By Bobby Wilson – – –

With confirmed cases now over six million worldwide, the COVID-19 pandemic is striking like no other. Fortunately, damage control in the form of hand washing, social distancing, and global quarantining has mitigated the spread. However, a proactive approach—a vaccine—is what the world needs and impatiently awaits. Why, then, is it so hard to get a vaccine?

While a vaccine is more important now than ever, the business model for vaccines is unappealing on all counts. The vaccine’s commodity, exorbitant cost, and risk leave little room for profits, and by extension, a business model. The uniqueness of the COVID-19 crisis could make room, however, for an exception. But to allow vaccine businesses to flourish throughout COVID-19 and beyond, institutions must first break down systemic obstacles.

Why Vaccines are an Unattractive Business

Pharmaceutical companies do not aggressively pursue the vaccine business for four compelling reasons: commoditization, cost, risk, and viability of the business model altogether.

Commoditization

Designed to have universal effects at scale, vaccines do not lend themselves to differentiation. Drug companies, on the other hand, use marketing, brand power, and varying ingredients to differentiate their offerings. Moreover, since the vast majority of the population needs the vaccine to diminish the threat of disease, vaccines must be affordable to most everyone. These pressures mean lower prices for consumers, which in turn deter potential vaccine developers who need profits to stay afloat.

Cost

The costs of vaccine development are no less deterring. Conducting research and development (R&D) and bringing the vaccine candidate, if effective and chosen, to market could cost several hundred million dollars. Financial costs aside, vaccine development usually takes years, presenting an opportunity cost impossible to ignore. The heavy initial investment over several years’ time proves hard to recoup later on. Further, governments expect developers to produce vaccines not only at scale, but at cost, rendering it near impossible to profit.

That raises another troublesome aspect of the vaccine business: No business wants to be seen as profiting off a pandemic. Combine the desire for an altruistic image with unforgiving cost pressures and what do you get? A business virtually no one wants to enter.

Risk

The vaccines business is risky – even riskier than other pharmaceutical businesses. Why?

Pandemic is rife with uncertainty. Compared to preventing and treating diseases that have been around for years, the novelty of a pandemic makes the risk of the threat and the return of mitigating that threat (i.e., benefit to society) harder to calculate. Compounding the uncertainty is the possibility that the pandemic ends by the time the vaccine is available. Once enough people are immune, the outbreak becomes contained. Governments then withdraw funding for vaccine development, straining the already-thin margins of developers:

Assuming a player ignores these warning signs and enters the business, it then faces the risk of failure in development. By nature, vaccine development is a trial-and-error business. Unfortunately, most developers do not strike gold. Fewer than 10 percent of vaccine candidates reach the market.

But let’s still assume that a savvy vaccine developer clears all these obstacles and makes it to market. Then comes the risk of competition. Whereas drugs enjoy a 10-year monopoly that buoys prices, vaccines face the threat of another competitor offering an equally or more effective vaccine.

Too high risk, too low return. No thank you.

Viability

The most powerful disincentive of all? A sustainable vaccine business model does not seem viable. From an industry standpoint, vaccination is unique in that a successful offering renders the business model obsolete. An effective vaccine will reduce the threat and, consequently, demand for protection from that threat. Shortly after the successful vaccine is brought to market, the market no longer exists.

From a broader institutional view, the U.S. has not a health-care, but a sick-care, system. The money lies not in preventing disease, but treating it. Why develop a vaccine (read: prevention) and risk obsolescence when you can manufacture ventilators, PPE, and baby wipes indefinitely for the foreseeable future?

COVID-19 Vaccine: An Exception?

In spite of these deterrents, the vaccine business could be attractive in the COVID-19 pandemic.

First, a COVID-19 vaccine would not be a commodity. A pandemic of this scale and severity combined with the absence of a pre-existing effective vaccine would allow market entrants to test vaccine alternatives to determine which is most effective. The complexity of the pandemic could make it easier to differentiate since existing methods have proven ineffective.

Second, this pandemic has a sufficient market size (read: the entire globe) for the vaccine business model to be feasible. For routine childhood vaccination, governments pit vaccine candidates against each other to drive prices down and pick the best one to provide to the masses. Volume compensates for these lower prices. However, new, usually regional pandemics (e.g., Zika virus, swine flu) do not have a market large enough for volume to compensate for lower profit margins. COVID-19 has worldwide impact, boasting a vaccine market size larger than any since the 1918 Spanish flu. The dire need for a vaccine and the vast market size make vaccine development for COVID-19 exceptionally appealing.

Third, technology has made a vaccine more probable and scalable, even for a particularly complex disease like COVID-19. British American Tobacco has turned to its trusty plants for a potential solution. The company has experimented with growing a weakened virus in tobacco leaves, which grow fast and plentifully and would facilitate scaled vaccine production. Biotech startup Moderna Therapeutics is leading the charge in developing a vaccine. Instead of engineering a weakened pathogen, costing significant amounts of money and time, Moderna plugs pieces of the virus’s genetic code directly into the patient. This hyper-efficient technique reduces the vaccine timeline by a staggering two years.

The Road Ahead

With differentiation, market size, and technology making a COVID-19 vaccine an exceptionally attractive endeavor, vaccination could be on the brink of disruption. For a vaccine business model to thrive, however, our institutions must resolve the following systemic problems:

Once these systemic issues are addressed, individual players in the vaccine field must adapt as well. Even though they may not have experience in healthcare, companies should leverage and apply their tech, R&D, and production capacities to vaccine development. Vaccine developers must also find a way to monetize the R&D phase and/or hasten the recouping of the high costs in that phase.

More importantly, they must develop a core competency for vaccine development. While being the sole manufacturer of the one-and-only effective COVID-19 vaccine could be lucrative given the scale and severity of this pandemic, wise players will secure the resources and develop the capabilities for creating vaccines to any pandemic. With such foresight, the business model of vaccines could finally be viable.

Other ways that COVID-19 might disrupt business in a good way?

Sources:

Andreessen Horowitz. “When Bad Policy = Bad Business Models = Bad Public Health.” a16z, 16 Apr. 2020, https://a16z.com/2020/04/16/policy-market-public-health-healthcare-dynamics/.

“Coronavirus COVID-19 Global Cases.” Johns Hopkins Coronavirus Resource Center, Johns Hopkins University Center for Systems Science and Engineering (CSSE), 2020, coronavirus.jhu.edu/map.html.

Wall Street Journal. “How Coronavirus Could Change the Vaccine Business.” The Journal, 16 Apr. 2020, https://www.wsj.com/podcasts/the-journal/how-coronavirus-could-change-the-vaccine-business/3cdf6b63-30c2-4468-9af2-98d776f0175a.