Vaccine Procurement Contracts for Developing Countries

Abstract

In recent years, several global health organizations (GHOs) have experimented with market-based procurement contracts to encourage pharmaceutical companies to bring late-stage vaccines to developing-country markets. Pharmaceutical companies often find such markets financially unattractive because the opportunity cost of capacity commitment is high, developing countries have limited ability to pay, and demand is uncertain. A contract design recently implemented by one GHO offers the manufacturer a per-dose sales subsidy, which is paid by the GHO, on top of the base price paid by developing countries. The subsidy is required because the base price is not enough, by itself, to induce the manufacturer to commit capacity for developing-country markets. A natural question that arises in this context is whether alternate contract designs may lead to higher capacity commitment while keeping the GHO's budget fixed. This paper proposes and analyzes three contract designs that include the current practice and two alternatives inspired by the contracts studied in the operations management literature. We show that the best contract design depends on the size of the budget, and that GHOs can increase capacity commitment (over the contract design used in practice) by choosing the budget-appropriate contract design and optimal parameters for the chosen design.