INTRODUCTION

Scientific organizations, both public and private, are racing to develop vaccines for the novel coronavirus.  The extraordinary worldwide human and economic devastation of COVID-19 means that yet unproven technologies may soon represent some of the most valuable intellectual property.  Stakeholders in pharmaceutical and biotech companies that are pursuing a vaccine may wonder what the return on investment on such a vaccine could be expected to be.

This article discusses the value of a hypothetical coronavirus vaccine in the context of possible U.S. public policy responses.  Although no one has a crystal ball, and public policy responses have yet to be determined, the risks surrounding a coronavirus vaccine are not fundamentally different from the risks that valuation professionals deal with on a regular basis.

REQUIRED INVESTMENT AND MONOPOLIST RESPONSE

The investment required to develop a vaccine is enormous.  Some have estimated that the cost to develop a vaccine against an epidemic can be billions of dollars, with a 94% chance of failure.¹  Unlike the most profitable drugs, which treat chronic conditions such as high cholesterol or asthma and must be taken for extended periods of time,² vaccine treatments often involve only a single application through which a provider could recoup its development costs and profits.³

In the event that a vaccine is developed by a private entity, the vaccine will likely be protected by a patent, a government-granted monopoly. Economists have long observed that monopoly providers tend to provide fewer goods at a higher price than producers in competitive markets.  Said differently, monopolists’ incentives lead to prices that exceed marginal costs, meaning higher prices and lower output than in a competitive environment.⁴  As such, patent-protected drugs tend to be expensive, resulting in a social cost (sometimes referred to as deadweight loss).⁵

POTENTIAL POLICY RESPONSES TO A CORONAVIRUS VACCINE

It is hard to imagine that an effective vaccine to the deadly and highly contagious coronavirus would not inspire some sort of public policy response.  The humanitarian and economic value to society of broad herd immunity that an effective vaccine potentially offers will likely be too significant to leave entirely to the free market.  The value to investors of the vaccine will vary according to the policy response.

The U.S. federal government (like other government entities) already finances the development of socially desirable drugs, to which it may retain the rights.  As of February 29, 2020, the U.S. government had pledged $1 billion for coronavirus research.⁶  If the first vaccines are developed by a governmental institution such as the National Institutes of Health, the federal government will have substantial power to affect the price, and any stakeholder in a private enterprise involved in the sale or distribution of a vaccine owned by the federal government should not necessarily expect outsized profits.

If the first or most effective vaccines are developed and owned by private industry, the government may choose to leave the IP rights to the vaccine in private hands, use its power to negotiate the price, and attempt to make the vaccine widely available with a combination of direct purchases and insurance legislation.  The enormous market for the vaccine combined with the expected low cost to produce each dose could make a relatively low price appealing for both governments and the IP holder.  The monopoly return on a drug with such a large potential market, even with powerful national buyers negotiating the price, is likely to be extraordinary.

On the other hand, the government could make efforts to move the IP rights for the vaccine to the public domain.  Some economists have suggested that governments should acquire key pharmaceutical patents by paying their owners sums that would be approximately equal to the net present value of their forsaken monopoly profits.⁷  This sort of policy would seek to put investors in the same position that they would have been in without intervention (which is to say, with the net present value of a healthy monopoly profit), while providing a substantial benefit to public health and the economy.

Economists and other academics have proposed systems offering taxpayer-funded prizes to incentive research into public goals.⁸  The America COMPETES Reauthorization Act of 2010 establishes a framework for government prizes.⁹  A well-structured prize regime could potentially reward the companies with the most useful vaccines, offer some compensation to other competitors to offset their investment, and put life-saving drugs in the public domain where their price would be expected to approach their (relatively low) marginal cost.  Such a policy would reduce the risk to pharmaceutical investors and make investment more economically appealing in the event of future health crises.

The U.S. government has, on a limited basis, nationalized certain patents.  Under 28 U.S.C. § 1498, the federal government has the power to use or manufacture any patented product, and must provide “reasonable and entire compensation” to the patent holder.¹⁰  This power is rarely used, but provides substantial leverage to the federal government in crisis situations.  During the anthrax scare in 2001, the Bush administration threatened to use Section 1498 to purchase generic versions of Bayer’s antibiotic ciprofloxacin, which proved enough to coax Bayer to cut its price in half.¹¹

Further, because the federal government cannot be enjoined from using any patents, the federal government can effectively award itself a compulsory license to any patent in exchange for “reasonable and entire compensation” to the patent holder.¹²  The federal government could not be prevented from either producing patent-protected drugs directly or allowing generic manufacturers to manufacture or import the drugs.  Should this occur, shareholders in a firm that develops a coronavirus vaccine would, in theory, receive a reward equivalent to a reasonable royalty on the government’s drug sales.

Finally, it is not inconceivable that legislators could apply price controls to a coronavirus vaccine.  Pharmaceutical companies and many economists generally are not supporters of price controls on drugs because of the negative effects on innovation and investment.¹³  It is widely understood that any policy response must provide inventors with sufficient reward to encourage investment in continuing medical research.  Nevertheless, the federal government has powers to impose price controls, which could significantly depress the return on investment in the hypothetical coronavirus vaccine.

The economic value to investors in the company that prepares the coronavirus vaccine depends critically on public policy.  Such uncertainty, however, is not fundamentally different from other types of uncertainty that are assessed and valued as a matter of course.  Indeed, major pharmaceutical companies already have significant exposure to product risk, regulatory risk, pipeline risk,¹⁴ and many other types of risk. 

An effective coronavirus vaccine could help relieve untold humanitarian and economic suffering around the globe.  The stock prices of pharmaceutical firms that have made announcements about coronavirus vaccine development, such as Johnson & Johnson and Moderna, have been buoyed relative to the broader S&P Pharmaceuticals Select Industry Index.¹⁵  Investors with realistic expectations of the large but not unlimited upside of vaccine research may be rewarded for their risk.