[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.

                          ____________________