The Economics of Innovation in Times of Pandemic: How to Incentivise the Development, Supply, and Continuous Improvement of Innovative Solutions to Fight COVID-19?

Article by: Mikel Berdud, Adrian Towse and Mireia Jofre-Bonet, with collaboration from Maria Errea and Mehmet Bulut

The colossal health and economic shock caused by COVID-19 has highlighted the vital role that the public and private sectors play in finding health solutions and producing them in massive quantities in an unprecedentedly short length of time. However, the first treatments, tests and (hopefully) vaccines developed and used will only offer partial solutions. Competing follow-on technologies will offer better or complementary health benefits. It is essential that health systems do not put all of their eggs in one basket.

The rapid spread of the novel coronavirus (SARS-CoV-2) – known as Coronavirus Disease 2019 (COVID-19) – from Wuhan, China in December 2019 to 188 countries around the world with (at time of publication) 312k deaths and 4.6 million infected) has put governments under pressure to make difficult political choices.

In the EU, one of the most affected areas, most countries have implemented population lockdowns of different degrees including school closures, citizen confinements, non-essential business closures and banning public events. 

The aim is to ‘flatten the curve’ of new infections, providing some relief to health care systems to reduce potential deaths. But lockdowns have dramatic negative economic and social consequences – a GDP decrease of 20%-30% for the G7 - with associated mortality and morbidity.  When countries (i.e. Spain, Italy, UK, France) see lockdowns have ‘flattened the curve’, they rush to exit them judging that the marginal (economic and health) benefit of exiting exceeds the marginal cost of maintaining lockdown. The development of innovative health technologies including diagnostic tests, new or repurposed effective therapies, and vaccines, are crucial to further changing the benefit-cost balance. Their potential to generate health and economic net value is huge. Not surprisingly, a global R&D effort to discover and/or scale up production of potentially effective solutions has been triggered. R&D is being funded by the private sector, and by governments (e.g., UK, Spain, US, Canada) and foundations with  a total of 118  vaccine candidates under development (8 in clinical evaluation), and a long list of drug candidates with around 800 clinical trials investigating  COVID-19 therapies.  Finally, testing diagnostics, for both active infection and for antibodies, are in a development race to improve  specificity and sensitivity.

In the fight against COVID-19, Governments are learning by doing in public health interventions, using the experiences of their neighbours as positive or negative examples. Learning by doing will also characterise the development of innovative health technologies to fight the COVID-19, as more is known about the disease, better innovative solutions will be developed. However, in the current context the fast adoption and wide global access to the early but imperfect technologies might help to save huge health loss and economic cost. In the case of COVID-19 antibody tests, for instance, massive testing with an imperfect test will improve the effectiveness of exiting lockdown saving huge socio-economic costs. The first (likely imperfect) vaccines or new treatments making it to the market promise even higher expected benefits. Thus, two crucial policy questions arise: how to organise and regulate global markets to incentivise the timely and successful development and supply of innovative solutions to fight COVID-19?; and, how to keep competition going to incentivise the development and adoption of new improved versions of such solutions?

There is no guarantee that we have a pathway to developing the most effective diagnostic tests, treatments, and vaccines. A globally optimal outcome requires three things:

  1. Countries’ cooperating for the common good. As Bill Gates noted “some markets simply don’t function properly in a pandemic, and the market for life-saving supplies is an obvious example. The private sector has an important role to play, but if our strategy for fighting COVID-19 devolves into a bidding war among countries, this disease will kill many more people than it has to”.
  2. Mechanisms which provide incentives for continued private sector research and which reward investment. Proposals have been made for compulsory licencing of COVID-19 treatments and vaccines. However, this will reduce private sector willingness to invest at risk, increasing reliance on government and donor “push” funding of research, development, and manufacturing.
  3. Mechanisms which reward follow-on products rather than a ‘winner takes all’ approach. Multi-country patent buy-outs at a value-based price or an international COVID-19 Impact Fund have been proposed for new tests, products or vaccines. These could be efficient solutions for the first tests, vaccines or treatments making it to the market but developers of other tests, treatments, and vaccines of equivalent or better quality could lose out. Competition for development of better tests, treatments and vaccines would then be discouraged because rewards and purchase contracts were directed at the first to market. Investment in potentially better technologies offering more health gain and economic benefit would be abandoned and never reach the market.

One route forward is a benefit-based AMC, which has been proposed for a COVID-19 vaccine by authors from the Center for Global development (CGD), Program for Appropriate Technology in Health (PATH), and OHE. This is based on the Market-Driven Value-based Advance Commitment (MVAC) and designed to aggregate advance commitments by individual countries into a minimum guaranteed market for companies that are able to meet the agreed Target Product Profile (TPP). Value-based prices will be set in advance using Health Technology Assessment tools, varying by product, depending on how well the technology meets the TPP, and by country depending on ability to pay. Differential pricing would ensure that low income countries had access at cost, supported by donors, for example through The Vaccines Alliance (Gavi). Rules could be pre-agreed for priority allocations between countries whilst manufacturing volumes were being scaled up. 

A key part of the proposal is to incentivise the development of improved vaccines that could enter the market in future periods and to provide for competition between vaccines by (i) agreeing guaranteed value-based minimum prices in each country for products that meet the TPP threshold, and, (ii) allowing competition with governments deciding how to efficiently spend their advance commitment as between different vaccines.

The benefit-based AMC framework could be used for new treatments and for new diagnostic tests. It is intended to address the challenge laid down by Bill Gates – that in pandemic circumstances normal market mechanisms do not work. We risk a free-for-all bidding competition mirrored by calls for the abandonment of the intellectual property protection that is needed for long term private sector investment by those who fear they will lose out from such a competition.

Perhaps most importantly of all, we need market mechanisms that recognise that getting an optimal mix of different types of tests, treatments and vaccines will take time and requires rewarding the engagement of private sector research, development and manufacturing, as well using the resources and skills of government and of academic researchers. We will “learn by doing” using knowledge generated by discovery, by clinical development, and by clinical practice to get better use of new technologies as they appear and to develop better technologies that deliver more health and economic gain.

Related Research

Chalkidou, K., Towse, A., Silverman, R., Garau, M., & Ramakrishnan, G. (2020). Market-driven, value-based, advance commitment (MVAC): accelerating the development of a pathbreaking universal drug regimen to end TB. BMJ Global Health5(4), e002061. Available at: https://gh.bmj.com/content/bmjgh/5/4/e002061.full.pdf

Posted in Competition, Innovation | Tagged Commentary