Purchase commitments: Big business bias or solution to the ‘neglected diseases’ dilemma?

Hans Löfgren, Deakin University

Michael Kremer & Rachel Glennerster Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases, Princeton, Princeton University Press, 2004 (153 pp). ISBN 0-691-12113-3 (hardcover) RRP $69.95.

Miniscule research resources are allocated to researching the diseases of developing countries such as malaria, tuberculosis (TB), dengue fever, river blindness, Chagas disease and leishmaniasis, and the strains of HIV prevalent in Africa. Plainly, the patent system and the commercial model of drug research fail to respond to the needs of the poor for the simple reason that the poor exercise little purchasing power. But pressures are mounting on governments and corporations to tackle the ‘neglected diseases’ calamity. An important argument in an intense global debate is that corporations would respond to the needs of developing countries if the diseases of the poor could be made profitable. This is the idea developed by Kremer and Glennerster in a crisply written book, Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases.


How should research to discover new medicines and vaccines be financed and encouraged? Part of the answer is public funding: the United States National Institutes of Health (NIH) has a budget of US$28 billion and government funding contributed to the discovery of most of today’s medicines. But corporations also invest in health research on a massive scale. Research and development (R&D) expenditure by sixteen leading pharmaceutical companies in 2004 totalled close to US$50 billion, which represents around 40 per cent of global spending on health research (Trombetta 2005).

Corporations expect commercial returns from R&D investments. In industries such as pharmaceuticals, monopoly prices during a period of patent protection enable firms to recoup R&D costs and provide the principal incentive for reinvestments in the discovery of new products. The objective of harmonisation of patents across developed and developing countries through the TRIPS (Trade Related aspects of Intellectual Property Rights) agreement is to ensure that R&D costs are shared, to some extent, by consumers everywhere. This is the justification for the pressures, or at times outright intimidation, exercised by the United States on other countries for vigorous enforcement of intellectual property rights.

Angell (2005) and other critics contend that the pharmaceutical industry’s contribution to drug discovery is much exaggerated. Much of its R&D is directed at non-innovative ‘me too’ products, huge resources are wasted on marketing and, most disconcertingly, the health needs of the developing countries are largely neglected. In the debate on neglected diseases it is frequently noted that 1,393 new medicines were launched globally between 1975 and 1999, but only sixteen were for tropical diseases and TB (Trouiller et al 2002).

The pharmaceutical industry’s contribution to drug discovery is much exaggerated.

This enormous discrepancy is captured by the notion of the ‘10/90 gap’: 90 per cent of the global disease burden attracts ten per cent of research investments. All of Africa represents just one per cent of the global pharmaceutical market. Several major drug companies undertake no research into tropical diseases. Annual global R&D on vaccines is estimated at around US$500 million but less than 10 per cent is targeted at people in developing countries where 95 per cent of infections occur (WHO/UNICEF/The World Bank 2002, p. 8). There is a minor commercial market in supplying tourists and the US military with protection against some tropical diseases but the world’s poor are mostly ignored. Almost a third of the world’s population, roughly two billion people, is affected by TB which causes around two million deaths annually. Yet very little research is conducted into TB vaccines or new treatments, with the exception of projects co-ordinated by the non-profit TB Alliance.

Vaccination programs in developing countries are supported by global not-for profit procurement agencies, notably World Health Organisation (WHO) and UNICEF. In the last 30 years the immunisation rate for major vaccine-preventable diseases has increased from less than five per cent of the world’s children to more than 75 per cent, and UNICEF alone supplies vaccines to 40 per cent of the world’s children (WHO/UNICEF/The World Bank 2002). Yet many millions of people still cannot access existing vaccines and no vaccines exist for diseases such as malaria, schistosomiasis and HIV.


The grotesque misallocation of the global R&D effort has at long last given rise to intense international debate. Positions range from the view that only minor tinkering with the patent system is required to arguments for less reliance on intellectual property rights within a new global framework for health research. Kremer and Glennerster present a compelling though ultimately overly technocratic and conservative model, arguing the case for ‘advance purchase commitments’ (APCs) as a market-like mechanism to achieve a better alignment between corporate research investments and global health needs.

The APC idea has gained traction within influential institutions such as the Center for Global Development, the Brookings Institution, and the Bill and Melinda Gates Foundation. The G8 finance ministers meeting in June 2005 affirmed ‘that [APCs] are potentially a powerful mechanism to incentivise research, development and the production of vaccines for HIV, malaria and other diseases’ (G8 Finance Ministers 2005).

Kremer and Glennerster propose, in essence, that coalitions of governments, international organisations and charitable funds make legally binding commitments to make large purchases of newly developed vaccines. They consider this highly practicable since requisite institutional structures are already in place, including centralised procurement arrangements and regulatory systems. It would, they argue, be relatively straightforward to specify in contractual form the requirements that new vaccines would have to meet. In addition to safety and efficacy criteria, contracts would stipulate conditions for usability in low-income countries, and recipient governments would have to make a co-payment to demonstrate a commitment to the program. An independent adjudication committee would determine whether eligibility conditions have been met.

The grotesque misallocation of drug R&D has given rise to intense debate.

Under this model, the successful developer of a new malaria or HIV vaccine would be offered around US$3 billion, a figure approximating the annual sales revenue of a new blockbuster drug. This reward could be delivered through the immunisation of 200 million people for a price of US$15–20 per person, though the cost and price estimates presented are somewhat arbitrary. The price charged in developing countries would then have to be dropped to a small mark-up over manufacturing costs, say, US$1 per immunisation.

An essential aspect of program design would be to ensure credibility. Firms engaging in costly long-term research efforts must be confident that commitments would not weakened by political or economic pressures. A major advantage of the APC model is said to be that no public money would have to be expended if the program failed to induce the development of the new vaccines, but ‘if it succeeded, tens of millions of lives would be saved at remarkably low cost’ (p. 5).


Kremer and Glennerster provide a succinct analysis of market and government failures in respect of neglected diseases in general and vaccines in particular. Weak monetary demand is the principal manifestation of market failure. In theory, this could be addressed through the patent system which delivers commercial incentives for the costly process of developing vaccines, but the prices that a firm would have to charge would prevent access by millions of people.

The authors argue that governments have failed in at least two respects: they do not fund and organise research efficiently and effectively, and they use their position as monopoly purchasers to suppress prices thus weakening commercial incentives to develop and supply vaccines. But they show that vaccines are global public goods since the benefits to society from their consumption are greater than the returns private investors or any particular government could extract from R&D investments. High rates of vaccination have enormous impact on public health and governments therefore intervene to fund and implement vaccination programs, ensuring that consumers do not opt out and that services and products meet acceptable standards.

Kremer and Glennerster proceed to assess the role of push and pull programs in the funding and promotion of R&D into drugs and vaccines. The term ‘push program’ encompasses a wide range of government funding and subsidy schemes such as research grants and tax credits. The focus of this type of program is on research inputs rather than outputs. In contrast, pull programs, such as the proposed APCs, reward successful discovery and innovation through, for example, guarantees to purchase a certain volume of a successful product at a particular price. They describe historical examples of the pull model including Napoleon’s offer to pay a huge prize to anyone able to develop a way of preserving food for soldiers and sailors in the field. The closest example of a contemporary pull program in the medicines area is the United States Orphan Drug Act and similar programs elsewhere which provide financial incentives to undertake R&D to treat rare diseases.

High rates of vaccination have enormous impact on public health.

Kremer and Glennerster emphasise the advantages of the pull approach, which they compare with cases of corruption and other failures in publicly funded vaccine research programs. The core of the book is a detailed advocacy for the APC model which is said to be particularly suitable for stimulating vaccine research.


The book has a tone of brisk confidence in clever policy design. But does it offer a plausible solution to the global dilemma of neglected diseases? Probably not. Farlow (2005) and others have identified many shortcomings of the APC model. In the first instance, it is improbable that the prospect of a large purchase at the end of a risky R&D process, lasting years, will trigger innovative efforts of the magnitude likely to be required to tackle the challenge of developing vaccines for hitherto neglected diseases. Moreover, it would be impossible to arrive at reasonably accurate assessments of R&D costs many years in advance of the launch of a new vaccine (or medicine). Contract figures could easily be way above or below real development costs. Indeed, contract specifications and the bureaucratic structures necessary to implement large-scale APCs would surely be more difficult and unwieldy than Kremer and Glennerster allow.

It is also not clear how follow-on innovation could be encouraged if the whole ‘prize’ is to be awarded to a single winning competitor. And it is not self-evidently an advantage that no funding would be provided until the new vaccine or drug was fully tested and approved since this would exclude from the competition all but the very largest of corporations. Only ‘big pharma’ companies could invest hundreds of millions of dollars in a gamble for future billion dollar payoffs.

The APC model is aptly described by one critic as ‘designed for big pharma’ (Light 2005). Kremer and Glennerster’s basic supposition that the self-contained big corporation provides the best framework for cutting edge vaccine and drug developments flies in the face of innovation patterns in science-intensive industrial sectors, particularly biotechnology and pharmaceuticals. The trend is towards innovation networks encompassing many public and private actors, including universities and public research institutes, and smaller firms (see, for example, Fagerberg et al. 2005). Scientific breakthroughs are more likely to originate in small science-intensive firms or in the public sector than in ‘big pharma’ companies. In fact, the problems of the blockbuster model are widely recognised and ‘big pharma’ companies now draw extensively on the in-licensing of external research results (see, for example, El Feki 2005).


Neglected disease research is currently undertaken predominantly not by ‘big pharma’ companies but within flexible networks co-ordinated through public-private partnerships (PPPs) which can be defined as ‘public-health-driven not-for-profit organisations’ (Moran 2005b). A recent report issued by the Wellcome Trust describes the emergence since the late 1990s of more than 90 PPPs in this area as a ‘dramatic sea-change’ (Moran 2005b).

PPPs such as the Medicines for Malaria Venture, the TB Alliance, the Institute for One World Health, and the Drugs for Neglected Diseases Initiative, funded largely by philanthropic organisations, manage collaborations involving ‘big pharma’ companies, smaller firms, academic researchers, and government research institutes. Moran (2005a, 2005b) shows that collaborative neglected disease projects have a better track record than either private or public organisations working alone. There were 63 neglected-disease drug projects under way by the end of 2004, which are expected to result in eight to nine new drugs by 2010.

The APC model is aptly described by one critic as ‘designed for big pharma’.

For small and medium sized companies, particularly in developing countries, PPPs offer opportunities for commercial returns. But the big companies—notably GlaxoSmithKline, Novartis, AstraZeneca, and Sanofi-Aventis—participate on a non-commercial basis and accept that final products will be made available at not-for-profit prices. From their perspective, contributing to this type of research minimises ‘the risk to their reputation stemming from growing public pressure … over their failure to address developing country needs’ (Moran 2005a). It is likely also to form part of a strategy of building a presence and reputation in developing country markets and may also be driven by genuine ethical concerns.

And for companies with billion dollar R&D budgets the cost of participation in such ventures is marginal indeed. Total expenditure on such PPPs in the four years to 2004 was only around US$112 million. Imagine then what could be accomplished if only a fraction of the resources that Kremer and Glennerster wish to make available as future rewards to big companies could be channelled immediately into already operational neglected disease projects!

Drug research is undoubtedly expensive, but the PPP experience reinforces doubts about the ‘big pharma’ claim that the cost of successful drug developments is in the order of US$800 million. Collaborative efforts, drawing also on the resources of countries such as India, Brazil, China, and South Africa, can achieve significant results with relatively limited budgets. Moran concludes that a focus on ‘commercialising R&D to bring big companies back into the field’ is ‘now significantly out of kilter with the industry neglected-disease drug landscape’ (Moran 2005a).


The PPP phenomenon intersects with initiatives and arguments for ‘open source’ drug development and more substantial challenges to the very concept of intellectual property rights as the primary incentive mechanism for health research. The open source model draws on the example of Linux in the software industry, and proposes non-commercial collaborations across firms and public research agencies using IT networks and computational tools, with a particular focus on basic research. Promising results can then be channelled into PPPs equipped to manage product development. Participation in open source ventures is motivated by non-monetary rewards, such as personal satisfaction and commitment to the public good, skills developments, and enhancement of professional reputation (Maurer et al. 2004). At least one such venture is in operation (Tropical Disease Initiative 2005).

There are historical precedents, including penicillin and the polio vaccine, for developing non-patented drugs. A related example is the decision to place the human genome sequence in the public domain to protect the ‘scientific commons’. An idea that is presently attracting significant attention—put forward by the US-based Consumer Project on Technology, Oxfam, South Africa’s AIDS NGO, and other health activists and scientists—is for a global R&D Treaty which would commit countries to an agreed level of pharmaceutical R&D expenditure to preclude ‘free-riding’ on the efforts of others. This could be in the order of 0.1 per cent of GDP, adjusted for higher contributions by wealthier countries.

There are historical precedents for developing non-patented drugs.

Significantly, countries would be free to determine how to meet their R&D commitment. The patent system (high monopoly prices) would continue to provide one possible way of funding and rewarding R&D but, alternatively, countries could decide to detach the research process from an all-out generics market where competition would result in greatly reduced prices (Hubbard & Love 2004).

The patent system is now questioned even in the United States Congress. In January 2005, Bernie Sanders, a member of the House of Representatives, introduced the Medical Innovation Prize Fund Act which proposes in lieu of patents a fund to compensate innovators who bring new pharmaceuticals to the market. ‘Innovation would be rewarded not by high monopoly prices, but by a $60 billion per year fund, which would provide money to developers of new products based upon the actual impact on health outcomes over ten years’ (James 2005).


These and other contributions to the debate indicate that the magnitude of the disease burden of the poor has finally put the spotlight on the shortcomings of the global R&D system. The APC model advanced by Kremer and Glennerster is but one possible approach. Its critics accept that purchase commitments in certain circumstances could serve a useful purpose, but an effective response to the neglected disease calamity requires more than inducements to big business.


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Hans Löfgren teaches Politics & Public Policy at Deakin University and has a particular interest in the political economy of pharmaceuticals.

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