Why Novartis Is Wrong to Insist Taxpayers Stuff More Cash Into Its Vaccine Mattress

Last Updated May 7, 2010 5:50 PM EDT

Don't feel too sorry for Novartis (NVS), which is whining about all the governments that ordered H1N1 flu vaccines but then decided not to pay once it became clear no one wanted them. The company does quite nicely, thank you very much, from government money. The swine flu season was mild last winter, and about half of the 15 governments that ordered vaccines from Novartis ended up canceling their orders, according to the WSJ.

From a business point of view, you can see how annoying it must be dealing with customers who demand something and then don't want to pay for it. But Novartis is making the wrong enemies here -- governments may be difficult to deal, with but in the long run they're Novartis' best friend. Management sometimes forgets that governments are customers too, and the customer is always right -- especially when it's wielding a discretionary budget in the millions of dollars.

First, you should know that Novartis earned $1.1 billion in sales from flu shots around the world in Q1 2010. Most of that will have come from governments, as only in the U.S. is the private sector a significant provider of health services. And even in America there are plenty of government programs providing free or subsidized vaccines.

Second, It's not as if Novartis turned up its nose at the $221 million grant it received from the U.S. to conduct clinical trials for vaccines.

Third, it's not really governments' fault that people didn't want vaccines.

Lastly, Novartis should remind itself that unlike any other category, vaccines are the one product that government's actually advertise, free of charge, on behalf of drug companies. You can't buy that kind of publicity. (Well, you can -- but then you get into trouble for doing so.)

So yes, it's irksome when the French government says it will pay only 16 cents on the dollar for unused vaccines. But this is one beautiful friendship the company might want to maintain.