Executive Summary: Introduction: Execution Challenges & Conflicting Responsibilities Importance of Vaccines: Public Health / Financial Impact of Influenza Flu Vaccine Value Chain: Functional Flow Map of 5-Stage MFG Timeline (Gov’t & MFG Firm), incorporates Exhibits 4 &5 and elements of 3Problem Statement & Analysis: An example of conflicting Commercial and Public Health responsibilities of vaccine makers:Michael Johnson at CSP must define a Flu Vaccine Production Plan that balancesHow to balance responsibilities and overcome execution challenges?Supply Challenges: Long MFG lead time Yield variability Contamination risk High fixed costs Distribution challenges: Inventory in the wrong places, fragmented distribution network prevents getting it to where its needed These challenges CREATE COMMERCIAL PRESSURES that limit: How much Capacity can be committed in the industry How much vaccine production will be planned (i.e. conservative production planning to limit inventory risk) Unpredictable demand creates Inventory riskDemand challenges: Commercially driven - JIT scenario determined by probability weighting of severity levels based upon historical frequency Last 100 yrs: Can we get this data from IRIS? Public Health driven - JIC scenario = High Severity scenario = cover Total Recommended Population Michael would have to choose a scenario based upon probability weighting between Low Severity, Moderate Severity and High Severity (Pandemic Outbreak) as per actual historical frequency of severity (as large a sample pop as possible)NOTE: Discuss FCST methodology and results SUMMARY only (Detail of actual FCST calculations goes in Appendix)Risk Asymmetry challenges: MFG firms cannot absorb cost of Public Health without help, need Gov’t to share risk, improve incentive or simplify ease of entry to enable commitment of more industry capacity Cost/Benefit comparison of gov’t risk-sharing options: Which is most compelling for MFG firms? Cost-sharing Buying a fixed amount Absorbing leftover dosesRecommendations:How gov’t can align vaccine makers’ commercial incentives with public health objectivesAppendix
For MFG firms, the bad archer’s analogy applies: I shot an arrow into the air and when it lands, I know not whereAs such, excess inventory purchased by Kaiser Permanente System in CA may not be visible to or reach unexpected demand in FL. MFG firms don’t control this part…
High fixed costs + Inventory risk vs. Uncertain revenueSo commercial pressures encourage conservative production planning!!
improving MFG lead time, yield reliability and shelf-life
Csp flu vaccine case presentation - almost final - erik 04072011
Making Flu VaccinesBalancing Commerce & Public Health
Making Flu Vaccines :Balancing Commerce & Public Health• Introduction• Problem Statement• Analysis- Supply Challenges- Demand Challenges- Question of Government Risk Mitigation• Recommendations• AppendixOverview
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 in2009 on vaccines.•IntroductionSeattle policemen patrolling streets during 1918 Flu PandemicSource: National Archives
Flu Vaccines : A Breakdown in Patient Compliance CDC recommended 189.1 million vaccine recipients in 2009-2010, but only 114.5 milliondoses 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+IntroductionVaccine uptake rates are unpredictable.
Problem StatementsMichael Johnson, VP of MFG at CSP, must define a production plan now tosupport 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
DefineHealthBurdenDiscover Develop Produce Distribute RegulateDefinePolicyFinance ImmunizeFederalGovernmentState / LocalGovernmentAcademiaHealthInsuranceMFG Firmslike CSPWholesalers &DistributorsHealth CareProvidersPatientsMaking Flu Vaccines: Market defining forcesUnlike most drugs, U.S. Flu Vaccine market mechanics are largely government-defined… rightfully so, given Public Health risks.Analysis
AnalysisMaking Flu Vaccines: Distribution ChallengesMFG Firm MFG Firm MFG FirmManufacturerslike CSPWholesaler Wholesaler Wholesaler WholesalerWholesalersChainPharmaciesIndependentPharmaciesLargePurchasersHospitalPharmaciesMilitaryDoD / VAPurchasersLocalHealthDept.’sVisitingNurseAssoc.Physicians ClinicsMassImmunizersHospitals /ERsProviders• 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
OctNovDecJanFebMarAprMayJunJulAugSepOctNovDecJanFebMarEgg FarmersCDCMFG Firmslike CSPFDA / CBERWholesalers& DistributorsProvidersStage 0 1 2 3 4 5Secure egg supplyPlan ProduceMonovalent sub-formulasMixTrivalent formulaFGPKGSelect 3,Forecast& SeedStore &ShipMaking Flu Vaccines: Supply Challenges•Position inventory in anticipation of demand•Move inventory in response to demandVaccinate patientsQC TestApprove to proceed• Demand Forecasting and Product Release Gates are government-controlled• MFG firms face technical hurdles that drive execution risk…Analysis
OctNovDecJanFebMarAprMayJunJulAugSepOctNovDecJanFebMarEgg FarmersCDCMFG Firmslike CSPFDA / CBERWholesalers& DistributorsProvidersStage 0 1 2 3 4 5Secure egg supplyPlan ProduceMonovalent sub-formulasMixTrivalent formulaFGPKGSelect 3,Forecast& SeedStore &ShipMaking Flu Vaccines: Supply Challenges•Position inventory in anticipation of demand•Move inventory in response to demandVaccinate patientsQC TestApprove to proceedAnalysis• Yield variability, contamination risk, long MFG lead time, short shelf-lifemake accurate resource and supply planning difficultand demand uncertainty
OctNovDecJanFebMarAprMayJunJulAugSepOctNovDecJanFebMarEgg FarmersCDCMFG Firmslike CSPFDA / CBERWholesalers& DistributorsProvidersStage 0 1 2 3 4 5Secure egg supplyPlan ProduceMonovalent sub-formulasMixTrivalent formulaFGPKGSelect 3,Forecast& SeedStore &ShipMaking Flu Vaccines: Supply Challenges•Position inventory in anticipation of demand•Move inventory in response to demandVaccinate patientsQC TestApprove to proceedAnalysis• High fixed costs, inventory risk and revenue uncertainty• These commercial pressures encourage conservative production planning
Making Flu Vaccine: Demand ChallengesCan be viewed from either commercial or public healthperspective• Just in Time approach is commerciallyrecommended scenario that depends on lowinventories due to guaranteed spoilage• Just in Case scenario is based on human, andeconomic, costs of potential severe epidemicAnalysis
Commercial View: Production Considerations• Spoilage• Recent averages & trends like Patient Compliance• Probability of epidemic• Cost of overage vs. Cost of underageAnalysis
Our Recommended Forecasting MethodStandard Forecastof DistributorDemandA Small Probabilityof an a Moderateor Severe EpidemicAn Upward HedgeDue to High Costsof Missed SalesUse doubleexponentialsmoothing to makeprojection for 2010-11 as ‘normal’ year.Historical epidemicdata and educatedestimates of vaccinecoverage is epidemicscenarios.Newsvendor Model,Margin Estimatesfrom CaseAnalysis
Outcome of the Commercial Perspective:Incomplete Coverage (even of target groups)StandardForecast ofDistributorDemandA SmallProbability ofa Moderateor SevereEpidemicAn UpwardHedge Due toHigh Costs ofMissed SalesIndustryProduction108 million + 3million+ 3million114 millionSee Appendix ABest estimate of CSP Corporation Production =Avg. 46% market share X 114 million = 52.5 millionAnalysis
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•16Analysis
Government May be Motivated to AddressCommercial 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?17Analysis
What factors should the government consider?COST A probability-weighted cost of GDP loss due toinfluenza outbreak equals $9.3 billion/year.(see Appendix B)INNOVATION The government has an interest in ensuringthat innovation continues to happen in theinfluenza vaccine industry.ALTERNATEUSESOther uses of $9.3 billion/year may betterserve the public good and the economy.
Understanding the Scale of Costs Involved• Avoidance of 5% GDP loss, once every 120 years, plus avoidance of 1% GDP loss, onceevery 40 years is worth $9.3 billion/year.INDUSTRYCOMPLIANCE WITHCDC PROJECTIONWould have required a 4.35 million annual increasein units/year.(cost = $28 million/year)FULL COVERAGE Expense is likely justified, given potential costs tosociety of severe epidemic.(cost on the order of $1 billion/year)
Potential Government Strategiesfor Increasing ProductionStrategy Cost ConsequencesGuaranteed purchase ofexcess,up to 300 million unitsUp to $1.2 billion= (186 million x $6.50)• Full coverage• Could lead to bloated industry withlittle incentive for innovation.• Contracting complicationsGuaranteed purchase ofspecified quantitySimilar to above • Overestimate could lead tounnecessary subsidies• Underestimate could lead toshortages, in the event of a crisis.• Quantity is stickier, not as easy tochange.• Contracting complicationsSubsidies to allayproduction costsBetween 0 and $1.3 billion(cost estimated at $4.22/unit)see Appendix Cfor details• A near-full subsidy would cost $1.3billion.• Below that level, it is difficult toachieve full coverage.• Less focus in industry on courtinggovernment, perhaps more onreducing costs
Potential Government Strategies (cont’d)Strategy Cost ConsequencesSubsidize facilityconstruction$150,000,000 for facility capableof producing 100,000,000 doses.• Expanded production• Lower prices• Coverage will likely still not becompleteOrganize/subsidize bulkpurchases of key materialsFull cost of eggs, for instance, isbetween $60 and $160 million.• Could reduce production costs(eggs constitute 12.5% ofproduction cost)• Full coverage would still not beachieved.• Messy market interventionIncrease patient compliance variable • Industry likely to produce more.• Likelihood of vaccine decreased.Government takeover of allvaccine productionUp to $1.3bn annual costs + upto $500 million in facility costs +other set-up costs• Contravenes culture• Lack of competitive pressuresmay undermine innovation
Summary of Possible Government ResponsesGuaranteed purchase of excessGuaranteed purchase of specified quantityProduction subsidiesFacility construction subsidiesOrganize purchases of bulk materialsIncrease patient complianceTakeover production22
•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 betterdistribution controlManufacturersshould…•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 commitmentGovernmentshould…•Improve patient compliance within target population•Divert Vaccination traffic to Retail Pharmacy clinics with betterdistribution controlPayersshould…RecommendationsMaking Flu Vaccines :Balancing Commerce & Public Health
RecommendationsMaking Flu Vaccines :Balancing Commerce & Public HealthSupply• Refocus R&D efforts to reduce technical hurdles like shelf-life• Divert Flu Vaccination traffic to Retail Pharmacy clinics withbetter distribution controlDemand• Improve patient compliance within target populationRiskMitigation• Absorb cost for left-over qty if produced within reasonable speclimits for CDC projection accuracy• Subsidies to incent capacity expansion and ongoing commitmentProfitable MFG firms, better public health safeguards
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-termMaking Flu Vaccines :Balancing Commerce & Public HealthChallenge Recommendation AgentsSupplyVariability• Refocus R&D efforts to reduce technical hurdles likeshelf-life and yield variability• Divert Flu Vaccination traffic to Retail Pharmacy clinicswith better distribution control: Get it to where it’s needed!• MFG firms• Gov’t Agencies• AcademiaDemandVariability• Improve patient compliance within target population • MFG firms• Gov’t Agencies• Public & PrivatePayersMitigation ofCommercialRisk• Absorb cost for left-over qty if produced withinreasonable spec limits for CDC projection accuracy• Subsidies to incent capacity expansion and ongoingcommitment• Gov’t Agencies• MFG firms
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)
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)
Appendix A: Upward Adjustmentfor Possibility of Epidemic• Calculate weighted average of projected demand:Weighted average = 111 millionYear Type Probability CoverageNeededNormal 116/120 108 millionModerateoutbreak3/120 196 million(midpointbetweenextremes)Severeoutbreak1/120 285 million(95 percent ofpublic)
Appendix A: Upward Adjustmentfor 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.
Appendix A: Upward Adjustmentfor 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.
Appendix A: Upward Adjustmentfor 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 equalsapproximately 17 million doses.• Calculate optimal production amount for uncertain demand = 111 million+ (0.16) 17 million = 114 million
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 = $9.3bn33Year type Probability CostNormal 116/120 0Moderateepidemic3/120 1% 0f GDP= $140bnSevereepidemic1/120 5% of GDP=$700bn
Appendix C: Production Cost EstimateClient Type Client Share(percentage)Purchase PricePhysicians 34 11State and local healthdept’s 17.6 6.5Hospitals 16.9 11Pharmacies, secondarydistributors 19.1 11Federal government 12.4 6.5•Average purchase price received by manufacturer: $9.65•Manufacturer margin (given) = 56.3%•Manufacturer production cost = $4.22Note: All percentages, outside of that for “federal government,” are provided in case.Purchase price for pharmacies derived from case reference to “clinics.”