Archive for October, 2004

October 19, 2004

Vaccines- Why Can’t We Buy Any?

Kevin Drum is here partly right in his blog comments about the current shortage in flu vaccine supply, talking about Chiron and Aventis as the only remaining manufacturers willing to sell into the US market. He completely misses the core issue, because he wildly and verifiably writes off the primary cause of the problem.

There is absolutely no reason that there could not be a thriving and competitive human vaccine market in the US. We have a lot of vaccine manufacturers here- several large producers, and a lot of start-ups. Big companies buy up smaller ones all the time and new ventures try to get started.

There are also many research organizations, both non-profit, and commercial, who are exploring vaccine-based cancer treatments, which makes sense because the very basis of the vaccination process is stimulation of our own body’s immune system to fight off and destroy abnormal cells (e.g., humoral immunity associated with lymph filtration, etc.). If our own natural immunity did not work as well as it does against cancers, we would all be dead at a very young age; the best illustration of this is the high cancer rates experienced by transplant patients, whose immune systems must be depressed in order to prevent rejection due to graft-versus-host disease (GVHD). I saw one case history of a heart transplant patient who developed over one hundred new skin cancers in the year following his receipt of a new heart for this exact reason. Therefore, vaccination, for a variety of ailments, is still an extremely important method of treatment and subject of on-going, cutting-edge research.

What about all those missing vaccine manufacturers? Drum talks about low margins and small markets- the fact that the potential revenue numbers are not that high and the prices not that appealing, causing firms to exit the business.

So, what constitutes an attractive vaccine market? How about less than $50 million per year in the US, for about six major diseases, and yet, attracting at least six eagerly competing suppliers? If that is true, there must be another problem scaring the manufacturers away.

Well, the total annual market for broiler chicken vaccines is $38 million. Chasing that market in the US are Merial, Ft. Dodge, Schering Plough, Intervet, Solvay, Lohmann, and Biomune, to list the bigger players. Other animal vaccine producers and marketers for the total animal market include, with those listed above, Boeringer-Ingelheim, Novartis, and Pfizer (which just bought another animal vaccine company, in Australia). The most telling fact is that the revenues margins on this business are even smaller than those for human application, reaching grosses of tenths of a cent per dose for many types.

Drum suggests that a possible deterrent might be market volatility (“some years you sell out, but other years you make 50 million doses and only sell 20 million”). First of all, that difference looks large but is not actually terribly important- marginal costs of production, as with most pharmaceuticals, is extremely low; the biggest costs are “licensing” (the federal regulatory approval), R&D, and set-up. Once you turn the process on, you make large batches (which is why the Chiron lot failures are so problematic). But second, look at a market where the government is telling everyone what vaccinations to get, and how often to get them, along with the AMA, Academy of Pediatrics, and so on- people who compete to sell wristwatches or diet soda pop would kill for a market like vaccines.

The problem is not new production technology, either. There is nothing beloved or sacred about the current processes; suppliers are always doing R&D looking for more reliable methods of creating different vectors, whether “hot” or “attenuated” viruses, and new ways to grow them. If any new production technique really works, it will work for far more than the annual US flu outbreak, it will be used for your dog, your cow, and 40 billion chickens around the world. Production process investment amortization is not a barrier.

Then he proposes regulation as the bugaboo. Not. Each animal vaccine is regulated and must be licensed prior to any sale by the Department of Agriculture (DoA). Furthermore, the standards are not trivial, because you cannot have contamination entering the food supply; just ask the mad cow people, if you need an example. I would venture that if you compared the pre-market steps required of a supplier by the FDA and the DoA, you won’t find a huge difference.

So the shortage issue is not about market size, margins, volatility, production processes, or regulation.

Finally, Mr. Drum falls back on government monopsony procurement. If that were the problem, there would be no US Department of Defense. There is no market more fraught with roller-coaster monopsonistic volatility on a program basis, more regulation, or more scrutiny on margins- just ask Halliburton. The only reason that this marketplace works, and works a lot better than many out there is because of I*N*D*E*M*N*I*F*I*C*A*T*I*O*N!

Kevin Drum wastes an entire post dancing around and discarding the one elephant-in-the-room issue because it really messes up his major political ally. John Edwards can’t channel the words of a wounded GI in front of a jury as the grief-stricken mother wails in the background and demands $500 million as punitive damages. The product liability risk, absent fraud by the manufacturer, rests on Uncle Sam, and he ain’t buyin’ into it, which option he does not afford Pfizer or GM. There are claims, but they are not adjudicated by whiny ambulance chasers in front of credulous juries selected for their very credulity. Until the John O’Quinns, and Peter Angelos of the world are reigned in, we will deal with this over and over.

October 18, 2004

My hometown newspaper is the StarTribune (of Minneapolis, though they call themselves “the newspaper of the Twin Cities” because of larger circulation (than the St. Paul rival) leavened with a healthy dose of plain ol hubris. Because of their execrable editorial policies (on both the commentary pages and the alleged “news” pages- it is hard to tell the difference at election time), I don’t subscribe to the daily editions, but do read the weekend papers.

As part of the current full-court press to save Minnesota from the ascending conservatives, led by very popular and personable Governor Tim Pawlenty, the “Strib” has gone into bunker mode for the full dress battle over the soul of the state, which battle culminates on November 2. Among the stories on the business pages last week, all more or less positioned to try to persuade us that the economy is in the tank (hey, it worked in 1992…..), was a piece Sunday, Oct 17 piece on page D-1, discussing relative stock market performance under Democrats and Republicans. The most interesting element of their analysis was this little point on the graphic sidebar with the usual simplistic and a bit inflammatory title:

“Bush tide didn’t lift all boats- Of four industry sectors that were widely expected to do better under a Bush presidency than if Al Gore had been elected, two advanced smartly between Inauguration Day and the day before the terrorist attacks on 9/11. The oil sector showed only a small gain, however, and pharmaceuticals declined during the period.”

Stop and think about that revealing statement for a moment. It makes three important points:

1) They admit that any economic slowdowns we have experienced over the last three years were powerfully affected (not caused- the market actually peaked in 2000 before the election) by the wrenching events of 9/11. Of course, Mr. Kerry and his friends (read: MSM, most particularly and explicitly including this very same Strib) are still selling the snake oil about Republican economic management, outsourcing, whatever, causing job losses.

2) Pharmaceutical stocks have dropped? Gee, I thought that, according to the Kerry commercials, Bush was in the tank for the drug manufacturers and doesn’t care about prescription prices. Not so.

3) Oil stocks have only showed a very small gain? Hey, I thought that we were at war for oil and all that kind of stuff, to make the Texans and Enron rich. Scratch that one too.

I wonder what else about old Bushitler these guys have been lying to me about? Maybe there are even elections in Afghanistan and progress in Iraq, where the French were blocking Iraqi liberation and freedom in order to preserve the TotalFinaElf oil concessions they would be awarded after getting the sanctions lifted……