http://www.washingtonpost.com/wp-dyn/articles/A8986-2001Nov10.html
U.S.
Limits Bids on Vaccines
Costs on Rise for Smallpox Preventive
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By Justin Gillis
Washington Post Staff Writer
Sunday, November 11, 2001; Page A14
"We have determined that competition will be limited due to unusual and
compelling urgency," the e-mail said.
Last week Tommy G. Thompson, secretary of health and human services, stood
before reporters to acknowledge that the "limited" competition, all
involving bids from huge pharmaceutical companies, had produced prices far
higher than he had hoped.
The government is considering whether to pay in the range of $6 to $8 a dose
for 250 million doses of vaccine that some erstwhile bidders say can be made
for closer to $2. This has raised concern among consumer groups. Are the
American taxpayers, already frazzled by the events of the past two months,
about to get ripped off by the nation's drug companies?
"I was surprised" at the prices Thompson cited, said Terry Irgens,
president of DynPort Vaccine Co. of Frederick, a company holding a master
contract to manage a vaccine-acquisition program for the Pentagon that includes
smallpox vaccine. DynPort Vaccine was one of the six bidders thrown out early.
"I was shocked."
Economists who follow the drug industry, though they have made no detailed
study of the bidding controversy, say the price may be a consequence of the
government's own decisions -- and of the fundamental economics that flowed from
those decisions.
A review of the bidding documents shows that the Health and Human Services
Department decided early on that price would not be the only consideration. At
least as important, the government said in one document, would be to find the
bidder "most capable of performing the services required."
This review suggests the government is about to pay a high price essentially
to guarantee that the vaccine stockpile will be in place as quickly as
possible, and delivered by a pharmaceutical company with a proven track record.
According to the documents, the winning bidder is being asked, in the course
of a single year, to set up production lines from scratch using rigorous safety
protocols, make trial lots of vaccine, initiate expensive human safety studies,
then produce 250 million doses of the vaccine with associated paraphernalia.
When all is said and done, the government will have enough vaccine for every
man, woman and child in the United States. Over the succeeding four years, the
bidder must maintain and secure the stockpile.
Performing the services required under the bid is likely to be a daunting
task that many in the industry say demands expertise, spare production capacity
and deep financial resources. Many of the bidders who complain that they can
make and stockpile the vaccine for $2 a dose are small biotechnology companies
with few or none of those assets.
One bidder was eliminated late, so only three remain in the running. All
three bids include participation by a huge international drug company with tens
of thousands of employees and billions of dollars on the balance sheet.
Those companies will not discuss the exact prices they have offered the
government. Thompson said Tuesday that "the proposals are all below $8 but
they are much higher than what I had anticipated." He had hoped to spend
about $509 million for 250 million doses, or a bit above $2 a dose.
Smallpox was eradicated from the world in the late 1970s, and only in recent
years did the U.S. government grow alarmed at its potential use by terrorists.
Well before Sept. 11, the government had decided to build a new vaccine
stockpile, just in case.
Last year the federal government ordered 40 million doses of smallpox
vaccine from a company now known as Acambis PLC. Under new plans, the
government intends to increase that contract to 54 million doses, accelerate
the timetable and let an additional contract for 250 million doses, creating a
total stockpile of 304 million doses.
All this new vaccine would eventually replace a small, aging national
stockpile kept in Pennsylvania. Variola major, the smallpox virus, can
kill one-third of its victims, but mass vaccination would likely stop an
outbreak and limit the toll.
Various people with vaccine expertise say the bids may reflect the costs of
setting up a production line, coupled with a relatively short window to recover
those costs. Government vaccine contracts sometimes run 15 or 20 years, giving
companies plenty of time to recoup their initial investment. This contract,
drawn up to deal with an immediate crisis, is due to run only five years.
"When Detroit makes an automobile, and the first one rolls off the
line, how much did that automobile cost?" said Capers McDonald, chief
executive of BioReliance Corp., a Rockville biotechnology company that produces
vaccines as a subcontractor to other companies.
"You've done all that engineering, all that design work, all that
testing, all that development. You've spent billions to make that first car.
But if you're lucky, you're going to make millions of them."
He was talking about the economics of sunk costs -- producing any item gets
cheaper as the high initial costs of setting up production are amortized over a
long period. When told the government's smallpox contract runs five years, with
most of the work required in the first year, economists said the high prices
probably have something to do with the short cost-recovery schedule.
"I'm sure that's a big part of why the bids are high," said Henry
Grabowski, director of a program in pharmaceutical and health economics at Duke
University. "The companies are thinking, 'This is a plant and a lot of
capital investment, and there's a lot of fixed costs involved that you have to
capture back.' "
Moreover, said his colleague Mark Pauly, a health care economist at the
University of Pennsylvania's Wharton School, the fixed costs are likely to be
far higher per dose in a situation where a huge amount of vaccine has to be
produced quickly. The winning bidder must build a substantially larger
production line than if it could make the same volume of vaccine over, say, a
decade.
"I think it is, as much as we can justify these things,
legitimate," Pauly said. "You have to create enough production
capacity to meet the maximum immediate demand."
The Acambis contract for smallpox vaccine, awarded last year, offers one
example of the economics at work. If all costs in the early stages of that
contract, including research and development, are divided by 40 million, the
number of doses called for in the early stages, the cost works out to something
like $8.50 a dose.
But the contract runs for 20 years and the company will keep making vaccine
to replace aging stocks, as well as to sell overseas. The contract contemplates
a cost to the government in the later years of less than $2 a dose. So the
final cost per dose will depend on how many doses the government winds up
buying over those 20 years, divided by the money it paid.
Acambis, of Cambridge, England, formed a joint venture with Baxter
International Corp. of Deerfield, Ill., a huge vaccine and medical supply
company, to bid on the new, 250-million-dose contract. Their bid is one of
those still under consideration at the Health and Human Services Department. So
are bids by Merck & Co. of Whitehouse Station, N.J., and GlaxoSmithKline
PLC of London.
The bidding procedure has left small biotech companies embittered. People at
some of those companies said Thompson gave away a potential bargaining
advantage when he spoke publicly of the prices the bidders were offering,
something that isn't normally done in a government procurement until a contract
is awarded.
"This is the weirdest procurement I've ever seen," DynPort's Irgens
said.
The smaller companies say that while it is true that setting up a vaccine
production line costs money, they still think they could have done the job for
less than the big pharmaceutical companies are planning to charge.
"My sense is that this was a forgone conclusion," said Louis
Potash, director of a vaccine division of Novavax Inc. in Columbia. "They
knew exactly who they wanted to have and they had to go through this charade to
give the idea that the small biotechs had an opportunity."
His company was booted from the bidding in a 7:21 p.m. e-mail on Nov. 1 from
Charlotte L. Flitcraft, a procurement officer at the U.S. Centers for Disease
Control and Prevention in Atlanta, a unit of the Health and Human Services
Department. In a sign of how quickly the government is moving, she rushed to
send virtually identical e-mails to six companies at once, signing her name
"Charlote" in the process.
DynPort got the same e-mail. Though disappointed, Irgens had another take
when asked to think about the issue as a citizen or parent worried about
biological attack.
"I would not worry about the price," he said. "I'd want the
material as quickly and as safely as possible, and from as many sources as
possible."
© 2001
The Washington Post Company
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