Editor’s note: The original version article was published in May 2013. A new updated version has been published using new and revised data. It has also been updated to improve readability and to add some new research into the burden of vaccine preventable diseases. The calculations for those costs have also been revised. The comments for this article are now closed – please comment at the new article.
One of the ongoing memes, tropes and fabrications of the vaccine deniers is somehow, somewhere, in some Big Pharma boardroom, a group of men and women in suits choose the next vaccine in some magical way, and foist it upon the world just to make billions of dollars. And while magically concocting the vaccine brew, these pharmaceutical execs ignore ethics and morals just to make a profit on hapless vaccine-injured victims worldwide.
The Big Pharma profits conspiracy trope ranges across the junk medicine world. Homeopathy, for example, claims that Big Pharma suppresses the data that shows water cures all diseases. Like Ebola.
But the Big Pharma vaccine profits conspiracy is still one of most amusing myths of the antivaccination world.
The vaccine denier myths
The vaccine deniers pollute the internet with their screeds about the Big Pharma vaccine profits. One of them said, “measles expert Offit has already made millions of dollars profit from his ties to vaccines and the measles MMR vaccine maker Merck.” Using a childish ad hominem, the article calls him, Dr. Paul “For Profit” Offit. Seriously, that’s how you’re going to “prove” that vaccines are a Big Pharma conspiracy? A 3rd grade playground tease? That’s the best you can do.
You can find whole threads of tedious commentary about Big Pharma vaccine profits on any typical anti-vaccine forum. One of the more illogical claims is that “maybe vax companies see vaccines as more of an investment? Break mostly even on what the vaxes cost to make and sell, but make a bank load of money on treating all the chronic problems they cause!” Of course, that would be a business strategy that would be laughed out of the secret Big Pharma boardroom, because they know that vaccines don’t cause chronic problems. The vaccines prevent it.
What is infuriating about these rants by the antivaccine cult is that not only that their scientific knowledge about vaccines is ridiculous, so is their business knowledge. Of course, I shouldn’t be surprised given that almost all vaccine deniers exhibit the same characteristic–a few hours googling is equivalent to a Ph.D., or, in this case, and an MBA.
A cheap psychological analysis of these claims
It’s a perfect example of the Dunning–Kruger effect, a cognitive bias in which unskilled, and uneducated, individuals suffer from an illusory superiority of their knowledge and skills, which causes them to overestimate their abilities in critical thinking abilities and knowledge of a field as much higher than average.
It continues to amaze me that these deniers (in whatever science, evolution, global warming and vaccines) think that reading a few pages on the internet is somehow equivalent to years of study. Attacking Paul Offit by calling him childish names must make the science deniers believe that brings Offit down to their level of knowledge, except that it doesn’t. Offit has been researching infectious diseases and vaccines for over 25 years, and probably laughs at these people.
I used to think that the Dunning-Kruger effect was only about the deniers science skills in vaccines. Apparently, it extends to their business knowledge of how a real corporation is managed. So I thought I’d look at the great Big Pharma vaccine profit conspiracy and deconstruct it as best as I can.
For once, I’m going to set aside the science side of this discussion and stick to the business side. I actually have 15 years of background in accounting and financial analysis of biomedical companies, which requires high level mathematical skills, while still understanding and critiquing the science of these companies. So, don’t be accusing me of the Dunning-Kruger effect. Reserve that accusation for my understanding of baseball.
Let’s take a look at these profits from two different perspectives. First, are vaccines as profitable as other Big Pharma endeavors? And second, if Big Pharma execs were truly immoral and corrupt, would selling vaccines actually be the best business strategy?
Are vaccines really profitable?
It would be insane for anyone to claim they are not highly profitable. But here are some facts that might temper your expectations that vaccines are that valuable:
- Just to give some perspective, IMS, the top pharmaceutical market analysis firm, estimates the 2010 revenues for pharmaceuticals to be over US$955 billion, and will exceed US$1 trillion dollars by 2013. Big Pharma also shows revenues of around US$300 billion in medical devices in 2012, and close to US$320 billion in 2013. So the total revenues that Big Pharma will derive just from pharmaceuticals and devices will be around US$1.32 trillion.
- According to the World Health Organization, estimated 2013 global revenues for vaccines is around US$24 billion. In other words, from the Big Pharma perspective, vaccines make up around 1.82% of their total expected revenues in 2013. That’s essentially a rounding error in estimating revenues, that is, errors in estimating these revenues could have a value greater than US$24 billion.
But even though vaccine revenues are a tiny percentage of Big Pharma revenues, it is still a huge number. And new companies are entering the vaccine market, because as new vaccines are developed and as more adults get vaccinated, the market growth of vaccines is substantially higher than other pharmaceuticals.
The worldwide revenue growth rate for all pharmaceuticals is around 6-7% per year, but around 10-15% per year for vaccines. Now, this type of growth rate will not last forever, because eventually the market becomes saturated, and much of the growth will be in lesser developed countries, where the market value for vaccines is substantially less than in developed countries.
Let’s look at that US$24 billion in worldwide vaccine revenues more carefully. All of the numbers below are in billions of US dollars and were estimated based upon Vaccines: Expert Consult (page 41).
|Cost of goods sold (manufacturing, distribution, returns)||7.7|
|Gross margin (often called gross profit)||16.3|
|Administration (corporate overhead)||1.7|
|Sales and marketing||4.1|
|Research & Development||2.7|
So vaccines generate about US$10.5 billion in “net profits,” or about 43.8% of revenue. Most non-vaccine pharmaceuticals would generate about US$11.1 billion in net profit, or 46.3%, from the same revenue–thus, vaccines produce around 5% less profits than do other pharmaceuticals.
This lower profit for vaccines is because non-vaccine pharmaceuticals have a lower cost of goods as a result of fewer returns due to spoilage and change in antigens (like from flu season to flu season). Regular pharmaceutical products rarely change from year to year, so something manufactured in 2013 can be sold in 2014 as long as it still has shelf life remaining. Moreover, distribution is a lot more expensive for vaccines, because they need to be shipped more carefully (which is much more expensive) to prevent spoilage.
Analysis of Big Pharma vaccine profits
Still, US$10.5 billion sounds like a boatload of cash, but let’s see what happens to that boatload.
- Every drug, whether a new vaccine or new drug for erectile dysfunction, costs from US$3.8 to 11 billion dollars each to fully develop, depending on the drug and the market. But despite what some believe about Big Pharma, drug development is not a slam dunk. For example, in cancer drugs, less than 10% gain final approval from the FDA, so the vast majority are miserable failures. Since Big Pharma funds its own R&D, it has to pay for both its successes and its failures. A typical broad based pharmaceutical company like Johnson & Johnson spends about 11.4% of REVENUES (not profit) on R&D (pdf). So out of the US$24.0 billion in vaccine revenue, about US$2.7 billion is removed from the net profit, so we’re down to US$7.8 billion.
- One of the mistakes made by individuals with no experience in business finance assume two things: risk capital, that is, the money to finance operations, including R&D, is free. And it is freely available. But it’s not. Big Pharma needs to finance its own R&D operations from its own cash (or borrow at high rates). And remember that’s all types of research from initial laboratory studies up through large clinical trials.
- Big Pharma also has to pay taxes on the net profit. And because Big Pharma has manufacturing, R&D, and administration facilities in modern nations (need access to intelligent, well trained employees), they have a more difficult time in moving revenues outside of taxing authorities. They usually pay around 40% in taxes on the net profit. And they have to depreciate all of their capital, whether its buildings or equipment, because eventually they have to replace it
- Companies need to acquire technology too, which costs money. Back to Johnson & Johnson (JNJ). They weren’t much of a player in vaccine manufacturing and sales until 2011, when they paid US$2.4 billion for Crucell, a manufacturer of vaccines. In other words, one year of profits for all vaccines was spent to purchase one vaccine manufacturer.
When all is said and done, that US$24 billion becomes around US$2.5 billion in earnings, which is usually paid to shareholders, who took the risk in investing in the company. It may actually be quite a bit less, because I’m ignoring things like cost of risk capital (even though Big Pharma is mostly self funded, it’s not always so, and if that capital could make more money invested in gold or something, it’s a lost opportunity). Given this level of profit, and spread over 50 or so vaccines, it’s hard to imagine that Big Pharma executives are sitting in that Boardroom laughing at how they’re taking over the world with vaccines.
Just some more perspective. Lipitor, probably the #1 drug in revenues ever, sold US$10 billion worldwide in 2011. That’s one drug, with one type of manufacturing facility. In just a few locations. Those Big Pharma execs would rather have Lipitor once or twice over than vaccines. By a long shot.
But are vaccines a good business strategy?
Going back to the laughing, unethical Big Pharma executives sitting in their boardroom, are they really conspiring to push vaccines on us, because it makes so much money? Or, as we saw above, would investing in another kind of medication make more money? Or would they make more money not even selling vaccines?
Let’s take an example of just one infectious disease, measles. According to the CDC, one hospitalization for a serious measles complication costs more than US$142 thousand. Typical cost breakdown of hospital billing indicates that pharmaceuticals and other consumables (syringes, IV’s, saline, etc.) are around 35-40% of the total cost to the patient. Now, a hospital marks up the costs to the patient, so let’s just go with 20% revenue from one measles case flows to Big Pharma, or around US$28,000.
Let’s assume that Big Pharma ended production of all vaccines today, because the evil Big Pharma execs wanted rapidly increase their profits. According to the CDC (pdf), there are about 4 million births in the USA every year. Starting today, those 4 million children annually will not be vaccinated, and the vaccine deniers will be dancing in the streets.
Staying with this imaginary scenario, in 2016, there’s an outbreak of measles that hits the 12 million US kids who are not vaccinated. Again, according to the CDC, about 30% end up being hospitalized, so of the 12 million or so kids who catch the measles (it’s very contagious, so I’m just going to assume that everyone catches it, which is not far from what would really happen), about 3,600,000 would end up being seriously hospitalized. That would mean one outbreak of one disease in one country would end up giving about 100 billion dollars to Big Pharma. Let’s say that only 10% need serious hospitalization. That’s still over 30 billion dollars.
Actually there are other issues that become problematic if we suddenly had this size of an epidemic. For example, the number of ICU beds per capita has dropped by 75% since the 1960’s partially as a result of the reduction in numbers of children with infectious diseases. If we suddenly stopped vaccinating because Big Pharma wanted to make billions more, our hospitals would be overwhelmed. And guess who’s making money then. Big Mortuary. Because children will die in much higher rates than in the 1950’s because we couldn’t handle it.
Again, one disease. In one country. Multiply these numbers out over all countries and all diseases, and those Big Pharma execs would be moving gold bars into their corporate headquarters. So, if Big Pharma were only interested in making money in the most unethical way possible, they’d be funding the anti-vaccine movement.
So, all of you people at Age of lying about Autism, how much money are YOU receiving from Big Pharma to create the illusion that vaccines are dangerous. Because, now I have uncovered the real goal of Big Pharma–get rid of vaccines. Best conspiracy theory ever.
But the truth is that pharmaceutical companies manufacture vaccines because they are able to make a decent profit, the goal of any corporation, and the goal of every human who needs to survive. They are not trying to harm humanity, because if they were truly ruthlessly profit motivated, they’d crush vaccines and wait for huge epidemics to strike the planet. Maybe they still have the specs to manufacture iron lungs for polio victims.
Is Big Pharma perfect? Hell no, and I’ve said it before.
But vaccines save lives. And Big Pharma makes sure that happens.
- Dayan GH, Ortega-Sánchez IR, LeBaron CW, Quinlisk MP; Iowa Measles Response Team. The cost of containing one case of measles: the economic impact on the public health infrastructure–Iowa, 2004. Pediatrics. 2005 Jul;116(1):e1-4. PubMed PMID: 15995008.