Vaccine Controversy Hits Big Pharma: Who Will Pay?

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Big Pharma is no stranger to controversy. Nowtwo big pharmaceutical firms -- GlaxoSmithKline and Pfizer -- are embroiled in yet another controversial matter.

Doctors Without Borders publicly challenged Glaxo and Pfizer to dramatically reduce their prices charged for theirpneumococcal vaccines in developing nations to $5 per child. Both drugmakers defended their current pricing strategies. So what's next?

The dilemma
Doctors Without Borders points to skyrocketing increases for vaccines in poor countries. The cost to fully immunize a child soared from $0.67 in 2001 to $45.59 last year -- 68 times higher. According to a report released by the international medical humanitarian organization, pneumococcal vaccines make up around 45% of that total cost.

The issue of affordability could get even worse soon. Gavi, the global Vaccine Alliance that helps underwrite the costs of providing vaccines to children in poor countries, determines its level of support by a nation's Gross National Income, or GNI, per capita. More than a quarter of the nations that currently receive financial assistance from Gavi will begin losing support starting next year because their GNI per capita will exceed the threshold.

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Big Pharma does help in some ways already. Glaxo and Pfizer use tier-based pricing where the poorest countries pay much less than wealthier countries. Vaccine prices in developing nations can be as low as one-tenth the price charged in the U.S. and Europe.

Both Glaxo and Pfizer have also committed to extending price discounts to countries that are losing financial assistance from Gavi over the next several years. However, a Doctors With Borders representative said that "the discounts the companies are offering today are just not good enough."

It's complicated
The large drugmakers are quick to point out the complexities involved in producing vaccines. Pfizer's Prevnar 13, for example, undergoes 500 quality control tests over a two-year period -- just to create one batch. Glaxo'spneumococcal vaccine includes 10 different vaccines rolled into one.

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This complexity adds to costs for the pharmaceutical companies. Glaxo and Pfizer maintain that they're making little to no profit with heavily discounted pricing offered to Gavi. Doctors Without Borders, though, noted that the two companies have together made over $19 billion in worldwide sales for the pneumococcalvaccine that was introduced.

There really are two legitimate viewpoints at work. Doctors Without Borders is a non-profit organization with a noble goal of helping bring quality medical care to impoverished countries. Rising vaccine costs interfere with the organization's ability to effectively meet that goal.

Big Pharma companies, on the other hand, are for-profit organizations. Their primary goal is to deliver positive returns to shareholders. Discounting prices too heavily could interfere with achieving that goal.

The desire to make a profit provides the underlying motivation for companies to invest, to take risks, and to innovate in ways that make vaccines like Pfizer's Prevnar 13 and Glaxo's Rotarix possible. And further innovations are still needed. Dr. Greg Elder with Doctors Without Borders stated, "We would like a whole new range of vaccines that are simpler to use, are heat stable, and have simpler schedules, making it easier for us to vaccinate kids." If the potential for profit is cut back too much, those new vaccines likely won't be developed.

Market medicine
It's that profit motivation that just might ultimately provide the answer to the dilemma. Consistent profits attract competition. Competition pushes prices lower. And competition could be on the way.

China now has 34 companies making vaccines -- seven of which are run by the Chinese government. One of these organizations, Sinopharm, sells around 800 million vaccine doses annually. Chinese vaccines could change the competitive landscape in the future.

In the meantime, it's possible that Glaxo and Pfizer could opt to lower costs somewhat, although perhaps not enough to satisfy the demands of Doctors Without Borders. If they do, their shareholders will pay instead of governments and charitable organizations. Whatever happens, it seems likely that the controversy will continue.

The article Vaccine Controversy Hits Big Pharma: Who Will Pay? originally appeared on Fool.com.

Keith Speights has no position in any stocks mentioned, but he hopes they keep developing vaccines to keep kids healthy across the world. And he hopes that one day the only controversy about vaccines will be over how much they sting when the shot is given. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.