Report on the United States Vaccine Industry

Exhibit 23

Major U.S. Vaccine Production Costs
$3.00
$2.50 $2.27 $2.8
$2.00 $1.72$0.60
$1.72
S/Dose-.
$1.50 $0.30$1.32 $1.47 oye
Royalties
$1.00 1
Other (Materials,
$0.57 Utilities)
$0.50
Labor and Depreciation
$0.00
MMR/ DTP Hib DTaP Hop B
OPV Pediatric
Life Cycle Established New
Royalties are a major cost of many new vaccines and have the potential to change the
economics of the vaccine business. While most production costs are mostly fixed and thus
very sensitive to changes in volume (e.g., doubling the volume of production in a plant will
decrease most costs on a per-unit basis), royalties are not. Because royalties are typically
calculated as a percentage of sales revenues, doubling the unit volume of a vaccine, doubles the
cost of the royalty - the cost per unit remains the same. For Hep B, royalty payments are
actually the most expensive cost of production - twice the cost of labor and depreciation.
A royalty is a payment for access to someone else's intellectual property or R&D. The owner
may be an educational or research institution or a private company (often a biotech firm), or
both. For example, Hep B has 14 different patents and a number of organizations with royalty
rights. Royalty agreements typically include an upfront management fee and ongoing payment
calculated as a percentage of sales on commercially sold units. Because so many organizations
own royalty rights to Hep B, its royalty payments approximate 13 to 15 percent of sales. Hib
and DTaP royalties are more typical, at 4-6 percent of sales.
Its important to note that while vaccine production is in general very scale-sensitive, every
product is different. For some products, very large reductions in unit costs will accompany
increases in volume; with others, much less. Understanding a product's manufacturing process
is required to determine the behavior of its costs to changes in volume. And, even then, scale
does not happen automatically. In most cases, to take advantage of scale, a supplier must
invest in a new technology or adopt new practices, as well as relicense its plant for changes in
production. Even so, the increased volume generally justifies the investment in new
technology.

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