The Value of a Vaccine

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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.

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  1. Let us not forget the tragedy of Thalidomide — a wonder drug provided to pregnant women 60 years ago for morning sickness.
    And then their children had horrific birth defects….

    We don’t want to rush a vaccine to market before we know it is safe!

    1. That is just the problem. You are talking about absolute safety, which is of course impossible. Nevertheless COVID-19 is killing thousands of Americans. If we get a resurgence, it could kill tens, if not hundreds, of thousands more. I think that to be realistic, the standard has to be that the cure is less dangerous than the disease. Making sure that the vaccine is completely safe is likely to kill many more than would be killed by the virus if the vaccine were not utilized.

      1. The current cure for the Chinese flu is proving to be far worse than the disease, in no small measure because we have become so dangerously risk averse.

        1. Here in Corrupticut it has killed 1/10 of 1%,if you believe the figures given,so for that,3,000,000 have to suffer?

      2. To rush to market with a vaccine is to risk that it will be BOTH unsafe and ineffective.

        That said, you are correct and perfect safety is impossible, so we can’t necessarily wait for proof that the vaccine is safe.

        On the other hand is it worth the risk without proof that the vaccine is effective?

      3. The 1976 Swine Flu vaccine serves as an exception….

    2. Did you read the news about the vaccine trials? It is being tested for safety now.

      And while vaccines can have hazards, vaccines are quite different technology than drugs, this vaccine is an RNA snippet, not a chemical compound like Thalidomide, your body already has trillions of RNA snippets floating around. And this RNA snippet does nothing more than train your immune system to recognize and kill Covid-19 like it already does for hundreds of viruses.

  2. The counterarguments are largely based on ethics rather than cost-benefit analysis,

    A major problem with challenge trials is that it is expected that the volunteers for such a trial will be young healthy individuals. It’s not clear that either the safety or the efficacy outcomes will carry over to others not in that category, especially the particularly vulnerable.

    1. So what? The purpose of human trials is to shed light on the effects to the trial group. The results will always be limited to the trial group. If you don’t extrapolate that to other groups, no harm no foul. The main benefit of human trials is to develop causal theories, which can extrapolate or at least inform future tests. That won’t work for every disease, but perfect shouldn’t snuff the good.

      1. To follow up, why do we engage in testing on mice? What’s true of “young healthy individuals” re: testing is at least as true for rodents.

      2. So what?

        Well, if you find the vaccine safe for the challenge group and use that as a reason to administer it to others you may have a considerable tragedy on your hands.

        It’s fine to get results for the challenge group, or mice, as long as you don’t generalize those results to others who differ in a significant way.

        My impression, possibly wrong, is that those advocating for the challenge trials would make that generalization. Otherwise they would hardly be controversial as one cautious step in assessing overall safety.

        1. I can’t speak for every person advocating for challenge trials. But they provide valuable information that can be used to save lives. Human challenge trials, like all research, has limitations. But human challenge trials have fewer limitations (in terms of extrapolating from the results) than virtually any other trial that can be ethically utilized. Obviously we could get more information if we randomly infected a representative cross-section of the population, without telling them. But we can’t do that. I assume the only ethical human challenge trial for COVID, based on information to date, would target groups that are low risk of serious illness or complications from the disease, for the reason that they are low risk. And if the trials prove effective for young healthy people, better that option be available to old unhealthy people who are willing to take a chance on a new drug, or die.

  3. What C19 has shown is that governments can trash an economy overnight, and individuals cannot repair that damage until the government gets out of the way.

    1. It was important to the government that the medical system not be overwhelmed. But now that there’s enough ventilators, I think there’s a growing consensus it’s approaching the time to let er’ rip.

      1. “enough ventilators” has proven to have been a panic about nothing. They are more often harmful than helpful, particularly when compared to just extra O2.

        1. Tell that to Spain and Italy.

          1. ~90% mortality, Sarcastr0. Sort of like the Hotel California. You can get on them, but you probably won’t survive them.

            1. Fair point. But the idea that we could be overwhelmed was certainly pretty strongly pointed to by the experiences of those countries.

              Not a panic about nothing, rather a quite rational reaction that proved unneeded.

            2. OK, but that’s hindsight, isn’t it?

              In the early stages who was claiming that ventilators were of little use?

        2. Yeah,”ventilators”the AMA does more harm than good with them.

    2. Pretty much. We’re in the middle of a demonstration that, while government doesn’t have a lot of power to improve an economy, it can crash one with one hand tied behind its back.

      The only hope here is that, if the courts permit it, an emergency can also be used as an excuse to deregulate, and Trump might just be able to take enough regulatory dead weight off the economy that it bounces out of this into an expansion.

      After all, the destruction so far is just a matter of money moving around, we haven’t reached the point of factories being destroyed yet.

      1. It’s not the government, Brett, it’s the people. They agree and are going along with the government’s policies.

        1. The “Sheeple”convinced by the media that only Big brother can save them.

  4. People should be free to try whatever drugs or medical treatment they want.

    1. And by the same token, Govts. should not force the vaccine on people who do not want them….I for one believe vaccines are pure BS & actually weaken the immune system! They are intentionally filled with soooo much by-product crap that is not even essential & one will need another of Big Pharma’s wonder drugs down the road to deal with diseases from the vaccines! Vaccines for the flu have not even been effective over the years!…..The whole CV-19 thing is a scam, a hoax so they can institute “Medical Martial Law”!

      1. Parody or nah?

        1. Neither…TRUTH!!!!

      2. Wow. You must be smoking some crazy weed.

    2. I am going to ask the VA to prescribe Hydroxychloroquin for me-
      The Don had admitted he’s on it.

  5. If such an effort is successful, then all of the vaccine manufacturers likely benefit from the same speedup.

    Well, all the manufacturers of successful vaccines will benefit. I don’t expect there to be a lot of those. If each manufacturer proceeds on the assumption/hope that it will be successful then they all have an incentive to speed things up, even though some will see no benefit. (Though actually, even the failures will see some benefit, as they will be able to turn their attention elsewhere sooner.)

    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.

    The manufacturers do have an incentive to lobby. Quicker to market is better than later, and whatever the pricing there are going to be large sums involved.

    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.

    But the trial and approval process is controlled by government. Given the huge social benefits of having a successful vaccine as soon as possible there seems to be an incentive for government to do what it can to expedite this.

  6. I don’t think you can generalize from COVID & Moderna. No infectious disease has had this big an impact on our economy for what, a hundred years at least? If a vaccine allows us to eliminate all the unemployment, distancing, closures, etc., of course the social value will be enormous.

    But this situation is virtually unique. I don’t think there’s ever been a previous case where Phase 2 vaccine data (on less than 100 subjects!) moved the entire Dow Jones by multiple percentage points. Thus, I don’t think you can extrapolate from Moderna or other COVID vaccines and assume that all other (or even *any* other) vaccines have similar social values.

    I also disagree that greater profit potential would be sufficient to speed up vaccine development very much. That’s only possible up to a point. Vaccines can’t be marketed until they’ve been adequately tested for safety and efficacy. Manufacturing also has to meet proper standards. Achieving those things takes finite time, and no amount of extra money or profit potential can speed them up.

    In fact, leaders in this area have already said that the main reason we might get a COVID-19 vaccine in record time is because many of the regulatory requirements are being eased or bypassed. Making more money available for manufacturing scale up could help some, but only because it could allow more vaccine candidates to be ready as soon as they generate approvable data in human clinical trials.

    Finally, I think you are greatly mistaken when you say “Any single vaccine manufacturer has relatively little incentive to argue for speeding up the vaccine testing and approval process.” In fact, the time it takes to develop a new vaccine (or other drug) from scratch is one of the biggest economic costs in the process. Most companies estimate net present values for products by discounting future cash flows by 10-15% per year. Cutting development time from, say, 8 years to 4 years can be worth billions.

    1. “No infectious disease has had this big an impact on our economy for what, a hundred years at least? ”

      Covid-19 has had diddly in the way of an impact on our economy. What you’re looking at is the impact of our governments’ response to it.

      Ironic, in a way. When Covid-19 kills you, it’s usually by way of what’s called a “cytokine storm”, where the immune system’s own response is just so over the top that it destroys the infected tissue.

      What we’re seeing now is the economic analog of a cytokine storm: An otherwise survivable epidemic being turned into an economic disaster by government’s utterly over the top response to it. If they’d just done NOTHING, the economy would be fine now, the virus wasn’t in fact bad enough to have much economic impact.

      All the economic damage is on the government, not the virus.

      1. “Covid-19 has had diddly in the way of an impact on our economy. What you’re looking at is the impact of our governments’ response to it.”

        You are assuming that, absent the various government interventions, that 100% of Americans would have just carried on with the status quo as of, say, late January or early February.

        You are assuming that, as the human costs of the pandemic mounted, people would continue to:

        -travel by air or subway
        -go to crowded churches
        -go to sporting events and concerts
        -go to the movies
        -eat out at restaurants
        -etc., etc., etc,

        You are assuming that people would not modify their behavior when they confronted evidence that doing things like the above was much more risky than it was prior to the pandemic.

        1. Also the dead ones would have some pretty radical behavioral shifts.

      2. Which only reinforces my point. The only reason a potential COVID vaccine has such a huge perceived value is because of the unique situation we’re in, so extrapolating the current situation to other vaccines is ill founded.

      3. There’s little empirical evidence that the public response to COVID differs meaningfully based on government policy. There is a lot of evidence that government policies (throughout the world) chased private reactions to COVID. It’s worth asking whether shelter in place orders shit down the NCAA tournament, or whether the NCAA shutting down its tournament caused shelter in place orders.

      4. This is nonsense, Brett.

        Do you truly imagine that behavior would not have changed even without government action? I know I cancelled my plans to attend a large event in late February, well before it was officially called off, and I know many others did too.

        And do you seriously believe that without the response we’ve had there would not have been many more fatalities? How would that have affected the economy and behavior, do you think?

        The damage to the economy is being done by the virus, not by the response. You’ve let ideology, not to say fanaticism, eat your brain.

  7. “… and since when have deontological considerations won the day on a major issue of global import?”

    Since forever? What planet are you from?

  8. Every day, stocks go up, down, or sideways, and the media just makes up a headline pretending that it must be related to whatever 24 hr news item.

    I doubt the $216 billion reflects the expected value of some crappy vaccine, so much as it simply reflects the expected value of stock gains associated with such a shiny news item.

    1. Yes, there is some definite post hoccery in this post.

  9. I think it was the ’57 flu where a vaccine was developed in ~4 months? Clearly this is not the fastest-track vaccine effort in history.

    (That said, the FDA was probably a lot less hassle to deal with in 1957 too).

    1. The flu vaccine is not developed from scratch every year. It is simply adjusted for the strains of flu virus that are expected to be most prevalent in the coming year. It’s a much faster process.

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