FEDERALIZE IN HASTE, REPENT AT LEISURE:
Why Vaccine Production Should Stay In The Private Sector

By SAM KAZMAN and HENRY I. MILLER

Wednesday, Nov. 14, 2001

The recent germ warfare attacks are cause for concern, but so is one proposed government response: the move to federalize vaccine production. This recommendation was contained in a report issued earlier this month by the Gilmore Commission, the federal advisory panel on terrorism.

The report recommends "the establishment of a government-owned, contractor-operated national facility for the research, development, and production of vaccines for specified infections." Dismissing private sector involvement, it argues that "direct government ownership or sponsorship is likely to be the only reasonable answer for producing vaccines" for such diseases as anthrax and smallpox.

But industry officials see things differently. A former senior executive at a company that develops vaccines described the problem as follows: "You've got a booming demand for vaccines that people think cost only pennies, coupled with increasing regulatory burdens that cost companies millions. In short, the current shortage situation was, unfortunately, predictable."

As her comments illustrate, the problem with respect to vaccines is not — as the Gilmore Commission suggested — too little government involvement. Rather, it is too much.

The New Demand for Smallpox Vaccine

The appearance of cases of anthrax — the first in this country in a quarter-century — coupled with innumerable hoaxes and false alarms about further attacks with biological agents has fueled interest in vaccines against various exotic diseases. Moreover, the media recently have seized on the possibility of terrorists' obtaining and using smallpox virus, considered by many experts to be the most feared and potentially devastating of all infectious agents.

Smallpox spreads from person to person, primarily via droplets coughed up by infected persons, direct contact, and contaminated clothing and bed linens. Smallpox is fatal in approximately a third of previously unvaccinated persons who contract the disease.

The German government has just bought six million doses of vaccine, and pressure is mounting in the United States for widespread, or even universal, vaccination. (Routine smallpox vaccinations ceased in the U.S. in 1972.) Health and Human Services Secretary Tommy Thompson has promised that the government will obtain 300 million doses of the vaccine, enough to immunize every man, woman and child in the country.

The Cautionary History of Government Manufacture of Pharmaceuticals

Federalizing vaccine production would obviously ride the political currents that favor extending government control to a host of activities related to national security. But the history of government manufacture of pharmaceuticals is far from encouraging — so we should think twice before deciding this is another area where more federal control should be exercised.

Consider the production of human growth hormone for short children by the National Pituitary Agency, under the auspices of the National Institutes of Health. Extending from 1963 to 1985, this was an extremely careless operation.

The hormone was prepared from human pituitary glands recovered from cadavers, and the absence of rigorous collection guidelines and purification procedures permitted contamination with the agent that causes Creutzfeldt-Jacob disease, the human equivalent of "mad-cow disease." As a result, dozens of recipients of human growth hormone have died a lingering and gruesome death.

In this and other cases, there was an inherent conflict of interest, for one federal agency regulated another. The nation's drug regulator, the Food and Drug Administration, is a sibling agency to the National Institutes of Health. When federal agencies regulate each other, they are susceptible to political pressure and often do not exercise as much scrutiny as they would when the private sector is the focus.

The Anthrax Vaccine Debacle — Attributable to the Public Sector, Too

Of course, the private sector has had its problems, too. The recent history of the privately produced anthrax vaccine, for example, might appear to support more government involvement. The controversial vaccine has been characterized as "perhaps the most shunned and controversial shot ever produced."

The vaccine's producer, the Lansing-based BioPort Corporation, has had repeated difficulties meeting FDA requirements. The company has been cited for problems ranging from poor quality control to lax record-keeping, and its production of the anthrax vaccine was suspended by FDA in 1998 (though that suspension may soon be lifted).

But BioPort is hardly a representative pharmaceutical company. It is the sole supplier of the anthrax vaccine for the Defense Department, and one of its four board members is a former member of the military's Joint Chiefs of Staff.

More importantly, until late 1998 Bio-Port was not a private-sector operation at all; its facility belonged to the Michigan Department of Public Health. And many, if not all, of BioPort's problems arose when it was still a state-run institution.

According to the General Accounting Office, at that time FDA inspectors were given only limited access to the plant, and FDA itself was not promptly notified about important changes in the vaccine manufacturing process. In 1990, the facility altered the filters it used to purify the vaccine, a change that could affect the vaccine's safety and efficacy. But by the time FDA learned of this change, there were no more pre-1990 batches of the vaccine to compare against the later product.

In 1993, the state public health department added several new fermenters, for which FDA repeatedly requested documentation. Not until seven years later, however -- after BioPort took over the facility -- was that documentation submitted to the agency.

In short, the anthrax vaccine's problems appear to originate not within BioPort, but rather from its pre-1998 history of government production–and from the absence of competition to make such products. Again, history shows that the private sector, not the government, is the optimal place for vaccine production.

The Need to Encourage Pharmaceutical Companies, Particularly In Biotech

Leaving aside BioPort's manufacturing problems, the design of the anthrax vaccine is antiquated. What we should be seeing (and encouraging) are biotech companies scrambling to use gene-splicing technology and more recent knowledge about the anthrax organism to make purer, safer, more effective, state-of-the-art vaccines.

Yet we are moving in exactly the opposite direction. And a federal move to take over the manufacture of other vaccines could easily replicate, on a far greater scale, the problems of both government-produced human growth hormone and the current anthrax vaccine.

Federalization of vaccine production would be a dangerous omen for the future of pharmaceuticals generally. In recent years, the industry's long-term survival has become increasingly imperiled by the controversy over drug prices. But the old saw about pharmaceuticals is especially true today: The first dose costs hundreds of millions of dollars to produce, while the rest cost pennies apiece.

New drugs are hugely expensive to develop and test; the time from discovery until marketing may well take 12-15 years, at a cost of $200 million or more. The process is a gamble with extraordinarily poor odds. Thousands of drugs must be tested in order to produce one successful product. Even among drugs that are ultimately approved for marketing, only one in three generates revenues that cover development costs.

For that reason, blockbuster drugs are doubly important – they not only advance public health, but also cover the costs of the industry's countless scientific and commercial flops. But of course, these drugs can only cover pharmaceutical companies' costs if companies are allowed to make a profit from them — rather than selling at government-mandated discounts or even being forced to provide drugs free in an emergency.

In order to anticipate emergencies, government may well be justified in guaranteeing minimum sales or in contracting with private companies for large purchases of vaccines. But the notion of making vaccine research, development and production a government-operated enterprise would do little to advance either the safety of current vaccines or the development of new ones. Far better to remove the regulatory and other disincentives that currently make vaccine development so unattractive and uncompetitive.


Sam Kazman is general counsel at the Competitive Enterprise Institute. His e-mail address is kazman@cei.org. Henry I. Miller is a physician and a fellow at the Hoover Institution. His e-mail address is miller@hoover.stanford.edu

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