The Pilot Advance Market Commitment - Innovative Development Financing in Operation
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Innovative Development Financing in Operation:
The Pilot Advance Market Commitment
for pneumococcal vaccines
Susan McAdams
Director, Multilateral Trusteeship and Innovative Financing
Informal Event on Innovative Sources of
Development Finance, New York, 3 June 2010
What is innovative financing?
"There is a genuine need to establish, by international consensus, “Innovative financing means different things to
different people. For some, it is about raising
stable and contractual new sources of multilateral finance." Innovative
new monies for global health work (like
sources of finance could include a currency transaction tax, a carbon Debt2Health), while others consider the new
tax, resuming Special Drawing Right allocations, and/or establishing mechanisms as tools to make existing aid
an international tax organization." spending more effective through various
means, including: 1) changing the timing of
United Nations Zedillo Report 2001
“Innovative financing options disbursements to accelerate health results (like
are simply new combinations the International Finance Facility for
Innovative development finance … involves
Immunization); 2) increasing certainty to bring
or adjustments of existing nontraditional applications of … mechanisms
down prices of commonly-purchased
instruments and resources, that (i) support fund-raising by tapping new
medicines and goods (such as the Advanced
sources and engaging investors beyond the
rather than new financial financial dimension of transactions, as
Market Commitments); and, 3) changing the
incentives to recipients (through results-based
instruments aimed partners and stakeholders in development; or
aid such as the Global Fund and GAVI ISS).
exclusively at addressing (ii) deliver financial solutions to development
Brookings Institution
climate change.” problems on the ground.
Navin Girishankar 2009
UNFCCC 2007 “An innovative financing mechanism
(IFM) is defined here as an institutional
Global environmental taxes, currency arrangement that results in the transfer of
transaction taxes, taxes on global arms sales, … the notion of innovative new or increased financial resources
voluntary private-sector contributions, private development financing mechanisms from those willing to pay for sustainably
donations, global lottery and global premium designates resources that are provided produced goods and/or forest ecological
bonds, topic-specific global funds, financial services, to those willing to provide these
in addition to Official Development goods and services in turn.”
engineering, the International Finance Facility
(IFF), a development-focused allocation of Assistance (ODA) and are more Verweij 2002
SDRs, and public guarantees. predictable.
Reisen, OECD, 2004 Leading Group 2009
2Two 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
3Innovative financing raises
additional funds
Raising EXAMPLES
additional Sources of obligatory financing.
funds Global taxes: Adaptation Fund, Arms
Trade Tax, Air Ticket Solidarity Levy,
Currency Tax, Digital Solidarity Levy.
Efficient Cap and Trade: Emission Certificates.
financial
engineering Sources of voluntary private financing.
Affinity Credit Cards, Diaspora Bonds,
Private Giving, Product Red, P2P Internet
Effective Giving, Remittances, Social Investing.
Implemen- Domestic sources of financing.
tation Payments for Environmental Services.
4Financial engineering increases
financing efficiency
EXAMPLES
Raising
additional Timing of financing. IFFIm (frontloading
funds of aid), endowments (backloading). AMC
(financial pull mechanism)
Scale of financing. Microfinance.
Financial Volatility and unpredictability of aid.
engineering IMF Exogenous Shocks Facility, IFFIm.
Risk management. Local currency
lending: GEMLOC (currency risk).
Effective Caribbean Catastrophic Risk Insurance
Implemen- Facility (natural disaster risk), GDP-
tation indexed Bonds (country risks).
5Innovative financing increases
development effectiveness
Raising EXAMPLES
additional Incentive creation. Advance Market
funds Commitments (for the private sector),
credit buy-downs (for developing country
governments).
Financial Market creation. Advance Market
engineering Commitments. Market enlargement.
Affordable Medicines Facility for Malaria.
Market power. UNITAID.
Effective
use of funds
6Product Development Cycle: Vaccines
Developing a new vaccine can take 7-20 years - assuming success at
each stage of the process – and cost $ hundreds of millions.
Manufacturing
High cost,
capacity low probability of
Decision scale-up success
gate:
Probability of A disincentive
success? Efficacy to invest at
Cumulative
investment
trials each stage
(phase III)
Primate/
early
clinical
Research/
pre-clinical ?
0
1 2 3 4 5 6 7 8 9 10 11 12 13
7
Elapsed time (years)
Source: Mercer Management Consulting analysisLack of access to vaccines –
the vicious cycle
Limited vaccine Limited
supply keeps
prices relatively supply
high
Higher
Uncertain price
Higher prices keep
demand developing
Uncertainty about countries uncertain
demand in about demand and
developing countries donors uncertain
leads industry to about financing
limit investments in needs
capacityGlobal Introduction of a New Vaccine
(to date)
100%
Vaccine Coverage
Industrialized
World
Developing
World
0%
15-20 yearsThe 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
countriesAMC 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.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.
12Leading infectious killers
3.5
3.5 S. pneumoniae:
< 5 years ~1.6 > 5 deaths,
old million years old
3.0
2.7 including ~800,000
2.5 2.2 child deaths
Deaths (millions)
2.0 1.7
1.5 1.1
1.0
0.5
0 Pneumonia Malaria
AIDS TB Diarrhoea
Source: WHOBurden 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 to
200m dose annual capacity over time ($7.50 per dose of
committed capacity)
• Tail price ceiling of $3.50Target 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 process
Step 1
Donors
Donors provide AMC
Financial Support subsidy Step 3
Step 4
World Bank
Financial WB manages AMC
Management for subsidy disbursing it
Donor Funds as needed
UNICEF
UNICEF Entry into a procures
UNICEF Call for Supply
Procurement Supply Offers vaccines from
Agency Agreement manufacturers
Manufacturer supply offer
Manufacturers
Develop and Step 2
produce vaccines Application for pre-
qualification
WHO
WHO
Technical support
prequalifies
Defines TPPs
pneumococcal
Pre-qualification
vaccine
GAVI IAC assesses if
Financial, GAVI Strategic
the vaccine
Administrative, Demand forecast meets the Target
Programmatic updated biannually Product Profile
support GAVI and
countries
contribute to cost
Countries of vaccine
Vaccines
Decide to adopt are
Application for
vaccine and co- delivered
finance vaccines
to
countriesCurrent Status: UNICEF calls for offers
Million of doses
222
200
127
Un-awarded supply
available for bidding
Awarded supply
19AMC 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
19Beyond the Pilot: Challenges
Pricing/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
20AMC 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 22
www.worldbank.org/innovativefinancing
Backup Slides
Key structures
GAVI World
Independent Bank
Independent
• Provide co-payment/tail
Assessment
Assessment
• Provide financial
price, has already Committee
Committee platform, balance sheet
committed $1.3B commitment
through 2015
• Manage donor
• Host AMC Secretariat • Establish Target
commitments and AMC
Product Profile (based
• Provide programmatic & disbursements
on WHO
operational functions recommendation)
WHO
AMC
AMC • Monitor & report
Stakeholders
Stakeholders progress
• Provide regulatory
Committee
Committee • Determine vaccine role/prequalification
eligibility given TPP
• Assure funding • Promote country
• Resolve disputes demand
commitments
• Monitor implementation • Provide technical
and progress assistance
25Industry’s perspective
Demand 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
AMC Supply Agreement
$7.00
AM C Subsidy
AMC Price per Dose
Tail pric e c eiling
Tail
Price $3.50
G AV I Country co-pay ($0.1 0 - $0.30 pe r dos e initially)
Funding
$0.00
0 2 6 8 10 Y ea rs
4
1st e ligible S upply C om mit me nt
v ac cine av aila ble D onor Funds D eple te d
Fulf ille d
AMC Subsidy Period T ail PeriodSupply Agreements
Illustrative Annual Supply Commitments
200
Emerging SC#2
Annual Doses (M)
150
Emerging SC#1
100
Global 1 SC#2
50 Global 2 SC#2
Global 2 SC#1
Global 1 SC#1
2009 2012 2015 2018 2021 2024 2027 2030
Global Supplier #1 enters into supply agreements in 2009 and 2012.
Global Supplier #2 enters into supply agreements in 2010 and 2012.
Emerging Supplier enters into supply agreements in 2015 and 2018.
Shaded triangles indicate headroom sales prior to reaching full capacity.Per-unit subsidy vs. payment rate
Total subsidy entitlement = annual supply
commitment * per-unit subsidy = Total
subsidy payment
US$
8 US$
8
7
Per-unit subsidy = 7
6 AMC volume / total
supply commitment 6
5 sought = $1500m / 5 Total subsidized doses = total
200m doses = $7.5 subsidy entitlement / payment rate
4 per dose 4
3 3
2 2 Payment rate
Doses (m) = $3.50
1 1
20 40 60 20 40 60 80 100 Doses (m)
Annual supply Doses delivered Doses delivered Doses delivered
commitment year 1 year 2 year 3Why 200m doses supply
commitment?
• The AMC should incentivize
enough supply to meet 300
demand
250
• Demand projections are the
200
result of a very strong process,
D o ses (m illio n )
and are highly credible 150
• Long-term demand is 100
estimated at approximately 50
200m doses annually
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
• It is likely that the $1.5bn total
subsidy provides sufficient GSK Wyeth Emerging Demand Forecast
financing for 200m doses
capacityWhy 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 price
Decision 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.
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