How can funding be structured to incentivise the rapid production of a vaccine for coronavirus? Elias Papaioannou, Professor of Economics at London Business School and Academic Director of the Wheeler Institute for Business and Development was joined in conversation with Christopher Snyder, Professor of Economics at Dartmouth College, to discuss how an advanced market commitment could help speed the development of a vaccine for COVID-19.
- Novel ways of funding the development of vaccines could be used to boost the identification and production of a vaccine for COVID-19;
- There are huge economic losses expected, with the IMF estimating up to $9 trillion, therefore governments should invest a proportion of GDP to speed up the development of a vaccine;
- The benefits of international cooperation will lead to a greater chance of success that a candidate vaccine is found quicker, as well as enable access to superior supply chain capabilities;
- Vaccine nationalism effects will be mitigated by developing enough capacity to supply global demand
An ‘Advanced Market Commitment’ approach might help speed up the development of a vaccine for COVID-19
Snyder has been part of the research led by Michael Kremer, which describes the ‘Advanced Market Commitment’ to the development of vaccines for neglected diseases in poor countries in ‘Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases’. As these markets are not lucrative, they require donor agencies and donor countries to provide funding. This payment mechanism means the company is paid for the production of a vaccine and is tied to the number of doses administered. This provides security to companies, as the donors have pre-committed funding into R&D and production capacity, while the donors avoid funding a vaccine that is not useful for the target audience, so they only pay for successful or useful products.
A pilot programme incentivised capacity investments for a vaccine against pneumococcus, the leading preventable killer of children under five. This required $1.5bn of funding, but accelerated rollout by 5 years, saving the lives of an estimated 700,000 children’s lives. With the spread of Coronavirus worldwide, much work has been done to identify whether a similar approach could accelerate the development of a vaccine for COVID-19.
Accelerating the development of a vaccine by just one month could prevent $375bn of economic losses
Three principles underpin Snyder’s approach. The first being that because the situation is so unprecedented, the response will have to be unprecedentedly big, in the way that it is hard to wrap your mind around how big he means. Secondly, there needs to be market shaping and incentives added to enlist firms to be part of the process. Finally, the approach works much better if, instead of focusing on individual countries, there is an international effort with widespread cooperation.
The scale of economic output losses expected by the IMF due to the current pandemic is $9 trillion, so accelerating the development of a vaccine by just one month could avoid losses of $375 billion, without considering the mortality, health and quality of life costs. Therefore, the unprecedented gain if we can end the crisis means we would be justified spending sums of money of that magnitude to develop a vaccine. Using a similar process to that of the pneumococcus project, Snyder is advocating governments invest 0.17%, one-fifth of 1% of their GDP in 2018, which would amount to $147 billion, to scale up capacity quickly for vaccine candidates. These specific recommendations are subject to change as the research team (Accelerate HT) he is participating on refines their data and model and more is learned about the coronavirus situation but provide a rough idea of orders of magnitude.
Snyder is pushing for this investment so that they can support 15-20 different vaccine candidates, with capacity built before phase three trials, so that there is huge capacity to support the demand for 1.5billion doses within a period of months. While some of this will be wasted on building capacity for candidates that do not eventually reach the market, the benefit of launching a successful vaccine far outweighs any investment. People are going to be reluctant to go back to their ordinary lives until a vaccine is ready and, in a sense, cures the whole pandemic. There needs to be a holistic approach when it comes to investment; not just vaccines but also health technology, testing and clinical trials.
Incentives need to help direct efforts to find a successful candidate at speed
There needs to be a mixture of ‘push’ and ‘pull’ funding. ‘Push’ funding, where the funder directly pays on a cost-plus basis for clinical trials, capacity and development, can be a cost-effective way of moving money to firms. Snyder thinks there should be considerable push funding, with as much as 85% of investment costs covered by the proposal, still leaving firms with some skin in the game, around 15%, to be incentivized with ‘pull’ funding. This residual firm-funded investment gives them the incentive to make realistic investments, which is the payment made for a successful candidate. It is important to provide incentives for intelligent investment that is directed toward a successful product, but it also the key to incentivising speed, because several firms might develop the ultimate candidate, the firm that is first with a successful product receives pull funding. The pull funding can be structured in many different ways, either through paying for the initial doses and a lower tail price.
There are a multitude of gains from international cooperation
Snyder refers to the ‘insurance value’ of exploring many different candidates across national borders. If each country just explored a single national champion with a domestic pharmaceutical manufacturer the country only gets one ‘shot on goal’. On the other hand, global cooperation provides 15 or 20 equivalent ‘shots on goal’, providing outsized value for your population. Another benefit of international coordination is the ability to optimise the candidate portfolio by developing across different platforms, therefore spreading the investment out maximises the chance of success. Furthermore, an international supply chain can resolve bottleneck issues, allowing for development where the capacity and components are already in place.
The ‘advanced market commitment’ approach will also prevent bidding wars breaking out between companies and countries. By building a programme that transcends national boundaries, countries collaborate with the development of a vaccine, with the side effect that countries are focussed on providing a solution to a global problem. By incentivising such vast capacity development to resolve a global problem, Snyder believes the risk that competition among countries to get their citizens first in line for a vaccine is mitigated. Even if the country that developed the vaccine first said they would prioritise their own population ahead of vulnerable people globally, this would only slow down the global rollout by a week or two, due to the enormous capacity, 1.5 billion doses in a month, that is being developed. Snyder thinks that implementing a large-scale programme with unprecedented scale and speed could reduce vaccine nationalism to a second-order problem. Policymakers should consider whether it is worth perfectly resolving the problem of vaccine nationalism if that entails delaying implementation of the entire programme.
There needs to be collaboration between world governments and private industry: neither one is the enemy of the other
The responsibilities lie not only with countries but also the vaccine industry, commercial manufacturers and firms across the global supply chain. Vaccines are an unusual product, with externalities that are often not captured by the market, and consumer benefit not captured by the firm. While this typically leads to government intervention, commercial manufacturers will also need to invest and collaborate.
Elias Papaioannou’s conversation with Christopher Snyder is part of the Wheeler Institute’s COVID-19 series – bringing together the expertise and experience of our extended community to understand, illuminate and offer solutions to the challenges created by COVID-19. Our differentiating factor is the role of business in addressing these challenges, with a focus on the implications and actions for those in developing countries.
If you’re interested in following the Wheeler Institute COVID-19 series, check out the previous episode below.
Elias Papaioannou is academic director of the Wheeler Institute for Business and Development and professor of economics at London Business School, focusing on international finance, political economy, applied econometrics and growth and development.
Christopher Snyder is the Joel Z. and Susan Hyatt Professor in the Economics Department at Dartmouth College. He specializes in the fields of industrial organization, law and economics, and microeconomic theory. He is a Research Associate in the National Bureau of Economic Research, Treasurer of the Industrial Organization Society, an Editor for the Journal of Law and Economics, and an Associate Editor for the Review of Industrial Organization.