Friday, March 26, 2010

GAVI's Finance Model Strikes Vaccination Gold for Emerging Markets

Imagine you are Rwanda's minister of health. You have a problem – actually many problems, but we'll start with one. Pneumococcal diseases kill 1.6 million people per year around the globe, nearly one million of them children under 5 years old, and nearly all of them in emerging markets like Rwanda. Why only in emerging markets? Because the diseases can be prevented with a vaccine, one that costs as much as $104 per dose in developed countries, $312 per patient since the vaccination protocol requires three doses. Your government, even with help from NGO's like UNICEF, can't afford to vaccinate even a tenth of Rwanda's population at these prices, but you are very tired of watching your children die.

The GAVI Alliance, a non-profit partnership of governments and NGOs, recently announced an agreement with Pfizer, Inc. and GlaxoSmithKline (GSK) that will go a long way to solving your problem. First, GAVI recognized that the patent protected price of $104/dose reflects the cost of R&D, testing and approvals, production facilities, marketing, etc. not to mention some profit, but that the actual marginal cost of producing one extra dose would be tiny, perhaps a few dollars per dose. The marginal cost of producing many extra doses, enough to make a real dent in the needs of emerging markets would still be relatively low (since it would not reflect sunken costs like R&D, testing and approval, marketing) but it would have to include the cost of expanded production capacity. Nonetheless, big pharma could sell at a huge discount to fully absorbed cost and still make a few bucks on a marginal cost basis, provided it could actually sell the extra volume to emerging markets at a deeply discounted price.

The problem? How could big pharma invest in expanded production capacity with no assurance that emerging markets would actually buy the extra vaccine output, even at steeply discounted prices? The GAVI Alliance solution – AMC. Old timers, push away those blurry notions of Ramblers and Mitt Romney's dad and think Advance Market Commitment. GAVI and the emerging market governments have committed to pay Pfizer and GSK for 30 million doses per year from each supplier for ten years, at a price of $7.00 per dose for the first 20% of the doses purchased and $3.50 per dose thereafter.

Nice work GAVI (and attaboy Pfizer and GSK too). Exactly who, to quote Butch Cassidy, are those guys? Launched in 2000, the GAVI Alliance is a global health partnership representing stakeholders in immunization from both private and public sectors: developing world and donor governments, private sector philanthropists such as the Bill & Melinda Gates Foundation, the financial community, developed and developing country vaccine manufacturers, research and technical institutes, civil society organizations and multilateral organizations like the World Health Organization (WHO), the United Nations Children's Fund (UNICEF) and the World Bank. The agreements with Pfizer and GSK are a culmination of the first AMC project, commenced in June 2009.

GAVI uses a second financial wrinkle, IFFIm, collecting binding governmental pledges from donor countries (G-7 types) and then borrowing against the pledges in capital markets to accelerate effective receipt of the pledged funds. Look for AMC and IFFIm to show up again, and again, possibly with an even more dramatic application. Some diseases, malaria for example (a primary focus for the Bill & Melinda Gates Foundation), present a more difficult variation on the Pneumococcal problem. The emerging markets offer a huge potential market for a vaccination that will prevent malaria, but instead of just adding production, big pharma needs to invent the drug, and it is reluctant to invest billions in anything where the potential customers are generally very poor. The potential market is so vast that a malaria cure could be profitable even at a low price per dose. An AMC arrangement might be enough to move a promising malaria vaccine research program into development and ultimately production,

Photo Credit: hdtpcar

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1 comment:

  1. Very crafty model. What wouldn't I have given to have been a fly on the wall when these negotiations were underway! Thanks for the article. We'll certainly have to do what we can to leverage this expansive thinking in other sectors of the developing world.