#31 India and the Global Race for Vaccines
There's now a race to develop a vaccine. Soon, there will be another to access it. India should plan on winning the latter.
This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?
Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.
The ongoing global efforts to develop a vaccine against the novel coronavirus and the subsequent plans to manufacture billions of doses of the successful vaccine pose a public policy challenge for India. WHO has a list of about 80 potential candidates that are at various stage of pre-clinical vaccine research (four of them are from India). Seven have moved to human trials stage at this moment. 3 of them are from China, 1 from the UK and the rest from the US. Assuming a lot of things fall perfectly into place, the earliest a universal vaccine can be available for production is possibly by March 2021. India has to then assume it gets access to the production technology to make it domestically or it places huge orders for the vaccines from the manufacturer. It then has to coordinate a national mission to inoculate hundreds of millions of Indians in a really quick time. An optimistic wager would be India accomplishing all of this by end of 2022. That’s a long time to be living with intermittent lockdowns.
It is important for India to project the likely scenarios that might emerge after a vaccine is developed, evaluate the alternatives available now and initiate policy actions right away. In order to appreciate the policy options available to India, it is useful to understand the economics of vaccine consumption and its research and production. There are three questions we attempt to answer here:
Why does the world not have vaccines for infectious diseases (tuberculosis, malaria, measles and acute respiratory infections) that take more than 5 million lives every year?
What happens when a vaccine for the novel coronavirus is developed?
What policy options must India consider and start acting on immediately?
Market failures in vaccine development
The entire vaccine development lifecycle can be used to explain almost every single form of market failure. To begin with, the market for vaccines tend to be inefficient for a variety of reasons:
Unseen benefits: The benefits of inoculation aren’t immediately apparent. The health benefits can only be gauged over the long-term. Further, a number of people who don’t take the vaccines remain healthy. There’s misinformation about vaccines that’s peddled actively by multiple lobbies as well. Poor and uneducated consumers, therefore, tend to view vaccines with suspicion
Free rider problem: Those who take vaccines inoculate themselves and break the cycle of infection. This stops the spread to others. So, the marginal incentive for the next person to take a vaccine reduces
Inability to pay based on future benefits: The biggest beneficiaries of a vaccine are children who, in future, will have good health leading to longer employment and, possibly, better incomes. But it is difficult to design a contract that allows them to pay for a vaccine today based on better future earnings
Market dominance: Developing a vaccine takes a long time (about 10 years), involves cutting edge research and lots of trials. After all these, the success rate of taking a vaccine to market is about 6 per cent. Any enterprise will use its monopoly over a vaccine to recover the significant R&D spends it incurs in developing it
These market failures lead to government interventions. They buy vaccines in bulk, run vaccination campaigns on a mission mode with volunteers fanning out and, often, provide them free to improve adoption. That’s all good but this creates newer distortions in the vaccine R&D market that already has market failures endemic to it.
Let’s look at the economics of infectious disease vaccine R&D market.
Positive externality: The social benefits of vaccines go beyond the value a vaccine manufacturer derives from selling a vaccine. The vaccine maker can’t price in these externalities
Partial monopsony: Government is often the sole buyer of vaccines. It further uses its coercive powers to reduce the prices, loosen the IP regime and make the vaccine know-how available to other makers
First-mover disadvantage: Vaccine development is a risky, long-drawn and costly process. But once a successful vaccine is developed it isn’t difficult for others to copy the process with minor modifications and with some help from the state relaxing patent regimes in the name of the greater good. These imitators flood the market with cheaper versions without violating any patents. The resolution of technology and market uncertainty at great cost by the first mover makes it easier for the later entrants to price it out of the market
Information asymmetry: The various market failures of vaccine research deter private makers. It is left to multilateral bodies, philanthropies and government agencies to fund R&D efforts. These agencies don’t have the expertise to know which among the many research efforts are likely to succeed in the market. Scientists aren’t always interested in ‘market success’ of their efforts. Often, academic research is the sole objective. But it is difficult for the grant agencies to make out the difference
Supply side challenges
It is evident there’s hardly any incentive for vaccine research and the limited funding often goes into basic research over applied uses of research. The solution for this has to be a guarantee of strong demand for vaccines at a pre-determined price that rewards the vaccine maker who is first to the market. The COVID-19 pandemic eliminates most of these market failures. But this has arrived at the cost of millions of infections, a hundred thousand deaths and economic distress. With the demand sorted, consider how the supply side for the development of a vaccine is evolving.
Funding: Governments and central banks world over have spent trillions of dollars in bailouts and relief packages. But there’s hardly been a fraction of that amount spent on the only long-term solution to the pandemic – a vaccine. Private sector and philanthropic organisations (Gates Foundation, specifically) have taken the lead in the funding the research
Resource pooling: In the last week we have seen governments starting to coordinate efforts between various research initiatives within their national boundaries. Operation Warp Speed announced by the White House is an example. The idea is to expedite the development process by pooling of trials, building manufacturing capabilities in advance for different options without waiting for their results and creating a master trial protocol
Stockpiling: There are many unknowns still – reinfection risks, duration of immunity from a vaccine, mutation possibilities, geographic and climate dependencies – that might lead countries to stockpile vaccines and place export barriers for them
Vaccine as a tool for geopolitics: The impact of a successful vaccine on the economy and health of people makes it a strategic tool for the governments. Supply will be controlled and rationed by countries to further geopolitical and geo-economic objectives
Options for India
A low-income country with a large population like India has significant risks even if a universal vaccine is developed quickly elsewhere in the world. India can ill-afford the huge economic costs and time for the vaccine to reach its shores. There are a few strategic options that it must exercise at this moment to make the best of a bad situation. These include
Funding domestic vaccine research: That one among the Indian candidates succeeds in developing the vaccine shouldn’t be ruled out. But, more importantly, the farther these initiatives go, the easier it will be for one of them to ‘reverse engineer’ a successful vaccine developed elsewhere. This is critical for future self-sufficiency. The Indian government should fund half of the research efforts underway among the six candidates identified in the WHO shortlist. These grants might cost about Rs. 10,000 crores which is small potatoes considering the relief and stimulus package being considered that runs into trillions
Advance contracts with global vaccine makers: India should explore options of signing forward contracts with as many among the seven candidates who have moved to the human trials stage. An advance commitment to purchase a few hundred million doses and some upfront payments to a few players will help secure earlier access to vaccines when they are market-ready. The likely cost of this could be in the range of Rs. 15,000 crores
Offering manufacturing capacity: India has a comparative advantage in manufacturing vaccines (Serum Institute of India is the world’s largest producer of vaccines). It must consider proactively building multiple production lines at a scale that might be relevant for the seven candidates. Not all of these lines will be productive eventually, but this is a good investment that plays to its strengths and fulfils the production capacity challenge that some of these candidates face at this moment. India should fund the excess capacity building among its domestic producers which could be up to Rs. 15,000 crores. There are multiple options of recovering this cost including sharing the earnings from exporting the vaccine doses or being the sole distributor of the doses made in those production lines for domestic and export markets
Don’t piss off China: It is very likely China will be the first to produce a successful universal vaccine. It makes sense to keep the relationship with China on an even keel and not lapse into the populist China-phobia prevalent at this moment. Multilateral institutions aren’t going to help. We have to play our bilateral cards carefully
Vaccines as strategic stockpile: These efforts should lead to a long-term programme of vaccine research and development for infectious disease and stockpiling of key vaccines for future emergencies
A successful vaccine for this virus, unlike others in the past, won’t just solve a public health crisis. It will also be a ticket to be free from frequent lockdowns and to be on road to permanent economic recovery. The benefits of securing early access to a successful vaccine and building future self-sufficiency far outweighs the Rs. 40,000-45,000 crores of costs. Considering the lack of global coordination among countries to fight the pandemic and deepening of the instincts of economic nationalism, it is a tad optimistic today to expect any vaccine that’s successful to be immediately shared with the rest of the world. India needs to play its cards wisely.
Reading and listening recommendations on public policy matters
[Article] “In the Race for a Coronavirus Vaccine, We Must Go Big. Really, Really Big” - Michael Kremer who pioneered the concept of Advance Market Commitment (AMC) suggests the U.S. government should commit to $70 billion guaranteed spend on a new vaccine to secure the future
[Article] Ngozi Okonjo-Iweala points out “neither domestic agendas nor profit can be allowed to drive the effort for the largest vaccine deployment in history.”
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