Investing in New and Improved Vaccines
Vaccine development and manufacturing is an almost entirely commercial enterprise in the United States. Twenty years ago there were a dozen entities that made vaccines for U.S. children. Today, for a variety of reasons, nearly all the childhood vaccine used in this country are manufactured by four private companies (see Appendix H). At the beginning of 1993, there was only one supplier of oral polio vaccine (Lederle-Praxis Biologicals), one supplier of a combination measles-mumps-rubella vaccine (Merck and Co., Inc.), two companies that made a combination diphtheria and tetanus toxoids and pertussis vaccine (Connaught Laboratories, Inc., and Lederle-Praxis Biologicals) in the United States. The states of Massachusetts and Michigan manufacture combination diphtheria and tetanus toxoids and pertussis vaccines for their respective populations, but procure the oral polio vaccine from Lederle-Praxis Biologicals and the combination measles-mumps-rubella vaccine from Merck and Co., Inc.
The majority of basic research in the United States that leads to the development of new or improved vaccines is funded or conducted by the federal government, although a significant amount of research is conducted and funded by the private sector (Chapter 3). Product-oriented research and development (R&D) is conducted largely by biotechnology firms and established pharmaceutical companies. Although pharmaceutical companies have shown an interest in developing new and improved vaccines for domestic use, little effort has been expended to improving existing vaccines for use in the developing world (see Tables 4-11 and 4-12).
Established pharmaceutical firms currently devote approximately 5
percent of their total R&D expenditures to applied vaccine-related R&D, often building upon basic discoveries made through federally funded research (see Table 4-10). Over the last 10 years, biotechnology firms have emerged as a new force in the area of applied vaccine research and early-stage product development. However, as noted in Chapter 3, neither biotechnology firms nor the federal agencies involved in vaccine research currently have the capability of manufacturing vaccines on a large scale. This is also true for Massachusetts and Michigan, the only two states currently producing vaccines. Consequently, large-scale manufacturing capacity rests entirely with the large commercial manufacturers.
Generally, a commercial manufacturer begins the process of vaccine development when scientific research has yielded promising results and when ''proof of principle" (the point in R&D when the feasibility of a particular product or process is determined) has been established. The decision to invest in this process takes into account two critical factors: the technical feasibility and complexity of developing the vaccine and market considerations. These market considerations include the likelihood of and anticipated rate of return on investment, the availability of patent protection (and freedom from third-party patent rights), and the potential costs of liability exposure.
Corporate R&D investment in human vaccines is often viewed less favorably than investment in drug-related R&D (DeBrock, 1983; Freeman and Robbins, 1991; Institute of Medicine, 1985; Pettinga, 1983). Unlike drugs, which may be used many times by the same patient over the course of several years, vaccines are designed to give long-lasting immunity after one or at most a few administrations. Although the benefit of vaccination to the individual is clear, there is a larger benefit of vaccination that accrues to society at large if a significant proportion of the population is immunized and herd immunity is achieved (see Chapter 2).
Compared with drugs, vaccines are disproportionately complex, both in terms of the technologies used to produce them and the skills needed to manage those technologies (Institute of Medicine, 1992). The analogy has been made that pharmaceutical manufacturing is similar to chemistry, whereas vaccine production is more like agriculture: drugs can be synthesized and put in tablet form within days to weeks; however, it can take a year or more, with complicated intervening steps, between the first culture of a vaccine product and its eventual use in a child.
Vaccine manufacturing also requires substantially greater investment in sophisticated and elaborate production facilities than is typically true for pharmaceutical production (Institute of Medicine, 1992). Vaccine manufacturing facilities must be upgraded on a regular basis, and the technicians and researchers who operate them must be particularly well trained and motivated to ensure that the production of vaccines meets or exceeds good
manufacturing practice standards. Ongoing quality control is critical in vaccine manufacture, since tests of the final product may not detect certain deficiencies.
Even if the technological feasibility of a vaccine product is established, commercial manufacturers may be unwilling to pursue development. The anticipated costs associated with R&D may be too high, patent issues may be too complex, the licensing process may present unacceptable obstacles, and the risks of liability may appear too great.
Private-sector vaccine manufacturers in the United States pursue the development of vaccines that are both technologically feasible and that have a profitable market in industrialized countries (see Table 4-12). No additional incentives are needed, provided that companies are assured an adequate return on their investments.
In some instances, a company may be willing to undertake the development of a vaccine that is needed primarily in the developing world, provided that there are predictable markets of sufficient size and profitability. Such markets include U.S. armed forces, U.S. travelers, and wealthy segments of indigenous populations. In other instances, the development of new vaccines or improvements in existing vaccines cannot be justified economically or legally by commercial vaccine manufacturers.
Commercial enterprises cannot be expected to engage fully in a venture, such as the Children's Vaccine Initiative (CVI), that does not offer much hope of a return on investment. The primary objective of any business corporation, including pharmaceutical companies, is to enhance returns for its shareholders (American Law Institute, 1992). The legal system once forbade corporations from diverting resources away from maximizing returns for any reason at all. For example, in 1919, the Michigan Supreme Court rejected an effort by Henry Ford to reduce the price of his cars to benefit consumers, articulating the then prevailing view on corporate responsibility: "A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes" (Dodge v. Ford Motor Co., 204 Mich. 459, 507, 170 N.W. 668, 684, 1919). The legal system has evolved to accept that corporations "may devote a reasonable amount of resources to public welfare, humanitarian, educational, and philanthropic purposes" (American Law Institute, 1992). Many pharmaceuti-
cal firms donate pharmaceutical and biological products for medical and emergency needs and have in many cases, made a major contribution to the enhancement of public health in the world. For example, Wyeth Laboratories (United States) contributed substantially to the eradication of smallpox through the donation of the bifurcated needle and Merck and Company, Inc., currently donates IvermectinTM to a number of developing countries to treat onchocerciasis (river blindness). Corporate decisions that are consistent with laudable public policy objectives are often inconsistent with the interests of the shareholders, however. Corporations are not only constrained by law but also must withstand the scrutiny of their shareholders who, if they are unhappy with management's decisions regarding the use of corporate resources, may sell their stock (thereby driving the stock price down) or may seek to replace management altogether.
Without an expectation of adequate returns, it is unrealistic to expect commercial vaccine manufacturers to divert their resources in favor of what U.S. and international public health experts and world leaders may perceive to be a greater public good. As a result, commercial vaccine manufacturers cannot bear the sole responsibility for the development of high-risk, low-priced products such as those envisioned by the CVI.
The pediatric vaccine market in the United States is as predictable as it is limited. The size of the market is defined by the birth cohort in the United States, roughly 4 million live births annually, and the number of visits children make to clinics or pediatricians to receive necessary booster shots.
There are two major classes of buyers of childhood vaccines: the public sector (including federal and state governments) and the network of private-sector physicians, hospitals, pharmacies, and clinics across the country. Over the last decade, the public sector has purchased an increasing share of the vaccines sold in the United States. Currently, a little more than half of all vaccines purchased in this country are bought with federal or state funds at federally negotiated prices (see Table 4-5). The current trend toward public-sector procurement of vaccines is of considerable concern to the large commercial manufacturers, particularly given calls for universal purchase of vaccines by the federal government (American Academy of Pediatrics, 1993; Liu, 1993; Marks, 1993; National Vaccine Advisory Committee; 1991) and the introduction of the Comprehensive Childhood Immunization Act of 1993 (H.R. 1640 and S. 732/733).
Industry representatives have indicated that they would find it difficult to maintain current investments in vaccine-related R&D if all childhood
vaccines were purchased by the federal government (Douglas, 1992, 1993; Saldarini, 1992, 1993; Williams, 1993). They argue that the combined forces of a single government buyer and the unpredictability of the federal appropriations process would not provide companies with the confidence of a long-term, stable, and reliable infusion of the funds required to invest in highly innovative and risky vaccine R&D projects (Douglas, 1993). Furthermore, the vaccine manufacturers and some public health experts argue that a universal vaccine purchase policy would drive prospective companies out of the business altogether (Katz, 1993a,b; Williams, 1993). Others, however, believe that the effects of any large-scale federal procurement policy on the U.S. vaccine industry are not so clear (Edelman, 1993; Shalala, 1993). They assert that policies regarding pricing, funding for product development, and competitive production of vaccines could actually entice additional entries of companies into the U.S. vaccine industry (Edelman, 1993; Shalala, 1993).
Until quite recently, U.S. manufacturers have concentrated their sales efforts domestically. Merck & Co., Inc., and Lederle-Praxis Biologicals have now initiated efforts to market their vaccines in Europe and, more recently, the Confederation of Independent States. Merck has also bid on international tenders for hepatitis B vaccine sales in a number of foreign countries and is setting up a facility to produce hepatitis B vaccine in the People's Republic of China.
Despite some level of interest in certain overseas markets, U.S. vaccine manufacturers have expressed little interest in becoming involved in the high-volume, low-price market offered by the United Nations Children's Fund (UNICEF) and the Pan American Health Organization (PAHO) (Institute of Medicine, 1986, 1992). It has been suggested that the reason that U.S. companies do not bid for UNICEF and PAHO contracts is that it is illegal for U.S. commercial manufacturers to sell vaccines at prices lower than those that they charge the U.S. government (Institute of Medicine, 1992). However, government procurement regulations do not stipulate that the U.S. government receive the "best price." It would appear that much of the reluctance stems from the negative publicity that accompanied revelations some 10 years ago that U.S. vaccine makers were supplying vaccines to PAHO and individual developing countries at prices significantly lower than those charged the U.S. government. Speaking to a representative of a major vaccine manufacturer at a congressional hearing, Senator Paula Hawkins argued, "How can you justify charging nearly three times as much to the U.S. government as you did to foreign countries, and then the next year again submitting a bid also substantially below Federal U.S. prices?" (U.S. Congress, Senate, 1982). Indeed, the last time that a U.S. vaccine manufacturer bid on a UNICEF tender was in 1982, following the aforementioned congressional hearing.
Even though U.S. vaccine manufacturers do not supply vaccines to UNICEF or PAHO for distribution to the developing world, U.S. companies continue to be accused of marketing vaccines overseas at prices well below those they charge to the U.S. government. Indeed, in announcing his new childhood immunization initiative on February 12, 1993, President Clinton said, "I cannot believe that anyone seriously believes that America should manufacture vaccines for the world, sell them cheaper in foreign countries, and immunize fewer kids as a percentage of the population than any nation in this hemisphere but Bolivia and Haiti" (Clinton, 1993).
For the purposes of this report, intellectual property rights include patents, patent applications, and know-how. Know-how involves confidential information (e.g., trade secrets) and can be embodied in tangible items like tissue cultures and their genetic components as well as in less tangible forms, such as an oral disclosure of information. (see Appendix A). In vaccine development and manufacture, know-how is as important as patent considerations.
Patent Rights and Limitations
Pharmaceutical and biotechnology companies rely on patents to exclude others from unfairly reaping the rewards of their investments in research and to protect the markets they serve.
The protection granted under patent laws is a 17-year "right to exclude others from making, using, or selling the invention throughout the United States" (35 USC § 154 (Supp. 1982)). In return for that right, the patentee is required to disclose, in detail, the subject matter of the invention. The owner of a patent is not granted the right to exclude others from using the information disclosed in the patent application to produce and patent a noninfringing, new, different, and better product or process. Therefore, disclosure not only promotes additional R&D but also discourages unnecessary duplication of research.
The patent owner is granted a 17-year right to exclude others from making, using, or selling the patented invention in the United States. The patent right does not extend beyond the United States, and if protection is desired in foreign countries, patents must be applied for there as well. The patent owner receives no affirmative right to make, use, or sell the claimed invention. In fact, a patent owner may find that practicing the invention
infringes upon another party's previously issued patent. In this case, a patent owner must be authorized by the holder of the previously issued patent to use the owner's invention. For example, if a patentable improvement were made on a patented vaccine, the inventor of the improvement would need permission from the first-generation patent holder of the vaccine to make, use, or sell the improved vaccine.
There is no requirement that one use or license a patented invention, nor would one lose a U.S. patent for failing to use it. One can own a patent, never use it, and still exclude everyone else from making, using, or selling it. In contrast, most other countries impose a requirement that a patent owner must use or license a patented invention within a defined period of time.
A patent license is a transaction in which the patent owner gives permission to another party to use his or her patent. Patent licenses can be sought prospectively, before investment in product development, or after the product is in hand and on the market. Taking the former approach may require more licenses to cover applications that might become patented, as well as those that are already patented. Awaiting product completion may give the patent holder greater leverage, in view of the developer having extended itself, and the developer could run the risk of losing all by injunction unless a steep price is paid.
Patents and Vaccines
Historically, vaccines have been perceived to be more difficult to patent than drugs. This perception is changing in the wake of advances in biotechnology and the spur of Diamond v. Chakrabarty, 447 U.S. 303,309 (1980), a landmark legal decision that affirmed the patentability of microbial life forms and "anything under the sun that is made by the hand of man." Increasingly, layers of patent applications are filed—often by different groups and companies—on techniques, components, and genetic subassemblies of microbial systems used in the manufacture of biologics. The explosive growth of biotechnology and in the number of companies engaged in it has led to a mushrooming of patent applications and patents.
Under U.S. law, pending patent applications are held in confidence until they are granted (see Appendix A). By comparison, if corresponding applications are lodged overseas, they are typically "laid open" to public examination 18 months after the first filing. Even in this event, it is not possible to track the progress of corresponding U.S. applications through proceedings in the U.S. Patent and Trademark Office, or even to learn whether they have been abandoned.
The net effect of these patent-related concerns is to increase the level of uncertainty, and risk, surrounding investments in vaccine-related R&D. The list of potential unknowns is daunting and includes the type of patent protection a company or its competitor might win, how courts will decide competing claims, the number of third-party patents that might ultimately overlay a particular product, and whether necessary licenses can be assembled at a reasonable cost. Thus, when the possibility of financial reward is perceived to be low, as might be true for CVI vaccines, risk aversion runs high.
An individual or company who violates the patent owner's rights is liable for patent infringement. If patent rights have indeed been violated, the owner is entitled to an injunction—a court order that prohibits an infringer from continuing to make, use, or sell the invention. The issuance of injunctive relief is within the discretion of the court. The Patent Act also authorizes an award of "damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer" (35 USC § 284). The court may increase the damages awarded by as much as threefold and may award interest and costs. This is usually done when the infringement was willful.
As noted above, prospective infringement of valid patents can be prevented by injunctions, but the courts may withhold an injunction when not doing so would be contrary to public health or needs. Requests for injunctions are sometimes refused when the patent infringer is meeting a public health need that would otherwise go unserved. To grant such an injunction in private litigation is entirely within the discretion of courts, however, and few private companies are willing to bank on the court's unwillingness to grant such a remedy. No injunctive relief is possible when the invention is used "by or for the United States" (28 USC § 1498). This exception to injunctive relief is broad. As the Patent Act states: "For the purposes of this Section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States" (28 USC § 1498). Here, the patentee's only remedy is an action against the government in the U.S. Claims Court for "reasonable and entire compensation" (28 USC § 1498).
There is always the risk that a drug or vaccine will cause unwanted and potentially serious health effects. All pharmaceutical companies market products with the knowledge that they may be sued for an adverse reaction months to years after the product is used. Most firms accept this risk and adjust the prices of their products upward to cover their perceived liability exposure (Institute of Medicine, 1985).
In the case of vaccines, a manufacturer's evaluation of liability risks depends in part on whether the vaccine would be used only in developing countries or whether it would be marketed in the United States, a notoriously litigious society. In general, liability concerns appear to be of less concern in developing-country markets. Foreign plaintiffs do sometimes sue U.S. pharmaceutical manufacturers in U.S. courts for injuries allegedly caused by products sold abroad, however. The determination as to whether such claims can be maintained in the U.S. courts is made on a case-by-case basis.
Compared with other pharmaceuticals, vaccines are unique in ways that may cause manufacturers to assess their risks and benefits differently. For example, vaccines are administered to healthy people, and as a result, adverse reactions are far more noticeable and less tolerated by the vaccinee and family. In addition, when the injured person is a child with many potential years of life left, settlements from litigation over injury resulting from receipt of a childhood vaccine can be much larger than those from other products that are used primarily by adults (Institute of Medicine, 1985; Wendy K. Mariner, Boston University School of Public Health, personal communication, 1992;).
Liability exposure was cited by many vaccine makers as the primary reason they exited the vaccine business in the 1970s and early 1980s (U.S. Congress, House, 1986). There is some reason to believe that the generally lower rate of return for most vaccines produced during that period, as well as the U.S. Food and Drug Administration's stringent requirements for demonstration of vaccine efficacy, also influenced companies' decisions to withdraw from the market.
The National Vaccine Injury Compensation Program (NVICP), authorized by the U.S. Congress in 1986 and implemented in 1988, was an attempt both to compensate the families of children adversely affected by government-mandated vaccines and to shore up the vaccine industry by eliminating liability risk through the imposition of a vaccine excise tax (Public Health Service Act, 1987; 100 Stat. 3756, codified as Title XXI of the Public Health Service Act at 42 USC 300aa-1 et seq. (Supp. V 1987); the Compensation Program is codified as Subtitle 2 of Title XXI, 42 USC 300aa-34). The excise tax was removed by the Secretary of the Treasury on
January 1, 1993, when a bill unrelated to the NVICP but containing language that would have extended the tax was vetoed by President Bush. The trust fund into which the excise taxes were paid had a balance of about $620 million at the beginning of 1993.
It is too early to assess the program's impact on future cases of liability against individual manufacturers, and it is not entirely clear that the compensation program is having the desired impact on the number of vaccine manufacturers in the business (see Appendix B). Despite the apparent drop in vaccine-related lawsuits and despite the increased activity in vaccine-related R&D (see Chapter 4), none of the companies that dropped out of vaccine manufacturing in the United States in the 1970s and 1980s have returned. However, as noted in Chapter 4, foreign companies, many of whom have traditionally shied away from the U.S. vaccine market, appear to be readying themselves to enter the U.S. market, either by applying for FDA licenses for their products or by entering into alliances with other companies and entities that currently hold U.S. product licenses.
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