A 2008 report estimated that 19 percent of the 10 million or so child deaths each year are the result of pneumonia, making it the world’s leading cause of child mortality. An affordable vaccine for fighting off the pneumococcal bacterium could save many children from this fate if it were available.

This enormous tragedy shows why vaccinations are one of the best investments for long-term impact in global health. A supplier who produces an effective, affordable vaccine can save millions of lives in low- and middle-income countries.  One of the biggest challenges to seizing this opportunity is aligning the economic forces of the market with the desired outcome—more vaccinations developed and delivered at an affordable price.

The Problem

The traditional approach to funding vaccine development is a system that pays for research and development rather than results. Government actors and philanthropists issue contracts and grants for specific R&D projects, and investors place bets on companies that have promising but unproven ideas.  All hope the R&D yields results, but are paying for effort, whether or not the research achieves the desired outcomes.

When effective vaccines are produced through this process, the product is often priced at a range unaffordable to developing countries. As Ruth Levine, Director of Global Development and Population at the William and Flora Hewlett Foundation explains, “In the case of vaccines, R&D basically isn’t incentivized for products for poor countries. Typically you wait for products to go off patent and generic manufacturers to produce them at prices that are relatively affordable.”

The Action

The Global Alliance for Vaccines and Immunization (GAVI), an international public-private partnership established in 2000, sought to address this problem. GAVI implemented a non-traditional model known as an Advance Market Commitment (AMC) that pays for a new affordable pneumococcal vaccine rather than simply the research outputs.

An AMC, first suggested by Harvard economist Michael Kremer, works by guaranteeing a market for a product that hasn’t been developed. It provides an economic incentive for potential suppliers to spend R&D resources on a project that might otherwise seem like a poor investment. To accomplish this, the interested AMC funders all agree on the specifications of the product and commit resources to “top up” the price for the first units sold.  The size of the top up is based on estimated demand combined with an understanding of the revenue required to offset R&D costs and provide a reasonable profit to investors. Funders do not have to spend money before a product is available; they simply guarantee that they will provide top up payments for each unit sold.  After the provision of the top up guarantee expires, the supplier is required to continue to make the product available at the base price for a period of time.

The AMC went from idea to reality when a working group at the Washington, DC think tank Center for Global Development outlined a technical application of Kremer’s concept in a report. Global health and vaccinations seemed like the perfect place to apply the AMC approach—the international community viewed vaccines as the key to better global health, and that meant there were many potential purchasers who could buy into the AMC. As they developed their report, the authors asked a lawyer with experience working on pharmaceutical deals to mock up the paperwork needed to effectively pursue an AMC. Levine, a co-author on the report, notes that this addition made a big difference in bringing the idea to life. “We didn’t understand at the time how important it was that this practical tool be included in the report,” said Levine. “It wasn’t just a list of recommendations, it was an actual contractual outline.”

This addition turned the AMC report into more of a “how-to” guide for setting up a project. On the philanthropy side, the Bill and Melinda Gates Foundation, a GAVI member, expressed interest in the idea early on and began looking for funding partners. In a stroke of perfect timing, the “how-to” guide also caught the attention of global leaders interested in large-scale public health initiatives that could be presented at the international G8 Summit, an annual convening where leaders of the major industrial countries meet to discuss some of the big issues the world is facing. A large coalition came together with GAVI to begin the difficult work of establishing an AMC for a pneumococcal vaccine.

One of the more straightforward questions was the specifications for the desired pneumococcal vaccine. Existing regulatory frameworks offered a clear guide for what would constitute a safe, successful product. “If you don’t have an established authority that judges whether or not a product meets the technical specification you have to create that from scratch,” said Levine.

Discussing an appropriate price for the AMC proved more challenging. Estimating the cost of developing a product that doesn’t exist is challenging, even in fields less shrouded in uncertainty than health research. There is also a balance to be struck between cost and speed. A higher top up would likely spur a quicker response from the market and potentially more entrants to get involved, however some funders may be worried about windfall profits to pharmaceutical manufacturers. Agreeing on a lower cost for the end of the AMC when the pool is empty can help address that concern, but requires projecting an appropriate price far in the future—a difficult and inherently uncertain process.

Levine and others spent several years considering these issues and helping to put together the AMC project. “The devil’s in the details,” said Levine. “You’re going from an elaborate idea to the actual nuts and bolts—the mechanics of who does what and exactly what is this magical price at the beginning of the AMC and at the end of the AMC, what demand forecast do we use, and what precisely is the language of the contract. All of these things needed to be worked through.”

A few unanticipated issues also came up when presenting this idea to governments. By using market forces, the AMC was using potential profits to spur investment and research. There is a legitimate and ongoing debate in many countries about when, or even whether, health research and care should be driven by profit in this way. However, for some governments the chief concern was the overall commitment required to designate funds in a binding contract for a product that didn’t yet exist, particularly in a budgeting process where funds are generally committed annually and not beyond.

“Nothing is perfect in the real world. This is a different way to incentivize R&D and to purchase a needed product,” Levine said about the challenges of pulling together the AMC. “In evaluating whether it’s something worth trying or not, sometimes the temptation is to think about all the ways in which it differs from what would be perfect. It would be perfect if we could get the same product for less. It would be perfect if we could get the same product without having to make a binding commitment. The real question is, within the realm of feasible solutions that don’t require upending the way the world works, what might work better than our current approach?”

The Outcome

When the AMC was finalized, the United Kingdom, Norway, Canada, Russia, and Italy, along with the Gates Foundation, had pledged a joint $1.5 billion to guarantee a relatively high price to any company able to make early doses of a pneumococcal conjugate vaccine that met their predetermined safety and efficacy standards.

The AMC was announced in 2007, and the first vaccine to qualify for the price offered was developed and approved by 2010. Since then, another manufacturer has developed a vaccine that qualifies for the AMC funds, and more are under development. The original pool of money still isn’t exhausted and continues to drive additional manufacturers to invest in qualifying products.

The most important measure of success? According to the latest report from GAVI, the AMC-produced vaccines have been introduced in 57 countries. The vaccines have protected over 76 million children, and many more will be covered as the project continues. With the current supply agreements, the total supply contracted through 2024 is nearly 1.5 billion doses.

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To learn more about Advance Market Commitments read Ruth Levine’s chapter in What Matters: Investing in Results to Build Strong, Vibrant Communities.

• All-Party Parliamentary Group on Pneumococcal Disease Prevention in the Developing World (APPG), “Improving Global Health By Preventing Pneumococcal Disease” APPG, March 17, 2018 http://www.gavi.org/library/ga....
• AMC Secretariat of Gavi, The Vaccine Alliance, “Advance Market Commitment For Pneumococcal Vaccines Annual Report 1 January – 31 December 2016” The Global Alliance for Vaccines and Immunization, December 2016, www.gavi.org/library/gavi-docu...
• Ruth Levine, Director of Global Development and Population, William and Flora Hewlett Foundation, Interview on August 31, 2017
• Ruth Levine, “Advance Market Commitments: Rewarding Innovation Without Picking Winners” Nonprofit Finance Fund, June 13, 2017 http://investinresults.org/cha...