Report on the United States Vaccine Industry

The third tread is the emergence of the biotechnology industry as an important source
of new vaccine technologies. This provides suppliers with access to a far wider set of
technologies than they could develop internally; it also variabilizes some of their
research costs. Licenses require some initial payment, but most of the moneys paid to
the biotech firm are as royalties on sales which is a variable cost to the vaccine
supplier.
A vigorous biotech industry is essential to the development of new vaccines, but the
funding of biotechs is very fragile. Most have little internal cash flow and rely on
venture capital. Money from venture capitalists is fluid and unsteady; the
commitments to provide money are generally short term and the flow of cash can be
turned off quickly if the anticipated returns are not promising.
Biotech firms focus on developing a technology (whether proprietary or patented) that
can be licensed to large global suppliers who can provide the capital, expertise and
market access to realize the commercial value of the technology. As long as there are
enough suppliers with global access to maintain a high level of competition, this
industry structure can be very efficient for the development of new vaccines at
reasonable prices.
These three trends are causing upheaval in the vaccine supply structure. Suppliers are
seeking global alliances with other vaccine suppliers that can fill the gaps in their
product portfolios, give them access to markets that were previously inaccessible, and
share with them the costs and risks of new product development. As global suppliers
increasingly dominate the market for new vaccines, niche strategies that focus on a
narrow line of vaccines or small geographic areas will become economically unstable.
Government policy needs to be cognizant of the changes occurring in the vaccine
supply structure and to avoid actions which could weaken the competitiveness of U.S.
suppliers in this global market.

Mercer Management Consulting Page 3