The value of disease eradication is very high because VPD elimination is a global public good: once a VPD is eliminated, everyone benefits from it. This also brings in the incentives to free ride, given the nonrivalrous and nonexclusive nature of global public goods. The economic and humanitarian benefits of vaccination are evident; but so are the economic limits of achieving elimination.

Thus, the discussion shifts from elimination to control, or achieving herd immunity: the threshold for vaccination rates above which disease cases become highly infrequent. Herd immunity levels for several diseases are achieved when vaccination rate goes up to 85%; yet vaccination rates in most low- and middle-income countries are significantly below that, according to household survey data. Herd immunity against most vaccine-preventable diseases benefits all countries by reducing the frequency of imported outbreaks.

What would be the best way to go to achieve herd immunity, given the resource constraints? A study by Klepac et al, recently featured in The Economist, finds that the optimal vaccination rate depends on the relative costs of vaccination, and not on the level of contagiousness. Coupled with porous borders and immigration, the burden of each additional infection exceeds the cost, pointing out to the need for sustained investment. This inter-connectedness also promotes free-riding in vaccination efforts between populations and results in lower levels of vaccination in each subpopulation relative to the global optimum. Given this, it is important to pool resources together, especially for neighboring communities, to ensure herd immunity: India, for example, would benefit from supporting vaccination efforts in Bangladesh as much as it would benefit from increased uptake within its own borders. (Granted, India performs worse than Bangladesh on vaccination, so India probably should be thanking Bangladesh for doing the right thing.) The same is true for many countries in South and Southeast Asia, where neighboring countries have low vaccination rates.

This is why vaccination should be perceived as a global public good across the world: achieving herd immunity requires coordinated action to increase vaccination levels.

Vaccine uptake in several countries is stagnating or even declining (see here and here for example). What explains this poor uptake and coverage? Public health researchers have recently begun to apply the concept of  ‘vaccine hesitancy’ and ‘vaccine refusal’, largely focusing on individual knowledge, attitudes, and practices (KAP). But in a new blog post Robert Steinglass of JSI has argued that, while communications and advocacy interventions to change individual KAP are important, this person-centric view will fail to consider the context and the role of quality on the supply-side in determining uptake. He writes:

For example, when I brought my child to the vaccination session:
- was the health worker present at the appointed time?
- was one or more of the required vaccines or syringes absent?
-was I yelled at for not having “retained” a vaccination card which I might never have been given in the first place or that was damaged in the rain on the long walk home or that I perhaps did lose?
- was I reprimanded publicly for not having returned exactly four weeks after the previous dose?
- was I ridiculed for my child’s threadbare or unclean clothing?
- was I informed in my own language what the health worker was trying to say to me?
- was I made to feel ignorant for asking the health worker to explain the purpose of the vaccination or why my child needed to return yet again for another dose?
- was I told when to return for subsequent doses?
- was I requested to make unofficial payments that I could not afford?
- was I expected to wait in the hot sun without any explanation, without seats, without water?

Put differently, if donors and governments push for improved communication and advocacy in order to influence knowledge and practice of patients and people, this is likely to be an insufficient remedy if the supply of health-care is of poor quality or lacking. When will behavioral scientists start accounting for health systems and supply-side factors of health-care?

For all of the millions of lives saved and bodies kept whole, the graphs are nothing to do with a Christmas miracle.  They reflect tireless work day in and day out by heath officers around the world from Afghanistan to Honduras to Nigeria running vaccination programs, supported by national governments, agencies like GAVI and donors from USAID to Rotary Clubs.  And they reflect the increasing number of parents worldwide who recognize the value and importance of vaccinations for their kids. Let’s hope 2012 sees further progress.  Perhaps, even, getting the polio line down to the zero mark.

November 12th is fast approaching and with it comes world pneumonia day. Unfortunately, pneumococcal diseases still pose an enormous global threat–remaining the leading cause of death for children worldwide and taking the lives of 1.4 million children under five years annually. What’s more—a staggering 98% of these children live in developing countries.

But November 12th doesn’t only bring bad news—it provides an opportunity to reflect on “what works” for new vaccine development and access. At least in some ways, the case of pneumonia has been a success story.

Over six years ago the CGD launched a report outlining how incentive structures could be designed to encourage pharmaceutical and biotechnology manufactures to invest in research and development of vaccines for global diseases. This report, Making Markets for Vaccines: Ideas to Action was based on a concept by Michael Kremer and suggested that commitments to purchase vaccines – if they are developed – might provide needed incentives to accelerate the creation of new vaccines for the developing world.

Luckily for many children around the world, the ideas from these reports aren’t just ideas any longer. I was more than happy last year (read my post here), when this method—termed an Advanced Market Commitment (AMC)—helped make new pneumococcal vaccines available to an initial set of 19 countries. GAVI reports that the roll-out will continue to cover a total of 40 countries by 2015—averting as many as 650,000 deaths within the next four years.

A further benefit of the AMC is that it reduced the lag-time that normally occurs between the introduction of a new vaccine in developed countries and when it reaches low-income countries. This is particularly important for pneumonia, as a child in Nicaragua (the first country to receive the vaccine from the AMC) is more than two-hundred-thousand times (yes two-hundred-thousand) more likely to die from the infection than a child in the United States. The quick roll-out is making substantial impact on saving saves.

There are many other advantages too–for example, the World Bank and GAVI indicate that the AMC:

1) Mitigates market failures: As I have argued before, the reduction of unpredictability and volatility has had a large effect on encouraging private investment. Not only does this provide a guaranteed market for introduced vaccines, but it also allows country governments to plan and budget appropriately for their immunization programs with the knowledge that the vaccines will become available at reasonable price.

2) Encourages competition: AMCs are open to any company or organization—motivating a wide variety of originations to participate in the creation of innovative and cost-effective treatments.

3) Pushes down vaccine prices: By providing a long term contract which pre-establishes market volumes following vaccine development, vaccines can be sold at a price that is affordable even to low-income countries. The pneumonia vaccine, for example, costs developing countries just $3.50 a dose and may be set to fall further.

Making a vaccine available is not enough. The major barrier to roll out is not science or even effectiveness, but whether long-term, large volume funding will be committed such that manufacturers make the investments needed to produce at scale. The success of the AMC argues for further investments in this instrument as new vaccines come online.

News this month that an experimental vaccine cuts in half the risk of malaria in children in Africa is a welcome success story 20+ years in the making. It’s also a rare bright spot in the clinical trials labyrinth that stands between promising new medicines, vaccines, and diagnostic techniques and the one billion people in the developing world who suffer from one or more neglected diseases. Ninety other drug and vaccine candidates for neglected diseases are waiting in the pipeline for late stage clinical development. Under current arrangements, they will face lengthy, inefficient reviews in countries where the regulatory capacity ranges from weak to non-existent.

Funding from major donors such as the Bill and Melinda Gates Foundation, Wellcome Trust , Médecins Sans Frontières (MSF) and the World Health Organization has led to an upsurge in new products—including vaccines for diseases like TB, cholera and dengue fever. These funders now face huge costs in bringing the new compounds they helped to develop to market.

Meanwhile, neglected diseases take a heavy toll. Malaria and TB alone kill an estimated 2.1 million people annually, nearly all in low-and middle income countries. Lesser known diseases, like human African trypanosomiasis, chagas disease, leishmaniasis, dengue fever and leprosy kill another half a million people.

These diseases are most widespread precisely where the capacity to test new therapies is most lacking. To assure scientific validity, new compounds must often be tested in several countries, each with their own regulatory authorities and ethical review boards, which are often weak and lacking in transparency.

What does it take to get a new treatment through the pipeline and into the hands of a patient who needs it? A 2008 article in the Lancet cited two examples where trials for TB treatments had been delayed by a year or more due to regulatory hurdles. One trial needed approval from 18 authorities in six countries and was stalled for two years before patient recruitment could begin. Yet the primary drug in this study, Rifapetine, had already been approved by the U.S. Food and Drug Administration (FDA) in 1998.

Unfortunately, this story isn’t unique. In many countries where neglected diseases are endemic, approval of clinical trials can take as long as 6-24 months. For products that require multiple trials in different populations, subsequent application approvals may take an additional 6-24 months or longer. Approval for an amendment to a trial protocol can take up to four months in a low-income setting. In contrast, regulatory approval for trials in the United States and the European Union can generally be obtained within 30-60 days, and trial protocol amendments take only a few weeks.

Long delays in protocol approvals raise costs, eroding the limited funding available to find cures for neglected diseases and bring them to market. According to a recent report by the G-FINDER project, in 2009 the total global spending on TB drug development was just $180 million, with nearly eight out of ten dollars coming from public funders and philanthropic organizations. These scarce funds could go much farther with improved regulatory pathways and clinical trial protocols.

We believe this is a problem that can be fixed. On Monday, October 31st, CGD will release a new report, Safer, Faster, Cheaper: Improving Clinical Trials and Regulatory Pathways to Fight Neglected Diseases. Prepared by a CGD working group led by Tom Bollyky and comprising 22 experts from diverse backgrounds including medicine, law, ethics, government, industry, public-private partnerships, and international development, the report offers technically sound and politically feasible recommendations for overcoming the clinical trials labyrinth. We are delighted that FDA Commissioner Margaret Hamburg will kick off the event with a keynote speech.

We hope that you can join us!

They argue that vaccines which are developed for rich country markets should be available at the lowest possible price in developing countries:

… the return on the cost of most new vaccines comes from wealthy countries, since research and development (R&D) is targeted to those markets. Rotavirus and pneumococcal vaccines– two top priorities of GAVI were first developed for and have impressive sales in rich country markets. In 2008, Pfizer earned over $2.8 billion in annual revenue from the sale of its pneumococcal conjugate vaccine, Prevnar.  A New York Times article notes Prevnar sales are expected to top $5 billion annually by 2015.

For those vaccines that already earn multinational companies high returns on investments in the developed world, there is no risk to the viability of vaccine supply from low-cost production. In other words, companies will not necessarily abandon the market if the price is lower in developing countries if they are making healthy profits in rich markets.  Indeed, market segmentation is already a core principle, well established in the orthodoxy of innovator companies, therefore it is difficult to see why vaccine prices for such products should not be as low as they possibly can in the poorest countries and for the poorest people.

I completely agree with Dr Kamal-Yanni and Daniel Berman on the importance of the principle of ‘market segmentation’.  For products which serve people in industrialised countries and in developing countries we should encourage the practice of charging higher prices for richer consumers to cover the costs of research and development, so that the prices charged to poor consumers can be kept as close as possible to marginal cost. (I have written about that before, here and here.)  There is scope for a lot more thinking about how public policy can support and enable firms to practice this kind of price differentiation more extensively (for example, by using regulatory restrictions to prevent arbitrage).

But it does not follow, as Dr Kamal-Yanni and Daniel Berman suggest, that the prices of pneumococcal conjugate vaccines for developing countries should be ‘as low as they possibly can be’.  There are three reasons why it has been important to create additional incentives for private investment in pneumocooccal vaccines.

First, it is not simply a question of rolling out Prevnar in Africa and Asia.  Prevnar is a 7-valent vaccine which was developed for rich country markets and is not well adapted to preventing infection against the serotypes of pneumococcal infection which occur in developing countries.  The vaccines now being purchased under the Advance Market Commitment (AMC) are 10- and 13-valent vaccines which are better suited to the serotypes in developing countries.  Nor can vaccines which have been tested only in Europe and North America simply be distributed in other countries. The AMC has stimulated important research on the impact of pneumococcal vaccines in Africa and Asia (for example, gathering data for the first time on the impact on HIV-infected people).  It accelerated the process of obtaining regulatory approval.  It has also stimulated work on different ‘presentations’ (such as Pfizer’s 4-dose vial) which bring down prices and make it easier to get vaccines to people in more difficult environments.

Second, we want vaccine companies to scale up production very considerably to produce enough vaccines for people in developing countries.  We don’t have well-documented estimates of the cost of setting up a large-scale production facility, but informed speculation suggests that it costs somewhere between $100m and $400m.  Companies face a significant risk doing this: namely the possibility that they will spend the money on a new plant, and then get hammered by purchasers intent on driving down the price (for example, under pressure from Oxfam and MSF).   Once the plant is built, the producer has no bargaining power: they have capacity to produce millions of doses and nobody else to sell them to. This means the purchasers can force the price down to marginal cost, and so the producer won’t recover the fixed cost of the production facility.  To avoid that risk, the company may choose not to build the plant in the first place.  (This is known in economics as the ‘hold up’ problem.)   So if we want firms to build facilities to mass-produce the vaccines for developing countries, we have to agree a price in advance which covers this part of the fixed costs, and then resist the temptation to drive the price down once the plant has been built.

Third, the idea that we should just roll out the vaccine at the lowest possible price ignores the substantial benefits of further investment in research and production capacity, which will result in better and cheaper vaccines for everyone.  Merck is currently making a 15-valent vaccine for pneumococcal infection which – apparently because of the AMC – they plan to to produce at large scale at an affordable price for developing countries.  The AMC is attracting companies from emerging markets, such as FioCruz in Brazil (who have done a technology transfer deal with GSK) and manufacturers in India and China who are in late pre-clinical testing of formulations designed to meet the needs of developing countries.   Dr Kamal-Yanni and Daniel Berman compare the pneumo AMC with the Meningitis Vaccine Project, which has indeed been successful in many ways. But because the price has been set so low for the Meningitis A vaccine,  there is (as far as I know) no private investment in new and better vaccines, in contrast to the efforts being made to develop better and cheaper pneumo vaccines.

When governments and public authorities invest directly in developing and producing vaccines they need to manage carefully the possibility that there is, or may appear to be, a conflict of interest between these activities and their normative and regulatory functions such as licensing and recommending vaccines.  It is possible that some pharmaceutical companies may have been put off developing a new Meningitis A vaccine by the prospect of having to secure regulatory approval from public authorities who are themselves investing in an alternative vaccine.

We do not have to speculate too much about what would have happened if we followed the advice of Dr Kamal-Yanni and Daniel Berman and set the price of pneumo vaccines as low as possible.  We can see what happened when vaccines for Hepatitis B and Haemophilus Influenzae Type b (Hib) were developed for use in rich countries.   In principle, exactly the same ‘market segmentation’ principles should have applied in these cases. According to the view put by Dr Kamal-Yanni and Daniel Berman the firms could have recovered their investment in rich countries, and sold the vaccines at cost in developing countries.  But in practice that didn’t happen: it took at least fifteen years before those life-saving vaccines were available in developing countries.

It does not reflect well on the pharmaceutical industry that these vaccines took so long to be produced for developing countries.  But nor does it reflect well on public policymakers who failed to think about the incentives required to get them to do so.  Somebody has to bear the costs of getting regulatory approval, sorting out appropriate presentations for developing countries, and building large enough plants for mass production.  In some cases, such as pneumo, the vaccine itself may have to adapted. Firms are reluctant to bear these costs if they are unlikely to be able to recover those investment through sales, and if they perceive a risk that their high-price markets will be undercut by imports of low-cost substitutes manufactured for developing countries.

About two million people die each year of vaccine-preventable diseases.  Our reluctance to create incentives which make it profitable for pharmaceutical companies to serve these people is not “erring on the side of the poor”: it is erring on the side of ideology at the expense of the poor.

An alternative approach, favoured by Dr Kamal-Yanni and Daniel Berman, is to manage this work as a public sector led partnership like the Meningitis Vaccine Project.  These kinds of partnership and the AMC share some important characteristics: public authorities determine the strategic health goal, provide a subsidy to the private sector to develop and produce the vaccine, and set the price of the product. But there are important differences too. In the public-private partnership the subsidy is paid in advance to the chosen private sector partners, whether or not the vaccine is delivered.  In the AMC the subsidy is paid transparently though a higher price,  in proportion to the amount of vaccines which are actually delivered and used.  While the public-private partnership relies on the good sense and experience of the public authorities to choose appropriate partners and shape the vaccine development strategies, the AMC allows any firm – including pharmaceutical companies in emerging markets – to innovate and compete for part of the subsidy.  The AMC places more faith in the benefits of diversity and competition than the public-sector directed approach, and it links the subsidy directly to results achieved. While the public-private partnership puts public authorities in the possibly uncomfortable position of being both a producer of vaccines and the regulator, the AMC keeps those roles separate.

Dr Kamal-Yanni and Daniel Berman are concerned about “overly cosy relations” in GAVI, where pharmaceutical companies have 2 seats on the 27-member board, yet they seem less concerned about collaborations between the public and private sector which involve substantial grants to private firms, often with little transparency, which create a potential conflict of interest for public authorities.

I don’t have an ideological position on the respective merits of the private and public sector: each has advantages and disadvantages.  (I do plead guilty to having a bias towards more open, diverse and competitive approaches.)  You can make a case for developing medicines mainly in the public sector, based on the idea that the knowledge generated by R&D is a public good and ought to be free for everyone to share.   But that logic applies also to the development of medicines for families in rich countries. I notice that, in practice, most rich countries prefer to engage the resources, innovation and energy of the private sector, working alongside the public and non-profit sectors, in developing and producing new medicines.  Perhaps we want this kind of mixed economy because some people doubt that programmes directed by the the public sector alone will be able to deliver these products. I don’t want to live in a world in which we have one level of aspiration for technologies for our own health needs, which we choose to meet by a combination of public and private efforts, and lower aspirations for developing countries in which we rely on programmes funded and managed by the public sector alone.  But if we want the private sector to do this work too, we have to set appropriate incentives for them, rather than create conditions in which this cannot be a worthwhile business and then complain about their values when they don’t participate as much as we would like.

In low- and middle-income countries, children living in poverty are much less likely to be vaccinated and more likely to die or become ill from a vaccine-preventable disease than better-off children. An example comes from Nigeria, where less than 5% of children in the lowest quintile of the wealth distribution were fully vaccinated in 2003, as opposed to 40% of children in the wealthiest quintile. (For more on inequalities in health, see here)

Although lack of effective supply and distribution systems limits the reach of immunizations, especially to “ last mile” populations, much progress has been made and innovative strategies are underway to strengthen vaccine supply chains (see here for some examples).

However, as CGD’s Charles Kenny noted last week in Foreign Policy, few efforts focus on the “demand-side” — the barriers that poor families face when considering whether or not to vaccinate their children.

Yet according to recent impact evaluations, providing modest cash or in-kind incentives to poor families conditional on vaccination of their children has worked in at least five developing country settings to improve results among poor kids (see here and here). Based on these positive evaluations, we believe conditional transfer programs are a promising demand-side alternative for vaccination coverage levels that should be tried and evaluated in multiple settings.

But will these schemes get the scale up and evaluation they deserve?  That depends in part on whether we can address the concerns of donors and policy-makers who worry about the economics and ethics of cash and in-kind transfers for vaccination.  Specifically, they worry that cash transfers for vaccination will diminish intrinsic motivations for getting children vaccinated and create long-term dependency on the transfer.

In our view, while legitimate questions to ask, these concerns are unfounded. Here’s why:

Economics. Since families benefit from vaccination by avoiding vaccine-preventable morbidity and mortality, policymakers question why a government should provide additional cash or in-kind subsidies. Yet we know that poor families don’t invest sufficiently in their children’s health – the inequalities in health status and coverage bear this out. Poor families don’t have enough money to cover costs of seeking care, nor do they value preventive services for a number of reasons (high discount rate, intangible benefits, risk perceptions, etc.). There are also other sociocultural barriers that make health services “unfriendly” to poor and vulnerable households, in addition to unfounded rumors and misconceptions about the safety of vaccination. The conditional transfer intends to adjust this cost-benefit analysis for poor households by bringing the benefits of vaccination more tangibly and immediately into view and by reducing the cost associated with obtaining the vaccine.  Finally, the benefits of vaccination do not accrue only to the individual or household; so providing “compensation” to the poorest for giving the benefit of herd immunity to others is also a good argument.

Ethics. Some policymakers argue that paying people commoditizes people or behaviors or that such a transfer can be considered a “bribe”. While important to support intrinsic motivations, is the counterfactual situation ethical? Is it okay to leave some children unvaccinated because their parents are too poor or lack sufficient knowledge? An unvaccinated child is more likely to become ill and die from disease than a vaccinated child. If repeated evaluations show that an intervention can significantly increase vaccination coverage among the extreme poor, is it ethical to withhold this intervention? (HT Mead Over)

Dependency. Building off the U.S. preoccupation with welfare dependency, policymakers also worry that poor families will become dependent on cash or in-kind transfers, and that transfers are not sustainable over the long-term.  We consider this highly unlikely to occur because (i) the amount of the transfer is marginal with respect to a beneficiary household’s consumption, so unlikely to create a permanent change in consumption patterns or affect employment choices; (ii) households automatically “age out” of the conditional transfer – if no kids below 5, no transfer; (iii) conditional transfers can be thought of as transitional programs to “educate” poor households on the benefits of prevention. On the latter, in Nicaragua, a conditional cash transfer substantially increased vaccination and use of preventive services.  Once the demand-side transfer was eliminated (for political reasons), however, utilization of preventive services on the supply side was maintained at almost the same level, suggesting that families had learned the value of preventive care or from familiarity were now comfortable using services.

Up to one in every five children in the world doesn’t yet get the life-saving vaccines they need.  Even more remain needlessly vulnerable because they are delayed in receiving vaccines.  Overcoming this challenge will likely require a broad set of policy tools.  Unfortunately, we have few demand side tools at this time in our tool box.  In our view, conditional transfers represent a promising approach that warrants further evaluation and that concerns about the ethics and economics of this approach argue for, not against, investigating these programs further.

Maurice Hilleman may have saved more lives than any other scientist.  He developed eight of the vaccines widely used around the world:  for measles, mumps, hepatitis A, hepatitis B, chickenpox, meningitis, pneumonia and HiB. Hilleman worked throughout his career at Merck, a pharmaceutical company.

Last week, donors pledged $4.3 billion to GAVI to help immunize 250 million children by 2015.  Most of this money (over 80%) will come from four donors: the UK ($1.3 billion), the Gates Foundation ($1 billion), Norway ($677 million) and the US ($450 million).    Other donors also generously doubled their previous commitments, and Japan and Brazil gave for the first time.

We should heap praise on donors for this. Childhood vaccination is among the most successful and cost-effective development interventions (pdf).  When the Expanded Programme on Immunization (EPI) was launched in 1974, less than five per cent of the world’s children were immunized during their first year of life. Today, about 80% of children receive the basic package of six life-saving vaccinations (polio, diphtheria, tuberculosis, whooping cough, measles and tetanus), saving about 3 million lives a year.

And what a difference it has made.  Smallpox has been eradicated. Polio may be next.  The number of children dying of measles has declined by about 80% from 733,000 deaths in 2000, to 164,000 in 2008.  It is easy to become complacent about success on this scale.  Now that many fewer children die of these diseases, we are in danger of forgetting that they were ever a problem, and the role that vaccination has played in ridding us of them.

We have not only the medical technology, but also the health systems, skills and logistics to reach children across most of the developing world. So we could also reach children with vaccines which are still considered too new or too expensive to be widely used in developing countries, including those against pneumococcal disease, rotavirus, meningitis,  hepatitis B, yellow fever, cervical cancer, rubella, typhoid, and Japanese encephalitis.

Backing vaccination with big money is an astute political move. Taxpayers understand the idea that every child should have the same vaccines as their own children; and vaccination programs clearly work.

This is not just good politics: it is good development policy too. DFID recently conducted an exhaustive review of the value for money for the taxpayer from 43 multilateral organisations.  GAVI was one of the top-rated organisations, along with UNICEF and the Global Fund.  Vaccination is one of the most reliably cost effective, life changing development interventions that money can buy.  It ought to be a no-brainer.

Save the Children UK and ONE both ran impressive campaigns supporting a large GAVI replenishment, and the new donor commitments were welcomed across most of the mainstream development community.  But a small number groups – notably Médecins Sans Frontières and Oxfam – have criticized the way that GAVI works.  (For example, Daniel Berman from MSF appeared on Newsnight to criticize GAVI).

These groups are clear that they support the objective of greater access to vaccination; but they say that donors could make better use of the aid budgets by by pushing pharmaceutical companies for lower prices. They have accused GAVI of having too cozy a relationship with drug companies, which have two representatives on GAVI’s 27-person board.

Getting a better deal

MSF and Oxfam are certainly right that lower prices would mean that a given vaccine budget could go further: we could immunize more children, and so save more lives.  If we think vaccination is important for development, we should do whatever we can to make it as widely available as possible. Oxfam and MSF say they want GAVI to take three steps:

first, full transparency about the prices GAVI pays; second, forceful action by GAVI to use competition to get a better deal; third, all pharmaceutical companies should step down from the GAVI Board because of their clear conflict of interest.

I have no argument with the first objective, and I’m glad to see that UNICEF has announced that it will be publishing vaccine prices on its website.

But the other two objectives (getting ‘a better deal’, and removing pharmaceutical companies from the GAVI board) are seem to me to be potentially reckless.

There are, in principle, two kinds of ways to cut prices.  One way is to reduce the cost of developing and producing new vaccines.  These include simplifying regulations, shifting production to lower-cost places, and reducing or diversifying risk.  The second way to cut prices is to squeeze producers, and so get a better deal for purchasers by reducing the profits of the pharmaceutical companies.  We might be able to do this, for example, by using the market power of UNICEF (which purchases vaccines on GAVI’s behalf) to push prices down, or by bringing more suppliers into the market so that competitive pressures make it harder for any firm to make big profits.

The first kind of price reduction – reducing costs – is a net benefit to society (other things being equal).  If we can do it, we should.  There is a big and important agenda to pursue here.  Long term commitments to GAVI, enabling long term contracts with pharmaceutical companies, are an important way to bring down the costs of production.  GAVI can play an important role, and I would argue (indeed,I have argued) they should be doing it more.   Amanda Glassman and colleagues set out a great agenda on this in a recent working paper.

The second kind of price reduction – transferring surplus from producers to consumers – is a zero sum transfer from the shareholders in pharmaceutical companies to governments and aid agencies.  That may be desirable on distributional grounds but it may have long-term consequences which we come to regret.

We want pharmaceutical companies to develop new vaccines, and to improve existing vaccines.  For diseases which hardly ever affect rich countries – like malaria – we want them to go ahead and develop the vaccine anyway.  And when they invent a new vaccine for diseases which affect people everywhere, we want them to trial those new vaccines in poor country settings as well as industrialised countries and, if they work, to invest in manufacturing capacity to produce the millions of doses needed to vaccinate people  across the developing world.

So this is the dilemma: we want pharmaceutical companies to invest more in developing and producing new vaccines and drugs for developing companies.  But once they’ve done so, we want those products to be available at the lowest possible price, ideally free.

Be careful what you wish for

In simple economic models, we don’t need to think too hard about protecting the interests of companies. We encourage competitive markets, and let competition drive the price down to the marginal cost.  That enables firms to make a reasonable return on their capital, leaving the rest of the surplus in the hands of the consumer.

But drugs and vaccines are different in a crucially important way.  They are characterised by massive up-front costs of research, development and testing, and relatively low costs of production once the vaccine has been approved.  These products are only profitable if the companies have some way to recover their up-front development costs.

So what should the price be?  If the price is forced down to marginal cost – as it would be in unrestricted competition – the firm which has developed the product will never recover the costs of its investments.  If we want the firm to consider doing this again (or indeed to consider doing it in the first place) then the price paid to the firm has to stay above marginal cost, at least for a time, so that the firm gets its money back.

An imperfect answer to this has been the patent system: to grant the firm a temporary monopoly so that it can keep the price above marginal cost and recover those development costs.  But this way of paying development costs has huge disadvantages: namely that charging higher prices excludes some consumers from the product. That may not be a problem if the product is an MP3 song or a computer game, but it is a helluva  price to pay when the product is a life-saving vaccine.

The other potential problem with paying above marginal cost is that firms may be able to make excess profits. We want firms to be able to cover their costs, and reward their shareholders for the risk they have taken, but we don’t want them to hold society to ransom if they have invented a life-saving drug or vaccine.

So we want a mechanism which gives firms a reasonable return on their investment but which does not allow them to make excessive profits.  That in turn means neither allowing competition to force the price down to marginal cost, nor allowing firms to charge inflated prices.

Achieving both access and innovation

Oxfam and MSF want to see more manufacturing by producers in developing countries, as a way to bring the price down.  Such a move has two effects: one good and one iffy.  Moving production to lower-cost locations may bring down the total cost of production: that must be good.  But companies  are not going to invest in future vaccines if they know that they will be undercut by manufacturers making copies of the new product, having borne none of the development costs.  So untrammeled competition may be good in the short run, if it brings down prices, but bad in the longer term if it chokes off future investment in these products.

The analysis of the vaccine market by Oxfam and MSF alleges that prices are too high.  The entire policy agenda rests on the judgement , so it is unfortunate that the report offers no evidence to support it.  All the report tells us is that ‘actual prices are not determined in a simple way by, or justified by, R&D costs’.

Just because Oxfam and MSF offer no evidence for their claim doesn’t mean that they are wrong.  Perhaps we are paying too much for these vaccines, and the companies are making excessive profits in these markets.  After all, a lot of other business are making a lot of money out of the aid industry.  It is hard to tell, because these companies are extremely secretive about the actual costs of development and production (in a way that I find rather sinister and which certainly does not help their cause).  I have no difficulty believing that many pharmaceutical companies would be trying to make profits from developing countries if they could.

Here’s why I don’t think that is very likely that they are.  We don’t see firms lining up to develop new products to tackle the health problems of people in developing countries. We don’t see them rushing new products to market in developing countries.   We don’t see them investing in the adaptation of existing products, or in the investment of large scale plant needed for large scale production.  On the contrary: over the decades before GAVI was established, we saw fewer and fewer firms seriously engaged in medicines for developing countries.  If firms are making huge profits on selling drugs and vaccines for developing countries, why isn’t there a gold rush?

That isn’t a very satisfactory basis for a judgement. But let’s consider the balance of risks.  If I’m wrong, and we are overpaying for vaccines, the damage is that some of the aid budgets of rich countries is unnecessarily bloating the coffers of Big Pharma.  But vaccines are a hugely cost-effective development intervention: even if we were paying twice as much as we should for them, they would still be saving lives more cheaply than almost anything else we do. And as news spreads of the handsome profits to be made, more firms and investors would be attracted into developing, manufacturing, registering and selling new products for developing countries. But if Oxfam and MSF are wrong, then driving down the returns to pharmaceutical companies will reduce their interest in these markets.  There will be less research; less investment in large-scale production; and products will be brought to markets more slowly. The consequence will be that millions of people will be denied access to life-saving products.   Given that we can never get the prices exactly right, I’d rather err on the side of making these markets too congenial for pharmaceutical companies, and so attract more businesses to the field, than making the environment too hostile for them and driving them away.

The MSF and Oxfam paper implies that they believe that prices should be pushed down to the lowest possible level, because this will increase access. If that is their view, they do not tell us how firms will be encouraged to engage in these markets in future; if that is not their view, they offer no insights into how they would prevent the price from falling too far or how we would know when we’ve got there.

The value of partnership

One way to achieve a combination of innovation and investment (requiring higher revenues for firms) with access for the citizens of poor countries (requiring lower prices paid by purchasers) is to use aid budgets to make up the difference.   GAVI has a huge role to play in making this happen. Making developing country markets more valuable for private investment is a legitimate, high-value use of aid.  But we put those benefits at risk if we have appear to have ideological objections to using aid to support good returns for pharmaceutical companies when they engage in developing countries.  That is why I’m concerned about the recommendation that the pharmaceutical industry should be kicked off the GAVI board.  Max Lawson of Oxfam calls this the ‘thorniest issue’.

GAVI was established as an alliance of governments, international organisations, donors, research organisations, firms and civil society working together to increase access to vaccinations.  The 27-seat board has one seat for an industrialised country firm, and one for a developing country firm.   Those firms are hardly over-represented: there are ten government seats.  Civil society also has one seat – exactly as many as rich country pharmaceutical firms.  Every member of the board has a profound interest in the decisions of the alliance – sometimes a shared interest with the other stakeholders, sometimes competing interests.

The benefit of having pharmaceutical companies engage in the alliance is obvious: they understand the economics of their industry better than anyone else. If we want to figure out what we need to do to get more vaccines produced for and distributed in developing countries, we have to work closely with the firms who do it.

That model is yielding benefits.  Vaccines against pneumococcal infections have been rolled out much more quickly in developing countries, not long after they became available in industrialised countries, in stark contrast to the 15 year delay in the roll-out of previous vaccines for HiB and Hepatitis B.  GAVI has brought together governments and firms to bring down the price of rotavirus vaccine for developing countries.

MSF and Oxfam are not entirely explicit about what they see as the main risk of industry participation but their main concern seems to be that firms have somehow overcome their numerical inferiority to capture the GAVI board, leading it to collude to pay too much for vaccines. If that were true, it would indeed be a matter for concern.  But it depends again on their view that prices are too high.

Given their concern to bring down prices, and ensure access in the least developed countries, MSF and Oxfam could speak out more energetically against  PAHO’s  ’most favored nations’ clause which prevents vaccine companies from charging least developed countries a lower price than they charge in wealthier middle income countries like Brazil.  Yet the NGOs seem strangely reluctant to take this on.  Perhaps attacking the pharmaceutical industry is easier, if lazier, than challenging the policies of governments of emerging markets?

Let’s show some love to Big Pharma

My colleague Charles Kenny has shown that over the last century there have been massive improvements in the length and quality of life even in countries whose incomes have hardly changed. Countries with GDP per person of $300 in 1999 have approximately the same life expectancy (46 years) as people had in 1870 in a country with an income ten times as great. Charles lists five countries in which incomes fell by an average of 18 percent over forty years, yet life expectancies increased in all of them over the same period, by an average of 40 percent.  How has this happened?  In large part as a result of the development and use of vaccines, drugs and contraceptives.

Development of new medicines has almost always depended on a combination of public and private investment.  As we know from the story of Maurice Hilleman, many of the most important breakthroughs have come from scientists working in pharmaceutical firms.

There is plenty of reason to maintain a healthy suspicion of pharmaceutical companies. There are plausible allegations of unethical clinical trials, misrepresentation of data, irresponsible marketing and corruption. I find the industry’s obsessive secrecy sinister.  I don’t like the industry’s zealous protection of intellectual property rights, which inhibits the spread of ideas and society’s technological progress.  I share the widespread suspicion of companies that are too big, too rich and too powerful.   I’m sure that many pharmaceutical companies would be happy to gouge the market if they were given the opportunity to do so.   Nonetheless, it is a shame that an industry which has done so much good for humanity – including in developing countries – is so widely vilified.

We have seen massive improvements in health in the last fifty years, far outperforming growth in incomes, as a result of new vaccines and drugs mainly brought to us by private pharmaceutical companies, on a platform of scientific research conducted in or funded by the public sector. You could make a pretty compelling case that the pharmaceutical industry has done more than the aid industry to improve the lives of poor people.

Conclusion

The decision last week by a group of donors to put a lot of money into GAVI to pay for vaccination was one of the very smartest, most humane decisions they could have taken.  They have been generously praised from many quarters, and rightly so.

A combination of publicly-funded research and the market-driven engagement of pharmaceutical companies has resulted in the development and production of vaccines and drugs which have had a huge, positive impact on people’s lives in both rich and poor countries.  We don’t want firms to be making excessive profits, least of all out of the aid budget.  But I see no signs that this is what is happening.  If anything, the opposite seems to be true.  Over the years, partly out of an abundance of concern to increase access by keeping prices down, we’ve made things tough for firms wanting to sell to developing country markets. The result: not enough vaccines and drugs for diseases which mainly affect people in poor countries, and too slow a roll-out of new products.  If we want to reverse that, we should be trying to make these markets more profitable.

Of course it is important to bring down the price paid by developing country governments, to prevent high prices from excluding poor people from access to these life-saving products.  We should do everything we can to bring down costs – including looking again at how we can cut the regulatory burden, take advantage of low cost production, and reduce uncertainty.   But we should be very cautious about driving down prices merely by squeezing pharmaceutical companies harder. We have to weigh our pleasure from poking the rich and powerful in the eye against the enormous damage we will cause if we drive firms out of these markets. A much smarter if less satisfying approach is to use aid budgets to bridge the gap between reasonable returns to the pharmaceutical industry and prices that the developing world can afford.

Declaration of (non) interest:  neither I nor any programme on which I work is funded, or has ever been funded, by the pharmaceutical industry.

This post is joint with Lawrence MacDonald

One result of President Obama’s visit to the UK last month was a statement on the UK-US Partnership for Global Development in which the U.S. President and Prime Minister David Cameron “reaffirm [their] commitment to changing the lives of 1.2 billion poor people in the world today.” In the statement they promise to work together on a range of important development issues: economic growth, conflict and fragile states, aid (accountability, transparency, results), global health, girls and women, and climate change.

It’s a long and familiar list of what matters in rich-world development policy (notably absent: trade). Buried in it is an important, real-world commitment to ensure that the Global Alliance for Vaccines and Immunization (GAVI) “has the resources it needs to do its job.” On the part of the UK, at least, this is more than an empty promise. On Monday, Prime Minister Cameron will host GAVI’s first ever pledging conference, which aims to secure US$ 3.7 billion to vaccinate 250 million additional children and save 4 million lives between 2012 and 2015.

The UK, Norway, Sweden and Australia have all signaled that they will pledge significant contributions. It’s widely anticipated that the UK and the Gates Foundation may each pledge in the neighborhood of $1 billion.

GAVI is asking the United States, which has yet to signal the amount of its pledge, to provide $450 million over the next three years. This would be money extremely well spent.

Studies have repeatedly shown that vaccines are one of the most cost-effective means for reducing suffering, saving lives, and improving productivity. This month’s issue of Health Affairs synthesizes much of what we know about the importance of childhood vaccination to health and well-being. Full coverage of vaccination against pneumococcal and Haemophilus influenza type b pneumonia and meningitis, rotavirus, pertussis, measles, and malaria over the next ten years could save 6.4 million lives and avert 426 million cases of illness, $6.2 billion in treatment costs, and $145 billion in productivity losses. Over the past decade, the GAVI Alliance has been successful in driving down the cost of new vaccines and supporting the poorest countries in the world in the rapid expansion of their vaccination programs.

Pledging for three years instead of just one, as the United States frequently does, is absolutely crucial for GAVI to continue to lower vaccine prices; if GAVI can make longer-term contracts with vaccine manufacturers, its negotiating leverage increases enormously.

Providing adequate U.S. funding to GAVI would also allow the U.S. Global Health Initiative to report annual progress on children vaccinated to Congress, an important step in improving accountability.

It’s not as if the United States is unwilling to spend money to improve global health: The FY 2012 Budget Request includes more than US$ 7 billion for HIV/AIDS to provide antiretroviral treatment and medications to prevent mother to child transmission to 3.8 million people and to provide care and support from 11 million people living with HIV/AIDS. Vaccinating children against common childhood diseases can actually help to lower the costs of coping with the HIV/AIDS epidemic. For example, according to the Sabin Institute, HIV-positive children are up to 40 times more likely to get pneumococcal disease than HIV-negative children. Protecting these children with pneumococcal vaccine would not only improve their survival and reduce suffering, it would also help to create herd immunity to these diseases that could protect others, including other immune-compromised children and adults.

Bottom line: providing $450 million over three years to GAVI to help vaccinate 250 million children is both compassionate and cost-effective. I’ll be watching closely to see how much the United States, with the world’s biggest economy, contributes to this important, life-saving effort.

Update 6/13/11:

Today the U.S. announced that it will contribute US$ 450 million to GAVI to cover the 2012-2014 period, subject to Congressional approval. This is great news, although the pledge amount actually represents a declining U.S. share of contributions to GAVI given the success of the pledging conference. In total, donors committed US$ 4.3 billion, exceeding the $3.7 billion target, bringing GAVI’s total available resources for the period 2011 to 2015 to $ 7.6 billion.

A few weeks ago I looked at WHO figures on DTP3 by country income group and size of the cohort of one year olds. The data show that the lower middle-income countries (LMICs) are home to the largest absolute numbers of unvaccinated children. However, WHO data relies mostly on administrative reports of unknown quality, sometimes reporting number of doses purchased or shipped instead of children actually vaccinated.

I’ve now looked at the gold standard source—Demographic and Health Surveys (DHS) data since 2004—to examine the situation of timely and complete vaccination for age in low-income countries (LICs) versus LMICs, adjusting for the size of each country’s population. These data are only representative of those 37 countries with a DHS and do not include the large LMIC like China and South Africa. See our spreadsheet here.

The share of children with timely and complete vaccination is much larger in LICs than in LMICs.

On the one hand, this is great news. The poorest countries—with the help of GAVI and its partners—are immunizing the majority of their children on time and with the full schedule of immunizations. These results also belie the assumption that a strong health system is a pre-requisite to deliver immunizations in a timely manner.

On the other hand, in the LMICs—where the largest numbers of children under five years old reside, vaccine-preventable disease burden is largest and health systems are relatively strong—on average, less than half of children are completely immunized according to age. There aren’t many upper middle-income DHS to examine, but the few that are available suggest that the situation is more similar to the LMICs than to the LICs!

Further, as I mentioned in my comment to the original blog, new vaccines such as rota and pneumo—and in some cases Hib—are not yet introduced in most LMICs.

What to do? Blog readers and yours truly have a number of ideas:

• LMIC governments’ own priority-setting processes need to be better understood, supported and developed. By priority-setting, I mean the process by which existing and new vaccines are considered and adopted for public funding and how population coverage decisions are taken. In most settings, this is a very ad hoc process.  (I’ll blog on this topic more in the coming months.)
• Civil society watchdogging and/or community accountability needs to be improved. Colombia has an interesting initiative where they post vaccination coverage rates on the doors of schools, churches and community centers as a way to increase awareness of the need to vaccinate. Global efforts to rank and score countries on vaccination programs may also be useful to create reputational incentives.
• The World Bank and regional development banks social and health policy lending could include conditionality and support for minimum vaccination coverage rates. Should the international community really invest in anything else until more than half of children are fully vaccinated? Can a government be expected to efficiently procure and oversee major infrastructure investments if they can’t vaccinate the majority of their young children? Some LMICs are still eligible for IDA—should a minimum vaccination rate be a condition for receipt of IDA funding (as it is for the MCC)?
• Even if some GAVI-eligible LMICs failed to take advantage of the lower GAVI price, there may be appetite for regional pooled procurement of vaccines, modeled on PAHO’s Revolving Fund for vaccine purchases (without the lowest price clause). GAVI could play a role here as the organizer of an LMIC window—consolidating purchasing without providing funding, but regional organizations could be a viable alternative.

Thanks to Juan Ignacio Zoloa for research assistance.