Strong Medicine:Designing Pharmaceutical Markets

to Treat Neglected Diseases

Michael Kremer

May 9, 2008Harvard University,

Brookings Institution,

Center for Global Development,

& NBER

mkremer@fas.harvard.edu

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 1975-1997, 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 http://post.economics.harvard.edu/faculty/kremer/vaccine.html

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