The document discusses challenges in balancing commercial and public health goals in producing seasonal flu vaccines. It analyzes supply and demand challenges manufacturers face in an unpredictable market with variable patient compliance. It recommends that manufacturers focus R&D on reducing technical hurdles, governments improve compliance and consider subsidies, and all parties work to better distribute vaccines. The appendices provide models for production forecasting and cost-benefit analyses of government intervention strategies.

1. Making Flu Vaccines
Balancing Commerce & Public Health

2. Making Flu Vaccines :
Balancing Commerce & Public Health
• Introduction
• Problem Statement
• Analysis
- Supply Challenges
- Demand Challenges
- Question of Government Risk Mitigation
• Recommendations
• Appendix
Overview

3. Flu Vaccines : A Breakthrough in Public Health
 Seasonal flu is actually a lethal disease
− In US, average of 41,400 people per year died from the flu
− 90% of deaths were among seniors over age 65
 Influenza pandemics are much worse!
− Historically, major pandemics occurred on average once every 29 years
− The 1918 flu pandemic had 3 times more casualties than WW1!!
 Vaccines are the answer: yes, they are important!
 CBO estimates a severe pandemic would cost $700 billion
(or 5% of GDP). By contrast, US only spent $1 billion in
2009 on vaccines.
•
Introduction
Seattle policemen patrolling streets during 1918 Flu Pandemic
Source: National Archives

4. Flu Vaccines : A Breakdown in Patient Compliance
 CDC recommended 189.1 million vaccine recipients in 2009-2010, but only 114.5 million
doses were produced
 Why?
 In the US, compliance is typically less than 50% of recommended population
 Rates vary by patient perceptions and demographics (age, race, income)
– In general, lower compliance observed in seniors, minorities, and low-income groups
– e.g. 90% in infants vs. 66% in seniors 65 years+
Introduction
Vaccine uptake rates are unpredictable.

5. •Variable demand creates challenges supply hurdles:
Flu Vaccines : A Challenging Marketplace
Introduction
YOY Changes in
Flu Severity
Variable Patient
Perceptions &
Compliance
Forecasting
Challenges
Risk Averse
Manufacturers
Technical Hurdles
& Cost Uncertainty
Production Risks

6. Problem Statements
Michael Johnson, VP of MFG at CSP, must define a production plan now to
support vaccine demand a year from now.
• What challenges does CSP face in planning supply to safeguard public health?
• How can he plan production to balance commercial and public health goals?
• How can vaccine makers’ interests be better aligned with public health goals?
Making Flu Vaccines :
Balancing Commerce & Public Health

7. Define
Health
Burden
Discover Develop Produce Distribute Regulate
Define
Policy
Finance Immunize
Federal
Government
State / Local
Government
Academia
Health
Insurance
MFG Firms
like CSP
Wholesalers &
Distributors
Health Care
Providers
Patients
Making Flu Vaccines: Market defining forces
Unlike most drugs, U.S. Flu Vaccine market mechanics are largely government-defined
… rightfully so, given Public Health risks.
Analysis

8. Analysis
Making Flu Vaccines: Distribution Challenges
MFG Firm MFG Firm MFG FirmManufacturers
like CSP
Wholesaler Wholesaler Wholesaler WholesalerWholesalers
Chain
Pharmacies
Independent
Pharmacies
Large
Purchasers
Hospital
Pharmacies
Military
DoD / VAPurchasers
Local
Health
Dept.’s
Visiting
Nurse
Assoc.
Physicians Clinics
Mass
Immunizers
Hospitals /
ERs
Providers
• Vaccines travel through many hands to reach patients
• No system-wide inventory visibility or coordination in the U.S.
• Makes it difficult to move excess inventory to areas of greater need:
Surplus here… while shortage there

9. Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Egg Farmers
CDC
MFG Firms
like CSP
FDA / CBER
Wholesalers
& Distributors
Providers
Stage 0 1 2 3 4 5
Secure egg supply
Plan Produce
Monovalent sub-formulas
Mix
Trivalent formula
FG
PKG
Select 3,
Forecast
& Seed
Store &
Ship
Making Flu Vaccines: Supply Challenges
•Position inventory in anticipation of demand
•Move inventory in response to demand
Vaccinate patients
QC Test
Approve to proceed
• Demand Forecasting and Product Release Gates are government-controlled
• MFG firms face technical hurdles that drive execution risk…
Analysis

10. Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Egg Farmers
CDC
MFG Firms
like CSP
FDA / CBER
Wholesalers
& Distributors
Providers
Stage 0 1 2 3 4 5
Secure egg supply
Plan Produce
Monovalent sub-formulas
Mix
Trivalent formula
FG
PKG
Select 3,
Forecast
& Seed
Store &
Ship
Making Flu Vaccines: Supply Challenges
•Position inventory in anticipation of demand
•Move inventory in response to demand
Vaccinate patients
QC Test
Approve to proceed
Analysis
• Yield variability, contamination risk, long MFG lead time, short shelf-life
make accurate resource and supply planning difficultand demand uncertainty

11. Oct
Nov
Dec
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Egg Farmers
CDC
MFG Firms
like CSP
FDA / CBER
Wholesalers
& Distributors
Providers
Stage 0 1 2 3 4 5
Secure egg supply
Plan Produce
Monovalent sub-formulas
Mix
Trivalent formula
FG
PKG
Select 3,
Forecast
& Seed
Store &
Ship
Making Flu Vaccines: Supply Challenges
•Position inventory in anticipation of demand
•Move inventory in response to demand
Vaccinate patients
QC Test
Approve to proceed
Analysis
• High fixed costs, inventory risk and revenue uncertainty
• These commercial pressures encourage conservative production planning

12. Making Flu Vaccine: Demand Challenges
Can be viewed from either commercial or public health
perspective
• Just in Time approach is commercially
recommended scenario that depends on low
inventories due to guaranteed spoilage
• Just in Case scenario is based on human, and
economic, costs of potential severe epidemic
Analysis

13. Commercial View: Production Considerations
• Spoilage
• Recent averages & trends like Patient Compliance
• Probability of epidemic
• Cost of overage vs. Cost of underage
Analysis

14. Our Recommended Forecasting Method
Standard Forecast
of Distributor
Demand
A Small Probability
of an a Moderate
or Severe Epidemic
An Upward Hedge
Due to High Costs
of Missed Sales
Use double
exponential
smoothing to make
projection for 2010-
11 as ‘normal’ year.
Historical epidemic
data and educated
estimates of vaccine
coverage is epidemic
scenarios.
Newsvendor Model,
Margin Estimates
from Case
Analysis

15. Outcome of the Commercial Perspective:
Incomplete Coverage (even of target groups)
Standard
Forecast of
Distributor
Demand
A Small
Probability of
a Moderate
or Severe
Epidemic
An Upward
Hedge Due to
High Costs of
Missed Sales
Industry
Production
108 million + 3
million
+ 3
million
114 million
See Appendix A
Best estimate of CSP Corporation Production =
Avg. 46% market share X 114 million = 52.5 million
Analysis

16. Public Health Perspective:
Motivation for a Just-in-case Strategy
• In a high severity scenario . . .
• High demand
• Logistical challenges (closed borders, new distribution channels,
etc.)
• social costs would be high.
• Increased health care costs
• Social disruption caused due to lost of work days
• Death
• economic impacts would be great.
• Drop in GDP levels
• Estimated $700 billion hit to the US economy
• an ageing population would be at risk.
• Highly susceptible group for infection in coming years
•
16
Analysis

17. Government May be Motivated to Address
Commercial Risks
• A Review of Commercial Risks:
• output variability
• spoilage
• ****
• virulence variability
• compliance variability
• Government’s Resulting Role?
• Risk sharing with existing firms
• Facilitate entry by new firms
• Other?
17
Analysis

18. What factors should the government consider?
COST A probability-weighted cost of GDP loss due to
influenza outbreak equals $9.3 billion/year.
(see Appendix B)
INNOVATION The government has an interest in ensuring
that innovation continues to happen in the
influenza vaccine industry.
ALTERNATE
USES
Other uses of $9.3 billion/year may better
serve the public good and the economy.

19. Understanding the Scale of Costs Involved
• Avoidance of 5% GDP loss, once every 120 years, plus avoidance of 1% GDP loss, once
every 40 years is worth $9.3 billion/year.
INDUSTRY
COMPLIANCE WITH
CDC PROJECTION
Would have required a 4.35 million annual increase
in units/year.
(cost = $28 million/year)
FULL COVERAGE Expense is likely justified, given potential costs to
society of severe epidemic.
(cost on the order of $1 billion/year)

20. Potential Government Strategies
for Increasing Production
Strategy Cost Consequences
Guaranteed purchase of
excess,
up to 300 million units
Up to $1.2 billion
= (186 million x $6.50)
• Full coverage
• Could lead to bloated industry with
little incentive for innovation.
• Contracting complications
Guaranteed purchase of
specified quantity
Similar to above • Overestimate could lead to
unnecessary subsidies
• Underestimate could lead to
shortages, in the event of a crisis.
• Quantity is stickier, not as easy to
change.
• Contracting complications
Subsidies to allay
production costs
Between 0 and $1.3 billion
(cost estimated at $4.22/unit)
see Appendix C
for details
• A near-full subsidy would cost $1.3
billion.
• Below that level, it is difficult to
achieve full coverage.
• Less focus in industry on courting
government, perhaps more on
reducing costs

21. Potential Government Strategies (cont’d)
Strategy Cost Consequences
Subsidize facility
construction
$150,000,000 for facility capable
of producing 100,000,000 doses.
• Expanded production
• Lower prices
• Coverage will likely still not be
complete
Organize/subsidize bulk
purchases of key materials
Full cost of eggs, for instance, is
between $60 and $160 million.
• Could reduce production costs
(eggs constitute 12.5% of
production cost)
• Full coverage would still not be
achieved.
• Messy market intervention
Increase patient compliance variable • Industry likely to produce more.
• Likelihood of vaccine decreased.
Government takeover of all
vaccine production
Up to $1.3bn annual costs + up
to $500 million in facility costs +
other set-up costs
• Contravenes culture
• Lack of competitive pressures
may undermine innovation

22. Summary of Possible Government Responses
Guaranteed purchase of excess
Guaranteed purchase of specified quantity
Production subsidies
Facility construction subsidies
Organize purchases of bulk materials
Increase patient compliance
Takeover production
22

23. •Refocus R&D efforts to reduce technical hurdles like shelf-life
•Improve patient compliance within target population
•Divert Vaccination traffic to Retail Pharmacy clinics with better
distribution control
Manufacturers
should…
•Refocus R&D efforts to reduce technical hurdles like shelf-life
•Improve patient compliance within target population
•Absorb cost of excess qty if produced within reasonable CDC spec limits
•Subsidies to incent capacity expansion and ongoing commitment
Government
should…
•Improve patient compliance within target population
•Divert Vaccination traffic to Retail Pharmacy clinics with better
distribution control
Payers
should…
Recommendations
Making Flu Vaccines :
Balancing Commerce & Public Health

24. Recommendations
Making Flu Vaccines :
Balancing Commerce & Public Health
Supply
• Refocus R&D efforts to reduce technical hurdles like shelf-life
• Divert Flu Vaccination traffic to Retail Pharmacy clinics with
better distribution control
Demand
• Improve patient compliance within target population
Risk
Mitigation
• Absorb cost for left-over qty if produced within reasonable spec
limits for CDC projection accuracy
• Subsidies to incent capacity expansion and ongoing commitment
Profitable MFG firms, better public health safeguards

25. Recommendations
• Short-term: Responsible production plan to cover:
• Target pop: children, seniors, pregnant women and their care givers
• Additional patients based upon probability of outbreak severity
• Long-term
Making Flu Vaccines :
Balancing Commerce & Public Health
Challenge Recommendation Agents
Supply
Variability
• Refocus R&D efforts to reduce technical hurdles like
shelf-life and yield variability
• Divert Flu Vaccination traffic to Retail Pharmacy clinics
with better distribution control: Get it to where it’s needed!
• MFG firms
• Gov’t Agencies
• Academia
Demand
Variability
• Improve patient compliance within target population • MFG firms
• Gov’t Agencies
• Public & Private
Payers
Mitigation of
Commercial
Risk
• Absorb cost for left-over qty if produced within
reasonable spec limits for CDC projection accuracy
• Subsidies to incent capacity expansion and ongoing
commitment
• Gov’t Agencies
• MFG firms

26. • Sentence about jit and jic

27. Appendix A: A “Normal” Year
• Use Double Exponential Smoothing, with optimization of alpha and beta to make 2010-11 forecast
(forecast = 108 million for a normal year)

28. Appendix A:
Probability of Epidemic
• We use data from the past 120 years:
– One severe outbreak (1918-20)
– Three moderate outbreaks (1889-1890, 1957-58, 1968-69)

29. Appendix A: Upward Adjustment
for Possibility of Epidemic
• Calculate weighted average of projected demand:
Weighted average = 111 million
Year Type Probability Coverage
Needed
Normal 116/120 108 million
Moderate
outbreak
3/120 196 million
(midpoint
between
extremes)
Severe
outbreak
1/120 285 million
(95 percent of
public)

30. Appendix A: Upward Adjustment
for Demand Hedging
• The cost of missed sales is greater than the cost of excess production (margin = 56.3%).
• A degree of production above the forecast is recommended.
– Adjusted industry forecast = 114 million units
– CSP Corporation has an average of 46% of market share => 52.5 million units produced.

31. Appendix A: Upward Adjustment
for Demand Hedging, cont’d
• Use Newsvendor Model to adjust production for proportional cost of overage and underage.
• Cost of underage is 56.3% of sales (the margin reported in the case), the cost of a missed sale.
• Cost of overage is 43.7% of sale price, which is production cost.

32. Appendix A: Upward Adjustment
for Demand Hedging, cont’d
• Calculate critical factor = 0.56/(0.56+0.44)
• Find z-score = 0.16
• Calculate standard deviation of distributor demand from 1999-2000 to 2009-2010, which equals
approximately 17 million doses.
• Calculate optimal production amount for uncertain demand = 111 million
+ (0.16) 17 million = 114 million

33. Appendix B: National Cost of Flu Epidemic
(Proability-Weighted)
• Using probability figures found in Appendix A and GNP costs found in case:
• Probability-weighted cost of epidemic = $9.3bn
33
Year type Probability Cost
Normal 116/120 0
Moderate
epidemic
3/120 1% 0f GDP
= $140bn
Severe
epidemic
1/120 5% of GDP
=$700bn

34. Appendix C: Production Cost Estimate
Client Type Client Share
(percentage)
Purchase Price
Physicians 34 11
State and local health
dept’s 17.6 6.5
Hospitals 16.9 11
Pharmacies, secondary
distributors 19.1 11
Federal government 12.4 6.5
•Average purchase price received by manufacturer: $9.65
•Manufacturer margin (given) = 56.3%
•Manufacturer production cost = $4.22
Note: All percentages, outside of that for “federal government,” are provided in case.
Purchase price for pharmacies derived from case reference to “clinics.”