Determinants of Vaccine Supply

Vaccines can be an extremely cost-effective type of medical care, helping to slow or prevent the spread of infectious diseases, reduce medical expenditures, and save lives. But vaccines can suffer from supply interrup-tions and shortages, a situation exacerbated by the often small number of suppliers - or in some cases, the existence of a sole supplier - for a given vaccine.

The government plays a large role in the market for vaccines in the U.S. As with all pharmaceuticals, the Food and Drug Administration (FDA) must authorize new vaccines before they can enter the market and moni-tors their safety after introduction. The Centers for Disease Control and Prevention (CDC) issues recommendations for pediatric and adult vaccinations. The CDC is also an important purchaser of vaccines, in some cases buying over 50 percent of all doses of a particular vaccine sold on the market.

Is the large government role in purchasing vaccines partly to blame for the small number of suppliers for many vaccine products? This question is explored by researchers Patricia Danzon and Nuno Pereira in their paper "Vaccine Supply: Effects of Regulation and Competition" (NBER Working Paper 17205).

The conventional wisdom is that having the government as a large purchaser is a major contributor to lack of vaccine profitability and eventual exit of vaccine suppliers. However, competition, limited market size, and cost structure may produce this result. The vaccine industry is characterized by large fixed costs of initial vaccine development as well as substantial "semi-fixed" costs of producing an individual batch (a process that may take 6 to 18 months) but low marginal costs of producing an additional dose, up to the batch limit, and low storability. If there are multiple competing suppliers with large sunk costs and low marginal costs, competition may drive the price low enough that it is relatively unattractive for multiple firms to remain in the market and for new firms to enter.

To explore this issue, the authors assemble a data set on the dates of grant and withdrawal of all vaccine li-censes authorized by the FDA between 1901 and 2003. They explore how the firm's decision to cease produc-tion of a particular vaccine relates to a number of factors, including the number of competing vaccines on the market, the time since the license was awarded, the liability environment, and, importantly, whether the government has recommended the vaccine for universal purchase and the role of the CDC as a purchaser of the vaccine.

The authors find that vaccines that face more competition are more likely to be withdrawn from the market, as are older vaccines. Vaccines that are recommended for universal purchase are much less likely to exit. However, there is no effect of whether the CDC is a purchaser of the vaccine, the amount purchased, or the CDC price on exit. One possible explanation for these findings is that the negative effect of government purchase on price may be offset by the positive effect on volume.

Taking a global view, the authors note that there are likely to be high country-specific fixed costs, for example costs incurred in satisfying each country's regulatory agency, and country-specific preferences about pediatric vaccine schedules. It may be unsurprising, then, that few vaccines are sold globally in exactly the same formulation and dosing and that each country has relatively few producers of any given vaccine. Interestingly, for several vaccine types the U.S. has fewer suppliers than countries with a smaller market and a higher level of government purchase. This suggests that more stringent and costly regulatory requirements may reduce the number of suppliers.

Finally, the authors turn to a recent, well-publicized case study of vaccine scarcity, the 2004-05 influenza vaccine shortage. They note that while several suppliers did exit the market in the years before the shortage, this cannot be blamed on government purchase and price controls, as less than 20 percent of the flu vaccine is publicly purchased.

The authors conclude that U.S. vaccine markets are likely to have either one or a few suppliers of each vaccine type once the market is mature. They argue that this is not due to the government's role as a purchaser of vaccines. Rather, it is the result of high fixed costs of vaccine development, price-sensitive demand in the private market (physician and hospital receive a fixed reimbursement per vaccination and thus capture any margin between their cost and the reimbursement), and dynamic quality competition in which vaccine makers have weak incentives to invest in existing products because they are likely to be supplanted by new and improved products, such as combination vaccines.

In the long run, scientific advances that improve the storability of vaccines or reduce the lead time required for production may help alleviate vaccine shortages. In the short term, however, the authors warn that new technologies are more likely to "exacerbate supply shortages, by undermining incentives to invest in older plants that are destined to become obsolete."

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