Are Drugs More Profitable Than Vaccines?

Abstract: In a simple representative consumer model, vaccines and drug treatments yield the same revenue for a pharmaceutical manufacturer, ceteris paribus. Revenue equivalence breaks down if consumers vary in probability of contracting the disease; since drug treatments are sold only to people who have contracted the disease, there is less asymmetric information to prevent the firm from extracting consumer surplus with drug treatments than with

vaccines. For appropriate distributions of risk of infection, the ratio of drug treatment to vaccine revenue can be arbitrarily high; we calculate that the ratio is about two to one for empirical distributions of HIV risk. However, if consumers also vary in income, if price discrimination is impossible, and if income covaries negatively with risk of infection, vaccines

may be more profitable than drugs. For example, if the ability to price discriminate internationally broke down, incentives to develop vaccines against HIV/AIDS and tuberculosis might exceed incentives to develop drug treatments. Revenue equivalence also breaks down if vaccines interfere more than drug treatments with the spread of the disease. An integrated economic epidemiological model implies that the ratio of steady-state revenue for drug treatments to that for vaccines is highest for rare diseases. The case for subsidizing research and development on vaccines relative to drug treatments is strongest when the distribution of risk among consumers is skewed and when the disease is rare.

For more information, contact Jere Behrman.