Lori Williams elaborates the perspectives of Advance Market Commitments -contractual agreements that guarantee a market for a specific product that might not otherwise be developed.

Millions of residents of developing nations die every year from preventable or treatable diseases because the drugs to help them don’t yet exist. Pharmaceutical companies are hesitant to develop and produce new drugs when they’re unsure they’ll be able to recover their investment through sales. As a result, most of the health product R&D is directed at products for developed countries, and within developed countries most products address chronic, not infectious, diseases.

An innovative legal agreement, scheduled to be signed this month, may be the answer to how to spur pharmaceutical R&D for the diseases of the world’s poor. I heard the latest update on the new strategy, called Advance Market Commitments (AMCs), from Michael Kremer, Harvard Economics professor and Macarthur Fellow at the American Public Health Association’s annual meeting in San Diego.

AMCs are contractual agreements that guarantee a market for a specific product that might not otherwise be developed. In February, 2007, the countries of Canada, Italy, Norway, Russia and the United Kingdom and the Bill & Melinda Gates Foundation committed US $1.5 billion to create the world’s first AMC. The target product is a vaccine against pneumococcal disease, which kills 1.6 million people a year. Many of its victims are children under age five, most of whom live in developing countries.

The current model of AMCs is a two stage pricing system with two different types of payers: AMC investors and long-term payers. In the case of the pilot pneumococcal vaccine, the AMC investors are the developed countries and the Gates Foundation. The long-term payers are individual developing countries and the Global Alliance for Vaccines and Immunization (GAVI). In stage one, which lasts for a pre-determined period of time, both types of payers pool their money to pay a “market” price for a vaccine that meets certain technical specifications. This guaranteed market price is the incentive to companies to invest in R&D and production infrastructure. It allows companies to recoup their costs and make some profit on an otherwise low value product. The AMC investment money is what makes this high price possible.

In stage two, the AMC investors stop contributing financially and the long-term payers continue to purchase the vaccine at a “tail” price that is sustainable and provides broad access to those in need of the vaccine. The lower tail price is possible because it is instituted after pharmaceutical companies have already invested in the R&D to create the product and in the production capacity to make the product for the masses. This tail price is expected to be only slightly above actual cost.

The exact details of how the pilot pneumococcal AMC will work have yet to be determined. April and July reports from the Economic Expert and Implementation Working Groups for the pneumococcal AMC have suggested several enhancements to the two-stage pricing structure to create larger incentives for pharmaceutical companies to invest in production capacity and assure an adequate supply of vaccine.

Kremer believes AMCs offer companies a “pull” incentive that encourages research and development. Other pull mechanisms include intellectual property rights and prizes, such as the X prize (the main traditional push mechanisms are forms of direct research funding). AMCs are an improvement over other pull mechanisms because they go beyond just providing market incentives. AMCs also have a component to ensure long-term, low-cost product access. According to Kremer, the X Prize Foundation has already shown support: the institution is considering an AMC to spur innovation in diagnostic tools for tuberculosis.

AMCs present some moral challenges. First, it’s sheer treachery to set up the pricing mechanisms. As the controversy over HIV retrovirals taught us, assigning a monetary value to a health product that could save human lives is anything but easy. Second — and perhaps it’s just the cynic in me — I have concerns about who is going to reap the financial benefit of the AMCs. If most of the companies that make the vaccine are located in the Western world, isn’t that just another way of making developing countries dependent on us, rather than empowering them to develop the capacity to solve their own problems? What could the people of a developing nation do with $1.5 billion? Further refinement of AMCs could include dialogue about the social justice aspects of the agreement.

Moral hazards aside, AMCs are an exciting new strategy. AMCs have a huge potential to decrease suffering while insulating investors against too great a financial risk. If the pneumococcal AMC succeeds on the financial, innovation and entrepreneurship fronts, we will have a new and powerful tool for reshaping the marketplace for developing new vaccines, antibiotics and diagnostics against infectious diseases.

The real question is – will the system work like we think it will in terms of innovation and entrepreneurship?

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