On 4 May 2020, a pledging conference convened by the EU raised €7.4 billion in funding for Covid-19 vaccines, treatment, and diagnostic research. Leading funders included the European Commission, Germany, France, the UK, the World Bank, the Bill and Melinda Gates Foundation, the Global Alliance for Vaccines and Immunisation – even the pop singer Madonna.
As of 15 May, the Covid-19 pandemic has caused more than 300,000 deaths throughout the world. This pandemic may be the first major global event in the history of humankind: all countries are hit, and within each country, entire populations are affected negatively by the pandemic itself, or potentially positively by public interventions to fight against its diffusion.
For locked-down countries, production losses have been estimated at 30% of usual activity (OECD 2020). EU countries pledged to donate €4 billion, but each week of lockdown may cost €60 billion in foregone production. Some countries which have begun to soften their lockdown policies may have to reimpose strict measures, at tremendous economic cost.
Strict containment policies are not sustainable
Beyond the direct healthcare costs of the pandemic and the human costs of deaths and suffering, the main economic consequences are not due to the virus itself, but to policies aimed at flattening the curve. In April 2020, half the world population was confined in some way.
According to the OECD (2020), the direct costs are already enormous: the EU27 may have lost at least €280 billion in foregone production in the first month of lockdown. Baldwin et al. (2020) and Gourinchas (2020) observe the GDP loss could be tremendous if this lockdown triggers a full-scale recession.
One major issue with ending policies of containment is that we don't know if they will need to be reactivated in the near future. Successful lockdowns bring new infections to zero in a population, but with a low share of individuals who have gained immunity. In Europe this share ranges from 0.4% in Norway to 9.8% in Italy (Flaxman et al. 2020). This possibly underestimates true immunity, but herd immunity requires levels of 50% to 66%.
There is a significant probability that new imported cases will trigger new epidemic waves in Europe. And so epidemiologists argue that suppression strategies will need to be maintained until vaccines or effective treatments become available (Walker et al. 2020). Even currently undefined (and controversial) policies that would seek to balance containment with the need to restart and maintain economic production may still induce substantial production losses.
Such policies could be avoided if a vaccine were available and could be produced in large quantities. Early economic epidemiology papers have shown that complete eradication is very difficult to attain (e.g. Geoffard and Philipson 1996), but many infectious diseases are kept under control today through vaccination. If a sufficiently large proportion of the population is vaccinated, we potentially achieve herd immunity by this route. Even if a vaccine fails to eradicate Covid-19, it will be a major tool to reduce prevalence.
The economic gains from the rapid creation and manufacture of a vaccine have been noticed by investment fund managers. The Financial Times reported on 24 April that BlackRock, Fidelity International, Aviva Investors, Janus Henderson and Amundi all wanted drug companies to collaborate with their competitors to speed up its availability.
Vaccines are political
According to Le et al. (2020) and the Coalition for Epidemic Preparedness Innovations, 115 vaccine candidates were in development on 8 April, although even in the most optimistic case, this development will take more than a year. Researchers and their employers may be motivated by the desire to contribute to human wellbeing – but money may be important too, if only because it allows innovators to throw more people and resources at the research. Those financial incentives to innovate are generally determined by the expectation of a temporary patent monopoly.
Though the 4 May conference was indeed a great success, the total amount pledged so far still represents only a small fraction of the economic costs induced by the pandemic. Though a substantial share of that amount will be targeted towards vaccine research, this research is also sensitive to the political risk of expropriation.
An example: one week after the conference, Paul Hudson, CEO of Sanofi, said that the subsidy granted by the US Biomedical Advanced Research and Development Authority to finance its vaccine research programme came with a commitment by Sanofi to give priority for a vaccine to US customers. In response, French authorities and members of the European Parliament countered that any vaccine would have to be equitably available to all. Many MEPs went further and expressed support for compulsory licensing of any vaccine.
Vaccine research takes time and resources, and is a risky enterprise. The chance is high that even if a vaccine is discovered by a pharmaceutical firm, political pressures will prevent this firm from making profits by the usual route of obtaining a patent and selling the vaccine at a high price.
For a Covid-19 vaccine, the social and political pressures for an exception to patent protection will be considerable. It is hard to believe that some, if not most, countries will not invoke Article 31 of the TRIPS Agreement, enabling a government to use compulsory licensing to allow a local firm to produce a patented product without the consent of the patent owner, or to import the product from another country.
Under TRIPS, governments must still pay an 'adequate' fee to the patent holder. But if the emergency is extremely urgent, they don't need to try to agree a voluntary license. In short, a government can impose its own price.
It's a safe bet that Covid-19 satisfies these conditions and so, for a private firm, the risk of expropriation seems particularly important. Even if governments do not activate compulsory licensing, political pressures and healthcare budget constraints mean that firms will be under pressure to lower prices.
Incentivising vaccine research
Many major pharmaceutical companies are already dedicating risky research efforts to find a vaccine against Covid-19, reducing investment in other drugs or vaccines. But these hold-up risks may reduce their effort. Stockholders may gripe if there's a risk that a firm will succeed but not be granted a patent, or that it gets a patent but is unable to recoup R&D spend.
Kremer et al. (2020) and Athey et al. (2020) have argued for advanced market commitment. This was intended to foster research on diseases common in developing countries, but it could apply here. Donors pledge to top up payments for newly introduced vaccine meeting technical benchmarks, conditional on the firm’s setting the price close to marginal cost. Three pneumococcal vaccines have been developed encouraged by such a pledge and 150 million children in poor countries have been immunised, saving an estimated 700,000 lives.
But, if production costs are difficult to observe, the commitment to sell at marginal cost is impossible to verify. This generates a political risk: NGOs campaigning for lower drugs prices and transparency in price-setting would put pressure on any patent-holder to reduce prices, even those claiming to sell at production cost.
A more standard way to come close to marginal cost pricing is to rely on competition between producers. However, since competition brings profits to zero, financial incentives for research must come from another instrument.
One way to get around these issues while providing incentives for vaccine research would be for donors to pledge to buy the patent at a high value. They would then allow private firms to produce the vaccine without having to pay any patent fees. The patent would have high value, but it can be thought as a way to front-load the costs that would be borne in future by health insurance schemes, which in European countries are mostly funded by payroll taxes – revenues from which have already been severely damaged by the drop in economic activity (Baker 2020). If pledged by the EU, such a commitment would also speed up the availability of the vaccine, as the producer will not have to negotiate a price in each country.
Governments could even set up such a scheme as an option offered to pharmaceutical firms. The patent holder could still decide to remain the owner of the patent and to negotiate market access, and prices, with each healthcare financing institution.
A high public cost, but extraordinary benefits
This could be financed by the Recovery Fund announced by the European Commission which, according to the European Parliament, could be as large as €2 trillion. A commitment by the EU to buy a vaccine patent would be a clear and transparent mechanism that would reduce the political risk of expropriation, could foster investment in R&D, and will speed up market access.
We could argue that an investment that could hasten the end of containment by just one week in Europe would be socially profitable if it costs less than €60 billion This amount provides a lower bound for the social value of a vaccine.
A commitment to buy for, say, €60 billion seems an enormous sum; but if this shortens a future lockdown by a single week, it would be an efficient use of public money.
Athey, S, M Kremer, C Snyder and A Tabarrok (2020), “In the Race for a Coronavirus Vaccine, We Must Go Big. Really, Really Big”, New York Times, 4 May.
Baldwin, R, and B Weder di Mauro (2020), Economics in the Time of COVID-19, a VoxEU.org eBook, CEPR Press.
Flaxman, S, et al. (2020), “Estimating the number of infections and the impact of nonpharmaceutical interventions on COVID-19 in 11 European countries”, Imperial College COVID-19 Response Team, 30 March.
Geoffard, P-Y, and T Philipson (1996), "Disease Eradication: Private versus Public Vaccination", American Economic Review 87(1): 222-30.
Gourinchas, P-O (2020), “Flattening the pandemic and recession curves,” in R Baldwin and B Weder di Mauro (eds), Mitigating the COVID Economic Crisis: Act Fast and Do Whatever It Takes, a VoxEU.org eBook, CEPR Press.
Kremer, M, J Levin, and C M Snyder (2020), “Advance Market Commitments: Insights from Theory and Experience", forthcoming in American Economic Review Papers & Proceedings.
Le, T T, Z Andreadakis, A Kumar, R G Roman, S Tollefsen, M Saville, and S Mayhew (2020), “The COVID-19 vaccine development landscape”, Nature Reviews Drug Discovery 19: 305-306.
OECD (2020), "Evaluating the initial impact of COVID-19 containment measures on economic activity".
Walker, P, et al. (2020), “The Global Impact of COVID-19 and Strategies for Mitigation and Suppression,” Imperial College COVID-19 Response Team, 26 March.