NCPA - National Center for Policy Analysis


April 29, 2009

Since their introduction, vaccines have served as a cornerstone of public health in the United States and abroad.  Vaccinating large numbers of people, especially children, has proven to be one of the most cost-effective options for enhancing and preserving life.  But the vaccine industry itself is at high risk for failure, with shortages becoming more and more frequent says Matt Baumann, a research assistant with the National Center for Policy Analysis.

Of the 12 pediatric vaccines recommended for all children, there have been severe shortages of more than half, ranging from a shortage of MMR-vaccine (measles, mumps and rubella) lasting seven months to a shortage of PNU-vaccine (pneumococcal infections like meningitis) lasting nearly two years!  Immunizations for some children were delayed until adequate supply levels were restored.  Inevitably, some children never "caught up" after supply levels were finally restored, remaining unvaccinated. 

What has led to this fragile supply within the vaccine industry?  It is a combination of challenging economic conditions for manufacturers and actions by the federal government which have distorted the market, says Baumann:

  • About 60 percent of total production costs in manufacturing vaccines are fixed, meaning that those costs are incurred for any level of production and do not depend on the quantity produced.
  • These fixed costs are also sunk costs, meaning they cannot be recovered.
  • If a firm had to shut down production, these costs could not be recouped.

Production of the flu vaccine illustrates this troubling condition:

  • In order for their vaccine to be effective, flu vaccine manufacturers have to predict nearly a year before the target flu season which strains of the flu virus will be prevalent and which strains they will immunize against.
  • If their prediction is incorrect, the manufacturers can only cut their losses.
  • In addition, if the flu season turns out to be mild, producers risk having large unsold inventories without the ability to decrease production costs.
  • When sunk fixed costs are about 60 percent of total costs, this loss can be devastating to a manufacturer.

With the average cost to bring a vaccine to market at about $700 million, sunk fixed costs can be so prohibitive that producers leave the vaccine marketplace, says Baumann.

Source:  Matt Baumann, "What's Behind Vaccine Shortages?" National Center for Policy Analysis, Brief Analysis No. 655, April 29, 2009.

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