A-chew On This

Ian Cook gets to the bottom of the flu vaccine shortage. Based on the current political climate, odds are better than even that this is a microcosm of the future of drug development.

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I don't see that Cook

I don't see that Cook explains the issue. Are private manufacturers prevented from selling additional vaccine at market prices?

I think flu vaccine supplies might well decrease significantly in a free market. Producing flu vaccine looks an expensive crap shoot to me.

I agree with John -- Ian

I agree with John -- Ian fails to explain the issue. The IOM report Ian links to doesn't say that government purchases are done below cost, as Ian appears to imply, merely that the government gets a large volume discount.

How is this any different than the large volume discounts negotiable by any private purchaser of a good, especially those whose purchases are regular and thus predictable? Vendors will often trade off predictability of revenue for a higher than average discount, or larger guaranteed sales volume for a higher than average discount. By itself I see nothing that implicates the government as the "problem" here.

The IOM report alludes to the real reason why vaccines are less attractive to pharmaceutical companies -- they provide a lower return on invested assets than commercial drugs, especially new prescription drugs that can later be released OTC. In terms of asset allocation, pharmaceutical companies are making relatively sound business decisions. It's not government purchasing that disincents vaccine production, but the relatively low profitability of vaccines overall.

The problem is thus even more severe than Ian suggests -- if vaccines are unprofitable uses of scarce investment capital, then how does society incent what is obviously a public good?

No, vaccines are a private

No, vaccines are a private good - the lion's share of the benefit goes to the vaccine consumer. Selling vaccine to private consumers isn't the problem.

Sorry, I wasn't clear. I'm

Sorry, I wasn't clear. I'm arguing that epidemiology creates a public good in the control over the spread of infectious diseases. Controlling the spread of flu or a host of other diseases is a public good because it's non-excludable and because in fact it results in externalities which aren't borne by either the vaccinated individual or the company making the vaccines.

In the case of infectious diseases, costs to individuals who elect not to be vaccinated may be small (in the case of flu) but carry large uncompensated externalities. Infected individuals spread the disease and cause costs to their employers and to other uninfected individuals. All of these costs are not borne by the infected/unvaccinated individual, and thus there is no incentive for vaccination to be uniformly practiced as a purely private good, except insofar as the personal inconvenience of getting the flu provides such an incentive.

When treated as a public good, however, vaccination provides a way to control the unremunerated external costs of infected carriers by replacing it with a relatively known and fixed cost for large-scale vaccination. It's non-excludable because everyone benefits from reducing the infection rate and number of carriers of a disease, not just those who pay for vaccination. It's non-excludable as a good to employers because they benefit from a healthier workforce with less productivity lost to sick days, again whether they offer vaccination as part of a health plan or indeed even offer health coverage.

This obviously is a qualitative argument, and deserves more quantitative analysis to know exactly whether and how much of a discount is warranted for government vaccination programs. My comments were intended to argue that it's possible that (a) we need to continue government vaccination programs, and (b) that if industry is finding it difficult to justify the asset allocation, the public sector needs to analyze vaccination carefully as a potential public good and determine its value and funding level appropriately.

For those that may care,

For those that may care, I've posted again.

I read the article at truck

I read the article at truck & barter and had several major problems
with it -- he builds a big structure on many assumptions about costs and other variables without providing any information to demonstrate they have any baises in reality.

His article has many, many assumptions, but very, very few facts.

It looks like a very simple case of someone in govt trying to save a few cents but at the costs of taking a big risks. It is standard pratice to use multiple suppliers even though one supplier might be a little cheaper than others so you are not tied to the one source because there is always the risks that this type of thing can happen. The govt did not do it this time . Why -- Truck & Barter constructs this big theory about why,but provides no facts to support his theories.

For all I know the govt decision maker responsible for the goof may be a member of the Bush admin that wants to demonstrate that the govt always goofs things up. I have as many facts to support this theory as the Truch & Barter people have to support their theory.

The decision of

The decision of manufacturers not to enter a market or exit a market is based upon expected returns. In this case the returns that can be expected do not appear to be driven by demand (large market and long time horizon). We can then say that demand is not detracting from the markets attractiveness.

We must then turn to factors that effect ability to develop, produce, costs, price and profits.

The ability to forecast the nature of "flu bugs" to develop is a difficult forecasting problem. This means that firms are likely making a bet that they can correctly guess which strains will be in the general population at the time the vaccine is needed. How are they compensated for the risk that they take? It is in the price. Is the price set before or after they have guessed? It make a big difference. If before, firms must estimate the probability of a wrong guess and negotiate it into the contract. I assume that this must be done while watching competitors. Does this lead them to reduce the risk premium? This situation likely leads to a very wek negotiating position for producers who have already commited to the game and must face a large buyer.

If the line of reasoning is correct then we have a potential problem where firms will hedge both fixed costs outlays and product volumes to reduce risk (reduce lot sizes to conserve capital).

One possible way around this is to have a multi-level pricing scheme to incent speculation and help ensure firms invest at the development phase.

When we move to production firms are likely betting only on variable costs. The problem is that the bet involves all of the variable costs associated with a lot. This is a real risk. It looks like an all or nothing bet. Again how are firms able to manage this risk and what premium is included in the price.

I see a lot of costs (ie capital) that are at risk and a pricing scheme that sets price without a true understanding of the probability distrubution around "flu bugs." The time horizon also makes it difficlt to coninue playing the odds to get to the expected value.

We also have costs assocaited with legal actions. These costs are also variable and not known with certainty. Should consumers set-up a fund to handle legal suits?

Net, Net, I think that Ian is pretty much on the mark with his assessment. Controling a large block of the market reduces manufacturers ability to manage price to offset variable risks assocaited with this product.

All Vaccine, All the

All Vaccine, All the Time
Well, let's hope not. It's just that I've had limited time, and -- to my great delight -- the vaccine post below has generated a bit of discussion that I feel the need to mention. Many thanks to the folks that have hit the post with a Trackback, inc...