Flu shot debacle: The flu vaccine crisis was produced by the very policies favoured by those who seek to reform the entire pharmaceutical industry. Any lesson here?

Brian Ferguson

Friday, October 29, 2004

If the would-be reformers of the pharmaceutical sector get their way, the whole sector will wind up looking remarkably like the U.S. flu vaccine sector. Now that’s progress.

Consider the reformers’ favourite gripes and remedies. Patents, combined with a private market system, allow drug companies to drive up prices and exploit consumers. Too many drug companies spend too much developing “me-too” drugs that are virtually indistinguishable from existing drugs. They spend too much time going after market share rather than looking for new diseases to conquer. All of this would be remedied if the government decided what drugs should be produced and used its major buying power to drive drug prices down.

As it happens, that’s pretty much what the U.S. government has been doing in the vaccine field for some time, and the flu jab debacle is the result.

Everybody knows the basic outline of the story. Just before it was about to be shipped to the United States, a batch of flu vaccine produced by Chiron Corp. in its Liverpool plant in the U.K. was found to be contaminated. The British government impounded all doses made at the plant. The amount impounded came to 48 million doses — almost half the total flu shots the United States needed for this year’s public health campaign. The result is panic, and fears in Canada that our stock of vaccine, which comes from a different source, will be gobbled up by Americans elbowing their way north to get flu jabs.

The obvious question is how the United States got to be dependent for its flu vaccine supplies on just two companies, one of them foreign.

The answer is U.S. health policy.

It’s not just flu vaccine that has been affected by badly designed policy. According to a report in The New York Times, 30 years ago there were 25 companies making vaccines for the U.S. market, whereas today there are just five. According to the Times, experts say the problem is that “no one person or agency is in charge of making sure the United States has an adequate vaccine supply.” In fact, the problem is precisely the opposite. The government is playing too much of a role in the vaccine market.

Consider pricing. The U.S. government, through the Centers for Disease Control, is the largest single purchaser of vaccine. It has used that clout precisely the way reformers say governments should — it has obtained discounts on the order of 50% off catalogue prices. At the same time, the Food and Drug Administration has imposed ever more stringent quality control requirements on producers of vaccines. Sensible enough, you’d think, but the increased quality is costly to produce and prices have not risen to permit the vaccine producers to recover those additional costs. The result is that vaccines have become less and less profitable over the years. According to a report from the U.S. National Academy of Sciences Institute of Medicine, which predicted problems ahead, vaccines account for only 1.5% of drug company revenues.

It’s that decreased profitability which has driven producers out of the field. Thirty years ago, more than a dozen companies made flu shots, but five years ago that number was down to four, and by 2002-3 there were three. Wyeth Pharmaceuticals used to produce flu vaccine in Pennsylvania, but decided to get out of the market after losing US$30-million on seven million unsold doses last year. In fact, over three flu seasons, Wyeth lost US$50-million on unsold flu vaccine. It got out of the market, leaving only two producers.

The low rates of return on vaccines make them unattractive to drug companies, both as current products and as directions for research effort. Vaccines are also fertile ground for lawsuits — to the point where the U.S. government had to step in some years ago and provide some protection for producers of common childhood vaccines. Flu vaccine isn’t covered. Considering the numbers of people who could be involved, and the vast sums that could be claimed in damages in class action lawsuits should there be the slightest suggestion that vaccines had harmed anyone, it’s understandable that drug companies wouldn’t want anything to do with them.

So there it is. Government uses its clout to keep prices down, and government also decides what should be produced by predicting what particular flu bugs are likely to be around next year. There is very little research going on in the vaccine sector — much less than we need — but at least there’s no wasteful research happening. And with only a couple of companies in the business, we’re spared the waste represented by all those me-too drugs. What more could a reformer want?

Brian Ferguson, a health care economist at the University of Guelph, is preparing a paper on the economics of drug policy for the Atlantic Institute for Market Studies, a public policy think-tank in Halifax.