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Why are there so few vaccine suppliers?

February 7, 2012 in Contagious Disease, Pharmaceuticals, Regulation, Supply of Medical Services, Vaccinations | No comments

In many cases, only a handful of suppliers produce vaccines for a given disease.  In fact, for several vaccine types the U.S. has fewer suppliers than countries with a smaller market and a higher level of government purchase.

One reason for this finding could be strict government regulation.  All vaccines must be approved by the FDA.  Further, the CDC provides guidelines to physicians regarding who should get which vaccines.  The CDC also is a large purchaser of vaccines.  Thus, at first glance, it seems that government regulation may be causing industry consolidation in the vaccine market.

A paper by Danzon and Pereira, however, finds this not to be the case.  They find that the likelihood a supplier exits from a particular vaccine market is not effected by whether the CDC is a purchaser of the vaccine, the amount of vaccine the CDC purchases, or the CDC price at the time the firm exits.

The authors propose that the large economies of scale in vaccine production are the cause of the lack of competition in the vaccine market.

“The vaccine industry is characterized by large fixed costs of initial vaccine development as well as substantial ‘semifixed’ costs of producing an individual batch (a process that may take 6 to 18 months) but low marginal costs of producing an additional dose, up to the batch limit, and low storability. If there are multiple competing suppliers with large sunk costs and low marginal costs, competition may drive the price low enough that it is relatively unattractive for multiple firms to remain in the market and for new firms to enter.”

Further, the demand for vaccines is price sensitive.  Insurers (public and private) typically pay physicians and hospitals a fixed payment per vaccine administered.  Increases in vaccine costs come directly from the provider’s bottom line.

Some observers may point to the 2004-2005 influenza vaccine shortage and claim that government regulation had to cause this shortage.  The authors note that although several suppliers did exit the market before the shortage years, “…this cannot be blamed on government purchase and price controls, as less than 20 percent of the flu vaccine is publicly purchased.”

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Setting FDA Standards

July 5, 2011 in CER, Pharmaceuticals, Regulation | 1 comment

To what standard should the FDA hold new drugs?  The FDA has a number of choices.  Drugs companies could be required to prove that the drugs they make:

  • Do no harm.
  • Are more effective than placebos
  • Are more effective than existing drugs
  • Are more cost-effective than existing drugs, or
  • Are both more effective and more cost effective than existing drugs.

For my money, I believe the standard should be the first and second ones.  The drug company should simply have to show that the drug does no harm and is more effective than placebos.

Due to asymmetric information, however, the FDA could require the drug companies to compare their drug’s effectiveness against existing treatments or gauge the cost-effectiveness of the treatment.  Although these effectiveness and cost-effectiveness tests need not affect drug approval, insurance plans could use this information to determine if they should cover the drugs.

GoozNews has some interesting commentary regarding calls for the FDA to perform Stage III CER testing.

“I do not support the position of advocates like former New England Journal of Medicine editor Marcia Angell who think new drugs should have to be proven better than what exists before they are approved. If companies want to bring comparable therapies to market, that’s their business. It may even be the case that some me-too drugs work in some sub-populations, but not in others. So if one drug fails to achieve lower cholesterol, or offer arthritis pain relief, for instance, the doctor can switch her patient to the newer drug. But if the new drug is not proven to be better than what exists in a large Phase III trial, then physicians, patients and payers will have the information they need to insist that people start on the cheapest, comparably effective medicine that is available. For most drug classes, that will mean a generic.“

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User Fees: A solution to decrease wait times for FDA approval of generic drugs?

October 21, 2010 in Pharmaceuticals, Regulation | 3 comments

The Consumer’s Union used Medicare.gov to show that many people could save $3,500-$5,000 by switching to generics.  Why don’t more people do so?  One reason is the long delays for FDA approval of generics.  The FDA’s Office of Generic Drugs is understaffed and thus generic drug approvals takes much longer than it should.

Brand name pharmaceuticals pay user fees to the FDA to speed up approval time.  Is this a good idea to apply for generics as well?

A Consumer Reports (Nov 2010) editorial states the following:

“In general, we oppose user fees that allow a regulated industry to fund the regulators.  A government agency can become dependent on the companies it’s supposed to objectively regulate , which can influence decision. In a 2006 survey…many FDA employees said they felt pressured to hastily and perhaps improperly approve user-fee drugs.  And at least one felt the agency viewed industry, not the American public, as its client.“

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Do Economists Support FDA Pre-approval of Drugs?

May 9, 2010 in Pharmaceuticals, Public Health, Regulation | No comments

Conventional wisdom holds that economists advocate for reducing regulation on most policy arenas.  Regulation imposes costs and businesses and is often ineffective.  Further, as technology and market conditions change, regulations which were originally welfare enhancing can now become archane.

The public generally views the FDA’s pre-approval as a worthwhile endeavor.  The goal of FDA pre-approval is to protect consumers against unsafe and/or ineffective drugs.  In the world of neo-classical economics, agents have perfect information about drug quality and the role for the FDA disappears.  Even if information is not perfectly observed, the FDA’s ability to restrict the entry of potentially useful drugs into the market can be welfare destroying.  Certifying drugs as safe rather than prohibiting them through regulations may be a preferable form of spreading information.

In a recent survey of 44 leading economists, 23 support or strongly support pre-market approval of new pharmaceuticals and devices while 15 where opposed or strongly opposed (6 were neutral).  The key rationale behind the support of pre-market approval was the problem of imperfect information and also the public goods aspect of knowledge.  Fewer economists supported the notion that the government has superior ability to assure safety and  efficacy.

The majority of economists also believe:

  • the effect of pre-market approval in suppressing would-have-been benefits is often or typically overstated in public discourse.
  • doctors do not systematically error when prescribing medicines.
  • replacing the current FDA system with a simple physician prescription requirement for new drugs and devices is a bad idea
  • The current FDA system increase the amount of knowledge available on new drugs.

Economists were split as to whether drugs approved by European, Japanese, and Canadian authorities should automatically be approved for use in the U.S.

This survey shows that economists do not have a clear consensus answer to the question of whether there is “a sound market-failure rationale for the banned-till-permitted policy for drugs and devices.“

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Drug Safety: FDA Approval vs. Product Liability

February 22, 2010 in Pharmaceuticals, Regulation, Vaccinations | 1 comment

Before a drug can come to market, it must receive FDA approval.  This involves 3 phases of testing with Phase I having 20-80 volunteers and Phase III often testing more than 1,000 people.  Despite the FDA approval, patients can sue drug companies if they are injured by a drug.  Patients can generally sue manufacturers under one of three theories of legal liability:

  • defective design (design of a drug or device was inherently unsafe)
  • defective manufacturing
  • defective warnings, the firm failed to provide sufficient warning of the possibility of an adverse event if it knew or shown have known about the risks.

Is it efficient to maintain a system of product liability in addition to government licensing or does this legal framework simply drive up the costs of pharmaceuticals?

A paper by Philipson, Sun, and Goldman (2009) argues that when FDA approval is binding, the removing the drugs product liability increases efficiency.  This is because the product liability “has no additional effect on the level of safety firms choose to provide, but raises prices and thus restricts access.”   I believe, this is the system adopted by the UK where drugs that are approved by NICE are not liable for lawsuits.  If the drug turns out to perform poorly in practice, NICE will pull it off the market (readers, can you confirms this is correct?).

The authors use American policy on vaccine liability to elucidate their point. “The National Vaccine Injury Compensation Program (NVICP) provides a useful case study. This program shielded vaccine makers from liability in exchange for a special compensation program funded by an excise tax on vaccines. This program therefore essentially mimicked pre-emption by lowering the cost of liability dramatically.”

However, the problem with the paper is knowing whether the FDA safety procedures are binding in practice.  For some drugs, the FDA approval provides firms with more than enough incentive to produce evidence of the safety of their projects.  On the other hand, for other cases FDA approval may not provide sufficient incentives to make the drugs safe.

In the larger view, if the FDA approval does a good job of monitoring safety, then product liability could be abandoned to increase safety.  However, if the FDA approval does not induce firms to make their drugs safe, the product liability acts as a costly but effective backup to insure the firms manufacture products that are safe for consumers.

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Cost of drug development: $1 billion

February 16, 2010 in Pharmaceuticals | 3 comments

A paper by DiMasi et al. (2003) found that the cost of drug development was $802 million.  This is a highly contentious number.  Drug companies have used this number to lobby regulators to loosen the FDA approval process.  The data used in the study, however, was confidential and could not be replicated by other authors.

A new paper by Adams and Branter (2010) replicates the methods of the older study with publicly available data and find that the previous number is an underestimate.  The paper claims that the cost of drug development is actually $1 billion.  This is not an absolute number, however, as there is a substantial variation drug development expenditure depending on the therapeutic category.

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Should Generic Industry Payoffs be Outlawed?

October 19, 2009 in Pharmaceuticals | 3 comments

GoozNews reports that “the Senate Judiciary Committee…passed legislation prohibiting brand name drug manufacturers from paying off generic manufacturers in patent disputes.  They get the money in exchange for not bringing the cheaper drug to market.” Is this a wise move for Congress?

The main question one should ask is why brand name manufacturers pay off generic manufacturers to not bring their drug to market in the first place.  In a competitive market, a firm could pay off a competitor not to introduce a new product.  However, paying off one competitor is likely counterproductive, because another competitor could also bring the product to market.  Further, because generics drugs are not really innovations, but rather cheaper versions of the brand name drug, paying off any single generic company would certainly not prevent the drug from coming to market.  

This leaves a few possibilities.  

  • Making a generic may be more complicated than I assume and it take significant resources to produce a generic.  If the lag in generic development is long, paying off one generic company could buy the brand name drug extra time (months? years?) to continue their monopoly.   
  • There are few generic drug makers thus paying off a handful of companies may be cost effective.  However, if entry into the generic drug making business is possible, this would still not be a useful tactic.  Thus, it must be the case that entering the generic drug making market is very costly.  
  • I believe there are many international generic drug makers, especially in India.  However, regulation concerning drug importation, and FDA approval may mean that it is difficult for these companies to bring their generic products to the U.S. market. I had thought that the FDA could fast-track generic approvals, but this may not be the case.

Any other explanations of why a brand name drug manufacturer would pay off a generic manufacturer?

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FDA bans import of Indian Pharmaceuticals

April 28, 2009 in Pharmaceuticals | No comments

Marketplace reports that the FDA has blocked sales from one of India’s largest drug producers, Ranbaxy Pharmaceuticals.  “It prevented sales of Ranbaxy’s generic versions of the antibiotic Cipro and the cholesterol pill Zocor.”

This begs the question: should the FDA put office in foreign countries?  On the one hand, it is important to ensure that imported drugs are safe.  However, FDA decisions to ban certain drugs could be influenced by protectionist concerns rather than patient health. 

Ajay Sahai, executive director of the Federation of Indian Export Organizations: ”In many of the cases, Indian companies do have a case where they have been stopped by large companies present in the importing countries. They have tried to restrict the imports at whatever cost or citing whatever reason.”

Is the FDA doing a diligent job or protecting the safety of the U.S. drug supply, or is it engaged in protectionism.  Finding the true answer is exceedingly difficult.

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Adaptive Partial Drug Approval

April 10, 2009 in Pharmaceuticals | No comments

Currently the FDA requires that drug companies conduct 3 phases in order to secure the approval of a pharmaceutical. These are:

  • Phase I. These are smaller (20-80 participants), clinical trials which determine a drug’s safety and pharmacologic properties among healthy volunteers.
  • Phase II. This phase tests a drug’s efficacy and optimal dosage. Typically 100-300 individuals are enrolled and these volunteers have the disease which the drug is supposed to treat.
  • Phase III. The third phase is very similar to phase 2, except that the study is much larger. Often there are over 1000 participants in these trials. A drug can receive approval from the FDA if Phase III proves successful.

Is this the best way to insure a safe drug supply? Charles Manski argues no.  Instead, Dr. Manski argues that pharmaceutical companies should received approval to sell limited quantities of a drug after Phase II approval.  This would help reduce the amount of Type II error (not approving a drug that is beneficial).  Quantity limits would increase if the drug was shown to be effective over time.  Drug companies would submit annual reports to the FDA regarding the drug efficacy.

Further, Manski argues that Type III trials should be of much longer length and should focus more on outcomes than on surrogates.  ”For example, treatments for heart disease may be evaluated using data on patient cholesterol levels and blood pressure rather than data on heart attacks and life span.”

The Healthcare Economists Take

While I agree with much of what Manski proposes in theory, putting his proposals into practice will be exceedingly difficult.  The first matter is how much should the drug company be allowed to sell during the partial approval stage.  Manski claims that this decision should be made by a panel of experts, but it is possible that the experts in the field may have strong relationships with pharmaceutical companies.  Further, even an expert will not know if releasing 1000 or 1200 doses of a medicine is optimal.

From a political standpoint, a limited release is a difficult sell.  If the drug is beneficial, it will be hard to justify limiting its sale when it could help other people afflicted with the disease.  If it is potentially harmful, why sell it at all.  Further, one wonders when would insurance companies decide to cover the drug?  This would likely only happen after the full approval many years down the line.  

I agree with Manski that surrogates are a poor measure of health outcomes.  Nevertheless, mandating phase 3 trials of “considerably longer” duration will make the drug development process even more expensive.  Finding the optimal tradeoff between additional information and increased cost is an exceedingly difficult one.

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Is the FDA Safe and Effective?

November 13, 2007 in Pharmaceuticals, Public Policy | 1 comment

The Food and Drug Administration is one of the most important government agencies. The FDA has an interesting history and below I will review some important dates.

  • 1938 Federal Food, Drug and Cosmetic Act. This law was enacted after the drug Elixer Sulfanilamide killed over 100 people. Firms were required to submit new drugs to the FDA. “If the FDA was not convinced of a drug’s safety then it had 180 days from the receipt of the application to block the drug’s introduction into the market.” The law required that drugs have an appropriate label for safe use.
  • 1951 Durham-Humphrey Amendment. The amendment divided the drug world into prescription and over-the-counter drugs. Patients using over-the-counter drugs did not need a physicians prescription.
  • 1962 Kefauver Amendments. These amendments removed the 180 day limit. Further, the law required not only that new drugs be safe, but also that they are effective. The FDA also gained control of all drug testing in the U.S.
  • 1992 Prescription Drug User Fee Act. Due to lengthy approval times, this law allowed the FDA to charge drug companies user fees in order to receive guarantees on review times.

Presently, there are 4 phases that a drug must go through in order to gain FDA approval.

  • Phase I. These are smaller (20-80 participants), clinical trials which determine a drug’s safety and pharmacologic properties among healthy volunteers.
  • Phase II. This phase tests a drug’s efficacy and optimal dosage. Typically 100-300 individuals are enrolled and these volunteers have the disease which the drug is supposed to treat.
  • Phase III. The third phase is very similar to phase 2, except that the study is much larger. Often there are over 1000 participants in these trials. A drug can receive approval from the FDA if Phase III proves successful.
  • Phase IV. This is the least formal stage. It involves post-market surveillance. Often the FDA will request that the pharmaceutical company conducts a study to determine the long term safety of the drug.

A paper by Philipson and Sun (2007) looks at whether having the FDA and product liability is an efficient use of societal resources. If the FDA approves a drug as safe, then why would there be product liability? The chance of an enormous lawsuit will only lead to higher drug prices as companies have to find a way to fund lawyers and damage awarded during lawsuits. “For example, firms seldom do more clinical testing than what the FDA requires, which suggests that at least for this investment in safety, product liability may sometimes duplicate the role of the FDA.” If the drug companies will not preform more clinical trials, having a product liability system will only add the cost of drugs.

One issue not taken into account is one of fairness. If an individual is harmed by an unsafe drug, without a product liability system they will not be compensated. Further, if we believe that individuals harmed by the drug have more medical expenses (from drug complications) and thus lower income, it is possible that an efficiency argument could be made by which product liability redistributes income from those with lower marginal utility of income to those with higher marginal utilities of income. Since I am not in favor of having the courts decide cases based on issues of income inequality, I think the fairness is the most compelling argument for a product liability system.

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