Thursday, January 7, 2021

Coronavirus - profits from vaccines

Yahoo Finance says: Pfizer, Moderna expect billions in profits from COVID vaccines. That's a scandal

Why is it a scandal? The author Michael Hiltzik says:

"The companies stand to earn billions of dollars in profits from their COVID vaccines this year, according to investment analysts' projections. Since it's unlikely that the vaccines will provide 100% cures or eradicate the virus causing the disease, there will be more profits in later years.

While no one is saying that the companies should collect no profit at all from the COVID vaccine, that leaves open the question of how much is enough?

I’ve written already  about the stranglehold that Pfizer and Moderna have maintained on the manufacturing of their COVID vaccines, even though American taxpayers have paid billions of dollars for the basic research and early development of the technology.

Although the vaccine is to be delivered free to Americans, the government is paying what looks like top-dollar for the drugs. Pfizer's government contract for 100 million doses sets the unit price at about $20 per dose. Moderna's two contracts for 100 million doses each are set at about $15 per dose.

The actual production cost is much less. Pfizer's profit margin on its vaccine will be 60%-80%, Geoffrey Porges of SVB Leerink has estimated.

That's plainly excessive for a product with a guaranteed worldwide demand, especially one based heavily on government investment."

Firstly, Hiltzik is wrong about Pfizer receiving billions of dollars of government money for the research and development of the vaccine. Pfizer paid it from its own pocket. "Pfizer, with its German partner BioNTech, will be given $1.95 billion for 100 million doses, but received no federal funding for the research and development of their vaccine" (link).

Also, the author fails to consider the question more broadly, which he seems to believe is irrelevant. How much profit from a successful drug does a drug developer need to offset losses from developing drugs that do not make it to market? It takes a huge amount of money to develop a drug and then test it in clinical trials. If the drug doesn’t make it to market, and hence generate enough revenue to offset the sunk costs, then the company has a huge loss. Indeed, the number of losses easily outnumber the number of successes. So huge profit margins on a successful drug are to a large extent eaten up by losses on unsuccessful drugs.

The author seems to believe that a drug company should make only a small profit margin, e.g. similar to a grocery story, on its successful products, while absorbing huge losses on its unsuccessful products. He  regards each drug in isolation, having little or no concern about the unsuccessful ones. Unlike a drug developer, a grocery store can make do on a small profit margin on most sales because it doesn’t have the burden of losses to offset or overcome that a drug developer does. 

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