When people in the biopharmaceutical world speak of the valley of death, they’re not talking about a geographic hot spot where a lethal disease has infected a large number of people. Rather, the valley of death is where scientists in a research program have spent the last of their grant money, or a young biotech company has burned through its preliminary financing, and, though a program may still be promising, potential funders decide that they don’t want to risk the costs of taking it to the next level, and it dies. Currently, the valley of death, and similar financial constraints, are hampering vaccine development, which health officials are counting on to release us from the scourge of COVID-19 and, perhaps even more important, from future pandemics that the novel coronavirus portends.
Judging from the Times’s “Coronavirus Vaccine Tracker,” a lack of research funds wouldn’t seem to be a serious problem. More than a hundred and sixty-five vaccines are in development around the world. Seven, including three in China, are in advanced human trials. The two most talked-about in this country—Moderna’s, in Cambridge, Massachusetts, and AstraZeneca’s, at Oxford University—rely on new technologies, based on genetic engineering, being deployed with seemingly unprecedented speed. Similar programs run by Pfizer, Johnson & Johnson, and Novavax claim to be not far behind. All speak of a vaccine by 2021. The U.S. government is paying up to ten billion dollars in subsidies to five of these programs, for trials and manufacturing, under a plan called Operation Warp Speed. Three weeks ago, Pfizer was awarded a contract worth nearly two billion dollars, to pay for a hundred million doses, and to support the company’s scaling up to produce six hundred million. On Tuesday, it was announced that Moderna would supply a hundred million doses for a billion and a half dollars.
This would all suggest that governments and Big Pharma are doing all that can be done. And that may well have been the case if the vaccines currently under development were in response to a virus so novel that no one could have anticipated it; or if nothing like it will ever occur again, so that emergency funding on this scale will never be called for again, either. But neither is true. We have known about other fatal coronaviruses, such as SARS and MERS, for years—and we have also known that they would not be the last that we encountered. Moreover, vaccines are developed in distinct research platforms: some work with genes, others with proteins, or parts of the virus itself. Each requires particular methods of development and manufacturing, and those methods, not to mention the extensive testing regimes that are required—in this country, by the Food and Drug Administration—all make the typical financial pitfalls of drug research worse in the case of vaccines.
For a start, costs are higher. You aim to vaccinate millions of people who are still healthy, and whose responses to an inoculation may vary greatly by age, gender, body type, and other factors. You don’t want to harm anyone unnecessarily, so advanced trials may involve tens of thousands of people. Then there’s the issue of demand. A drug that could successfully treat a chronic disease such as cancer would be in demand around the world every day. Right now, so would a COVID-19 vaccine, but that’s not typical of vaccine markets; indeed, vaccine producers will likely face radically shrinking markets as soon as their products become widely available. Other vaccines, for diseases such as malaria, which target poor countries, are often purchased by philanthropic organizations for distribution, and do not promise satisfactory returns.
SARS and MERS both subsided before vaccines for them could attract investment. But, had investments been made, Ray Jordan, Moderna’s chief corporate-affairs officer, told me, by now we might have at least learned what levels of antibodies were sufficient to provide immunity against other coronaviruses. He added that this knowledge might have expedited advanced human trials for COVID-19, and, just as crucially, that we might now have had “a vaccine-manufacturing system and supply-chain up and running.”
Little wonder that, prior to COVID-19, only four of the Big Pharma firms—most prominently, perhaps, Britain’s GlaxoSmithKline—considered the market for vaccines attractive enough to commit to developing them in their own labs. Pfizer’s COVID-19 vaccine, for instance, is being developed by BioNTech, a twelve-year-old German biotech firm with which it entered into an agreement in August, 2018, to do research on cancer and infectious diseases, where the former promised a more profitable return. As things stand, even at the current accelerated pace, it will take a year, at least, from the time the coronavirus genome was sequenced, in January, for a COVID-19 vaccine to reach the first of us. And who knows what new mutations or viruses may present themselves as we wait?
Back in 2005, Anthony Fauci, who was already the director of the National Institute of Allergy and Infectious Diseases, presented the problem in a lecture to the Milbank Memorial Fund. “Infectious diseases accounted for about twenty-six per cent of the fifty-seven million deaths worldwide in 2002,” he said, deploring the persistence of HIV/AIDS, malaria, and tuberculosis. But, “faced with the choice of putting two hundred million dollars into a new area, will pharmaceutical companies make a product to combat an emerging microbe, for which there is an uncertain market, or will they develop a new Viagra or a better Lipitor?” No indictment was implied, at least not of individual companies, which have to answer to shareholders; the companies were behaving normally, which only makes the crisis more vexing. The challenge, Fauci suggested, calls for new approaches to producing vaccines not just for a moment of crisis but as part an ongoing, long-term process, and not just in the United States but internationally—in short, a radical breakthrough not only in biological science but also in financial engineering.
Andrew W. Lo and Roger M. Stein have been making the same argument for much of the past decade at the Massachusetts Institute of Technology’s Laboratory for Financial Engineering. Lo, the lab’s founding director, was born in Hong Kong in 1960, and was raised by his mother, in Queens. He did a Ph.D. in economics at Harvard, research in advanced financial models at Wharton, and, by 2010, he had become an innovator in managing large asset funds. He was one of the original quants, applying advanced mathematics to devise complex financial products. Then, Lo told me, “Over a four-year period, six people that were close to me all died of cancer, including my mother. I thought that, somehow, knowing me was carcinogenic.” He couldn’t reconcile himself to the slack pace of finding new drugs, and, he said, “The more I studied this, the more I realized that finance actually plays a huge role in drug development—in many cases, way too big a role.” It also became clear to him that it would be possible to secure better, more efficient financing “just by taking some of the tools that we use routinely in financial-portfolio management and applying it to drug-portfolio management.”
Drugs are a risky business and, for equity investors hoping to eventually share in the profits, each stage of development presents an escalated risk. Lo reasoned that substantially lowering the risks, even if it meant correspondingly lowering the rewards, could attract investment instead from ordinary bond markets—that is, from managers of pension funds, university endowments, and sovereign-wealth funds, who control a great deal of money and generally invest in low-risk, low-return assets. He took the idea to Stein, an expert in risk management and machine learning whom he knew from various professional encounters. Stein currently teaches at New York University’s Stern Department of Finance, but at the time he was the president of the research lab at Moody’s, the bond-rating agency. As it happens, he had also been thinking about applying risk management to medical science, because his father, too, had cancer. “I thought at the time it was going to be a quick project, because the math didn’t sound complicated to me,” Stein said. “Had I understood how many different pieces have to come together for drugs to get developed—all the things I had to learn—I wouldn’t have thought it was going to be so quick.” (Their model was first published in 2012, in Nature Biotechnology, in a paper titled “Commercializing biomedical research through securitization techniques,” which they co-authored with José-María Fernández, who is now at Altamar Credit, in Spain. It was refined in a 2019 paper, “Funding Long Shots,” co-authored with the derivatives expert John Hull, of the University of Toronto, and published in The Journal of Investment Management.)
Stein told me that he and Lo agreed on two rules. “First, we didn’t care who got credit, and we were going to make all of our models available for free on the Web—the articles, spreadsheets, data, algorithms, everything,” he said. “Second, whatever we developed had to be able to stand on its own as a financial investment, though in partnership, at times, with governments and foundations. It had to promise continuing returns to investors, appropriate to the risks assumed.” That was the only way to make a model sustainable. “There are more people who want to do good and make a return,” he noted, “than there are people who want only to do good.”
In the earliest stages of drug research, it’s usually venture capitalists who keep programs viable. But a great deal more money has to be brought in to move a program through the three phased trials mandated by F.D.A.’s rigorous approval process. Bruce A. Chabner, a former director of the division of cancer treatment at the National Cancer Institute and now a professor of medicine at Harvard and Massachusetts General Hospital, told me that “the success rate for any new drug for cancer even entering clinical trials is probably less than one in five, which is still a marked improvement over my earlier time at N.C.I., when it was one in twenty. The valley of death is still responsible for maybe twenty-five per cent of the failures.” It costs tens of millions of dollars just to move from preclinical development (testing on animals) to Phase I trials, which primarily prove a compound’s safety in humans. Getting to Phase III—large-scale trials, usually involving around a thousand people—can cost hundreds of millions of dollars. (If a compound is approved, production and distribution costs can be equal to or higher than those in Phase III.) The chance of moving from Phase I to market varies, depending on the disease, but, on average, it’s just about eleven per cent.
The hit rate for vaccines is actually higher—about nineteen per cent—in part because immunology is a comparatively mature science, at least where diseases can be clearly traced to invasive pathogens. Again, however, vaccines ordinarily present higher costs and lower rewards than other pharmaceuticals; profit margins are slightly more than five per cent, compared with more than fourteen per cent. Before the coronavirus pandemic, the total global vaccine market was about forty billion dollars annually; a big number, but only about three-and-a-half per cent of the total pharmaceutical market.
Biotech companies trying to move beyond Phase I with vaccines, then, may confront not just a valley but a canyon. This is where private-equity firms ought to come in, and occasionally they do. But their focus is typically on restructuring existing businesses, not on placing hundred-million-dollar bets on scientific breakthroughs. That brings us back to Big Pharma, which does make such bets, generally by scooping up the most attractive smaller biotech firms in the most profitable markets. America’s top three Big Pharma corporations—Johnson & Johnson, Pfizer, and Merck—are, together, worth about three-quarters of a trillion dollars, and all three boast prestigious research specialties. So it may seem that the most important research is done at this level, and that the financial problems of thousands of scattered biotech companies are marginal to accelerating development. In fact, the scatter—a multitude of approaches, taking the greatest number of shots on goal—is crucial. According to a report from the IQVIA research group, emerging companies developed thirty-eight of the fifty-nine new therapies brought to market in 2018.
Stein presented the challenge succinctly in a 2014 TED talk. Imagine, he said, a hundred bottles of different compounds in various Phase I labs. They contain different compounds, six of which will save lives, and be worth billions of dollars—“sometimes, billions a year.” But for ten years, no one will know which six. Now imagine being asked to pick one of the hundred bottles and invest two hundred million dollars in it: if you fail to choose one of the winners, in ten years you’ll get nothing. Try raising an investment with that pitch.
The solution appeared obvious to Lo and Stein. (Nevertheless, no one seems to have connected the same dots in pharma.) They had studied Wall Street securitization methods—how investment banks bundle consumer debt (home mortgages, credit-card accounts) into a single bond, get it assessed by a rating agency, and market it to fund managers. They had also studied derivatives traders, who routinely profit from broad portfolios of high-risk, high-reward assets, basically on the assumption that, if just one of them hits, it will more than compensate for the losses on the rest.
Even before doing the math, they asked, as a thought experiment, what if the managers of a portfolio treated biotech firms purely as financial assets, eighty per cent of whose equity might be acquired at launch—a common split for venture capital. The portfolio would continue to invest in the companies as long as their research yielded positive results. Suppose that the portfolio acquired a hundred and fifty biotech firms in this way and, to pay for the equity, it raised a megafund of perhaps, twenty-five billion dollars, mainly through borrowing, using the companies’ scientific prospects as collateral. It could issue a bond—in the case of this portfolio, a ten-year, “zero-coupon” bond, the kind that pays no annual interest, but pays back a lump sum (capital plus compounded interest) at maturity. A number of companies, corresponding to the average success rate of compounds in Phase I reaching market, could be expected to provide enormous payoffs when a product is ready to be sold for manufacture, and the portfolio as a whole could be expected to earn a reasonable profit.
It’s simply a matter, Stein told me, of “scaling-up to smooth out risk.” In effect, he and Lo are proposing research-backed obligations (R.B.O.s); but these securities would avoid the moral hazards of, say, mortgage-backed securities, which helped to sink the markets in 2008, when mortgage brokers and investment bankers pocketed commissions irrespective of whether the bonds defaulted—which many did, in large part because of predatory subprime-lending practices, which roped in borrowers who could never have been expected to repay their loans.
With R.B.O.s, the science that serves as their collateral is subject to constant scrutiny. For portfolio managers, empirical results, not a lack of funds, or hype, would determine when to advance products and when to cut them off. Stein and Lo reckoned that the bond should gain a risk profile of among the safest assets that pension funds might acquire. But the concept is new, Stein added, “so having some kind of government guarantee, with little actual risk to the government, could be very, very helpful.” That guarantee wouldn’t substitute for private investment but catalyze it.
Portfolios, with government guarantees, have, in fact, already proven themselves in the health sciences, albeit on a smaller scale and without financing from long-term bonds. Glenn Yago, a founder of the Milken Institute’s Financial Innovation Lab, advised the Israeli government on a life-sciences fund, for which the government put up the first fifty million dollars and agreed to assume the first losses should the fund be liquidated. “A single new investment by Merck into one of the fund’s oncology companies,” Yago said, “has already put the entire fund in the black.”
Lo thinks that “the U.S. government could have played an amazing leadership role at the beginning of this crisis,” if it had securitized a portfolio of this kind for vaccine biotechs, launching “a global COVID-19 bond.” He imagines a portfolio that wouldn’t have acquired companies outright but would have infused them with money and taken a portion of their equity. “There are over a dozen late-stage vaccine developers, right?” Lo said. “What if the Administration announced that the U.S. Treasury would issue a fifty-billion dollar, three-per-cent, thirty-year government bond?” It would invest in every vaccine-development program that exists, and “for any one vaccine that’s developed, we sell a billion doses.” The portfolio, Lo added, “would just be incredibly profitable.”
Had a vaccine megafund been established before COVID-19, Lo adds, the pandemic might well have been brought more quickly under control. The model could still be useful in the current crisis, given that COVID-19 is still far from under control, and could mutate. As my colleague Carolyn Kormann has written, Moderna is working on a revolutionary “messenger-RNA” platform (as is BioNTech). “It is a function of the technology that if mutations occur, we expect to be able to react quickly and match a new vaccine to a new virus,” Moderna’s chief medical officer, Tal Zaks, told me. “The platform is like a digital software that can be optimized for different applications.”
The larger question, though, is how, when the current crisis is passed, such a megafund would help prepare us for the next one. In early May, the Social Science Research Network published a paper titled “Financing Vaccines for Global Health Security,” by Lo and co-authors from M.I.T., Brown University, and various investment companies. The paper appeared after COVID-19 had emerged, but the authors had been working on it for two years, and it describes a simulation of how such a megafund would function proactively in normal times. If the notional fund acquired a hundred and forty-one preclinical vaccine programs, targetting the nine most ominous emerging infections (including SARS and MERS), the portfolio would have needed to raise about thirty-five billion dollars, and its hypothetical bond would have had a fifteen-year maturity. It would have produced perhaps eleven vaccines, each earning approval after five years.
Given how uncertain vaccine markets are, the paper notes, governments (“public-sector interventions,” and so forth), would need to guarantee a vaccine bond by committing in advance to purchase and stockpile vaccines. The paper’s most creative suggestion is for a subscription model, a kind of vaccine Netflix, where governments would pay an annual fee to a new international-development fund, one that could perhaps be managed by the G7. The fund could float a bond to both advance vaccine biotechs and to make market commitments to Big Pharma. The virus, the markets, and the science are global.
Indeed, the paper refers to an already existing candidate for a development fund of this kind, the Coalition for Epidemic Preparedness Innovations (CEPI). Headquartered in Oslo, CEPI was founded in 2017 by the Bill and Melinda Gates Foundation; the World Economic Forum; the governments of Japan, Norway, Germany, and India; and the Wellcome Trust, a medical charity based in London. CEPI’s mandate is to accelerate the creation of vaccines for emerging infectious diseases; it was initially capitalized with about half a billion dollars, and it depends on philanthropic and public funding. It is currently committed to supporting nine COVID-19 vaccine programs in various countries; Moderna and other U.S. programs were its beneficiaries before Operation Warp Speed was established. (CEPI was set up to complement the work of another initiative, the Global Alliance for Vaccines and Immunisation—GAVI—which the Gates Foundation, in conjunction with the World Health Organization and the World Bank, launched in 2000 to purchase vaccines for distribution in poorer nations.)
CEPI, Lo told me, is “grossly underfunded,” but it has “the right expertise” and “connections to all the relevant policymakers in the various different countries.” He thinks that, in time, a CEPI-like agency—an international “public-private partnership”—might well gain the sponsorship of the G20, including China. In fact, he thinks that a future vaccine bond might be launched in a coöperative venture with the European Investment Bank, the International Monetary Fund, and even the People’s Bank of China.
Talk of any new international agency may seem nostalgic in the era of Donald Trump, who, as the pandemic still rages, has announced his intention to withdraw from the W.H.O. Nevertheless, Jeremy Farrar, the director of the Wellcome Trust, who is one of CEPI’s founders and sits on its board, seems undaunted. He is a former professor of tropical medicine at the University of Oxford, and from 1996 to 2013 he directed Oxford’s clinical research unit in Ho Chi Minh City. (In 2004, he and his colleague Tran Tinh Hien identified the reëmergence of the deadly bird flu H5N1 in humans.) He has gotten to know Lo and the work of his lab, and, just before the coronavirus pandemic struck, he met with a group of fund managers to discuss how CEPI, in acquiring a biotech portfolio, might diminish its reliance on intermittent government largesse.
“This is a once-in-a-hundred-years crisis,” he told me. “We need private as well as philanthropic and public support. They each come with their own challenges.” Public money brings “all sorts of problems”—bureaucracies, nationalism. CEPI, he said, needs “the discipline of the commercial sector,” although with the longer time horizon typical of bond markets, which attract far more money than equity funds, and, with interest rates plummeting, have few attractive offerings just now. The opportunity for the next few years is “a portfolio as opposed to individual assets.” Philanthropy, he added, cannot bring the scale to this. “Working with people like Andrew gives us the intellectual underpinning,” he said.
Farrar would also like to help organize governments to purchase vaccines together, thus enabling “a distributed model” of manufacturing. “Countries like Denmark—with just five million people, but fantastic manufacturing capacity—could be making hundreds of millions of doses,” he said. According to Kendall Hoyt, my colleague at Dartmouth, who has been a consultant to CEPI and is the author of the book “Long Shot: Vaccines for National Defense,” joint purchases would also prevent price gouging and bidding wars. Working from calculations she developed with the Dartmouth economist Christopher M. Snyder, Hoyt projects that rival countries could “bid-up the price of a vaccine by a factor of thirteen.” Glenn Yago would like to see a CEPI-like agency establish an insurance fund into which Big Pharma paid premiums; the insurance would require the companies to build manufacturing facilities while a vaccine is still in Phase III, and would indemnify losses in the event that the vaccine fails to win approval. That would help guarantee that distribution began as soon as approval was granted. If, as one might expect, more vaccines fail than succeed, the fund “could be subsidized with ‘warrants’ ” to acquire equity “in successful vaccine programs,” he said.
Still, it’s hard to advance any such plans as long as the United States remains aloof. As Farrar put it, “A U.S. election year, already in tense relations with China, and then this virus coming out of there, destroying the global economy for a period of time—one could not have envisaged a worse sort of scenario.” On the present course, he said, “Vaccine nationalism is inevitably going to rise.” Martin Murphy, the founding head of the C.E.O. Roundtable on Cancer, and a China expert, is similarly concerned. “We may need multiple types of vaccine, including China’s own, and will certainly need China’s manufacturing capacity,” he told me. Without a different U.S. approach, he fears “something really bad—the beginnings of a vaccine cold war.”
There is a worse scenario, which is that Trump gets reëlected. Joe Biden, for his part, has announced that he would recommit the United States to the W.H.O. That’s a good sign, but his campaign Web site also promises steps “to produce American-sourced and manufactured pharmaceutical and medical supply products” and “reduce our dependence on foreign sources.” As Lo said, “The U.S. government has been writing checks like there’s no tomorrow,” and, when you have a budget in the trillions, “the government should be able to put twenty million dollars into a biotech and say, ‘Show us what you’ve got.’ ” But, he added, it would be much better for the government to say that the money is not from taxpayers. “We’re borrowing it from the rest of the world. And if and when you succeed, or any of the other hundred and fifty projects—that could have been funded, but aren’t being funded right now—succeeds, all the bond holders will get paid. That would be great. Everybody earns a return.”
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The Case for a Coronavirus-Vaccine Bond - The New Yorker
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