Strong Medicine: Designing Pharmaceutical Markets to Treat Neglected Diseases Michael Kremer May 9, 2008 Harvard University, Brookings Institution, Center for Global Development, & NBER

Sources Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases (w/Rachel Glennerster) Making Markets for Vaccines: A Practical Plan to Spark Innovations for Global Health: Pull Mechanisms Working Group, Center for Global Development Draft Paper

Main idea Market distortions mean little research on diseases of developing countries Even less on vaccines – best way to reach the poor A commitment to purchase vaccines if developed could create the incentives needed to spur research Many design issues

Overview Motivation Distortions in the market for vaccines Push and pull as ways to stimulate R&D How to structure a purchase commitment How much to pay for a vaccine? The politics of a vaccine commitment

Health in Low-Income Countries Differing disease environment Weak health infrastructure Simple technologies have made big difference in life expectancy Malaria, TB, AIDS: three big killers with no adequate vaccine

Benefits of vaccines Compared to drugs, easier to deliver in low- income countries with weak health care infrastructure Smallpox eradicated, polio largely controlled 74% of world’s children receiving EPI vaccines, estimated to save 3 million lives a year Rates likely to improve (GAVI)

Dearth of R&D on tropical diseases Pecoul et al. (1999): 1,233 drugs licensed between , 4 by private firms for human tropical diseases WHO: 50% of health R&D is private, but less than 5% of that is spent on diseases of poor countries Private vaccine research for HIV oriented towards clade B, not clade C (most common in Africa)

Reasons for the lack of R&D Scientific challenge Small market Poverty Market failures

Market failures: the patent trade-off Intellectual property rights (IPR) such as patents and copyrights provide incentives Also distort prices, reduce consumption

Poor countries and IPR Most large low-income countries historically limited patent protection Indian Patents Act of 1970 TRIPS required countries to introduce IPR Debate over AIDS drug pricing/compulsory licensing Access vs. Incentives

Market failures: vaccines vs. drugs Externalities—you benefit if I am vaccinated Prevention vs. cure Harder for producers to observe the benefits Harder for developers to capture the consumer surplus

Role of public purchases In theory, large-scale government purchases could make both vaccine producers and consumers better off In practice, governments typically pay low prices Time-inconsistency Free-riding Political economy

Social versus private returns General social return from R&D likely twice private return (Mansfield et al. 1997) Neglected vaccines : greater ratio Example: Hypothetical malaria vaccine Cost-effective even at $35 per vaccinated person, or $2.1 billion annually Total market for all childhood vaccines is $200 million, likely price <$2 per dose Suggests aid targeted at vaccine R&D will have greater return than other types of aid

Creating incentives for R&D Push and pull

Push and pull approaches Push programs: subsidize research inputs Grants, R&D Tax credits, Government laboratories Pull programs: rewards for success in developing specific products R&D system in rich countries involves both For diseases of poor countries, some push, but minimal pull

Pull: Market size matters Studies show correlation between market size and level of innovation Schmookler (1966): Agriculture Griliches (1957) Hayami and Rutton (1971) Pharmaceutical R&D Vernon and Grabowski (2000) Morton (1999), Reiffen and Ward (2002) Acemoglu and Linn (2003) Finkelstein (2003)

Pull: vaccine precedents Orphan Drug Act Key provision: 7 years of market exclusivity 200 orphan drugs since 1983, fewer than 10 in the previous decade Meningococcal C vaccine UK indicated would buy effective vaccine

Legal precedents Historical and legal record suggest legally enforceable Domestic Manganese Purchase Program (1960s) Issue is design, not pure reneging

Advantages of pull programs Pay for results Funder sets goals; researchers choose own technical approach Can proceed despite divided technical opinion Align incentives of researchers, funders Less subject to political distortions Addresses access and incentives

Limitations of pull programs Must specify desired output in advance Eligibility standards for vaccines manageable, but far from trivial Basic research Potential duplication of R&D Competition can be good (human genome project?) Possible excessive duplication

Pull programs: A Menu Product / Patent Purchases Patent Extension on other Products Best Entry Tournaments Expanding Existing Markets

Purchase commitments: Vaccine Eligibility Goals 1) Create incentives for useful vaccine 2) Avoid incentives for useless vaccine 3) Ex post efficiency 4) Credibility 5) Simplicity

Structuring a vaccine commitment Determining eligibility Basic technical requirements Independent Adjudication Committee Market test requirement Sunset clauses

How much to pay? Berndt et al. (2004): $2.56 billion (in 2004$) would match realized revenue from existing products. Other approaches: Industry opinion, cost of development $15 per person vaccinated for first 200 million people, lower price thereafter, would match in pessimistic scenario

Cost-effectiveness estimates Benchmarks: LDC cost per DALY saved: $100 US cost per DALY saved: up to $100,000 ARV cost per DALY saved: $600 - $1800? Our estimates: Under reasonably conservative assumptions… Malaria vaccine: < $15 per DALY saved Estimates generated by a flexible downloadable spreadsheet tool

Pull Working Group Set up by CGD at request of Gates Foundation to analyze how to operationalize advance contracts as a tool for encouraging research on neglected diseases

Pull Working Group Set up by CGD at request of Gates Foundation to analyze how to operationalize advance contracts as a tool for encouraging research on neglected diseases

Process of the Working Group Consulted with vaccine experts to understand vaccine supply, funding and procurement Worked with legal team to draft term sheets Discussed proposals with industry and potential funders Assessed necessary commitment size and cost- effectiveness

Process of the Working Group Consulted with vaccine experts to understand vaccine supply, funding and procurement Worked with legal team to draft term sheets Discussed proposals with industry and potential funders Assessed necessary commitment size and cost- effectiveness

Working Group Products Term sheets for contract Report Spreadsheet tool Book: Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases

Conclusion Any of several organizations have the resources to create credible purchase commitments to stimulate vaccine R&D Not easy, but downside small compared to status quo Harness energy, inventiveness of private sector to address needs of low-income countries If no vaccine is developed, no public funds spent If successful, millions of lives saved