Innovative Development Financing in Operation:The Pilot Advance Market Commitment

for pneumococcal vaccines

Susan McAdamsDirector, Multilateral Trusteeship and Innovative Financing

Informal Event on Innovative Sources of Development Finance, New York, 3 June 2010

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What is innovative financing?"There is a genuine need to establish, by international consensus, stable and contractual new sources of multilateral finance." Innovative sources of finance could include a currency transaction tax, a carbon tax, resuming Special Drawing Right allocations, and/or establishing an international tax organization."

United Nations Zedillo Report 2001

“Innovative financing means different things to different people. For some, it is about raising new monies for global health work (like Debt2Health), while others consider the new mechanisms as tools to make existing aid spending more effective through various means, including: 1) changing the timing of disbursements to accelerate health results (like the International Finance Facility for Immunization); 2) increasing certainty to bring down prices of commonly-purchased medicines and goods (such as the Advanced Market Commitments); and, 3) changing the incentives to recipients (through results-based aid such as the Global Fund and GAVI ISS).

Brookings Institution

“An innovative financing mechanism (IFM) is defined here as an institutional arrangement that results in the transfer of new or increased financial resources from those willing to pay for sustainably produced goods and/or forest ecological services, to those willing to provide these goods and services in turn.”

Verweij 2002

“Innovative financing options are simply new combinations or adjustments of existing instruments and resources, rather than new financial instruments aimed exclusively at addressing climate change.”

UNFCCC 2007

Global environmental taxes, currency transaction taxes, taxes on global arms sales, voluntary private-sector contributions, private donations, global lottery and global premium bonds, topic-specific global funds, financial engineering, the International Finance Facility (IFF), a development-focused allocation of SDRs, and public guarantees.

Reisen, OECD, 2004

… the notion of innovative development financing mechanisms designates resources that are provided in addition to Official Development Assistance (ODA) and are more predictable.

Leading Group 2009

Innovative development finance … involves nontraditional applications of … mechanisms that (i) support fund-raising by tapping newsources and engaging investors beyond the financial dimension of transactions, as partners and stakeholders in development; or (ii) deliver financial solutions to development problems on the ground.

Navin Girishankar 2009

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Two aspects of innovative financing

(1) Innovative financing solves specific development problems.

(2) Innovative financing includes:

- raising additional funds

- financial engineering and financial transformation

- effective use of funds

4

Effective Implemen-

tation

Innovative financing raises additional funds

Efficient financial

engineering

Raising additional

funds

EXAMPLES

Sources of obligatory financing.Global taxes: Adaptation Fund, Arms Trade Tax, Air Ticket Solidarity Levy, Currency Tax, Digital Solidarity Levy. Cap and Trade: Emission Certificates.

Sources of voluntary private financing.Affinity Credit Cards, Diaspora Bonds, Private Giving, Product Red, P2P Internet Giving, Remittances, Social Investing.

Domestic sources of financing.Payments for Environmental Services.

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EffectiveImplemen-

tation

Financial engineering increases financing efficiency

Financial engineering

Raising additional

funds

EXAMPLES

Timing of financing. IFFIm (frontloading of aid), endowments (backloading). AMC (financial pull mechanism)

Scale of financing. Microfinance.

Volatility and unpredictability of aid. IMF Exogenous Shocks Facility, IFFIm.

Risk management. Local currency lending: GEMLOC (currency risk). Caribbean Catastrophic Risk Insurance Facility (natural disaster risk), GDP-indexed Bonds (country risks).

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Effective use of funds

Innovative financing increases development effectiveness

Financial engineering

Raising additional

funds

EXAMPLES

Incentive creation. Advance Market Commitments (for the private sector), credit buy-downs (for developing country governments).

Market creation. Advance Market Commitments. Market enlargement. Affordable Medicines Facility for Malaria. Market power. UNITAID.

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Source: Mercer Management Consulting analysis

Product Development Cycle: Vaccines

High cost, low probability of success

A disincentive to invest at each stage

Cum

ulat

ive

inve

stm

ent

Elapsed time (years)1 2 3 4 5 6 7 8 9 10 11 12 13

0

Research/pre-clinical

Primate/ early clinical

Manufacturing capacity scale-up

Efficacy trials (phase III)

?

Developing a new vaccine can take 7-20 years - assuming success at each stage of the process – and cost $ hundreds of millions.

Decision gate: Probability of success?

Lack of access to vaccines –the vicious cycle

Higher priceUncertain

demand

Limited supply

Uncertainty about demand in developing countries leads industry to limit investments in capacity

Limited vaccine supply keeps prices relatively high

Higher prices keep developing countries uncertain about demand and donors uncertain about financing needs

0%

100%

Vacc

ine

Cov

erag

e

15-20 years

Industrialized World

Developing World

Global Introduction of a New Vaccine

(to date)

The problem

• Market failure: strong market power, limited competition or lack of market– Create a market, increase competition

• High and indivisible capital investment costs– Subsidize cost of increased capacity needed for

developing country production• Perceived demand risk and asymmetric

information on demand– Provide better information, demand assurance

• High social benefits/public good– Target characteristics needed in developing

countries

AMC Concept

A financial commitment by donors,

to subsidize vaccine purchase

at a set price for a set period,

if it meets a specified target product profile,

and is demanded by GAVI-eligible countries,

To spur increased supplier participation, investment and production scale-up and accelerate the introduction of needed vaccines in the world’s poorest countries.

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How an AMC works

• AMC offer creates a market: for new vaccines needed in poor countries (not a purchase guarantee)

• Donors make a financial commitment upfront to fund an AMC of a specified market size and price for a target vaccine with set specifications (effectiveness, public health impact)

• Candidate vaccines become available: an Independent Assessment Committee determines if a vaccine meets the target specifications

• Country demand: Where GAVI-eligible recipient countries are interested in introducing a successful candidate vaccine, donors subsidize its purchase and recipient countries provide co-payment.

• Post-AMC predictable supply and pricing: When AMC subsidy funding is depleted, manufacturer continue to provide the vaccine at an established price for a specified period.

Leading infectious killersD

eath

s (m

illio

ns)

< 5 years old > 5 years old

0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

AIDS

2.7

TB

1.7

Malaria

1.1

Diarrhoea

2.2

Pneumonia

3.5

Source: WHO

S. pneumoniae:~1.6 million deaths, including ~800,000 child deaths

Burden of Disease of Pneumonia

Pilot AMC

• $1.5 Billion subsidy from six donors (Italy, UK, Canada, Russia, Norway, Gates Foundation), paid up front to cover capital costs, at a rate of $3.50 per dose delivered (subsidy takes about 26 months to pay out at full demand), with a limited purchase guarantee equivalent to 45% of one year’s committed capacity (roughly 21% of subsidy entitlement)

in exchange for• Vaccines that meet specifications for use in poor countries• Long-term supply commitments sought for 200m doses

annually for ten years, i.e., AMC subsidy entitlement is tied to200m dose annual capacity over time ($7.50 per dose of committed capacity)

• Tail price ceiling of $3.50

Target AMC Results• Create a viable market: Spur development and

production scale-up of vaccines needed in poor countries

• Encourage at least one emerging market manufacturer to participate

• 2 billion guaranteed doses over 10 years, at less than $4.25 per dose in real 2009 US$

• More than 7 million deaths averted by 2030

• Socially highly efficient: $33-36 per DALY, compared to $100 benchmark

• Accelerated, sustainable access: $12.75 total for a 3-shot course of immunization compared to $200 in U.S.

The processDonors

provide AMC subsidy

Donors provide AMC

subsidy

Entry into a Supply

Agreement

Entry into a Supply

Agreement

Application for vaccines

Application for vaccines

IAC assesses if the vaccine

meets the Target Product Profile

IAC assesses if the vaccine

meets the Target Product Profile

WHO prequalifies

pneumococcal vaccine

WHO prequalifies

pneumococcal vaccine

Application for pre-qualification

Application for pre-qualification

GAVI Strategic Demand forecast

updated biannually

GAVI Strategic Demand forecast

updated biannually

UNICEF Call for Supply Offers

UNICEF Call for Supply Offers

CountriesDecide to adopt vaccine and co-

finance

CountriesDecide to adopt vaccine and co-

finance

GAVIFinancial,

Administrative, Programmatic

support

GAVIFinancial,

Administrative, Programmatic

support

WHOTechnical support

Defines TPPsPre-qualification

WHOTechnical support

Defines TPPsPre-qualification

ManufacturersDevelop and

produce vaccines

ManufacturersDevelop and

produce vaccines

UNICEFProcurement

Agency

UNICEFProcurement

Agency

Manufacturer supply offerManufacturer supply offer

World BankFinancial

Management for Donor Funds

World BankFinancial

Management for Donor Funds

Vaccines are

delivered to

countries

Vaccines are

delivered to

countries

UNICEF procures

vaccines from manufacturers

UNICEF procures

vaccines from manufacturers

DonorsFinancial Support

DonorsFinancial Support

WB manages AMC subsidy disbursing it

as needed

WB manages AMC subsidy disbursing it

as needed

GAVI and countries

contribute to cost of vaccine

GAVI and countries

contribute to cost of vaccine

Step 1Step 1

Step 2Step 2

Step 3Step 3

Step 4Step 4

Million of doses

Current Status: UNICEF calls for offers

127

222

200

19Awarded supply

Un-awarded supply available for bidding

AMC Lessons Learned

Characteristics– Well-defined product need: vaccine with specific public

health impact, can rely on existing regulatory and delivery structures

– Discrepancy between public and private valuation of needed product

• Pilot AMC: high public health value versus demand uncertainty, high capital costs, regulatory uncertainty, differential pricing incentives, very limited competition

– Market “failure”: critical uncertainty may be remedied by pull funding; market “creation” addresses specific dysfunction

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Beyond the Pilot: ChallengesPricing/Structure issues• Lack of information

– complexity; estimating costs when product does not yet exist; asymmetric info between companies and public sector funders

• Politics/Public perceptions– Subsidizing private sector (big pharma, big energy…)

• Financial structure– Upfront legally binding commitments, long-term

payment arrangements

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AMC for agriculture

A financial commitment by donors

to subsidize a “product”

if it meets a specified product profile

at a set “price” for a set period

and is demanded farmers / markets in developing countries.

Open design process

Tailoring solutions to specific need:• AMC/other pull mechanisms• Prizes• Regulatory structure• Tax regimes• Push funding

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www.worldbank.org/innovativefinancing

Backup Slides

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Key structures

GAVI

• Provide co-payment/tail price, has already committed $1.3B through 2015

• Host AMC Secretariat

• Provide programmatic & operational functions

WorldBank

• Provide financial platform, balance sheet commitment

• Manage donor commitments and AMC disbursements

IndependentAssessmentCommittee

IndependentAssessmentCommittee

• Establish Target Product Profile (based on WHO recommendation)

• Monitor & report progress

• Determine vaccine eligibility given TPP

• Resolve disputes

AMCStakeholdersCommittee

AMCStakeholdersCommittee

• Assure funding commitments

• Monitor implementation and progress

WHO

• Provide regulatory role/prequalification

• Promote country demand

• Provide technical assistance

Industry’s perspectiveDemand risk is critical

Source of risk:– Risk is inherent in binding supply commitment– Donors have historically over-estimated demand– Funding contingent upon long-term ODA commitments

Mitigation:– AMC subsidy provides financing for capital cost– Partial demand guarantee to ensure subsidy payments– Fast AMC subsidy payout for early cash flow– Opt-out provision if demand absent

AMC can create a virtuous cycle of lower perceived risks and higher future investment.

1

AM

C P

rice

per D

ose

TailPrice

AMC Subsidy Period Tail Period

AM C Subsidy

GAVIFunding

Country co-pay ($0.10 - $0.30 per dose initially)

$7.00

$3.50

AMC Supply Agreement

Tail price ceiling

1st eligible vaccine available Donor Funds Depleted S upply Commit ment

Fulf illed

$0.00Y ears0 2 4 6 8 10

1

AM

C P

rice

per D

ose

TailPrice

AMC Subsidy Period Tail Period

AM C Subsidy

GAVIFunding

Country co-pay ($0.10 - $0.30 per dose initially)

$7.00

$3.50

AMC Supply Agreement

Tail price ceiling

1st eligible vaccine available Donor Funds Depleted S upply Commit ment

Fulf illed

$0.00Y ears0 2 4 6 8 10

Supply Agreements

2009 2012 2015 2018 2021 2024 2027 2030

Global 1 SC#1Global 2 SC#1

Emerging SC#1

Ann

ual D

oses

(M)

Illustrative Annual Supply Commitments

50

100

150

200

Global 2 SC#2

Global 1 SC#2

Emerging SC#2

Global Supplier #1 enters into supply agreements in 2009 and 2012.Global Supplier #2 enters into supply agreements in 2010 and 2012.Emerging Supplier enters into supply agreements in 2015 and 2018.Shaded triangles indicate headroom sales prior to reaching full capacity.

Per-unit subsidy vs. payment rate

US$

Doses (m)1

2

3

4

5

6

7

8

20 40

Per-unit subsidy = AMC volume / total supply commitment sought = $1500m / 200m doses = $7.5 per dose

Total subsidy entitlement = annual supply commitment * per-unit subsidy = Total subsidy payment

Doses (m)

US$

1

2

3

4

5

6

7

8

20 40 60 80 100

Total subsidized doses = total subsidy entitlement / payment rate

Payment rate = $3.50

60

Annual supply commitment

Doses delivered year 1

Doses delivered year 2

Doses delivered year 3

Why 200m doses supply commitment?

• The AMC should incentivize enough supply to meet demand

• Demand projections are the result of a very strong process, and are highly credible

• Long-term demand is estimated at approximately 200m doses annually

• It is likely that the $1.5bn total subsidy provides sufficient financing for 200m doses capacity

0

50

100

150

200

250

300

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Dos

es (m

illio

n)

GSK Wyeth Emerging Demand Forecast

Why a $7.50 subsidy per unit of capacity?

• The per-unit subsidy is determined by the total supply commitment volume and the total amount of AMC funds.

• In the original AMC design, a volume of $1.5bn was deemed sufficient to attract sufficient supply. This amount is locked in politically, although since then, design changes have been considerable.

• Therefore, one must re-evaluate whether a $1.5bn subsidy makes sense in the current AMC structure.

• Estimates of capital cost per unit of capacity range from $1-$4.50 overall.

• At the mean overall estimate of $2.75, a $7.50 subsidy covers investment cost with 10.6% real returns over 10 years. This is close to the assumed supplier discount rate of 10%, and indicates that the subsidy value is reasonable.

• If true capital cost were at the low (high) end of the distribution and variable cost were constant, then the subsidy would of course be too high (too low).

Why pay the subsidy at a rate of $3.50 per dose?

• Donors have higher confidence in demand projections than industry, and hence, want to compensate industry for demand risk.

• The higher the subsidy rate, the fewer doses must be sold to pay it out, and therefore, the lower is the impact of demand risk.

• The subsidy should therefore be paid out at as high a rate as acceptable to donors.

• A $3.50 subsidy implies a $7 price per dose early in the AMC. This is the highest price that donors would consider.

Why a $3.50 tail price?Argument• An AMC’s success hinges on its viability for the least efficient

producer.• Therefore, the tail price should be equal to, or somewhat higher

than, the least efficient producer’s variable cost.

Data challenges• Estimates of marginal cost from industry experts, indications of

reservation priceDecision rule• The downside risk of a marginal price reduction far outweighs the

upside.

Inflation indexing review

• Suppliers can request, every three years (or when cumulative inflation exceeds 7%), that an expert group review the price ceiling and recommend an inflation adjustment that equitably shares the burden of price increases.

• Nominal cost is likely to rise with inflation, though perhaps not quite at the same rate.

Why a 45% demand guarantee?

• Donors have better information about the demand forecast than suppliers, and are more confident in it.

• A demand guarantee sets a strong positive signal to suppliers on the credibility of the forecast.

• If the forecast is indeed correct, a guarantee is cost-free.

Basic maxims on setting prices• Set AMC subsidy per unit of committed supply so that it

compensates for capital investment cost.

• Set tail price so that it equals variable per-unit cost of the least efficient producer whose participation is needed.

• A higher tail price cap can compensate for a lower subsidy, but suppliers will not sell below cost, no matter what the overall NPV.

• Either the subsidy or the tail price should compensate for residual subjective demand risk.