Neonatal sepsis, a bloodstream infection in babies in the first 90 days of life, affects 1.3 to 3.9 million newborns annually and causes 400,000 to 700,000 deaths per year. These deaths primarily occur in low- and middle-income countries (LMICs). While treatable with antibiotics if identified early, the current diagnostic method—blood culture—takes 48 to 72 hours, which is too slow to guide initial life-saving treatment decisions. Instead, clinicians rely on ambiguous and nonspecific clinical signs and symptoms when deciding to initiate care and later use the blood culture results to narrow or discontinue treatment.

This ambiguity leads to two dangerous outcomes. Missed and delayed diagnoses result in preventable deaths. Research indicates that better case management could reduce sepsis-related deaths by 20 percent, potentially saving hundreds of thousands of newborn lives annually. In other cases, babies without sepsis receive unnecessary antibiotics, which drives antimicrobial resistance (AMR) and increases the risk of adverse health effects. Despite the need and likely technological feasibility of rapid point-of-care tests for neonatal sepsis, no such test has yet been developed and rolled out across hospitals.

This reflects market, government, and institutional failures that have deterred commercial investment in this area. This blog post explores the key market and government failures that contribute to underinvestment and proposes an advance market commitment (AMC) as a solution.

First-mover disadvantage

Pioneering firms in diagnostic development face substantial risks and costs that later entrants don’t share. First-movers must invest in research and development (R&D), establish regulatory pathways without precedents, and demonstrate sufficient clinical utility to establish a new standard of care. Rival firms producing copycat products that haven’t incurred these costs can enter at lower prices, making it difficult for innovators to recover investments.

Intellectual property protections are meant to address this problem but offer limited help in the case of diagnostics. Key diagnostic innovations, including biomarkers, are often ineligible for patent protection, frequently classified as “natural phenomena.” Even when patents are obtained, IP rights are often poorly protected in LMICs where the burden of neonatal sepsis is highest.

Pioneering firms face both regulatory and market development burdens as trailblazers. First-entrants in medical device markets spend 34 percent longer in the regulatory approval process than followers, primarily from establishing new regulatory pathways rather than technological novelty. Additionally, they must also invest heavily in market development—educating clinicians, establishing guidelines, and developing training programs. These pioneering efforts ultimately decrease risk for future competitors who enter markets with established regulatory pathways and greater clinical awareness.

Low- and middle-income country pricing pressure

The burden of neonatal sepsis falls disproportionately on LMICs, where health expenditure remains low—just $80 per capita in India as of 2022. In these resource-constrained environments, governments and aid agencies are often the primary purchasers of point-of-care tests and drive hard bargains due to limited budgets. After a company has already invested millions in R&D and product development, buyers have a strong incentive to negotiate prices toward marginal cost. At this point, manufacturers would have an incentive to sell at close to marginal cost, even though this means they can’t recover sunk development costs. However, anticipating the risk of being unable to cover the fixed cost of innovation, forms may be reluctant to invest in innovation for LMIC markets—this is an example of a hold-up problem.

The malaria diagnostics market illustrates this risk: with limited profit margins and uncertain demand, there is concern that commercial incentives are insufficient to sustain innovation or retain manufacturers, despite ongoing clinical need. Addressing this kind of market failure was precisely the rationale behind the pneumococcal vaccine AMC, which accelerated the distribution of vaccines by making pricing commitments in advance of development, creating incentives for manufacturers to invest in development and capacity.

One common approach to addressing this challenge is differential pricing—charging more in high-income countries to recover development costs while offering lower prices in LMICs. This model, supported by donor-backed agreements in the case of HIV self-tests, has helped expand access in LMICs. However, maintaining such pricing strategies faces challenges, including parallel imports, price controls in high-income countries using reference pricing, and reputational risks associated with price discrimination for life-saving technologies.

In addition, the market in high-income countries may be too small or too different to incentivize innovation. Neonatal sepsis diagnostics are distinct from those needed for pediatric or adult sepsis. Fewer babies are affected by neonatal sepsis in high-income countries, and hospitals in such countries are also likely better resourced, with established surveillance systems, clinical monitoring, and prevention strategies. Lower disease prevalence also reduces the test’s positive predictive value, meaning more false positives and less clinical utility. While a high negative predictive value could help reduce unnecessary antibiotic use, this benefit is often overlooked in reimbursement decisions that focus narrowly on individual outcomes. Additionally, the type of preferred test may differ—LMICs often need low-cost, point-of-care tools, while high-income countries may prioritize higher-performing, lab-integrated diagnostics.

Undervaluing AMR reduction

Diagnostics generate broader public benefits by enabling targeted antibiotic use. In LMIC neonatal units, only 18 percent of neonates treated for suspected sepsis had a culture-confirmed infection. This likely reflects a combination of true absence of bacterial infection and the poor sensitivity of blood cultures, especially in low-resource settings. The result is widespread antibiotic use on many neonates, most of whom do not need antibiotics. This in turn fuels resistance; nearly half of pathogens causing neonatal sepsis are now resistant to World Health Organization-recommended first- and second-line treatments. Evidence from neonatal units shows that reducing antibiotic use leads to lower rates of multidrug-resistant organisms and reduces transmission risk of resistant bacterial infections.

However, these AMR-related benefits are not fully reflected in pricing. Clinicians and payers focus on immediate patient outcomes, and reimbursement systems tend to value diagnostics only for their direct clinical utility. Broader public health gains are often unmeasured and undervalued, and many AMR benefits aren’t localized, as resistant pathogens can spread beyond a single health system and potentially reduce the lifespan of drugs we use to treat neonatal sepsis. The full value of a diagnostic that helps reduce resistance extends beyond the boundaries of the institution that pays for it. As a result, diagnostic firms are unlikely to earn more based on the broader benefits, which makes it less profitable to develop these tests.

An advance market commitment could address these challenges

An advance market commitment (AMC) could help address these overlapping market and institutional failures. An AMC is a pull financing mechanism in which a funder commits in advance to provide payments for the delivery of a product meeting predefined criteria. In the context of neonatal sepsis diagnostics, this could, for example, be structured as top-up payments from funders for each qualifying test purchased by health providers in LMICs or as a commitment to purchase a set number of tests at a predetermined price. This type of mechanism could improve the commercial viability and reduce the financial risk for innovators.

By raising expected returns, an AMC could help correct the core market failures. An AMC could favor the first firms to bring a test to market, thereby reducing the first-mover disadvantage. It would also help cover the development and scaling up of a test, addressing the risk of firms being bargained down to marginal cost. This mechanism would help reduce the gap between the social value of reduced AMR and health systems’ willingness to pay based on individual health outcomes.

A pull mechanism like an AMC is particularly well-suited to this market challenge. Firstly, the technological path remains uncertain: solutions could involve biomarkers, molecular diagnostics, metagenomics, machine learning, or other emerging approaches. An AMC would remain agnostic to the underlying technology, allowing diverse innovators to compete in developing effective solutions. Second, an AMC can tie payments to a predefined target product profile, specifying in advance the features needed for clinical utility and suitability in target geographies, such as ease of use, time to result, and resource requirements. Finally, by linking financial support to affordability requirements, an AMC can ensure access in the settings where the test is needed most.

The O’Neill Report advocated for a similar “diagnostic market stimulus” in 2016, and numerous experts have called for pull incentives targeting AMR innovations. Our approach builds on this work by identifying a specific diagnostic target and proposing an instrument tailored to its particular market failures.

Beyond direct financial incentives, a broader AMC initiative can make investment more attractive by reducing institutional barriers and risk. These include aligning global priorities, establishing clearer regulatory pathways, and encouraging countries to signal demand and commit to integrating diagnostics into standards of care. The CGD-MSA working group is advancing both the financing instrument and the enabling ecosystem needed for its success by defining target product profiles, modeling market potential, and identifying key evidence needs for adoption.

Read our next blog, which explores the working group’s broader agenda in depth.