Why the market cannot be trusted to develop a vaccine

Are there enough incentives for firms to develop a vaccine for Covid-19? On the face of it, I shouldn’t even be asking this question. When demand for a vaccine far outstrips supply, it makes good economic sense to produce such a vaccine. Margins on products would be high and shareholders will be content with their dividend. Then why don’t we have a vaccine for diseases such as SARS or Ebola yet?

It’s important to understand some of the fundamental differences between drug markets and vaccine markets to answer this question. Drugs are less complex to produce than vaccines, relatively easier to produce generic versions, and the end product is offered great protection by patents and are largely propelled by market force of demand.

Vaccines, on the other hand, are relatively more complex to produce, and often the process of production is patented rather than the end product, and it is largely propelled by government or institutional incentives.  So why don’t we have a vaccine for SARS or Ebola? Primarily because government interest faded out once the pandemics were under control . Vaccine development needs a long-term commitment from governments, otherwise, economically, for firms, it is not attractive to produce the vaccine. Given that 90% of the world’s vaccines are produced by only 15 firms that are publicly listed on the stock exchange, their shareholders concerns have to be catered to.

Significant issues revolve around patents and copyrights. Take the case of Gilead, a pharmaceutical company listed on the NASDAQ developed a drug called Remdesivir for treating Ebola. Even though it failed to produce results for Ebola patients, it has been promising in some clinical trials on Covid-19 patients. But institutes around the world have applied for multiple copyrights on the same drug. Arguably, why should firms like Gilead develop drugs if their patents are not guaranteed? Likewise, why would pharmaceutical firms endeavour to develop a vaccine if governments do not see the effort through to fruition by continued support? In the case of SARS, that is exactly what happened when governments withdrew their support after the pandemic had died down.

But if so much government support is required, then why grant the firms patents over the vaccine development process? Indeed, granting of a copyright is akin to granting a monopoly to a firm for producing a vaccine. From a pharmaceutical firm’s perspective, this is fabulous as they can rake in abnormal profits without competition. Consider Sanofi, in 2018 about 17% of their Q4 global sales revenue came from vaccine sales.

Given that the global vaccine market is worth multibillions, this market segment is very important to pharmaceutical companies and to their shareholders, therefore, patents are always welcomed by them. But the counter argument to this is that patents put vaccines beyond the reach of the developing nations, despite subsidy programs such as Gavi launched by the World Health Organization (WHO), the World Bank Group and the Bill and Melinda Gates foundation.

Moreover, pharmaceutical firms tend to misuse government incentives and legislation to maximise profits which critics argue is not the case for incentives. Consider the case of the orphan drug legislation passed in the United States in 1983. The fundamental aim of such legislation was to ensure that pharmaceutical companies produce drugs for rare diseases that effect less than 200,000 people. If pharmaceutical firms produced these drugs, they would get a seven year monopoly over manufacturing the drug as the FDA would not grant any other permission for similar drugs to be launched in the market place, even if the original patent had expired during that period.

However, an analysis has shown that about a third of the orphan drug statuses were granted to drugs that were originally launched for mass illnesses, and were later prescribed as a treatment for rare illnesses, thereby granting the companies the orphan drug status. Such loopholes are defeating the original purpose of the legislation and earning the pharmaceutical companies billions through monopolies.

Hence, there are many who are skeptical of providing pharmaceutical companies additional incentives. Stiglitz et al. (2020) recently argued for abolishing the current system based on maximising profits and granting monopolies by introducing a new mechanism or widening an existing mechanism such as the existing patent pooling system. Hence, patents holders grant licences and in developing countries the drugs are produced for lower costs as is done by the medicines patent pool (“Our Model – MPP,” n.d.).

The generic competition drives prices down to the benefit of end consumers. But all these ideas also fundamentally challenge the ideas taught around the world in business schools. Primarily of value creation and maximising shareholder value. Moreover, can free enterprise and innovation thrive in markets where the winner does not take all? Patent pooling is not a novel idea, but the medicines patent pool only has seven pharmaceutical companies that have granted their licences for only three diseases namely, HIV, Hepatitis C and Tuberculosis (“Products Licensed – MPP,” n.d.). In the current form, it seems rather farfetched that pharmaceutical firms would take such a decision with ease and if it were through government intervention that such firms business model was changed risks eroding these firm’s competitiveness.

But this is not to say the current aim of creating shareholder value that drives most pharmaceutical businesses is not without flaws. Consider the practice of share buybacks. Companies argue that by buying back shares they are reducing the number of outstanding shares in the market, and thereby, improving their shareholder value as the earnings will be distributed over fewer shareholders. Moreover, shareholder value increases through capital gains which is more efficient means of rewarding shareholders than a dividend pay-out. Merck the global pharmaceutical giant spent 16 billion dollars on share buy backs in 2018, whereas they only spent 10 billion dollars on research and development. It could be argued that investing more in research and development is a better way of creating shareholder value than share buybacks. However, reality is different.

There is no easy solution to the economic and market problems of creating a vaccine for Covid-19. Radically changing business models, government support and corporate capitalism all feed in to the problem. But they in tandem also are providing solutions. This is the nature of markets muddled and imperfect, and we need to make the best of what we have.

Dr. M.A.Zaka is an academic with an interest in business, new technology and economics.