Purchase Commitments for Vaccines: Their Uses and Their Limitations

1. Purchase Commitments for Vaccines:Their Uses and Their Limitations Andrew Farlow University of Oxford Department of Economics, and Oriel College BioDesign Institute Arizona State University 5 April 2005 This version: 16 May 2005 This has been rewritten so as to be a stand-alone presentation without need of a presenter. A downloadable copy of this PowerPoint and supporting papers can be found at: www.economics.ox.ac.uk/members/andrew.farlow The author very much welcomes feedback: andrew.farlow@economics.ox.ac.uk

2. Based on: “The Global HIV Vaccine Enterprise, Malaria Vaccines, and Purchase Commitments: What is the Fit?” Andrew Farlow, Submission to Commission on Intellectual Property Rights, Innovation and Public Health, WHO, March 2005. Forthcoming in Innovation Strategy Today. “An Analysis of the Problems of R&D Finance for Vaccines: And an Appraisal of Advance Purchase Commitments” Andrew Farlow, April 2004.

3. The problem • Over 40,000 people – many of them children – die every day in developing countries of infectious or parasitic diseases. • Many could be saved by access to already developed vaccines and drugs: “A large proportion of the disease burden in such countries is unnecessary, since it could be reduced by the effective distribution of medicines that are currently available and inexpensive.” International Policy Network “Incentivising research and development for the diseases of poverty” 2005 p17. • Barely more than 1% of total global pharmaceutical expenditure goes into the research and development of new products for diseases affecting 90% of the world’s population*. *10%-15% of global pharmaceutical spending goes into R&D, and barely 10% of this goes into diseases impacting 90% of the world’s population.

4. Recent strides • Large fresh funds to purchase currently existing vaccines and to roll out immunisation programs: • The UK – $1.8bn over 15 years; • Bill and Melinda Gates foundation – $750m; • Norway – $290m. • Proposed $4bn budget over ten years for Immunizations, via an ‘International Financing Facility for Immunizations’: • Though this budget – and immunization initiative – could, and should, have been provided with or without the IFF possibility*. • Launch of ‘Global HIV Vaccine Enterprise’ in 2004. • UK presidency of the G8 and EU this year: • Big opportunity…or lost opportunity? * Given the potentially controversial nature of the IFF proposal, policy makers also need to take great care that, in all their public pronouncements, the IFF is seen to the there to support the immunizations and never the other way around.

5. A spectrum of vaccines • Low or non-use of many already existing, already cheap or even practically costless vaccines. • ‘Late-stage’ vaccines – where most of the science is already known and a viable product is close to, or already at, hand. • ‘Early-stage’ highly complex and difficult vaccines – such as those for HIV, malaria, and TB – where there are either no viable vaccines on the horizon or current candidates fall well short of 100% effectiveness, and many scientific difficulties remain. • Spectrum of vaccines often lumped together. • But, instruments needed for each case are different. • Nature of ‘purchase commitments’ for each kind of vaccine also differs.

6. The role of purchase commitments • Long-term purchase contracts/commitments very advantageous for underused and late-stage vaccines. • Advance Purchase Commitments (APCs) for early-stage vaccines here argued much weaker and a great deal more problematic than is often suggested: • The phrase ‘Advance Purchase Commitment’, APC, is used here, and not ‘Advance Market’, since the latter needs to be proven and not prejudged to be the case by the choice of language used. An inability of APCs to perform ‘as if’ a market is central to many of the concerns here. • For early-stage vaccine R&D, manufacture and access may even be harmed by the presence of prior precommitments (certainly as currently proposed) compared to alternative mechanisms. • Where does the boundary between the cases fall?

7. Lessons from vaccine introductions 1 • Past vaccine introductions: • Hepatitis B; • Haemophilus influenzae type B (Hib); • Smallpox. • Recent purchase arrangements: • African trivalent meningitis vaccine; • Meningitis conjugate C. • Future late-stage vaccines: • Pneumococcus; • Rotavirus; • Issues: • Cost of manufacture; • Safety issues; • Epidemiology. All these case-studies are treated in detail in Farlow, March 2005, Section 3.

8. Lessons from vaccine introductions 2 • None of these case-studies remotely matches anything being proposed for HIV, malaria, and TB. • Many of the problems caused/resolved by contracts are very different for these case-studies compared to early-stage vaccines. • Case-studies illustrate current faults in need of rectification. • Current short-run contracts are inefficient – a stable long-term market matters. • Get rid of market risk: • The need for ‘distribution commitments’, ‘vaccine/health infrastructure commitments’ and commitments to tackle market risk at many levels; • APCs (as currently designed) for early-stage vaccines put market risk back on to developers!

9. Lessons from vaccine introductions 3 • Good information on how to efficiently set terms: • Information extracted through competitive tenders, etc. • Relatively easy to make the incentive ‘additional’ via procurement contracts, etc. • Commitments as coordination devices. • In practical cases, the breakthrough was through lowering production costs: • Incentives/competition for this? • Technological ‘shifts’ dependent on access to technology, IP, know-how, especially at manufacture and distribution stage; • Volume and regulatory issues important in lowering costs.

10. Lessons from vaccine introductions 4 • Incentives to install capacity quickly and for use quickly. • Product differentiation and correcting vaccine market distortions. • Ability to use IP in ways to encourage competition, to keep the market open to many potential developers and producers, and to help create cheaper-to-produce vaccines. • Wider finance in place for a wider set of players: • More open to those who cannot draw off ‘deep pocket’ finance for long periods.

11. Lessons from vaccine introductions 5 • Importance of role of developing/emerging country developers and manufacturers. • More ability to share information and collaborate (key for HIV? Malaria? TB?). • ‘Relatively’ low levels of capital costs (compared to, e.g. case of HIV vaccines). • Lower risk to biotechs. • Many of these reasons are ‘fungible’ – they apply whatever the source of finance. • Not ‘committee-driven’ over long horizons. • Current purchases do matter – a lot.

12. Hepatitis B case-study • Hepatitis B case-study in draft versions of the recent CGD report – dropped from final report. • Hepatitis B case does not support the report’s underlying hypotheses for HIV/malaria/TB: • The original Hepatitis B vaccine developers were not the ones who developed and maintained the lower price market; • The competitive situation for hepatitis B today – a key component in achieving long-term sustainable low prices – reflects poorly on the lack of competition at a similar stage in product life cycle in the CGD report; • Emphasis in the success of the Hepatitis B case on market and competitive devices to push production prices lower – compared to insufficient emphasis in CGD report.

13. Why the sudden interest in HIV, malaria, and tuberculosis? 1 • Focus of attention increasingly on speculative, experimental applications to HIV, malaria, and tuberculosis, even though APCs never been used before for even the most basic of applications. • Less than a year ago these ‘difficult’ vaccines were not deemed likely doable by this approach: • Including by many now heavily advocating the approach. • By definition APCs cannot be tested except through trying: • Should ‘crash test’ the thinking, subjecting it to the harshest of possible self-critiques before trying; • Given the risks of abandoning the approach due to lack of industry response and the constant need to change the program, should learn by trying less complicated vaccines first and building up to more complicated vaccines.

14. Why the sudden interest in HIV, malaria, and tuberculosis? 2 • Supporters and critics all concerned with incentives and rewards for private firm involvement. • Disagreement is about: • The shape and timing of incentives and rewards; • The ability to set APC terms remotely efficiently; • Whether APCs will actually work as proposed; • The role of, and interaction with, other parts of the overall mechanism for developing these early-stage vaccines; • Order of priority, given the burden APCs place on the ‘system capacity' of GAVI/VF/WHO, and use of political capital; • The dangers of perverse results. • BIG CONCERN: Approach feeds off (and also feeds) growing budgetary pressures to cut Vaccine R&D funding – especially for HIV – given global fiscal deterioration.

15. Literature on this as an R&D incentive for early-stage vaccines • “Making Markets for Vaccines” (henceforth ‘MM’ in all references), Center for Global Development (henceforth CGD), Washington, D.C., April, 2005. • “Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases”, Kremer, M, and Glennerster, R, Princeton University Press, November, 2004. • UK’s No. 10 Policy Unit 1998-2001. • Mostly the work of a small handful of authors.

16. Benchmark as an R&D incentive for early-stage vaccines 1 (These details taken from MM) • ‘Legally binding’ contract before vaccine R&D: • Sponsor(s) and all actual and potential vaccine developers sign-on to the contract within 36 months of the initiation of the program; • All actual and potential developers agree to be monitored by the committee controlling the program; • Later entry of developers policed by the committee; • Those conducting current vaccine trials and failing to sign-on, and those initiating future vaccine trials without prior permission from the committee, are barred access to the ‘eligible’ markets controlled by the committee; • Sponsors have an opt-out if contract fails to stimulate ‘enough’ research (though current status of opt-out is a little unclear).

17. Benchmark as an R&D incentive 2 • ISSUE: Inability to identify all developers in advance. • ISSUE: Highly complex and evolving vaccine development process that is also moving increasingly toward emerging/developing country developers. • How to avoid biasing early-stage APCs too early in favor of large developed-country companies, stymieing this evolution, and forcing later entrants to work through current large multinationals? • Opt-outs and ‘sunset clauses’ hard to incorporate without feeding back to harm R&D incentives.

18. Benchmark as an R&D incentive 3 • Sponsor(s) commit $3bn-$10bn per disease: • Figure keeps falling. Now $3bn each for HIV, malaria, and TB (This presentation sticks to original figures for now). • For the purchase of a vaccine or vaccines in a pre-agreed quantity (200-300 million treatments): • Figure keeps falling. Now 200 million each for HIV, malaria, and TB. • Benchmark has changed over last year. Prior to May 2004 a simple flat subsidy on each of the first X million of ‘a vaccine’. • Now a complicated subsidy spread over first X million of several possible vaccines: • Rules for this unclear?…and un-write-able? • But this is largely a change in language: • Recent malaria announcements seem to target one vaccine.

19. Benchmark as an R&D incentive 4 • To ‘aid credibility’, sponsors relinquish control of their funding to a committee with discretionary powers. • Supposedly (since extremely difficult, if not impossible, to do in any practical sense for vaccines such as HIV, malaria, and TB) the size of (and distribution of) funding for the ‘first’ 200m high-cost treatments over developers is set precisely high enough to re-create the precise size of ‘additional’ market needed to encourage the entry of the precise amount of venture capital and stock market finance needed for the remaining research and development including capital cost (though ‘remaining’ is unclear) needed to produce a ‘high quality’ vaccine or series of vaccines. • A complex ‘expected’ subsidy pattern across developers and over time (investors’ ‘expectations’ of this are key).

20. Benchmark as an R&D incentive 5 • All R&D costs repaid through the purchase of a successful vaccine or (since May 2004) several vaccines in a particular period in time (if there are several meeting ‘eligibility conditions’ in any period of time), or series of vaccines over time (to combat resistance perhaps and to give incentives for follow-on innovation), and only the successful vaccine(s) or series of vaccines. • This program (supposedly) funds ‘additional’ ‘eligible’ market purchases only: • Eligible and non-eligible markets are separated…somehow. • Repayment of R&D costs is from taxpayers of richer countries, foundations such as the Bill and Melinda Gates Foundation, and through co-payments made by developing countries themselves (that may come from third parties); • The program is foundation- and publicly-funded.

21. Benchmark as an R&D incentive 6 • NOTE: Overall cost of vaccine development should include all funding needed outside of the program, including subsidies, tax-breaks, and other benefits granted for research, and the spending of national governments and foundations, and any costs of ‘vaccine enterprises’. • An APC for HIV is likely to cover only a very small portion of the overall costs of HIV vaccine development. • This is ignored (so far) in CGD cost effectiveness calculations for early-stage vaccines: • All DALYs saved are apportioned to the purchase commitment even if it will represent only a small portion of the overall cost of development of an HIV vaccine.

22. What the winner gets • (Supposedly) winner(s) repaid all of the privately-funded (and only the privately-funded) R&D costs (including all capital costs) of all firms (both the successful and the unsuccessful) and only the private firms, who used such private funding on R&D towards the vaccine since the time the purchase commitment had been announced (and only since the announcement) and only for eligible markets covered by the mechanism. • ‘Capital costs’ refers to the costs of the finance used, and includes the required return to cover all risk being borne, including any risk created by the mechanism itself (i.e it does not refer to physical real capital investment). • Very different pricing strategies in ‘eligible’ and ‘non-eligible’ markets. • Firm gets all IP to the vaccine (under current proposal).

23. Problems with underlying model 1 Underlying (Kremer Appendix 3) model driving the logic for early-stage vaccines is highly simplistic. The ‘critique’ here is that highly idealized perfectly-functioning APC models are contrasted with highly imperfect alternatives thus generating unfair comparisons, and not that alternatives are not themselves highly imperfect too. • The science is fixed, simple, constant, static, ‘linear’: • Extremely simple probability structure. • No patents on anything other than end vaccine products: • No financial constraints, investment hold-ups, strategic behaviors, constraints on flows of information, or concentrations of market power based on IP ownership; • CASE: When the Malaria Venture Initiative (MVI) ‘mapped’ the patent status of the MSP-1 antigen, it found 39 different families of patents with monopoly scope impinging on it; • No notion of ‘near market’ or ‘near scratch’ developers.

24. Problems with underlying model 2 • No benefits in sharing information across vaccine developers. No ‘know-how’ monopoly: • Not good for describing projects involving science with lots of feedback loops, ‘collaboration’ and the sharing of information (HIV, malaria, and tuberculosis vaccine research); • Lots of incentive to hoard information; • CASE: Existing developed economy patent holders, facing a potentially emerging-economy competitor, can exploit ‘secret’ know-how (as well as more general technical know-how, and undisclosed test or other data), including refusing to contract to transfer necessary know-how, thus creating a barrier to entry. Given the mechanism for distributing payments, there is a strong incentive to ‘hold out’ under APCs; • Lack of know-how (extremely important for biological products) makes many disciplining threats non-credible (e.g. compulsory licenses if vaccine developers refuse to supply).

25. Problems with underlying model 3 • No variation in the probabilities of discovery over the vaccine development process: • No ‘easy’ or ‘difficult’ stretches of science. • No ways for technology to improve or deteriorate over time: • No ‘technology shocks’,‘scientific breakthroughs or deteriorations’; • No need to incentivize such breakthroughs. • No sunk costs. • No large incumbent firms – instead perfect competition everywhere and always. • No strategic behaviour of any sort, and of any firm, based on sunk costs, patent ownership, finance, or any other real-world factor.

26. Problems with underlying model 4 • Extremely good understanding of the state of current and future (extremely simple) science. • No coordination problems across public and private sectors in their research decisions at a single point in time and over time. • No coordination problems across public and private sectors and all countries in their vaccine purchase decisions and in their provision of vaccine delivery systems. • An idealised, non-cyclical, set of financial markets. • No pipelines of products, no problems with vaccine resistance. • No composite vaccines, and no therapeutic vaccines. • Wide range of delivery issues ignored. • APCs need to be designed to handle/avoid these issues.

27. Some very rough HIV figures 1 • 10 firms put in equal effort on an early-stage HIV vaccine (we maintain the fiction of competition for now; that the program encourages competition needs to be proved). • Presume this is the optimal number of firms (we can’t). • Expected 70% of capital costs (a guess - no figures released…but presumed high for an HIV APC). • Presume one firm wins (supposedly, several could). • $6.25bn (pre-April 2005 figures) goes to a firm having spent, in present discounted (2005) terms, less than $200m, on private out-of-pocket research costs (this is a figure for purely illustrative purposes). • This is the efficient and ‘fair’ outcome and not being critiqued here…But it does create problems for firms and the committee running the program, as we will see later.

28. Some very rough HIV figures 2 • With no ‘crowding out’, the $6.25bn ‘pays for’: • $1.875bn of out-of-pocket HIV R&D costs across all firms; • $4.375bn of capital (i.e. finance) costs. • With 50% ‘crowding out’ (explained below) and other inefficiencies, the $6.25bn would pay for: • about $900m of new out-of-pocket research costs; • about 9 months’ worth of what those working on the Global HIV Vaccine Enterprise say is actually needed. • The most likely response of firms – no response at all? • Again, these figures are very rough, and for illustrative purposes only.

29. Some very rough HIV figures 3 • We can look at HIV from another angle. • HIV vaccines likely to take a minimum of 15 years to develop. • $1.2bn per year of out-of-pocket research and trial costs needed (IAVA 2004), i.e. double the current level. • Replacing this flow for 15 years with an APC at the end, would cost: • $85bn (if required nominal rate of return 20%); • $130bn (if required nominal rate of return 25%); • Uncertainty about ever getting a vaccine is embedded in capital costs; • ‘Crowding out’ would make the figures worse; • ‘Reputational risk’ would make the figures worse. • These are low rates of return by venture capital standards, and exclude the (still likely very high) costs after 15 years.

30. Some very rough HIV figures 4 • So, where does the MM figure of $3bn come from? • Where does the notion of multiple developers come from? • Need for a mega-blockbuster if using APC route for HIV? • Maybe this is why private firms currently spend so very little on HIV vaccine research in spite of there being a sizeable extant market for some clades of HIV? • How large are politicians prepared to make APC funds for HIV vaccines? • Are they prepared to massively ‘top up’ later? • Is it realistic to believe that funding levels for such programs for HIV will be set high enough with no pressure to readjust firm payoffs down later? • All MM cost effectiveness figures are worked out on basis of the $3bn and not on the basis of these much larger figures for HIV.

31. Some very rough figures for firms • For a vaccine costing $25 per course of treatment, the ‘best-case’ scenario (no crowding out, but high capital costs) is: • $1-$2 for production and distribution; • $6-$7 for private out-of-pocket R&D costs; • $16-$18 for the cost of finance. • With 50% ‘crowding’ out: • About $3 for new private out-of-pocket R&D costs. • But it is not clear that an HIV vaccine could be manufactured for a dollar or so (especially in early days): • Previous experiences with vaccine introductions suggest problems; • Too little manufacturing competition to drive prices that low; • IP held in too few hands; • Ex ante worries that this will be the case, will undermine incentives to do R&D in the first place (More on this below).

32. Figures for currently existing and late-stage vaccines • The above are very, very rough figures, since paucity of information is such that we really do not have much of a handle on these issues. • We can say, however, that the above proportions are completely the converse for currently existing vaccines, and, indeed, for many late-stage vaccines: • Much lower capital costs because of much lower risk, especially risks of the mechanism itself; • No crowding out (because of the ability to use competitive tenders and other ‘separation’ devices); • Much more easy to set efficient terms (because of competitive tenders and other devices to reveal information, and good information on technology, etc.).

33. Impossible to set size efficiently • Each APC should be set commensurate with the difficulty of the underlying science and the cost of the R&D of developing the vaccine at hand. • MM suggests $3bn per disease for HIV, malaria, and TB. Setting this right is a “crucial detail”(MM April 2005): • For no obvious reason, the figure is much lower than in draft versions of the report (of even just a few months ago); • Though this was recently described, though not in MM itself, as for ‘illustrative’ purposes only. • Needs a methodology based on expected: • Complexity of underlying science; • R&D costs (also depending on types of firms encouraged); • Epidemiology; • Production costs, etc. • NOTE: Not just information on the medical condition itself.

34. Not a good idea to base on ‘typical market size’ • An ‘auction’ and heavy monitoring suggested to set ‘size’: • Couldn’t work – so abandoned. • Now ‘size’ based on ‘typical market size’ of new drugs and heavy monitoring to check firms are investing ‘enough’: • Implicitly this means that the size is based on the typical costs of developing suchdrugs, since, in equilibrium, investment in drug development should be driven to the point where this is the case; • This methodology is therefore essentially random for these early-stage vaccines; • Overestimates (per unit) innovation costs of developing and emerging country innovators, even as they struggle to take advantage of APCs, even as it underestimates eventual costs if dependent on APC and developed country developers.

35. Setting size too high is wasteful • Racing, duplication. • Even less incentive not to ‘share’ information. • Rent-seeking/lobbying/corruption. • Reduced resources made available for other vaccines and treatments, sanitation, nutrition, housing, etc. • If using an International Financing Facility, IFF, overly-high (and overly-low) APCs add to the risk the IFF bears. • Extra deadweight losses of taxation and the opportunity cost of the other projects that foundations, governments, and the IFF are prevented from doing. • If firms are not perfectly competitive, shareholders gain something (ceteris paribus) – but at the expense of neglected diseases and other poverty alleviation projects.

36. Other reasons for overpayment • ‘Me-too’ drugs/vaccines partly discipline patented drug/vaccine prices. • For purchases of underused vaccines, price disciplined by competitive tender, competition, access to IP, etc. • These disciplining devices are lost under APCs for early-stage vaccines. • Discipline in APC via committee and pre-agreed rules: • But pre-agreed rules are hard to set and to credibly follow through. • RESULT: Higher payment for given (lower) quality. • Self-fulfilling incentive ex ante also to work on ‘lower quality’. • There is also an additional ratchet effect: No adjustment downwards if R&D costs are reduced by technological advances or by improved publicly funded initiatives, etc.

37. Setting size too low is wasteful 1 • Get no, or too little, extra private funding into R&D. • Can raise size at the rate of interest rate. But no faster: • Raising the size of the APC acts like an extra discount factor; • Early investment becomes even more expensive; • Firms delay investment. • But the rule about raising ‘size’ is difficult to set: • How is the start level chosen? • How is the speed of rise set? • How is judgment made that not enough investment has taken place, without good monitoring and given that the ‘result’ on which to base judgment is only provided at the end? • Are politicians willing to sign on to such open-ended programs? • Current CGD thinking is that this is too difficult (or politically unacceptable), and this is not planned (or CGD are not yet saying how later re-adjustment will happen).

38. Setting size too low is wasteful 2 • Development costs highly uncertain. • CGD “after a long deliberation process did not narrow down beyond the range of $15-$25 per treatment”* • The upper bound being 167% of the lower bound. • If size starts, optimistically, at the bottom of the range when actual costs are at the top of the range, and 10% interest rate – it takes 8 years till APC has any effect (or it collapses first). • If real R&D costs also grow at 5% per year (starting at the optimistic end of range) – it takes 15 years to have any effect. • Consequence is delay, and strong pressures towards ‘poorer quality’ (broadly defined) at any given APC size in order ‘to get a result’. * Maurer S. “The Right Tool(s): Designing Cost-Effective Strategies for Neglected Disease Research”, Goldman School of Public Policy, University of California at Berkeley, March 2005. Figures on this page from Maurer paper.

39. Some too high, others too low • Some vaccines set way too low. Get no or little response: • $3bn for HIV? No connection to reality? • Overconfidence in ability to revise upwards later? • Other vaccines set too high and wasteful. • Other cases, strong incentive to head for more ‘limited quality’: • Current malaria vaccine policy? • We never get to see the ‘good outcomes’ that we never get because of poorly-set initial terms. • Overall a poor deal compared to alternatives? • It depends on how well alternatives cope with incentivizing ‘effort’, and dealing with failures in vaccine R&D portfolios. • Yet, funder of program reserves right to abandon the mechanism if it is not working ‘enough’?

40. Getting it wrong for HIV? “If scientific complexity means that R&D costs are much higher for an HIV vaccine than for other medicines, then $3bn may be too low to stimulate sufficient investment… Note that, if the commitment is too small to stimulate industry investment, and therefore does not succeed, there is no cost to sponsors.” CGD ‘FAQ’ sheet, April 2005.

41. Would a $3bn HIV purchase commitment simply ‘collapse’? • Political limits to a program without any effect (especially if high transactions costs to GAVI, Vaccine Fund, WHO, and others of setting up and running the program). • Collapse is self-fulfilling (investors will not trust that any early investment will yield a payback, so don’t bother). • ‘Collapse’ incorporates cases where – to avoid litigation – the mechanism ‘does nothing’ but sits ready to activate – even if very destructive meanwhile – after an alternative approach has been successful. • Worse if other approaches have stalled to make room for this approach. • The sole criteria of “the (political) willingness of sponsors and recipient governments to pay” (MM p52, word inserted) for dictating the size chosen, is a non-criterion.

42. More ‘pay-as-you-go’ better? • This suggests more ‘pay-as-you-go’ may be more capable of adapting to changing environment and less likely to fail to get a result (if set too low) or to overpay (if set too high). • It depends on how good PPPs and others can be made at dropping failing projects. • Note, alternative approaches still potentially include commercial involvement. • Current low levels of ‘commercial’ involvement in PPPs is more a fault of the shoestring funding of PPPs than of any specific failings of PPPs.

43. Technical requirements in advance? 1 • “it would be possible – though complicated – to agree to product requirements in advance…a small number of public health experts were concerned that it would be difficult to establish in advance technical requirements that a vaccine would need to meet.”MM March 2005 p58, and final report. • Some set of technical requirements always possible. • But ‘efficiency’ of those technical requirements requires some notion of the underlying feasibility of HIV, malaria and tuberculosis science, the potential costs of manufacture and distribution, epidemiology, etc. (i.e. many factors, and not just medical issues). • So “fixed enough to avoid the danger that the sponsor would renege, but flexible enough to accommodate contingencies that were not foreseen at the time the rules were established.”MM March 2005 p43, and final report.

44. Technical requirements in advance? 2 • Shifts problem to a different level – of having a good notion of potentialunforeseencontingences when setting the original rules. • An inability to set efficient technical specifications for each vaccine far in advance: • Potential for great deal of discretion and interference later; • Risk that term-setters are unwilling to admit they ‘got it wrong’ and to reset the terms ‘more efficiently’ later (though they can only correct themselves in the downwards direction); • Risky for all developers, but more so for some than for others; • Most risky for those unable to ‘influence’ the committee; • It is expectations of all of this that matter to investors.

45. Minimum vaccine requirements 1 • Minimum vaccine requirements set at the start: • But, an efficient technical specification, closely resembling the eventual possible vaccine, would be impossible to set so far out for HIV, malaria, and tuberculosis. • Discretion of as few as four members of a committee to “grant waivers and make modifications” (MM April 2005) but only to lower those requirements – never to raise them. • This asymmetry is bad policy in light of future possible improvements in science and possible future epidemiology. • But symmetric ability to raise requirements as well as to lower requirements creates risks for firms, and is irreconcilable with the current MM mechanism. • A dilemma.

46. Minimum vaccine requirements 2 • Constant pressures to lower the minimum acceptable requirements towards the very lowest level of any epidemiological value. • In successive drafts of MM, malaria vaccine requirements gravitated ever-lower: • Final report: 50% efficacy for 24 months from up to four doses; • This requirement (and the $3bn size) was recently described as for ‘illustrative’ purposes only. • A program that militates against the development of useful vaccines that far exceed minimum requirements?

47. Problems setting the long-term price • Contracts call for determination, at the time of signing, of the ‘guaranteed’ long-term price, or of an ex ante methodology for determining the long-term price. • ‘Legal’ obligation to supply at this price in the long-term in return for having had the short-term advantage of initial sales at very high, heavily subsidized, guaranteed prices. • The $3bn is payment, in part, for this. • A “critical component of the advance market commitment” (MM report April 2005) and key to its claim as the way to end ten to fifteen year delays in access to new vaccines. • No such methodology for setting long-term price exists (see NIH evidence). • CGD advised price could range from $0.50 to $15.00, and that no such guarantee could be inserted into contracts. • Left blank in MM contract term sheets.

48. What if firms won’t/can’t supply? 1 • Firm can always refuse to supply at short-term price (e.g. in order to supply a more lucrative market for HIV first). • If cost not low enough, or firm “prefers” not to sell to ‘eligible’ countries at the long-term price, contract allows sponsor to ‘acquire’ right to produce: • Supplier(s) turn over IP to the sponsor – but supplier may not have the right to sublicense all the IP; • Conflicts because supplier retains IP rights to ’non-eligible’ markets; • Sponsor has difficulties acquiring ‘know how’ and production; • Threat undermines incentives to invest in vaccine R&D; • Threat undermines incentives to invest in vaccine delivery systems; • Severe supply shortages and damaging access delays; • Reputational damage issues for supplier and sponsor(s); • Not credible way to discipline firms.

49. What if firms won’t/can’t supply? 2 • Contract term sheets say “other penalties” such as “liquidated damages provisions” imposed on supplier: • Contract leaves details blank; • Threat feeds back to weaken ex ante incentives to invest in R&D in the first place (especially if provisions are so vague); • Threat can create perverse incentive not to supply eligible market in the first place or delay supplying eligible market: • HIV vaccine in particular, given richer non-eligible markets and the option value of the APC given the different HIV clades. • Threat weakens incentive to invest in vaccine delivery systems; • Not credible way to discipline firms. • Contract term sheets leave blank those sections specifying remedies in the event of a breach.

50. What if firms won’t/can’t supply? 3 • IP and know-how barriers have been principal causes of delays in achieving flexible, cost-effective manufacturing and quick access to vaccines for the poor in the past. • Now control of IP and know-how part of a threat mechanism to drive the contracts! • If the threats do not work, how do production costs get low enough to supply the ex post market? • Lack of competition; • Weakened price signals due to the presence of the APC; • Lack of access to technology; • Insufficient pressures to lower production costs; • This is all contrary to, e.g., the Hepatitis B case, and to application of APC-type arrangements to current late-stage vaccines.