Business

Vaccine Demand Forecasting: Creating Markets and Incentives

The PSD Blog and CGD’s Global Health Policy Blog mention a Scientific American article on the need for and initiatives to forecast the demand for vaccines. The problem this work addresses is what happens in the absence of well-defined markets:

Unpredictable demand creates a three-way catch-22 problem, as pointed out in a 2002 study commissioned by the GAVI Alliance, formerly the Global Alliance for Vaccines and Immunization. Poor countries have to know the price of a vaccine to see if they can afford it. Manufacturers, however, are hesitant to set a price unless they know how many doses will be bought. And aid donors cannot be sure they can subsidize a purchase without knowing the price and quantity of the sale.

The Vaccine Gap: Lack of Markets

This article brings into perspective a major gap that has been overlooked – the gap between R&D investments in vaccines and those in pharmaceuticals.

In 1992, global expenditure on pharmaceuticals was $220 billion, compared to $71 billion for medical devices/equipment. A mere $2 billion was spent on vaccines. By 2004, the vaccine market grew substantially to $9.9 billion. However, that was still just 1.8% of total pharmaceutical sales at $550 billion. One can presume that R&D investments tracked these sales.

The SA article argues that the reason for less R&D in vaccines is the lack of a viable market. In the absence of substantial and substantiated demand, companies are unwilling to make investments that are highly risky. This is certainly true.

Advance Market Commitments go towards reducing that market uncertainty (the CGD runs an excellent Markets for Vaccines with an FAQ on AMCs). AMCs guarantee a minimum return to companies that create a given vaccine, backed by donor countries, governments or public private partnerships.

Lack of Incentives and Advance Market Commitments

The lack of markets, however, is not the only problem. A more fundamental issue skews investment towards pharmaceuticals – the incentives of the pharmaceutical industry are geared not towards prevention, but towards cure. The adage, “give a person a fish and you feed him for a day, teach him to fish and you feed him for a lifetime” fails in this case, as the pharmaceutical industry is the one selling the fish.

If a substantial shift is to be made towards teaching a man to fish, i.e. preventive rather than curative health related R&D, we need to create lucrative incentives – with vaccine sales at least within an order of magnitude of sales of pharmaceutical drugs.

AMCs, in addition to reducing market risk, also go some distance towards changing incentives, by rewarding companies for preventive discoveries. Indeed, this is a benefit of AMCs that has not been talked about sufficiently.

Obstacles to Policy Action

As argued before, market incentives may, however, be insufficient and policy failures that are more difficult to address require a policy response. This implies a shift in how we view healthcare – from private to global public goods.

One major obstacle is that few policy thinkers – including the CGD and World Bank – see the underlying incentives as a problem. In a world where ‘market based solutions’ are politically correct and trendy, we do not question the underlying vested interests of the market and its suppliers – which explains why AMCs have not been discussed in this context.

Second, a change management perspective indicates the industry has no reason to change. Industry literature (see industry view to the EU) sees the problem as one of lack of markets, to be corrected through incentives such as tax breaks, AMCs and particularly patent extensions (the problems of which were analyzed before, especially for India). In the absence of external or internal crises, the industry has no strong drivers for systemic change. Therefore, giving up a highly profitable business model based on quarterly profits, for an uncertain and long-term one is difficult, if not impossible and akin to changing the engines of a plane in mid-air – for no pressing reason.

Finding Common Ground for Policy Action

Yet, it is a matter of common sense that preventing a disease is better than finding a temporary cure. Further, an emphasis on vaccines would be most rewarding in countries that have high birth rates, and therefore, high market potential (countries such as India and China). This implies that a solution to the vaccine gap – and a shift towards preventive R&D – would benefit everyone, including rich countries.

This makes it different from the global health gap, in which the beneficiaries of policy action (poor countries) are far removed from those that pay for the system change (rich countries). It also suggests that solutions to both, that require international action are possible, if difficult.

Market forecasts and AMCs, are a start, but probably insufficient against the overwhelming profitability of curative drug sales. Substantial solutions may require industry-pooled investment funds for long-term, preventive and neglected R&D. However, more drastic change may have to come from outside big pharma. Looser patent legislation – such as is the norm in developing countries – is one measure. Most important, radical innovation and system change, that leads to creative destruction and changes the very raison d’etre of an industry, can only come from outside the industry. So, policy makers may also want to look elsewhere for solutions to the dilemma.