Creating Markets for New Vaccines - Part II: Design Issues

Several programs have been proposed to improve incentives for research on vaccines for malaria, tuberculosis, and HIV, and to help increase accessibility of vaccines once they are developed. The US administration's 2000 budget proposed a tax credit that would match each dollar of vaccine sales with a dollar of tax credit. The President of the World Bank has proposed a $1 billion fund to provide concessional loans to countries to purchase vaccines if and when they are developed. European political leaders have spoken favorably about the concept of a vaccine purchase fund. This paper explores the design of such programs, focusing on commitments to purchase new vaccines.
For vaccine purchase commitments to spur research, potential vaccine developers must believe that the sponsor will not renege on the commitment once vaccines have been developed and research costs sunk. Courts have ruled that similar commitments are legally binding contracts. Given appropriate legal language, the key determinant of credibility will therefore be eligibility and pricing rules, rather than whether funds are physically set aside in separate accounts. The credibility of purchase commitments can be enhanced by specifying rules governing eligibility and pricing of vaccines in advance and insulating those interpreting these rules from political pressure through long terms.
Requiring candidate vaccines to meet basic technical requirements, normally including approval by some regulatory agency, such as the US FDA, would help ensure that funds were spent only on effective vaccines. Requiring developing countries to contribute copayments would help ensure that they felt that the vaccines were useful given the conditions in their countries.
The US Orphan Drug Act's success in stimulating research and development is widely attributed to a provision awarding market exclusivity to the developer of the first drug for a condition unless subsequent drugs are clinically superior. Purchases under a vaccine purchase program could be governed by a similar market exclusivity provision.
A purchase commitment program could start by offering a fairly modest price. If this proved inadequate to spur sufficient research, the promised price could be increased. This procedure mimics auctions, which are often efficient procurement methods when costs are unknown. As long as prices do not rise at a rate substantially greater than the interest rate, vaccine developers would not have incentives to withhold vaccines from the market.
The World Bank has termed health interventions costing less than $100 per year of life saved as highly cost-effective for poor countries. If donors pledge approximately $250 million per year for each vaccine for 10 years, vaccine purchases would cost approximately $10 per year of life saved. It is unlikely that vaccines for all three diseases would be developed simultaneously, but if donors wanted to limit their exposure, they could cap their total promised vaccines pending under the program, for example at $520 million annually. No funds would be spent or pledges called unless a vaccine were developed.