The economics of developing and pricing a vaccine : Planet Money : The Indicator from Planet Money Governments and drug companies agree: We need to develop a vaccine for COVID-19. But their motives for developing a vaccine are different. And that will have a big effect on the vaccine's price.

The Economics Of Vaccine Pricing

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Hey, everyone. It's Cardiff. And I'm joined today by INDICATOR editor Paddy Hirsch, who is filling in for Stacey. Paddy, welcome back.

PADDY HIRSCH, BYLINE: Thank you very much - lovely to be here. Listeners should know that Stacey will be back next week, so you only have to handle me for just a couple of days.

GARCIA: (Laughter) Indeed. OK - on with today's show. The fastest vaccine ever developed was for the mumps. From the time when the sample of the mumps was isolated in 1963 to when the vaccine was licensed to be sold took four years. Michael Kinch leads the Centers for Research Innovation in Biotechnology and Drug Development.

MICHAEL KINCH: But if you were to say how long does an average vaccine take to develop, it's something on the order of about two decades.

HIRSCH: Michael says development for a COVID-19 vaccine is moving much faster than the historical trajectory. More than a hundred global companies are now racing to develop a vaccine. For a couple of vaccines under development here in the U.S., clinical trials on thousands of people might start as soon as July.

GARCIA: And Michael is cautious about how quickly an effective and safe vaccine can be ready, but he's also thinking about what happens when it is finally ready. How much will people have to pay for it? A lot more goes into answering that question than so many of us realize, and the stakes - for public health, for the economy, for the world - could not be higher. So today on THE INDICATOR FROM PLANET MONEY, a guided tour through the economics of vaccine pricing.

Michael Kinch is the author of "Between Hope And Fear," a book about the history of vaccines. And he says that over time, the pharmaceutical industry has become a lot less innovative and efficient at producing useful drugs and vaccines.

KINCH: And the other way of saying that is that if we had a billion dollars in, let's say, 2010 dollars, in the 1950s we could develop 90 new products with that. Today we could develop about one-third of one. And that declining efficiency has fundamentally been the problem that the biotech and pharmaceutical industries have been battling.

HIRSCH: This declining efficiency means that producing drugs and vaccines is more costly for the pharma companies.

GARCIA: And since the pharma companies obviously still want to make a return on the money they spend, they also end up charging more for drugs and vaccines to the public. But making money on a vaccine is harder than making money on, say, a lifesaving cancer drug, Michael says.

KINCH: A vaccine generally tends to be a relatively inexpensive, short-term therapy. You immunize everybody, but you really get that patient population once and at a relatively low price point. Compare that, for example, with a drug for metastatic cancer, where you can price that drug at hundreds of thousands - and now we're reaching the point of millions - of dollars per person. And that's much more profitable both in the short term and in the long term.

HIRSCH: Because of this, in recent decades, the pharma industry has mostly focused on those lucrative drugs and not on vaccines, which is why Michael argues that pharma companies have been caught flat-footed by having to create a vaccine for COVID-19. And that's also influenced their scientific approach to making that vaccine.

KINCH: There hasn't been much discussion of this, but most of the companies that are involved in making these - most of those in Europe and the United States are taking technologies that were developed for, for example, cancer and repurposing them for COVID-19.

GARCIA: And this approach by U.S. companies has a couple of consequences, Michael says. First, this is not a tried and true approach. It does look promising, and these new technologies have led to the creation of some amazing cancer-fighting drugs. But we just don't know how well this approach is going to work for a COVID vaccine.

HIRSCH: Michael says this approach is very different from the old-fashioned approach to developing a COVID vaccine that's been taken by Chinese pharma companies, using traditional methods and older technologies.

KINCH: Old technologies such as killed viruses or what are known as attenuated viruses, where you weaken the virus so that it's not causing disease but it is triggering immunity.

GARCIA: The other consequence of American companies using these newer technologies is their cost because an American pharma company that develops a COVID vaccine might not actually own the patents on those newer technologies. The company's just using those technologies in combination to make the vaccine. So for every patient that buys the vaccine, the company might have to pay a certain percentage or a fee to the other companies that do own the patents.

KINCH: There might be three or four or five or six different patents that you have to serve. Each of them may want a percent or two or three or four, and that starts to add up very, very quickly.

HIRSCH: So that further increases the pressure on a pharma company to raise the price of the vaccine once it's ready to be sold, right? It needs to charge enough to pay for the use of those patents and cover all of its other costs and, of course, still make a profit.

KINCH: And so that's unfortunately the new reality - is that the vaccines that come out of this, and perhaps including COVID, could end up being priced at a point that will - many people will find surprising and even shocking.

GARCIA: Charging a lot of money for a vaccine that the public absolutely needs to immunize itself against COVID would be extremely controversial.

HIRSCH: A high price would be especially controversial if the vaccine's developed by one of the companies that's being subsidized by the U.S. government. So far, the government's pledged roughly $2.2 billion to five U.S. pharma companies that it thinks have a good chance of developing the vaccine.

KINCH: The other issue that's, I think, inevitably going to come up is that if the government is underwriting, in the case of COVID-19, the costs of this vaccine, what is going to be expected in return?

GARCIA: So to simplify what's going on here just a little bit, the government can say to pharma companies, hey; look. If our taxpayers are subsidizing the vaccine, then don't you dare make the vaccine unaffordable to them. The taxpayers have already helped pay for it. We will force you to keep prices low if we have to, and the public will agree with us. And in fact, Democrats in Congress have already proposed bills that would cap the price of a COVID vaccine.

HIRSCH: And you can imagine the pharma companies responding to this. Hang on a second. It costs a lot of money to make a vaccine even with subsidies, by the way. And limiting how much we can charge for it takes away our incentive to make vaccines in the first place. And the return that taxpayers get on their investment is that the country gets immunized, which means the whole economy can open up again.

GARCIA: The government and the pharma companies obviously both want a vaccine to be developed. But when it comes to pricing the vaccine, they have somewhat different goals. Pharma companies want to charge enough to cover costs and make a profit whereas the government and the public want prices to be affordable enough that everyone can get immunized.

KINCH: We don't want to disincentivize the private sector from making a new vaccine. Instead, we want to incentivize them and figure out, how do we balance that incentive with making sure that the drug is affordable and available to everyone?

HIRSCH: Not getting that balance right is one of the reasons there have been so few new vaccines developed in the last few decades. Pharma companies know they'll get lambasted if they charge too high a price, but charging a low price isn't really worth it to them because developing vaccines is expensive. So they just haven't bothered.

GARCIA: Yeah, and it also doesn't help that the pharma companies are so opaque about how they spend their money. So people just don't really trust them. In any case, Michael argues, it is time for new ideas, new business models to finally be tried. For example, if the government is going to restrict the price of a vaccine, it could offer a cash prize to the companies that do end up making the vaccine so that it is still worth it to them to try. The government's offer basically is, hey; if you come up with a good vaccine, you cannot charge people too much. But we'll give you a dump truck full of money for having succeeded.

KINCH: Take that dump truck full of money, and you say, OK. Whoever can achieve a particular milestone, this will be yours. But if you do this dump truck full of money, you could also - as the governments say, I'll allow you to make a profit on it, but I'm not going to allow you to make a crazy profit on it. So there can be more of a tempering of prices.

GARCIA: Aligning the incentives of the public and the pharma companies is massively important. It obviously matters for the fight against COVID-19, which continues to cause such widespread damage to public health and to the economy. But it also matters for the future because as urgent and terribly important as the fight against COVID is right now, it probably won't be the last against a threatening pandemic.

This episode of THE INDICATOR was produced by Camille Petersen. Our fact-checker is Brittany Cronin. Our editor is Paddy Hirsch, and THE INDICATOR is a production of NPR.

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