ADVANCE MARKET COMMITMENTS FOR VACCINES ...

ADVANCE MARKET COMMITMENTS FOR VACCINES AGAINST NEGLECTED DISEASES: ESTIMATING COSTSAND EFFECTIVENESS,

E. R. BERNDT ET AL., HEALTH ECONOMICS, 2006

Summary: The G8 is considering committing to purchase vaccines against diseases concentrated in low-income countries (ifand when desirable vaccines are developed) as a way to spur research and development on vaccines for thesediseases. Under such an ‘advance market commitment,’ one or more sponsors would commit to a minimum price tobe paid per person immunized for an eligible product, up to a certain number of individuals immunized. For additional purchases, the price would eventually drop to close to marginal cost. If no suitable product were developed, no payments would be made. We estimate the offer size which would make revenues similar to the revenues realized from investments in typical existing commercial pharmaceutical products, as well as the degree towhich various model contracts and assumptions would affect the cost-effectiveness of such a commitment. ...

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• Rather than attempt to guess how much it would cost to develop a vaccine for a disease such as HIV,our strategy is therefore to ask how large a commitment would be needed to give developers incentives comparable to product markets for diseases prevalent in rich countries. To outline our approach asdescribed in this section, we first estimate the NPV of revenues earned by a sample of recently launched commercial pharmaceutical products. We then adjust this figure to account for the fact that developersof a vaccine under an advance market commitment would likely have lower marketing costs, and thus require somewhat lower revenues to generate the same incentive to invest in R&D.6 We also...
• The most recent comprehensive evidence of sales revenues for biopharmaceutical products is a paper byGrabowski et al. (2002) ... on 118 new chemical entities (NCEs) that were introduced into the US pharmaceutical market between 1990 and 1994. An important finding ... is that the revenue distribution over the sample set of products is not only widely distributed, but is also highly skewed. In particular, ... the top selling 10% of products earn approximately half of the total market revenues (in terms of worldwide sales). Using separate estimates of the cost of pharmaceutical development, [the report] also find[s] that sales revenues of the median NCE are insufficient to break even, implying the mean sales revenue may provide a more reliable estimate of what level of expected revenues may be effective in spurring industry investment.
• To transform the revenue stream into a NPV, we assume an estimated industry-wide real cost of capital (that is, earnings foregone on other investment opportunities) of 8%, close to the annual average return on the stock market (Siegal, 1998).[n9] This real rate of 8% is equivalent to a nominal cost of capital of 11%, assuming 3% inflation. Using the sales revenue data together with this assumption of an 8% real cost of capital, the NPV of revenues (pre-tax, and gross of plant, equipment, promotion and marketing, production, and distribution costs) derived over the life cycle of the average product in theGrabowski et al. sample is $3.44 billion (in 2004 dollars).[n10]
• To obtain concrete cost-effectiveness numbers we also need to consider a particular set of contract provisions and vaccine characteristics including assumptions about which countries would participate in the program, vaccine adoption rates, and sources of additional revenue to the vaccine supplier (e.g.travelers’ or military purchases). These parameters and assumptions can be modified in the spreadsheet,thus allowing the user to investigate the impact of alternative contract parameters and different assumptions regarding take-up, disease burden, etc. For example, the spreadsheet allows the user to assess the revenue and cost-effectiveness consequences of different combinations of price, quantity, and vaccine characteristics. Based on the user inputs as well as recent data compiled on disease burden and population, the spreadsheet outputs the cost per disability adjusted life year (DALY) saved by the program and the NPV of revenues that would accrue to the vaccine supplier.
• A vaccine commitment would also be cost-effective at the time of vaccine development under a wide range of contract provisions. For example, to match the revenues of drugs falling between the 70th and80th percentile and generating a market roughly comparable to $3.61 billion in NPV of sales, a commitment could offer $17 per person immunized for the first 200 million people immunized, at a cost of about $16 per DALY saved. To match the revenues of drugs falling between the 80th and 90th percentile and generating a market roughly comparable to $5.73 billion in NPV of sales, a commitment could offer $25 per person immunized for the first 250 million people immunized, at a cost of about $23 per DALY saved. As discussed below, if raising the price offered per person immunized accelerated the vaccine development time, a larger commitment might prove more attractive than a smaller one.