I’d like my free market pricing with a side of sovereign indemnity, please.
Indemnity to vaccine manufacturers: the latest slithering twist in the high-stakes game of snakes and ladders that is India’s vaccination programme. It started with reports in mid-May that an ‘indemnity demand’ from Pfizer and Moderna, together with the Indian regulatory requirement to conduct post-approval bridging trials after authorisation, were holding up the Indian government’s negotiations with these vaccine manufacturers. By June 1, 2021, it looked like a resolution was near—the government waived the requirement to hold bridging trials, and signalled that it might grant indemnity.
But the next day, it was reported that the Serum Institute of India now wanted domestic vaccine manufacturers to be granted indemnity if foreign companies were, because, “the rules should be the same for everyone”. Is it really that simple? And what exactly are we, the taxpayers who ultimately fund everything, on the hook for when the government grants indemnity to a vaccine manufacturer?
What is Indemnity Anyway?
Indemnity is not legal immunity, as has been reported. It (very broadly) means that if Pfizer, for instance, is ordered to pay damages by a court to someone who has taken the vaccine and, as a consequence, suffered a side effect or health complication (called an ‘adverse event’), Pfizer can recover those damages from the government.
Wait, That Doesn’t Sound Fair
Pfizer developed the vaccine (actually, BioNTech did) and manufactured it, as did Moderna, why should they have the luxury of shifting responsibility for side effects to the government? Well, for at least four reasons:
1. It Was Market Practice Even Before the Pandemic: Let’s look at how medicines are sold. Large drug manufacturers typically sell to wholesale distributors at the national level, who then, through regional distributors, resell to pharmacies, who then sell to the ultimate consumer. The distributor is the manufacturer’s customer, not the consumer. Likewise, the government in the current scenario is Pfizer’s customer and essentially, a distributor, because it will through central and state government centres distribute and administer the vaccines or resell them to private players. And, it actually is common for drug manufacturers to seek indemnification from their distributors. However, it is a heavily negotiated clause.
Round 1: The manufacturer will argue that the distributor is responsible for storage, transportation, administration, adverse event warnings and monitoring, among other things, under the purchase contract, and if it fails to carry out any of these activities (over which the manufacturer has no control) properly, it could result in harm to consumers, lawsuits and potentially damages, ergo it should be indemnified by the distributor.
Round 2: A distributor may agree to this indemnity, but will seek to limit it only to losses arising out its failure to discharge its obligations under the contract (i.e. storage, distribution etc.), and in turn ask the manufacturer for indemnity for losses arising out of inherent problems with the manufactured drug, e.g. if the drug was not manufactured in accordance with internationally accepted regulatory standards. This is logical—the distributor had no control over the actual manufacture of the product, and shouldn’t be liable for product flaws. However, a manufacturer with greater leverage will often refuse to indemnify the distributor even for manufacturing defects, instead insisting that the distributor take the product ‘as is’.
If s/he can, the distributor will also seek to cap their obligation to indemnify the manufacturer, at say, the value of the contract (what s/he has paid for the drugs they’ve bought), because, well, why risk a deal where you could end up paying more than you stand to make? The distributor will also generally refuse to indemnify the manufacturer for losses it suffers due to its own fraud, negligence or wilful misconduct.
Round 3: Even if the manufacturer accepts the distributor’s demand for a counter-indemnity, s/he will, similarly, still likely refuse to indemnify the distributor for losses arising from the distributor’sown fraud, negligence or wilful misconduct.
This is a grossly simplified version of actual indemnity negotiations in pharmaceutical deals, which are infinitely more convoluted, of course, but one assumes that the government’s negotiations with Pfizer/Moderna over the last few weeks have broadly followed a similar, tortuous path.
2. Risks Associated with Accelerated Development Timeline: It normally takes 10-15 years to develop a vaccine and certify that it’s safe. The mumps vaccine was developed the fastest, and that took four years. Thanks to the years of work already done on coronaviruses, COVID-19 vaccines were developed and launched in under a year.
Pfizer, Moderna and other manufacturers have taken the position, from the very first supply contracts they signed, that, given the accelerated development timelines under which they have developed their COVID-19 vaccines, they would neither warrant that no serious side effects would arise once the vaccines were administered to a wide patient population, nor assume any liability for the same. Serious adverse events may occur, they said, that did not arise in the clinical trials or that initially appeared to be unrelated to the vaccine and were found to be causally related only with the collection of subsequent information. They wanted their customers, who were all national governments, to acknowledge that the vaccines would be rolled out in ‘epidemic conditions’, and agree that the administration of the vaccines would therefore be conducted under the sole responsibility of such governments.
3. Why Make an Exception? Newspaper reports suggest that most governments buying vaccines from Pfizer/Moderna have agreed to grant them some form of contractual indemnity, and countries like the United Kingdom and the United States have even passed legislation granting vaccine manufacturers immunity from civil liability.
Unfortunately, most supply agreements between vaccine manufacturers and governments are not in the public domain (except for those entered into by the European Commission, albeit in redacted form) so we don’t know the exact contours of the indemnity granted in all cases.
Still, if the European Commission’s contract with Pfizer is any indication, the vaccine manufacturers have virtually no liability. The member states of the European Union are liable to indemnify Pfizer for specified losses (including death, illness, disability etc.) arising from the use and deployment of the vaccine in such member state, with limited exclusions for losses caused by quality defects, and wrongful acts by Pfizer intended to cause harm.
Of course, these agreements were signed when the vaccine was still in clinical trials, and any indemnity given by the Indian government now, after the vaccine has been in use for months, should ideally be more limited.
4. Because They Have Leverage: Ultimately, of course, what you get in a contract is often a function of your leverage. Right now, Pfizer and Moderna have a great deal of leverage, because demand for their vaccines exceeds supply. Yes, a country with hundreds of millions of unvaccinated people is an attractive market but they don’t need another customer right now. India, however, does need vaccines. Immediately, and in large numbers.
One still hopes, of course, that the government will ultimately negotiate the best deal it can with Pfizer/Moderna, ideally limiting the scope of its indemnity and seeking a counter-indemnity for defective vaccines.
So Just Give Them the Indemnity?
Yes, that’s how it’ll likely play out. The government might, however, want to note the following: First, damages awarded in product liability lawsuits in India, when they arise, are (unfortunately) not very high. The government may, therefore, conclude that the actual risk arising from a suitably tailored indemnity is low. Second, drug manufacturers usually procure product liability insurance to deal with these risks. The cost of such insurance is typically factored into the price of the drug. The government should therefore argue that its liability to indemnify should be reduced to the extent the manufacturer is covered by insurance. Finally, the government should consider establishing up a vaccine compensation scheme, which should be a non-judicial, institutional mechanism for compensating victims of adverse events, as has been done in the United States.
Wait, What about Serum Institute’s Indemnity Demand?
There are at least three problems with Serum’s demand: first, Serum is only a contract manufacturer. It did not develop the vaccine, it has only been licensed by AstraZeneca to manufacture (and presumably sell) it within India. As such, it should be seeking indemnification for product defects from AstraZeneca, not its customers. Serum’s contract with AstraZeneca has never been made publicly available, but the government would be well advised to examine how liability for adverse events has been dealt with in the Serum-AstraZeneca contract before it engages in indemnity negotiations with Serum.
Second, indemnity is not a right. It’s not part of the basic rules of the game, like Thou Shalt Not Renege On A Deal, it is a bilaterally negotiated contractual concession, like price or payment terms. Serum negotiated its supply deal with the government in January—that was the time to ask for indemnity. To ask for indemnification, five months after closing a deal, on the basis that it’s being offered to others, is like your cable operator demanding Rs 800 for a Rs 300 package, halfway into your contract period, because well, if you can pay Netflix that much, why not him?
Of course, Serum could still ask for indemnity in connection with future orders, but most people do not react favourably when their counterparty seeks to renegotiate the terms of a deal six months later. Even if for some reason, the government did agree to indemnify Serum, tricky questions remain. Would the indemnity be retrospective? If not, how would you distinguish between claims brought under the ‘no indemnity’ regime and the ‘post-Pfizer’ regime?
Third, reallocation of liability impacts price. Serum’s selling price to the government (reportedly Rs 150 per dose) factored in the risk of assumption of liability from adverse events. If Serum now wants to move that liability to the government via an indemnity, then the Government must ask for a lower price per dose. And, it must do so on behalf of all of us tax payers.
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