Sometimes an argument by an academic economist helps to trigger a process that saves 700,000 lives. This is the story of what\’s called an \”advance market commitment\”–a contractual agreement by governments, international organizations and nonprofits to purchase a certain amount of a vaccination or drug, if and when that drug is developed. An advance market commitment launched in 2009 helped lead to the development and distribution of a pneumococcal vaccine for low-income countries, which in turn led to the development of three vaccines that have been used to immunize 150 million children , saving an estimated 700,000 lives.
Michael Kremer, Jonathan D. Levin, and Christopher M. Snyder tell the story in \”Advance Market Commitments: Insights from Theory and Experience\” (February 2020, NBER Working Paper 26775). This is a more polished follow-up to a working paper presented at a session of the Allied Social Science Associations (ASSA) meetings in January.
Kremer, in particular, as been pushing the idea of advance market commitments for several decades. For example, back in the Fall 2002 issue of the Journal of Economic Perspectives (where I work as Managing Editor), he wrote an article about \”Pharmaceuticals and the Developing World\” (pp. 67-90). He pointed out that a number of diseases had their primary effect in low-income countries and that drug companies in high-income countries had a limited incentive to focus on these diseases. Kremer wrote:
However, the most severe distortions in developing country pharmaceutical markets probably involve dynamic issues. Pharmaceutical firms are reluctant to invest in R&D on the diseases that primarily affect developing countries not only because the poverty of the potential users reduces their willingness to pay, but also because the potential revenue from product sales is far smaller than the sum of customers’ potential willingness to pay due to the lack of intellectual property protection and the tendency for governments to force prices down after firms have sunk their research and development costs. …
Programs to encourage R&D can take two broad forms. “Push” programs subsidize research inputs—for example, through grants to researchers or R&D tax credits. “Pull” programs reward research outputs, for example, by committing in advance to purchase a specified amount of a desired product at a specified price. Both approaches have important roles, but current policy underutilizes pull programs. …
[U]nder pull programs, the public pays nothing unless a viable product is developed. Pull programs give researchers incentives to self-select projects with a reasonable chance of yielding a viable product and to focus on developing a marketable product. Under pull programs, governments do not need to “pick winners” among R&D proposals—they simply need to decide what success would be worth to society and offer a corresponding reward. Moreover, appropriately designed pull programs can help ensure that if new products are developed, they will reach those who need them. One kind of pull program is a purchase commitment in which sponsors would commit to purchase a specified number of doses at a specified price if a vaccine meeting certain specifications were developed. … An example of a purchase commitment would be for developed countries or private foundations to commit to purchase malaria vaccine at $5 per immunized person and to make it available to developing countries either free or for a modest copayment.
A working group under the auspices of the Center for Global Development, chaired by Ruth Levine, Michael Kremer, Alice Albright, thought in more concrete terms about how to design advanced market commitments so that they would be enforceable contracts, and published its report in 2005.
Kremer, Levin, and Snyder summarize what happened next:
In 2007, five countries and the Gates Foundation pledged $1.5 billion toward a pilot AMC targeting a pneumococcal conjugate vaccine (PCV). The World Health Organization (WHO) estimated pneumococcus killed more than 700,000 children under five in developing countries annually at that time (WHO 2007). A PCV covering disease strains prevalent in developed countries already existed, and PCVs covering the strains in developing countries were in late-stage clinical trials; so this was a technologically close target.
In 2009, the AMC launched under the supervision of GAVI (formerly the Global Alliance for Vaccines and Immunizations). The design called for firms to compete for ten-year supply contracts capping price at $3.50 per dose. A firm committing to supply 𝑋𝑋 million annual doses (𝑋𝑋/200 of the projected 200 million annual need) would secure an 𝑋𝑋/200 share of the $1.5 billion AMC fund, paid out as a per-dose subsidy for initial purchases. The AMC covered the 73 countries below an income threshold for GAVI eligibility. Country co-payments were set according to standard GAVI rules.
