1 I explicitly note that the discussion hereafter is primarily focused on global diseases, which affect high, middle, and low-income countries. For example, cervical cancer impacts women in high, middle, and low-income markets, although the primary burden of disease is in less-developed countries. Global diseases are different from the so-called neglected diseases or orphan diseases, whose burden is primarily in LICs or affect a small and distinct population, respectively. For neglected diseases, such as malaria and tuberculosis, the burden is almost exclusively in low-income markets. Policies directed towards providing incentives for research, development, and introduction of new medicines for global diseases will necessarily be different than those for neglected or orphan diseases because of the difference in market potential. Sunk costs for research, development, regulation, and capacity for pharmaceuticals and vaccines for global diseases can be spread across both high and low-income markets. Neglected and orphan diseases have more concentrated demand, and lower potential to recoup sunk costs.

2 See World Health Organization, Projections of Mortality and Burden of Disease, 2002-2030, http://www.who.int/healthinfo/global_burden_disease/projections/en/ (last visited Nov. 01, 2008) (baseline scenario projections for 2008).

3 Currently, there are two licensed HPV vaccines: CERVARIX®, which protects against HPV types 16 and 18, and is supplied by GlaxoSmithKline (GSK), and GARDASIL® which protects against types 6, 11, 16, and 18 and is supplied by Merck and Co., Inc. (Merck). CERVARIX® and GARDASIL® have demonstrated 96.9 percent (95 percent CI 81.3 percent; 99.9 percent) and 100 percent (95 percent CI 87.9 percent; 100 percent) efficacy against HPV 16/18 related disease in clinical trials, respectively. Types 16/18 are responsible for 70 percent of all invasive cervical cancer cases. See GSK, Cervarix Package Leaflet: Information for the User (2008), http://emc.medicines.org.uk/document.aspx?documentId=20207; Merck, Gardasil Prescribing Information (2008), http://www.merck.com/product/usa/pi_circulars/g/gardasil/gardasil_pi.pdf.

4 GARDASIL® has been approved in 106 countries so far and CERVARIX® in at least 64 countries. Press Release, Merck, FDA Approves Merck's Gardasil To Protect Against Two Additional Cancers (Sept. 12, 2008), available at http://www.merck.com/newsroom/press_releases/product/2008_0925.html; Press Release, GSK, Cervarix™, GSK's Cervical Cancer Vaccine, Wins Tender for UK National Immunisation Programme (June 18, 2008), available at http://www.gsk.com/media/pressreleases/2008/2008_pressrelease_10071.htm.

5 See Richard T. Mahoney & James E. Maynard, The Introduction of New Vaccines into Developing Countries, 17 Vaccine 646, 646 (1999).

6 See Marleen Boelaert et al., Letter to the Editor, Do Patents Prevent Access to Drugs for HIV in Developing Countries?, 287 JAMA 840, 841 (2002); see also Kevin Outterson, Patent Buy-Outs for Global Disease Innovations for Low- and Middle-Income Countries, 32 Am. J.L. & Med. 159, 159-60 (2006); see also Bernard Pécoul et al., Access to Essential Drugs in Poor Countries: A Lost Battle?, 281 JAMA 361, 366 (1999); see generally John H. Barton, TRIPS and the Global Pharmaceutical Market, 23 Health Affairs 146 (2004) (discussing conflict between the needs of pharmaceutical manufacturers and the needs of low-income countries).

7 See Mahoney & Maynard, supra note 5, at 651-52; Jan M. Agosti & Sue J. Goldie, Introducing HPV Vaccine in Developing Countries – Key Challenges and Issues, 356 New Eng. J. Med. 1908, 1910 (2007); Amir Attaran, How Do Patents and Economic Policies Affect Access to Essential Medicines in Developing Countries?, 23 Health Affairs 155, 163-64 (2004); John Clemens & Luis Jodar, Commentary, Introducing New Vaccines into Developing Countries: Obstacles, Opportunities and Complexities, 11 Nature Med. Supp. S12, S12-13 (2005); PATH, Introducing HPV Vaccines in Developing Countries: Overcoming the Challenges (2005), http://www.path.org/files/RH_hpv_intro.pdf.

8 Kevin Outterson & Aaron S. Kesselheim, Market-Based Licensing For HPV Vaccines in Developing Countries, 27 Health Affairs 130, 135 (2008).

9 Outterson and Kesselheim estimate that for the HPV vaccine, the cost of the GO License based on lost R&D funds would be approximately 16.5 million dollars per year for the life of the patent. See id.

10 Id.

11 I explicitly focus on the tenets of the GO license as it relates to the vaccine market, which is distinct from the pharmaceutical markets. The differences are significant enough that conclusions drawn from this critique may not be entirely applicable to the pharmaceutical market.

12 See Shaou-Bai Chao & Ranjit Deshmukh, Wyeth Biotech, Large Scale Manufacturing – Challenges and Opportunities (2007), http://www.wtec.org/vaccmfg/workshop-na/Proceedings/04-Chao.pdf.

13 In most countries, vaccine firms must fully comply with legal and regulatory requirements known as Good Manufacturing Practices (GMPs) and Good Laboratory Practices (GLPs). GMP and GLP requirements help to assure that the production and testing of vaccines is conducted within validated ranges and under sterile conditions to provide added assurances that the product remains safe and efficacious. Manufacturers undergo periodic review of all of their facilities to assure that they remain in compliance with guidelines for GMPs and GLPs. For example, in the United States, vaccine production is regulated by the Center for Biologics Evaluation and Research (CBER), which is part of the Food & Drug Administration (FDA). CBER also has the responsibility of reviewing all batch records and test results for each batch of vaccines prior to release to ensure that each batch of product is both safe and effective. See FDA, Vaccine Product Approval Process (July 22, 2002), http://www.fda.gov/Cber/vaccine/vacappr.htm.

14 Pre-qualification is a formal evaluation process that assures the acceptability in principle of vaccines from specific manufacturers to be procured by UN agencies. See WHO, A System for the Prequalification of Vaccines for UN Supply (Apr. 6, 2009), http://www.who.int/immunization_standards/vaccine_quality/pq_system/en/index.html.

15 Alejandro Costa, World Health Organization, Vaccine Supply Seminar: Global Production and Availability of Vaccines 3 (2003), http://www.who.int/immunization_supply/vaccine_production_supply_seminar.pdf.

16 Amie Batson, Sarah Glass & Piers Whitehead, Vaccine Economics: From Candidates to Commercialized Products in the Developing World, in New Generation Vaccines 57, 65- 67 (Myron M. Levine et. al. eds., 2004).

17 Vaccine Security: A Global Challenge, 3 Update: Vaccines & Immunization WHO/UNICEF Technical Update 1, 1 (2003), available at https://www.who.int/vaccinesdocuments/DoxNews/updates/VIupdate3e.pdf.

18 Developed-world vaccine suppliers include GSK, Novartis, Merck, Sanofi Pasteur, and Wyeth. See GAVI Alliance, Industrialised Country Vaccine Industry, http://www.gavialliance.org/about/in_partnership/industrialized/index.php (last visited Apr. 13, 2009).

19 From 1997 to 2001, industrialized manufacturers supplied 39 percent to 77 percent of the doses required for the traditional vaccines (measles, diphtheria-tetanus-pertussis, yellow fever, and BCG) procured through UNICEF, and in 2001, 100 percent of the initial supply for GAVI-procured antigens (HepB, Hib, and Yellow fever). Press Release, IFPMA, The Value of Vaccines 4 (May 18, 2003), available at http://www.rxcolleagues.com/content/stay_informed/gallery/resource_library/docs/Value_of_Vaccines.pdf.

20 Currently, regulatory authorities are debating the idea of “sameness” required for follow-on biologics or bio-similar products. Pharmaceuticals are small-molecule chemicals whose structure can be fully described and therefore generic copies can be produced. Advances in technology, process control, and characterization have allowed for greater understanding of the physical structure of large-molecule biologics, which will allow for the production of follow-on biologics. However, due to limits in describing the completed structure of biologics and the inherent variability in biologic production it is not possible to make exact generic copies. Additionally, for vaccines it is not currently possible to make even bio-similar products because of their complexity. See Henry Grabowski et al., The Market for Follow-On Biologics: How Will It Evolve?, 25 Health Affairs 1291, 1292 (2006); Richard G. Frank, Regulation of Follow-On Biologics, 357 New Eng. J. Med. 841, 841-42 (2007).

21 Developing world manufacturers include Bio Farma (Indonesia), Fiocruz (Brazil), and Serum Institute of India, among others. See DCVMN Members, http://www.dcvmn.com/members/members-lists.html (last visited Apr. 12, 2009).

22 UNICEF estimates the developing-country manufacturers increased annual vaccine sales from $63 million to $146 million from 2002 to 2005. This increase in sales captures not only the change in relative market share for developing country manufacturers but also an overall increase in the price per dose of vaccines sold. Additionally, in a 2004 presentation by the Developing Countries Vaccine Manufacturers Network, developing world manufacturers supplied twenty-seven percent of volume for new antigens that were procured with GAVI funds, from zero percent in 2001. Suresh S. Jadhav, Developing Countries Vaccine Manufacturers Network 12 (2004), http://www.who.int/vaccine_research/about/gvrf_2004/en/gvrf_2004_jadhav.pdf; See WHO, Developing Country Vaccine Manufacturers and Sustainability of Vaccine Supply, http://www.who.int/immunization/newsroom/Vaccine_supply_FINAL.pdf, last visited Apr. 12, 2009 [hereinafter WHO 2006].

23 The EPI program initially focused on vaccines for six diseases, diphtheria, tetanus, pertussis, measles, polio, and tuberculosis.

24 An example of the technology limitations is conjugation technology. Conjugation is a process whereby antigens are attached to carrier protein. This process improves the immunological properties of the vaccine. Conjugation is used in particular for pneumococcal, meningitis, and Hib vaccines, and although the technology has been in the public domain for some time, developing world manufacturers do not currently have a conjugated vaccine that has been prequalified by WHO. See WHO, United Nations Prequalified Vaccines, http://www.who.int/immunization_standards/vaccine_quality/pq_suppliers/en/ (last visited Oct. 24, 2008); Julie Milstien & Brenda Candries, WHO, Economics of Vaccine Development and Implementation: Changes Over the Past 20 Years 3-4 (2006), http://www.who.int/immunization_supply/introduction/economics_vaccineproduction.pdf.

25 Joseph E. Stiglitz, Economics of the Public Sector 120 (1988).

26 See Tomas Philipson, Private Vaccination and Public Health: An Empirical Examination for U.S. Measles, 31 J. Hum. Resources 611, 612 (1996).

27 “Herd immunity” refers to the effect when a high proportion of the population, but less than 100 percent, is immunized against a specific disease. In a highly vaccinated population vulnerable persons are very unlikely to transmit the disease to one another. In effect, this confers protective immunity to unvaccinated individuals. This is particularly beneficial for portions of the population that are unable to be immunized, such as people who are immunocompromised. However, herd immunity also encourages a “free rider” phenomenon in which individuals may avoid the present costs of vaccination in the rational expectation that mass immunization will protect them from the disease. This free riding has been used to justify government mandates for vaccinations such as school entry requirements. For a fuller discussion of the externalities related to vaccination refer to Dagobert L. Brito et al., Externalities and Compulsory Vaccinations, 45 J. Pub. Econ. 69, 70-71 (1991); Thomas Philipson, Economic Epidemiology and Infectious Diseases, in Handbook of Health Economics 1761, 1787-89 (Anthony J. Culyer & Joseph P. Newhouse eds., 2000).

28 Donald S. Kenkely, Chapter 31 Prevention, in Handbook of Health Economics 1675, 1694 (Anthony J. Culyer & Joseph P. Newhouse eds., 2000).

29 For example in the United States, the federal government purchases between fiftytwo and fifty-five percent of childhood vaccines. See Institute of Medicine, Financing Vaccines in the 21st Century: Assuring Access and Availability 4 (2004) [hereinafter IOM 2004].

30 Both GSK and Merck have filed for prequalification for their respective cervical cancer vaccines. See, Press Release, GSK, GSK Seeks Prequalification for Cervarix™ from the World Health Organization After Obtaining Marketing Approval in Europe (Oct. 4, 2007), available at http://www.gsk.com/media/pressreleases/2007/2007_10_04_GSK1127.htm [hereinafter GSK 2007]; see, e.g., ROTATEQ® and GARDASIL® Adopted by All Immunization Projects of the Centers for Disease Control and Prevention's Vaccines for Children Program, Business Wire, July 16, 2007.

31 See International AIDS Vaccine Initiative, Policy Brief: Procurement and Pricing of New Vaccines for Developing Countries 2 (2008), https://www.iavi.org/viewfile.cfm?fid=49389 [hereinafter IAVI 2008].

32 See PAHO, Member States, http://www.paho.org/english/paho/member-states.htm (last visited Apr. 12, 2009).

33 PAHO, Vaccines and Immunization_Expanded Program on Immunization:_Revolving Fund,_ http://www.paho.org/english/hvp/hvi/revol_fund.htm (last visited Nov. 19, 2008); see also UNICEF, Procurement Policies, http://www.unicef.org/supply/index_procurement_policies.html (stating that UNICEF uses competitive tender for all procurement) (last visited Apr. 1, 2009).

34 For example, UNICEF and PAHO prices for some of the traditional vaccines (BCG, DTP, and Polio) are all below US$0.16 per dose. See UNICEF, 2008 Vaccine Projections: Quantities and Pricing (2008), http://www.unicef.org/supply/files/Copy_of_2008_Vaccine_Projection_March_2008.pdf; PAHO, Immunization Unit, Prices for Vaccines Purchased Through the PAHO Revolving Fund (2008), http://www.amro.who.int/English/AD/FCH/IM/RF_VaccinePrices2008_EN.PDF

35 See IAVI 2008, supra note 31, at 2; PAHO, Revolving Fund, supra note 33; Vaccine Security, supra note 17, at 1.

36 See Gavi Alliance, http://www.gavialliance.org/about/index.php (last visited Oct. 1, 2008) The alliance is composed of representatives from developing and developed country governments, vaccine manufacturers from both industrialized and developing countries, research and technical institutes, non-governmental organizations like WHO, UNICEF and the World Bank, and finally donors, like the Bill & Melinda Gates Foundation. Id.

37 Gavi Alliance, Media and Publications, http://www.gavialliance.org/media_centre/facts/index.php (last visited Apr. 3, 2009).

38 Id.

39 Pharmaceuticals are chemical in nature and can be fully characterized, which allows for identical generic copies to be manufactured. There is an abbreviated regulatory approval process because generic products can bridge to the results of clinical trials that were used to originally approve the patented pharmaceutical product. This is not the case currently for biologics because identical copies cannot be produced. As a result, each biological product has to independently prove safety and efficacy. The FDA and other regulatory agencies are currently in the process of examining or enacting procedures that will allow for abbreviated reviews for “follow-on” biologics. As noted earlier, it is not currently possible to characterize vaccines sufficiently to allow for “follow-on” production. See Brian Orelli, Investing in Follow- On Biologics, Motley Fool, Apr. 3, 2009, http://www.fool.com/investing/highgrowth/2007/10/26/investing-in-follow-on-biologics.aspx.

40 Richard T. Mahoney & James E. Maynard, The Introduction of New Vaccines into Developing Countries, 17 Vaccine 646, 651 (1999); PATH, Introducing HPV Vaccines in Developing Countries: Overcoming the Challenges 1 (2005), http://screening.iarc.fr/doc/RH_hpv_intro.pdf; Batson et al., supra note 16, at 57; Milstien & Candries, supra note 24, at 14.

41 ADIPs (Accelerated Introduction and Development Programs) are vaccine specific programs that are a component of the overall GAVI program. There are currently ADIPs for pneumococcal conjugate vaccines and rotavirus vaccines at Johns Hopkins University and the Program for Appropriate Health Technology (PATH), respectively. See McKinsey & Co., Presentation to the GAVI Board: Accelerated Development and Introduction of Priority New Vaccines: The Case of Pneumococcal and Rotavirus Vaccines (2002).

42 PneumoADIP, Research and Surveillance, http://www.preventpneumo.org/activities/surveillance_and_research/index.cfm (last visited Nov. 19, 2008).

43 GAVI Alliance, GAVI Gets Results 1 (2008), http://www.gavialliance.org/resources/GAVI__s_Results_final.pdf (“By the end of 2007, GAVI Alliance support will have averted 2.4 million premature deaths, with a total of 176 million children immunized in the world's poorest countries, according to WHO projects”).

44 Most donor infrastructure funding has been directed towards strengthening the pediatric immunization infrastructure. The improvements to this part of the health care system may not translate for an adolescent based vaccine like the HPV vaccines. School-based programs may be able to help with access to the adolescent populations in less developed countries. Nonetheless, addressing supply side concerns is the focus of this article and I acknowledge that any solutions may be ineffective if infrastructure concerns are not satisfactorily resolved.

45 The International Financing Facility for Immunization (IFFIm) allows for “front-loading” of donor commitments in order to allow funding to be more stable over time. The IFFIm works by having donor countries make legally binding 10 to 20 year aid commitments which allow the IFFIm to raise money on capital markets using these commitments as collateral. In this way funds can be raised and disbursed in a more optimal way by allowing higher initial implementation costs to be funded while providing assurance of longer term funding. GAVI Alliance, Innovative Funding, http://www.gavialliance.org/about/in_finance/index.php (last visited Apr. 3, 2009).

46 Lance Armstrong & John Seffrin, Opinions, Our Vote to End Cervical Cancer, Wash. Post, Oct. 30, 2008.

47 Evidence suggests that patent protection is particularly important for pharmaceuticals, and investment in pharmaceutical research would have greatly diminished without strong patent protection. See generally Henry Grabowski, Patents, Innovation and Access to New Pharmaceuticals, 5 J. Int’l Econ. L. 849 (2002); Richard C. Levin et al., Appropriating the Returns from Industrial Research and Development, 3 Brookings Papers on Economic Activity (Special Issue) 783 (1987); Edwin Mansfield, Patents and Innovation: An Empirical Study, 32 Mgmt. Sci. 173 (1986); Edwin Mansfield, Intellectual Property Protection, Direct Investment and Technology Transfer: Germany, Japan and the USA, 19 Int’l J. Tech. Mgmt. 3, 3 (2000).

48 Mattias Ganslandt & Keith E. Maskus, Parallel Imports and the Pricing of Pharmaceutical Products: Evidence from the European Union, 23 J. Health Econ. 1035, 36 (2004).

49 For example, Canada, Greece, Italy and Japan have external price regulations whereby these governments set the price or reimbursement rate for pharmaceuticals and vaccines based on the prices charged in other countries. Manufacturers are required to disclose these prices when they are seeking product approval.

50 Patricia M. Danzon & Adrian Towse, Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents, 3 Int’l J. Health Care Fin. & Econ. 183, 184-6 (2003).

51 Outterson & Kesselheim, supra note 8, at 135-36.

52 Id. at 135.

53 Products manufactured by generic companies could be explicitly packaged or labeled for sale only in lower or middle-income countries. External reference pricing regulations require that firms report the selling price for their product in other markets. The generic selling price would currently not be required to be reported because it is made by a different company. However, regulatory agencies may determine the selling price for all generically equivalent products and under these conditions market separation would be threatened.

54 Klaus Kultti, Tuomas Takalo & Juuso Toikka develop an equilibrium search model based on the probability of multiple independent inventions within an industry. See Secrecy Versus Patenting, 38 Rand J. Econ. 22, 23-24 (2007). They show that firms will choose to patent if the likelihood of a competitor coming up with the same invention are sufficiently large. Id. at 36. The probability of independent, nearly simultaneous inventions is high in traditional industries but also likely high for industries where reverse engineering is relatively easy, like pharmaceuticals. Independent innovation has historically not been the case for vaccines. Further, it is not currently possible to reverse engineer bacterial or viral seed stock from a vial of inactivated or killed vaccine. Under these conditions for vaccines, firms are more likely to choose secrecy in order to protect new innovations. See also Anthony Arundel, The Relative Effectiveness of Patents and Secrecy for Appropriation, 30 Research Policy 611, 613 (2001); Mattias Ganslandt, Keith E. Maskus & Eina V. Wong, Defending and Distributing Essential Medicals to Poor Countries: The DEFEND Proposal, 24 World Econ. 779, 780-81 (2001); Ove Granstrand, Innovation and Intellectual Property Rights, in The Oxford Handbook of Innovation 266, 278 (2005).

55 See Kultti et al., supra note 54, at 25; see also Wesley M. Cohen, Richard R. Nelson & John P. Walsh, Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not) 14-15 (Nat’l Bureau of Econ. Research, Working Paper No. W7552, 2000).

56 See Cohen, supra note 55, at 14.

57 While there is ongoing debate about follow-on approval for vaccines in the United States, the European Agency for the Evaluation of Medicinal Products (EMEA) has actually published a number of guidelines on similar biological products. See generally EMEA, Committee for Medicinal Products for Human Use, Guideline on Similar Biological Medicinal Products (Oct. 30, 2005), http://www.emea.europa.eu/pdfs/human/biosimilar/043704en.pdf. As noted by the EMEA, there may be situations where full clinical trials will be required when biological equivalence cannot be assured. Id. at 4. Equivalency for vaccines may not be able to be satisfactorily demonstrated because of the complexity of the product and manufacturing process. See id. The EMEA explicitly notes “Vaccines are complex biological medicinal products. Currently, it seems unlikely that these products may be thoroughly characterized at a molecular level.” Id. at 6.

58 Chao & Deshmukh, supra note 12.

59 For example, conjugation technology has been in the public domain for many years. However, generic firms have not been able to introduce competitive products. This is most likely due to the fact that firms have both product and process secrets that prevent successful product duplication. See Milstein & Candries, supra note 24, at 4.

60 Arundel, supra at note 54, at 612.

61 GSK's second quarter, 2008, investor report notes that the vaccine market is attractive because of the limited number of global players, the high barriers to entry, and the long life cycles for the products. Press release, GlaxoSmithKline, GSK Sets Out New Strategic Priorities (July 23, 2008) (http://www.gsk.com/media/pressreleases/2008/2008_pressrelease_10088.htm). For example, Merck's M-M-R II vaccine was approved for licensure prior to 1980 and still enjoys a monopoly in the United States although any relevant patents would have expired some time ago. Additionally, it does not appear that Merck will face competition in the US until around 2014 for their HPV vaccine if at all. See Associated Press, Morgan Stanley Sees Tough FDA Hurdles for Glaxo's Cervical Cancer Vaccine; Cuts Rating, Canadian Business Online, May 27, 2008 (regarding concerns as to whether the FDA will approve Ceravix in 2009).

62 Vaccines are required to be stored in a temperature-controlled environment or they will rapidly lose efficacy. Most vaccines are stored at temperatures between 2°C and 8°C, but others are required to be stored frozen (less than or equal to -15°C). Therefore, refrigeration and monitoring of vaccine transportation is required from the manufacturer to final destination. The cost of parallel importation of efficacious product is increased due both to increased transportation costs and to the higher likelihood of detecting parallel importation because the products are highly monitored. See Centers for Disease Control and Prevention, Notice to Readers: Guidelines for Maintaining and Managing the Vaccine Cold Chain, 52 Morbidity and Mortality Weekly Report 1023, 1023 (Oct. 24, 2003), available at http://www.cdc.gov/mmwr/preview/mmwrhtml/mm5242a6.htm.

63 Parallel importation and counterfeiting of vaccine products is low also because the potential profits from price differences relative to the costs of transportation and counterfeiting are much lower than that for pharmaceuticals. However, more profitable vaccines, such as the HPV vaccine, may be subject to more parallel importation.

64 Author's calculation based on the unweighted differences between private and public sector prices for pediatric vaccines. Prices available at CDC Vaccine Price List, http://www.cdc.gov/vaccines/programs/vfc/cdc-vac-price-list.htm (last visited Oct. 20, 2008).

65 Id.

66 Price calculations are based on the CDC vaccine price list, and the UNICEF 2008 supply projections. See id.; UNICEF Vaccine Projections, http://www.unicef.org/supply/index_7991.html. UNICEF calculations are weighted average price for all suppliers and therefore also include developing world manufacturer prices. Nonetheless, innovator companies that supply the same product across markets have shown a willingness to differentially price products.

67 See Merck Press Release (2007), supra note 30; GlaxoSmithKline Press Release (2007), supra note 30.

68 As noted earlier, generic manufacturing is not currently possible for vaccines. However, developing world manufacturers would likely play the role of market entrants who would license the innovative vaccine products. See Outterson & Kesselheim, supra note 8, at 135-36 (discussing need to allow for generic sales in middle income markets).

69 See GSK Q2 Results 2008 Presentation to Investors & Analysts (July 23, 2008), http://www.gsk.com/investors/reports/q22008/q22008_presentation_colour.pdf [hereinafter GSK Q2 Results 2008]; Big Pharma Rushing for Foothold in Emerging Markets Despite Challenges, Pharmaceutical Business Review, Mar. 13, 2008, http://www.pharmaceutical-business-review.com/article_feature.asp?guid=3EA7DBAF-544F-48F0-BF65-4B08D3D7D5FB [hereinafter PBR 2008]; Isabel Fraser-Moodie, Emerging Pharmaceutical Markets: Growth Opportunities, Changing Healthcare Dynamics and Regulatory Trends 22 (2007). GSK estimates that middle-income markets will grow from 8 percent in 2004 to 19 percent of the health care market in 2020. See GSK Q2 Results 2008.

70 GARDASIL® has been approved in 106 countries so far. Merck Press Release, supra note 4.

71 Outterson & Kesselheim, supra note 8, at 135-36.

72 See WHO 2006, supra note 22.

73 Currently, the GO license does not have provisions that require the selling of licensed products to LICs. It may be necessary to amend the language of the GO license to assure that licensees sell a proportion of their capacity to LICs. As shown later, the vaccine market is characterized by limited capacity and high regulatory and manufacturing fixed costs. This could lead to a situation where licensees may decide to only sell to middle income markets to maximize returns on regulatory and capacity investments.

74 See William J. Baumol & Alan S. Blinder, Economics Principles and Policy 192-95 (8th ed. 2000).

75 Id.

76 Id. at 372.

77 UNICEF utilizes a closed-envelope single-bid auction format for its tender process, however, as part of its Supply Security initiative UNICEF, attempts to award some quantity of vaccine to most manufacturers that participate in the bidding process. Vaccines that are procured by UNICEF are funded through country contributions, GAVI financing, and UNICEF EPI funds. See UNICEF Procurement Policies, supra note 33.

78 The PAHO vaccine tender is an annual closed-envelope single-auction bid process. PAHO, along with its partner countries, estimate the entire annual demand for each of the required vaccine products. These demand estimates are then sent to all qualified vaccine manufacturers who submit prices for 50 percent and/or 100 percent of the estimated annual volume. The lowest price bidder who commits to supplying 100 percent of the forecasted number of doses is awarded the annual contract. Split awards are made for the lowest and second lowest prices in cases when neither manufacturer can supply the entire demanded quantity. Subsequent to the bidding process, the final winning prices are disclosed to the countries that then submit their needs to PAHO. PAHO aids in coordination of the actual procurement of the required vaccines. Vaccine payments are made by the PAHO Revolving Fund, which is financed through the countries’ contributions. The Revolving Fund's primary purpose is to mitigate exchange rate risk and allow for procurement of needed vaccines in hard currency. See PAHO, Vaccines and Immunization, supra note 33.

79 Mark V. Pauly, Improving Vaccine Supply And Development: Who Needs What?, 24 Health Affairs 680, 684 (2005).

80 Temporary shortages occur because vaccine manufacturing processing times on the order of twelve months from initial growth to final packaging and discarded product must be replaced. Chao & Deshmukh, supra note 12.

81 Paul A. Offit, Why Are Pharmaceutical Companies Gradually Abandoning Vaccines?, 24 Health Affairs 622, 622-30 (2005); Pauly, supra note 79, at 680-89.

82 Center for Biologics Evaluation and Research, FDA, Biological Product Shortages, http://www.fda.gov/cber/shortage/shortage.htm (last visited Apr. 12, 2009).

83 Currently, of the fourteen antigens recommended for childhood and adolescent vaccination in the United States, three – Haemophilus influenza type B (Hib), Hepatitis A, and Varicella – have some form of caution on limitations of supply. Centers for Disease Control and Prevention, Vaccines and Preventable Diseases: Current Vaccine Shortages and Delays, http://www.cdc.gov/vaccines/vac-gen/shortages/default.htm#chart (last visited Oct. 11, 2008). Additionally, shortages of supply have plagued a variety of products across the market spectrum. See Stephen Jarrett, Deputy Director, UNICEF Supply Division, Vaccine Shortages, http://www.unicef.org/immunization/23244_shortage.html; IOM, supra note 29.

84 For example, one of the first blockbuster vaccines, PREVNAR®, experienced shortages from 2001 through 2004. See Centers for Disease Control and Prevention, ACIP Votes to Temporarily Revise Recommendations, http://www.cdc.gov/vaccines/vacgen/shortages/past/pneumo-and-dtap-2001.htm (Dec. 7, 2001) (regarding 2001 shortage); Centers for Disease Control and Prevention, PCV7 (Prevnar®) Shortages and Suspension of the Recommendation for the 3rd and 4th Doses, http://www.cdc.gov/vaccines/vacgen/shortages/past/pcv7-shortage-faqs-3-1-04.htm (Mar. 1, 2004) (2004 shortage). Despite the shortages, PREVNAR® had revenues of $1.05 billion in 2004. See Wyeth, Leading the Way to a Healthier World: Wyeth Annual Review 2006 35 (2006), available at http://thomson.mobular.net/thomson/7/2220/2444/print/print.pdf.

85 VAQTA® is a Hepatitis A vaccine manufactured by Merck that was approved for sale in the United States on March 29, 1996. Food and Drug Administration, Product Approval Information (Mar. 29, 1996), http://www.fda.gov/CbER/approvltr/havamer032996L.htm (letter granting FDA license approval). However, despite having more than a decade of experience with the manufacture of this vaccine, Merck reported manufacturing problems on August 1, 2007, that may not be fully resolved until the first quarter of 2009. Biological Product Shortages, supra note 82; Vaccine Shortages, supra note 83.

86 See IOM 2004, supra note 29, at 122.

87 A profit-maximizing firm will choose the activity with the highest expected profits. In this case, the decision is between making profits from a royalty payment based on a percentage of sales to be dedicated towards R&D and continuing to sell the product, particularly in middle-income markets. The GO License estimates that the royalty would be approximately $16.5 million per year for the life of the patent. Although figures are not available, it is likely that expected profits for HPV vaccines from middle income markets would be greater because of continued growth in these markets and because vaccines typically are profitable over longer time frames than the patent term. See Outterson & Kesselheim, supra note 8, at 135; GSK Q2 Results 2008, supra note 69, at 13-15.

88 Outterson & Kesselheim estimate royalties based only on expected lost profits that would have been invested in R&D. Supra note 8, at 134-35. This estimate would have to be adjusted for the manufacturing intellectual resources that are currently protected by secrecy.

89 GSK Q2 Results 2008, supra note 69; PBR 2008, supra note 69.

90 WHO 2006, supra note 22.

91 UNICEF Measles Vaccine Supply, Partnership for Measles Advocacy (Feb. 14, 2006) (on file with author).

92 Merck 2007, supra note 30; GSK 2007, supra note 30.

93 Innovator firms would still be able to sell their branded product to UN agencies, therefore there would be multiple manufacturers bidding on sales to UN agencies.

94 Low-income markets are riskier because uncertainty about demand means that the sunk costs of capacity may not be recouped if products are not introduced, resulting in unutilized capacity. For higher income markets, firms typically have enough information on the product and on the national regulatory environment to reasonably forecast expected demand for the product. In contrast, there is limited information available for low-income markets regarding demand.

95 GSK Q2 Results 2008, supra note 69.

96 Once capacity decisions are made it is extremely difficult to expand existing facilities because changes to existing biologics facilities require revalidation and regulatory approval, which will disrupt existing supplies. Therefore, if a company needs to expand capacity to provide products to low-income countries, the fixed costs of new facilities and the opportunity cost of the capital will need to be borne by low-income markets. Even if firms plan capacity for global demand, these decisions must be made under conditions of considerable uncertainty for LICs. There is limited evidence on the demand parameters for developing world countries, which represents forty to fifty percent of all global demand based on volume. Factors contributing to the uncertainty are issues relating to affordability of the vaccines, the stability of donor funding, and the political will in many countries. It is unlikely that the returns, especially for vaccine sales to low-income markets, would meet the typical internal hurdle rates required for new projects. Because innovative vaccine supply is encapsulated within the larger pharmaceutical industry, vaccine capital projects must compete with pharmaceutical projects for limited funds based on an expected rate of return on investment, or hurdle rate. Pharmaceutical companies typically have projected double-digit growth (less than 10 percent) which can be used as a proxy for the likely internal hurdle rate for capital projects. Similar figures (11 percent) have been used to estimate the price of pharmaceutical innovation. See Joseph A. DiMasi et al., The price of innovation: new estimates of drug development costs, 22 J. Health Econ. 151, 164 (2002).

97 Vaccine manufacturing can be roughly broken into a number of steps: the initial growth stage, whereby product is either fermented or grown in viral cell factories; concentration; purification; filling; and final packaging.

98 For products with capacity constraints, the more logical strategy would be to have the developing world manufacturer take initial responsibility for the processing step that has the most severe bottleneck. For example, if an innovator firm has sufficient filling and packaging capacity they could contract for purification processing.

99 Innovator firms could chose to introduce the licensed products to lower-middle income markets in order to generate some short-term profits. However, once selling rights are transferred to the developing world manufacturer the innovator firms would have to either introduce their own product in these markets and compete directly with the developing world firm or enter into an agreement with the developing world manufacturer to continue to sell the product in those markets.

100 Centralized procurement agencies and donors have recognized the importance of maintaining prices to cover long-term marginal costs. UNICEF, Procuring supplies for Children: Vaccine Security, http://www.unicef.org/supply/index_vaccine_security.html (last visited Apr. 12, 2009).

101 Mercer Management Consulting, Lessons Learned: New Procurement Strategies for Vaccines, GAVI Board Meeting (2002), http://www.gavialliance.org/resources/lessons_learned_2.ppt; IOM 2004, supra note 29, at 114; GAVI, Key Concepts: Economics of Vaccine Production 7, http://www.who.int/immunization_financing/options/en/briefcase_vacproduction.pdf (last visited Apr. 12, 2009).

102 GSK Biologics and their HPV manufacturing facilities are based out of Belgium and the European Agency for the Evaluation of Medicinal Products (EMEA) was the initial agency that reviewed GSK's HPV vaccine manufacturing facility. Merck's HPV vaccine production is based in the United States where the U.S. Food and Drug Administration (FDA) is the national regulatory authority.

103 WHO, Fact Sheet No. 278: The Who Prequalification Project (2004), http://www.who.int/mediacentre/factsheets/fs278/en/index.html.

104 See Batson et al., supra note 16, at 63-65.

105 It should be noted that Merck currently pays royalties of approximately 24 percent to 26 percent on global sales of GARDASIL® as the result of third party license agreements, including a cross-license and settlement agreement with GSK. These royalty payments are included in Merck's material and production costs. A potentially beneficial feature that can be included in the proposal is that royalty payments be waived for product produced by developing world manufacturers and sold to UN procurement agencies. Merck & Co., Inc., Annual Report (Form 10-K), at 58 (Feb. 28, 2008).

106 There is precedent for this type of direct funding of capacity. For example, the U.S. Department of Health and Human Services (HHS) recently announced a $487 million multiple year contract with Novartis Vaccines and Diagnostics, Inc. (Novartis) to build a U.S. based facility to manufacture flu vaccine. As part of the agreement, HHS will fund 40 percent of the costs of the new manufacturing facility, while Novartis will fund the remaining 60 percent. The agreement was brokered in order to assure that there would be sufficient flu vaccine available in the case of an influenza pandemic. The level of uncertainty around the timing and magnitude of any potential pandemic, i.e. the demand for pandemic flu vaccine, was such that it was unlikely that a profit-maximizing firm would independently invest in the necessary capacity. See Press Release, U.S. Department of Health & Human Services, HHS Awards $487 Million Contract to Build First U.S. Manufacturing Facility for Cell-Based Influenza vaccine (Jan. 15, 2009), available at http://www.hhs.gov/news/press/2009pres/01/20090115d.html. In addition, it has been shown that under conditions of uncertainty around recouping high initial sunk costs “…it would be appropriate, given the existence of substantial externalities, for the government to subsidize additional [vaccine firms’] initial qualification costs.” F.M. Scherer, An Industrial Organization Perspective on the Influenza Vaccine Shortage, 28 Managerial & Decision Econ., 393, 403 (2007).

107 See Patricia M. Danzon & Adrian Towse, Differential Pricing for Pharmaceuticals: Reconciling Access, R&D and Patents, 3 Int’l J. Health Care Fin. & Econ. 183, 187-87 (2003); Patricia M. Danzon, Outlook, Neglected Diseases: At What Price?, 449 Nature 176, 176 (2007).

108 Danzon & Towse, supra note 107, at 187.

109 A “first best” solution is when a good is consumed to the point where the marginal benefit from the last unit of a consumed good is equal to the marginal cost of producing that last unit of a good. However, under conditions where there are large fixed costs, due to R&D or manufacturing costs, marginal pricing and a “first best” solution is not possible. Id. at 185.

110 Danzon & Towse, supra note 107, at 187-88; Danzon supra note 107, at 176; Jean O. Lanjouw, Patents, Price Controls, and Access to New Drugs: How Policy Affects Global Market Entry (Apr. 19, 2005) (unpublished manuscript), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=984259.

111 International reference pricing is when one country uses the price of a good in another country to determine the price of that same good in their country. PAHO currently maintains a uniform price for all vaccines across all member countries regardless of development status. Additionally, vaccine supply contracts with PAHO contain a “most favored nation” clause, which if enforced, means that PAHO may reference UNICEF vaccine prices that are intended for the least developed countries. These are all forms of reference pricing.

112 See generally Patricia M. Danzon et al., The Impact of Price Regulation on the Launch Delay of New Drugs – Evidence from Twenty-Five Major Markets in the 1990’s, 14 Health Econ. 269 (2005).

113 See Jens Plahte, Tiered Pricing of Vaccines: A Win-Win-Win Situation, Not a Subsidy, 5 Lancet Infect Dis. 58, 59-60 (2005).

114 For a fuller discussion see Danzon & Towse, supra note 107.

115 The procurement agencies provide multiple awards because many times a single manufacturer will not have sufficient available capacity to fulfill the entire expected demand, however they also do help to assure long-term sustainable supply.

116 PAHO, Prices for Vaccines, supra note 34, at 7; UNICEF, Vaccine Projections, supra note 34.

117 Confidential rebates can also be negotiated directly with funding agencies, like GAVI. For example, the GAVI is considering purchasing the HPV vaccine for $10 per dose. This could be the UNICEF purchase price, however the firms could compete for larger volume by negotiating confidential rebates with GAVI. In this case, GAVI and each individual manufacturer would be the only ones who know the true purchase price of the vaccines. Firms may also choose price confidentiality as a condition of receiving the lowest tier or no-profit prices. Both of these types of private agreements would require a third party audit to assure that prices are low and that donor funds are being used wisely.

118 GSK Q2 Results 2008, supra note 69; PBR 2008, supra note 69.

119 Quagmire to Goldmine?, Economist (May 15, 2008)

120 Outterson & Kesselheim, supra note 8, at 137.

121 Id. at 131, 136.