The hidden cost of free vaccines
By John Gapper
Published: June 18 2009 03:00 | Last updated: June 18 2009 03:00
Giving products away free, from browsers to newspaper articles, is commonplace in the technology and media industries. The trend has now spread to vaccines.
Pharmaceuticals companies, scarred by years of losing the public relations battle to campaigners over the price of HIV/Aids drugs in Africa, are eager not to be caught out by swine flu.
Andrew Witty, chief executive of GlaxoSmithKline, has offered to donate 50m doses of GSK's planned swine flu vaccine to the World Heath Organisation. He has caught the public mood: Margaret Chan, WHO director-general, has urged "solidarity" with poor countries over the H1N1 flu virus.
Mr Witty and Ms Chan have forced Daniel Vasella, chief executive of Novartis, to defend the profit motive. He told the FT this week that Novartis did not want to follow the GSK example by giving away doses of its planned vaccine because "if you want to make production sustainable, you have to create financial incentives".
Mr Vasella, who is normally the most public relations-adept of executives, has placed himself in an awkward corner, but he is right. For reasons that go beyond the general value of unfettered markets and the price mechanism, cheap is a better price than free for new vaccines in the developing world.
The debate over swine flu vaccine is a sign of things to come, for vaccines have emerged as one of the drugs companies' more hopeful areas for innovation. "Vaccines have gone through a renaissance from being a financial backwater to a real source of future profits," says Mark Pauly, a professor of healthcare management at the Wharton School.
A drought of traditional drugs still bedevils pharmaceutical companies, but they have developed vaccines against chicken pox, rotavirus and cervical cancer. Prevnar, Wyeth's vaccine for pneumococcal meningitis, a blockbuster with annual revenues of $3bn (£1.8bn, €2.2bn), was a factor in Pfizer's $68bn acquisition of Wyeth. The vaccine world of the late 20th century was dominated by quasi-public bodies - Jonas Salk developed the polio vaccine in 1954 with funding from the National Foundation for Infantile Paralysis. Today's innovation resulted from price controls being relaxed.
Vaccines now contribute up to 20 per cent of the revenues of companies such as Merck and GSK, estimates Andy Pasternak, a partner of Bain & Co. Pharmaceutical companies also like vaccines because there is little generic competition and high barriers to entry: it is much harder to mimic a vaccine than a traditional pill.
Despite rising vaccine prices - new vaccines can cost between $50 and $100 per treatment - they are good value for healthcare providers. It is cheaper for insurance companies or governments to vaccinate against diseases than to provide medicines and treatment for outbreaks.
Still, if pharmaceutical companies are now making such healthy profits from vaccines in the developed world, why not give them away free in developing countries to save the lives of poor children? It is a seductive idea, but there are two reasons for them to charge.
First, if developing countries do not pay for vaccines, there is a danger that drugs companies will stop producing enough of them. Vaccines have a high marginal cost of production because they have to be cultured in eggs, and stored and distributed carefully.
Although western companies disliked being told to sell HIV/Aids drugs cheaply in Africa, they could cover their marginal costs at a very low price. Making vaccines is more capital-intensive and the losses from donating them mount up faster.
Too much "solidarity" can lead to a lack of production, as it did in the US in the 1980s, when the six main childhood vaccines - including measles and polio - were priced so low that several vaccine producers dropped out of the industry.
Second, while there is a benefit to one-off donations of vaccines against adult pandemics such as swine flu, there is no point in a developing country vaccinating children one year with a donation of free medicines if it cannot afford to carry on with the programme.
Indeed, one-off gifts of childhood vaccines can cause more harm than good. Developing countries obtain far greater benefits from being offered guaranteed low prices for a vaccine over several years, enabling them to plan vaccination properly.
What matters most is not one-off initiatives but the long-run cost of a vaccine. GSK's offer to donate 50m swine flu vaccines was accompanied by a commitment to supply the vaccine around the world at tiered prices - more cheaply in developing than in developed countries.
This approach is being promoted by the Gavi Alliance, the group that gathers government and private donations to subsidise vaccination in 72 of the world's poor countries. Gavi has a $1.5bn programme under which companies have made 10-year commitments to supply low-priced pneumococcal vaccines.
Tiered pricing for the new vaccines seems to be working. Latin American countries can buy vaccines against rotavirus, which causes diarrhoea, at $6 per treatment, compared with a US price of $80.
Perhaps drugs companies have seen the light; perhaps they have merely learnt a public relations lesson. Whatever the cause, variable pricing offers the best hope for combining the profit motive with the humanitarian imperative.
Giving vaccines away free sounds like a more generous approach but the hidden cost is too high.
Copyright The Financial Times Limited 2009
Comments