Creating Markets for New Vaccines - Part I: Rationale

Malaria, tuberculosis, and the strains of HIV common in Africa kill approximately five million people each year. Yet research on vaccines for these diseases remains minimal largely because potential vaccine developers fear that they would not be able to sell enough vaccine at a sufficient price to recoup their research expenditures.
Enhancing markets for new vaccines could create incentives for vaccine research and increase accessibility of any vaccines developed. For example, the President of the World Bank has proposed establishing a fund to help developing countries finance purchases of specified vaccines if they are invented. The US administration's 2000 budget proposal includes a tax credit for new vaccines that would match each dollar of vaccine sales with a dollar of tax credits. This paper examines the rationale for such proposals.
Private firms currently conduct little research on vaccines against malaria, tuberculosis, and the strains of HIV common in Africa. This is not only because these diseases primarily affect poor countries, but also because vaccines are subject to severe market failures. Once vaccine developers have invested in developing vaccines, governments are tempted to use their powers as regulators, major purchasers, and arbiters of intellectual property rights to force prices to levels that do not cover research costs. Research on vaccines is an international public good, and none of the many small countries that would benefit from a malaria, tuberculosis, or HIV vaccine has an incentive to encourage research by unilaterally offering to pay higher prices. In fact, most vaccines sold in developing countries are priced at pennies per dose, a tiny fraction of their social value. More expensive, on-patent vaccines are typically not purchased by the poorest countries. Hence, private developers lack incentives to pursue socially valuable research opportunities. Large public purchases could potentially enlarge the market for vaccines, benefiting both vaccine producers and the public at large.
Government-directed research programs may be well suited for basic research, but for the later, more applied stages of research, committing to compensate successful private vaccine developers has important advantages. Under such programs, the public pays only if a successful vaccine is actually developed. This gives pharmaceutical firms and scientists strong incentives to self-select research projects that have a reasonable chance of leading to a vaccine, and to focus on developing a viable vaccine rather than pursuing other goals.
Committing to purchase vaccines and make them available to poor countries may be attractive relative to other ways of rewarding vaccine developers. Extending patents on other pharmaceuticals to reward developers of new vaccines would place the entire burden of financing vaccines on those needing these other pharmaceuticals. Increasing prices for current vaccines without explicit incentives for development of new vaccines would be insufficient to spur new research.