E 1997, only 13 were for tropical dis-
eases, and only 4 of these were speci½-
cally developed by commercial pharma-
ceutical ½rms to treat tropical diseases in
humans. Half of all global health r&d in
1992 was undertaken by private industry,
but of that, less than 5 percent was spent
on diseases speci½c to poor countries.
The scienti½c challenges of developing
vaccines for diseases such as malaria are
formidable, but biotech and pharmaceu-
tical ½rms often take on dif½cult scien-
ti½c challenges. So what explains this
underinvestment in r&D?
A key factor is that expected markets
for these products are small, with most
vaccines sold in poor countries currently
priced at pennies per dose. The small
expected market size is partly due to the
poverty of these countries–but it also
reflects severe distortions in markets for
such vaccines. Typically, once pharma-
ceutical companies have invested in the
R&d necessary to develop products, gov-
ernments have often used their powers
as regulators, dominant purchasers, E
arbiters of intellectual property rights to
keep prices low. Inoltre, because
R&d on vaccines is an international
public good, with the bene½ts of r&D
advances spilling over to other coun-
tries, no country has the incentive to
unilaterally offer to pay higher prices.
Because ½rms anticipate low prices for
products aimed at developing countries,
they have limited incentives to invest in
R&D.
In a forthcoming book, Strong Medi-
cine: Designing Pharmaceutical Markets to
Treat Neglected Diseases, Rachel Glenner-
ster and I argue that foreign-aid donors
should issue advance contracts commit-
ting to ½nance purchases of needed
products such as malaria vaccines. Questo
would provide vaccine developers with
an incentive to invest in r&d and would
help ensure that once vaccines were
Michael Kremer
on how
to improve
world health
Malaria, tuberculosis, and the strains of
hiv common in Africa kill 5 million peo-
ple each year, almost all of them in low-
income countries. Effective vaccines
against these diseases are desperately
necessario.
Yet there is a striking dearth of re-
search and development (R&D) on vac-
cines and treatments for diseases prima-
rily affecting poor countries. Of the 1,233
drugs licensed worldwide between 1975
Michael Kremer, a Fellow of the American Acad-
emy since 2003, is Gates Professor of Developing
Societies in the economics department at Harvard
Università, a Senior Fellow at the Brookings Insti-
tution, and the cofounder and cochair of bread,
the Bureau for Research and Economic Analysis
of Development. He is cochair of the Center for
Global Development’s Policy Research Network
working group on pull incentives for vaccines. Lui
is also the author, with Rachel Glennerster, Di
“Strong Medicine: Designing Pharmaceutical
Markets to Treat Neglected Diseases,” which will
appear later this year.
© 2004 dall'Accademia Americana delle Arti
& Scienze
120
Dædalus Summer 2004
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How to
improve
mondo
health
developed they would reach those who
need them.
Programs to encourage the provision
of r&d can take two broad forms. ‘Push’
programs subsidize research inputs, for
esempio, through grants to researchers
or r&d tax credits. ‘Pull’ programs re-
ward research outputs, Per esempio, by
committing in advance to purchase a
desired product at a speci½ed price.
For pharmaceutical products needed
in developed countries, R&d is spurred
by a combination of both approaches:
funding from institutions such as the
NOI. National Institutes of Health covers
the cost of most basic research, and the
prospect of a market provides incentives
for ½rms to turn their discoveries into
marketable products. For products
needed in developing countries, a num-
ber of push programs have been put in
place, including the International aids
Vaccine Initiative and the Malaria Vac-
cine Initiative–but policies have not yet
been implemented that would guarantee
a market to developers of new vaccines.
Push programs have led to some tre-
mendous successes and are an essential
part of any overall r&d strategy. How-
ever, these programs are also subject to
several weaknesses. Primo, since funders
cannot perfectly monitor the actions of
grant recipients, researchers may be
tempted to divert their effort away from
developing the desired product toward
other goals, such as researching prob-
lems of theoretical interest or working
on their next grant application. In
contrasto, under pull programs money
changes hands only when a usable prod-
uct is delivered, so researchers’ and
funders’ incentives are aligned.
A second problem is that researchers
writing grant applications have incen-
tives to make the case for funding appear
as strong as possible. Decisionmakers
must rely on the researchers for much of
their information and they may there-
fore end up ½nancing projects that have
only a slight chance of success, O,
worse, may be overcautious and fail to
fund promising research. In contrasto,
under a pull program in which develop-
ers are rewarded once they produce the
desired product there is a strong incen-
tive for ½rms considering r&d invest-
ments to use all the information avail-
able to them in assessing their prospects
for success.
A third concern with push programs is
that when funds are allocated in advance
of results, decisions may be based on po-
litical rather than scienti½c considera-
zioni. Domestically there may be pres-
sure to allocate funds to speci½c states or
congressional districts; internationally
there may be pressure to allocate funds
to speci½c countries. In contrasto, under
pull programs sponsors promise to pay
for a viable vaccine no matter who devel-
ops it.
A dramatic illustration of the risks of
push programs can be seen in the failure
of U.S. Agency for International Devel-
opment (usaid) efforts to develop a
malaria vaccine in the 1980s. In 1984,
the agency claimed that there had been
a “major breakthrough in the develop-
ment of a vaccine against the most dead-
ly form of malaria in human beings,"
and that “the vaccine should be ready
for use around the world, especially in
developing countries, within ½ve years.”
usaid spent $60 million on this pro- gram, only to discover that some of its grant money had been diverted and that the project director had received kick- backs. In the end, the research program yielded few results. Although there are of course many examples of successful push programs, the usaid example illustrates the vulnerability of such pro- grams to general overoptimism and monitoring problems. Dædalus Summer 2004 121 l D o w n o a d e d f r o m h t t p : / / d i r e c t . m i t . / e d u d a e d a r t i c e – p d / l f / / / / / 1 3 3 3 1 2 0 1 8 3 1 5 6 3 0 0 1 1 5 2 6 0 4 1 5 0 4 5 6 0 p d . f b y g u e s t t o n 0 7 S e p e m b e r 2 0 2 3 Note by Michael Kremer Under pull programs the public pays only once a viable product is developed. How might a viable pull program be de- signed? The most attractive way to de- sign a pull program is through an ad- vance contract, in which sponsors com- mit to fully or partially cover the cost of purchasing products meeting certain prespeci½ed technical requirements. Per esempio, a sponsor could commit to guarantee a price of $15 (adjusted for
inflation) for each of the ½rst 200 mil-
lion people immunized with a malaria
vaccine, subject to a 10 percent co-pay-
ment from developing countries or other
donors.
The credibility and design of the pur-
chase commitment will obviously be a
critical determinant of its effectiveness.
Potential developers of a vaccine or drug
must believe that once they have sunk
funds into developing a product the
sponsors will not renege on their com-
mitments by paying a price that covers
only the cost of manufacturing and not
risk-adjusted r&d costs. Courts have
held that similar public commitments to
reward contest winners or to purchase
speci½ed goods constitute legally bind-
ing contracts, and that the decisions of
independent parties appointed in ad-
vance to adjudicate such programs are
binding. The credibility of a purchase
commitment will therefore depend on
clearly specifying product eligibility and
pricing rules and on establishing a credi-
ble process for adjudicating any dis-
putes.
A program could require that vaccines
not only satisfy technical eligibility re-
quirements, but also be subject to a mar-
ket test. Nations wishing to purchase
products or donors acting on their be-
half might be required to provide a mod-
est co-payment. This would help ensure
that only useful products were rewarded
and would give countries incentives to
avoid wasting vaccines. Finalmente, force-
majeure provisions should also be incor-
porated into the purchase agreement so
that obligations would end if the disease
environment changed radically and the
product was no longer needed.
Given the enormous burden of dis-
eases like malaria, commitments to pur-
chase vaccines would be extremely cost
effective. A price of $15 for the ½rst 200 million people immunized, plus rev- enues from modest sales outside the pro- gram, would give a potential vaccine de- veloper a net present value of revenues that would be comparable to the rev- enues from products developed for com- mercial purposes. A commitment at this level to purchase vaccines for malaria would be extremely cost effective, cost- ing nothing if a usable product were not developed, and less than $20 per year of
life saved if a vaccine were developed.
A wide range of policy leaders and or-
ganizations has endorsed the concept of
purchase commitments. The Clinton
administration proposed a pull program
for hiv, tuberculosis, and malaria vac-
cines, and the Bush administration’s
Project Bioshield includes a pull-like
mechanism for certain drugs and vac-
cines protecting against bioterrorism.
Reports from the World Health Organi-
zation’s Commission on Macroeconom-
ics and Health and from the U.K. Cabi-
net Of½ce have endorsed creating pull
programs for vaccines. The president of
the World Bank and leading members of
the U.S. Congress, including Senators
Frist and Kerry, have proposed pull pro-
grams. The Bill & Melinda Gates Foun-
dation recently asked the Center for
Global Development to establish a work-
ing group to examine the feasibility of a
purchase commitment.
A number of organizations–including
the World Bank, national governments,
and private foundations like the Gates
122
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Foundation–have the resources to enter
into advance contracts to purchase need-
ed vaccines. Such commitments may
require changes in standard operating
procedures, but they are certainly in the
realm of feasibility. If purchase commit-
ments fail to induce the development of
new products, no money will have been
spent. But if they succeed, millions of
lives will be saved each year.
How to
improve
mondo
health
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Dædalus Summer 2004