If You Build It, They Will Pay

A novel incentive called an Advance Market Commitment could help spur private sector investment in AIDS vaccine research and development

By Catherine Zandonella, MPH*

What if you could order your dream house, the perfect abode that would take years to design and build to perfection, but only have to pay for it on the day you are ready to move in? Global public health experts are exploring just such a concept, only the "house" is a vaccine for a disease such as AIDS and the people buying it are international foundations and governments that want to provide the vaccine to the poorest nations on the planet. The important part is these donors only have to pay for the vaccine once biopharmaceutical companies create it.

Under an AMC, donors would pledge to purchase a new vaccine for one of these developing-country diseases at a price that would generate revenues that match other health products in a global competitive marketplace. The donors would commit to pay a set price for a certain number of people immunized, after which the vaccine company would be obligated to sell to eligible countries at an agreed-upon lower price that is affordable in the developing world.

"The goal is to create a market of sufficient size to encourage industry to invest in vaccine development," says Robert Hecht, senior vice president for public policy at IAVI, one of several organizations exploring the concept.

IAVI envisions AMCs as part of a comprehensive strategy. The commitment would "pull" on industry to engage in vaccine research and would complement existing "push" mechanisms such as funded research in academic labs and biotechnology companies. To make the concept successful, the global health community must also work on removing barriers to vaccine research across a range of issues, including clinical trials, intellectual property, and liability. "Advance market commitments are part of a menu of things that are necessary, none of which alone is sufficient," says Seth Berkley, president and CEO of IAVI.

A sound idea

The concept of the AMC has found widespread favor among donors such as the Bill & Melinda Gates Foundation, public-private partnerships, the World Bank, the G8 Finance Ministers, and biopharmaceutical industry representatives. Although the concept has been around for some time, AMCs started coming into focus in the late 1990's through the writings of Harvard University economist Michael Kremer¹and Rachel Glennerster, director of Poverty Action Lab at the Massachusetts Institute of Technology (Kremer, M, Glennerster, R, Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases Princeton University Press, 2004). In 2003 the Center for Global Development (CGD), an independent think tank working to reduce global poverty, assembled a working group of economists, public health professionals, lawyers, and pharmaceutical and biotech experts to transform a "sounds-good" idea into a concrete proposal. Their report, issued in May of this year, examines the major issues and provides a basis for IAVI's draft proposals.

In late 2004 the UK government expressed support for AMCs as part of a larger package of new mechanisms to expand financing for international development and the achievement of the Millennium Development Goals. The UK and the other G8 countries asked the World Bank in May to coordinate a process of consultation with industry on the feasibility of establishing an AMC to support development of vaccines against AIDS, malaria, and other diseases. At their July summit in Scotland, G8 heads of state reaffirmed support for advance market incentives and asked the Italian government to lead the development of a concrete proposal by the end of this year.

Lack of incentive

These global leaders hope that market incentives will draw more private sector investment to vaccine R&D. Even though the total investment in AIDS vaccine research has climbed from US$160 million in 1996 to an estimated $690 million in 2004, annual spending on AIDS vaccine R&D from all sources still represents less than one percent of expenditures on all health R&D. And whereas about 48% of investment in health R&D across the world comes from the pharmaceutical industry, the private sector accounts for just 10% of all AIDS vaccine R&D funding².

Private sector investments are needed because vaccine development requires expertise not found anywhere else. While the key scientific breakthrough that leads to a successful vaccine may well come from a university laboratory or small biotechnology company, the biopharmaceutical industry is best equipped to translate this research into a successful product. These companies have the experience and infrastructure to devote to the costly later stages of vaccine development—clinical testing, regulatory approval, and production. "Pharmaceutical companies look to biotech companies for new product candidates, so a market commitment that stimulates Big Pharma investment will benefit large and small companies alike," says Berkley.

But companies won't put forth resources if they can't foresee how to recoup their research, development, and production costs. Even a company that has a strong social commitment must answer to shareholders. "The main thing that causes companies to enter a field is the prospect of a market," says Stanley Plotkin, emeritus professor of pediatrics at the University of Pennsylvania and executive adviser to the chief executive officer of Sanofi Pasteur, the vaccine business of Sanofi-Aventis.

Consolidation among pharmaceutical companies and vaccine companies has left just five major vaccine manufacturers; GlaxoSmithKline, Sanofi-Aventis, Merck, Wyeth, and Chiron. Vaccine candidates now compete in a company's portfolio against potential drug blockbusters to lower cholesterol, improve erectile function, or restore hair loss. In terms of revenues, vaccines are sure to lose out against drugs since a vaccine may be used only a few times in a lifetime while drugs are often used every day. Whereas the market for a single drug can reach billions of dollars, the total market size for vaccines in developing countries is about $500 million a year.

Pennies a dose

One factor keeping the market size small is the negotiating power of international agencies like UNICEF. In the late 1990s several companies either reduced or dropped altogether production of the vaccines routinely purchased by UNICEF. While the low prices have helped ensure the expansion of immunization programs around the world, writes World Bank senior health specialist Amie Batson, "They have also created expectations that all vaccines should cost pennies per dose forever." (Health Affairs 24, 693, 2005)

The urgent social concern for these vaccines may put enormous pressure on the vaccine maker to sell the vaccine at a greatly discounted price or even give it away for free. More worrisome than bad publicity is the prospect that the vaccine could be "confiscated" through compulsory licensing in response to a public health crisis, says Wendy Taylor, executive director of BIO Ventures for Global Health, an organization formed to address the development and distribution of biotechnology products for developing-country diseases. When anthrax was deemed to be a threat, the US government appeared to threaten such a move on the antibiotic ciprofloxacin (Cipro).

An AMC could go a long way toward persuading biopharmaceutical companies that vaccines for diseases like AIDS or malaria are a viable investment. Such a fixed-price commitment would only apply to low-income countries, leaving companies free to sell the vaccine at market prices in higher-income countries.

To assure vaccine developers that they will indeed receive the money promised to them, the AMC would be legally binding. As long as the new vaccine meets efficacy and other standards put forth in the AMC contract and eligible countries want to use the vaccine, the developer will receive the guaranteed price per vaccinated individual. An independent adjudication committee composed of experts from both the biopharmaceutical industry and the global public health community would decide if the product has met the qualifying criteria, and could grant waivers if a vaccine does not meet the original standards but is still judged to be of significant public health value.

For an AIDS vaccine, IAVI has proposed a draft market commitment that would require the vaccine to be at least 50% effective at preventing the transmission of HIV subtypes A and C, the subtypes circulating in the poorest nations (Figure 1). Eligible countries would contribute a small "co-payment", and the donor would make up the rest.

Donors might be government entities or private foundations. The UK government, for example, through the Department for International Development (DFID), would be able to commit to an AMC within its existing budget mechanisms. The US government, however, would face procedural obstacles because Congress does not normally make multi-year financial commitments. The World Bank is another possible sponsor but under current rules it cannot commit to programs beyond five years. Private foundations would face the fewest obstacles.

Win-win

The proposal has numerous benefits for both vaccine developers and donors. For developers, the commitment reduces the risk that an urgently-needed vaccine would be subject to compulsory licensing while preserving the company's intellectual property rights. Companies will be able to assure investors that there is indeed a market for this vaccine. And AMCs could help deflect criticisms that Big Pharma doesn't do enough for the poor.

For donors, the AMC would ensure that an AIDS vaccine is made available in the low-income countries in Africa and Asia that bear the biggest disease burden. It would also stimulate competition among manufacturers to produce the vaccine as quickly as possible and thus claim the guaranteed price. If a second company or "second-entrant" to the market develops a better vaccine, it too will be eligible to sell its second-generation vaccine at the guaranteed price.

Importantly, donors would only pay when a vaccine is developed, leaving them free to spend their current funds on push mechanisms and vaccine-promoting efforts. If a vaccine is developed and it is met with little or no demand then the donors’ financial outlays will be limited.

AMCs might help vaccines reach developing countries sooner, avoiding millions of needless deaths that can occur when a vaccine is too expensive for developing countries. A vaccine against Haemophilus influenzaeserotype b (Hib) developed in the mid-1990's is still too expensive for use in many low-income countries and an estimated 4.5 million unvaccinated children have died from Hib-related disease over the last decade.

Even if the vaccine can be made affordable, infrastructure problems can derail the delivery of vaccines. Every year about 3 million people die of diseases such as measles, hepatitis B, and tetanus that can be prevented with existing affordable vaccines. These issues are being addressed by the Global Alliance for Vaccines Initiative and its partner, the Vaccine Fund, both of which are supportive of AMCs. "We very much welcome the conversation surrounding advanced market commitments," says Alice P. Albright, the Vaccine Fund's chief financial officer.

How big?

One of the toughest challenges in developing an AMC is determining the market size needed to stimulate vaccine R&D. Rather than use estimates of actual R&D costs, which could be far off the mark, economists calculate the market size based on sales revenues of existing commercial products, reasoning that comparable revenue levels will be attractive enough markets for vaccines. IAVI, working with a model developed by the Center for Global Development, estimates that an AIDS vaccine AMC would require total lifetime sales revenues of about $4 billion. After subtracting out $0.7 billion in revenue that a company would likely recoup from sales in developed countries, the AMC market would be $3.3 billion. In one of the illustrative scenarios developed by IAVI this would be achieved by guaranteeing a price of $15 per course for 250 million people (Figure 1). Since it will likely take a number of years to get the vaccine to everyone who would benefit from it, IAVI's proposal is based on the expectation that the commitment would last about ten years.

An important feature of AMCs is two-stage pricing. In IAVI's proposed AMC, after the first 250 million people are vaccinated the developer would be required to drop the price to a level that allows the company to cover its production costs but keeps the vaccine affordable for eligible countries. Under the current proposal the developer would retain the intellectual property rights and existing patent laws would apply. "The two-tiered pricing system ensures that the vaccine developer will continue to sell the vaccine if sufficient demand exists after the initial price and quantity provisions are fulfilled," says John Hurvitz, a Washington DC-based lawyer who worked on the IAVI AMC proposal. "We don't want the product to disappear from the developing world when the purchase contract goes away."

Not just ivory tower

IAVI has held consultations with industry to gauge the interest in the proposed AMC. "We haven't just sat back in an ivory tower," says Hecht, "We've taken the idea on the road." In general the response from executives has been positive, although most agree that details remain to be worked out. One concern from industry is that if an AMC is structured to provide a market of $3 billion and three vaccine-makers hit the mark, each will receive only $1 billion each. "That may not be enough to recoup a company's investment," says Rudi Daems, executive director of policy and corporate affairs at Chiron Vaccines, who thinks AMCs are a very promising concept once the details get worked out. "If you don't put significant resources into a vaccine commitment then you will fail, and we will all be waiting 30 years from now for an HIV vaccine."

Some industry representatives find problematic the lack of a guaranteed purchase if demand dries up. That is unlikely to happen, however, because companies and public health officials will forecast demand and remove barriers to adaptation, says Saul Walker, a policy analyst at DFID. "In the end, it is in everybody's interests to develop a product that will actually get used."

Companies don't have guaranteed markets for any vaccine or drug they develop, even those marked for sale in developed countries, points out Owen Barder of the CGD and one of the lead authors of the organization's AMC report. “Companies should have an incentive to develop the best possible product, one that people will want to buy.”

Venture capitalists have expressed support for the concept, although it is too soon to tell how widely their enthusiasm is spread. "It will be viewed as a curiosity at first," says J. Leighton Read of Alloy Ventures, an early-stage venture capital firm, "but once a company with a credible vaccine plan signs such a commitment, the signing could generate a lot of interest."

Untried but true

Not everyone favors AMCs as a way to motivate the discovery of an early-stage vaccine against AIDS or malaria. The concept has sparked criticism from a handful of scholars, including some members of the CGD working group.

One concern is that the scientific hurdles involved in creating vaccines for AIDS, malaria, and TB are so high that an AMC will prove to be an ineffective tool for these diseases. A further risk is that vaccine firms and AMC donors will fight over whether a vaccine meets the requirements, which were set out years in advance. An AMC runs the risk of either costing too much, yielding nothing, or, most disastrously, disintegrating amid acrimonious litigation, says Andrew Farlow, an economist at the University of Oxford. "We have no proof at all that this mechanism will pull a major vaccine through," says Farlow. "It has never been used for anything." Not so, says Barder. “The AMC replicates the incentives that produced almost all the drugs on the shelves in one’s local pharmacy.”

Other critics charge that the advance markets are structured to unfairly reward large biopharmaceutical companies and that the $3 billion per disease price tag is far too high, especially when many of these companies already receive significant amounts of "push" funding. "The most cost effective and fastest way to discover new vaccines is to fund research directly," says Donald Light, professor of comparative health care systems at the University of Medicine and Dentistry of New Jersey and a member of the CGD's working group who decided not to sign the final report (PLoS Medicine 2, e271, 2005). However, Hecht replies that public funding alone will not bring in the full resources of the private sector.

These critics say the solution is to first test AMCs on ‘late-stage’ vaccines against rotavirus or pneumococcus, where the biology has been worked out and the goal is to get the vaccine produced and deployed in developing nations. However, a successful AMC for a late-stage vaccine will do little to actually prove that the commitment can motivate R&D for early-stage vaccines for AIDS and malaria, says Adrian Towse, director of the Office of Health Economics, an independent research, advisory and consultancy service in London. "The right design for an AMC might be determined only through the action of setting one up."

Many global health experts would agree that AMCs are not a panacea for the problems that bedevil vaccine development and delivery. Market incentives alone will not deliver an AIDS vaccine. As the research efforts progress so must capacity building for testing, distribution, delivery and training.

If AMCs can pull research and accelerate development of a vaccine they will prove their worth. Over the next ten years, the $3 billion price tag for stimulating the AIDS vaccine market will look like a bargain in comparison to the cost of providing antiretroviral (ARV) therapy to infected persons in developing countries; UNAIDS estimates the cost of ARV programs at $3-9 billion in 2007 and $8-$20 billion in 2015.

IAVI calculates the cost-effectiveness of an AMC to be between $21 and $67 per saved disability-adjusted life year (DALY), a measurement that reflects the loss of healthy life due to AIDS-related illness and premature death. At this rate, investing in a vaccine would be more cost-effective than spending on most other means to fight AIDS or to otherwise improve the health of people in poor countries of Africa, Asia, and Latin America. The actual cost-effectiveness will depend on vaccine characteristics such as efficacy against HIV transmission and how long protection lasts, and on how long it takes for the majority of people to get vaccinated.

Vaccines are the best way to protect the most vulnerable victims of the AIDS pandemic, such as women and children, says Kate Taylor, IAVI's senior director of policy and advocacy. "It is critical to continue care today but also to develop the next generation of preventive technologies because the tools we have today are not sufficient," she says. "Developing a vaccine against HIV is one of the greatest scientific challenges of all time. The science is really hard. Advance market mechanisms provide incentive for the required long-term commitment and significant investment."

Figure 1. Overview of IAV's Draft Proposal for an AMC for an AIDS Vaccine.

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*Catherine Zandonella, MPH, is a freelance writer whose work has appeared in Nature and New Scientist.

1. Michael Kremer and Rachel Glennerster, Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases, Princeton University Press, 2004.

2. IAVI Draft Proposal for an AIDS Vaccine Advance Purchase Commitment July 2005.

3. IAVI Draft Proposal for an AIDS Vaccine Advance Purchase Commitment July 2005.

4. Offit Health Affairs. Volume 24, Number 3 May/June 2005

5. Center for Global Development

6. UNICEF Executive Board, Vaccine Security: Ensuring a Sustained, Uninterrupted Supply of Affordable Vaccines, Pub. no. E/ICEF/2002/6 ( New York: UNICEF, December 2001). as quoted in Amie Batson

7. Batson, A. HEALTH AFFAIRS ~ Volome 24, Number 3 p 693

8. Center for Global Development: Making Markets. Chapter 7: How Sponsors Can Do It

9. Source: IAVI Draft Proposal for an AIDS Vaccine Advance Purchase Commitment July 2005.

10. CGD Vaccines report: Making markets for vaccines.

11. A spreadsheet model (available for download from the Center for Global Development website atwww.cgdev.org/vaccine) allows users to analyze a large number of different scenarios and estimate the costs and benefits of commitments for malaria, tuberculosis and HIV vaccines under a variety of assumptions, such as about delivery costs, uptake, disease burden and eligibility.

12. Light DW (2005) Making practical markets for vaccines. PLoS Med 2(10): e271.

13.IAVI. Antiretroviral program costs and implications for AIDS funding 8/15/2005

14. IAVI Draft Proposal for an AIDS Vaccine Advance Purchase Commitment July 2005.