Pharma Market Push Pull politics

[Randy Burge]

New Yorker Magazine: THE FINANCIAL PAGE

PUSH AND PULL
by James Surowiecki
Issue of 2004-12-20 and 27
Posted 2004-12-13

A couple of weeks ago, Gordon Brown, Britain?s Chancellor of the Exchequer,
made a promise. The United Kingdom, he said, would buy up to three hundred
million doses of a new malaria vaccine for the developing world. It was a
welcome sign that the West is finally paying attention to the most important
problem in global public health; namely, the spread of infectious diseases
like malaria, tuberculosis, and aids. It was also something else: a dramatic
innovation in the way those diseases are fought.

That?s because the vaccine that the U.K. promised to buy doesn?t exist yet.
There are several good candidates for a malaria vaccine, and one of them,
being developed by GlaxoSmithKline, showed excellent results recently in a
clinical trial in Mozambique, where it cut the risk of developing severe
malaria by fifty-eight per cent. But there are still years of testing and
hundreds of millions of dollars in development costs before any viable
product could be sold. What Brown?s announcement guarantees is that if an
effective vaccine emerges there will be someone to buy it at a fair price.

Usually, a company that invents something useful doesn?t have much trouble
selling it. But vaccines?especially for diseases in the developing world?are
notorious exceptions to this rule. To begin with, Third World countries have
unimaginably tiny amounts to spend on public health. (The poorer African
countries spend eighteen dollars per person a year on health. We spend five
thousand dollars.) And then the market value of a vaccine may be a fraction
of its social value. If you?re vaccinated, it not only makes you safer; it
makes me and my children safer, too. So though you might be willing to pay
the vaccine-maker just two dollars for a shot, its value to your community
might be twenty times as great. Governments, of course, could make up the
difference, but, historically, they haven?t been willing to. Instead,
they?ve used their regulatory and bargaining powers to drive prices down to
the bare minimum.

The result is that drug companies have put very little money into vaccine
research. They?d much rather invest in an anti-arthritis drug that
well-insured Americans will take every day than a vaccine that may never
command a fair price. (Just a few years ago, a promising malaria-vaccine
candidate that had been tested in Papua New Guinea was abandoned for lack of
funding.) Meanwhile, diseases like malaria and tuberculosis have continued
to ravage the Third World. Hundreds of millions of people are newly infected
every year. And the burden of disease has helped keep sub-Saharan Africa
poor: students who are in and out of school have a hard time learning,
ailing workers aren?t very productive, and Western firms are loath to invest
in countries where such diseases are endemic.

When the private sector isn?t providing the innovations we need, the
traditional answer is to have the government stump up for R.&D. This is
what?s called ?push? funding, because the government chooses among various
options and gives its favorites a push. In the case of a malaria or t.b.
vaccine, this means that the government sizes up candidates, offers grants,
and subsidizes drug companies, universities, or its own research teams as
they experiment with the vaccines. In fact, that?s what the United States
did at the beginning of the nineteen-eighties, when it funded a number of
malaria-vaccine projects?none of which panned out.

Instead of deciding in advance which vaccine candidates deserve funding,
however, a government could commit itself to paying a reasonable price for
whatever vaccine turns out to work, effectively guaranteeing a market for
it. Drug companies would thus have an incentive to invest in promising
candidates. Rather than pushing vaccines into existence, this approach pulls
them.

Although ?pull? is relatively new to public health, it has a good track
record; think of the prize that the British government offered to the first
person to come up with a way of measuring longitude at sea. It?s an approach
with two great virtues. First, the buyer?whether a government or a nonprofit
organization like the Bill and Melinda Gates Foundation, which might well
spend hundreds of millions on any vaccine that?s developed?doesn?t have to
guess which candidates are most likely to succeed. Second, buyers pay only
if the vaccine works, so they aren?t stuck bankrolling bad ideas.

The logic of the pull strategy in vaccine development?a strategy that has
been most cogently advocated by the Harvard economist Michael Kremer, who is
the co-author, with Rachel Glennerster, of the new book ?Strong
Medicine??seems hard to resist; it?s low risk, high reward. But there are
powerful forces against it. Politicians prefer push funding because it?s an
easy way of doling out favors, rewarding supporters, and getting publicity
when the lab back home gets a nice grant. Some activists scorn anything that
might further enrich drug companies. And the companies themselves?especially
big ones?actually like push funding better, too. It assures them a steady
flow of R.&D. money, can often be earned via political connections, and
isn?t tied to performance. Then, there?s the ticklish matter of appearances.
Drug companies are wary of admitting publicly what everyone knows to be
true: that the size of a market affects how much they invest in it.

But pay attention to what companies do, not to what they say. Push funding
will continue to be important, especially in subsidizing basic research, but
the way to get companies to put resources where they?re most needed is to
make a concrete, binding promise to buy. All it takes, in the end, is a
little pull.