After Decades of Malaise, the Vaccine Industry Is Getting an Injection

After decades of decline, the vaccine industry is gaining new interest from drug makers and the federal government in response to last year’s flu-shot shortage, concerns about an avian flu pandemic, and the development of potential vaccines targeted at new markets, including cancer.

Vaccines remain a small piece of the overall drug market, with sales of only $9 billion — less than 3% of the global pharmaceutical industry. And vaccine manufacturers continue to face liability problems and low payments from public-health customers, according to Wharton faculty and industry experts.

Despite the obstacles, however, many of the world’s top pharmaceutical companies are increasing their stake in the vaccine market. Wyeth Pharmaceuticals, partly on the strength of its new childhood vaccine Prevnar, has opened a new research and manufacturing plant in Ireland. GlaxoSmithKline bought a Pennsylvania vaccine plant where Wyeth once made flu vaccine and has bid $1.4 billion for Canadian flu-vaccine producer ID Biomedical. Novartis has offered to take a controlling stake in Chiron Corp., a California vaccine maker. Merck & Co. is readying applications for regulatory approval of what could be a breakthrough cervical cancer vaccine. And Sanofi-Pasteur, the world’s largest vaccine maker, has won nearly $200 million in U.S. government contracts to boost flu-vaccine production and test new technology to produce vaccines more efficiently.

The new interest in vaccines represents a significant uptick for the industry, suggests Scott Lundstrom, vice president of research at Life Science Insights in Framingham, Mass. “All industries have cycles and vaccines have been a sleepy little corner of the market for awhile,” he says. “I think you do see some companies trying to reinvigorate and reinvent the way we think about vaccines.”

Of all the reasons to develop new vaccines, perhaps the most pressing one is the worry over the possibility of a worldwide avian flu pandemic, which, according to media reports, could kill anywhere from under two million to more than 100 million people. Among big pharmaceutical companies, Sanofi-Aventis is the most advanced in the search for a vaccine to protect against avian flu. The company has already launched clinical trials testing vaccines against the H5N1 virus linked to this strain.

Jerome Berton, an analyst with Natexis Bleichroeder in Paris, notes that Sanofi-Aventis has 55% of the world’s capacity of flu vaccine, but that would hardly be enough to protect the world during a pandemic. “It’s really a global issue, an international health issue,” says Berton. “The companies involved in research to fight the potential pandemic threat are saying it’s not a question of money, it’s a question of persons — human beings. Governments need to protect their population and fight the pandemic by any means.”

If a pandemic were to take hold, Berton says governments would negotiate huge purchases of vaccine at low margins for drug makers. In addition, he predicts, governments will waive patent protections and allow competing firms to produce vaccines discovered by others in order to meet the demand. Meanwhile, to stimulate production, U.S. Senate Republicans have drafted legislation that would give drug companies $1 billion in incentives to develop products to protect populations from bioterror and epidemics.

Pharmaceutical Backwater

Until recently, vaccines were a pharmaceutical backwater as companies pulled out of the industry that had come to be viewed as a high-risk commodity business. In 1967, there were 26 vaccine manufacturers in the U.S. market; by 2002 there were 12. Five firms produce almost all routine childhood vaccines and five of the eight currently recommended pediatric vaccines have a single supplier, according to Wharton health care systems professor Patricia Danzon.

Danzon, whose research on the subject has been published in the peer-reviewed journal Health Affairs, points to Gardisil, a new vaccine under development by Merck to prevent cervical cancer, as an example of a new generation of vaccines for expanded markets that should be able to fetch a premium price from government and private insurers. And GlaxoSmithKline has 20 new vaccines under development, including products to combat strep, meningitis and rotavirus. “In the past, a lot of attention was paid to the childhood vaccines, but more and more research and development is focusing on vaccines for adolescents and young adults or even on adult vaccines for diseases such as cancer,” says Danzon. “The health system approach to vaccines really has to adapt to accommodate these new products.”

According to Danzon’s research, financed by grants from Wharton’s Leonard Davis Institute of Health Economics and the Merck Company Foundation, the U.S. vaccine market is prone to shortages. “This is an industry with a relatively small market where prices are set, so it tends to gravitate to the best producer and we end up in a sole-supplier situation,” she says.

When a supplier experiences a problem or cuts back production, shortages arise. For example, U.S. flu shot supplies were cut short last year after British authorities shut down production at a Chiron plant because of quality control problems. “It’s not just that we need to find a better way to finance vaccines and expand insurance coverage, but we also need to be aware that as policy managers we will face single or few suppliers,” says Danzon. “We need mechanisms to stockpile where possible, and a backup system to bring vaccines back into the system when they are needed.”

Wharton health care systems professor Mark Pauly studied the vaccine market for a 2003 Institute of Medicine report which concluded that the government often mandates vaccine protection, but does not back that up with enough money to encourage companies to develop new products or maintain production. “If government is going to require [this protection], it should bite the bullet and pay for it,” says Pauly. “Essentially these vaccines are thought of as a public good and they are an obligation for the government to finance.”

Danzon agrees. “Vaccines should be thought of as an important part of our normal health care system and should be covered by insurance because they are so effective in reducing costs,” she says.

The IOM report, Pauly adds, has been met with “stunning silence” by politicians. Insurers, he says, are also disinterested in receiving government subsidies for mandated programs because they fear they might ultimately be left with the mandate, but not the subsidy. “At the moment there is a total lack of trust between these three parties.”

The government generates additional mistrust when it threatens to step in and cut pharmaceutical prices when demand is high, as it did with the drug Cipro during the anthrax attacks on U.S. postal facilities in 2001. “I believe the relevant parties ought to get together and make a better plan,” Pauly urges. “There’s talk about better planning, but I haven’t seen any movement.”

He can envision a system that provides some government pricing guarantees to encourage manufacturers of vaccines, especially for flu, to remain in business. The flu market is particularly complicated because vaccines are formulated each year based on strains of the disease that are expected to be most prevalent. They cannot be stockpiled if they go unused.

He suggested governments could set a trigger price at which companies could not raise prices if shortages develop. At the same time, authorities could offer concessions to compensate for the price cap, such as extended patent life, to avoid temporary spikes. “But nobody has really planned a system like that,” he notes.

A Bet-the-firm Risk

Lawsuits filed against vaccine makers alleging their products have harmed patients are another reason drug makers have become wary of vaccine production, says Wharton health care systems professor Scott Harrington. With vaccines that can potentially reach millions of patients, the odds of a bad outcome in the courts could ruin a firm, he notes. In the case of widely distributed vaccines, “a firm is engaging in a bet-the-firm risk if things go bad. That discourages research and development on certain types of vaccines and discourages production and marketing.”

In 1986, Congress created the Vaccine Injury Compensation Program (VICP), which established a no-fault system for compensating those who may have been injured by routine childhood vaccines. The program was designed to streamline and limit vaccine makers’ liability. But Harrington says lawyers continue to bring suit against vaccine companies by using opt-out provisions in the legislation that created the VICP.

The biggest obstacle vaccine makers face, Harrington adds, is little payback for their risk because many of their products are purchased in bulk by governments and other public health authorities, including humanitarian agencies. These large buyers are able to negotiate low prices. “In the U.S., the government is paying for over half of all vaccines for children, and vaccine makers are more or less forced to take prices that are very low. It might be difficult to pursue research and development without worrying that you could get a very low price,” says Harrington.

Wharton health care systems professor Guy David points out that the demand side of the vaccine market is crucial to keeping the industry vibrant. “Even if we have really successful development of safe vaccines, we still need to have people know about them and believe they are beneficial, and have people willing to pay for them and providers willing to administer them,” he says.

David also suggests that some of the vaccine shortages in recent years may have come as a result of stepped-up Food & Drug Administration review of vaccine manufacturers’ plants. “The more serious the FDA got, the more shortages we got.”

According to Danzon’s vaccine study, Wyeth produced influenza vaccine for the U.S. market for more than 20 years, but in October 2000 the company was fined $30 million for manufacturing violations and an additional $15,000 for every day that it remained out of compliance. In November 2002, Wyeth announced it would exit the flu market, leaving only two manufacturers of injectable influenza vaccine.

David says the role of government in the vaccine market cannot be overlooked. Assertions that a market-driven system has failed in the vaccine industry are wrong, he suggests. “We do have private firms providing vaccines, but it’s not like we have ever given this market a chance to be a free market. This type of production is among the most heavily regulated industries we have.”

According to David, the most important issue in the debate about vaccines is how to finance new vaccine research and development. He notes that some analysts have suggested governments or large purchasing organizations sponsor a sort of vaccine-development contest. Under this system, sponsors would offer guarantees to buy quantities of vaccines at an attractive price from a sole provider who comes up with the best vaccine for a certain disease.

“This has a nice appeal from a theoretical perspective, but from a practical point of view it’s likely to fail,” David contends. He says research and development must remain highly flexible to be successful — not ordered from the top down. In addition, it would be difficult for an authority to guide the development process with an all-or-nothing vaccine sweepstakes. Firms also would be reluctant to take the risk of working on a vaccine that might come in second.

The best route to development of novel vaccines is continued investment in basic research that might lead to wide-ranging discoveries that could be applied to vaccine development, says David.

An all-or-nothing prize might also squeeze smaller, innovative firms out of the process. “What we really need is a way to fund basic research. Only a few firms in the Western world can take upon themselves the risk of developing and testing a product.”

A Real Revolution?

However, the new interest in vaccines comes at a time when the pharmaceutical industry is struggling with few new products coming to market. And while there are challenges on the revenue side of the business, Life Science Insights’ Lundstrom notes that the process of developing vaccines is more predictable, cheaper and faster than it is for other drugs. “Is this a real revolution, or simply the case of companies making lemonade out of lemons?” he asks.

On the other hand, Lundstrom supports Danzon’s point that the traditional view of vaccines as a bulk-order commodity is changing. “I think it’s almost a misnomer to call some of the new products vaccines. They are patented, targeted treatments and can create hybrid pricing,” he says. As an example, he points to Wyeth’s childhood vaccination, Prevnar, that has proven itself superior in clinical trials and commands $50 to $60 a dose from insurers, compared to competitors’ $10 a dose.

Insurers, he predicts, will increasingly be willing to support new, high-priced vaccines if they are proven to keep long-term costs down. “Vaccines are a very efficient way to treat illness. Prevention has significant economic advantages. We’re at a point in the market where developing vaccines is attractive; [this hasn’t been true] in the recent past. I don’t think you can underestimate the role that payers increasingly play in determining what’s valuable in the market. And I do think that this is really a different market.”