[Congressional Record Volume 145, Number 137 (Tuesday, October 12, 1999)]
[Senate]
[Pages S12422-S12426]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
By Mr. KERRY (for himself, and Mr. Durbin):
S. 1718. A bill to amend the Internal Revenue Code of 1986 to provide
a credit for medical research related to developing vaccines against
widespread diseases; to the Committee on Finance.
LIFESAVING VACCINE TECHNOLOGY ACT OF 1999
Mr. KERRY. Mr. President, I rise today to introduce the Lifesaving
Vaccine Technology Act of 1999 with my friend and colleague from
Illinois, Senator Durbin.
Mr. President, each year malaria, tuberculosis and AIDS kill more
than 7 million people, disproportionately in the developing world. Each
of these diseases is potentially preventable by vaccination.
A recent column in the Boston Globe by David Nyhan sums up the
situation facing the developing world succinctly.
Tuberculosis causes more deaths than any other infectious disease,
killing 3 million people annually. One hundred thousand children die
from TB each year. The World Health Organization estimates that between
now and 2020, ``nearly one billion more people will be newly infected,
200 million people will get sick, and 70 million will die from
tuberculosis, if control is not strengthened. Tuberculosis is not just
an issue for some faraway countries; in the United States, more than
19,000 cases of tuberculosis are reported annually and increasingly we
are seeing drug-resistant strains of tuberculosis in this country but
especially in the states of the former Soviet Union where, according to
one CDC doctor, an epidemic is taking place of ``the worst situation
for multidrug resistant tuberculosis ever documented in the world.''
Other areas of the world, such as central India, Bangladesh, Latvia,
Congo, Uganda, Peru are also experiencing near-epidemic tuberculosis
crises.
According to the World Health Organization, malaria kills more than 2
million people every year, and the disease is an important public
health problem in 90 countries inhabited by almost half of the world's
population. Each year, one million children under the age of five die
from complications associated with malaria. Again, Mr. President,
malaria is a disease we tend to associate with foreign exotic lands,
and overlook the fact that in this country, more than one thousand
people are stricken by malaria each year. Researchers at the National
Institute of Allergies and Infectious Diseases contend that
``conventional control measures . . . appear increasingly inadequate. .
. As a result of drug-resistant parasites and insecticide-resistant
mosquitoes, fewer tools to control malaria exist today than did 25
years ago.''
Last year, the human immunosuppressant virus took the lives of 2.5
million, of which more than 500,000 were children under the age of 15.
In the United States, almost one million are currently living with HIV-
disease and 40,000 are newly infected each year. In Zimbabwe and
Botswana, as many as 25 percent of the adult population is infected
with HIV. In Zambia, 72 percent of households contain a child orphaned
by AIDS. South Africa, which was largely isolated from HIV during its
apartheid years, is now home to 10 percent of the new infections in
Africa, and in the country's most populous province, KwaZulu-Natal,
one-third of adults are HIV-infected. Analysts claim that India is an
AIDS disaster-in-waiting: half a million people in one of India's
smallest rural states (Tamil Nadu) are HIV-positive, as are fifteen
percent of the women in one of India's more populous states
(Maharashtra).
While AIDS is entirely preventable in this country and abroad, and
while behavioral interventions for HIV have proven effective at
reducing infection rates, many factors, including political obstacles,
insufficient prevention funding, forced sexual encounters, and the
difficulty of maintaining safe behavior over a lifetime, mean that a
vaccine will be required for control of this worldwide epidemic.
And, yet, Mr. President, biotechnology and pharmaceutical companies
in the United States, the home of the most innovative research and
development in the world, are not working on vaccines to the world's
largest killers. Market disincentives--especially the lack of a viable,
cash-rich market--play against investment into these vaccines. Private-
sector scientists and chief executive officers have a difficult time
justifying to their boards an investment in developmental research
toward these vaccines as long as other pharmaceutical research and
development into products appealing to the developed world, like anti-
depressants or Viagra, present more attractive investments.
This market failure and the need for incentives is shown most
dramatically by last year's survey by the Pharmaceutical Research and
Manufacturers of America. Of the 43 vaccine projects found to be in
development by the survey not one was for HIV, malaria or tuberculosis.
To find vaccines for the biggest infectious disease killers in the
world, both the private and public sectors must be engaged in a bolder,
more creative and dramatic way.
Mr. President, with that in mind, we are introducing the Lifesaving
Vaccine Technology Act, which establishes an income tax credit for 30
percent of the qualified expenses for medical research related to the
development of vaccines against widespread diseases like malaria, HIV
and tuberculosis, which according to the World Health Organization,
cause more than one million deaths annually.
This bill also declares that it is the sense of Congress that if the
vaccine research credit is allowed to any corporation or shareholder of
a corporation, the corporation should certify to the Secretary of the
Treasury that, within one year after that vaccine is first licensed,
the corporation will establish a good faith plan to maximize
international access to high quality and affordable vaccines. In
addition, the bill expresses the sense of Congress that the President
and Federal agencies (including the Departments of State, Health and
Human Services, and the Treasury) should work together in vigorous
support of the creation and funding of a multi-lateral, international
effort, such as a vaccine purchase fund, to accelerate the introduction
of vaccines to which the vaccine research credit applies and of other
priority vaccines into the poorest countries of the world. Lastly, the
bill expresses the sense of Congress that flexible or differential
pricing for vaccines, providing lowered prices for the poorest
countries, is one of several valid strategies to accelerate the
introduction of vaccines in developing countries.
Mr. President, this legislation has received the support of the
American
[[Page S12423]]
Public Health Association, the Global Health Council, AIDS Action, the
AIDS Policy Center for Children, Youth and Families, the International
AIDS Vaccine Initiative and the AIDS Vaccine Advocacy Coalition. And, I
am especially pleased that the Clinton Administration has signaled
their approval of our approach. At his most recent speech before the
General Assembly of the United Nations, President Clinton committed
``the United States to a concerted effort to accelerate the development
and delivery of vaccines for malaria, TB, AIDS and other diseases
disproportionately affecting the developing world.''
This bill is highly targeted: it will cost relatively little to
implement but would have a profound impact on America's response to
international public health needs. And it would complement--certainly
not supplant--current federal efforts at USAID, the NIH and other
federal agencies to assist developing countries and to bolster vaccine
research.
Mr. President, this legislation is a companion to a bipartisan bill
introduced in the other body by my friend and colleague from San
Francisco, Congresswoman Nancy Pelosi, and 36 co-sponsors. Over the
years, I have had the honor to work with the distinguished
Congresswoman on various pieces of legislation. The nation is in her
debt for her tenacity and her overwhelming sense of duty to country.
Her constituents benefit daily from her leadership, and I am pleased to
be associated with her again today.
I am hopeful that the positive response Congresswoman Pelosi has
found in the other body is replicated in the Senate and that our
colleagues join the Senator from Illinois, Senator Durbin, and I in
passing the Lifesaving Vaccine Technology Act as quickly as possible.
Mr. President, I ask unanimous consent that the Nyhan column, an
article which appeared in the Albany Times-Union about the market
difficulties of developing an AIDS vaccine, and a Congressional
Research Service study of the bill be printed in the Record.
There being no objection, the material was ordered to be printed in
the Record, as follows:
[From the Boston Globe, Oct. 1, 1999]
It's Mostly Bad News for the Poorest People on the Planet
(By David Nyhan)
Human nature being what it is, the hawkers of news prosper
more off what arouses the customer than that which accurately
informs.
That's why you get more sizzle than steak, particularly
when matters ``foreign'' are addressed. Pictures of a boy
dragged from the earthquake's rubble or a riot squad in
action are more compelling than footage of some middle-aged
bureaucrat rattling on about poverty statistics. But today
we're holding the sizzle and serving you teak in the form of
speeches made in Washington this week before the annual
meeting of the World Bank and the International Monetary
Fund, two outfits that have become punching bags for a lot of
people who are convinced they know what's wrong with the
planet.
What is really going on here on Spaceship Earth?
Some good things: Life expectancy, on average, has gone up
more in the last 40 years than in the previous 4,000. The
Internet means near-universal access to information. Then
there are the not-so-good trends, World Bank chief James
Wolfensohn said Tuesday:
``Per-capita incomes which will stagnate or decline this
year in all regions except East and South Asia. . . . with
the exception of China, 100 million more people living in
poverty today than a decade ago. In at least 10 countries in
Africa, the scourge of AIDS has reduced life expectancy by 17
years. More than 33 million cases of AIDS in the world, of
which 22 million are in Africa. Some 1.5 billion people still
lacking access to safe water, and 2.4 million children who
die each year of waterborne diseases. Some 125 million
children still not in primary school. . . . A world where the
information gap is widening. And the forests are being
destroyed at the rate of an acre a second.''
These statistics are almost impossible to believe. In the
time it takes to sneeze, three acres of forest are burned.
And everything revolves around money. It is poverty that
holds half of mankind in chains.
Next month the planet's ridership surpasses 6 billion human
beings. How do they live now? Half of humanity gets along on
the equivalent of $2 a day or less. Half of that half lives
on less than $1 a day. When a child born today reaches the
age of 25, there will be 2 billion more people fighting for
air, water, food, space, roofs, jobs, schooling, roads,
sewers, farmland. Only development will spare them a life of
perilous poverty.
As the earthling more responsible than any single
individual, perhaps even more obligated than the President of
the United States, for the well-being of mankind and the
development of economic structures to make mankind's future
more secure, Wolfensohn asked: ``What have we learned about
development?''
``We have learned that development is possible but not
inevitable, that growth is essential but not sufficient to
ensure poverty reduction.'' And it is essential to help poor
people with local institutions, controlled by them, insulated
against the corruption, both petty and grand, that turns so
many cops and bureaucrats in poor countries into petty
despots or grand thieves on the scale of the Baligate thieves
who sacked the treasury of Indonesia and pitched the world's
fourth-largest nation into anarchy.
He quoted from a massive World Bank study, ``Voice of the
Poor,'' distilled from 60,000 poor people in 60 countries:
``Poverty is much more than a matter of income alone. The
poor seek a sense of well-being--which is peace of mind.''
Here's the bulletin: The poor of the planet are just like
us cozy Americans. What they want is what we've got. ``It is
good health, community, and safety. It is choice, and
freedom, as well as a steady source of income.'' He quoted
the old African woman: ``to live in love without hunger'';
the Eastern European survivor of communism: ``to be well is
to know what will happen to me tomorrow''; the mother in
Southeast Asia: ``When my child asks for something to eat, I
say the rice is cooking until he falls asleep from hunger.
For there is no rice.''
The day after Wolfensohn laid out the challenge, President
Clinton showed up to announce cancellation of that portion of
the debt owed the United States by 36 of the poorest
countries that had not already been forgiven. The Pope and a
number of celebrities had been agitating for debt
forgiveness.
The Clinton administration had already written off about 90
percent of that debt, and this final write-off of what once
totaled nearly $6 billion will encourage the campaigners of
Jubilee 2000 to press other lender nations to follow suit.
Clinton has been a very good President, all things
considered, for the poorest people of the planet. He alluded
to the high-priced lobbying that goes on in the jousting
between agricultural haves to carve out more elbow room at
the trough of market share: ``Because we want to fight over
who sells the most food . . . are we supposed to accept the
fact that nearly 40 million people a year die of hunger?
That's nearly equal to the number of all the people killed in
World War II.''
He had more good lines, such as ``the wealth of nations
depends upon the health of nations.'' But you get the idea.
We rich nations are our brother's keeper; sister's too.
____
[From the Albany Times Union, Mar. 14, 1999]
Drug Makers Still Reluctant to Invest in HIV Vaccine
scientific uncertainty, drug economics combine to discourage efforts
(By Eric Rosenberg)
Washington.--Soon after the AIDS epidemic exploded in the
1980s, Dr. Donald Burke, a senior researcher at Baltimore's
Johns Hopkins University, began work on a vaccine against
HIV, the virus that causes the deadly disease.
Burke made progress but knew he needed the financial
backing and laboratory firepower of a pharmaceutical
manufacturer in order to succeed.
``I went to all the major companies that were involved in
AIDS work at the time,'' said Burke, now the director of the
university's Center for Immunization Research. ``I couldn't
get anybody interested and I was shocked.''
Burke's experience highlights the fact that, with a few
exceptions, the pharmaceutical industry has been reluctant to
commit resources toward such a goal, despite worldwide demand
for a vaccine to protect against a disease that afflicts 35
million people and infects 16,000 more people daily.
According to the Pharmaceutical Research and Manufacturers
of America, a trade organization that represents prescription
drug makers, companies are sinking research dollars into 101
new treatments for people infected with HIV.
These include new classes of antiviral drugs to suppress
the HIV virus once a person is infected; medications to fight
AIDS-related diseases such as Kaposi's Sarcoma; and drugs to
fend off opportunistic infections that attack when the immune
system is suppressed by HIV.
Although President Clinton has made development of an AIDS
vaccine a top priority and Congress has budgeted nearly $200
million this year alone for the effort, companies are
investing in only 12 experimental vaccine proposals.
Nearly 20 years after the disease erupted, only one AIDS
vaccine has received Food and Drug Administration approval
for widespread human testing. That vaccine is under
development by VaxGen, a small, 52-employee biotechnology
firm, of South San Francisco, Calif.
More than 90 percent of the world's vaccines against other
diseases are produced by five companies: Merck & Co., of
Whitehouse Station, N.J., SmithKline Beecham and Wyeth-
Lederle of Philadelphia, Pasteur Merieux Connaught of
Swiftwater, Pa., and Chiron Corp. of Emeryville, Calif.
All are involved to varying degrees in AIDS vaccine
research. For example,
[[Page S12424]]
SmithKline Beecham has only a small AIDS vaccine effort
underway. ``At this point it's not one of the major efforts
in our vaccine programs,'' said Richard Koenig, a SmithKline
spokesman.
Pasteur, on the other hand, has aggressively pursued an
experimental vaccine that is nearing government approval for
a large-scale human study.
Other companies started, but then curtailed, AIDS vaccine
programs. They include Bristol-Myers Squibb, British Biotech
and Immuno AG.
Dr. Donald Francis, president of VaxGen and a former AIDS
specialist at the federal Centers for Disease Control and
Prevention, said that if VaxGen and Pasteur fail, ``There's
nothing five years behind us. That's it in the AIDS vaccine
field.''
Lagging science and drug economics are the two
considerations underlying the modest corporate interest in
AIDS vaccines.
Scientists have made strides unlocking the mysteries of how
the virus operates after it infects a person. While the
knowledge has been key to making new drugs that slow or halt
the disease's deadly progression, it doesn't point to the
discovery of a vaccine that would render a healthy person
immune to HIV.
Dr. Peggy Johnston, the assistant director for AIDS
vaccines at the National Institute for Allergy and Infectious
Diseases, said company officials worry that not enough is
known about how HIV works to warrant a large vaccine
investment.
``There are enormous challenges that AIDS presents that are
unparalleled compared with other viruses,'' said Johnston.
For example, HIV is proving more resilient than other
viruses. Vaccines typically fend off disease by stimulating
the body's production of antibodies which in turn destroy an
invading virus. However, HIV appears to defend itself with a
kind of sugar-based shield to fend off antibodies.
Another problem is that different strains of HIV exist in
the West and in Africa and Asia. So a vaccine to protect
against the North American variety might not work against
other strains.
The economics of vaccines also are daunting.
The average vaccine costs about $100 million to develop.
But because the scientific understanding of HIV is murky, a
company could commit the resources and more than a decade of
work and still fail to invent a vaccine.
In order to make a profit on vaccines, which are typically
priced in the $1 to $5 per shot range, a drug maker must sell
millions of inoculations. While industrialized countries
could easily afford the price, much of the developing world,
which is the largest potential market for an AIDS vaccine,
would have difficulty.
The profitability issue is fueling a proposal by the
International AIDS Vaccine Initiative (IAVI), an advocacy
group based in New York, that is pressing wealthy nations to
create a $1 billion AIDS vaccine purchase fund for the Third
World, effectively assuring profit to a successful
manufacturer.
``We think the fund would provide a very strong incentive
for industry,'' said Victor Zonana, a vice president at IAVI.
``The companies would know that in addition to their markets
in industrialized countries, they would have a guaranteed
paying market in developing countries.''
But pharmaceutical executives believe that even with such a
fund in place, a vaccine won't be as profitable as are AIDS
therapeutic drugs, which are taken for the lifetime of a
patient as opposed to only a few times, as are vaccines.
____
Memorandum
Congressional Research Service,
Library of Congress,
Washington, DC, October 6, 1999.
To: Hon. Nancy Pelosi and Hon. John Kerry; attention: Chris
Collins and Ryan McCormick.
From: Gary Guenther, analyst in business taxation and
finance, government and finance.
Subject: Effectiveness of the proposed tax credits for
vaccine research in H.R. 1274.
Responding to your request, this memorandum assesses the
likely effectiveness of the proposed tax credits for vaccine
research in H.R. 1274. Effectiveness in this case signifies
the likely rise in domestic investment in vaccine research
and development (R&D) in response to the tax credits. This
method of assessing the proposed credits' effectiveness boils
down to comparing the additional vaccine R&D induced by one
dollar of tax credit claimed, which is a way of analyzing the
benefit-cost ratio for the credit. The proposed credits also
raise the issue of whether such a subsidy can be justified on
economic grounds. This issue is discussed briefly in the
final section.
Two noteworthy conclusions emerge from the analysis
presented here. One is that the proposed tax credits can be
expected to spur increased investment in vaccine R&D by the
private sector, by both increasing expected after-tax returns
on this investment and improving the access of small startup
firms to equity capital for investment in vaccine R&D. The
second conclusion relates to the economic rationale for the
proposed tax credits: they are justified on economic grounds
to the extent that they attempt to correct failures in the
market for vaccines that result in economically inefficient
levels of domestic investment in vaccine R&D.
If you have any questions about this analysis, please call
me at 7-7742.
The Economics of Vaccine Innovation
Vaccines are among the most cost-effective weapons in the
arsenal of modern medicine against the spread of contagious
diseases, lethal and non-lethal. By strengthening an
individual's immune system to resist a wide range of
infectious diseases, they offer a relatively inexpensive
means of lowering a society's overall cost of medical care.
While historically vaccines have been used to prevent a
variety of diseases, intensive efforts are being made to
develop vaccines that can treat certain diseases--mainly
cancer and AIDS--after an individual contracts them.
On the whole, the development of new vaccines is a long,
costly, and risky process. It typically takes 10 years and
requires outlays of $100 million to bring a new vaccine from
the research laboratory to the medical marketplace.\1\ In
addition, firms seeking to develop new vaccines face a
considerable risk of failure. A 1989 study estimated that
only 3 out of 10 vaccines that enter clinical trials end up
being approved for general use.\2\ For the most part, vaccine
development passes through the same stages as the development
of new therapeutic drugs: a period of basic research or
discovery, followed by the filing of an investigational new
drug application with the U.S. Food and Drug Administration
(FDA), followed by three stages of clinical trials. Vaccine
development, however, departs from the path of new drug
development during the third phase of clinical trials, when a
firm developing a new vaccine must file both a product
license application and an establishment license application
with the FDA; firms developing new therapeutic drugs only are
required to file a new drug application at this stage. Once
the FDA is satisfied that the vaccine is safe and effective
and that the plant where it is produced meets the FDA's
stringent standards for purity, cleanliness, and quality
control, the vaccine can be marketed in the United States.
This means that the FDA requires vaccine firms to construct
and start up manufacturing facilities for new products
several years before they can gain marketing approval--and
thus begin to earn a return on the funds invested in their
development.
---------------------------------------------------------------------------
Footnotes at end of document.
---------------------------------------------------------------------------
The economics of vaccine innovation has important
implications for the structure of the vaccine industry. High
fixed costs for research, production setup, and obtaining and
maintaining FDA marketing approval result in marginal vaccine
production costs that are significantly below average vaccine
production costs. Such a cost structure is not conducive to
the existence of multiple sellers of the same vaccines. As a
seller's output expands, its average costs decline; and as
those costs fall, its ability to underprice its competitors
and still cover its costs grows.\3\ The degree of competition
in the world vaccine industry seems to confirm this crucial
point. Vaccine production in the United States and the rest
of the world has been highly concentrated: in 1994, four
firms (Institut Merieux, Merck, SmithKline Beecham, and
American Cyanamid) accounted for between 65% and 80% of world
sales of vaccines; and in 1993, the same four firms produced
nearly all the pediatric vaccines purchased in the United
States.\4\
In the United States, the federal government finances the
lion's share of basic research in vaccines, where the
emphasis is on understanding the fundamental mechanisms of
infectious disease and the immune system. Once a vaccine
research project advances to the level of applied research
and development, where the emphasis is on producing and
testing specific products with commercial potential, the
private sector takes the lead in financing. Near the end of
the development cycle for vaccines, the federal government
becomes more involved again by helping fund clinical trials
to test the safety and efficacy of new vaccines.\5\
According to one estimate, the federal government provided
$500 million (or 36%) of the $1.4 billion spent on U.S.
vaccine R&D in 1995, and the private sector contributed
the remaining $900 million (or 64%), with the lion's share
coming from four large, established sellers of vaccines:
Merck, the Wyeth-Lederle division of American Home
Products, SmithKline Beecham, and the Pasteur Merieux
Connaught division of Rhone Poulenc.\6\
In the past decade, the private sector has shown a vibrant
interest in vaccine innovation, and investment in vaccine R&D
has risen accordingly. While a number of factors have come
together to spur this interest, a key driving force has been
the revolutionary advances in the understanding of the
molecular basis of the immune system and disease engineered
by biotechnology. Recombinant technology is now being used to
improve existing vaccines and to produce new ones, to design
more efficient combinations of existing vaccines, and to find
better ways of delivery than a shot in the arm. Moreover,
most vaccine industry executives are convinced that the new
vaccines developed through the application of recombinant
technology will gain patent protection, unlike traditional
vaccines which are derived from naturally occurring organisms
and thus not eligible for patent protection. Patented
vaccines tend to command much higher prices in private
markets than those lacking patent protection. By one account,
as of May 1998, at least 50 biotechnology firms had joined
the large, established producers of vaccines
[[Page S12425]]
in the search for new vaccines, and about 75 new vaccines
were in various stages of development worldwide.\7\ The
economies of scale in vaccine production, however, make it
unlikely that many of small startup firms now engaged in
vaccine R&D will grow into large, independent producers.
Although public data on vaccine R&D are sparse and not
systematically collected, figures on pharmaceutical R&D
reported by the Pharmaceutical Research and Manufacturers of
America (PhRMA) appear to underscore the renewed interest in
vaccine R&D in the pharmaceutical industry. In its latest
profile of the U.S. pharmaceutical industry, PhRMA reports
that domestic R&D investment in biologicals, a product class
that is dominated by vaccines, rose from $274 million (or
4.7% of domestic pharmaceutical R&D) in 1989 to $716.8
million (or 5.3% of domestic pharmaceutical R&D) in 1996.
intended purpose of h.r. 1274, the lifesaving vaccine technology act of
1999
The central aim of H.R. 1274 is to boost U.S. investment in
the development of vaccines for diseases that kill large
numbers of people each year, especially in developing
countries. Its chief policy instrument for achieving this
objective is a tax credit equal to 30% of qualified vaccine
research expenses in a tax year. Under the bill, qualified
vaccine research expenses are defined as a firm's in-house
and contract research expenses related to the discovery and
development of vaccines for malaria, tuberculosis, HIV, or
any infectious disease that kills over one million persons
annually, as determined by the World Health Organization. The
definition of qualified research expenses under H.R. 1274 is
identical to the definition of research expenses that qualify
for the research and experimentation (R&E) tax credit, with
one significant exception: the proposed vaccine research
tax credit would apply to 75% of qualified contract
research expenses, whereas the R&E tax credit applies to
only 65% of such expenses--except in the case of contract
research performed by certain research consortia, where
75% of the expenses qualify for the credit. Like the R&E
tax credit, public or private grants for vaccine research
are ineligible for the credit. In addition, any research
expenses claimed for the vaccine research credit cannot
also be claimed for the R&E tax credit, although qualified
vaccine research expenses could be used to calculate the
base amount for the R&E credit; and with the exception of
expenses for human clinical testing conducted abroad, no
credit is available for foreign vaccine research. H.R.
1274 also specifies that the proposed vaccine research
credit would become part of the general business credit
and thus subject to its limitations; any portion of the
vaccine research credit that cannot be used in the tax
year in which it is earned could be carried forward to a
succeeding tax year, but the unused portion could not be
carried back beyond the year in which the credit was
enacted. Finally, like the R&E credit, qualified research
expenses that are deducted under section 174 of the
Internal Revenue Code (IRC) must be reduced by the amount
of any vaccine research credit claimed. This requirement
has important implications for the marginal effective rate
of the credit, because whatever vaccine research credit is
claimed in effect is taxed at a firm's marginal corporate
income tax rate.
H.R. 1274 would also create a less direct tax subsidy for
vaccine R&D. This subsidy is targeted at investors and is
intended to make it easier for small firms involved in
vaccine R&D to raise money in equity markets. Specifically,
the bill would grant individuals or firms that purchase the
``qualified research stock'' of small firms undertaking or
funding qualified vaccine research a tax credit equal to 20%
of the amount they pay for the stock, provided two conditions
are met. First, the firm whose stock is bought must use the
proceeds within 18 months of the date of purchase to pay for
research that qualifies for the vaccine reseach credit.
Second, the firm must waive its right to claim a tax credit
for the vaccine research funded by the stock purchases. Under
H.R. 1274, qualified research stock is defined as any stock
issued by a firm that is subject to the corporate income tax
and has gross assets of $50 million or less; the stock must
be issued after the date the bill is enacted and acquired
``at its original issue in exchange for money or other
property (not including stock).''
Likely Impact of H.R. 1274 on U.S. Vaccine R&D
How are the proposed tax subsidies in H.R. 1274 likely to
affect vaccine R&D? The answer hinges largely on the effect
of the subsidies on two key determinants of business R&D
investments: the expected after-tax rate of return on such
investments and the availability and cost of capital to
finance the investments.
For firms seeking to develop new or improved vaccines, the
decision to invest in R&D is no different in principle from a
decision to invest in any other capital asset, such as a new
production facility. The key considerations are the expected
after-tax returns on the proposed R&D projects, the cost of
capital or funds for the projects, and the availability of
funds to finance the projects. Small startup firms are more
likey than large, well-established firms to have trouble
funding R&D projects out of retained earnings or raising
funds in debt or equity markets to finance these projects. In
theory, a vaccine firm will invest in R&D projects up to the
point where the expected after-tax rate of return on a
possible project matches the firm's cost of capital. Projects
with the largest gap between expected after-tax rates of
returns and the cost of capital are likely to receive the
highest priority.
H.R. 1274 can be expected to increase the level of domestic
vaccine R&D by both increasing the expected after-tax rates
of return on possible research projects and improving the
access of smaller, newer vaccine firms to equity markets. The
proposed flat 30-percent tax credit on qualified vaccine
research would be one of the factors shaping the expected
after-tax returns on vaccine R&D investments. Other important
factors are the eventual size of the market for the vaccine,
the predictability of prices and usage rates for the vaccine,
expected production costs, exposure to liability suits for
side effects of the vaccine, patent protection, the ease of
entry into the market for the vaccine, and the cost of
capital.\8\ The proposed credit would increase expected
after-tax rates of return. Under current tax law, firms
performing vaccine R&D can claim the 20% R&E tax credit for
qualified research. But because of the rules governing the
use of the credit, the marginal effective rate of the credit
is 6.5% or 13% on each additional dollar spent on vaccine
research by firms in the 35-percent corporate tax bracket. If
H.R. 1274 were enacted, the same firms could claim a tax
credit for qualified research with a marginal effective rate
of 19.5%; the rate would not be 30% because of the
requirement that any credit claimed must be added to a firm's
taxable income. All other things being equal, as a firm's
marginal effective rate for the vaccine research credit goes
up, the after-tax rate of return to this research rises.
In addition, vaccine firms that are constrained by a lack
of funds in pursuing research opportunities could be expected
to invest more in vaccine R&D if H.R. 1274 were enacted.
Investors would be eligible for a flat 20% tax credit on
purchases of common stock issued by small vaccine firms,
provided the firms invest the proceeds from the stock
purchases in qualified research within 18 months of the
purchase. As a result, investors would face lower marginal
tax rates on the returns to these investments than on the
returns to alternative investments. This difference could
lead them to invest more in small vaccine firms than they
otherwise would, augmenting their available funds for R&D.
Innovation is the main route of entry into the vaccine
business for small firms.
How much is vaccine R&D spending likely to increase in
response to the proposed credit? This is difficult to analyze
in the absence of reliable estimates of the responsiveness of
vaccine R&D to changes in its after-tax price. The proposed
credit lowers the after-tax price of qualified R&D, and in
theory vaccine firms can be expected to perform more R&D as a
result. A variety of studies have estimated that in the 1980s
the ``tax price elasticity of total (U.S.) R&D spending'' was
unity or even higher, meaning that U.S. firms responded to a
1% decline in the after-tax price of R&D by increasing their
R&D spending by 1% in that decade.\9\ Assuming vaccine firms
exhibit the same tax price elasticity today, a research tax
credit with a marginal effective rate of 19.5% could lead to
a rise of as much as 19.5% in domestic vaccine R&D spending.
However, this estimate cannot be regarded as reliable and
could be greatly exaggerated, because it is unlikely that the
sensitivity of R&D investment to changes in its after-tax
price remains constant over time and is the same for all
kinds of R&D projects, and because vaccine firms would be
likely to differ in their ability to use the credit in any
given year.
Furthermore, there is some reason to believe that the
proposed vaccine research tax credit would eventually be as
cost-effective as direct spending by the federal government
on vaccine R&D. A number of studies have concluded that the
existing R&E tax credit yields roughly a dollar-for-dollar
increase in reported R&D at the margin, but that in the early
years of the credit firms were not as responsive as they were
adjusting to the credit's availability.\10\ In other words,
these studies suggest that government spending programs and
the R&E tax credit are equally effective in increasing the
amount of qualified research performed in the United States.
Economic Justification for a Tax Credit for Vaccine Research
Under conventional economic theory, the use of a subsidy
such as a research tax credit is justified if its ultimate
aim is to correct some sort of market failure. In the case of
R&D, the R&E tax credit is one way to offset the tendency of
firms to underinvest in R&D because of the gap between the
social and private returns to research. Economists argue that
in the absence of government support for R&D, firms are
likely to invest too little in R&D because they cannot
appropriate all the returns to those investments. So the R&E
tax credit, by lowering the after-tax cost of qualified
research, is intended to spur firms to invest more in R&D
than they otherwise would. Ideallly, the added R&D stimulated
by the credit is enough to raise domestic R&D spending to the
level commensurate with the social returns to R&D. The market
failure that the R&E tax credit is attempting to remedy is
underinvestment in R&D arising from the inability of firms
performing R&D to capture all the profits generated by the
investment.
These considerations raise the issue of whether the
proposed tax credit for vaccine research in H.R. 1274 is
justified on economic grounds. Is there a failure in the
market for
[[Page S12426]]
vaccines that would warrant the adoption of such a subsidy?
As was suggested earlier, there are external economic
benefits from controlling the spread of infectious diseases.
The cost to society of preventing an outbreak of an
infectious disease tends to be much lower than the cost of
treating the outbreak that might occur in the absence of
immunization. This raises the possibility that private firms
invest less in vaccine R&D than its potential social benefits
warrant. Partly in an effort to correct for such a market
failure, the federal government supports vaccine R&D through
its funding of basic research in vaccines and clinical trials
for new vaccines. Its research support is also intended to
direct vaccine investment to address current and future
public health needs. In addition, it offers two tax subsidies
for R&D, namely: the R&E tax credit and the expensing of R&D
costs under IRC section 174. Although these subsidies are not
targeted at vaccine research but are available to all firms
that perform qualified research, they benefit vaccine firms
by increasing their potential aftertax rate of returns on R&D
investments. The proposed vaccine research tax credit would
supplant the R&D tax credit for vaccine firms, but its
treatment of qualified research would be more favorable,
increasing the expected profitability of vaccine F&D
investment relative to other kinds of R&D investment.
Thus, an important policy issued for Congress is whether
the current level of domestic vaccine R&D investment is
socially desirable or efficient. And if not, would the
proposed tax credit in H.R. 1274 be more efficient than added
federal funding of vaccine R&D or some other policy measure
(such as government grants to international agencies
that purchase and distribute needed vaccines in poor
countries) in raising total investment to such a level.
From the perspective of economic efficiency, the R&D
projects that should be promoted are those with the
largest gaps between the social and private rates of
return. Yet vaccine firms are likely to use any research
tax credits to fund first those projects with the highest
expected private rates of return. At the same time, there
is no certainty that the federal government could do a
better job of targeting those vaccine R&D projects with
the largest spillover effects. If it is determined that
domestic vaccine R&D is less than socially optimal,
perhaps a combination of a targeted tax credit like the
one proposed in H.R. 1274 and increased government support
for basic and applied vaccine research would be more
attractive than relying solely on one instrument or the
other.
Another policy issue for Congress raised by the proposed
tax credits in H.R. 1274 relates to the external benefits of
mass immunizations. The economic benefits to a society from
vaccinations far outweigh the benefits to individual
consumers, who in deciding whether or not to purchase
vaccines for themselves or their children tend to consider
only the costs and benefits to themselves and not the
potential benefits to others in the community. Even if the
market for vaccines were perfectly competitive, it is
unlikely that immunization levels would be socially
optimal.\11\ Thus government intervention in the development
and distribution of vaccines is certainly justified on
economic grounds. The proposed tax credits would spur the
development of new vaccines, but they would not lessen any of
the barriers to the achievement of universal immunization
with available vaccines. Low immunization rates are due to a
variety of factors, including out-of-pocket costs, parental
attitudes and knowledge, access to health clinics or doctors'
offices, the perceived efficacy of vaccines, and the
perceived risk of contracting diseases for which vaccines
exist.\12\ Clearly, other policy initiatives would be needed
to address these factors.
footnotes
\1\ Sing, Merrile and Mary Kaye Willian. ``Supplying
Vaccines.'' Supplying Vaccine: An Economic Analysis of
Critical Issues. Pauly, Mark, et al., editors. Washington,
D.C., IOS Press, 1996. P. 61.
\2\ Grabowski, Henry G. and John M. Vernon. The Search For
New Vaccines. Washington, D.C., American Enterprise Institute
Press, 1997. P. 20.
\3\ Pauly, Mark V. and Bridget E. Cleff. ``The Economics of
Vaccine Policy: A Summary of the Issues.'' Supplying
Vaccines. P. 7.
\4\ Sisk, Jane E. ``The Relationship between Scientific
Advances and the Research, Development, and Production of
Vaccines in the United States.'' Supply Vaccines. p. 181; and
FIND/SVP. The World Market for Vaccines. New York, October
1995. P. 169.
\5\ Sisk, Jane E. Supplying Vaccines. P. 177.
\6\ Marcuse, Edgar K., et. al. ``United States Vaccine
Research: A Delicate Fabric of Public and Private
Collaboration.'' Pediatrics, December 1997. P. 1017.
\7\ Vaccines: Big Shots. Economist, May 9, 1998. P. 63.
\8\ Sisk, Jane E. Supplying Vaccines. P. 175.
\9\ Hall, Bronwyn H. and John van Reenen. How Effective Are
Fiscal Incentives for R&D: A Review of the Evidence. Working
Paper 7098. Cambridge, MA, National Bureau of Economic
Research, April 1999. P. 21.
\10\ Hall, Bronwyn H. How Effective Are Fiscal Incentives for
R&D? P. 21.
\11\ Holtmann, Alphonse G. ``The Economics of U.S.
Immunization Policy.'' Supplying Vaccine. P. 155.
\12\ Pauly, Mark V. and Bridget E. Cleff. ``The Economics of
Vaccine Policy.'' Supplying Vaccine. P. 12-16.
____________________