American Journal of Law & Medicine

Addressing supply side barriers to introduction of new vaccines to the developing world.(Symposium)

ABSTRACT

Low-income countries experience significant morbidity and mortality from avoidable infectious diseases, but all too often life-saving innovative vaccines are only available in high-income markets. The Generic Open (GO) license proposal posits that an increase in generic entry will lower prices through greater competition and increase vaccine availability in low-income markets. However, the GO proposal, as currently structured, is unlikely to function as envisioned in the vaccine market. Innovator vaccine firms will be unlikely to participate in the program because the payments in the GO license do not adequately compensate firms for all lost profits. Additionally, the price reductions from competitive entry are unlikely because the vaccine market is already characterized by low, and in some cases unsustainable, prices. I propose a potential adaptation where developing world vaccine manufacturers serve as contract suppliers to innovator firms for a given period of time. Donors could also share in the initial costs of capacity with the developing worm manufacturers. Sales of developing world manufactured vaccines would be sold solely to UN procurement agencies under a confidential pricing or rebate system. This would increase overall product availability, maintain market separation, and decrease costs to UN agencies.

INTRODUCTION

Low-income countries (LICs) shoulder a disproportionate share of the disease burden for many global diseases. Tragically, much of the mortality and morbidity associated with these diseases are avoidable because effective treatment and prevention exist in wealthier countries. (1) For example, cervical cancer is estimated to cause 286,000 deaths annually worldwide with over 80 percent of the mortality in low and lower-middle income countries. (2) Two new vaccines (3) that target the major cause of cervical cancer, the human papilloma virus (HPV), have been shown to be safe and effective, and have been introduced in a number of high-income markets. (4) However, it has typically taken 10 to 20 years to introduce new vaccines into LICs after their approval in higher income markets. (5) Even after introduction, the supply of vaccines has been unstable. If history is a guide, many of these now avoidable deaths caused by cervical cancer will still occur in these countries.

There are multiple causes for the long lag in introduction and episodic supply of new medicines to less developed countries. For example, many authors (6) have posited that patent and intellectual property (IP) rights lead to higher prices, which place these products out of the reach of the majority of consumers in low-income markets. Compounding this problem is the fact that decision makers in low-income markets are faced with problems of episodic donor funding and ephemeral political will resulting from limited awareness of the disease burden. (7)

A number of policies are currently being debated to address these problems, one of which is the Generic Open (GO) license. This novel proposal, as described by Outterson and Kesselheim, posits that the time and costs to introduce new pharmaceuticals and vaccines can be reduced through a market-based approach that will encourage generic competition. (8) Theoretically the increased competition would lower prices towards marginal cost, and ultimately improve the sustainable access to pharmaceuticals and vaccines. The GO proposal is based on creating a voluntary license that will automatically go into effect after a new pharmaceutical or vaccine is invented, allowing any generic manufacturer to license, produce, and sell these products in middle-income and less-developed markets. In exchange for allowing generic companies to manufacture and sell their inventions, the originating companies would receive royalty payments. The royalty payments would be based on the patent rents that an innovator firm would have expected to receive from selling the product in middle and low-income markets. The royalty rate would be close to zero for sales to LIC markets because there is limited expectation that these countries would contribute to the sunk cost of research and development (R&D). For middle-income markets, the royalty would be based on the percent of sales that are usually dedicated to R&D. (9) The innovator firm would also receive political and public relations benefits from being associated with helping to alleviate the suffering from preventable diseases in LICs. The generic companies would benefit from access to new products and increased profits from sales in middle-income markets. Because the license is open to all generic suppliers, it is expected that competitive entry would cause prices to approach marginal cost in low-income markets. In theory, overall societal welfare would be improved because an increased number of people would have quicker access to life-saving pharmaceuticals and vaccines at lower prices. An additional benefit to the GO license is that it could easily work in a complementary fashion with existing donor and public-private activities. (10) The lower prices created from increased competition would allow donor funds to go further and to be spent in a more cost-effective manner. Specifically, the GO license proposal posits that it would be an effective tool to help accelerate the introduction of the HPV vaccines to less developed countries.

An evaluation of the merits of any new policy intervention targeted towards correcting a market failure (in this case, the socially wasteful delay and limited uptake of new, life-saving vaccines) will hinge on analysis along two specific dimensions. First, the causes of the market failures must be accurately identified. Second, it must be determined if the policy intervention effectively addresses these market failures in order to allow for the efficient flow of product. For the vaccine market, we have to understand the reasons for delayed product introduction into less developed markets. Based on this, the following questions arise: will the GO license encourage innovator firms to voluntarily participate; are the incentives sufficient to induce generic entry; and will increased competition result in prices that are below those that currently exist?

The GO license proposal rests on three key assumptions. First, innovator firms are choosing not to introduce products to LICs because of concerns around patent protection and market separation. The GO proposal posits that under these conditions the royalty payment based on foregone patent rents should then be sufficient to induce innovator firm participation. Second, if innovator firms voluntarily participate in the open licensing agreement, generic firms will wish to purchase GO licensing rights because of higher expected profits from middle-income market sales. Third, generic entry and competition will be sufficient to drive prices towards marginal costs, reduce overall costs to donors and countries, and increase the uptake of vaccines in LICs. This article critically examines these assumptions--focusing on the market for vaccines and, specifically, the HPV vaccine--to determine if the GO license proposal is likely to succeed.

I argue that patents are not the primary reason for delayed introduction of new vaccine products (11) in the LIC markets. Therefore, royalty payments based on lost patent rents will not be sufficient to encourage voluntary participation. Additionally, the GO proposal requirement to allow generic selling of licensed products in middle-income markets is highly problematic. This requirement will require a significant increase in the royalty payments in order to assure innovator firm participation. The GO license proposal posits that this is necessary to encourage generic entry; however, it may not be necessary because new manufacturers may be willing to participate under a different set of conditions. I also argue that the significant amount of buyer power in the vaccine market already depresses prices to low levels. Price reductions due solely to increased competition are unlikely to produce additional savings.

I conclude by presenting an alternative option that could be part of an amended licensing agreement for vaccines. Innovator vaccine firms possess a high level of technological know-how that is protected by secrecy. Firms retain these secrets in order to assure continued profits over long periods of time; however, these innovations are not disseminated beyond the firm. An additional problem in the vaccine market is that there is a significant amount of demand uncertainty in a low price market, which impacts capacity investment decisions, especially for LIC markets. The problem is that innovator firms, who wish to retain control of valuable know-how, cannot also justify investing in additional capacity because of the high degree of demand uncertainty. Encouraging innovator firms to enter into time-limited contract manufacturing agreements with developing world vaccine manufacturers may be a solution to this pernicious problem. Developing world vaccine manufacturers may provide cost and capacity advantages that will lower prices to LICs. Additionally, donors may wish to provide some initial funding to developing world vaccine manufacturers to offset some of the sunk costs. Finally, sales would be limited to UN procurement agencies, with a confidential pricing or rebate system, which will allow for market separation between and within countries. This will encourage greater uptake of new vaccines at lower prices and provide for the socially beneficial dissemination of technological know-how.

I. THE VACCINE MARKET

I begin my analysis of the potential effectiveness of the GO license proposal to accelerate the introduction of the HPV vaccine into low-income countries (LICs) by describing the major relevant features of the global vaccine market. The vaccine market has many distinct features from the global pharmaceutical market that will influence the design and effectiveness of policies.

Vaccines are produced by using biological organisms in the manufacturing process. Biologic production is highly variable, requires production under sterile conditions, and often requires that production facilities be dedicated to specific vaccines. (12) The biological nature of manufacturing also does not permit full characterization of the product, and in order to assure the safety and efficacy of these products, strict regulatory oversight is required for both the product as well as the overall manufacturing process. Typically, a national regulatory authority oversees the production and release of vaccines and assures safety and efficacy. (13) For vaccines that are destined for less developed and some middle-income countries, the World Health Organization (WHO) prequalifies (14) vaccines and vaccine manufacturers to assure that processing is controlled at levels ensuring minimal standards of safety and efficacy. Strict regulation of vaccine production is necessary to assure product quality, but can have the unintended effect of limiting the number of manufacturers by creating regulatory barriers to entry. For example, in 2003, only four of the 18 manufacturers of the Bacille Calmette-Guerin (BCG) vaccine for tuberculosis were prequalified, even though BCG is a relatively old and an easily produced vaccine. (15) In addition, the ever-increasing regulatory oversight, the complexity of vaccine production, and the inherent manufacturing variability result in vaccines having high fixed and variable costs. (16)

The global supply of vaccines is dependent upon firms based in both high-income and developing countries. (17) Almost all vaccine innovation currently comes from multinational pharmaceutical firms who derive the majority of their profits from high-income markets. (18) However, these firms also supply a large portion of the low-income and middle-income markets' demand. (19) Traditional generic manufacturing does not exist for vaccines because these biological products are not currently fully characterizable, (20) however there is growing capacity and capabilities in the developing world. Developing country manufacturers (21) are becoming an increasingly important supplier of vaccines to low and middle-income countries. These firms could play a critical role in licensing arrangements targeted towards decreasing the time and cost of introduction of newer vaccines. (22) Currently however, developing world vaccine manufacturers focus on mature products, such as the traditional six Expanded Program of Immunization (EPI) antigens, (23) which is in part a result of company expertise being limited to particular technologies. (24)

Government and nongovernmental procurement agencies are highly involved in the purchasing of vaccines because of three factors. First, the actual consumers of vaccines typically undervalue the full benefit of vaccines because they must incur current costs (i.e., direct payment, injection pain, and potential side-effects), in exchange for future benefits (i.e., avoidance of potential illness). (25) Second, increasing vaccination rates reduces the incidence of these diseases and lowers consumers' valuation of immunization because of a lower likelihood of contracting the diseases, or "prevalence elasticity." (26) Third, vaccines also have a direct externality effect in the form of the so-called "herd-immunity." (27) These factors have been cited as reasons for government involvement (28) in vaccine markets through direct governmental procurement and mandatory vaccination programs.

A large volume of vaccines are purchased by governments or other centralized procurement agencies. (29) For example, once a product has been pre-qualified, (30) it is available to be procured by UN agencies on behalf of the countries they represent. The United Nations Children's Fund (UNICEF) procures vaccines for almost all less developed countries, while the Pan American Health Organization (PAHO) procures vaccines for a large portion of Latin America. UNICEF procures supplies and vaccines for 80 to 100 countries and on behalf of 55 percent of the world's children. They are the largest single buyer of vaccines based on volume, purchasing over 2 billion doses per year; however they only represent five percent of total global vaccine revenues. (31) PAHO provides procurement services for their 37 member states that represent an important segment of the middle-income markets. (32) Typically, UNICEF and PAHO receive the annual vaccine demand from the countries they represent, which they then aggregate and solicit bids from the different vaccine manufacturers through a tender process. (33) The aggregation of demand across countries and the utilization of a centralized procurement system has allowed for these organizations to keep prices relatively low for existing vaccines. (34) However, this structure may have had the unintended effect of decreasing the available capacity for existing vaccines and limiting the incentive for introduction of new and underutilized vaccines because of a low profit incentive, at least in LIC markets. …

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