The vaccine oligopoly
This week, in the face of the most serious influenza scare for over a decade, the US has basically run out of flu vaccine. And part of the problem, according to the Wall Street Journal, is due to oligopoly.
In an article called “Lack of Vaccines Goes Beyond Flu Inoculations,” (12/8/2003), reporter Bernard Wysocki Jr. writes about “the malfunctioning of the small but vital marketplace for preventive vaccines in America.”
There are only two companies making injected flu vaccines in the US, the article points out, French Aventis SA, and Chiron Corp. There is a third company called MedImmune Inc. with a nasal spray vaccine. But it isn't just a one-time shortage or just about the flu, the article states. “This is the eighth major shortage of preventive vaccines in the U.S. since the beginning of 2000. Shortages of vaccines for diphtheria, tetanus, chickenpox and measles have occurred since then. Flu vaccines have been in short supply for three of the past four years.”
The reason behind these problems is a steady oligopolization of the vaccine industry. From 1970, when there were 25 vaccine makers, there are now only five. Companies like Merck, Wyeth, and Pfizer have gotten out of the vaccine business. “With such a small number of producers, shortages can develop quickly as a result of manufacturing problems, poor management, or a bad guess on the expected demand.” In fact, flu is better off than diseases tetanus or chickenpox, which have a monopoly supplier in the US.
Part of the reason has to do with exposure to lawsuits for real or perceived vaccine-caused illness, a growing problem or delusion, depending on who you talk to. But the main problem, as the WSJ article makes clear, is price controls, on of the few areas in the US where there are government-mandated controls for pharmaceuticals.
For makers of all types of vaccines, the Institute of Medicine's report traced the decline in manufacturers' interest to the fact that the U.S. government — predominantly through the Vaccines for Children program run by the CDC — buys slightly more than 50% of the vaccines in the U.S., and keeps prices low.
One observer quoted in the article calls this an issue of monopsony power, where the government sets the prices. But I see it as a fight between oligopoly and monopsony, where the monopsony is working for the public good, offering free vaccines to poor children and protecting the public health from pandemics.
Pharma companies can't get the robust profits in this area that they can expect in other unregulated, ones. The vaccine industry in the US is only a measly couple of billion dollars in total, nothing compared to Viagra or Oxycontin, which are far easier to manufacture and distribute, and bring a far more lucrative return.
But with the flu vaccine, government controls should not be a big problem. The government is not a big buyer of the vaccine, rather physicians, clinics and hospitals. So it's not just price controls that are the culprit, rather an evaluation of the opportunity for profits.
And the problem will get worse. The costs of vaccination and the number of available vaccinations keep going up. Calls for a national vaccine problem fall on deaf ears as the government has just decided to spend scores of billion on Medicare drug benefits, along with regs which deliberately prohibit price controls or government negotiation on most drugs. Opposition to any extension of a requirement for vaccination is fought most vigorously by the drug companies and the insurance companies.
The development of an oligopoly in vaccines is not an evil plot. It is the result of a set of business decisions that were made to pacify stockholders and choose more profitable lines of business. But current drug development hurdles presents a high entry obstacle for new companies, so the threat of low-cost innovators taking over the market is low. That's particularly so in terms of innovation; when there are few labs working on improving current vaccines or discovering new ones, innovation is less and less likely.
But this is also a case where proper corporate behavior (making sure not to overestimate demand) conflicts with the public good, where a reasonable amount of surplus is a general good. But the combination of a drug industry looking elsewhere for profits and an absolutist aversion to government activism and regulation may soon lead to a major rise in preventable epidemics. [Oligopoly Watch]