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Why pharmaceutical firms may prefer to invest in drugs over vaccines

HANOVER, N.H. – March 2, 2016 – When it comes to addressing disease, many industry observers and public health advocates believe that pharmaceutical companies prefer to invest in drugs rather than vaccines, as preventives are perceived to be inherently less profitable. A Harvard-Dartmouth study on preventives versus treatments published in theQuarterly Journal of Economics and recently summarized in “VOX EU”, offers a new economic rationale for this trend– the population risk for diseases resembles a Zipf distribution, where the demand curve for a drug is likely to support stronger revenue extraction from a drug than for a vaccine. (A Zipf distribution is a special case of the power-law distribution in which the values and probabilities scale by an inverse proportion, rather than by some arbitrary constant).

Holding constant the harm caused by the disease (curing a disease that only causes mild discomfort would be less lucrative than one causing paralysis, but hold this constant), revenue from a drug sold on the private market is proportional to the disease’s overall prevalence. A drug for a disease that affects twice as many people will generate twice the revenue. But vaccine revenue depends on finer details about how the risk is distributed in the population. A disease for which everyone shares the same risk will generate considerably more vaccine revenue than one for which a few individuals have a high risk and most only a small, positive risk because a low price does not extract much of the considerable value provided to high-risk consumers and a high price excludes most people from buying.

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