Should We Pay Less for Vaccines?

Progressive development thinkers have welcomed the announcement of new money for the Global Alliance for Vaccination and Immunization (GAVI), and support the partnership between governments and the private sector.  A minority of NGOs have criticized GAVI on the grounds that it is too cozy with pharmaceutical companies.  But we should be encouraging more, not less, engagement by pharmaceutical companies in the health needs of developing countries.  Perhaps pharmaceutical companies have done more for the world’s poor than the aid industry?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 dealMSF 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 forIn 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 innovationOxfam 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 partnershipOne 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 PharmaMy 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.ConclusionThe 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.