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Strong Medicine:Designing Pharmaceutical Markets
to Treat Neglected Diseases
Michael Kremer
May 9, 2008Harvard University,
Brookings Institution,
Center for Global Development,
& NBER
Sources
Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases (w/Rachel Glennerster)
Making Markets for Vaccines: A Practical Plan to Spark Innovations for Global Health: Pull Mechanisms Working Group, Center for Global Development Draft Paper
Main idea
Market distortions mean little research on diseases of developing countries
Even less on vaccines – best way to reach the poor
A commitment to purchase vaccines if developed could create the incentives needed to spur research
Many design issues
Overview
Motivation Distortions in the market for vaccines Push and pull as ways to stimulate R&D How to structure a purchase commitment How much to pay for a vaccine? The politics of a vaccine commitment
Health in Low-Income Countries
Differing disease environment Weak health infrastructure Simple technologies have made big
difference in life expectancy Malaria, TB, AIDS: three big killers with no
adequate vaccine
Benefits of vaccines
Compared to drugs, easier to deliver in low-income countries with weak health care infrastructure
Smallpox eradicated, polio largely controlled 74% of world’s children receiving EPI vaccines,
estimated to save 3 million lives a year Rates likely to improve (GAVI)
Dearth of R&D on tropical diseases
Pecoul et al. (1999): 1,233 drugs licensed between 1975-1997, 4 by private firms for human tropical diseases
WHO: 50% of health R&D is private, but less than 5% of that is spent on diseases of poor countries
Private vaccine research for HIV oriented towards clade B, not clade C (most common in Africa)
Reasons for the lack of R&D
Scientific challenge Small market
Poverty Market failures
Market failures: the patent trade-off
Intellectual property rights (IPR) such as patents and copyrights provide incentives
Also distort prices, reduce consumption
Poor countries and IPR
Most large low-income countries historically limited patent protection Indian Patents Act of 1970
TRIPS required countries to introduce IPR Debate over AIDS drug
pricing/compulsory licensing Access vs. Incentives
Market failures: vaccines vs. drugs
Externalities—you benefit if I am vaccinated
Prevention vs. cure Harder for producers to observe the benefits Harder for developers to capture the
consumer surplus
Role of public purchases
In theory, large-scale government purchases could make both vaccine producers and consumers better off
In practice, governments typically pay low prices Time-inconsistency Free-riding Political economy
Social versus private returns
General social return from R&D likely twice private return (Mansfield et al. 1997)
Neglected vaccines : greater ratio Example: Hypothetical malaria vaccine
Cost-effective even at $35 per vaccinated person, or $2.1 billion annually
Total market for all childhood vaccines is $200 million, likely price <$2 per dose
Suggests aid targeted at vaccine R&D will have greater return than other types of aid
Creating incentives for R&D
Push and pull
Push and pull approaches
Push programs: subsidize research inputs Grants, R&D Tax credits, Government
laboratories Pull programs: rewards for success in
developing specific products R&D system in rich countries involves
both For diseases of poor countries, some
push, but minimal pull
Pull: Market size matters
Studies show correlation between market size and level of innovation Schmookler (1966): Agriculture
Griliches (1957) Hayami and Rutton (1971)
Pharmaceutical R&D Vernon and Grabowski (2000) Morton (1999), Reiffen and Ward (2002) Acemoglu and Linn (2003) Finkelstein (2003)
Pull: vaccine precedents
Orphan Drug Act Key provision: 7 years of market exclusivity 200 orphan drugs since 1983, fewer than 10
in the previous decade Meningococcal C vaccine
UK indicated would buy effective vaccine
Legal precedents
Historical and legal record suggest legally enforceable Domestic Manganese Purchase Program
(1960s) Issue is design, not pure reneging
Advantages of pull programs
Pay for results Funder sets goals; researchers choose own technical approach Can proceed despite divided technical opinion Align incentives of researchers, funders Less subject to political distortions Addresses access and incentives
Limitations of pull programs
Must specify desired output in advance Eligibility standards for vaccines
manageable, but far from trivial Basic research
Potential duplication of R&D Competition can be good (human genome
project?) Possible excessive duplication
Pull programs: A Menu
Product / Patent Purchases Patent Extension on other Products Best Entry Tournaments Expanding Existing Markets
Purchase commitments: Vaccine Eligibility
Goals
1) Create incentives for useful vaccine
2) Avoid incentives for useless vaccine
3) Ex post efficiency
4) Credibility
5) Simplicity
Structuring a vaccine commitment
Determining eligibility Basic technical requirements Independent Adjudication Committee Market test requirement Sunset clauses
How much to pay?
Berndt et al. (2004): $2.56 billion (in 2004$) would match realized revenue from existing products. Other approaches: Industry opinion, cost of
development $15 per person vaccinated for first 200
million people, lower price thereafter, would match in pessimistic scenario
Cost-effectiveness estimates
Benchmarks: LDC cost per DALY saved: $100 US cost per DALY saved: up to $100,000 ARV cost per DALY saved: $600 - $1800?
Our estimates: Under reasonably conservative assumptions… Malaria vaccine: < $15 per DALY saved Estimates generated by a flexible downloadable
spreadsheet tool http://post.economics.harvard.edu/faculty/kremer/vaccine.html
Pull Working Group
Set up by CGD at request of Gates Foundation to analyze how to operationalize advance contracts as a tool for encouraging research on neglected diseases
Pull Working Group
Set up by CGD at request of Gates Foundation to analyze how to operationalize advance contracts as a tool for encouraging research on neglected diseases
Process of the Working Group
Consulted with vaccine experts to understand vaccine supply, funding and procurement
Worked with legal team to draft term sheets Discussed proposals with industry and potential
funders Assessed necessary commitment size and cost-
effectiveness
Process of the Working Group
Consulted with vaccine experts to understand vaccine supply, funding and procurement
Worked with legal team to draft term sheets Discussed proposals with industry and potential
funders Assessed necessary commitment size and cost-
effectiveness
Working Group Products Term sheets for contract Report Spreadsheet tool
Book: Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases
Conclusion
Any of several organizations have the resources to create credible purchase commitments to stimulate vaccine R&D Not easy, but downside small compared to status
quo Harness energy, inventiveness of private sector
to address needs of low-income countries If no vaccine is developed, no public funds spent If successful, millions of lives saved