The economics of the vaccine business

The world infected with coronavirus needs a vaccine to be ready and available as soon as possible.

Scientists are labouring day and night to find an effective vaccine.

And there is light shining at the end of the tunnel.

Covid-19 vaccines have started cropping up, defying the traditionally long and tedious timeline required to develop a vaccine.

The newer platforms that are currently leading the race to create vaccines are able to produce them quickly and in great volumes.

On 12 August 2020, The Economic Times reported that Russia registered the world's first coronavirus vaccine; President Putin said his daughter was given a shot.  

During this pandemic, vaccines may become a wonderful business for some countries.

The Western nations' security services have warned concerned parties saying that the hackers have been targeting British, Canadian and American organisations that are racing to create coronavirus vaccines.

As soon as the dream of developing a safe and effective Covid-19 vaccine is realised, the first innovator will certainly file a patent to bring the vaccine to the market in a hurry and recover his/her costs.

The patent will allow the manufacturer to secure a better profit margin while at the same time it will hinder other vaccine innovators from entering the market for a finite period, thus making the vaccine expensive and limiting its availability.

But there is also a big problem when the definite duration of patent protection expires.

As soon as the period ends, the market will be flooded with cheaper generic versions.

Regardless of profits, the economic and social benefits of vaccination are huge in saving lives. PHOTO: REUTERS

The business of making vaccines

Historically, vaccines were produced at a relatively low price and sold at a low profit margin.

Vaccines, as pharmaceutical products, were not particularly profitable.   

They were add-ons to other products (mostly drugs) that pharmaceutical manufacturers were producing routinely.

For pharmaceutical companies, vaccines are often bad business.

An effective vaccine generally provides protection for life if an individual takes a single dose once a year, or once in a lifetime. Thus, a single consumer does not need more than a few doses in a lifetime.

On the contrary, it is extremely profitable for pharmaceutical companies to put their efforts into providing drug treatments for chronic conditions, where people take medicines on a daily basis for extended periods of time.

For these reasons, many companies turn away from the vaccine business.  

It was not too long ago that the vaccine industries were struggling with slim profit margins.

In 1967, there were 26 vaccine manufacturers. By 1980, the number dropped to 17.

Most drug makers don't want to spend time on such a low-margin business. Rather they prefer to employ their research and development (R&D) personnel for developing new blockbuster drugs that have higher chances of success and will make them wealthy.   

Apparently vaccine developers often call themselves the stepchildren of pharmaceutical companies since they have to fight hard for the resources to develop new vaccines.

At present, vaccines are massively expensive to produce and involve a big financial risk.

Even vaccines that got approval from R&D sections to move forward often fail during clinical trials, forcing companies to abandon the projects.

Many companies are working to produce vaccines and taking massive financial support from the US government and others.

There are many factors that make vaccine business less lucrative.

Live vaccines are troublesome to manufacture.

They are closely regulated by the US Food and Drug Administration for quality control.

Governments are the primary buyers because of heavy regulations and a lack of a broad customer base.  

They buy vaccines in great volumes at capped prices.

High production costs, low market prices, and heavy regulations combined together discourage many drug companies to make vaccines.

The vaccine business has thus become a business of stockpiling. It hardly belongs to the reactive market.

It is the kind of business that is proactively built by governments.

Even in some developed countries, vaccine making is largely left to public institutions.

Skyrocketing prices

Interestingly, vaccine prices have always been higher in the US and Europe.

Due to tiered pricing, vaccine prices have been rising dramatically in recent years.

But the profit margins are hardly known to general people.

Costs incurred by activities such as Performing R&D, Manufacturing, Trials to Test Efficacy, and Distribution are not made public.

The manufacturers purposefully keep these expenses secret.

Maybe they are afraid of facing probable pressures to lower prices in the developing world.

There were once worries that low vaccine prices would drive manufacturers out of the market and lead to shortages.

Instead, now there are health and financial worries for both the developed and developing world since vaccine prices are skyrocketing in recent years.

The manufacturers justify this high pricing by saying that vaccine production is very complicated and R&D budgets would suffer if they lower prices.

Thus, this marginal, money-losing vaccine business has turned to a massive profit generator for a small number of global companies, since the public and governments hasten to protect themselves from diseases and unwanted deaths.

These circumstances have been driving the concerned authorities to think about how to enhance access to treatments at low prices and affordable vaccines during future disease outbreaks.

The sole motivation behind vaccine production cannot be making profit. That is an unethical approach.

Rather, the most important question should be, are the vaccines safe and effective?

Top manufactures always lobby governments around the world to get higher vaccine prices and push harder to increase prices.

And they succeed because a drug maker cannot become a vaccine maker overnight.

Very few manufacturers are big players in growing live viruses or harvesting genes from viruses.

The vaccine market is now greatly concentrated on both the supply and demand side, with high fixed costs and exclusive licensing discouraging competition.

Pharmaceutical companies, of course, need incentives to keep producing vaccines.

Regardless of profits, the economic and social benefits of vaccination are huge in saving lives.

Only a vaccine can become the protective shield against this prevalent global pandemic which is disrupting society more than any previous pandemic outbreak or battle.

And an effective vaccine can stop this unprecedented havoc.

A US study showed that successful vaccination between 1994 and 2013 saved around $295 billion in direct costs and $1.38 trillion in total societal costs.

Therefore, vaccine administration might rationally be expensive.

Yet it is objectively reasonable to ask the innovators to produce vaccines in great volume and lower its prices for people without considering borders.

As for Bangladesh, newspaper headlines like "Big business in Bangladesh: Selling fake coronavirus certificates" is still looming large in the minds of the general people.

But the government has taken commendable steps against all these scams, criminal syndicates, and irregularities.

It is imperative to take proactive approaches to better control any sort of corruption, eliminate tariffs on importing vaccines, and control market prices and storage of vaccines at wholesale and retail levels.

Hopefully, we will not hear any bad news regarding vaccine procurement and business in the future.

The author is Assistant Professor, Institute of Appropriate Technology, BUET and Reviewer, Advances in Economics and Business, HRPUB, USA.