Vaccines Where They're Needed
Batson, Amie, Bekier, Matthias M., The McKinsey Quarterly
Governments and international organizations could reduce me financial risks borne by the developers and marketers of vaccines--and thereby make them cheaper and more plentiful.
Saving a life usually grabs more attention than preventing a death. Perhaps that is why the achievements of drugs--antibiotics, anti-cholesterol treatments, and countless others--have overshadowed those of simple vaccines. Yet the vaccines for polio and smallpox have been two of the greatest public-health triumphs of the past 100 years. From a developing country's point of view, immunization still promises the most cost-effective public-health strategy for maladies ranging from measles to polio to tetanus. It will be a long time before the world's most devastating infectious diseases are eradicated, as smallpox has been, thus making vaccination against them unnecessary. In the meantime, preventing their occurrence through vaccination is vastly cheaper than caring for their victims, but the economics of drug development often don't line up with the economics of health care provision in poor nations.
Sometimes, the result is that no vaccine gets developed. Two million people, mostly in the developing world, die of malaria annually, but only in the past five years has there been a concerted global effort to develop a vaccine against it. In other cases, vaccines do exist but are too expensive for the markets in question. For example, though a vaccine for the pneumococcal disease--a bacterial form of pneumonia that claims more lives than malaria--actually does exist, the $200 cost of a four-dose treatment is beyond the reach of most people in the developing world, where total annual health care expenditures come to less than $10 a head. For this reason, vaccines for diseases prevalent in these countries are a risky, and often a loss-making, proposition.
Manufacturers may well be able to justify to their shareholders low returns on some vaccine projects for developing countries. But if a project risks substantial losses or, by diverting finite resources, prevents a company from making and marketing more profitable products, it is likely to shy away.  Hence the need for subsidies from private donors and governments--a need that will only grow as the price of vaccines goes on rising around the world.
These and other kinds of entities recently committed well over $1 billion to distributing existing vaccines to the world's poorest people and to hastening the development of the most needed vaccines. Coordinating this initiative is the Global Alliance for Vaccines and Immunization (GAVI), composed of governments, international agencies, private foundations, and drug companies.  GAVI is assessing how alternative finance mechanisms could best allow the governments of developing nations to promote the development, production, and distribution of vaccines by paying for them in a different way (Exhibit 1), not just by paying more.
McKinsey has helped GAVI to mine one seam of opportunity. In certain areas, funding entities such as individual governments or international organizations can help cut the financial risks borne by the developers and marketers of vaccines, and at a lower cost than the company itself would have to assume. Sometimes, these entities would advance funding; in other cases, they would have to commit themselves only to purchasing a vaccine once it was produced. As a result, drug companies would be more willing to take on what had previously been commercially unpromising vaccine projects and might even be able to reduce prices per unit. The shifting of costs to the party that is in the best position to bear them would leave a greater sum of value to be divided between buyer and seller. In the language of investment banking, this would be an "arbitrage Opportunity."
A more than risky business
At present, governments in the developing world, as well as international agencies such as the United Nations Children's Fund (UNICEF), purchase vaccines much as private citizens might buy over-the-counter drugs. …