Why Pharmaceutical Companies Don't Make Any Money Off Of Flu Shots

Source: http://www.businessinsider.com/pharmaceutical-companies-flu-shot-profits-2013-1

It’s been a bad flu season with hospitals in many cities overwhelmed with patients. This is largely a preventable problem. The annual flu vaccine is not perfect but a wider use of the vaccine would provide some amelioration. So why don’t more people get a flu shot? Some reporter at the LA Times seemed to think that cost might be a factor (Why does a flu shot cost so much?, Jan 21). After all, getting the shot at your local pharmacy will set you back $30 or so. However, as the reporter found out, given the supply chain challenges of producing and distributing influenza vaccines, the real question is why flu shots cost so little.

"That’s because the process of manufacturing the flu shot and distributing it is a huge headache for pharmaceutical companies. The influenza vaccine must be made anew each year, beginning in February. Researchers determine what strains to put in the vaccine after looking closely at what types of flu are most prevalent in the Southern Hemisphere throughout its winter, which is our summer. …

Vaccines for other illnesses, such as measles, mumps and rubella, can be used until their expiration date, which is often years after they’re made. Influenza vaccines are really only used September through January and then go in the trash. And there are no regulations saying people have to get flu vaccines, meaning it’s very difficult for companies to estimate how many they should make. …

This year, companies have produced about 145 million doses, he said. Only about 129 million have been distributed. Last year, companies lost even more on the flu vaccine because it was such a light flu season and fewer people decided to get the shot. Only about 42% of the U.S. population got an influen! za vacci ne last year, which meant that about 30 million doses were never used and had to be destroyed."

So vaccine makers face a newsvendor problem — a one-period inventory model in which excess demand is lost while excess inventory is useless. And for this, they get something on the order of $10 to $16 per dose, which is cheap for a vaccine according to the article. A Hepatitis B vaccine goes for $52.

It is worth noting that comparing the price of a flu shot to other vaccines is a little unfair. I don’t know for how long a Hepatitis B vaccine provides protection, but I am guessing it is more than a year. Many vaccines provide protection for many years or even a life time. A flu shot will only get you through this winter.

A question that the article doesn’t address is whether the retail price is stiff in comparison to the wholesale price of the vaccine. If your local pharmacy is offering the shot at $30, that is in the ballpark of a 100% to 200% mark up from the wholesale price.

Despite that, I suspect that CVS and Walgreens are not getting rich selling these shots. They have their own inventory problem to manage at each location. While they obviously can tranship from one location to another if a store runs low on vaccines, managing inventory in a disaggregated  can be challenging and expensive.

There is the further complication of managing the capacity to give the shots. There is going to be a limited capacity in stores to administer the shot and handle the necessary paperwork (getting a flu shot is about the only time you will asked if you are allergic to eggs). That capacity could be sitting around under-utilized much of the day. Said another way, the personnel cost of administering shots through retail outlets as opposed to a county health department run clinic at a senior center is possibly ni! ght and day. The county might have to send four or five people to the senior center but they are going to be very busy. Your local Walgreens might have just one person handling vaccines but they might not give a single flu shot today.

That doesn’t mean that relying on pharmacies as a key distribution channel for flu vaccines is a bad idea. Indeed, I suspect that they are in the grand scheme of things a very cost-effective way of distributing vaccines. Yes, large clinics would have lower labor costs per vaccine administered if they can draw a big crowd. But drawing a big crowd means relatively few locations and likely long waits. Pharmacies provide greater convenience in both travel time and waiting at what in the grand scheme of things is a reasonable price.

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