The Value of a Vaccine

The stock market this morning offers a useful event study on how much of the social value of a vaccine the producer of the vaccine may expect to be able to capture. The good news from Moderna's early-stage coronavirus vaccine trials lifted the Dow about 3 percent and Moderna itself around 30 percent, according to the Washington Post. We can't be sure, of course, that these increases were solely because of this news, but let's assume that this is a good first approximation. The market cap of the Dow increased by around $216 billion, while the market cap of Moderna increased by around $6 billion.

Keep in mind that the value of global stock markets is more than ten times as great as the value of the Dow. Also keep in mind that a cure would produce benefits not reflected in equities, perhaps multiple times over. Whatever the exact math, it is clear that the markets expect that a company that produces a successful vaccine would only be able to capture a small percentage of the social value of that vaccine. This may be in part because if one vaccine maker is successful, several others are also likely to be successful, but the profits to all hypothetically successful vaccine makers in total are likely to exceed the private value to the vaccine company by many, many times.

My claim is not that the Moderna vaccine will be successful, a question on which I have no expertise. My point is simply that market participants were somewhat more confident about our economic future as a result of the news, and stocks therefore became more valuable. Moderna benefited from the news more than any other stock, but the total economic benefits of the vaccine are expected to be much larger than the benefits to Moderna.

What are the consequences for law and policy? It suggests that any government policy that reduces incentives to bring successful vaccines to market may be costly. For example, if vaccine manufacturers believe that governmental restraints on price gouging or public criticism will prevent them from selling at anything other than a low price, their incentives will be reduced. Fewer vaccine candidates may be tested, and those that are tested may be tested at a more leisurely pace than they otherwise would be. If that pace reduces social value by even 10%, that social loss may be much greater than the benefits of suppressing price. The analysis also highlights the potential value of government subsidies, such as Advanced Purchase Commitments. A group of economics professors has argued, persuasively in my view, that the government should commit billions of dollars to that effort.

The above considerations highlight a core argument for allowing patentees largely unfettered market power, at least where government subsidies will be modest or nonexistent: the more social value that a patentee is able to capture, the greater the incentives to invent in the first place. The informal event study this morning suggests that this argument may be especially important in COVID-19 vaccine development. Perhaps with some pharmaceuticals or other inventions, patentees are able to capture a solid chunk of the social welfare benefits. But vaccines have very large positive externalities, reducing the infection risk even of those not vaccinated, and a successful vaccine could help revive the economy. If even the recipient of a vaccine captures only some of the social welfare benefits from vaccination, it isn't surprising that the stock market does not expect patentees to be able to capture much of social welfare.

The general counterargument to the claim that patentees should enjoy considerable market power is that there is no reason for patentees to receive any more profits than were necessary to induce the invention and its commercialization. If one believes that a patentee would have invented and commercialized even with much lower profits, then social welfare will be maximized by reducing exploitability, for example by reducing patent scope or patent duration. In many cases, these arguments have a major flaw: If the ex ante incentives for research and development were supercompensatory were so much larger than necessary, then why didn't some other pharmaceutical company invent even earlier? John Duffy has rigorously shown that rents from patents are generally dissipated by patent races, with patent races beginning at such a time that the race participants expect zero economic profit. Sometimes, those who complain about excessive profits by a patentee underestimate the risk that the patentee faced, during the patent race and also at the earlier stages where the company that ultimately engaged in the research and/or commercialization was founded.

The model, however, does not work with COVID-19. Vaccine manufacturers could not have begun their research until the COVID-19 outbreak started. It is thus possible that there would be just as much effort toward producing a vaccine if, say, there were a tax on half of all COVID-19 vaccine profits. On this theory, everyone developing a plausible vaccine candidate has more than sufficient incentives to engage in the research. That seems plausible; it seems doubtful that we need more vaccine candidates, because it seems unlikely that the 101st best idea will work if the first hundred fail. And so, the argument would go, there is little reason to give a successful manufacturer assurance that it will be able to charge high prices or receive a substantial government subsidy.

Similarly, the counterargument might continue, if much greater profit potential existed, that would not mean that we could expect a vaccine to appear any earlier. That seems much less plausible. Even if we are providing sufficient incentives to allow for many vaccine candidates to be research, we may not be providing sufficient incentives to maximize the speed at which vaccine development occurs. Third parties like Bill Gates are stepping in to fund production of vaccines that have not yet been proven effective. But it is not yet clear that philanthropy will move the timeline forward as much as is optimal.

Vaccines are on a much faster track than any previous vaccine in history. But they may well not be on the fastest possible track. Any single vaccine manufacturer has relatively little incentive to argue for speeding up the vaccine testing and approval process. If such an effort is successful, then all of the vaccine manufacturers likely benefit from the same speedup. The benefit to the manufacturer is thus only that fewer people might need a vaccine if it comes out later, because some will have natural immunity from infection and because improvements in therapeutics might diminish the need for vaccination. Thus, if part of what is needed is to argue for changes to the conventional approval process–say, in the form of new regulations or new statutes–vaccine companies might not have sufficient incentives to bear the financial and publicity cost of lobbying.

Might this explain why we haven't had human challenge trials? There have been a number of commentators who have argued for such trials. The counterarguments are largely based on ethics rather than cost-benefit analysis, and since when have deontological considerations won the day on a major issue of global import? Arguably, even the aggressive calls for challenge trials are not aggressive enough. It seems plausible given the number of people dying from COVID-19 that a cost-benefit analysis might justify a much faster timeline, a couple of weeks with a small number of individuals and a couple of months with a few thousand. I suspect that public authorities in at least some countries could be convinced to go along with plans much more aggressive than the current ones. But there is no reason for a company to risk the liability that might develop with such an aggressive approach when the benefits to manufacturers are relatively low.