Purchase Commitments for Vaccines:
Their Uses and Their Limitations
Andrew Farlow
University of Oxford
Department of Economics, and Oriel College
BioDesign Institute
Arizona State University
5 April 2005
This version: 16 May 2005
This has been rewritten so as to be a stand-alone presentation
without need of a presenter.
A downloadable copy of this PowerPoint and supporting papers can be found at:
www.economics.ox.ac.uk/members/andrew.farlow
The author very much welcomes feedback: [email protected]
Based on:
“The Global HIV Vaccine Enterprise, Malaria Vaccines, and
Purchase Commitments: What is the Fit?”
Andrew Farlow, Submission to Commission on Intellectual
Property Rights, Innovation and Public Health, WHO, March
2005.
Forthcoming in Innovation Strategy Today.
“An Analysis of the Problems of R&D Finance for
Vaccines: And an Appraisal of Advance Purchase
Commitments”
Andrew Farlow, April 2004.
The problem
• Over 40,000 people – many of them children – die every day
in developing countries of infectious or parasitic diseases.
• Many could be saved by access to already developed vaccines
and drugs:
“A large proportion of the disease burden in such countries is
unnecessary, since it could be reduced by the effective
distribution of medicines that are currently available and
inexpensive.” International Policy Network “Incentivising research and
development for the diseases of poverty” 2005 p17.
• Barely more than 1% of total global pharmaceutical
expenditure goes into the research and development of new
products for diseases affecting 90% of the world’s
population*.
*10%-15% of global pharmaceutical spending goes into R&D, and barely 10% of this
goes into diseases impacting 90% of the world’s population.
Recent strides
• Large fresh funds to purchase currently existing vaccines and
to roll out immunisation programs:
– The UK – $1.8bn over 15 years;
– Bill and Melinda Gates foundation – $750m;
– Norway – $290m.
• Proposed $4bn budget over ten years for Immunizations, via
an ‘International Financing Facility for Immunizations’:
– Though this budget – and immunization initiative – could, and
should, have been provided with or without the IFF possibility*.
• Launch of ‘Global HIV Vaccine Enterprise’ in 2004.
• UK presidency of the G8 and EU this year:
– Big opportunity…or lost opportunity?
* Given the potentially controversial nature of the IFF proposal, policy makers also need
to take great care that, in all their public pronouncements, the IFF is seen to the there to
support the immunizations and never the other way around.
A spectrum of vaccines
• Low or non-use of many already existing, already cheap or
even practically costless vaccines.
• ‘Late-stage’ vaccines – where most of the science is already
known and a viable product is close to, or already at, hand.
• ‘Early-stage’ highly complex and difficult vaccines – such
as those for HIV, malaria, and TB – where there are either
no viable vaccines on the horizon or current candidates fall
well short of 100% effectiveness, and many scientific
difficulties remain.
• Spectrum of vaccines often lumped together.
• But, instruments needed for each case are different.
• Nature of ‘purchase commitments’ for each kind of vaccine
also differs.
The role of purchase commitments
• Long-term purchase contracts/commitments very
advantageous for underused and late-stage vaccines.
• Advance Purchase Commitments (APCs) for early-stage
vaccines here argued much weaker and a great deal more
problematic than is often suggested:
– The phrase ‘Advance Purchase Commitment’, APC, is used
here, and not ‘Advance Market’, since the latter needs to be
proven and not prejudged to be the case by the choice of
language used. An inability of APCs to perform ‘as if’ a
market is central to many of the concerns here.
• For early-stage vaccine R&D, manufacture and access may
even be harmed by the presence of prior precommitments
(certainly as currently proposed) compared to alternative
mechanisms.
• Where does the boundary between the cases fall?
Lessons from vaccine introductions 1
• Past vaccine introductions:
– Hepatitis B;
– Haemophilus influenzae type B (Hib);
– Smallpox.
• Recent purchase arrangements:
– African trivalent meningitis vaccine;
– Meningitis conjugate C.
• Future late-stage vaccines:
– Pneumococcus;
– Rotavirus;
– Issues:
• Cost of manufacture;
• Safety issues;
• Epidemiology.
All these case-studies are
treated in detail in Farlow,
March 2005, Section 3.
Lessons from vaccine introductions 2
• None of these case-studies remotely matches anything
being proposed for HIV, malaria, and TB.
• Many of the problems caused/resolved by contracts are
very different for these case-studies compared to earlystage vaccines.
• Case-studies illustrate current faults in need of
rectification.
• Current short-run contracts are inefficient – a stable
long-term market matters.
• Get rid of market risk:
– The need for ‘distribution commitments’, ‘vaccine/health
infrastructure commitments’ and commitments to tackle
market risk at many levels;
– APCs (as currently designed) for early-stage vaccines put
market risk back on to developers!
Lessons from vaccine introductions 3
• Good information on how to efficiently set terms:
– Information extracted through competitive tenders, etc.
• Relatively easy to make the incentive ‘additional’ via
procurement contracts, etc.
• Commitments as coordination devices.
• In practical cases, the breakthrough was through
lowering production costs:
– Incentives/competition for this?
– Technological ‘shifts’ dependent on access to technology,
IP, know-how, especially at manufacture and distribution
stage;
– Volume and regulatory issues important in lowering costs.
Lessons from vaccine introductions 4
• Incentives to install capacity quickly and for use quickly.
• Product differentiation and correcting vaccine market
distortions.
• Ability to use IP in ways to encourage competition, to
keep the market open to many potential developers and
producers, and to help create cheaper-to-produce
vaccines.
• Wider finance in place for a wider set of players:
– More open to those who cannot draw off ‘deep pocket’
finance for long periods.
Lessons from vaccine introductions 5
• Importance of role of developing/emerging country
developers and manufacturers.
• More ability to share information and collaborate (key
for HIV? Malaria? TB?).
• ‘Relatively’ low levels of capital costs (compared to, e.g.
case of HIV vaccines).
• Lower risk to biotechs.
• Many of these reasons are ‘fungible’ – they apply
whatever the source of finance.
• Not ‘committee-driven’ over long horizons.
• Current purchases do matter – a lot.
Hepatitis B case-study
• Hepatitis B case-study in draft versions of the recent CGD
report – dropped from final report.
• Hepatitis B case does not support the report’s underlying
hypotheses for HIV/malaria/TB:
– The original Hepatitis B vaccine developers were not the
ones who developed and maintained the lower price market;
– The competitive situation for hepatitis B today – a key
component in achieving long-term sustainable low prices –
reflects poorly on the lack of competition at a similar stage
in product life cycle in the CGD report;
– Emphasis in the success of the Hepatitis B case on market
and competitive devices to push production prices lower –
compared to insufficient emphasis in CGD report.
Why the sudden interest in HIV,
malaria, and tuberculosis? 1
• Focus of attention increasingly on speculative, experimental
applications to HIV, malaria, and tuberculosis, even though
APCs never been used before for even the most basic of
applications.
• Less than a year ago these ‘difficult’ vaccines were not
deemed likely doable by this approach:
– Including by many now heavily advocating the approach.
• By definition APCs cannot be tested except through trying:
– Should ‘crash test’ the thinking, subjecting it to the harshest
of possible self-critiques before trying;
– Given the risks of abandoning the approach due to lack of
industry response and the constant need to change the
program, should learn by trying less complicated vaccines
first and building up to more complicated vaccines.
Why the sudden interest in HIV,
malaria, and tuberculosis? 2
• Supporters and critics all concerned with incentives and rewards
for private firm involvement.
• Disagreement is about:
– The shape and timing of incentives and rewards;
– The ability to set APC terms remotely efficiently;
– Whether APCs will actually work as proposed;
– The role of, and interaction with, other parts of the overall
mechanism for developing these early-stage vaccines;
– Order of priority, given the burden APCs place on the ‘system
capacity' of GAVI/VF/WHO, and use of political capital;
– The dangers of perverse results.
• BIG CONCERN: Approach feeds off (and also feeds)
growing budgetary pressures to cut Vaccine R&D funding –
especially for HIV – given global fiscal deterioration.
Literature on this as an R&D incentive
for early-stage vaccines
• “Making Markets for Vaccines” (henceforth ‘MM’ in all
references), Center for Global Development (henceforth
CGD), Washington, D.C., April, 2005.
• “Strong Medicine: Creating Incentives for
Pharmaceutical Research on Neglected Diseases”,
Kremer, M, and Glennerster, R, Princeton University
Press, November, 2004.
• UK’s No. 10 Policy Unit 1998-2001.
• Mostly the work of a small handful of authors.
Benchmark as an R&D incentive
for early-stage vaccines 1
(These details taken from MM)
• ‘Legally binding’ contract before vaccine R&D:
– Sponsor(s) and all actual and potential vaccine developers
sign-on to the contract within 36 months of the initiation of the
program;
– All actual and potential developers agree to be monitored by
the committee controlling the program;
– Later entry of developers policed by the committee;
– Those conducting current vaccine trials and failing to sign-on,
and those initiating future vaccine trials without prior
permission from the committee, are barred access to the
‘eligible’ markets controlled by the committee;
– Sponsors have an opt-out if contract fails to stimulate ‘enough’
research (though current status of opt-out is a little unclear).
Benchmark as an R&D incentive 2
• ISSUE: Inability to identify all developers in advance.
• ISSUE: Highly complex and evolving vaccine
development process that is also moving increasingly
toward emerging/developing country developers.
• How to avoid biasing early-stage APCs too early in favor
of large developed-country companies, stymieing this
evolution, and forcing later entrants to work through
current large multinationals?
• Opt-outs and ‘sunset clauses’ hard to incorporate without
feeding back to harm R&D incentives.
Benchmark as an R&D incentive 3
• Sponsor(s) commit $3bn-$10bn per disease:
– Figure keeps falling. Now $3bn each for HIV, malaria, and
TB (This presentation sticks to original figures for now).
• For the purchase of a vaccine or vaccines in a pre-agreed
quantity (200-300 million treatments):
– Figure keeps falling. Now 200 million each for HIV,
malaria, and TB.
• Benchmark has changed over last year. Prior to May 2004
a simple flat subsidy on each of the first X million of ‘a
vaccine’.
• Now a complicated subsidy spread over first X million of
several possible vaccines:
– Rules for this unclear?…and un-write-able?
• But this is largely a change in language:
– Recent malaria announcements seem to target one vaccine.
Benchmark as an R&D incentive 4
• To ‘aid credibility’, sponsors relinquish control of their
funding to a committee with discretionary powers.
• Supposedly (since extremely difficult, if not impossible,
to do in any practical sense for vaccines such as HIV,
malaria, and TB) the size of (and distribution of) funding
for the ‘first’ 200m high-cost treatments over developers
is set precisely high enough to re-create the precise size
of ‘additional’ market needed to encourage the entry of
the precise amount of venture capital and stock market
finance needed for the remaining research and
development including capital cost (though ‘remaining’
is unclear) needed to produce a ‘high quality’ vaccine or
series of vaccines.
• A complex ‘expected’ subsidy pattern across developers
and over time (investors’ ‘expectations’ of this are key).
Benchmark as an R&D incentive 5
• All R&D costs repaid through the purchase of a successful
vaccine or (since May 2004) several vaccines in a particular
period in time (if there are several meeting ‘eligibility
conditions’ in any period of time), or series of vaccines
over time (to combat resistance perhaps and to give
incentives for follow-on innovation), and only the
successful vaccine(s) or series of vaccines.
• This program (supposedly) funds ‘additional’ ‘eligible’
market purchases only:
– Eligible and non-eligible markets are separated…somehow.
• Repayment of R&D costs is from taxpayers of richer
countries, foundations such as the Bill and Melinda Gates
Foundation, and through co-payments made by developing
countries themselves (that may come from third parties);
• The program is foundation- and publicly-funded.
Benchmark as an R&D incentive 6
• NOTE: Overall cost of vaccine development should
include all funding needed outside of the program,
including subsidies, tax-breaks, and other benefits granted
for research, and the spending of national governments
and foundations, and any costs of ‘vaccine enterprises’.
• An APC for HIV is likely to cover only a very small
portion of the overall costs of HIV vaccine development.
• This is ignored (so far) in CGD cost effectiveness
calculations for early-stage vaccines:
– All DALYs saved are apportioned to the purchase commitment
even if it will represent only a small portion of the overall cost of
development of an HIV vaccine.
What the winner gets
• (Supposedly) winner(s) repaid all of the privately-funded
(and only the privately-funded) R&D costs (including all
capital costs) of all firms (both the successful and the
unsuccessful) and only the private firms, who used such
private funding on R&D towards the vaccine since the
time the purchase commitment had been announced (and
only since the announcement) and only for eligible
markets covered by the mechanism.
• ‘Capital costs’ refers to the costs of the finance used, and
includes the required return to cover all risk being borne,
including any risk created by the mechanism itself (i.e it
does not refer to physical real capital investment).
• Very different pricing strategies in ‘eligible’ and ‘noneligible’ markets.
• Firm gets all IP to the vaccine (under current proposal).
Problems with underlying model 1
Underlying (Kremer Appendix 3) model driving the logic for
early-stage vaccines is highly simplistic. The ‘critique’ here is
that highly idealized perfectly-functioning APC models are
contrasted with highly imperfect alternatives thus generating
unfair comparisons, and not that alternatives are not themselves
highly imperfect too.
• The science is fixed, simple, constant, static, ‘linear’:
– Extremely simple probability structure.
• No patents on anything other than end vaccine products:
– No financial constraints, investment hold-ups, strategic
behaviors, constraints on flows of information, or
concentrations of market power based on IP ownership;
– CASE: When the Malaria Venture Initiative (MVI) ‘mapped’
the patent status of the MSP-1 antigen, it found 39 different
families of patents with monopoly scope impinging on it;
– No notion of ‘near market’ or ‘near scratch’ developers.
Problems with underlying model 2
• No benefits in sharing information across vaccine
developers. No ‘know-how’ monopoly:
– Not good for describing projects involving science with lots of
feedback loops, ‘collaboration’ and the sharing of information
(HIV, malaria, and tuberculosis vaccine research);
– Lots of incentive to hoard information;
– CASE: Existing developed economy patent holders, facing a
potentially emerging-economy competitor, can exploit ‘secret’
know-how (as well as more general technical know-how, and
undisclosed test or other data), including refusing to contract
to transfer necessary know-how, thus creating a barrier to
entry. Given the mechanism for distributing payments, there is
a strong incentive to ‘hold out’ under APCs;
– Lack of know-how (extremely important for biological
products) makes many disciplining threats non-credible (e.g.
compulsory licenses if vaccine developers refuse to supply).
Problems with underlying model 3
• No variation in the probabilities of discovery over the
vaccine development process:
– No ‘easy’ or ‘difficult’ stretches of science.
• No ways for technology to improve or deteriorate over
time:
– No ‘technology shocks’,‘scientific breakthroughs or
deteriorations’;
– No need to incentivize such breakthroughs.
• No sunk costs.
• No large incumbent firms – instead perfect competition
everywhere and always.
• No strategic behaviour of any sort, and of any firm, based
on sunk costs, patent ownership, finance, or any other realworld factor.
Problems with underlying model 4
• Extremely good understanding of the state of current and
future (extremely simple) science.
• No coordination problems across public and private
sectors in their research decisions at a single point in time
and over time.
• No coordination problems across public and private
sectors and all countries in their vaccine purchase
decisions and in their provision of vaccine delivery
systems.
• An idealised, non-cyclical, set of financial markets.
• No pipelines of products, no problems with vaccine
resistance.
• No composite vaccines, and no therapeutic vaccines.
• Wide range of delivery issues ignored.
• APCs need to be designed to handle/avoid these issues.
Some very rough HIV figures 1
• 10 firms put in equal effort on an early-stage HIV vaccine
(we maintain the fiction of competition for now; that the
program encourages competition needs to be proved).
• Presume this is the optimal number of firms (we can’t).
• Expected 70% of capital costs (a guess - no figures
released…but presumed high for an HIV APC).
• Presume one firm wins (supposedly, several could).
• $6.25bn (pre-April 2005 figures) goes to a firm having
spent, in present discounted (2005) terms, less than
$200m, on private out-of-pocket research costs (this is a
figure for purely illustrative purposes).
• This is the efficient and ‘fair’ outcome and not being
critiqued here…But it does create problems for firms and
the committee running the program, as we will see later.
Some very rough HIV figures 2
• With no ‘crowding out’, the $6.25bn ‘pays for’:
– $1.875bn of out-of-pocket HIV R&D costs across all firms;
– $4.375bn of capital (i.e. finance) costs.
• With 50% ‘crowding out’ (explained below) and other
inefficiencies, the $6.25bn would pay for:
– about $900m of new out-of-pocket research costs;
– about 9 months’ worth of what those working on the Global
HIV Vaccine Enterprise say is actually needed.
• The most likely response of firms – no response at all?
• Again, these figures are very rough, and for illustrative
purposes only.
Some very rough HIV figures 3
• We can look at HIV from another angle.
• HIV vaccines likely to take a minimum of 15 years to
develop.
• $1.2bn per year of out-of-pocket research and trial costs
needed (IAVA 2004), i.e. double the current level.
• Replacing this flow for 15 years with an APC at the end,
would cost:
– $85bn (if required nominal rate of return 20%);
– $130bn (if required nominal rate of return 25%);
– Uncertainty about ever getting a vaccine is embedded in
capital costs;
– ‘Crowding out’ would make the figures worse;
– ‘Reputational risk’ would make the figures worse.
• These are low rates of return by venture capital standards,
and exclude the (still likely very high) costs after 15 years.
Some very rough HIV figures 4
•
•
•
•
•
•
•
•
So, where does the MM figure of $3bn come from?
Where does the notion of multiple developers come from?
Need for a mega-blockbuster if using APC route for HIV?
Maybe this is why private firms currently spend so very
little on HIV vaccine research in spite of there being a
sizeable extant market for some clades of HIV?
How large are politicians prepared to make APC funds for
HIV vaccines?
Are they prepared to massively ‘top up’ later?
Is it realistic to believe that funding levels for such
programs for HIV will be set high enough with no
pressure to readjust firm payoffs down later?
All MM cost effectiveness figures are worked out on basis
of the $3bn and not on the basis of these much larger
figures for HIV.
Some very rough figures for firms
• For a vaccine costing $25 per course of treatment, the ‘bestcase’ scenario (no crowding out, but high capital costs) is:
– $1-$2 for production and distribution;
– $6-$7 for private out-of-pocket R&D costs;
– $16-$18 for the cost of finance.
• With 50% ‘crowding’ out:
– About $3 for new private out-of-pocket R&D costs.
• But it is not clear that an HIV vaccine could be
manufactured for a dollar or so (especially in early days):
– Previous experiences with vaccine introductions suggest
problems;
– Too little manufacturing competition to drive prices that low;
– IP held in too few hands;
– Ex ante worries that this will be the case, will undermine
incentives to do R&D in the first place (More on this below).
Figures for currently existing and
late-stage vaccines
• The above are very, very rough figures, since paucity of
information is such that we really do not have much of a
handle on these issues.
• We can say, however, that the above proportions are
completely the converse for currently existing vaccines,
and, indeed, for many late-stage vaccines:
– Much lower capital costs because of much lower risk,
especially risks of the mechanism itself;
– No crowding out (because of the ability to use competitive
tenders and other ‘separation’ devices);
– Much more easy to set efficient terms (because of
competitive tenders and other devices to reveal information,
and good information on technology, etc.).
Impossible to set size efficiently
• Each APC should be set commensurate with the difficulty of
the underlying science and the cost of the R&D of
developing the vaccine at hand.
• MM suggests $3bn per disease for HIV, malaria, and TB.
Setting this right is a “crucial detail” (MM April 2005):
– For no obvious reason, the figure is much lower than in draft
versions of the report (of even just a few months ago);
– Though this was recently described, though not in MM itself,
as for ‘illustrative’ purposes only.
• Needs a methodology based on expected:
–
–
–
–
–
Complexity of underlying science;
R&D costs (also depending on types of firms encouraged);
Epidemiology;
Production costs, etc.
NOTE: Not just information on the medical condition itself.
Not a good idea to base on ‘typical
market size’
• An ‘auction’ and heavy monitoring suggested to set ‘size’:
– Couldn’t work – so abandoned.
• Now ‘size’ based on ‘typical market size’ of new drugs and
heavy monitoring to check firms are investing ‘enough’:
– Implicitly this means that the size is based on the typical costs
of developing such drugs, since, in equilibrium, investment
in drug development should be driven to the point where this
is the case;
– This methodology is therefore essentially random for these
early-stage vaccines;
– Overestimates (per unit) innovation costs of developing and
emerging country innovators, even as they struggle to take
advantage of APCs, even as it underestimates eventual costs
if dependent on APC and developed country developers.
Setting size too high is wasteful
•
•
•
•
Racing, duplication.
Even less incentive not to ‘share’ information.
Rent-seeking/lobbying/corruption.
Reduced resources made available for other vaccines and
treatments, sanitation, nutrition, housing, etc.
• If using an International Financing Facility, IFF, overlyhigh (and overly-low) APCs add to the risk the IFF bears.
• Extra deadweight losses of taxation and the opportunity
cost of the other projects that foundations, governments,
and the IFF are prevented from doing.
• If firms are not perfectly competitive, shareholders gain
something (ceteris paribus) – but at the expense of
neglected diseases and other poverty alleviation projects.
Other reasons for overpayment
• ‘Me-too’ drugs/vaccines partly discipline patented
drug/vaccine prices.
• For purchases of underused vaccines, price disciplined by
competitive tender, competition, access to IP, etc.
• These disciplining devices are lost under APCs for earlystage vaccines.
• Discipline in APC via committee and pre-agreed rules:
– But pre-agreed rules are hard to set and to credibly follow
through.
• RESULT: Higher payment for given (lower) quality.
• Self-fulfilling incentive ex ante also to work on ‘lower
quality’.
• There is also an additional ratchet effect: No adjustment
downwards if R&D costs are reduced by technological
advances or by improved publicly funded initiatives, etc.
Setting size too low is wasteful 1
• Get no, or too little, extra private funding into R&D.
• Can raise size at the rate of interest rate. But no faster:
– Raising the size of the APC acts like an extra discount factor;
– Early investment becomes even more expensive;
– Firms delay investment.
• But the rule about raising ‘size’ is difficult to set:
– How is the start level chosen?
– How is the speed of rise set?
– How is judgment made that not enough investment has taken
place, without good monitoring and given that the ‘result’ on
which to base judgment is only provided at the end?
– Are politicians willing to sign on to such open-ended programs?
• Current CGD thinking is that this is too difficult (or
politically unacceptable), and this is not planned (or CGD are
not yet saying how later re-adjustment will happen).
Setting size too low is wasteful 2
• Development costs highly uncertain.
• CGD “after a long deliberation process did not narrow down
beyond the range of $15-$25 per treatment”*
– The upper bound being 167% of the lower bound.
• If size starts, optimistically, at the bottom of the range when
actual costs are at the top of the range, and 10% interest rate –
it takes 8 years till APC has any effect (or it collapses first).
• If real R&D costs also grow at 5% per year (starting at the
optimistic end of range) – it takes 15 years to have any effect.
• Consequence is delay, and strong pressures towards ‘poorer
quality’ (broadly defined) at any given APC size in order ‘to
get a result’.
* Maurer S. “The Right Tool(s): Designing Cost-Effective Strategies for Neglected
Disease Research”, Goldman School of Public Policy, University of California at
Berkeley, March 2005. Figures on this page from Maurer paper.
Some too high, others too low
• Some vaccines set way too low. Get no or little response:
– $3bn for HIV? No connection to reality?
– Overconfidence in ability to revise upwards later?
• Other vaccines set too high and wasteful.
• Other cases, strong incentive to head for more ‘limited
quality’:
– Current malaria vaccine policy?
• We never get to see the ‘good outcomes’ that we never get
because of poorly-set initial terms.
• Overall a poor deal compared to alternatives?
– It depends on how well alternatives cope with incentivizing
‘effort’, and dealing with failures in vaccine R&D portfolios.
• Yet, funder of program reserves right to abandon the
mechanism if it is not working ‘enough’?
Getting it wrong for HIV?
“If scientific complexity means that R&D costs are
much higher for an HIV vaccine than for other
medicines, then $3bn may be too low to stimulate
sufficient investment… Note that, if the commitment
is too small to stimulate industry investment, and
therefore does not succeed, there is no cost to
sponsors.”
CGD ‘FAQ’ sheet, April 2005.
Would a $3bn HIV purchase
commitment simply ‘collapse’?
• Political limits to a program without any effect (especially
if high transactions costs to GAVI, Vaccine Fund, WHO,
and others of setting up and running the program).
• Collapse is self-fulfilling (investors will not trust that any
early investment will yield a payback, so don’t bother).
• ‘Collapse’ incorporates cases where – to avoid litigation –
the mechanism ‘does nothing’ but sits ready to activate –
even if very destructive meanwhile – after an alternative
approach has been successful.
• Worse if other approaches have stalled to make room for
this approach.
• The sole criteria of “the (political) willingness of sponsors
and recipient governments to pay” (MM p52, word
inserted) for dictating the size chosen, is a non-criterion.
More ‘pay-as-you-go’ better?
• This suggests more ‘pay-as-you-go’ may be more
capable of adapting to changing environment and less
likely to fail to get a result (if set too low) or to overpay
(if set too high).
• It depends on how good PPPs and others can be made at
dropping failing projects.
• Note, alternative approaches still potentially include
commercial involvement.
• Current low levels of ‘commercial’ involvement in PPPs
is more a fault of the shoestring funding of PPPs than of
any specific failings of PPPs.
Technical requirements in advance? 1
• “it would be possible – though complicated – to agree to
product requirements in advance…a small number of
public health experts were concerned that it would be
difficult to establish in advance technical requirements
that a vaccine would need to meet.” MM March 2005 p58, and
final report.
• Some set of technical requirements always possible.
• But ‘efficiency’ of those technical requirements requires
some notion of the underlying feasibility of HIV, malaria
and tuberculosis science, the potential costs of
manufacture and distribution, epidemiology, etc. (i.e.
many factors, and not just medical issues).
• So “fixed enough to avoid the danger that the sponsor
would renege, but flexible enough to accommodate
contingencies that were not foreseen at the time the rules
were established.” MM March 2005 p43, and final report.
Technical requirements in advance? 2
• Shifts problem to a different level – of having a good
notion of potential unforeseen contingences when setting
the original rules.
• An inability to set efficient technical specifications for
each vaccine far in advance:
– Potential for great deal of discretion and interference later;
– Risk that term-setters are unwilling to admit they ‘got it
wrong’ and to reset the terms ‘more efficiently’ later (though
they can only correct themselves in the downwards
direction);
– Risky for all developers, but more so for some than for
others;
– Most risky for those unable to ‘influence’ the committee;
– It is expectations of all of this that matter to investors.
Minimum vaccine requirements 1
• Minimum vaccine requirements set at the start:
– But, an efficient technical specification, closely resembling
the eventual possible vaccine, would be impossible to set so
far out for HIV, malaria, and tuberculosis.
• Discretion of as few as four members of a committee to
“grant waivers and make modifications” (MM April 2005)
but only to lower those requirements – never to raise
them.
• This asymmetry is bad policy in light of future possible
improvements in science and possible future
epidemiology.
• But symmetric ability to raise requirements as well as to
lower requirements creates risks for firms, and is
irreconcilable with the current MM mechanism.
• A dilemma.
Minimum vaccine requirements 2
• Constant pressures to lower the minimum acceptable
requirements towards the very lowest level of any
epidemiological value.
• In successive drafts of MM, malaria vaccine requirements
gravitated ever-lower:
– Final report: 50% efficacy for 24 months from up to four
doses;
– This requirement (and the $3bn size) was recently described
as for ‘illustrative’ purposes only.
• A program that militates against the development of useful
vaccines that far exceed minimum requirements?
Problems setting the long-term price
• Contracts call for determination, at the time of signing, of
the ‘guaranteed’ long-term price, or of an ex ante
methodology for determining the long-term price.
• ‘Legal’ obligation to supply at this price in the long-term in
return for having had the short-term advantage of initial
sales at very high, heavily subsidized, guaranteed prices.
• The $3bn is payment, in part, for this.
• A “critical component of the advance market commitment”
(MM report April 2005) and key to its claim as the way to
end ten to fifteen year delays in access to new vaccines.
• No such methodology for setting long-term price exists
(see NIH evidence).
• CGD advised price could range from $0.50 to $15.00, and
that no such guarantee could be inserted into contracts.
• Left blank in MM contract term sheets.
What if firms won’t/can’t supply? 1
• Firm can always refuse to supply at short-term price (e.g. in
order to supply a more lucrative market for HIV first).
• If cost not low enough, or firm “prefers” not to sell to
‘eligible’ countries at the long-term price, contract allows
sponsor to ‘acquire’ right to produce:
– Supplier(s) turn over IP to the sponsor – but supplier may not
have the right to sublicense all the IP;
– Conflicts because supplier retains IP rights to ’non-eligible’
markets;
– Sponsor has difficulties acquiring ‘know how’ and production;
– Threat undermines incentives to invest in vaccine R&D;
– Threat undermines incentives to invest in vaccine delivery
systems;
– Severe supply shortages and damaging access delays;
– Reputational damage issues for supplier and sponsor(s);
– Not credible way to discipline firms.
What if firms won’t/can’t supply? 2
• Contract term sheets say “other penalties” such as
“liquidated damages provisions” imposed on supplier:
– Contract leaves details blank;
– Threat feeds back to weaken ex ante incentives to invest in
R&D in the first place (especially if provisions are so vague);
– Threat can create perverse incentive not to supply eligible
market in the first place or delay supplying eligible market:
• HIV vaccine in particular, given richer non-eligible markets and
the option value of the APC given the different HIV clades.
– Threat weakens incentive to invest in vaccine delivery
systems;
– Not credible way to discipline firms.
• Contract term sheets leave blank those sections specifying
remedies in the event of a breach.
What if firms won’t/can’t supply? 3
• IP and know-how barriers have been principal causes of
delays in achieving flexible, cost-effective manufacturing
and quick access to vaccines for the poor in the past.
• Now control of IP and know-how part of a threat
mechanism to drive the contracts!
• If the threats do not work, how do production costs get low
enough to supply the ex post market?
–
–
–
–
–
Lack of competition;
Weakened price signals due to the presence of the APC;
Lack of access to technology;
Insufficient pressures to lower production costs;
This is all contrary to, e.g., the Hepatitis B case, and to
application of APC-type arrangements to current late-stage
vaccines.
What if firms won’t/can’t supply? 4
• Legal advisors inform this author that threats in contracts
at 20+ year horizons are not used in practice.
• Long-term price and sustainable production capacity for
‘eligible’ countries thereby unresolved in MM report.
• Excessive emphasis on getting the $3bn to the supplier(s)
of the first 200m or so ‘eligible’ treatments, and
insufficient attention to follow-on suppliers and the post200m treatments.
• A mechanism that relies on this presumption in order for
it to work should be treated with a great deal of caution,
indeed skepticism – especially when, after 8+ years since
the idea first surfaced, the contract writers haven’t a clue
how to do it.
• Vaccine developers facing many risks that a viable
mechanism should seek to remove from them.
Follow-on innovation 1
“Advance purchase commitments may also stifle
incremental innovation. Because they create a ‘winner
takes all’ solution, it would be difficult for incremental,
follow-on competitors to emerge, thus dulling the benefits
of competition on cost and improvements. The innovation
that wins will crowd out competing inventions because it
is being given away free by the public sector. This
‘crowding out’ effect means that no improvements will be
made to the winning formulation, and this may have
negative consequences for resistance and effectiveness in
subpopulations.” International Policy Network “Incentivising
research and development for the diseases of poverty,” 2005 p15.
Follow-on innovation 2
"It is difficult to get the right quality, in particular to
reward follow-on products that offer higher quality. Our
view is that it should be possible to set an effective quality
threshold, and that the terms of the APC must allow for
superior quality follow-on products to be used…(However)
there may not be enough money left in the initial APC to
reward the R&D involved in developing some of the
superior follow-on products. This is quite possible, as the
commitment is only designed to generate at least one
product that meets the quality threshold. Clearly a view
would have to be taken by the donors as to whether they
wished to finance follow-on products with additional
money. This would be a separate investment decision from
the original APC." Towse, A. and Kettler, H, “A Review of IP and
Non-IP Incentives for R&D for Diseases of Poverty.What Type of Innovation
is Required and How Can We Incentivise the Private Sector to Deliver It?”
April 2005, p87.
Follow-on innovation 3
• However, so as not to harm investor incentives, this
‘additional money’ for follow-on products should be
credibly promised in advance if not part of the original
APC… but that makes this ‘additional money’, by default,
part of an original APC-type arrangement!
• Efficient incentives require each generation of products to
cover its expected R&D costs. How achieved?
• MM removes ‘Quantity guarantee’ to (supposedly)
remove the risk that the sponsor will end up funding a
non-used product, and to give incentives for follow-on
products.
• Multidimensional ‘quality’ problem – a quality ‘surface’
over vaccines, over time. Set terms wrong and
disincentivize (dynamic) investment. Expectations are
everything to investors.
Follow-on innovation 4
• MM suggests potentially very complicated rules about
qualities of acceptable vaccines, and variation in
allocations and prices of vaccine purchases across
multiple developers and purchasers, and over time:
– But no practical details of how this is done;
– Hard to visualize that policy makers could derive the
optimal way to ‘hold back’ on early products so as to leave
funds for later products.
• Hugely aggravated by the fact that the likely quality
improvements, science, and costs are all highly uncertain.
– Also no ex ante grasp of the potential timing of anything,
or characteristics of firms such as access to finance, risk
tolerance, etc.
• On average, achieving ‘quality’ is more expensive.
• Will investors expect the distribution of the ‘subsidy’ to
be efficient?
Follow-on innovation 5
• Constant danger of ‘poor’ vaccines driving out ‘better’
vaccines (aggravated if the overall fund is set too low to
start with).
• Need for follow-on instruments (Towse and Kettler, ibid.)
but these need to be fully articulated and credibly promised
in advance if investors are not to be harmed.
• Dangers that fund becomes unbounded at top, yet still
highly uncertain – killing dynamic incentives.
• Original (Kremer) model is static and ignores these issues.
– In particular it presumes one vaccine target.
• Recently, these dynamics are simply presumed perfectly
performed by the ‘committee’:
– In truth the committee would fall massively short and
investor and researcher expectations would respond
accordingly.
Follow-on innovation 6
• Recent malaria case – so far no attention at all to dynamic
incentives in CGD and UK policy announcements.
• End up with a committee with discretion, risk to investors,
higher risk premia, more pressure to go for lower quality,
and rent seeking behaviour of big players?
• ‘Follow-on products’ also covers cases of complete vaccine
replacement.
• Incentives to actually carry out this replacement?
• Incentives to expediently create capacity when vaccines are
replaced?
• Replacement is only statistical. How is this handled in size
and distribution rules of APC?
• All the time there is the need for developing country trust of
vaccine products and of ethical trials.
Follow-on problems especially
severe for HIV, malaria and TB
• An ‘Arms war’ between virus and drugs/vaccines.
• First vaccines not necessarily the best:
– More so if only therapeutic and not preventative.
• Expectations about payments to the first must not stifle
incentives for later needed vaccines.
• Expectations about payments to non-composite vaccines must
not stifle incentives for composite vaccines:
– HIV vaccines: coordination, information sharing, and timing worries.
• Expectations about payments for therapeutic vaccines:
– Needing monitoring and even more long-term follow-on vaccines.
• Worries that ‘better’ vaccines arrive after subsidies are gone.
• Second-generation vaccine costs even harder to work out in
advance than first-generation costs.
• It is all about INVESTOR EXPECTATIONS.
The paradox of market risk 1
• For most ‘late-stage’ and underused vaccines the objective
of purchase commitments is to remove market risk.
• Early-stage vaccine APCs (as currently designed) put
market risk back on to vaccine developers (supposedly) to,
ex post, drive the ‘quality’ rules and ex ante ‘effort’
incentives. BUT:
– These are resource-poor markets;
– Most buyers are relatively uninformed (about current vaccines
never mind about expected future vaccines);
– There are no marketing budgets;
– Vaccine usage needs a good distribution system, with such
systems generally not under the control of vaccine companies;
– There are heavy knock-on costs to purchase decisions;
– There are multiple organizational problems;
The paradox of market risk 2
–
–
–
–
There is a severe lack of qualified personnel on the ground;
There are multiple political interests;
There are cultural barriers;
There are plenty of ways to ‘encourage’ decision-makers to
take one firm’s product over another firm’s product (even
more so if the ‘other firm’s’ product does not exist yet);
– There are strong ‘self-fulfilling’ pressures in the co-payment
mechanism driving towards lower-quality outcomes;
– This, ex ante, feeds investor expectations and R&D
incentives towards the ‘low-quality’ outcomes.
• Why put all these risks back on to vaccine developers in
order to try get this mechanism to work for early-stage
vaccines and to try to create follow-on incentives?
• ‘Less’ of an issue if system collapses down to just the one
vaccine – but that, supposedly, was not the point.
The paradox of market risk 3
• Maybe intention is that mechanism collapses down to a
limited number of developers?
• In case-studies, production scale and competition were
key to low-cost vaccine production.
• No sense using (expected) ‘restrictions’ and ‘holding back’
of sales of a single supplier to discipline ‘quality’.
• Why inflict uncertainty on investors seeking to scale up
manufacturing capacity?
• It is ‘dynamically inconsistent’ anyway – hard to hold
back on a ‘bird-in-the-hand’ vaccine to supposedly
discipline ‘quality’ and to leave funds for later vaccines.
• Leads to further pressure to lower ‘quality’ with risk to
‘quality’ investors.
• More likely = just lots of uncertainty, higher capital costs,
and fewer developers in the end game.
This paradox undermines R&D
incentives
• Hard to see how any ‘quality’ control over the whole
development process could be done in the end-game in this
way without conflicting with the need to get the
manufacturing costs low.
• RESULT: A mechanism that disciplines ‘quality’ en route
is better able to achieve larger capacity, multiple suppliers,
and low prices, than is the mechanism that disciplines
‘quality’ via holding back in the end market. A
FUNDAMENTAL CONFLICT.
• Paradoxically, undermines investors who will not believe
that manufacturing costs will be pushed low enough ex
post to make the whole investment exercise worthwhile ex
ante (see forthcoming slide for more on this).
Incentives to block second generation
products
• Unlike patents, the first to market is likely to get all the
subsidy if it can hold off ‘follow-on’ vaccines just long
enough. Even better if it can create the reputation for this;
it becomes self-fulfilling and the firm gets the subsidy
quicker (if there is discretion over how to split the
subsidy).
• With standard patent-based systems and marketing, firms
can more easily agree to split the market, so there is
incentive to share/license/split the higher price for the
better product.
• This has all gone.
• This gives strong incentives for the first-generation
developers to block (advertently or inadvertently) second
generation vaccines (via not ‘sharing’ IP, know-how, etc.).
The sums don’t add up either
• “Pricing structure can be designed to provide substantial
insurance against demand risk for prospective vaccine
developers so as to yield a net present value of revenue
comparable to commercial products even under
pessimistic uptake scenarios,” MM March 2005 p50 and p114,
emphasis added:
– Indicates the complicated tradeoff that needs to take place,
not that it would take place or ever could take place (it
could not, because of the intractable information problems
needed to make it work);
– Commercial return means ‘ex ante commercial return’.
What happens when that is gone?
– No way to know how to set any of this many years in
advance.
• In reality, according to recent announcements, seems little
intention to use any of these ‘dynamic’ rules anyway.
Two-stage game problems
• Always better to compete for contract before sinking costs.
• Award after costs are sunk runs the risk of forcing firms to
compete twice:
– R&D stage;
– Market stage.
• ‘Bygones are bygones’…After costs are sunk, always
worth spending up to the value of the contract in rentseeking behavior to ‘win’ the contract.
• In such situations, firms expect to face a negative rate of
return from the overall project.
• CONSEQUENCE: The incumbent firm signals/behaves in
ways to increase the expected risk of later firms. No
second firm bothers to enter whatever the size of the
commitment. Competition is stifled.
Avoiding two-stage game problems
• Must fix terms at the start to make it clear that no amount
of lobbying/spending at the second stage will change the
payouts.
• BUT:
– Contradicts the need for discretion to change terms;
– Becomes mechanistic based on expectations at the very start:
• E.g. HIV science that is 10-20 years out of date!
– Real problems if a ‘market test’ is used since firms can try to
influence purchase decisions (illegal kickbacks, bundling to
hide discounts. There are sanctions against the former – if
detected. Hard to detect the latter and fewer sanctions);
– Biased against small biotechs (can’t bundle and can’t hide
other subsidies), not-for-profits (who may not be allowed to
behave in these ways), and emerging developers. Again,
expectations of this will disadvantage the latter groups when
trying to acquire finance for R&D.
Ex ante versus ex post information
problems: an unhelpful caricature
• Sponsors of APCs said to need little knowledge about the
‘likely success of particular approaches’.
• But, they do need a huge amount of qualitative and
quantitative information about overall set of potential
scientific, epidemiological, expected research and
manufacturing costs, ‘existing’ market possibilities, etc. –
well in advance of product development – in order to get
the terms vaguely efficient.
• To be credible and to minimise the risks to firms, firms
need to trust that policy-makers have this ex ante
information. Otherwise, lots of discretion later and risk.
• Mechanism cannot claim it solves information difficulties
it has ruled out at the start.
‘Crowding out’ weakens ‘pull’ 1
• “The proposal is that private investment would underpin
R&D by private firms” Barder, O., CIPIH Forum, 19 November
2004.
• Has to be ‘additional’ incentive:
– Additional to current R&D;
– Additional to current market.
• Has to be believed that it will be additional.
• This is a big challenge.
• Easy to achieve ‘additionality’ for underused vaccines:
– It is a total non-issue.
• More difficult to achieve for late-stage vaccines though
still possible:
– Run a competitive tender (with more access to IP) and use
known scientific information, etc.
‘Crowding out’ weakens ‘pull’ 2
• Extremely difficult to achieve for early-stage vaccines.
• Referring to HIV/AIDS, perinatal conditions, maternal
conditions, childhood diseases, malaria, and tuberculosis:
“All of these are health problems in the first world too, and,
ignoring the special case of mutant strains, there are
substantial incentives for the development of effective
therapies. Malaria is perhaps the principal exception, but there
is a lot of work on it currently. To be sure, some diseases
occur primarily in the third world, but the magnitude of the
problem that is uniquely without solution ought to be brought
into sharper perspective.” F.M. Scherer, CIPIH May 2005. Emphasis
added.
• Pull payment to any firm would need to be reduced by many
times the ‘push’ payments it had ever received to achieve a
level playing field between firms (unless unequal access to
push efforts can be made to be part of the efficient solution).
‘Crowding out’ weakens ‘pull’ 3
• For scientific areas with a complicated interplay of push
and pull and a large push element, there is great risk that
the pull-motivated will lose out to the push-motivated and
to those not relying on an APC for their funding:
– Allowing heavily push-motivated and PPP/philanthropicfinanced players to have access to the fund, effectively
weakens the expected value of the fund to the APC players.
• SIMPLE EXAMPLE:
– 10 firms working equally hard on HIV vaccines, 70% capital
costs, no splitting of $6.25bn APC fund;
– ‘Winning’ firm has 50% subsidies, grant support, nonprivate funding, etc.;
– Winning firm should be denied just over $3bn of the fund;
– $3bn left ‘in the pot’ for competing and follow-on vaccines;
– But every $1m of ‘hiding’, worth nearly $17m to the firm.
‘Crowding out’ weakens ‘pull’ 4
• Needs a great deal of monitoring. Paradoxical – given that
those advocating the program often highlight the opposite.
• Need for high-quality historical evidence (20-30 years).
• Need for committees, discretion, treaties?
• Impossible to correctly ‘price’ streams of ‘other payments’
(e.g. appropriate capital costs?).
• ‘Repayment’ side-contracts that may not unfold for ten or
twenty or more years.
• The mechanism claims that to work out an optimal
strategy, every firm needs to know how much privatelyfunded activity is taking place. How is this achieved…if
what is going on is so opaque?
• Private firms need to trust that push is being efficiently
handled.
‘Crowding out’ weakens ‘pull’ 5
• Favors ‘large pharma’ players for early-stage vaccines:
– Smaller firms, biotechs, not-for-profit firms, etc. have
many fewer ways to hide research supports (if they can get
them);
– Many biotechs work on one area only – their funding flows
are less opaque than ‘large pharma’ players;
– Easier for ‘large pharma’ to avoid monitoring generally.
• Standard procurement contracts capable of paying only
for additional private funds to ‘finish a project’:
– Competitive tender separates out the push from the pull
funding.
• Here, ‘Framework Agreement’ is the tender.
• Here, highly complicated side device has to be appended
to ‘the tender’ to achieve a standard property.
‘Crowding out’ weakens ‘pull’ 6
• Near-scratch versus near-market:
– APC (if not ‘appropriately’ adjusted) disproportionately benefits
those nearer to market, even if not the ultimately ‘best’ vaccine;
– Disincentivizes ‘near-scratch’ developers;
– This reduces the average expected quality of vaccines.
• PPP funding:
– How exactly do PPP activities “complement” and not conflict with
APC-based private activities?
– Should an MVI- or IAVI-funded vaccine be denied APC funds?
– What if the MVI/IAVI vaccine is best? It should get all the APC
fund? Or not, so as not to harm other private efforts?
– If coordination of ‘repayment’ is not achieved, there will be
temptations for individual countries and foundations to ‘cheat’;
– It is not up to the individual funders to decide on repayment of
funding. It has to be coordinated (and policed) and investors need
to trust that this is so.
‘Eligible’ countries 1
• No ‘eligible’ country ‘signatories’.
• They ‘commit’, via purchases, after committee has cleared a
vaccine. Their purchase decisions (supposedly) drive first-,
second-, third- and later-generation innovation.
• They pay about 10% of the initial procurement price.
• They therefore have a veto over success of the program:
– Small, marginal, contributions essential to success of the
whole program - involving billions of dollars;
– They (or those politically connected) could use this to achieve
additional benefits unless policed not to do so.
• Vaccine supplier(s) (or country of vaccine supplier(s)) have
inventive to exploit this via ‘subsidies’– in whatever forms
these might take – targeted at winning the $13.50 pertreatment subsidy on the first small tranche of treatments.
• The tranche of vaccines using up the subsidy is, after all,
only a very small part of the overall number of treatments.
‘Eligible’ countries 2
• Long-term multi-institution and multi-country monitoring
and policing of such behavior.
• All vaccine developers need to trust that such monitoring
and policing takes place to protect their investments and to
ensure that those with longer, more expensive, higher
‘quality’ R&D projects get repaid on average.
• Given the risks of this, there are dangers of self-fulfilling
collapse of R&D projects for ‘higher quality’ vaccines,
because of risk that ‘too much’ of the subsidy has
inefficiently gone to early developers because of the
inefficient decisions of purchasers.
• Better not to have such a high proportion of subsidy
making up ‘early’ vaccine purchase prices?
• Better to use other modes of payment for R&D instead,
including mechanism to spread repayment over time?
• Or will later innovators demand (and get) more funding on
top of that already allocated once the APC has gone?
‘Non-eligible’ countries 1
• Risk that non-eligible countries harm the program.
– Asia, Latin America, Africa a mix of eligible and non-eligible
countries.
• Non-eligible countries must be stopped from using vaccines
that fail the program:
– Russia purchasing HIV vaccines for its non-covered program?
China? India? Who polices them? What rules to prevent them
using vaccines falling short of APC requirements?
– Such purchases undermine incentives of the program;
– Such purchases contribute to self-fulfilling collapse of longer,
more expensive, ‘higher quality’, R&D projects (by making
such projects much more expensive because of higher risks
and capital costs);
– But such ‘non-eligible’ purchases are difficult to police.
• Non-eligible countries must also be stopped from using ‘metoo’ vaccines based on the APC program vaccine:
– Difficult – more so if the APC program is allowing ‘me toos’.
‘Non-eligible’ countries 2
• This refers as much to stopping the use of the technology
or science of APC-based vaccines for ‘non-APC’ based
research or manufacturing processes.
• Need to clamp down on IP.
• Extremely important issue for HIV, and TB.
• Increasingly important issue for malaria (given recent
evidence of the more widespread nature of malaria).
• Does segmentation of the market into eligible and noneligible segments enable higher prices to be charged to
non-eligible countries?
– Shows up also if there are different clades etc. even if not
the same vaccines (it works through an investment ‘option’
component);
– Prices to those not covered might even be higher than
without the mechanism.
‘Non-eligible’ countries 3
• Non-eligible countries, even if relatively poor themselves,
pay higher prices (both before and after the first 200
million treatments are gone).
• Tiered prices may be part of an efficient solution however.
• What if these countries heavily contributed to the Global
HIV Vaccine Enterprise?
• In these cases they might wonder why they should ‘lose
out’ under the APC and refuse to go along with it.
• What if PPPs want to supply these other non-eligible
countries at lower prices (thus breaking the mechanism)?
– A conflict? But how is it prevented?
• Chance of firms ‘abandoning’ the poor eligible segment
after the 200 million treatments have gone in order to
supply the (much) more profitable non-eligible segment…
but with no back-up mechanism for the eligible segment.
Unlike a standard procurement contract
• Firms don’t bid for the contract before sinking their
investments; they sink their investments in order to bid.
• ‘Competition’ driven by:
– Expected behaviour of the committee after most costs are
sunk (i.e. costs lost for ever);
– Expectations (and worries) about the behaviour of other
firms (especially larger and more influential firms) with
respect to the committee;
– The pre-set rules and eligibility conditions.
• The firms able to take part are different:
– Those who win the standard contract can use that fact to
attract finance;
– Those seeking the APC must already have good access to
finance and ability to sink what will (in most cases) likely be
irretrievable costs.
Time inconsistency is intractable 1
• ‘Time inconsistency’ - when firms have sunk R&D costs,
and buyers have the power ex post to bid prices down to
levels that do not cover – through the product prices of the
winning firms – the collective R&D costs of all firms.
Knowing this ex ante, no firm invests.
• Previously, ‘dynamic inconsistency’ showed up in pricing
controversies in the end market. Now, the controversy
shifts to committee decisions, allocations across
developers, and quality issues.
• Under an APC, potentially huge levels of already (and
sometimes long ago) sunk investment rest on the
(discretionary) decisions of a committee or committees.
Time inconsistency is intractable 2
• Two-stage pricing to ensure that the “producer received a
fair return on their investment” but that “once this return
had been achieved” prices could fall.
• But getting back development costs in the ex post sense is
insufficient in the ex ante sense.
• The relevant required return is before firms invest based on:
–
–
–
–
Expected trial attrition rates;
Expected capital costs;
Expected portion of the market allowed to firm by committee;
Expected pricing structure allowed by committee.
• This never ‘looks fair’ ex post.
• Must be fully understood by all firms, buyers, political
commentators, and general public that ‘fair return’ is ex ante
return. Very hard to make this credible though.
Time inconsistency is intractable 3
• Especially problematic for:
– Mechanisms concentrating repayment in the end period;
– Long investment horizons (even tiny amounts of uncertainty
about whether the program will be fair or work as promised
will compound very heavily);
– The more complex the science:
• The less easy it is to fix rules ex ante;
• The greater the required ex post discretion;
• The harder it is to judge ‘results’.
– Situations where ‘quality matters’:
• ‘Time inconsistency’ shows up in ‘quality’ as much as in price.
• Again, it is EXPECTATIONS/RISKS that matter.
• Can alternative funding mechanisms protect firms from
these problems while still giving them good incentives?
Reputation risk and time inconsistency
• Reputational problems to the ‘winner’, especially if
discretionary elements in the ‘end-game’ have to be fought
over, and firm gets all the IP to the vaccine.
• Further reputational problems (and aggravations from
non-eligible countries who had contributed greatly to the
overall effort) if the program covers only the very small
last portion of the overall costs of creating an HIV
vaccine.
• These reputation risks weaken firms in the ex post
bargaining game and increase their chances of facing time
inconsistency:
– Is it conceivable that a firm that had spent ‘only’ a few
hundred million dollars on HIV vaccine research would not
face severe bargaining problems in the ‘end game’?
• This weakens investment incentive ex ante.
Simple example of time inconsistency
• Instead of the ‘fair’ return of $6.25billion for a couple of
hundred million dollars’ worth of out-of-pocket research
costs, firm gets, say, ‘only’ half of this:
– General public know about the firm’s costs, given, supposedly,
information revelation to make the program work;
– But this is not a ‘fair’ return;
– Fighting ex post for the ex ante ‘fair’ return looks ‘greedy’;
– Firms (especially those lacking power) worry that ex post
returns will be bid down to look more ‘fair’ ex post or to leave
funds for later vaccines – and they don’t invest ex ante.
• Heavy reputation risk/costs to large pharmaceutical firms
from ex post fight for the ex ante fair deal.
• But, biotechs face most of the risk from this?
• Researchers/investors demand a premium to cover this risk.
• Sponsors pay more.
Simple example of extra premium
• 75% chance of purchasing at agreed $6.25bn, and 25% chance
of ‘reneging’ and paying only half. Expected payment
$5.47billion:
– Still a ‘very good’ deal from the public’s ex post perspective.
• But, if $6.25bn was the risk-adjusted figure to generate
optimal research intensity, and we wish for vaccine
development to not be slowed by the risk of reneging, the
promised payment by the sponsor has to rise to $7.14bn*.
• Premium of $890m to compensate for the risk of reneging.
• If vaccine developers are risk-averse, the figure must be even
higher (vaccine developers have different required premia,
with some – biotechs, emerging developers – especially badly
hit)**.
* x such that 0.75*x + .0.25*0.5x = $6.25bn, if vaccine developers are risk-neutral.
** The calculation also presumes that the probabilities are not altered in the process of
adjusting up to $7.14bn. This is unlikely to hold. If probability of reneging rises with
the APC size, the APC size will have to rise even further to compensate. Size settles at
the stationary point in this process.
Committee faces asymmetric
information problems too
• Firms know more about the costs/value of their vaccines than
the committee does.
• If the committee has discretion to change the ‘reward’, firms
have incentive to misrepresent costs/value of their vaccine:
– Make out that R&D is much more expensive that it really is, to try
to get a higher ‘reward’;
– Hold back research to force out a higher ‘reward’;
– Misrepresentation makes monitoring the program and knowing if
it is working or not much more difficult.
• Firms also have the option to pull out:
– E.g. they treat the APC as an ‘investment option’ for other much
more lucrative but risky investments (especially problematic for
HIV, given different clades and variable value of sub-markets);
– Sponsors pay more for less (the presence of an investment option
element intensifies the difficulty of tracking ‘additional’ R&D).
Doubts about the committee?
• Committee (like a central bank) has to build a reputation:
– Like a central bank, setting terms wrongly unnecessarily
early with need to reset later, will only harm reputation and
make the committee’s job much more difficult, even as it
raises private players’ risks and capital costs;
– Another reason not to ‘rush in’ and risk getting it all wrong?
• Worries about capture?
– Would the committee do something financially ‘damaging’
to a dominant company in favour of a developing country
manufacturer, like entirely replacing the former with the
latter?
• Small doubts at 15-30 year horizons feed back in a big way
on to investment decisions.
• Hence, a high proportion of APCs for HIV, malaria, and
tuberculosis are absorbed in the costs of finance – so much
so that many investors would not respond.
All avoided at first…
• Original CGD model avoided this:
– One firm wins all, with scientific possibilities fixed and
known from the start:
• A fixed single-value solution;
• Much easier to solve.
– Easy if all hints of scientific complexity removed;
– Easy if only one ever vaccine;
– Easy if …..
• But we now know it is much more complicated than that…
• All problems in current system get transformed into a set
of problems facing the APC program organizers and firms
in the APC program – the dynamic inconsistency problem
changes its form. Can the committee/program/firms cope?
Rules versus discretion: costly tradeoff
• Point was to get away from decision-makers with discretion!
• So…use commitment devices and pre-set rules?
• But policymakers then lose flexibility to change the approach if
circumstances change (technology, health needs, epidemiology,
other funding, other research, etc.). And permanently ‘fixing’
terms is expensive (an option component on technology to cover
worse-case scenarios, long horizons, etc.).
• Ever-growing tension between:
– Non-flexible rules for credibility – but there are inefficient and
raise costs;
– Discretion, and other remedial features – but these cause risks for
developers, higher capital costs, more complicated contract terms,
stronger informational demands, and dangers of institutional
failure or capture (or costly mechanisms to prevent it).
• So, cannot set up product requirements…yet discretion is very,
very bad. This core dilemma is downplayed in the MM report.
Features raising cost of tradeoff
• No experience of operating such commitments:
– No evidence of how severe these problems with ‘mechanism
risk’ might be, of how to cope with them, and whether the
mechanism may even have to be radically overhauled later.
• Tendency to ratchet effect:
– Costs can rise but they can’t fall;
– Quality can fall but it can’t rise;
– Excessive risk on any firm believing that the criteria would
not be lowered.
• The cost of this trade-off rises sharply:
– The more complicated and risky is the technology;
– The longer the process being held together.
• Expensive APC to pay for all this.
Legal aegis of the controlling
committee? 1
• Sponsors could ignore the committee.
• So committee must be able to judicially enforce its own
decisions.
• Would firms take the World Bank, UN, WHO, Gates
Foundation to court?
• So committee has to be a stand-alone, independent,
institution?
• But vaccine regulation and IP are sovereign nation issues:
– ‘Sovereign’ includes international organizations which must operate
in accord with various treaties that have legal force;
– Foundations operate according to the laws of the countries in which
they are based.
Legal aegis of the controlling
committee? 2
• Founding organizations reputations are at stake, with vital
policy and financial interests that they must be able to
exercise.
• So it would not be independent after all?
• What about jurisdiction too over non-eligible countries and
non-program developers?
• Political rent-seeking? Temptations to favour political or
commercial allies? Project choice reflecting the preferences of
bureaucrats? Priority setting resulting in R&D being directed
only at one type of country, one region of the world, one
disease, one company…?
• Funding driven by political decision-makers and not by a
‘competitive’ process (we see this already in case of malaria).
What is the committee really doing?
• Committee expected to do what patent system failing to do.
• Instead of ‘winners’ and complicated patterns of IP
ownership dictated by a patent system, these are now all
dictated by a committee.
• Current worries about the patent system not avoided, just
transferred into worries about a committee (as well as the
IP system, since results are still strongly dependent on that).
• Problem with ex post incentive to bid down price, shifted to
ex post incentive to bid down firm payoff and quality at a
given price and to exclude less powerful players.
• Too risky for ‘big pharma’?
• Too risky for small bio, not-for-profit and emerging
developers?
• Best way to reduce risk…capture the Committee?
Payment and competition through one
point in time and a committee? 1
• Competition through one point in time and a committee?
• Always a bad idea, worse for emerging-economy and
biotech developers.
• Under static (perfectly known) state of science – these
problems never arise.
• Trivializing the science was a major failing of the original
APC modeling.
• Numbs the criticism that other mechanisms ‘require
information’.
• What is the point in criticizing vaccine scientists and
‘institutional failure’, given the heavy use of administrators,
executives, layers of institutions, and vaccine scientists, in
setting and updating terms of an HIV APC?
Payment and competition through one
point in time and a committee? 2
• Are multiple small rewards better?
– Mistakes average out.
• APCs – even a few mistakes late in the process after firms
have sunk costs will come to dominate the result.
• Better to ‘discover’ complex development costs as go
along rather than relying on ex ante guess?
• To avoid ‘two-stage’ game, rent-seeking, and ‘capture’...
give some rewards before reaching the market?
• Multiple vaccine leads can be encouraged via other means?
• Use other ways to build reputation:
– Current purchases increase credibility (firms believe that
sponsors will switch to better drugs as they come along);
– History of previous commitments honored.
Extreme capital cost of earlystage vaccines 1
• Long lengths of time (20+ years?) lead to very heavy
compounding of capital costs.
• Little current value in market risk reduction:
– Way too far off and uncertain to have impact now;
– Market risk remains very high given: i) Many forms of marketbased crowding-out; ii) Use of demand restrictions to control
‘quality’; iii) Use of ‘market demand’ in incentive mechanism
even though the market in question is highly dysfunctional.
• Scientific risks are very high:
– Risks of ever getting a vaccine;
– Risks of not internalizing the results of privately-funded
research for oneself (especially if data has to be shared and the
vaccine turns out not to be a pure preventative vaccine but
instead composite and therapeutic).
Extreme capital costs of earlystage vaccines 2
• High perceived risks of the mechanism itself (‘mechanism
risk’):
– Many institutional layers (APC program committee, country
purchase committees, PPPs and other funding committees);
– Behavior of other players (especially larger players);
– Trade-off between credibility and discretion;
– Very real possibility that the (untried) program will not work
as initially proposed;
– Worries about collapse of the program.
• Political risks:
– Investors and senior executives must trust multiple
overlapping political administrations to the mid 2020’s at
least, and probably beyond, when launching major and
expensive R&D programs that are then mostly ‘sunk’ cost.
HIV capital costs?
• The private sources of capital are expensive:
– Note, this is not a critique, but part of the capital cost
puzzle…The author has elsewhere discussed the important
role of private capital in pharmaceutical R&D. The issue
here is that it needs to be fully factored into the APC size.
• For an HIV APC to actually work – all capital cost needs
to be fully repaid by sponsors through the APC.
• All Capital costs need to be worked out in advance if the
overall payment is not to be set too low.
• A sizeable chunk of an APC for an early-stage vaccine
such as HIV will be taken up in the cost of capital. But
exactly how much?
• How might ‘risk creation’ within an APC, and high
consequent capital costs, offset any improvement in
choice of research leads and trial attrition rates?
Rough HIV figures (no crowding out)
Required nominal rate of return to financial capital invested in
current HIV vaccine R&D 20-25%:
– Not outrageously high compared to speculative investments
that venture capital firms normally make;
– But, is it too high for this case? Or too low?
• Average expected horizon until repayment: 10-15 years.
• Each dollar of early pull-induced private R&D requires:
– $6-$9 of payment at a 10 year horizon;
– $15-$28 at a 15 year horizon.
• 10 year horizon: each $1billion (nominal) pays for about
£100m-$160m of early out-of-pocket HIV research costs.
• 15 year horizon: each $1billion (nominal) pays for about
$35-$66m of early out-of-pocket research costs.
• (All in expected terms).
It gets worse…
• Add ‘crowding out’:
– Say, half:
• Maybe push payments prove hard to remove from ‘winners’,
• And Russia, India, and China – if deemed ‘non-eligible’
countries – cannot be barred from later ‘spoiling’ markets for
HIV vaccine products.
• $1billion of promised HIV payment paying for about:
– $50-$80m of genuinely additional new early out-of-pocket
private R&D at 10 year horizon;
– $15m-£30m at 15 year horizon.
• Maybe this is why current levels of private HIV vaccine
R&D funding are so low?
– “There is no market”? This is not the whole picture.
• All very rough figures purely for illustration.
• Where are the figures being used by policy makers?
… even worse…
• This mechanism presumes a huge and rapid response that
we have never seen in the past.
• As global spending on HIV research has risen, very little
privately financed research has been motivated – contrary to
expectations. Is this not a warning sign?
• Why the rush to set in place a program like this for HIV?
– Private firms will not respond;
– Yet it is fixed ‘for ever’ (given the discount rates, 20-30 years
is effectively ‘for ever’);
– Yet terms will be set badly with unnecessary amounts of
discretion (hence risk) needed later, sunset clauses a risk to
investors, credibility of the approach damaged.
• It invites collapse.
• Where should a fresh injection of funds go?
– Are the alternatives so bad?
When vaccines replace treatments 1
– more loss of pull
• If equity markets correctly price all future expected
discounted profit flows, then those firms working on projects
generating the mere possibility of reduced overall profit flows
caused by the replacement of profitable treatment programs
(profitable in the expected sense, which may be an important
sense for a growing treatment market like HIV/AIDS), will
experience a depressing influence on their equity valuations,
and this will increase their capital costs generally – not just
for this research project but for other activities too. This leads
to firms requiring an even higher rate of return on projects.
• The figures are not inconsequential*.
*For HIV treatments, over $1,000 per DALY saved in developing countries compared to a few
dollars per DALY saved for a vaccine. If there is already a ‘lack of a market’ for HIV/AIDS
vaccines, this reinforces this problem. [Based on approximately $430 per year of drug costs (No 10
Policy Unit Appendix 10). The author has no up-to-date (2005) figure for this based on $120-$140
per year drug costs and larger programs, and would welcome an updated calculation].
When vaccines replace treatments 2
• Controversial, but should not stop us from tackling it. If
‘replacement effects’ are part of the problem in raising
private finance for the R&D of HIV vaccines, then better
policy will result from considering rather than from
ignoring them.
• Tradeoff between the positive incentive effect of equity
finance and the ‘replacement effect’.
• The fewer the number of firms being relied upon for both
treatments and vaccines, the larger the ‘replacement effect’
and the lower the incentive to invest in vaccine R&D.
• Part of the reason for the lack of private HIV vaccine R&D
is related to the structure of the industry.
• A sizeable portion of an APC would be devoted to fighting
against these structural issues and ‘replacement effects’.
• More sense to tackle the structural issues head-on?
When vaccines replace treatments 3
• Even if biotechs and not-for-profit firms are marginal,
competitive, players and do not suffer from the ‘replacement
effect’ themselves, if they cannot raise finance to take a
vaccine ‘all the way’, the need to turn to firms suffering from
the ‘replacement effect’ feeds the ‘replacement effect’ onto
them.
• Bites even for markets not competing against vaccines:
– If vaccines weaken pricing power in markets where there are
both treatments and vaccines (this weakening only has to be tiny
for vaccines given the size and duration of treatment programs
elsewhere);
– If vaccine research for a clade for a low value treatment market
might produce results impacting high value treatment markets
for other clades;
– Implications for finance when we encourage both malaria
vaccine and malaria drug R&D?
When vaccines replace treatments 4
• The ‘replacement effect’ stronger the more able are
incumbents (through IP, etc.) to restrict access to
information that might undermine their positions.
• 50% of current vaccine research takes place in biotechs.
• Currently, ‘not-profitable’ biotech firms can only take
advantage of tax-breaks to the extent that they can be
bought-out by much larger pharmaceutical companies to
‘cash in’ on the value of the tax-break (the smaller firms
amass the unused tax-breaks as an asset reflected in their
equity valuations until taken over).
• Biotech research needs to boost biotech share valuations in
ways that appeal to large pharmaceutical firms.
• Another route for the ‘replacement effect’ to enter.
Need for more players, better finance
• Different configuration of sources of R&D funding and a
different industrial structure (both interdependent) create a
different set of constraints.
• The more players in the market, the stronger the incentive
for firms to work on vaccine R&D, since success replaces
products of other companies.
• IP system that better works to allow firms to acquire
technology that might undermine those firms experiencing
(and causing) a ‘replacement effect’.
• Finance mechanisms, alternative to APC, that give
differentially greater impact to biotechs, not-for-profits, and
all those working on ‘replacement’ projects, enabling them
to take projects further without needing to rely on firms
causing/suffering from ‘replacement effects’?
Need for more current purchases
• ‘Demonstration effect’ of the purchases of current
vaccines – in part unlocks the credit constraints (i.e.
makes finance cheaper) of biotechs, not-for-profits, and
emerging developers, by ‘demonstrating’ that the
‘replacement effect’ is now weaker.
• Positive ‘demonstration effect’ caused by investments
into healthcare infrastructure too.
• Not bigger sums pitched at the same few big players…
The global state of vaccine
manufacturing capacity 1
• Once, seven or eight leading industrial country
manufactures worked on five to six vaccine-related R&D
projects each.
• Share of the four major developers has risen from 50% in
1988 to about 80% today*.
• “R&D budgets have shrunk, and competition for capacity
has become fierce” Glass, S.N., Batson, A, and Levine, R., “Issues
Paper: Accelerating new Vaccines”, Global Alliance for Vaccines and
Immunization: Financing Task Force, 2001, p10.
• Dramatically reduced numbers of vaccine R&D projects,
especially for developing country markets.
* Aventis, GSK, Wyeth, and Merck, with the rest made up of Chiron (7%) Serum
Institute (about 1%), Bio Farma (<0.5%) and the remaining 10% made up of all the
rest. Based on 2000 market data. This might under-exaggerate the impact of domestic
production in China, Brazil and India on account of government suppression of prices.
The global state of vaccine
manufacturing capacity 2
• “While new players are emerging to fill these voids, they
have not replaced the multinational manufacturers, in
some cases contributing to vaccine shortages” Glass et al.
ibid. p5.
• “Smaller and emerging market manufacturers are less
likely – and financially less able – to take on the risks of
product development” Glass et al. p9 (emphasis added).;
• Having more, and different, vaccine players is more
valuable than having the same few players being enticed
with ever-bigger payments.
Ways to increase manufacturing
capacity
• Increased use of facilities by the four majors.
• Partnerships between regional and major
manufacturers.
• Growth of biotechnology companies into major vaccine
manufacturers.
• Growth of regional small manufacturers in countries
such as Brazil, Cuba, India, Korea, and Japan.
• Development of new institutions to make vaccines:
– Global Vaccine Enterprises to include production
facilities for trial vaccines?
Purchase commitments vary in
impact on manufacturing capacity
• Early-stage vaccines – order of impact is approximately
as listed on last slide.
• Is APC the most appropriate response to expanding
capacity for complicated vaccines?
• As purchase commitments become more late-stage, and
other instruments are used to support research, the order
of impact on manufacturing capacity is increasingly
reversed.
• Current purchases bolster emerging manufacturers.
The ‘bunching’ of HIV drug and
vaccine research
(For more details on ‘bunching’ issues see Farlow April 2005)
• Resistance to HIV/AIDS drugs is an increasing concern.
• Nine HIV genes in all.
• The pol gene specifies three separate protein targets:
protease; reverse transcriptase; and integrase. The first two
are the targets of all but one of the 20 FDA-approved
HIV/AIDS drugs:
• “It is instructive to note the degree to which drug R&D
groups all bunched together to go after the same few
targets in HIV over the same time frame” Erickson, J, President
and CEO Sequoia Pharmaceuticals, Inc. and Founder and Scientific Director
Institute for Global Therapeutics and Drug Design, 2 March 2005, CIPIH
Forum.
• Effect is ignored in APC models…just set a bigger pot!
Why bunch HIV research? 1
• Financial ‘herding’ – too risky not to herd/bunch.
• Large firms less incentive to target multiple leads.
• The downside consequences of integrating upstream R&D and
downstream manufacturing and marketing:
– Contrasts sharply with the incentives of bankruptcy and stock
options that small exploratory start-ups face. Limited liability
means that smaller organizations with fewer fixed assets at
stake, will be more willing to undertake more risky ventures;
– Vaccine industry a now a subset of the pharmaceutical industry
and must compete in that marketplace, even as it is impacted by
some of the disincentivising effects of that restructuring;
– Need for financial instruments more targeted at start-ups?
– IP systems that allow them to ‘undermine’ incumbent players?
– Better access (maybe via a processes of competitive bidding?) to
manufacturing facilities (for trial vaccines) independent of large
pharmaceutical firms?
Why bunch HIV research? 2
• Patent ‘stringing’:
– Creates more investor value in ‘gradually’ cracking the
problem than in ‘cracking it once and for all’?
– Especially important for conditions where resistance to a
vaccine or drug can build up over time.
• The bunching of public funders.
• Patent/licensing fees:
– Individually, fees more valuable if bunching?
• Relative versus absolute performance.
• Positive research externalities.
• Low levels of current funding:
– Research strategies have to become much more risk averse?
– With limited funds, it is better to stand the chance of a
medium quality result than gamble on a better quality result
that may also mean no result.
Why bunch HIV research? 3
• Secrecy and lack of openness:
– Easier to signal ‘quality’ and attract funds in the ‘research core’;
– Lack of transparancy and of a structure for sharing,
paradoxically, makes ‘spreading out’ of research leads more
costly and difficult – very difficult to signal good performance;
– Need to ‘reward’ firms for ‘spreading out’ and sharing
information – ability to profit from a discovery in highly
dispersed research more likely to need discoveries elsewhere.
Leads to coordination failure (e.g. composite HIV vaccines);
– Concersely, bunching lowers incentive to share information
(research is more substitutible);
– By concentrating on guidance through an end committee, APCs
(as currently constituted) have little interest in creating structures
for sharing information to overcome some of these problems;
– Tricky trade-off still to be properly resolved – information
sharing to prevent ‘bunching’ versus equity finance (needed for
‘effort’ incentives) that requires lack of ‘sharing’.
Who is targeted? 1
• APC favours (though facing them also with heavy risk)
those with:
– large free cash-flows…‘deep pockets’;
– good access to developed economy equity finance;
– i.e. large pharmaceutical firms in industrialised economies,
even if they don’t really want it.
• Original intent of the lead authors:
– “A large incentive might bring in a single major
pharmaceutical firm, a still larger incentive would bring in
more.” Kremer No. 10 Policy Unit, Appendix 1, p9.
• Large pharmaceutical firms regularly express a lukewarm
attitude to APCs for early-stage vaccines like HIV, malaria,
and tuberculosis, even though the logic seems to be
favoring them.
Who is targeted? 2
• This lukewarm attitude suggests APCs are poorly-targeted
instruments.
• Reinforced if large developed economy developers:
– Are (perceived) more generously subsidized and subsidies are
not sufficiency removed from their pull rewards:
• Preventing this removal is a privately very valuable form of rentseeking;
• Biotechs and others find subsidies much more difficult to hide.
– Use patents, know-how, and other strategic assets more
effectively than developing country competitors;
– Are (perceived) more able to influence decisions of program
committee and purchase committees after research costs have
been sunk. This influence is hugely valuable; it can add
literally hundreds of millions or even billions to the value of a
research project and force similar-sized losses on competitors.
Firms ‘would be fools’ not to invest in influencing decisions.
Research efficiency of biotechs and
PPPs
• Others may be at least as well or better placed for vaccine
R&D.
• Half the drugs in clinical development belong to
biotechnology companies many of whom are themselves a
spin-off from publicly-funded and university-based
research.
• Most of these drugs are found in just a handful of biotech
groups:
• “Hundreds of smaller biotech companies may have great
proposals, but hardly any have access to the hundreds of
millions of dollars needed to bring a new drug to market.”
Lauren Mills, “Great science not all that matters”, Financial Times
Special Report into Biotechnology, 10 November 2004, p5.
Small biotechs are already struggling
• A key component of APCs is to hold back on finance in
order to incentivize ‘effort’ and ‘quality’ – but this is selfdefeating if it locks out those who already struggle most
in their access to finance.
• Small innovative biotechs are already struggling to raise
finance under the current ‘blockbuster’ regime.
• It is not obvious that a regime based on similar principles
would work for early-stage vaccines if such work is
highly dependent on small and new biotechs, not-forprofit, developing country, and university-based research.
Will biotechs respond? 1
• Options value to venture capitalist from waiting especially
high if program is highly uncertain:
– There is an option value to not waiting too, though this is
likely to be much smaller than the option value of waiting for
early-stage APC activity for, e.g., HIV.
• This contributes to the self-fulfilling collapse scenario of
early-stage APCs for HIV.
• Biotechs need prices to be real in later rounds of the
process. The longer the horizon, the greater the chances that
the program will not work as intended and the market for
their outputs will not exist.
• Far too much ‘mechanism risk’, especially for non-large
pharmaceutical firms, generated by the committee-driven
‘tendering’ mechanism which is nothing like a standard
tender and not obviously ‘competitive’.
Will biotechs respond? 2
• Most of the discretion in the mechanism hits after VCs
have invested.
• Big risks to biotechs and VCs of dynamic inconsistency
and later capture by larger firms influencing mechanism
away from those who have taken longer-term risks.
• Greater risks to early-stage biotechs from crowding out
too.
• A disproportionate amount of these risks – especially in the
case of early-stage products – falling onto biotech firms,
even while they are relatively poorly favored by an APC.
• Large discount factors, high capital costs:
– $3bn for HIV will not motivate biotechs.
• If program fails, biotechs pay the heaviest price.
Will biotechs respond? 3
• Some finance may flow to biotechs for early-stage R&D:
– Though current investment response is based more on
expectations of value of their research to PPPs.
• The key point though is that the marginal impact of a
given dollar spent on an APC on the financial resources
made available to biotechs, emerging economy
pharmaceutical companies, developing country
researchers, and other researchers is lower compared to
the marginal impact on the financial resources made
available to large industrial market pharmaceutical firms,
and compared to other finance mechanisms that might
have been used instead to help the former groups.
Milestones for biotechs?
• At first milestones for biotechs ruled out.
• Then milestones ruled in, but not explained how would work:
– Drawn from the eventual pot of funds?
– How is the draw-down judged (underlying science would need
to be understood in setting terms at the start)?
– Incentives of others as the pot shrinks (especially if the drawdown is badly carried out and not transparently done)?
– Heavy rent-seeking over such decisions?
– Distortion at intermediary stages distorts overall incentives.
– “The complexity of the overall agreement, in at least some
cases, would be extraordinary and would require great
expertise in vaccine R&D on the side of the AdvancedMarkets
program. For example, who would adjudicate whether a
milestone had been reached when there was disagreement?”
Mahoney, R, CIPIH Forum, 21 December 2004.
• Then milestones ruled out in final MM report.
PPPs
• PPPs are a route for commercial involvement, yet may
protect firms from risks unrelated to R&D incentives.
• PPPs have better vaccine and neglected drug trial attrition
rates than large pharmaceutical firms, since they are able to
choose across a much wider field of IP, and not just what
they happen to hold in-house:
– Case: Pfizer, is working on just one ‘new’ malaria drug based
on its own in-house drug zithromax combined with off-patent
chloroquine;
– Medicines for Malaria Venture is working on 21 new malaria
drugs and approaches based on IP from half a dozen
companies, small and large, as well as academics, public
domain and developing country IP (for example Chinese
artemisinin discoveries);
– Being able to pick and choose across a field of IP is much
more efficient than an approach based on narrowness (and
secrecy).
Malaria Vaccine Initiative
• 20 vaccine candidates at various stages of pre- and clinical
development (8 in phase-I and phase-II clinical trials).
• Resources of just $43m since 1999.
• 0.007% of the $6.25bn (plus co-payments, subsides,
foundation funding, and tax breaks, etc.) possibly available
under an APC for a malaria vaccine meeting technical
requirements at the bottom of the range of possibilities.
• Compared to their marginal impact in 2000, developing
countries are now “helping to lead the field” (IAVI).
• How to extend funding to ‘neglected developers’ rather
than launching a mechanism that concentrates its financial
impact on large, and often less willing, firms?
Who was consulted?
• Most of those consulted on MM proposal were in rich
developed economy markets.
• Relatively little contact with developing/emerging
developers to work out the terms of such a mechanism:
– No input from, for example, Brazil, China, Cuba, and Korea
(one of the major developers and suppliers of hepatitis B
vaccine);
– Only one vaccine developer from a developing country – the
Serum Institute, India (less than 1% of the global market).
• If this cannot even be achieved at early stage of setting up
such a mechanism, what are developing/emerging country
developers to believe about later stages?
Can HIV vaccines be manufactured for
less than $1 per course of treatment?
• It would be “difficult to predict which technologies will
succeed and hence hard to anticipate costs.” MM Feb 2005
p57.
• Can a HIV vaccine be manufactured (and, in the case of
therapeutic vaccines, monitored) for $1-$2 per course of
treatment? More precisely, can developers expect this?
• In real case-studies, access to technology and know-how
and competition between firms has been very important in
driving production costs lower and in enabling access to
vaccines for poor countries.
• Work on some recent ‘pull’ mechanisms (for
pneumococcus and rotavirus) is all about getting the costs
of an expensive product lower.
A simple (‘one winner’) HIV case
• Firm develops a vaccine that costs $15 per course to
manufacture (multiple doses per course?).
• A good deal for the firm? No!
– $6.25bn minus $3.75bn (250million at $15 a course) = $2.5bn;
– Far more than the firm’s private out-of-pocket research costs
(even better if half was subsidized);
– More than what is needed to cover the firm’s capital costs.
• But completely the wrong decision problem. What matters is
the investment decision before investment is sunk, before any
firms know who will ‘win’.
• At that decision point, the expectation of a $15 cost takes
$3.75bn out of the $6.25bn fund. Even if the fund was set
right, this leaves far too little to motivate firms to bother
investing in the first place (they would end up collectively
subsidizing HIV development and production).
• They do not invest ex ante. HIV pull much weaker.
Lack of confidence of low vaccine
price undermines the program 1
• If firm has invested and has a vaccine, then ex post it is rational
to manufacture at $15 per course and take the $6.25bn, even if
this is not ex ante rational. Firm’s incentive to push towards
lower manufacturing and distribution costs is reduced ex post,
particularly if it risks delaying the allocation, or of firm ever
being rewarded at all, by taking too long:
– The firm is only competing ‘against itself’;
– Capital costs are growing heavily the more it delays sales;
– It is crucial to the mechanism having ‘additionality’ that the firms
holding the key IP keep a tight hold on it.
• PARADOX: Knowledge that there will be little competition to
drive prices lower at the manufacturing stage – will reinforce
the notion that vaccines will not cost $1-$2 to manufacture and
distribute, which undermines by backwards induction the
incentive to engage in R&D ex ante.
Lack of confidence of low price 2
• Expectations about a whole range of issues, including
possible manufacturing/distribution costs, matter.
• Under alternative competitive, tender-based, systems with
more emphasis on manufacturing and distribution, there is
more incentive/ability to lower costs.
• Puzzling that for very much more complicated vaccines
such as HIV there is not much more concern about
production costs and manufacturing competition.
• Importance of access at affordable prices during and after
the APC allocation (including to countries outside of the
program: Russia, India, China for HIV perhaps?).
• A great deal more attention needs to be paid to the
incentives to achieve affordable manufacturing prices,
especially for complicated and possibly composite
vaccines such as those for HIV.
PPPs, IAVI, Global HIV Vaccine
Enterprise, and APCs: Awkward fit? 1
• Stripped out in all models – no interaction.
• Different IP structures:
– More or fewer firms with access to the IP;
– ‘Social venture capital’ (IAVI) to achieve access, etc.
• Access to vaccines achieved in conflicting ways, and via
different price structures.
• Problems with non-eligible countries:
– Non-eligible countries expected to contribute to major and
hugely expensive Global HIV Vaccine Enterprise but then to
face APC non-eligible-country prices?
– Will they take part in and/or pay towards the Global HIV
Vaccine Enterprise?
– Do ‘winning’ firms want the PR disaster?
• Even if only getting ‘fair return’? How much ‘collective’ R&D
costs does a ‘winning’ firm want to extract?
PPPs, etc. Awkward fit? 2
• What does the (complicated) IP regime look like?
• How are clashes in IP systems resolved?
– Concentrated IP v spread IP?
– Technology/IP transfer to emerging vaccine developers?
– Legal jurisdiction?
• How are solutions enforced?
• Is it predictable how IP owners will be treated and how
much investors should therefore invest?
• Problems with acting out disciplining ‘threats’ across
institutions. Serious institutional/IP conflicts?
• What if markets that are not covered by the APC are
covered by PPPs or IAVI?
• None of the underlying principles tested yet.
• Learnt next to nothing about practical operation even for
‘basic’ existing vaccines. Should we not try on other less
risky (and much easier) cases first?
Liability risk 1
• Must apportion and deal clearly and effectively with
liability risk from the start.
• MM calls for:
– Sponsor(s) to fully indemnify the committee running the
program – even though the sponsor(s) lose control over
their funding to a committee with discretion:
• What firm wants the PR disaster of suing the World Bank,
the Gates Foundation, or a PPP?
• What if liability problem flows from a discretionary decision
of the committee? Able to sue the committee and sponsors?
• Not credible.
– Eventual designated supplier to “defend and indemnify”
the sponsor and members of the committee:
• Only the world’s largest companies will be able to
participate.
Liability risk 2
• Reliance on third parties, such as the WHO, who are
nevertheless expected to relinquish all decision-making
powers to a controlling committee.
• The problem with liability risk is one reason why the
private sector does not invest in complex early-stage
vaccines, such as HIV:
– More so, if not preventative vaccines.
• Failure to contractually cover liability risk has doomed
previous such proposals.
• Project Bioshield – no longer treats liability risk in the
fashion that MM proposes be applied to developers of
HIV, TB, and malaria vaccines.
Liability risk 3
• Liability of sponsors to show ‘due diligence’ in setting up
APC program to make sure that it will work as suggested.
• Sponsors have not shown this ‘due diligence’ so far.
• If an APC collapses through no fault of firms trusting in
the program to work, but because of negligene of those
setting it up, should it be possible to sue sponsors?
• Hard to imagine – supposedly in order to achieve
‘credibility’ of the program – that sponsors, especially
foundations and their legal advisors and the WHO, would
permanently relinquish key decisions to a committee with
discretion to lower standards, fail to work out the exact
legal status of these new institutions alongside already
existing institutions, and yet leave the issue of liability
risk entirely unresolved.
• MM contract term sheets leave all these issues blank.
Command and control 1
• Program is ‘committee-driven’, NOT ‘market-driven’.
• All the hallmarks of failed command and control
mechanisms:
– Heavy dependence on top-down monitoring, evaluating, and
approving of the activities of developers over very long
stretches of time;
– Incentives to distort evidence and to corrupt the decisionmaking process (especially high given large sunk costs at
key decision points);
– Reliance on a potentially very small committee (suggested in
MM to be of as few as five individuals) making critical
decisions at very few points in time;
– Important decisions – about specifications and eligibility of
vaccines –put into the hands of as few as two or three
individuals;
Command and control 2
– Opportunity for large mistakes (we see this happening
already);
– A few members of an already small committee with power
to make or break an expensive research strategy after
private costs sunk – a big risk to many firms, especially if
they are disadvantaged in ability to influence the committee.
• Past failed state experiences teach us that such highlycentralized top-down information processing systems do
not efficiently incentivize private efforts, and would work
against private competition to produce a diverse range of
vaccines, which improve over time.
• Such approaches are incapable of the subtle, complex,
constantly adaptive adjustments required for developing
vaccines for HIV, malaria, and tuberculosis.
Command and control 3
• MM concedes that “it would be extremely costly” to create
a committee fully capable of doing all required of it.
• Committee therefore to rely on third parties, such as the
WHO and its procedures.
• Why would WHO or others, including PPPs, perform such
acts and yet relinquish all decision-making power – with
all of its consequences for liability – to a committee with
wide discretion to lower vaccine requirements?
• Why yet more layers of decision-makers with potential
conflicts of responsibility and complicated IP, institutional,
and legal tangles of unclear jurisdiction?
Maybe because…? 1
• Incentive effect?
– Only the ‘right results’ lead to payment?
– But the ‘right results’ are themselves illusory;
– This is more useful in the case of more standard procurement
contracts disciplining production of the ‘right quality’
vaccines once (most of the) technology exists;
– There is no ‘free lunch’. All real resource costs of vaccine
R&D (including ‘failed’ R&D) have to be paid by taxpayers
including via their pension holdings in pharmaceutical firms;
– How bad do alternatives need to be to make APCs a
worthwhile approach?
• Avoids decisions about scientific approaches?
– But committees running the program and buying the vaccines
have to access and judge information at many levels to make
their choices.
Maybe because…? 2
• “Chickening out” when the scientific going gets tough?
– The ‘grass is always greener on the other side’. To avoid tough
adaptations and improvements of current approaches, look
elsewhere in a rolling set of ‘policy initiatives’?
• Costs of this program are less visible to tax-payers compared
to alternative approaches?
– A great way to defer tax implications till much later?
– But this should not be a criterion of choice of a mechanism!
• Interest in early-stage contracts feeds off interest in late-stage
contracts (same language used for both) and off recent highlyworthy initiatives for underused and late-stage vaccines:
– Biotech blanket lobbying – for cases when programs may work
as well as for cases where programs will not work – with aim of
getting ‘something’; that the latter may fail is not an issue;
– Policy makers need to be independent of this.
Maybe because…? 3
• An easy ‘policy success’:
– Impossible to judge by results:
• There are none till too late, and the horizons are very distant –
outside of many current politicians’ horizons.
• Another form of dynamic inconsistency?
– Ex ante, large firms prefer PPPs. But once they have a
potential vaccine, they lobby for APC instead?
• Imperfect competition:
– Large players can capture part of any overpayment;
– Hence they have some incentive to lobby for it;
– MM launch party at Covington and Burling with support of
Merck. Somewhere more neutral surely…if interest in
creating impression of competition and of a level playing
field? What are developing/emerging country developers to
believe about the crucially-needed independence of later
stages of the program, given such clear early bias?
Maybe because…? 4
• An ‘anticompetitive device’ to tackle the challenge of
emerging developers?
• Policy mistakes are less visible?
– But are they? What if HIV APC collapses?
• The target is implicit – not early-stage vaccines but a few
late-stage vaccines?
– When APC can’t be made to work for early-stage vaccines,
promoters will be looking for any ‘success’, and by a round
about route firms will guarantee sales of other vaccines?
– Meanwhile support APCs and go with the lobbying flow?
• ‘Tighter IP’ approaches preferred?
– Recent WIPO controversies and problems;
– How ‘less efficient’ are ‘alternatives’?
• The ‘alternatives will ‘show up’ the current system?
– So, better to have something resembling the current system?
Maybe because…? 5
• A way to always be looking as if one is working on the
problem?
–
–
–
–
Even if failing to push through tough action now;
Last year Global HIV Vaccine Enterprise;
This year APC for HIV?
Next year…?
• The advantage of something that has never been used before
so will not be shown to be unworkable till much, much later?
• Just a policy rollercoaster?
– An ‘apparently’ easy fix to a difficult problem? Something to
get policy makers ‘off the hook’ at this year’s G8?
• An idea that is easy to (over) simplify – if one ignores the
complexity – and hence easier to ‘market’ than alternatives?
– “It is so simple, one wonders why it was not thought of before!”
• Fits in with budgetary pressures to shrink vaccine R&D?
The dangers 1
• Attention has increasingly shifted away from late-stage
vaccines (such as for pneumococcal and rotavirus) and
currently existing vaccines (such as for hepatitis B,
influenza, cholera, etc.) toward much more speculative,
unknowable, and experimental application to HIV, malaria,
and tuberculosis.
• These are the only vaccines currently making the headlines
being generated by the Center for Global Development.
• MM and CGD language suggests that we now have a
powerful new instrument for incentivizing R&D into
vaccines for HIV, malaria, and tuberculosis, even though
we have never used such instruments for anything, not
even for the most trivial of cases, before.
The dangers 2
• MM makes no attempt at quantifying the response.
• The evidence above suggests that such programs will be
very weak at incentivizing fresh private R&D into such
early-stage vaccines.
• Meanwhile, such exaggerated claims run the very real
risk of encouraging the current heavy budgetary pressures
to cut vaccine R&D budgets or to redirect funding to
other vaccines (such as for bioterrorism projects) or to fail
to increase funding to currently more powerful vaccine
R&D approaches…without worrying about the long-term
damage to the discovery of HIV, malaria, and tuberculosis
vaccines.
The dangers 3
• Wasted opportunity and loss of momentum of other
initiatives, including Global HIV Vaccine Enterprise
previously launched at last year’s G8:
– With US support unlike several of this year’s G8 proposals;
– With the possibility of Russia – a country that would likely
be outside of any APC subsidy mechanism and worse off
compared to alternative mechanisms – taking the Vaccine
Enterprise forward for next G8.
• Huge absorption of ‘systems capacity’ of GAVI and
Vaccine Fund and others, and of political capital, to put an
HIV APC in place, diverting human resources away from
activities that are more certain to provide immediate
benefit and experience in general.
• Yet more delay.
(THIS IS THE LAST SLIDE)