Drug developers have little incentive to undertake costly research needed to develop vaccines for diseases that ravage the world's poor. After all, vaccines often wind up for sale for pennies in poor countries following government intervention. Developers can't even recoup their costs.
The solution? Turn to market mechanisms, argue two Harvard University faculty in a new book.
In Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases, Michael Kremer, a Harvard University professor, and Rachel Glennerster, an Adjunct Lecturer at the John F. Kennedy School of Government, argue for a "pull" strategy to motivate more research. In effect, governments, NGOs, and other players that provide healthcare services would agree to purchase effective vaccines before they are developed. No vaccine, no payment.
Kremer, the Gates Professor of Developing Societies in the Department of Economics at Harvard University and a Senior Fellow at the Brookings Institution, discusses the research in this e-mail conversation.
Cynthia Churchwell: What prompted you to study the lack of readily available vaccines for people in poor countries? What countries did you look at in particular?
Michael Kremer: After graduating from college, I spent a year teaching high school in a rural area of western Kenya. Six months into my job, I contracted malaria. If I had not gotten to a doctor, there could have been serious complications. Luckily for me, I was visiting Nairobi when I fell ill, and was able to receive care at a hospital there. The malaria I had proved resistant to the first-line drug used to fight the disease, but the doctors switched me to alternative drugs and kept me on them until I recovered. I returned to the village fifteen pounds lighter—but was phenomenally lucky with the first-rate care I was able to receive in Nairobi. Many people in Africa live far from clinics, cannot afford to see a competent doctor, or do not have the money to pay for effective medicine.
Malaria is of course only one of many diseases that plague low-income countries. Together, malaria, tuberculosis, and the strains of HIV common in Africa kill five million people each year. Diseases like schistosomiasis, which many people in higher-income countries have never heard of, also impose a heavy burden on poor countries. Vaccines offer the best hope for conquering these diseases because they are relatively easy to deliver, even in countries with a weak healthcare infrastructure. Yet research and development (R&D) on vaccines for diseases that primarily affect low-income countries remains minimal. Of the 1,233 drugs licensed worldwide between 1975 and 1997, only thirteen were for tropical diseases, and only four were developed by commercial pharmaceutical firms specifically for tropical diseases of humans.
Q: Please describe the meaning of "push" and "pull" approaches to R&D. What are the pros and cons of each? Is one method more effective?
A: Incentives systems to encourage the development of new products can be broadly classified as "push" programs, which subsidize research inputs, or "pull" programs, which reward developers for actually creating the desired product.
| Together, malaria, tuberculosis, and the strains of HIV common in Africa kill five million people each year. |
For pharmaceutical products needed in high-income countries, R&D is spurred by a combination of both approaches: Funding from institutions such as the U.S. National Institutes of Health covers the cost of most basic research, and the prospect of a market provides incentives for firms to turn these discoveries into marketable products. For products needed in developing countries, the market is lacking. A number of push programs have been put in place, such as the International AIDS Vaccine Initiative, but policies have not yet been set that would guarantee a market to vaccine developers that would be sufficient to cover risk-adjusted R&D costs. Pull programs attract private sector R&D to worthwhile products through an open, transparent, and market-oriented approach—with donor dollars rewarding success without micromanaging the research process.
With pull programs, money changes hands only after a successful product is developed, thus giving researchers strong incentives to self-select projects that have the best chance of success. Pull programs create incentives for researchers to focus on developing a vaccine rather than pursuing ancillary goals such as publishing journal articles. Moreover, appropriately designed pull programs can help ensure that, if new vaccines are developed, they will reach those people who need them. In Strong Medicine, we argue that the most attractive form of pull program is generally a commitment to full or partially financed vaccine purchases for poor countries.
Q: What can managers learn from your book regarding the importance of social good when compared to the bottom line? Is there room for both?
A: A number of pharmaceutical firms have done important things out of a sense of corporate social responsibility, but I think it's important to go beyond this and for governments and donors to create market incentives for R&D to meet the health needs of developing countries.
As I mentioned before, drug development in high-income countries is spurred by a combination of push funding and pull incentives. Pull programs such as vaccine purchase commitments for poor countries for diseases like malaria offer the opportunity to harness the same energy and creativity that the private sector has shown in developing products for high-income countries toward the development of products for low-income countries. Incentives for developing socially valuable products would be aligned with private sector incentives.
Q: How can governments, funding bodies, and managers of firms and R&D organizations all collaborate more effectively to balance each other's goals?
A: In Strong Medicine, we argue that vaccine purchase commitments are one way of aligning incentives in order to better balance the goals of governments, funding bodies, and the private sector.
The scientific challenges of developing vaccines for diseases like HIV and malaria are formidable, but biotech and pharma companies often take on difficult challenges. The problem has been that the industry is unlikely to invest in R&D on vaccines for diseases that primarily affect poor countries if it has little reason to think it will recoup the costs.
This is a very real concern, as most vaccines are sold to developing countries at pennies per dose. Once vaccines are developed, governments—in the interest of maximizing access to lifesaving vaccines—often use their powers as dominant purchasers and arbiters of intellectual property rights to keep vaccine prices low. Part of this is a time inconsistency problem—even if a government places a high value on having a vaccine, after developers have sunk their R&D costs the government has every incentive to force prices down to a level that only covers manufacturing costs.
Market mechanisms are key to overcoming these problems. For example, one way to structure a vaccine purchase commitment would be for sponsors to credibly guarantee a price of, say, $15-$20 per person for the first 200 million to 250 million people immunized, in exchange for a commitment from the developer to subsequently drop the price in the poorest countries to a modest markup over manufacturing cost. From the perspective of private sector companies, a commitment of this size would offer firms an opportunity for sales comparable to those available in commercial markets. From the perspective of governments and donors, it would be extremely cost-effective, saving more lives than virtually any imaginable comparable health expenditure.
Q: What role could governments play to more effectively promote vaccine R&D? Should the U.S. be playing a leading role?
A: One promising way for governments to promote vaccine R&D would be to undertake commitments to purchase vaccines.
Vaccine commitments could be undertaken by international organizations such as the World Bank, by national governments, by private foundations such as the Bill & Melinda Gates Foundation, or by a combination of these groups. If a commitment to purchase vaccines failed to produce an effective vaccine, for example, no donor funds would be spent. If it succeeded, tens of millions of lives would be saved at remarkably low cost.
National governments have a potentially valuable role to play. In November 2004, British Chancellor of the Exchequer Gordon Brown committed his government to work in cooperation with other donors to purchase vaccines for HIV and malaria if and when they are developed.
The U.S. government would be another valuable sponsor. One possible precedent is the Bush administration's Project Bioshield, which includes a spending authority intended to function as a pull program for bioterrorism-related vaccines and treatments. However, a key weakness of the program is that the government is not committed to pay specific prices for new therapies, so developers still run the risk that, after the fact, the government offers terms that do not cover the fixed costs.
One attractive feature of pull programs is that they pay for results. While surveys suggest considerable skepticism for foreign aid among the public, they also suggest that this is due to skepticism about its effectiveness. When asked what percent of U.S. foreign aid they expected ended up helping people who actually needed it, the median estimate was 10 percent (that is, that 90 percent of foreign aid never reaches those it is meant to help), and 58 percent of those surveyed said that they would be more supportive of foreign aid if they knew it was going to the people who really needed it rather than to wasteful bureaucracies and corrupt governments. A clear advantage of governments pledging foreign aid to a vaccine commitment is that the resources would only be spent if the actual results were obtained, and would require no outlays unless an acceptable vaccine was actually developed.
Q: What are some of the economic complexities surrounding the marketing of products with intangible benefits, such as vaccines? Are there other examples you could provide of such products?
A: Markets for vaccines and vaccine research fail for at least two reasons. First, vaccines are unlike most goods in that consumption by one person benefits many others by helping to reduce the spread of disease. Second, the fruits of R&D are difficult for developers to capture fully because they consist of intangible knowledge that others can copy. Patents can protect some of the benefits, but these benefits can only be realized by charging prices that far exceed manufacturing costs, implying that millions of people with low incomes would not obtain critical vaccines.
| If a commitment to purchase vaccines failed to produce an effective vaccine, no donor funds would be spent. |
[My colleague] Alix Zwane and I have examined how the market for innovations in tropical agriculture faces many of the same problems as the market for vaccines, and is thus another area in which pull programs could have a major impact. The R&D needed for tropical agriculture is distinct from that for temperate countries for numerous reasons, including differing types of staple crops, distinct agroecological systems, and eco-specific weeds and pests—all of which are part of a broader phenomenon in which agricultural technologies "spill-over" more easily within ecological zones than between them. But while the percent of agricultural R&D spending as a percentage of agricultural GDP is 2.39 percent in developed countries, for sub-Saharan Africa it is only 0.58 percent. The situation is even worse for private agricultural R&D, of which virtually none is targeted towards smaller or economically stagnant low-income countries.
Like R&D on vaccines, research and development in tropical agriculture is a global public good, and is thus likely to be under-produced. Another key market failure inhibiting developers from recovering the cost of R&D in agriculture is the potential for the resale of seeds. Plants and animals reproduce, and in developing countries farmers not only often reuse seed, but resell it in local markets. This drives down seed prices, making it more difficult for developers of new varieties to recoup R&D costs and thus reducing incentives for them to invest in tropical agriculture.
Many argue that researchers working under push programs produce seeds that are effective on experimental plots, but do poorly in real-world conditions and lack characteristics that farmers deem important. Diffusion of new technologies has sometimes been difficult in tropical agriculture. The rewards of pull programs in agriculture would therefore need to be linked to the farmers' acceptance of the technology. For example, the developers of new seeds could be paid based on the number of hectares sown with their seed.
Q: With Strong Medicine, did you learn anything that surprised you?
A: I was surprised to find out how slow the take up of new vaccines can be. When the hepatitis B vaccine was introduced (at $30 per dose), it was rarely used in low-income countries. The historical record suggests that the adoption of new vaccines in developing countries could easily be delayed by ten to fifteen years.
In addition to spurring development of new vaccines, a vaccine commitment would likely substantially accelerate access to vaccines in the poorest countries. Given the tremendous burden of diseases like malaria, the health benefits of speeding both development and adoption would be tremendous. 
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