Sources: Apart from widely known economic principles, this paper is based largely on grey literature and on consultation with colleagues in the world of vaccines and biologicals. Credit for many of the concepts discussed here should go to the members of the Global Alliance for Vaccines and Immunization, particularly the task forces on finance and on research and development. However, the views expressed here are my own and do not represent those of any other individual or organisation.

1. Technology R&D is driven by market forces. Demands for high return on investment result in a lack of investment capital for technologies for the poor. High fixed costs, high risks, and high barriers to market entry combined with intellectual property protection result in a lack of lower priced substitutes for health technologies.
2. There is market failure due to positive externalities, natural monopoly, and information asymmetry.
3. There are ways to address these market characteristics and market failures through both technology push and demand pull.

1. Market characteristics

The characteristics of the health technology business are high barriers to entry in the form of experience, knowledge and investment in production capacity, high risk in early phase R&D, a relatively long product cycle, and a demand for high rates of return on sales of successful products to compensate for the risk. Since investment capital is scarce by definition, it will be allocated to those R&D prospects that promise the best risk/return ratios. Since technologies aimed at the poor have just as high risk as those aimed at the rich, and because technologies aimed at the rich will have both a more predictable market and a larger one, market forces dictate that R&D for the poor will not be able to compete for investment capital.

Even though the poor are willing and able to pay a certain amount for health technologies, the lack of lower cost substitutes for health technologies developed for the rich leaves this market under-serviced. This is because the nature of the pharmaceutical industry, coupled with concerns over efficacy and safety, do not encourage the entry of manufacturers producing lower cost products. It could be argued that traditional medicine fills this gap in some cultures.

 

2. Market Failure

1. Demand pull and technology push can counteract these negative market forces and market failures

Demand pull means ensuring a profit motive for the production of technologies for the poor. Technology push means making the R&D process easier and faster, or giving it a head start through public investment. There are a variety of means of providing these pushes and pulls. These mechanisms take two forms. One form is increasing the efficiency of the market through improved access to information by industry, by consumers and by the consumers’ agents; harmonisation of standards; improved distribution systems; and so on. The other form is market distortion through subsidising risk. This includes subsidised R&D, subsidised investment capital, and so on. This market distortion is justified because of the market failures inherent in this system.

Here various mechanisms for technology push and demand pull are summarised for the purpose of stimulating thought, creativity, discussion and consensus on an approach to nurturing urgently needed technologies. It is likely that a set of interventions will be necessary to satisfy both the profit requirements of manufacturer and the urgent health needs of the poor. Each intervention is rated out of five stars in terms of its importance and urgency. These ratings were arrived at subjectively and should be viewed as the starting point for discussion. Suggestions for should implement the intervention are also provided.

 

Technology push:

***** Subsidised R&D: Public funds could be used to partly or wholly finance research and development for adapting technologies for use by the poorest countries or for technologies aimed only at diseases of the poor.

Implementation: Funding from developed country governments, philanthropists, foundations, NGOs and international agencies. Research by industry as well as by publicly funded researchers and industry in both the developed and developing countries.

***** Fast track approval: Shortened procedures and harmonization of international regulatory requirements would decrease expense and lower the time to market (and time is money). Perhaps a form of central world registration could solve the problem of producers in developed countries having to get through regulatory hurdles in countries where a technology will never actually be used. Some reciprocal agreements between countries to honour each other’s regulatory agency findings could also be very encouraging to industry. For example, the European Medicines Evaluation Agency (EMEA) promotes mutual recognition of standards.

Implementation: Government regulatory agencies.

***** Facilitation of trials in developing coutries: International organisations can decrease the risk and time involved in adapting technologies to the developing country context by facilitating or in some cases subsidising trials in developing countries. This should include developing local capacity and infrastructure for clinical trials.

Implementation: International agencies, industry, and research organisations, regulatory agencies and the medical community in developing countries.

***** Infrastructure for trials: Developing local infrastructure for clinical trials, as well as the human resources and regulatory environment would make adapting technologies a more attractive endeavour for industry. One possibility is the development of a publicly funded clinical trial facility in a developing country.

Implementation: International agencies, developing country governments.

***** Consensus on design and protocols for trials: International consensus on trial design and protocols would reduce the risk for industry. It is important for them to be sure that the trials they do are going to be accepted.

Implementation: international agencies, government regulatory agencies, industry.

***** Tax breaks for R&D: Tax-linked incentives for R&D are an established mechanism or public subsidy, and seem to work when complemented with other aspects of pull and push.

Implementation: Governments in countries with an R&D base.

***** Support for local regulatory capacity: Strong local regulatory capacity should facilitate harmonisation of quality standards, and may eventually lead to reciprocal agreements on trial results and resulting licences, decreasing R&D costs and reducing time to market. Strong local regulatory capacity also opens the door to the local production of safe and effective technologies, which should increase global production capacity for technologies for the poor.

Implementation: International agencies, developing country governments and regulatory agencies, developed country regulatory and technical agencies.

*** Support for technology transfer and local production: Where there is a strong local regulatory authority to assure quality, appropriate technology transfer can be supported as a means of increasing global production capacity. It should be noted, however, that this is not necessarily a means of producing a low cost product.

Implementation: International agencies, industry, developing country governments, NGOs.

*** Public-private research partnerships: Initiatives like the Medicines for Malaria Venture pair up academic and industrial research partners, and provide start-up research funding to catalyse early phase R&D for targeted health technologies. This is a not-for-profit venture that relies on public funding. Other forms of public-private partnerships may consist of access to specialised publicly supported facilities, such as a pilot lot facility, and may operate on a for-profit basis.

Implementation: Industry, international organisations and the public R&D community.

*** Support for private sector spin-offs: Some early phase health technologies are promising in terms of science, but do not hold out the hope of substantial profits. These technologies may not be developed further by a pharmaceutical company because they can’t compete internally with other initiatives demanding R&D resources. However, there may still be a good chance of developing a useful and even profitable technology. Health technologies for the poor are particularly likely to meet this fate, since the profit potential is uncertain. If such technologies can be spun off by the bigger pharmaceutical parent, the new company may be able to attract investors and grant support to further develop the technology. This process could be encouraged both through grant funds, through subsidised investment capital, and through the provision of low cost industrial space, for example, in an "incubator" scheme in which subsidised industrial premises are provided through public funding.

Implementation: Industry, international agencies, NGOs, governments.

* Subsidised venture capital: Investment capital is particularly scarce for high risk, low return ventures like the development of technologies for the poor. However, the levels of investment required are often too high to be satisfied through public sector or philanthropic sources. It is likely that private investment capital will need to be tapped in order to reach the levels of financing that are required to meet urgent public health goals. Therefore, the risk inherent in such investments should be bought down using public or philanthropic funds, resulting in a low risk, low return investment that would be attractive to the private or institutional investor. There are a variety of mechanisms to buy down this risk, although care would have to be taken to ensure adherence to securities exchange commission regulations on fair practice (the subsidised investment funds may be seen as unfair competition to mainstream funds).

Implementation: International agencies, NGOs, the investment community, industry.

* Reducing risk:

Subsidised vaccine injury compensation is one example of a mechanism for reducing the risk for industry of investment in vaccines. This might have application for more general application to the development of health technologies for the poor.

Implementation: International agencies, industry.

 

 

Demand pull:

***** Advocacy/Marketing:

Bottom-up demand for a health technology should result from effective advocacy, marketing and social mobilisation from the level of the consumer to the Ministries of Health and international organisations. This is an essential and powerful element of demand pull. Heavier advocacy measures might include linking governmental budget lines for cost-effective public health interventions with access to debt relief, infrastructure loans, most favoured nation status, and so on.

Implementation: Developing and developed country governments, international agencies, NGOs, civil society in developing countries.

***** Available and reliable data on disease burden:

Better information on the burden of disease would provide industry with a scientific basis for R&D resource allocation decision-making, serving to lower the risk associated with those decisions.

Implementation: International agencies, the international R&D community, and developing country governments.

***** Concensus on priorities for R&D in international community including clear objectives on detailed product specifications:

As for disease burden data, companies are better able to make R&D resource allocation decisions and decrease the risk associated with those decisions if there is consensus in the international community on what the R&D priorities are, what products are needed, and what specifications those products should meet.

Implementation: International agencies to lead consensus building with participation of all stakeholders.

***** Guaranteed purchase mechanism:

Transparent and available budgetary means, either for present or future purchase could be developed to assure industry of a market for future products or to provide a demonstration effect of future markets through the creation of a market for new technologies available at present. This mechanism could take the form of promises to buy in future, a trust fund, or a stream of cash flowing from the public, philanthropists, international finance institutions, or from governmental sources.

Implementation: Donors, international agencies, developing country governments.

***** Introduction and take-up plan:

Distribution mechanisms, including country level health system infrastructure development and up-front advocacy with governmental clients need to be developed and proven so that industry can be convinced that a new technology will reach its market.

Implementation: Developing country governments, the medical community and civil society in developing countries, international agencies, donors and NGOs.

***** Demand forecasting:

Lowering the risk for industry in investment in production capacity through more accurate and reliable long term demand forecasting, linked with credible financing and delivery planning.

Implementation: International agencies, procurement agencies and developing country governments in consultation with industry.

***** Facilitated procurement and fair pricing:

There is a tension between getting the lowest price to promote access, and allowing manufacturer to make sufficient profit to provide an incentive for further development of technologies for the poorest. Clear procurement rules level the playing field for manufacturers and increase confidence in the developing country markets. Bulk purchasing through an agency can make the market more efficient, especially with respect to servicing very small countries or countries with administrative capacity shortfalls. However, if bulk purchasing through a tender process drives the price down too far, there will be no incentive for further R&D on technologies for the poor. As the true cost of production of a new health technology is unknown, setting the right price will require highly skilled negotiating on the procurement side, and may involve the use of longer term contracts. Longer term purchase agreements can allow negotiation on a fair price that is not necessarily the lowest, but satisfies the tension between low price and a need to provide incentives for further R&D. The longer term nature of the purchase agreement decreases risk for the manufacturer, sometimes allowing a lower price.

Implementation: International procurement agencies, developing country governments, donors, industry.

***** Promise of temporary monopoly for first to gate with new technology:

This entails respect for existing intellectual property rights, or enhanced IP through promise of exclusive purchase contract for the poorest countries, where such procurement is centralised. This should serve as an added enticement to industry. In addition, market exclusivity mechanisms such as the medical indication monopolies granted under the US orphan drug act are a powerful non-patent incentive for manufacturers. However, the pricing resulting from this monopoly may affect access, and this may be more appropriate to orphan technologies for the rich, than for mainstream pharmaceuticals for the poor.

Implementation: Governments of countries where there is a target market for the technology.

***** Clear quality and presentation specifications:

Limit risk of investment in production capacity by reaching an international consensus on specifications for quality and presentation of health technologies.

Implementation: International agencies to lead consensus building among all stakeholders.

 

 

*****Demonstrated respect for intellectual property rights:

Lower the risks to industry in investing in R&D by ensuring that they will be able to recover their costs and make an acceptable profit through the protection of their intellectual property rights.

Implementation: Governments in countries with a market for the technology.

*****Demonstration effect:

Show that there is a market for existing health technologies for the poor. This involves improving advocacy as well as distribution and uptake.

Implementation: Developing countries, international agencies, NGOs, donors.

*** Market segmentation:

Clear cut market segmentation and tiered pricing allow manufacturers to offer the lowest possible prices to the poorest countries without canibalising their profit centres in medium income countries. This is a potential political issue for borderline countries. There are also problems of access to low prices by the poor within richer countries, and the risk of parallel imports is an implementation challenge, but there may be some appropriate applications of this mechanism that justify reaching an international consensus. This may expand access to the poorest, but could result in some medium income countries paying more for certain technologies than they might otherwise pay. Market segmentation can only work well where there is little leakage and parallel importing, such as in the vaccines market.

Implementation: International agencies, particularly procurement agencies, industry, donors, developing country governments.

* Patent extension:

Industry may be lured into developing technologies for the poor by a promise to extend a patent of their choice should they succeed in making a product to certain specifications. (Patent extension could only be granted by the government of a particular country and the mechanism is unclear.) This may be an attractive prize for industry, but it may have negative effects if it means that people who need the patented drug must pay more for it in order to subsidise R&D for the poor. Ideally, the ill should not be taxed regressively to pay for R&D.

Implementation: Governments of the countries where there is a market for the technology.

* Prize or bounty:

A substantial financial reward could be offered to the first manufacturer to produce a health technology that meets certain specifications.

Implementation: International agencies, developed country governments, donors.

 

 

 

 

 

 

 

* Per dose subsidy:

There could be a promise to subsidise a technology for the poor that meets certain predetermined specifications. This subsidy could take the form of a per dose rate that would have the effect of increasing demand and manufacturer profits.

Implementation: International agencies, developed country governments, donors.

2. What works in real life?