Michael Kremer, Jonathan D. Levin, and Christopher M. Snyder tell the story in "Advance Market Commitments: Insights from Theory and Experience" (February 2020, NBER Working Paper 26775). This is a more polished follow-up to a working paper presented at a session of the Allied Social Science Associations (ASSA) meetings in January.
Kremer, in particular, as been pushing the idea of advance market commitments for several decades. For example, back in the Fall 2002 issue of the Journal of Economic Perspectives (where I work as Managing Editor), he wrote an article about "Pharmaceuticals and the Developing World" (pp. 67-90). He pointed out that a number of diseases had their primary effect in low-income countries and that drug companies in high-income countries had a limited incentive to focus on these diseases. Kremer wrote:
However, the most severe distortions in developing country pharmaceutical markets probably involve dynamic issues. Pharmaceutical firms are reluctant to invest in R&D on the diseases that primarily affect developing countries not only because the poverty of the potential users reduces their willingness to pay, but also because the potential revenue from product sales is far smaller than the sum of customers’ potential willingness to pay due to the lack of intellectual property protection and the tendency for governments to force prices down after firms have sunk their research and development costs. ...
Programs to encourage R&D can take two broad forms. “Push” programs subsidize research inputs—for example, through grants to researchers or R&D tax credits. “Pull” programs reward research outputs, for example, by committing in advance to purchase a specified amount of a desired product at a specified price. Both approaches have important roles, but current policy underutilizes pull programs. ...A working group under the auspices of the Center for Global Development, chaired by Ruth Levine, Michael Kremer, Alice Albright, thought in more concrete terms about how to design advanced market commitments so that they would be enforceable contracts, and published its report in 2005.
[U]nder pull programs, the public pays nothing unless a viable product is developed. Pull programs give researchers incentives to self-select projects with a reasonable chance of yielding a viable product and to focus on developing a marketable product. Under pull programs, governments do not need to “pick winners” among R&D proposals—they simply need to decide what success would be worth to society and offer a corresponding reward. Moreover, appropriately designed pull programs can help ensure that if new products are developed, they will reach those who need them. One kind of pull program is a purchase commitment in which sponsors would commit to purchase a specified number of doses at a specified price if a vaccine meeting certain specifications were developed. ... An example of a purchase commitment would be for developed countries or private foundations to commit to purchase malaria vaccine at $5 per immunized person and to make it available to developing countries either free or for a modest copayment.
Kremer, Levin, and Snyder summarize what happened next:
In 2007, five countries and the Gates Foundation pledged $1.5 billion toward a pilot AMC targeting a pneumococcal conjugate vaccine (PCV). The World Health Organization (WHO) estimated pneumococcus killed more than 700,000 children under five in developing countries annually at that time (WHO 2007). A PCV covering disease strains prevalent in developed countries already existed, and PCVs covering the strains in developing countries were in late-stage clinical trials; so this was a technologically close target.
In 2009, the AMC launched under the supervision of GAVI (formerly the Global Alliance for Vaccines and Immunizations). The design called for firms to compete for ten-year supply contracts capping price at $3.50 per dose. A firm committing to supply 𝑋𝑋 million annual doses (𝑋𝑋/200 of the projected 200 million annual need) would secure an 𝑋𝑋/200 share of the $1.5 billion AMC fund, paid out as a per-dose subsidy for initial purchases. The AMC covered the 73 countries below an income threshold for GAVI eligibility. Country co-payments were set according to standard GAVI rules.
GSK, Pfizer, and the Serum Institute of India have all received payments from the advance market commitment contract. By 2018, about half of all children in these 73 countries had received the vaccine, although India had not yet rolled out a full nationwide program. In general, the World Health Organization says that an intervention is cost-effective if it avoids the loss of a "disability-adjusted life year" (DALY) at a cost of less than three times per capita GDP, and very cost-effective if it avoid the loss of a DALY at a cost of less that per capita GDP (for discussion, see here). By one early estimate, the pneumococcus vaccination avoided the loss of a disability adjusted life year at cost of $83--making it an extreme success even from the pure cost-benefit perspective.
There are reasonable and hard-headed questions to ask about how to value the benefits of a the advance market commitment approach. The pneumococcal vaccine was a "technologically close" target, taking vaccines that already existed in high-income countries and accelerating their development and use for the strains of disease in low-income countries. Just to be clear, no one is arguing that the advance market commitment is a magic bullet that, all by itself, can substitute for other "push" policies encouraging research and development. The argument is that it focuses priorities and speeds up what is possible, not just in the development of the vaccine or drug, but also in avoiding a protracted negotiation over what the price will be, and having countries that are ready and prepared to deliver the vaccine or drug through their health care systems.
But speeding up a public health process matters. As a counterexample, Kremer, Levin, and Snyder point out that a rotavirus vaccine was developed at about the same time, and was relevant to much the same group of countries, but did not have an advance market commitment. The rotavirus vaccine spread through the population about five years more slowly, and shortages of rotavirus vaccine were far more common.
