccines is comparatively small because repeat sales to recipient are uncommon. The potential market is economically distorted by undervaluation of preventive services--both by the public and by physicians. Vaccines also are undervalued because the total benefits that accrue to society are greater than the sum of benefits to individual recipients (because of reduced transmission). Consequently, research and development costs are relatively large compared to sales revenues. s

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62 TABLE 4.11 Vaccine Development and Licensing Product and Manufacturer Application/ Issue Date Comments Anthrax vaccine adsorbed Michigan Dept. of Health Cholera vaccine ISVTSa Hepatitis B vaccine Merck Sharp & Dohme Measles/mumps virus, live Merck Sharp & Dohme MMR vaccine, live Merck Sharp & Dohme Measles and rubella, live Merck Sharp & Dohme Meningococcal polysaccharide vaccine Merck Sharp & Dohme Connaught Mumps virus vaccine, live Merck Sharp & Dohme Pneumococcal vaccine, polyvalent Merck Sharp & Dohme Lederle Merck Sharp & Dohme Lederle Rabies vaccine (human 07-17-67 11-04-7 0 0 5-29-75 08-19-76 06-12-79 11-16-8 1 12-13-71 0 7-18-7 3 10-02-6 9 04-22-7 1 0 5-25-70 04-22-7 1 0 9-28-72 04-02-74 0 8-12-7 5 12-13-76 12-28-66 12-28-6 7 0 1-23-75 11-2 1-7 7 07-16-76 08-15-79 08-23-82 07-07-83 0 1-26-8 3 07-21-83 New manufacturer of old vaccine New manufacturer of old vaccine New vaccine New combination of old vaccines New combination of old vaccines New combination of old vaccines New vaccine Independent introduction New vaccine New vaccine Independent production Improved vaccine Improved vaccine diploid) Wyeth 05-23-77 Improved production 08-11-82 process Institut Merieux 08-31-79 Same as above 06-09-80

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63 TABLE 4.11 (continued) Product and Manufacturer Application/ Issue Date Comments Rubella virus vaccine, live Merck Sharp & Dohme (duck embryo cells) Smith, Kline & French (rabbit kidney cells) Rubella virus vaccine, live Merck Sharp & Dohme (human diploid cells) 08-05-68 06-06-69 12-27-68 03-12-70 7-16-76 9-15-78 New vaccine Improved production process Improved production process aIstituto Sieroterapico Vaccinogeno Toscano Sclavo. SOURCE: Committee interpretation of data supplied by the Food and Drug Administration. Other factors that may adversely affect decisions about vaccine development include the perception that new vaccines will not receive useful protection from patents (perhaps arising from historical experience) and liability risks, particularly in the case of companies already marketing vaccines. The effects of recent changes in the patent law and in government funding policies on vaccine innovation are difficult to predict. The situation should be monitored (by the vaccine commission suggested in Chapter 7) and further actions should be considered if the available protection of property rights appears insufficient to stimulate the desired level of innovation. REFERENCES AND NOTES 1. Bowman, J. 1982. Testimony for Lederle Laboratories before the subcommittee on Investigations and General Oversight, Committee on Labor and Human Resources, U.S. Senate, July 22, 1982, Washington, D.C. Institute of Medicine. 1985. New Vaccine Development: Establishing Priorities, Volume 1. Diseases of U.S. Washington, D.C.: National Academy Press. 3. Austrian, R. 1983. Development of Pneumococcal Vaccine. Importance in the

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64 Prepared for the Institute of Medicine Conference on Barriers to Vaccine Innovation, November 28-29, 1984, Washington, D.C. U.S. Congress, Office of Technology Assessment. 1979. A Review of Selected Federal Vaccine and Immunization Policies. Washington, D.C.: U.S. Government Printing Office. Inderal, the largest selling anti-hypertensive drug, has annual sales of about $350 million. Wall Street Journal. May 25, 1984. Prices of prescription drugs soar after years of moderate increase. A31. 6. Beale, A.J. 1985. Modern approaches to the development of vaccines: perspective of a traditional manufacturer. Pp. 377-381 in Vaccines 85. Molecular and Chemical Basis of Resistance to Parasitic, Bacterial, and Viral Diseases, R.A. Lerner, R.M. Chanock, and F. Brown, eds. Cold Spring Harbor, N.Y.: Cold Spring Harbor Laboratory. 7. Scherer, F.M. 1980. Market structure and technological innovation. Pp. 407-438 in Industrial Market Structure and Economic Performance, 2nd ed. Chicago: Rand McNally. 8. Collins, C., and Hanchette, J. December 1984. The Vaccine Machine, A Special Report. Washington, D.C.: Gannett News Service. 9. Arnould, R., and Grabowski, H. an analysis of market failure. 12:34-35. 10. McCabe, E.F. 1983. Personal communication, Merck Sharp & Dohme, West Point, Pa. 11. Mason, J.O. 1984. Testimony on H.R. 5810 before the Subcommittee on Health and the Environment, Committee on Energy and Commerce, U.S. House of Representatives, December 19, 1984, Washington, D.C. U.S. Congress, Senate. July 22, 1982. Hearing before the Subcommittee on Investigations and General Oversight, Committee on Labor and Human Resources, Washington, D.C. 1981. Auto safety regulations: Bell J. Econ. Manage. Sci.