Vaccines: need, speed and greed

The COVID-19 pandemic is an ongoing humanitarian catastrophe.

Efforts to stem the spread have resulted in underlying economic hardships across the world. To prevent the collapse of multiple businesses across sectors, central banks embarked on aggressive monetary expansion last year. Interest rates were lowered to levels last experienced in response to the global financial crisis, and a huge amount of quantitative easing was introduced.

To illustrate this, over 20% of all US dollars now in issue were created within the last year.  Governments around the world introduced fiscal support packages and banks provided payment holidays. The most influential factor, however, since the financial crisis has arguably been the actions of central banks and their control of global money supply.

While not their intended aim, all the stimulus efforts have resulted in considerable increases in asset prices. If it were not for the realism of an ongoing global pandemic, observers of the new record highs of several share indices might believe that COVID-19 had passed and that everything was now well with the world. A small minority of businesses have enjoyed significant benefits from lockdowns, with a huge rise in e-commerce and cloud-based computing two areas of particular interest. By and large, however, the reduction in company earnings has been significant.

Resolving the humanitarian and economic disruption caused by the COVID-19 pandemic requires effective vaccines. The world now has no less than five western developed vaccines shown in studies to provide protection against the virus:, Novavax, Johnson & Johnson, AstraZeneca/Oxford, Moderna and Pfizer/BioNtech. The speed with which these have been successfully developed has been remarkable. Previous vaccines have taken somewhere between eight and fifteen years, if efficacious at all, to be introduced. The challenge now moves to availability and successful delivery of the vaccines.

The price of medicines can be a controversial topic.

While the pharmaceutical industry in general spends as much on marketing as it does on research and development, marketing is not a requirement for COVID-19 vaccines given the need is so obvious and pent up demand so strong. There are two main elements to price, the costs of manufacture and profit. In order to ensure safety once any new medicine is approved, no changes to manufacturing protocols are permitted by pharmaceutical regulators. The Pfizer/BioNtech and Moderna vaccines are very novel using genetic vaccine technology. Given the speed to get to clinical trials minimal time would have been available for scale up efforts to optimise production conditions.

This has resulted in a comparatively high cost of goods for these particular vaccines and probably hampers the level of manufacturing output. Genetic vaccines require very low temperature storage which will also add to their total cost of delivery.

The pharmaceutical industry relies on making profits from medicines to fund development activities (both successful and not), and to reward capital providers. In times of great humanitarian need, however, some pharmaceutical companies have a track record of helping the world on a not for profit basis. Merck for instance during the second world war helped develop an industrial manufacturing process for penicillin. Oxford University and AstraZeneca’s gift to the world is to provide their vaccine at cost during the pandemic. Combined with a low cost of goods, this means a huge difference in vaccine prices. AstraZeneca should have manufacturing capacity of two billion doses per year. This is by far the cheapest option among western approved drugs as illustrated below naturally making this the preferred choice for many governments given the costs involved in immunising whole countries. Headline results of the recent small study of this vaccine against the South African variant were disappointing in preventing mild to moderate disease. The vaccine does however appear to continue to have, in the words of Prof Madhi the lead investigator of this study, “a high likelihood of preventing severe disease and death”.

Estimated COVID-19 price decomposition

COVID_19 price decoposition
Source: Ashburton Investments estimates, Bloomberg, Company reports, Fierce Pharma, NY Times, PM Live, Reuters

Distribution of vaccines across nations will be seen as unfair.

Vaccine nationalism has understandably been criticised by the World Health Organisation. Several nations pre-ordered vaccines before even knowing whether they would work. The UK for instance secured in the region of five vaccines per capita. The rate limiting step in vaccine roll outs is currently manufacturing capacity. This will be the case until around the end of the second quarter of the year whereupon it will become last mile logistics.

At the forefront of large economies, the UK is currently immunising around two million people per week, and estimates are that logistics could deliver five million doses if they were available. Meanwhile as case numbers continue to climb globally the risks of COVID-19 mutations giving rise to more easily spread, or dangerous, variants grow. This makes it imperative that vaccination programs are rolled out as rapidly as possible globally in particular to those at higher risk from the virus.

Paying attention to regional case numbers and the geographical differences in vaccine roll outs helps to provide an indication of where economic recoveries are likely to be seen soonest. This in combination with a continued focus on quality companies and in conjunction with valuation ought to enable stock pickers to position for an unfair world.

The Ashburton Global Leaders fund holds positions in AstraZeneca and J&J.